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Agriculture and Agriculture and DevelopmentDevelopment

By By

Aleksandra OlszewskaAleksandra Olszewska

Emanuel UlesEmanuel Ules

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AgendaAgenda

1.1. FactsFacts

2.2. Why is agriculture so important for Why is agriculture so important for Developing Countries?Developing Countries?

3.3. A short history of agricultural A short history of agricultural development thinking…development thinking…

4.4. CAPCAP

5.5. Threats for Agricultural DevelopmentThreats for Agricultural Development

6.6. World Development Report 2008World Development Report 2008

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Agriculture and Agriculture and Development – Development –

some factssome facts

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Per capita Dietary Energy Per capita Dietary Energy SupplySupply

Source: FAO

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The Candy QuestionThe Candy Question

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

65%65%Source: World BankSource: World Bank

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Why is Agriculture so Why is Agriculture so Important?Important?

accounts for about a third of overall accounts for about a third of overall economic growth in developing countrieseconomic growth in developing countries

Agriculture can be the engine of overall Agriculture can be the engine of overall growth in these countriesgrowth in these countries poverty alleviation is positively related to poverty alleviation is positively related to

overall economic developmentoverall economic development agricultural growth in developing countries agricultural growth in developing countries

has stronger effects on poverty alleviation has stronger effects on poverty alleviation than growth in other sectorsthan growth in other sectors

Important source of income Important source of income Rural poverty has also started to decline Rural poverty has also started to decline

many countries over the period from 1990 many countries over the period from 1990 to 2005to 2005

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Why is agriculture so Why is agriculture so important – Continuationimportant – Continuation

food provisionfood provision raw materials supplyraw materials supply balance of payments (as imports balance of payments (as imports

increase, agricultural goods make up increase, agricultural goods make up a large share of exports in poor a large share of exports in poor countries)countries)

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A short history of A short history of agricultural development agricultural development

thinking…thinking… ‘‘50s & ’60s: protective tariffs, exchange rate 50s & ’60s: protective tariffs, exchange rate

controls and selective investment incentives controls and selective investment incentives '70s: "growth with equity'70s: "growth with equity””, research and , research and

investments in rural infrastructure investments in rural infrastructure ‘‘80s & ’90s: GATT/WTO, Washington Consensus 80s & ’90s: GATT/WTO, Washington Consensus

- trade barriers, transportation costs and - trade barriers, transportation costs and communication costs fell communication costs fell

Current decade: community-driven development Current decade: community-driven development Easterly (2005): “Spending $Easterly (2005): “Spending $ 2.3 trillion 2.3 trillion (measured in today's dollars) in aid over the past (measured in today's dollars) in aid over the past five decades has left the most aid-intensive five decades has left the most aid-intensive regions, like Africa, wallowing in continued regions, like Africa, wallowing in continued stagnation; it's fair to say this approach has not stagnation; it's fair to say this approach has not been a great success”been a great success”

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Why is agriculture different Why is agriculture different to other sectors? to other sectors?

land fertility depends on past exploitationland fertility depends on past exploitation >> >> current activity affects future current activity affects future productionproduction ( (maximismaximisee intertemporal utility intertemporal utility ))

incomplete incomplete ccontracts ontracts (c(cannot account for land fertilityannot account for land fertility))

ddependenependence ce on natural and on natural and environmental factorsenvironmental factors

production patters production patters ((long plant growing long plant growing and animal rearing cyclesand animal rearing cycles) >>) >> quick quick adjustments in production difficult or adjustments in production difficult or impossible impossible

uunforeseen events can disrupt the nforeseen events can disrupt the agricultural activity of whole regionsagricultural activity of whole regions

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Barriers to trade >> Barriers to trade >> development development

the example of CAPthe example of CAP Started in 1962 –Started in 1962 – price floorsprice floors - - to keep to keep

agricultural pragricultural priices high and stableces high and stable For most of CAP’s existence prices were 50-For most of CAP’s existence prices were 50-

100% higher than world prices.100% higher than world prices. InitiallyInitially – – the the EUEU was was a a net importer of farm net importer of farm

products – manipulating imports so that D and products – manipulating imports so that D and S met at high price levels (import tariffs)S met at high price levels (import tariffs)

Unfair – owners of large farms gain moUnfair – owners of large farms gain most, st, price price floors reward output regardless of the farm floors reward output regardless of the farm size size

((European Commission estimated that European Commission estimated that in 1994 in 1994 20% of farmers 20% of farmers receivedreceived 80% of benefits 80% of benefits))

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Candy Question IICandy Question II

1987 – over ½ of the budget went to 1987 – over ½ of the budget went to ……

of populationof population

0,4 %

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CAP’s share in CAP’s share in expenditureexpenditure

Percentage of CAP Percentage of CAP expenditureexpenditure in EU budgetin EU budget

Percentage of CAP Percentage of CAP eexpenditurexpenditure in EU GDPin EU GDP

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CAP problemsCAP problems supply (green revolutionsupply (green revolution,, EU EU became a became a net net exexporter)porter) average farming income still lower than for an average average farming income still lower than for an average

workerworker industrialiindustrialissation ation ((pollution, pollution,

animal welfare, nostalgiaanimal welfare, nostalgia))

How they tried to solve How they tried to solve the excess supply…the excess supply… 1992 McSharry reforms1992 McSharry reforms: : lower lower price floorprice floorss almost to the almost to the

world price levelworld price levels and compensate a fall ins and compensate a fall in producer producer surplus by cash payments conditional on limiting surplus by cash payments conditional on limiting production production (paying for not producing?)(paying for not producing?)

BUT cash payments BUT cash payments made made to land owners not farmers to land owners not farmers ((the the British queen gets over British queen gets over €€1,5 m1,5 milillloon, Nestle n, Nestle €€30 30 mmililllioion)n)

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So why do we keep the So why do we keep the CAP?CAP?

Initially:Initially: average incomes rose so the share average incomes rose so the share

spent on food fellspent on food fell own food supply own food supply empathy for farmersempathy for farmers

Today:Today: volatile marketsvolatile markets public goodspublic goods sustainable rural environmentsustainable rural environment

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Threats for Agricultural Threats for Agricultural DevelopmentDevelopment

Macroeconomic policies designed in the past Macroeconomic policies designed in the past did not favour agricultural sector (especially did not favour agricultural sector (especially exchange rate policies)exchange rate policies)

Financial services in rural areas are often Financial services in rural areas are often poorly developedpoorly developed characterized by low repayment rates, poor characterized by low repayment rates, poor

targeting and low operational and managerial targeting and low operational and managerial efficiencyefficiency

Lack of infrastructure and technologyLack of infrastructure and technology Just 4% of the budget of Sub Saharan countries is Just 4% of the budget of Sub Saharan countries is

devoted for agricultural improvement devoted for agricultural improvement

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Threats for agricultural Threats for agricultural developmentdevelopment

Social unrests like warsSocial unrests like wars Berlage and Verpoorten (2007):Berlage and Verpoorten (2007):

Negative impact on FDINegative impact on FDI Create a large welfare lossCreate a large welfare loss Rwanda needed 15 years to reach the same Rwanda needed 15 years to reach the same

income level as before the civil warincome level as before the civil war Outcome of the war: more poorer population Outcome of the war: more poorer population

and a more unequal distribution of incomeand a more unequal distribution of income Food shortagesFood shortages

Natural disastersNatural disasters

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„„Since poverty is also a Since poverty is also a determinant of violent determinant of violent conflicts, Sub-Saharan conflicts, Sub-Saharan

Africa may be trapped in a Africa may be trapped in a down-ward cycle of poverty, down-ward cycle of poverty,

conflict and low growth conflict and low growth rates“rates“

M. Verpoorten and L. Berlage M. Verpoorten and L. Berlage

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Interactions Agriculture Interactions Agriculture and the Rest of the and the Rest of the

EconomyEconomy farm and non-farm rural activities farm and non-farm rural activities

strongly related strongly related savings derived from farm activities savings derived from farm activities

can be used as start-up capital for can be used as start-up capital for rural non-farm activities. rural non-farm activities.

savings derived from non-farm savings derived from non-farm activities can be used to acquire activities can be used to acquire inputs and adopt improved inputs and adopt improved agricultural technologiesagricultural technologies

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World Development Report World Development Report 2008: Agriculture for 2008: Agriculture for

Development Development Recommendations for agriculture-based Recommendations for agriculture-based

countries of Sub-Saharan Africa:countries of Sub-Saharan Africa: bbuilding markets and value chainsuilding markets and value chains aa smallholder-based productivity smallholder-based productivity

revolution in agriculturerevolution in agriculture eexpanding agricultural exportsxpanding agricultural exports ssecuring the livelihood and food ecuring the livelihood and food

security of subsistence farmerssecurity of subsistence farmers labor mobility and rural nonlabor mobility and rural non--farm farm

developmentdevelopment

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