Download Reflections on the Role of Agriculture in Pro

Are there public good justifications for
worrying about rural incomes?
Agriculture in Pro-Poor Growth:
A South American Perspective
William Foster
Can new products and new international and domestic marketing
channels increase rural incomes? Ideas, models, and evidence.
Sonoma, June 19-20, 2005
The importance of overall growth to
poverty reduction
 Dollar and Kraay (“Growth is good for the poor,” 2002)
 The growth elasticity of poverty is one.
 Policy-related factors usually considered important to
reduce poverty (health and education spending, farm
labor productivity) were found to have little marginal
effect on the average income of the poorest.
 Controversy: Ravallion and others.
 The lesson we learn from the literature is that economic
growth can be more pro-poor in some circumstance and
less in others, but just by itself, growth is pro-poor.
What can agriculture do to promote overall
growth and poverty reduction?
 Recent World Bank effort for Latin America and the
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Caribbean.
How big is agriculture?
Econometric evidence of the contribution of agriculture to
growth.
Econometric evidence of the contribution of agriculture to
poverty reduction.
Policy implications: assisting agriculture in promoting
overall growth.
Beyond agricultural production to the importance of the rural
economy as a whole.
Basic results:
 Agriculture can promote growth directly through
its own expansion, and indirectly through its
spillovers to the rest of the economy.
 Agricultural growth in contrast to nonagricultural growth can contribute differentially
to the increase in the income of the poorest,
 and sometimes its contribution to income growth
of the poorest exceeds its relative size in the
overall economy.
How big is agriculture?
 Development lit. in 1950s generally pessimistic with
respect to the sector’s potential for productivity and
export growth (Hirschman, Prebisch, Lewis).
 A reassessment of the efficiency of producers and the
sector’s growth potential, following the work of Schultz.
 Large lit. on farm sector’s significant multiplier effects
(Hazell and Bell, Haggblade, Mellor, Delgado, Adelman)
 Consumption effects dominate linkages in low income
countries.
 Probably production links dominate in middle income.
An expanded definition of agriculture
using input-output linkages:
Expanded agricultural GDP share estimates for Chile, Colombia and Mexico
Country
Official agriculture
Expanded
% increase in share
GDP share (%)
agriculture GDP
due to forward and
share (%)
backward linkages
Chile
4.92
9.32
89%
Colombia
14.42
18.51
28%
Mexico
5.26
8.00
52%
Source: Authors’ calculations in Beyond the City (2005), based on
methodology in Anríquez, Foster and Valdés (2003).
The contribution of agriculture to growth:
“old and honorable question, dating back to the Physiocrats.”
An equation of interest

 ln G NA 
d ln y

  SA  S NA 
d ln G A 
 ln G A 
 With no spillovers, the elasticity of national growth (GDP
p.c.) with respect to sectoral growth is share of GDP (SA)
 With spillovers, we must estimate the cross-sectoral growth
elasticities.
 How can one estimate externalitities and multipliers?
 Timmer (2002), Bravo-Lederman for World Bank, Beyond
the City (2005)
Timmer, using 65 developing countries
(1960-1985):
 A contemporaneous increase of one percent in the
growth rate of agriculture would contribute to about a
0.2 percent increase in the non-agricultural growth rate.
 But this does not show causality (both sectors could
have grown in response to other factors, such as
macroeconomic policies).
 More interestingly for inferring causality, a one percent
increase in the lagged agricultural growth rate (five
years) would contribute to about a 0.14 percent increase
in the non-agricultural growth rate.
Bravo-Lederman (World Bank), using
120 countries (1960-2000):
 Their approach controls for non-agricultural
GDP level (a way to control for the level of
development).
 Granger “causality” tests.
 Does agricultural growth lead non-agricultural
growth, or vice versa, or are there reverse
effects, each sector to the other?
Which sector leads which?
 In developing countries historically a 1% increase in ag.
growth leads to between 0.12 % (LAC) and 0.15% (other
developing) increase in non-ag. growth.
 High income: ag. growth has been associated with a
subsequent fall (–0.09) in non-ag. growth (resource pull?).
 Also a reverse effect: a 1% increase in non-ag. growth rate
leads to a decrease in ag. growth in non-LAC developing
countries.
 In LAC and developed, non-ag. growth appears not to be
related one way or the other to subsequent ag. growth.
 But much heterogeneity within country groupings.
Cross-sector growth elasticities:
A 1% increase in one sector’s GDP on the other sector’s GDP.
Effect of
1% growth Ag. on non-Ag.
1% growth non-Ag. on Ag.
1% growth Ag. + food sector on rest
of the economy.
GDP share of
Agriculture
Non-agriculture
LAC
countries
Non-LAC
developing
countries
Developed
countries
0.12
0.01
0.148
– 0.168
– 0.09
– 0.03
0.18
0.054
– 0.07
0.12
0.88
0.22
0.78
0.03
0.97
Granger-causality tests from Bravo-Ortega and Lederman (2005), also
Figures 3.3 and 3.4 and Table 3.16 in de Farranti et al. (2005).
Econometric evidence is consistent
with the I-O linkage results
 Chile has the strongest linkages (particularly
forward) and the strongest cross-sector growth
elasticity.
 Mexico has weaker linkages than Chile, but
stronger than Colombia, and has a cross-sector
growth elasticity double that of the regional
average.
 Colombia has the weak linkages and a cross-sector
growth elasticity equal to the regional average.
Extending the definition of agriculture
to include the food processing:
 LAC average cross-sector growth elasticity from ag. to
non-ag. increases to 0.18. This suggests that positive
spillovers of ag. are stronger when the downstream
industries are included in the “rural” economy.
 By contrast, with food processing in non-LAC developing
countries’ ag., average cross-sector growth elasticity falls.
 Interpretation: in non-LAC developing, much of the
subsequent growth in non-ag. related to current primary
ag. growth is in processing industries related to ag. A large
part of what is measured as the non-ag. growth correlated
with ag. is in the food processing sector.
 Ideally, we should disaggregate non-LAC.
Considering ag’s 2 contributions, direct (GDP
share) and indirect (  ln G NA  ln G A ):
 For non-LAC developing ag. contributes 1.5 x the size of
the sector to growth. For LAC ag. about 1.8 x size.
 Non-LAC developing : non-ag. contributes slightly less
its share to GDP growth. (Resource pull?)
 In LAC and developed the non-ag. contribution is
approximately equal to its share in GDP.
 Significant spillovers of ag. to non-ag. in developing
countries. (And comparable to Timmer’s long run.)
 Ag. growth would lead over time to a lower share of
agriculture in total GDP, which corresponds to the
historical trends we have seen.
Agriculture’s GDP share falls with development
per capita GDP in 1995 US$, annual data from 1960 to 2002
What are the policy implications of a strong indirect effect
of ag. on non-ag. (and a lesser reverse indirect effect)?
 Not an argument for subsidizing agricultural
production! But an argument for not taxing the sector.
 Granger tests suggest but do not really prove causality
in a mechanical sense: it shows predictive links.
 Mechanisms must be understood.
 There is a cost of underinvestment in rural public
goods relative to urban. (More on waste later.)
 Social project evaluation: meant to understand the
mechanisms.
 Important to screen public projects, promote high and
reject low returns.
The contribution of agriculture to poverty reduction:
Differing sectoral impacts on poverty
ln y j  f (ln gA ,ln g NA )
j  1,...,5
Relate average income in each quintile (j = 1,…,5) to the sectoral
labor productivities (gi = Gi ÷ Li : Li labor force in Ag. and Non-Ag.
 ln y1
We would like to know the Elasticities of Connection:
 ln gi
 With spillovers, EoC is augmented by the indirect effect of
cross-sectoral growth impacts.
d ln y1
 ln y1
 ln y1  ln g NA


g NA  0 
d ln g A
 ln g A
 ln g NA  ln g A
d ln y1
 ln y1

d ln g NA
 ln g NA
g A  0
 ln y1  ln g A


 ln g A  ln g NA
Income disparities matter for ag.’s impact on
the income of the poorest.
 Timmer: where disparity between richest and
poorest small, growth in Ag. labor productivity is
“slightly but consistently” more important in
generating p.c. income in every quintile.
 When income gap large, EoCs of both sectors for
poorest quintile small, but rise sharply by income class.
 High income gap countries: poorest quintile is
“nearly left out of the growth process altogether.”
 Implication: Ag. growth less successful than NonAg. growth at raising the incomes of the poorest
for countries with high income disparity.
Bravo-Lederman (World Bank), using
84 countries (1960-2002):
 EoCs (direct effects on poverty) are higher for Non-Ag.
than for Ag. growth across quintile groups.
 For non-LAC developing, the EoCs for the poorest
quintile are 0.36 for ag. and 0.64 for non-ag.
 Absolute impact: Non-Ag. growth more important than
Ag. growth, in both LAC and non-LAC developing.
 Relative impact of Ag. growth least for the lowest quintile
compared to higher quintiles (Timmer’s inequality scenario).
 EoCs for Ag. compared to non-ag. even less for LAC,
where the Ag. EoCs fall relative to non-LAC developing
countries and the Non-Ag. EoCs increase.
But there are indirect effects of Ag. on poverty via
influence of Ag. growth on Non-Ag. growth,
stimulates poverty reduction as well:
 For LAC total elasticity is 0.28 Ag. and 0.77 Non-Ag.
 Other developing countries: 0.48 Ag. and 0.58 Non-Ag.
 Note: indirect effect of Ag. growth on poverty is a notable
proportion of total effect both in LAC (≈0.33) and nonLAC developing (≈0.20).
 Note: relative to LAC, in non-LAC developing Ag. growth
has slightly higher impact on Non-Ag. growth, but NonAg. growth has smaller impact on poverty.
 So: for non-LAC developing, the direct effect of Ag.
growth is relatively more important than in LAC.
 Nevertheless: in non-LAC developing, growth of the NonAg. sector still more important (in absolute terms).
Relative to its GDP share agriculture has a
greater impact on poverty reduction than nonagriculture:
 Agriculture’s GDP share averages 0.12 for LAC
and 0.22 for non-LAC developing countries.
 Relative to their shares in GDP, on average,
agriculture’s contribution to raising the incomes of
the poorest is at least 2.5 times that of nonagriculture
 2.5 for LAC, 2.9 for non-LAC developing
countries.
Partial and total sectoral poverty elasticities: Impact of a 1% increase of
each sector’s GDP on average income of the poorest quintile.
Partial effect of
1% growth Ag. on average income
of poorest quintile
1% growth non-Ag. on average
income of poorest quintile
Indirect effect of
1% growth Ag. on average income
of poorest quintile
1% growth non-Ag. on average
income of poorest quintile
Total effectb of
1% growth Ag. on average income
of poorest quintile
1% growth non-Ag. on average
income of poorest quintile
LAC
countries
Non-LAC
developing
countries
Developed
countries
0.191
0.362
0.0
0.772
0.642
0.903
0.093
0.095
– 0.081
0.002
– 0.061
0.0
0.283
0.457
– 0.081
0.774
0.581
0.903
a
Did the expansion of Chilean agriculture after the reforms
contribute to the alleviation of national poverty?
 Lopez and Anriquez analyze sector’s influence on
poverty alleviation via impact of ag. growth.
 Skilled and unskilled labor the focus.
 Important finding: asymmetric response of the two types
of labor to expansion of agriculture and non-agriculture.
 Demand for unskilled workers more sensitive to
expansion of agriculture than skilled workers
 Critically, expansion in ag. Leads to more unskilled labor
demand compared to expansion in non-ag. output.
 Increasing ag. GDP by 1% (with 0.17% decline in nonag. output – a zero-growth scenario) would lead to a
0.51% expansion of the employment of unskilled.
The importance of a growing agriculture
sector for poverty alleviation in Chile:
Estimated Labor Demand Elasticities (evaluated at sample means)
Price of
NonAgricultural Agricultural
Output
Output
Quantity
demanded of
Unskilled
Labor
Skilled
Labor
Capital
Unskilled Labor
-0.53**
(0.2669)
0.21
(0.3911)
0.32
(0.4242)
0.58***
(0.1071)
0.40***
(0.0728)
Skilled Labor
0.07
(0.681)
-0.61***
(0.2045)
0.54**
(0.2454)
0.44***
(0.0581)
0.70***
(0.0384)
Note: Standard errors in parentheses. *** Significant at the 1% level, ** Significant
at the 5% level, *Significant at the 10% level. Source: Lopez and Anriquez (2004).
Consolidated effects of Chilean agricultural growth
on decreases in poverty headcount.
Effect of 4.5% increase in agricultural
GDP,
holding non-agricultural GDP constant
holding national GDP constant thus
changing composition of output
-7.29
-7.29
-7.43
Elasticity of
poverty
reduction
w.r.t. ag.
growth*
1.5
-6.46
-6.41
-6.17
1.1
Price, Wage
Price and Price and
and
Wage
Employment
Employment
Effects Only Effects Only
Effects
*Elasticity estimates based on price, wage and employment effects taken together.
Other elasticities extimates for the effect of aggregate growth on poverty in Chile are
in the range of 0.8 to 1.2. Source: Lopez and Anriquez (2004).
What are the implications for
government expenditures?
 For developing countries a 1% increase in Non-Ag.
growth has stronger impact on both growth and
poverty reduction than a 1% increase in Ag.
 If the decision is to choose between a 1% growth in
Non-Ag. versus a 1% growth in Ag., one should select
the growth in Non-Ag.
 But, of course, the policy choice is not trading off a
1% increase in growth in one sector foregoing a 1%
increase in growth in another sector.
 One cannot trade-off growth rate percentage points
one-for-one as if they summed to a budget constraint.
From a public policy point of view,
what are the restrictions?
 Human resources:
 The marginal impact of human expertise in promoting nonagricultural growth directly is very likely significantly larger
than in promoting agricultural growth directly.
 Improvements in “non-agricultural” policy would certainly
benefit agriculture.
 Budgets: question of public expenditures is different.
 Should it be allocated according to the relative size of the
sector in national GDP?
 Yes, if no cross-sector growth effects, and if additional
monies are equally efficient in promoting sectoral growth
across sectors, and if the only objective is increasing
national growth.
The answer is, no, however, if relative to their
sectoral shares agriculture contributes more than
non-agriculture to national growth.
 Ag. contributes about 1.8 times its size the contribution of
Non-Ag. to national growth in LAC countries.
 For non-LAC developing, Ag. contributes about 1.6 times
its size the contribution of Non-Ag. to national growth.
 If Ag.’s GDP share is 12% (LAC average), using
estimated cross-sector growth effects (and only interested in
promoting growth), one should allocate to Ag. on average
slightly less than twice its GDP share (24% of budget).
 If Ag.’s GDP share is 22% (average non-LAC), should
allocate to Ag. 1.8 times its GDP share (40% of budget).
 For Non-Ag., the government should allocate less of a
windfall than its sectoral share.
 Very important caveat: assuming that expenditures are
equally efficient in promoting sectoral growth.
The importance of the composition
of rural public expenditures:
 LAC FAO data set on public expenditures in rural areas
used by Lopez: while public spending levels can promote
slightly Ag. GDP per rural person, mix of spending much
more important.
 Reallocation of 10 percentage points of total rural public
expenditures (e.g., from 40% spending on public goods to
50%) raises Ag. GDP per rural person by 2.3% – and this
without spending a tuppence more in total.
 A dollar added to total rural expenditures would be shared
by public and private goods. An intra-marginal shift of a
dollar is claimed entirely by public goods and is lost to
private subsidies, and the latter might in fact have a
negative contribution to agricultural growth
Beyond agricultural production to the
importance of the rural economy as a whole:
 Gardner concludes that where growth in rural household income has
been achieved, 5 factors present:
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Macroeconomic and political stability,
Property rights and incentives,
Productivity enhance new technology,
Access to competitive input and product markets,
And real income growth in the Non-Ag. economy.
 “To remedy rural poverty, what is most needed is improvement in the
labor market generally more than, say, improved crop varieties. This
is not to say that agricultural research and rural infrastructure
investment are not valuable, or that the net effect on poverty is in the
right direction…. Agricultural economics is the discipline that can
analyze the possibilities of these and other profitable investments…
Yet it is becoming evident that rural growth and poverty alleviation
are not sub-fields of agricultural economics.”
The policy point: not exclusively sectoral but national and
territorial. How to facilitate the transition from a rural
economy based on small farms to one diversified in income
sources, competitive in internat’l markets, dynamic.
 This might mean migration, public policies to facilitate
the Non-ag. rural economy, education, R&D, public
infrastructure, etc.
 But there is an analytical problem: we know more about
how to promote agricultural growth than we do about
how to promote non-agricultural rural activities. This is
because we know so little about what drives the rural
economy and territorial development.
 As Hewings notes, there have been many fads in
territorial development, but few satisfying economic
evaluations.
The importance of non-farm
employment and income:
 The evidence suggests that wages, self-employment outside
agriculture, and other earnings from commercial activities,
manufacturing and other services are significant sources of
income for rural households.
 Rural nonfarm income tends to be positively correlated with
national development and case studies indicate positive growth
over time of nonfarm income as a share of total household
income in rural areas.
 As a proportion of total employment in rural areas, nonfarm
employment averages approximately 25% in Latin America
and 44% in Asia, usually representing a lower share than
nonfarm income relative to total income.
A portfolio of livelihoods for
generation of rural income
 Evidence not only for Latin America. Foster and
Rosenzweig (2004) underline importance of labor
intensive small scale manufactures in India. for the
generation of rural income
 Frank Ellis and Freeman (2002) (Uganda, Kenya, Tanzania
and Malawi) conclude:
 “Better off households are distinguished by virtuous spirals
of accumulation typically involving diverse livestock
ownership, engagement in non-farm self-employment, and
diversity of on-farm and non-farm income sources.
Lessons for …the creation of a facilitating rather than
blocking public sector environment for the multiplication
of non-farm enterprises….”
Productivity drivers found in the rest of the
economy have implications for scale in farming
 Requiring investments and fixed costs that influence
the “structure of farming” – the distribution of farm
sizes and returns.
 The rest of the economy and trade is changing,
producing a flow of new opportunities for farmers.
 A major issue for this conference is to what extent
small farmers can participate both as producers and
workers in taking advantage of this flow of
opportunities.
 What can be done to encourage their participation?
But is there anything inherently pro-poor
about maintaining the existence of a large
number of small farms?
 No, the point is not to maintain millions of small farmers, but to
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eliminate poverty.
BUT: we have to deal with what we have.
Best case: dynamic overall economy spurred by Ag. growth and in
turn spurring the Ag. growth and the structure of farming, while at
the same time offering better non-farm income opportunities.
Beyond having a stagnant economy, most discouraging case:
dynamic economy, both domestic and global, driving changes in
the structure of Ag. production but not providing opportunities to
the poor, who then remain as small farmers without being able to
take advantage of non-farm employment opportunities
for geographic, demographic and cultural reasons, and labor
market restrictions.
This leads to a discussion of safety nets
 More R&D, better infrastructure and rural finance, and
other initiatives in poorer regions will improve Ag.
productivity and the rural economy generally.
 But some households in some regions will lag behind,
because they do not have the assets that complement the
positive developments elsewhere.
 Age, illiteracy, poor soils and climate, low population
densities all will conspire against finding productive
employment opportunities, whether on or off the farm.
 How should policies be designed to aid these
households and communities?
Many governments have made use of programs to
provide income support and cash transfers
 Some compensatory response to trade liberalization, but more

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

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broadly applicable to lagging regions and families.
Focus on income based rather than farm related support.
3 common features for the conditional cash transfer payments:
 targeted to rural areas and to poor households,
 based on number of children,
 continuation contingent on final impact on human capital.
Perhaps the most important point is to support the long-term
human capital investments in children.
Objective : not to keep people on the farm or even rural, but to
promote opportunities and mobility of future generations
(economically and geographically).
For the immobile, such as the elderly, other safety net aspects are
being adopted in several developing countries.
Back to the importance of growth
 Middle income countries have at least the potential to finance

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such schemes, and in many countries they do.
To what extent can least-developed countries finance and
implement such safety nets?
This returns us to the theme of rapid growth and agriculture’s
role in securing that growth.
Rapid growth allows at least the potential for a rapid growth of
fiscal revenues.
This connects us again to the importance of the composition of
government spending.
Foreign assistance can help, but it cannot in a sustained manner
replace domestic resources wisely spent.