1 Agriculture and Development By Aleksandra Olszewska Emanuel Ules

2 Agenda 1. Facts 2. Why is agriculture so important for Developing Countries? 3. A short history of agricultural development thinking… 4. CAP 5. Threats for Agricultural Development 6. World Development Report 2008

3 Agriculture and Development – some facts

4 Per capita Dietary Energy Supply Source: FAO

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6 The Candy Question What is the percentage of labour force employed in agriculture in Sub-Saharan Africa? 65% Source: World Bank

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

8 Why is agriculture so important – Continuation food provision food provision raw materials supply raw materials supply balance of payments (as imports increase, agricultural goods make up a large share of exports in poor countries) balance of payments (as imports increase, agricultural goods make up a large share of exports in poor countries)

9 A short history of agricultural development thinking… ‘50s & ’60s: protective tariffs, exchange rate controls and selective investment incentives ‘50s & ’60s: protective tariffs, exchange rate controls and selective investment incentives '70s: "growth with equity”, research and investments in rural infrastructure '70s: "growth with equity”, research and investments in rural infrastructure ‘80s & ’90s: GATT/WTO, Washington Consensus - trade barriers, transportation costs and communication costs fell ‘80s & ’90s: GATT/WTO, Washington Consensus - trade barriers, transportation costs and communication costs fell Current decade: community-driven development 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”

10 Why is agriculture different to other sectors? land fertility depends on past exploitation >> current activity affects future production (maximise intertemporal utility ) land fertility depends on past exploitation >> current activity affects future production (maximise intertemporal utility ) incomplete contracts incomplete contracts (cannot account for land fertility) dependence on natural and dependence on natural and environmental factors production patters (long plant growing 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 unforeseen events can disrupt the agricultural activity of whole regions

11 Barriers to trade >> development the example of CAP Started in 1962 – price floors - to keep agricultural prices high and stable Started in 1962 – price floors - to keep agricultural prices high and stable For most of CAP’s existence prices were % higher than world prices. For most of CAP’s existence prices were % 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) 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 Unfair – owners of large farms gain most, price floors reward output regardless of the farm size (European Commission estimated that in % of farmers received 80% of benefits)

12 Candy Question II 1987 – over ½ of the budget went to … of population 0,4 %

13 CAP’s share in expenditure Percentage of CAP expenditure in EU budget Percentage of CAP expenditure in EU GDP

14 CAP problems supply (green revolution, EU became a net exporter) supply (green revolution, EU became a net exporter) average farming income still lower than for an average worker average farming income still lower than for an average worker industrialisation (pollution, 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 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) BUT cash payments made to land owners not farmers (the British queen gets over €1,5 millon, Nestle €30 million)

15 So why do we keep the CAP? Initially: average incomes rose so the share spent on food fell average incomes rose so the share spent on food fell own food supply own food supply empathy for farmers empathy for farmersToday: volatile markets volatile markets public goods public goods sustainable rural environment sustainable rural environment

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

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

18 „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

19 Interactions Agriculture and the Rest of the Economy farm and non-farm rural activities strongly related 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 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 savings derived from non-farm activities can be used to acquire inputs and adopt improved agricultural technologies

20 World Development Report 2008: Agriculture for Development Recommendations for agriculture-based countries of Sub-Saharan Africa: building markets and value chains building markets and value chains a smallholder-based productivity revolution in agriculture a smallholder-based productivity revolution in agriculture expanding agricultural exports expanding agricultural exports securing the livelihood and food security of subsistence farmers securing the livelihood and food security of subsistence farmers labor mobility and rural non-farm development labor mobility and rural non-farm development

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