Agriculture and Development

By Aleksandra Olszewska Emanuel Ules 1

Agenda

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Facts Why is agriculture so important for Developing Countries?

A short history of agricultural development thinking… CAP Threats for Agricultural Development World Development Report 2008 2

Agriculture and Development – some facts

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Per capita Dietary Energy Supply

Source: FAO 4

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The Candy Question

 What is the percentage of labour force employed in agriculture in Sub-Saharan Africa?

 65% Source: World Bank 6

Why is Agriculture so Important?

    accounts for about a third of overall economic growth in developing countries Agriculture can be the engine of overall growth in these countries   poverty alleviation is positively related to overall economic development agricultural growth in developing countries has stronger effects on poverty alleviation than growth in other sectors Important source of income Rural poverty has also started to decline many countries over the period from 1990 to 2005 7

Why is agriculture so important – Continuation

 food provision  raw materials supply  balance of payments (as imports increase, agricultural goods make up a large share of exports in poor countries) 8

A short history of agricultural development thinking…

    ‘50s & ’60s: protective tariffs, exchange rate controls and selective investment incentives '70s: "growth with equity”, research and investments in rural infrastructure ‘80s & ’90s: GATT/WTO, Washington Consensus - trade barriers, transportation costs and communication costs fell Current decade: community-driven development Easterly (2005): “Spending $ 2.3 trillion (measured in today's dollars) in aid over the past five decades has left the most aid-intensive regions, like Africa, wallowing in continued stagnation; it's fair to say this approach has not been a great success” 9

Why is agriculture different to other sectors?

     land fertility depends on past exploitation >> current activity affects future production (maximise intertemporal utility ) incomplete contracts (cannot account for land fertility) dependence on natural and environmental factors production patters (long plant growing and animal rearing cycles) >> quick adjustments in production difficult or impossible unforeseen events can disrupt the agricultural activity of whole regions 10

Barriers to trade >> development the example of CAP

    Started in 1962 – price floors - to keep agricultural prices high and stable For most of CAP’s existence prices were 50-100% higher than world prices.

Initially – the EU was a net importer of farm products – manipulating imports so that D and S met at high price levels (import tariffs) Unfair – owners of large farms gain most, price floors reward output regardless of the farm size (European Commission estimated that in 1994 20% of farmers received 80% of benefits) 11

Candy Question II

of population 12

CAP’s share in expenditure

Percentage of CAP expenditure in EU budget Percentage of CAP expenditure in EU GDP

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CAP problems

   supply (green revolution, EU became a net exporter) average farming income still lower than for an average worker industrialisation (pollution, animal welfare, nostalgia)

How they tried to solve the excess supply…

  1992 McSharry reforms: lower price floors almost to the world price levels and compensate a fall in producer surplus by cash payments conditional on limiting production (paying for not producing?) BUT cash payments made to land owners not farmers (the British queen gets over €1,5 millon, Nestle €30 million) 14

So why do we keep the CAP?

Initially:  average incomes rose so the share spent on food fell   own food supply empathy for farmers Today:  volatile markets   public goods sustainable rural environment 15

Threats for Agricultural Development

   Macroeconomic policies designed in the past did not favour agricultural sector (especially exchange rate policies) Financial services in rural areas are often poorly developed  characterized by low repayment rates, poor targeting and low operational and managerial efficiency Lack of infrastructure and technology  Just 4% of the budget of Sub Saharan countries is devoted for agricultural improvement 16

Threats for agricultural development

   Social unrests like wars Berlage and Verpoorten (2007):      Negative impact on FDI Create a large welfare loss Rwanda needed 15 years to reach the same income level as before the civil war Outcome of the war: more poorer population and a more unequal distribution of income Food shortages Natural disasters 17

„Since poverty is also a determinant of violent conflicts, Sub-Saharan Africa may be trapped in a down ward cycle of poverty, conflict and low growth rates“ M. Verpoorten and L. Berlage

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Interactions Agriculture and the Rest of the Economy

 farm and non-farm rural activities strongly related  savings derived from farm activities can be used as start-up capital for rural non-farm activities.  savings derived from non-farm activities can be used to acquire inputs and adopt improved agricultural technologies 19

World Development Report 2008: Agriculture for Development

Recommendations for agriculture-based countries of Sub-Saharan Africa:  building markets and value chains  a smallholder-based productivity revolution in agriculture    expanding agricultural exports securing the livelihood and food security of subsistence farmers labor mobility and rural non-farm development 20

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