Changing advantage of small vs. large farms: Experience from Asia and Africa Kei Otsuka Kobe University and Institute of Developing Economies Presented at the Conference on “Agricultural Transitions along the Silk Road” on April 4, 2016, Almaty in Kazakhstan 1

Farm Size in Asia and sub-Saharan Africa (SSA) Asia Farm size is tiny and generally declining. We observed either the weakened inverse relationship between farm size and productivity or the emergence of positive relationship, implying the increasing advantages of large farms. In order to maintain efficiency of agriculture in Asia, farm size expansion must take place. But land markets are distorted in many Asian countries including Japan, China and India. SSA Farm size is large but more rapidly declining than in Asia due to more rapid population growth. Recently, several studies found the emergence of inverse relationship in this region. 2

Table 1. Average operational farm size in selected countries in Asia CountryAverage size (ha)Year Bangladesh / India / /03 Indonesia Philippines Thailand Japan

Changing Optimum Farm Size Family farm dominates in agriculture almost throughout the world due to the difficulty in monitoring hired labor (Feder 1985; Hayami and Otsuka 1993). Low income (wage) economy: Small farm with family- labor intensive production methods is efficient. High income (wage) economy: Large farm with labor- saving, capital-using, and land-using production methods is efficient. When real wage rate increases, cost of labor-intensive production increases faster than that of capital-intensive production. Super large mechanized private firms may be efficient in land-abundant countries in Latin America and Central Asia. 4

Fig. 1 Long-run average cost (LRAC) and short-run average cost (SRAC) curves in low-wage and high- wage economies 5

Relationship between farm size and productivity (e.g., crop yield) The inverse relationship tends to be observed in low-wage economies when efficient small farms and inefficient large farms coexist, e.g., South Asia and SSA. The positive relationship tends to be observed in high-wage economies, when inefficient small farms and efficient large farms coexist, e.g., Japan. It is worth emphasizing that when land markets function efficiently, only efficient farms exist so that neither the inverse nor positive relationship is observed. Indeed, the inverse relationship was often observed in South Asia, but not in Southeast Asia except in the Philippines. This argument seems particularly valid for grain production (for production of high-value agricultural products, see Otsuka et al. (2016, forthcoming)). 6

Evidence from Case Studies in Asia 7

A Brief History of Japanese Agriculture “Miraculous” growth of the economy at 10% per year in the 1960s with rapid wage growth  Widening income gap between farm and non-farm sectors  Heavy price support and subsidization for agriculture since the early1960s  High rice price resulted in huge rice surplus and later led to the introduction of acreage restrictions. Moreover, land markets were suppressed by land reform laws  Preservation of small-scale farms despite scale economies and high wages, leading to increasing dependence on food imports. 8

9 Table 2. Comparison of Revenue and Production Costs per Hectare of Rice Production by Size of Cultivated Area (ha) in Japan (average=100) Less than Larger than 3.0 Larger than 5.0 Average size 1960 Revenue n.a.100 Labor costs n.a.100 Machinery cost n.a.100 Total cost n.a Revenue Labor costs Machinery cost Total cost

10 Fig. 2 Changes in the Grain Self-Sufficiency Ratio in Japan, Korea, and Taiwan

11 Not only Japan but also Taiwan and Korea have followed similar paths Question: What will happen to China, India, Indonesia and other high-performing and populous countries in Asia where the wage rate has been rising sharply and will continue to rise rapidly, but the average farm size is small (e.g., 0.6 hectare in China)?

Emerging Advantage of Large Farms in Other Asian Countries 1.Cross-country regression analysis by Otsuka et al. (AJAE 2013): Wage increase  Farm size expansion to adopt mechanization  Emergence of scale advantages  Activation of land rental markets 2.Case studies using household data in Indonesia (Yamauchi 2014), Vietnam (Liu, Violette, and Barette 2013), India (Deininger, Jin, Liu, and Singh 2014), and China (Wang, Yamauchi, Otsuka, and Huang 2014) 12

1. Indonesia Small farms in Java (0.3 ~ 0.4 ha) vs. “Large” farms in outer islands (1.0 ~ 1.8 ha) Wage increase  Substitution of labor by machines particularly by larger farmers  Farm size expansion by larger farms by renting in land  Higher growth of income by large mechanized farms, suggesting the emergence of positive relationship between farm size and crop yield per ha. 13

2. Vietnam Wage growth  Increased machine renting particularly by large farms  Farm size expansion by land renting (e.g., from 1.0 ha to 1.4 ha in south)  Lessened inverse relationship between farm size and rice yield; the elasticity of crop yield with respect to farm size changed from in 1992/98 to in 2006/08. 14

Fig. 3 Trend of rice yield for all farms, larger farms, and small farms in Vietnam 15

3. China Average farm size is only 0.6 ha and it increases by only 0.05 ha per year in the recent decade. Wage increase  Outmigration + Land renting + Machine rental  The higher growth in income among large farms in the 2000s, suggesting the emergence of scale advantages and consequently the emergence of positive relationship between farm size and productivity. The development of active machine rental markets in China, however, helps reduce handicap for small farms. 16

Fig. 4 Changes in the Domestic Production and Imports of Soybean in China 17

4. India Rapid development of urban areas  Migration of former agricultural workers to urban areas to engage in low-paying service sector jobs  Shortage of labor in rural areas  Mechanization Rhodes (1999) and Jha et al. (2000): Emergence of positive relationship in advanced regions (i.e., Punjab and Haryana) already in the early 1980s Rosenzweig and Foster (2013): Confirmation of positive relationship between farm size and productivity. 18

4. India (continued) Deininger et al. (2014): Based on nationally representative, large-scale, panel data in 1982, 1999, and 2008, the elasticity of crop yield with respect to farm size is found to increase from to -0.05, both of which are significant. The authors attribute this change to mechanization and better functioning of labor markets. It is clear that the efficiency of large farms will continue to increase in India in coming years. 19

What will happen if the current trend continues in Asia? Small farms continue to dominate due to imperfect and regulated land markets, despite the emergence of scale economies due to mechanization. Cost of food production increases due to the continued rise of wage rate, leading to the loss of comparative advantage in agriculture. Food demand exceeds food supply, resulting in massive import of food grains in Asia as a whole and the hike of world food prices. 20

Farm Size and Productivity in SSA To my knowledge, there were no empirical studies estimating the farm size – productivity relationship in SSA until recently. My hypothesis is that the farm size did not matter in primitive, land-using, and extensive farming system, such as slash-and-burn. Recently, however, the inverse relationship between farm size and productivity (mainly yield per ha) has emerged in Uganda, Kenya, and Tanzania. This is presumably because farming system has been intensified with increasing population pressure on limited land. 21

22 Concluding Remarks Small farm size is almost the common problem in Asia, including China, India, Indonesia, and Japan. Even if farm size expansion takes place in a socially or globally optimum fashion in Asia, in all likelihood increased imports of grains by Asia will not be avoided due to the inherent scarcity of land in Asia. The poor throughout the world will starve, if Asia as a whole becomes a massive importer of food grains, as food price will shoot up. Given the emerging inverse relationship, SSA should improve productivity of smallholders. How much supply potential Central Asia has is critically important issue for global food security.

Selected references Otsuka, K. (2013) “Food Insecurity, Income Inequality, and the Changing Comparative Advantage in World Agriculture.” Agricultural Economics 44(S1): Otsuka, K., Liu, Y., and Yamauchi, F. (2013) “Factor Endowments, Wage Growth, and Changing Food Self-Sufficiency: Evidence from Country-level Panel Data.” American Journal of Agricultural Economics 95(5): Otsuka, K., Liu, Y., and Yamauchi, F.(2016, forthcoming) “Growing advantage of large farms in Asia and its implications for global food security,” Global Food Security. Otsuka, K., Liu, Y., and Yamauchi, F. (2016, forthcoming) “Future of Small Farms in Asia,” Development Policy Review. Otsuka, K., Nakano, Y., and Takahashi, K. (2016, forthcoming) “Contract Farming in Developed and Developing Countries,” Annual Review of Resource Economics. 23

Thank you very much for your attention 24