Nafziger Economic Development (4th ed)

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must foresee salinity or sedimentation problems. But even when these matters are competently handled, irrigation is not a panacea for LDC agriculture. Many largescale irrigation systems in LDCs have failed to increase agricultural output to pay for their high construction and operating costs. These enduring monuments to failure underline the need for detailed preinvestment feasibility studies of irrigation projects, including careful estimates of capital, personnel, inputs, and maintenance costs over time and how to increase output (see Chapters 11 and 18).

Inputs tend to be complementary. For high-yielding varieties of rice associated with the Green Revolution, farmers require not only water but also seeds and fertilizer. Government ministries or agencies that supply these inputs must guarantee input quality, accessibility, and quantity (World Bank 1978i:40–42; Zuvekas 1979:216; Ensminger and Bomani 1980:63). The Nigerian bureaucracy failed to plan for its Operation Feed the Nation in 1979: One-half million tons of imported fertilizer were delivered two months too late for the planting season.

Government frequently subsidizes inputs such as fertilizer, a questionable policy. Because of farmers’ protests, in February 2003, India resisted withdrawing fertilizer subsidies within days after Finance Minister Jaswant Singh announced them (Economist 2003d:36).

TRANSPORT

The LDC crops otherwise competitive with those in other countries often cannot enter world markets because of high transport costs. Investment in roads, railroads, port dredging, canals, and other transport can lower the cost of producing farm goods and delivering them to markets. The U.S. Midwest became a center of specialized production of corn, wheat, beef, and pork in the mid-19th century only after several decades of road, railroad, steamboat, and canal expansion. Bolivia illustrates the transport problem for LDCs. Agricultural commodities in Bolivia’s lush subtropical and tropical eastern lowlands are at a competitive disadvantage because of high transport costs: Crops must get over the Andes mountains to the west or travel the great distance to the eastern coasts of Brazil and Argentina. Farmers near La Paz pay about twice, and those in remote rural areas of Bolivia several times, the price of fertilizer paid in the United States or Mexico. Thus, agricultural export potential in Bolivia is severely limited (Zuvekas 1979:135, 230).

MARKETING AND STORAGE

Poor marketing channels and insufficient storage facilities often hamper grain sales outside the region of production and limit production gains from the improved seeds of the Green Revolution. For example, the lack of storage and drying facilities in the Philippines in the 1960s prevented many farmers from growing two rice crops a year. And in northern India, the wheat resulting from production in 1968 had to be stored in schools or in the open air. Rats and rain destroyed as much as one-third of this crop.

Government must plan for the impact of new seeds and improved agricultural techniques on marketing and storage. Government can provide the infrastructure, such

as roads and grain bins; set uniform grades and standards that sharpen the incentive to improve product quality; and by supplying national price information, help farmers decide which crops to plant, when to sell, and what storage facilities to build.

Many LDCs have established official marketing boards to buy crops from farmers to sell on the world market. However, these boards have a tendency to demand a monopsony position to ensure financial success and frequently accumulate funds to transfer from agriculture to industry. Nevertheless, the boards can stabilize crop prices and provide production and market research, promotion, extension assistance, and other services.

Many government marketing institutions in LDCs have been established to replace open markets considered inefficient, antisocial, and subject to exploitation by middlemen and women. However, a government should examine whether its use of scarce capital and skilled personnel to establish such an enterprise to replace the private intermediary is socially beneficial. Ironically, such marketing institutions are more likely to eliminate the small, competitive grain trader than the agent or distributor for the large, influential agribusiness. Furthermore, the private middleman or woman operating in a competitive market is likely to have a smaller markup than the state enterprise, which frequently has a monopoly. Moreover, empirical evidence indicates that where transport and measurement infrastructure is adequate, the farm market is relatively efficient in transmitting price information, providing incentives, allocating production among commodities, and rationing goods among consumers. (This section draws from Hayami and Ruttan 1971:216, 267; Hunter 1978:89–91; Lele 1979:100–101.)

PRICE AND EXCHANGE RATE POLICIES

Irma Adelman’s and Sherman Robinson’s (1978:128–146) simulations of the effect of government policy interventions warn against confining rural development projects to those that only increase agricultural productivity – making more machinery and credit available; improving irrigation, fertilizer, and seeds; adding new technology; enhancing extension services; and so on. Increased agricultural production and an inelastic demand (see Figure 7-3) are likely to reduce the agricultural terms of trade as well as rural real income and to increase urban–rural inequalities in the short run. Thus, to reduce rural poverty, production-oriented programs must be combined with price and exchange rate policies, improved rural services, land reform, farmer cooperation, and more rural industry.

Empirical studies indicate a high long-run elasticity of supply (that is, a high percentage change in quantity supplied in response to a 1-percentage change in price) in LDC agriculture. Long run means the farmer can vary the hectares devoted to a given crop.

In response to consumer pressure, LDC governments frequently establish maximum producer, wholesale, or retail prices for food. But the long-run effects of such policies, given high supply elasticity, may raise prices by discouraging domestic production and increasing reliance on imports. This effect occurred in Argentina in the late 1940s. Subsequent government measures to increase relative farm prices in

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FIGURE 7-3. Increased Agricultural Supply When Demand is Inelastic. When the relevant range of a demand curve (D) is inelastic (that is, when the percentage change in price exceeds the percentage change in quantity demanded), an increase in agricultural supply will reduce agricultural income or total revenue. Note that the area of the total revenue (price times quantity) rectangles decreases in size as supply increases from S1 to S2.

the early 1950s did not stimulate output as expected because farmers felt the more favorable prices would not be permanent. Subsidizing food is the only way of reducing consumer food prices without harming production incentives (even in socialist countries).

The benefits of research, technology, extension and credit programs, and so on can be lost with ill-conceived pricing policies. Technological development is more efficient when farm input and output prices are competitive. Researchers and extension agents are more likely to innovate when farm prices clear the market than when they are controlled. Finally, farmers tend to press research institutions for technological innovations with a high payoff – for example, those that save resources with an inelastic supply (Hayami and Ruttan 1971:56–59; Zuvekas 1979:233–234).

The World Bank’s Berg report criticizes African states for keeping farm prices far below market prices, dampening farm producer incentives, using marketing boards to transfer peasant savings to large industry, and setting exchange rates that discourage exports and import substitutes (domestic production replacing imports). The World Bank economist Kevin M. Cleaver shows that the real exchange-rate change

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in African agricultural output per capita (Tomich, Kilby, and Johnston 1995).9 As an example, from 1967 to 1976, Tanzania launched ujamaa (literally “familyhood”) socialism, which emphasized land nationalization and communal village production units. Ujamaa failed, as its egalitarian goals collided with the actions of the state bureaucracy, whose mushrooming racketeering, embezzlement, and accumulation took place at the same time that both peasant prices and the transfer of resources from agriculture to the state fell (Nafziger 1993:117–119).

Farmers can sometimes reduce diseconomies of scale through machinery. Thus, in Brazil, mechanized plows allowed those farming hard cerrado soils to plow in advance of the rains and reduce runoff, and in North America, grain dryers lengthen harvest. More generally, there are economies in the use of lumpy inputs such as machinery or management; in access to inputs, credit, services, storage facilities, marketing, or distribution; and where processing or marketing economies are transmitted backward to the farm. Still, Johnson and Ruttan (1994:691–706) believe that optimal-sized farms are generally owner-operators, who can achieve economies of scale in purchasing and marketing cooperatives.

COLLECTIVE FARMS OR COMMUNES

Nafziger’s supplement (2006b) considers cooperatives and Soviet-type state and collective farms, discussing Stalin’s rationale for collectivization and China’s effort to “learn from the Soviet Union” by introducing communes from 1949 to 1959. Most economists doubt that the benefits of collective agriculture surpassed the costs. During the Soviet collectivization of 1929 to 1933, the forcible collection of grain, the confiscation of farm property, the arrest and deportation of real and alleged kulaks, the destruction of tools and livestock, the class warfare between peasants and kulaks, the administrative disorder, the disruption of sowing and harvest, and the accompanying famine led to the deaths of about five million people. Gross agricultural output per person declined from 1928 to 1937. Although Soviet agricultural performance improved from 1937 to 1991, the average level of food productivity per hectare was still below Western countries such as Italy. In the early 1990s, the Russian leadership was divided on agricultural policy, especially in light of peasant aversion to the risks of reform. Later on in the 1990s, despite efforts by the Russian government to introduce property rights in land, rural people opposed decollectivization. Vladimir Popov (1996; 2001:41) indicates that in the early to mid-1990s, the total wage bill of large Russian state and collective farms would about equal the value of output at world market prices; indeed at these prices, farms were value subtractors, meaning that farm products were worth less than the inputs embodied in them. No wonder people living on farms resisted land reform. The situation was similar to that in Moldova, where, in addition, a withdrawal from the collective

9Kung (1994:175–187), however, contends that collective agriculture in China failed, not because of the difficulties of monitoring work effort in a team, but because of the way the state impoverished the peasantry through a policy of extracting agricultural produce and a flawed remuneration system that rewarded work by piece rate rather than by time worked.

farm meant difficulty in obtaining inputs and marketing products (Dudwick et al. 2003:353).

In China, although industrial output per capita grew by 8.3 percent per year between 1952 and 1975, food output per person increased only 0.2 percent per year. Moreover, small private plots in the Soviet Union and Maoist China produced a disproportionate share of vegetables, livestock, and peasant’s money income, albeit with more labor per hectare than on the collective. Furthermore, in both socialist Poland and Yugoslavia, farmers resisted collectivization. In these countries, the private sector accounted for more than four-fifths of the agricultural area and output. To be sure, the Soviet people were adequately nourished, and Maoist China met the nutritional needs of its poorest 40 percent better than most other low-income countries. Nevertheless, the low productivity of pre-1989 Eastern European and Soviet agriculture compared to capitalist North America and Western Europe (Table 7-1), together with the slow pre-1979 growth in Chinese food output per person, suggests the failure of collective agriculture as a model for developing countries.

Collectivism’s advantages proved to be much less than their proponents claimed. Low farm prices and the transfer of agricultural savings to industry hampers agricultural growth. The few economies of large-scale production can be achieved instead through cooperatives, renting machinery, and technical and managerial assistance provided by extension agents. Local or provincial government or private enterprise can provide many of the social services mentioned. Even in a mixed or capitalist economy, off-farm employment opportunities can be made available to farmers during the slack season. Although the state leadership may wish to control the grain market for political reasons, there is no evidence that this increases agricultural efficiency and growth.

There are other problems with the collective farms. The link between individual initiative and effort, on the one hand, and income, on the other, is not so powerful as on the individually or family-owned farm. Also, the collectivist system for paying labor is complicated, time consuming, and cumbersome: The output of the production unit is usually distributed by work points based on the type of task and work performance. Disputes concerning its accuracy and equity are common. Additionally, there are marked differences in average income between collective farms. Effort and efficiency cannot usually overcome poor location and soil. Moreover, collective farm investment tends to be made for political reasons rather than prospective rates of return. Furthermore, collective farms are rewarded on the basis of output rather than cost efficiency and demand for what is produced.

In China, from 1979 to 1983, production teams (usually the size of a village) distributed the land they had farmed collectively for more than two decades under contract for long-term use rights to individual households, the household responsibility system. The local authorities allocated land to households on the basis of equal division by population (adjusted by age and gender), equal division by labor force participation, or some combination of the two methods. Martin Gaynor and Louis Putterman (1993:357–386) show that these methods of equal distribution of land correspond to optimal incentives for increasing the productivity of land.

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Moreover, ironically despite Deng Xiaoping’s repudiation of Mao’s slogans of egalitarianism and increasing moral (not material) incentives, Martin King Whyte (1986:103–123) thinks Deng’s decollectivization and price decontrol probably reduced China’s income inequality. Although Mao attacked privilege among encrusted bureaucrats and intellectuals, his opposition to financial incentives reduced income, especially among peasants. Mao’s urban bias policies widened the urban– rural gap from the mid-1950s to the mid-1970s. Although post-1979 agricultural reforms encouraged enterprising peasants “to get rich” and widen intrarural income differentials, the rapid growth of agricultural income vis-a`-vis industrial income reduced the difference between town and countryside, perhaps even reducing overall income inequality. Additionally, relaxing restrictions on urban emigration permitted rural families from depressed areas to reduce populations and benefit from nonfarm remittances. As implied earlier, market-oriented reforms may cut inequalities fostered by the state’s town-biased allocation system.

RURAL INDUSTRY

As discussed in Chapter 9, demand for agricultural labor grows slowly (and in later stages may even decrease). Technical advances and capital accumulation displace some farm labor. The LDC demand for food grows slowly, because its income elasticity (percentage change in per capita food purchases relative to percentage change in per capita income) is only about one-half. By contrast, population growth in rural areas is usually more rapid than in LDCs as a whole, so the labor supply usually grows rapidly. Off-farm employment must expand to take care of these extra workers. In the 1970s and 1980s, nonfarm activities comprised 79 percent of rural employment in Latin America, 34 percent in Asia, and 19 percent in Africa (Hazell and Haggblade 1993:190–192; World Bank 1990:60–61).

Public works projects and smalland medium-scale manufacturing, agribusiness, and processing increase relative incomes and reduce unemployment and underemployment in rural areas. Since 1958, China has had a policy of “walking on two legs,” with large urban manufacturing augmented by a “second leg,” small-and mediumsized industry on the rural communes. Until liberalization in 1991, India limited industrial expansion and new enterprises in metropolitan areas, whereas firms locating in industrially “backward” nonmetropolitan areas were given favored access to materials and facilities.

Industries and retail enterprises complementary to agriculture – firms producing and selling basic consumer items, blacksmithing, repair, and maintenance shops – are certainly worth developing. However, many industrial operations cannot be competitive without the materials, power, markets, financial institutions, communication network, and skilled labor usually concentrated in major urban centers. For example, except in a few metropolitan areas in Nigeria, the electricity supply has been too unreliable for many enterprises, including those using plastic injector molding machines, iron-smelting furnaces, or refrigerators. In the 1980s, Deng Xiaoping admitted that the emphasis by rural communes during the Chinese Cultural

Revolution on making their own lathes and tractors was very uneconomical, even given the high transport and distribution costs.

POLITICAL CONSTRAINTS

Improved rural social services, greater price incentives, effective farm cooperatives, and public spending on research, credit, rural industry, extension services, irrigation, and transport are frequently not technical, but political, problems. The political survival of state leaders in fragile LDCs requires marshaling the support of urban elites (civil servants, private and state corporate employees, businesspeople, professionals, and skilled workers) through economic policies that sacrifice income distribution and agricultural growth. Moreover, LDCs may lack the political and administrative capability, especially in rural areas, to undertake programs to reduce poverty. Established interests – large farmers, money lenders, and the urban classes – may oppose the policy changes and spending essential to improving the economic welfare of the small farmer, tenant, and landless workers.

Additionally, state intervention in the market is an instrument of political control and assistance. Government, quasi-government corporations, and private business pressure political elites for inexpensive food policies to keep down wages, and governments sometimes use troops to quell food-related riots (as in Brazil, Egypt, and Tunisia in the mid-1980s). Unrest by urban workers over erosion of their purchasing power has threatened numerous LDC governments. Real wage declines under Nigeria’s Abubakar Tafewa Balewa government in 1964 and the Yakubu Gowon government in 1974 to 1975, as well as Ghana’s Kofi Busia government in 1971, contributed to political unrest and violence that precipitated military coups. Politicians also may help emerging industry reduce raw material or processing costs. Market intervention provides political control for elites to use in retaining power, building support, and implementing policies.

In 1954 in Ghana, Kwame Nkrumah’s Convention People’s Party (CPP) passed a bill freezing cocoa producer prices for four years, anticipating use of the increased revenues for industry. But the CPP government undercut the newly formed opposition party in the cocoa-growing regions by selectively providing subsidized inputs – loans, seeds, fertilizer, and implements – for prospective dissidents. Additionally, state farm programs in each constituency in the 1960s made available public resources to organize support for the Nkrumah government.

Market-clearing farm prices and exchange rates, whose benefits are distributed indiscriminately, erode urban political support and secure little support from the countryside. In comparison, project-based policies allow benefits to be selectively apportioned for maximum political advantage. Government makes it in the interest of numerous individuals to cooperate with programs that harm the interest of producers as a whole (Bates 1981; Rimmer 1984; Hendry 1988:11; Nafziger 1988:140–56, 173–175).

Rural dwellers, who are often politically weak and fear government reprisals, rarely organize to oppose antirural policies. Although poor farmers have little tactical power, rich ones have too much to lose from protest. Moreover, they have less

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costly options – selling in black markets, shifting resources to other commodities, or migrating to urban areas. Yet, eventually rural classes harmed by state market intervention may have to mobilize to oppose the urban and large-farm bias of many contemporary LDC political leaders.

Agricultural Biotechnology

Biotechnology is “the application of biology to human use” (Burke 1999). Old applications include “fermentation for drink and food, plant and animal breeding,” and enzymes in cheese making and other food processing (Norman 2003). New biotechnological applications include (1) tissue culture, in-vitro multiplication or regeneration of plant material in the laboratory, bypassing slower cross-fertilization and seed production; (2) marker-assisted selection that shortens plant breeding by directly identifying desired DNA segments or genes, reducing the number of generations to develop a new variety; (3) genomics, the describing and deciphering of the sequence, location, function, and interaction of all genes of an organism; and (4) “genetic engineering, in which one or more genes are eliminated and transferred from one organism to another without sexual crossing.” Such genetically modified organisms (GMOs) first became commercially available in the 1990s.

Benefits of agricultural biotechnology include potentially large increases in productivity (reduced labor, capital, fertilizer, or toxic herbicide inputs) and improvements in quality, keys to reducing rural poverty (FAO 2003b:314–316; Norman 2003). First, for LDCs, the “built-in inputs such as pesticides embodied expertise directly into the seeds, reducing output losses where sophisticated production techniques (capital-intensive insecticides) are difficult to implement or where farmers lack the “management skills to apply inputs at the right time, sequence and amount.” Second, higher productivity may mean lower prices and increased availability of nutritional foods for consumers, especially amid a growing population. Third, many poor people are cultivating marginal land; GM crops can increase the potential to grow food in saline, acid, or other low-quality soils (FAO 2003b:322).

From 1996 to 2003, GM crops increased fortyfold globally to seven million farmers in 18 countries growing 69 million hectares (167 acres), about 18 percent of the world’s food-crop cultivation (FAO 2003:314–327; Elias 2004:C2). Important GMOs include insect-resistant corn, cotton, and other crops; herbicide-tolerant soybeans, virus-resistant genes in tobacco, potatoes, and tomatoes; color alteration in carnations; or stacked traits that embody combinations of insect tolerance, herbicide resistance, and quality improvements such as high lysine, low phytate, or higher oil content. GMO growth has decelerated in recent years either from saturation, lower prices from increased output (e.g., canola), or DC consumer concerns about biosafety and risk to human health. In 2001, soybeans, corn, cotton, and canola represent virtually all the area of GM crops. As of 2004, GM or transgenic farm animals and fish have remained outside commercial food production systems (FAO 2003:316–320).

The earliest major GM breakthrough in LDCs is Bacillus thuringiensis cotton that reduces insect damage, adopted in China (2.8 million hectares in 2003) (Elias

2004:C2). However, adoption of most GMOs in LDCs in limited by the inability of poor farmers to pay for new technologies. In the pipeline are salt-tolerant varieties of rice in China (reducing water scarcity and loss of land to salinization), more drought-tolerant plants, golden (vitamin A enriched) rice, medicine or food supplements directly within plants (which could improve the nutrition of the poor), specialty oils, anticancer drugs (taxol), poplars (grown in France for paper production and demanding less energy and producing less waste during processing), soybean oil with less saturated fat, and corn that improves livestock nutrition (FAO 2003:318– 322).

There are numerous risks associated with new technologies. Can LDCs harness the potential of biotechnology to increase productivity? Most of the gains from GM technology accrue to DCs, especially a few companies. In 1998, 60 percent of the world market for seeds was controlled by just 35 companies, and cotton, soybeans, and corn seeds were even more concentrated. Furthermore, do researchers, concentrating largely on DC crops and problems, consider LDC needs? Specifically, will crops such as millet or bananas, vital in the livelihoods of LDCs, receive the attention of DC researchers (FAO 2003:315–324)? Chapter 8 discusses problems of transferring DC technologies to different ecolological zones, including researchers training LDC farmers to benefit from the new technologies.

Although agro-biological research at universities, research institutes, and government may be produced as public goods (some beyond the country’s boundaries), most bioresearch is produced by private research firms. For private units, issues of intellectual property rights (IPRs) include how they are enforced and the extent to which firms holding IPRs can exclude others. Without excludability, private units would not recoup their investment, research would languish, and productivity gains and world welfare would slow down. But strengthening IPR leads to concerns. First, IPRs may be too wide, choking off spillovers, subsequent innovation, and diffusion. Second, IPR may prohibit altering a single gene derived from freely accessible germplasm generated by farmers and public efforts over centuries. Third, LDCs believe they should be compensated for contributions farmers and indigenous communities have made to plant genetic material and diversity. Local farmers are especially concerned about genetic use restriction technologies (GURTs) (such as terminator seeds) that restrict the unauthorized use of genetic material by sterilizing the next generation of seeds (FAO 2003:323–324).

A final issue is whether GM crops and livestock reduce biological diversity, environmental safety, and human health, especially given too little research on risks and the lack of funding for continuing research in LDCs. Other potential problems include gene mutation, the switching on of “sleeper” genes; the transfer of allergens, and the transfer of artificially inserted genes to weeds, other plants, or other species (FAO 2003:315, 324–326; Norman 2003).

Virtually all international agricultural development institutions favor transgenics, yet some Western and LDC consumer groups oppose them. The European Union supports the precautionary principle: rejection of biotechnology until science establishes the GM harmless to human health, burden of proof on GM proponents, and