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DEPARTMENT OF AGRICULTURAL AND RESOURCE ECONOMICS
DIVISION OF AGRICULTURE AND NATURAL RESOURCES
UNIVERSITY OF CALIFORNIA
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Working Paper No. 438
INTERNATIONAL ECONOMIC DEVELOPMENT AND U. S. AGRICULTURE
by
Alain de Janvry
California Agricultural Experiment Station
Giannini Foundation of Agricultural Economics
April 1987
4
INTERNATIONAL ECONOMIC DEVELOPMENT AND U. S. AGRICULTURE
by
Alain de Janvry*
Prepared for the Benjamin H. Hibbard Memorial Lecture Series, Department of
Agricultural Economics, University of Wisconsin, Madison, April 10, 1987.
*Professor and Chairman of the Department of Agricultural and Resource
Economics, University of California, Berkeley.
INTERNATIONAL ECONOMIC DEVELOPMENT AND U. S. AGRICULTURE
Alain de Janvry
As the economic crisis of the early 1980s has painfully evidenced, the
economic health of the less developed countries (LDCs) in an increasingly
interrelated world is an important determinant of the export performance of
the more developed countries (NDICs). In no sector of economic activity is this
more visible than in agriculture.
With U. S. agriculture exporting 33 percent
of the total value of its output of grains and soybeans and with the LDCs absorbing 43 percent of these exports in 1985, a falling import demand for food
and feedstuffs in the LDCs has severe income effects on U. S. farming. United
States agriculture is thus a direct beneficiary of strong economic growth in
the LDCs.
With both the LDCs and U. S. agriculture in the midst of the most serious
economic crisis since the 1930s, it is essential to define development strategies for the LDCs that can both stimulate growth and reduce poverty--given the
external context that these countries will have to face in the years to come-as well as expand the export market for U. S. farmers. Since, as we shall
argue, a strategy to reactivate LDC growth in the current international order
inevitably has to promote agricultural development in the LDCs, reconciling
LDC economic growth with U. S. farmers' interests is particularly delicate to
achieve and could easily backfire on U. S. exports. It is just such a strategy
which is outlined here. It is based on the following three fundamental propositions which I will develop in this paper:
-21. There exists a renewed role for productivity growth in agriculture
to
serve as an engine of growth for LDC economies.
2. Agricultural growth in the LDCs is not necessarily compatible
with
U. S. farm export interests, but a harmony of interests can be managed
through proper balancing of aid packages.
3. Stimulating growth in LDC agriculture requires far more than adequa
te
exchange rates, trade, and price policies. It also requires costly
technological innovations to reduce production cost and institutional
innovations to reduce transactions costs and to channel collective
action toward the generation of net social gains.
Aliew Role for 4riculture as an Engine of Growth
Theories of Agriculture in Economic Development
That agriculture has a key role to play in economic development is an idea
as old as the field of economic development itself. Historians of Wester
n
Europe, such as Bairoch, have observed how agricultural revolutions preced
ed
industrial revolutions with a lag of 30 to 50 years. These agricultural
revolutions were based not only on important technological breakthroughs
with the
introduction of new crops and new rotations but also on major structural
and
social changes such as the enclosure movement, the massive expropriatio
n of
peasants, and the consolidation of landownership.
Theoreticians of the role of agriculture in economic development
have
stressed different mechanisms whereby agriculture facilitates indust
rial
growth, undoubtedly influenced by knowledge of specific histor
ical experiences.
Jorgenson, extrapolating from the history of Western Europe, identified
the
role of technological change in agriculture in freeing labor for employ
ment in
-3industry. With full employment in all sectors of the economy, rising labor
productivity in agriculture and urban migration are the critical determinants
of industrial growth. Observing, by contrast, the densely populated countries
of Asia and reasoning in a closed economy framework, Fei and Ranis and Lele and
Mellor all stressed the key role of land productivity growth in lowering the
level of food prices and thus transferring an economic surplus to the rest of
the economy through the intersectoral terms of trade. With surplus labor in
all sectors of the economy, Fei and Ranis showed how falling prices lead to
falling nominal wages and rising industrial investment.
With surplus labor
confined to agriculture and income sharing between employed and unemployed in
that sector, Lele and Mellor show that it is possible for technological change
in agriculture to both lower nominal wages in industry and, as a result,
stimulate industrial growth while employment creation in industry reduces surplus labor in agriculture and raises real incomes. Technological change in
agriculture can thus simultaneously accelerate overall economic growth and
reduce poverty. Ohkawa and Rosovsky, by contrast, evidenced how technological
change and surplus transfer through imposition of a land tax was the main
source of government revenues which financed the early stages of the Japanese
industrial takeoff. The transfer of an agricultural surplus to finance industry has also taken the form of forced deliveries in the Soviet Union, Egypt,
and India; of "invisible transfers" through deterioration of the terms of
trade for agriculture resulting from overvalued exchange rates in Latin
America and export taxes in Africa; and through voluntary transfers of agricultural savings into industrial investment when an effective network of rural
financial institutions exists, such as in Taiwan and South Korea. Early development economists have, indeed, mainly stressed the key role of extracting
-4-
an economic surplus from agriculture, more often by coercion than by inducement, thus raising the difficult issue of sustained surplus generation versus
surplus extraction. As Kuznets aptly said in his pioneering study of the role
of agriculture in economic development, "One of the central problems of modern
economic growth is how to extract from the product of agriculture a surplus
for the financing of capital formation necessary for industrial growth without
at the same time blighting the growth of agriculture" (page 53).
With the massive development of an international market for agriculture and
the key role of capital goods and raw materials imports for industry, more
recent studies have stressed the foreign exchange contributions of agriculture
in open-economy models. This can be obtained through either agricultural exports or through foreign exchange savings generated by agricultural import
substitution.
Most important has been the recent reversal in assessing the growth contribution of an agricultural surplus which, instead of being extracted from
agriculture and transferred to industry, allows agricultural incomes to increase and the home market for other sectors in the economy to expand under
the pull of agricultural demand. This new wisdom in the role of an agricultural surplus has been most clearly conceptualized by Mellor and by. Adelman.
The latter, in particular, suggests that, "After the very initial stages of
industrial development, the emphasis in policy toward agriculture should shift
from surplus extraction to surplus creation and to the generation of demand
linkages with the rest of the economy" (page 6). Backward linkages with a
prosperous agriculture create a market for industrial inputs; forward linkages
induce the creation of value added in processing; and final demand linkages
create a mass market for industrial consumer goods, particularly if the land
-5-
tenure system is more egalitarian. As Hirschman indicated, however, the backward and forward linkages with LDC agriculture tend to be relatively weak.
This is not the case for final demand which tends to be significantly directed
at regionally produced nontradables with high labor intensity and low import
content. Empirical studies of final demand linkages in Malaysia (Bell,
Hazell, and Slade) and India (Rangarajan) show that each dollar of agricultural income creates 80 cents to $1.00 of value added in the nonfarm economy.
Mellor, on his side, stressed the demand for labor-intensive services originating in agricultural incomes, with the somewhat perverse implication that
greater inequality in landownership creates more demand for services and hence
greater income multipliers and greater equity in nonagriculture through employment effects. Recent empirical studies that analyze the sources of manufacturing growth originating in agriculture indicate that the home market
expansion effect has indeed been the most important contribution of agriculture in the recent period (de Janvry and Sadoulet, 1986).
The New Context for International Development
The second oil shock in 1980 and the debt crisis in 1981 have brought to a
halt 30 years of sustained economic growth in the LDCs. The economic crisis
which has followed has been extraordinarily profound
bringing real per capita
gross national income in the Latin American nations, for instance, to a level
in 1985 still below that in 1975 (FAO). Any strategy to reactivate these
economies and capitalize on a potential role for agriculture has to be defined
in terms of the context which this crisis has created and which will likely
prevail for the decaae to come. This context is characterized by sluggish
economic growth, rising industrial protectionism, and surplus agricultural production in the Organization for Economic Cooperation and Development (OECD)
-6-
countries, which combine to create limited opportunities for the LDCs to place
manufactured or temperate agricultural products on the markets of the MDCs and
unfavorable commodity prices on international markets. To the export optimism
of the 1960s and 1970s and the ability of marorcountries to successfully shift
from import substitution industrialization strategies to industrial exports-led
growth has followed export skepticism on both the industrial and agricultural
1
fronts. In a highly competitive international market for manufactured
goods, LDCs not yet well established on these markets will likely have to look
for other sources of effective demand.
While the international market is not particularly inviting, most LDCs also
face serious difficulties with their own economies. The external debt of Latin
America doubled between 1979 and 1986 to reach $380 billion. In 1985, debtservice payments absorbed 44 percent of the export value of all goods and
services leading to a sharp decline in capital goods imports and in capital
formation (Economic Commission for Latin America and the Caribbean). With a
collapse in borrowings from private creditors from $56 billion in 1981 to only
$0.3 billion in 1983, and direct foreign investments reduced to a trickle,
these LDCs were left with only one option to avoid defaulting: generate trade
surpluses to cover debt-service obligations and thus principally by reducing
imports. In addition, to control raging inflation, drastic stabilization
policies had to be implemented including exchange rate devaluations, freer
trade, and reductions in government expenditures.
temporarily successful in stemming economic decline
While these policies were
they had a heavy social
cost in terms of aggravated unemployment, sharply falling real wages, and a
worsening in the distribution of income.
..7
Implementation of these stabilization policies followed a period of easy
accumulation of debt--thanks to the high level of liquidity in the international financial system created by the first oil shock--and of systematically
2
overvalued exchange rates and appreciating real exchange rates created, in
particular, by oil- and debt-induced Dutch diseases.' The result was a massive destruction of domestic manufactures that had been created under decades
of import substitution industrialization, the bankruptcy of large segments of
tradable agriculture, and a rapid increase in food dependency. Food selfsufficiency thus decreased from 104 percent in 1969-1971 to 83 percent in
1979-1981 in Mexico and from 107 percent to 82 percent in the Andean group
countries (FAO). Acountry such as Chile, which was importing 14 percent of
its wheat consumption in 1970, was importing 53 percent in 1980.
Agriculture-Led Growth With Export Skepticism
Given this context of export skepticism and much more orthodox trade and
price policies resulting from stabilization efforts, it is clear that expansion of the domestic market to generate final demand for industry will have to
play a much greater role than in the previous three decades. Exchange rate
devaluations, more liberal trade policies, and scaling down of many food subsidy programs have improved prices for the tradable sectors--agriculture in
particular. Agricultural exports from these countries have been made both
more remunerative for producers and more competitive on the world market. More
importantly, currency devaluations have, in many situations, opened opportunities for import substitution in agriculture, thus creating significant possibilities for foreign exchange savings without having to raise the issue of
penetration in international commodity markets. It is this strategy which I
a.
want to explore here. It is a strategy of import substitution, without the
protectionist policies that characterized it in the previous 40 years, where
the opportunity to import substitute was created by the massive debt- and oilinduced disequilibria in the previous period. Instead of a disequilibrium
strategy as proposed by Hirschman in the 1940s, it is now an equilibrating
strategy that can be pursued with neutral monetary, trade, and price policies.
This strategy of agriculture-led economic reactivation occurs in a context
where imports of capital goods for a modern industrial sector are essential
and, in most cases, binding (in a two-gap sense) on the growth rate of industry. Domestic capital goods are imperfect substitutes for imported capital
goods, and the productivity of the latter is generally superior to that of the
former. If export skepticism means that the share of industrial output that
can be exported is unlikely to rise in the foreseeable future, productivity
growth in agriculture to allow import substitution in agricultural commodities
and foreign exchange savings is an essential source of growth.
Witnout this,
if food imports have priority over capital goods imports, growth will be
choked by rising food imports, foreign exchange shortages, and (eventually)
falling capital goods imports and industrial growth (de Janvry and Sadoulet,
1987). In an open economy with industrial export skepticism, imperfect substitution between domestic and imported capital goods, binding foreign savings, and significant import substitution possibilites in agriculture without
necessary protectionism, productivity growth in agriculture becomes an important new source of economic reactivation.
Admitting, for the moment
that agricultural productivity can indeed be
increased, there are a number of essential conditions that must hold for this
productivity growth to effectively induce overall economic growth. Clearly,
-9-
in the current context of large-scale unemployment, the labor contribution of
agriculture is irrelevant. With food and feed grains massively traded and more
liberal trade policies, surplus extraction from agriculture through falling
intersectoral terms of trade is less important than it historically was, except
in some very large countries such as India where the role of trade remains
minimal. The main contributions of agriculture are clearly foreign exchange
savings and domestic market expansion. The latter, in particular, will be
enhanced if the elasticity of substitution between capital and labor in the
nontradables sector is high. With surplus labor in the economy, a high elasticity of substitution implies that this sector is basically demand driven.
Income effects in agriculture will thus have large employment and income multipliers in the nontradables sector. Recent studies of the economic structure
of the Punjab, or of cities such as Lagos, Lima, and Mexico City, indeed have
shown that this sector is very large and can be highly dynamic if a demand pull
exists. The elasticity of substitution between capital and labor can be increased with the development of appropriate technologies and management techniques. Mobilizing domestic savings for that sector and giving it access to
institutional credit is also essential to relax the capital constraint if
effective.
We conclude that the current context of debt, stabilization policies,
industrial export skepticism, and import substitution possibilities in food
and feed creates new opportunities for many LDCs to use productivity growth in
agriculture (and the development of the home market for industry and services
out of the expenditure of the agricultural surplus) as a major source of economic reactivation.
-10The Conditions for Harmony Between
LDC Agricultural Development and U. S. Farm Export Interests
While stimulating agriculture appears to be an attractive element of a
strategy to reactivate many LDC economies, expanding export markets for U. S.
farm products is an equally essential component of a strategy to alleviate the
serious crisis of farm incomes. How can these two strategies, which are apparently incompatible, not run into conflict? Perception of this potential conflict has certainly been grasped by the farm lobbies. Similar to the pressures
of organized lobbies to shelter industrial employment from trade by protectionist policies, a number of farm commodity associations have been putting
demands on Congress to enact legislation that would restrict the use of foreign
aid to promote agricultural development in commodities that compete with U. S.
farm exports. Recent World Bank loans to Argentine and Brazilian agricultures
were also loudly decried.
Agricultural economists have, in general, taken the opposite position and
argued that, because of the strong income effects that agritultural development
can create and tne high income elasticity of demand for food; there should
exist a harmony of interest between LDC and U. S. farmers. As Robert Paarlberg
puts it, "The possibility of a partnership between American and Third World
farmers rests on the unique contribution which farm production can make in poor
countries to broad-based incoine growth and, hence, to dietary improvements and
enlarged food consumption demands. .
(In the developing countries), where
most of the income gained from farm growth will go directly into additional
food consumption, the paradoxical result of successful farm development can be
larger farm import demand. . . . Animal feedstuffs, in particular, will often
be imported in even larger volume, in response to income growth originally
-11-
turned loose in developing countries by farm sector prosperity" (pages 1
and 2). While technological change in agriculture only increases supply in
the MDCs since the income elasticity of demand for food is very low, in the
LDCs, where it is high, technological change in agriculture can increase both
supply and demand--and eventually demand more than supply--leading to rising
farm imports. Asimilar position has been advocated by Lee and Shane at the
U. S. Department of Agriculture, by Schuh at the World Bank, and by the Curry
Foundation.
While it is true that (1) the LDCs have been the fastest growing source of
export demand for U. S. agriculture, (2) it is the countries with the highest
growth in per capita income that have increased their agricultural imports the
most, and (3) the countries with successful income growth have usually also
been the ones with rapid agricultural growth, the relationship between productivity growth in agriculture and increased import demand for food and feed
grains is highly complex and can easily lead to falling import demand unless
properly managed (de Janvry and Sadoulet, 1987).
For one thing, there is an obvious problem of time lag between productivity
gains in agriculture (that allow import substitution and lead to a short-run
fall in agricultural imports) and higher real incomes in the economy at large
and eventually higher levels of import demand. This delayed effect occurs
through foreign exc14nge savings, the importation of high productivity capital
for industry, higher industrial employment, urban migration and declining surplus labor in agriculture and the informal urban sector, and rising levels of
real per capita income in all sectors of the economy. It occurs differently
in countries at different levels of per capita income. In poorer countries,
where the agricultural sector looms large and where the capital/output ratio
-12-
is still low, rising productivity in agriculture and capital imports for
industry create strong income effects. For the medium-income LDCs, income
effects translate into a sharp acceleration of grain demand as consumption
patterns shift from the direct intake of food grains to the indirect consumption of feed grains in animal products. In the higher income LDCs, economies
of scale in manufacturing create additional sources of income growth beyond
the growth of agricultural productivity.
Existence of a lag between productivity growth in agriculture and significant real income growth--that is, of falling import demand preceding eventually
rising import demand in the future--implies that different groups in society
with different discount rates will have a different assessment of the gains for
trade created by productivity growth in LDC agriculture. Commodity associations and exporters hard pressed to increase their turnover rate on capital
will typically have discount rates too high to value positively the present
value of the change in the flow of import demands. For them, a harmony of
interests between technological assistance to LDC agriculture and farm exports
does not exist. International aid agencies and foreign policy administrators,
by contrast, tend to value more highly the long-term prospects of active trade
relations between MDCs and LDCs. At low discount rates, the present value of
LDC agricultural import demand will indeed tend to be positive. It is thus
impossible to talk about a potential harmony of interests without specifying
for whom in the MDCs.
There exists, however, a number of policy instruments that can be used to
raise the discount rate at which the present value of the change in LDC farm
imports induced by technological change is positive. One is to make sure that
the linkage effects between agriculture and the rest of the economy are indeed
-13-
going to induce real income effects that are large and fast. India is an example where these linkages have failed. The Green Revolution was successful
at increasing agricultural output and farm incomes in the regions where it
occurred. On a national scale, however, excessively high international
capital/output ratios in basic industries, breakdowns in the socialized sector
(particularly energy and transportation), and effective rent seeking in the
bureaucracy dampened growth multipliers and limited employment creation. With
stagnant real wages for the last 30 years, productivity growth in agriculture
led to food self-sufficiency, massive accumulation of food stocks, and small
wheat exports, while some 35 to 40 percent of the population remains fed below
nutritional standards. Successful resolution of its linkages problem could,
however, transform India into a massive food importer.
The Chinese have, for the moment, equally failed to translate an extraordinarily successful agricultural development program into industrial growth
and real income effects beyond agriculture. This is due to the fact that price
liberalization and the individual responsibility system have not yet been
widely applied to the urban sector and that domestic markets are poorly integrated. The result has been slow improvements in urban incomes, sharply
declining food imports, and rapidly rising exports of corn and soybeans. Like
India, China could again become a large importer of food and feed when it
solves its linkages problem.
The multiplier effect of agricultural productivity growth on income per
capita can thus be enhanced by better intersectoral linkages, lower incremental capital/output ratios in industry, more labor-intensive technology, and
a more elastic supply response in the nontradables sector. All of these can
oe the focus of aid programs. If, as calculations in archetype growth models
-14-
tend to indicate, this is not yet sufficient to reconcile LDC agricultural
productivity growth with U. S. farm exports interests as seen by farm lobbies,
then additional sources of income effects must be created elsewhere in the
economy (de Janvry and Sadoulet, 1987). The most logical is productivity
growth in the industrial sector. Indeed, there always exists a level of industrial productivity growth that is able to make the present value of the change
in agricultural imports (induced by a given rate of productivity growth in
agriculture) positive at whatever level of discount rate.
What this implies is that, if international aid programs are to be beneficial to both the LDCs and U. S. farmers, the need is to deliver aid, not as a
set of piecemeal projects, but as a comprehensive package. Technological
progress in agriculture, which has been most effectively promoted by the network of international agricultural researcA centers of the CGIAR, must be complemented by improving intersectoral linkages, provision of labor-intensive
technology for the nontradables sector, and productivity growth in industry.
Assistance to productivity growth in industry is particularly critical in the
newly industrialized countries (NICs) where the weight of industry is the
greatest. The practice of discontinuing aid to these "graduating" countries
is clearly not in the best interest of U. S. farmers since it is precisely
where it would have the greatest impact on farm imports demand--particularly
feedstuffs.
In conclusion, while U. S. farmers would benefit most from Hong Kong-style
development strategies in the LDCs, where agriculture is neglected and industrial exports are the engine of growth, this type of strategy is not viable
under export skepticism. Given this fact, agricultural development has to be
a pillar of sustainable growth in these countries. A dynamic agriculture in
-15-
the LDCs can nevertheless be advantageous to U. S. farmers if aid programs to
technological change in agriculture are complemented by careful management of
intersectoral linkages and assistance to productivity growth in other sectors
of the economy which are maintained in the graduating countries as well.
Beyond Price Policy: The Role of Institutions in Agricultural Development
How can LDC agriculture be induced to grow faster in order to capture the
space available for import substitution and to generate the desired income
effects? It is clear that the well-known, terms-of-trade bias against agriculture that originated mainly in overvalued exchange rates, widespread food
subsidies, and heavy export taxes has been significantly reduced since 1980.
This has been due to a combination of abandonment of import substitution industrialization policies and shifts to open-economy models; conditionality policies associated with debt renegotiations, improvea economic wisdom due in no
small measure to the sustained efforts of the World Bank; and the simple
upward pressures on prices resulting from supply falling benind demand and
exhaustion of foreign exchange reserves.
Between 1969 and 1980, for instance,
the real prices of food and/or export crops have increased in all the African
nations, with no country lowering the real prices of both of these two groups
of commodities (Ghai and Smith).
With a very low aggregate elasticity of
supply response in these countries (Bond), rising prices have, however,
curtailed consumer demand and transferred income to producers without inducing
any significant output response. This demonstrates that price incentives are
indeed necessary but not sufficient. Needed, in particular, are technological
and institutional innovations that can reduce production and transactions costs
and hold in check the negative aspects of collective action.
-16-
While it is impossible to discuss here the great variety of technological
and institutional innovations that are necessary to make the supply response
of agriculture more elastic (be it only because they are highly historically
and geographically specific), there are some useful principles which economic
theory provides us with to organize our thoughts about this issue and design
policy interventions. We all know that a distinctive feature of the less-developed economies is the extensiveness of market failures and market imperfections. The implication is that it is in those economies that the theory of
the first best is least likely to hold true and that, by contrast to the Coase
theorem, the distribution of assets has a powerful impact not only on the distribution of personal income but also on economic efficiency and the rate of
economic growth. Market failures and imperfections originate in the existence
of a whole set of transactions costs additional to the production costs specified in the economic theory of the firm. Transactions costs typically include
the costs of obtaining information and of negotiating, monitoring, coordinating, and enforcing contracts. These costs originate in the opportunities
which transactions offer to shirk and cheat at the expense of the other party
or parties. Markets fail when transactions costs are greater than the value
which the transaction creates for at least one party. Similar to the way technological innovations serve to reduce production costs, institutional innovations serve to reduce transactions costs.
By placing us away from the abstract world of the first best, the theory
of transactions costs allows us to understand how institutions can be used as
surrogates for market forces in increasing the level of efficiency of resource
use. Rational choices by contracting parties thus explain the logic of such
fundamental features of agrarian economies as interlinkages in factor markets;
-17-
fixed versus share rents in land transactions; time versus piece rates in wage
payments, the role of the family and groups; and the importance of ideology,
loyalty, and trust. Those institutions that minimize total transactions costs
are the ones that will survive the test of competition and tend to prevail,
except for inertia and time-dependent paths or unless they have severely negative distributional or legitimation implications for dominant groups (including the state when it has enough relative autonomy) which can block their
emergence.
One important implication of transactions costs is that different sizes of
farms will face different levels of effective factor prices. This results, in
particular, from rising costs of labor supervision as the ratio of hired to
family labor increases, lower land prices as transactions costs are spread
over larger units, and generally lower costs of capital as privileged access
to national sources of subsidized institutional credit tends to increase with
asset ownership. Existence of these transactions costs implies that different
classes of farmers will benefit unequally from a same public good according to
their effective factor prices and that any measure to redistribute assets also
has efficiency implications. Programs of foreign assistance to LDC agriculture have to be based on a clear understanding of the origins and implications
of transactions costs and contribute to inducing institutional innovations
that will reauce them. Let me give just two illustrative examples.
One is the issue of technological cnange and induced technological innovations, the theory of which was importantly developed by Hayaini and Ruttan.
There is no question that technological changes such as the Green Revolution
have been a major success of international assistance in raising land productivity in the LDCs. As Hayami and Ruttan have shown, technology tends to be
-18biased toward saving the factors that become relatively
more expensive. It
will be biased toward landsaving with Green Revol
ution-type innovations when
land prices rise relative to wages and biased toward labor
saving with especially mechanical innovations when wages rise relative to
land values. Once
transactions costs are introduced in the analysis, there
no longer exists a
unique market-determined optimum technological bias as each
farm has its own
optimum bias, more heavily weighted toward landsaving
on the small farms and
toward laborsaving on the large ones. Farmers with diffe
rent farm sizes will
thus demand different technological biases. It is these diffe
rential demands
on the nature of technology, which the state aelivers as
a public good, that
gives its true meaning to collective action. And the outco
me of collective
action will likely be a technological bias aifferent from that
whicn the state
would choose, for instance, to maximize value added in agricultur
e. In this
case, with a skewed distribution of landownership, democratic
rules will lead
to a technological bias more oriented to landsaving than the state
's optimum
while successful lobbying by larger farmers will result in a bias
more oriented
toward laborsaving than the state's bias. Successful rent seeki
ng by large
farmers in biasing technology toward their purposes can have a
high social
efficiency cost. Institutional mechanisms to control rent seeking
should thus
be an integral part of agricultural assistance programs. In a
context of pervasive transactions costs, asset distribution consequently affec
ts not only the
distribution of income but also the bias of technology and the effic
iency of
resource use. Some of the negative social implications of the
Green Revolution
have resulted from failing to properly account for these relat
ionships.
Another example is the politically explosive issue of redistribu
tive land
reform. While these reforms have been at the basis of succe
ssful agricultural
v
-19-
development in South Korea and Taiwan, they have failed to be implemented in
Latin America, and policies to redistribute land have largely been abandoned.
With transactions costs, total factor productivity tends to decrease with farm
size due to rising labor costs. A land reform that transforms large netemploying farms into family farms can thus improve both efficiency and equity.
Because it generates net social gains, it can be done with full compensation of
the expropriated landlords. But if the cost of capital decreases with farm
size, total factor productivity may well increase with farm size once major
landsaving technological changes have become available. In this case, without
appropriate reforms in credit and technological institutions, land reform
becomes a redistributive measure with an efficiency cost and hence, for practical purposes, an unlikely event. It is in that sense that technological
change can be used as a strategy to block future land reforms. Here, again,
the highly mixed results of past land reforms and the current deadlock in most
of Latin America are in no small measure due to the failure to properly understand and take into account the pervasiveness of transactions costs in agrarian
economies.
Another important aspect of transactions costs is in the difference between stabilization and adjustment policies and in what it takes for success
of each of these to occur. In response to the debt crises of 1981 and as part
of conditional loans, most countries have had to implement both stabilization
and adjustment programs--the first aim at controlling inflation and the latter
at reducing the deficit in the balance of current accounts. While the two are
complementary, there are major differences in their timing and modes of implementation. While stabilization can be postponed, it can be approached through
shock treatment since it basically aims at controlling monetary and not real
-20-
variables (Bianchi, Devlin, and Ramos). Adjustment, by contrast, cannot be
postponed (unless the country has access to unconditional new loans) but needs
a gradual approach since it involves changes in the real structure of the
economy. Nbre specifically, adjustment implies a rising real exchange rate
and reallocation of resources from the nontradable to the tradable sectors,
agriculture in particular. This involves substantial transactions costs, particularly in the LDCs which have many imperfect and incomplete markets. It
requires new information on dynamic comparative advantages, the definition and
negotiation of new contracts, the transfer of resources which may have a considerable degree of specificity and immobility, the development of new skills,
and implementation of social programs to protect the poor from the short-run
costs of adjustments.
In Latin America, a first phase of recessionary adjustment in 1981-1984
was generally successful in equilibrating the balance of current accounts by
devaluation and austerity that created a strong contraction of imports.
When
growth started to resume in 1984, however, failure to adjust the economies
toward tradables created an import boom and strong overvaluation of the exchange rates with the need to devalue. Frustration of the attempt at adjustment with growth was dealt a final blow by sharply falling external terms of
trade in 1986 and further reduction in international capital transfers. This
experience clearly shows that a more orthodox price policy is necessary but
not sufficient for successful adjustment. The transactions costs associated
with complex and sticky structural transformations in the reallocation of
resources toward the export and import substitution sectors need to be
understood and reduced through a multiplicity of institutional innovations.
-21Conclusion
In the context of crisis of farm exports in the United States and of debt
burdens with export skepticism in the LDCs, accelerating the growth of agriculture in the LDCs offers an attractive element of a solution. In order for
the two crises to be jointly solved, foreign aid to LX agriculture has to be
carefully packaged into comprehensive programs of intersectoral linkage
development, productivity growth in industry, and employment creation in nontradables. Only under these conditions can productivity growth in agriculture
be expected to generate income effects sufficiently large to increase the level
of food and feed import demand with lags short enough to make it economically
attractive, even to private interests. Consequently, a piecemeal project
approach to aid or aid programs that focus on only one sector of the economy
are unlikely to achieve the desired harmony of interests. This is, unfortunately, the way most international assistance is dispensed, even by the highly
effective CGIAR. Also, in the best interest of U. S. farmers, aid programs
should be maintained to graduating countries since it is at that level of per
capita income that increased demand for feed imports will be the greatest.
For the United States, more than increased exports to the LDCs will be
needed to solve the problem of farm incomes since excess production originating
in the MDCs will vastly exceed LDC import demand, even under the most optimistic scenarios of growth in the latter. Thus transfers of resources, both
land and people, out of agriculture will remain needed in the years to come
but to an extent inversely proportional to the growth performance of the LDCs.
For the LDCs, where significant progress has been made in the design of price
policies that reduce the historical antitradables and antiagricultural biases,
more than price incentives will be necessary to achieve agricultural growth.
-22-
First, it is clear that a solution has to be found to the debt crisis if
it is not to frustrate the linkage effects of rising real exchange rates and
productivity growth in agriculture. The income effects created in agriculture
will otherwise be exported to service the foreign debt. Productivity growth
in agriculture will reduce import demand and backfire on U. S. farm interests.
Recent progress of import substitution in Latin American agriculture, induced
by significant increases in real exchange rates, has indeed been successful in
increasing food self-sufficiency while creating minimal and often negative income effects. Agricultural interests in the United States should thus support
initiatives to ease the debt burden on LDCs, especially since it is usually
the most indebted countries which tend to be at an income level where the
shifts in consumption patterns from food to feed grains are happening and,
hence, where income effects have strong consequences on grain import demand.
Easing the debt burden calls on measures to reduce service payments by lowering interest rates or by placing limits like in Peru, to increase foreign
direct investment and induce repatriation of speculative capitals through
debt-equity swaps like in Chile, to increase direct transfers of capital and
new loans from the International Monetary Fund and the World Bank in spite of
debt fatigue, and to realistically cancel part of the debt obligations.
Second, while domestic policies have been generally effective in raising
the real exchange rate for agricultural products, the policy interventions
that have created sharp drops in international prices should be opposed. This
includes highly protective policies in the EEC and the United States on
commodities such as sugar where tropical countries have clear comparative
advantages and export subsidies on rice and wheat. In general, farm income
objectives in the MLOCs should be decoupled from protectionism and freer trade
-23-
encouraged. The Uruguay round of General Agreement on Tariffs and Trade negotiations offers a historical first step in that direction. Liberalization in
industrial markets, both in the MDCs and in the LDCs which are still under
stringent import substitution industrialization programs, can, of course, be
most beneficial to U. S. farm interests.
Finally, technological innovations to reduce production costs and institutional innovations to reduce transactions costs (in a context of highly imperfect markets) will be critical. With the current scaling down of public
expenditures associated with stabilization policies, a significant fraction of
the programs of technological and institutional innovations may well have to
be borne, in the short run at least, by international aid. Farm interests in
the United States should, consequently, be highly supportive of generous appropriations to foreign aid budgets and induce the United States to honor its
budgetary commitments to multilateral institutions.
The land-grant colleges, which have been so effective in promoting technological change in U. S. agriculture, should become actively involved in
developing new technologies appropriate for the specific resource endowments
and the price and institutional conditions of LDC agriculture. The traditional reticences in using Agricultural Experiment Station resources to support work on international agriculture programs should at last be overcame.
Indeed, we have argued that assisting productivity growth in LX agriculture
in the context of balanced aid packages should be seen as a wise investment
for U. S. farmers. Our social science professions applied to agriculture have
a major role to play in identifying transactions costs, designing institutional alternatives to increase efficiency and equity, and showing how to
integrate aid into balanced programs that will ensure harmony of interests
between LUG development and U. S. farm interests.
A
-24-
•11,
Footnotes
•
1,
Export skepticism refers to a situation where the share of industry
wnich is exported is unlikely to rise. This, of course, does not mean that,
in a normative sense, every effort should not be made to increase the export
share. Key to this is to reduce the antiexport bias created by overvalued
exchange rates and by downward pressures on the real exchange rate. In Latin
America, the share of manufactures in total exports is 24 percent as opposed
to 86 percent in Taiwan and 90 percent in South Korea. The share of exports
in gross domestic product is 13 percent in Latin America while it is 52 percent in Taiwan and 38 percent in South Korea.
2
The real exchange rate is defined as the ratio of the price of
tradables to the price of nontradables goods. In agriculture, most of the
important commodities are tradable (Valdes). This is not the case in nonagriculture where a significant share of economic activity is nontradable,
including construction, services, the government sector, and many products of
the informal sector. A rising (or so-called "depreciating") real exchange
rate will thus be generally favorable to agriculture.
3
The "Dutch disease" describes a situation where an export sector (e.g.,
oil, gas, coffee, or drugs) is suddenly booming. The income effects that this
creates raise the price of nontradables which are in generally inelastic
supply, relative to those of tradables. The consequent falling (or 'appreciating") real exchange rate is unfavorable to agriculture, which is largely
tradable, and to the tradable sectors of industry. A booming export sector
can thus be highly destructive on the other tradable sectors. The rapid accumulation of debt or a massive transfer of foreign aid can also create a
Dutch disease effect.
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