Agricultural Economics

Development: meaning and measures

Defining development is normative
or value-laden
Change or transformation that leads to
improvement or progress
A goal and a process
Economic growth
Increase in number, size and/or capacity
Defined as achieving a certain level of
gross domestic product over time
Economic development
Improvement in the quality of life
Defined as achieving a set of social goals
--- welfare or well-being of people
Economic growth:
a wrong measure for well-being
Only paid work is taken into account.
Does not take into account non-financial aspects of well-
being, such as working time.
Does not count the social and environmental costs e.g.,
immediate cost of separating young families, or long
term effects, e.g. crime, natural environment, health.
No account of the distribution of income
Economic growth does not, in itself, make peoples lives
any better.
Simon Kuznets, Nobel Lectures, Economics 1969-1980, Editor
Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992.
Economic growth is a necessary but insufficient
condition for economic development
0
20
40
60
80
100
2003 2006 2009 2012
Income-Poverty Incidence Among Families
Source: NSCB
Economic growth and development
Countries that has made significant achievements in
poverty reduction and human development also secured
long-term economic growth.
Economic growth is an essential condition for the
generation of resources needed to sustain investment in
health, education, infrastructure, and good governance
(law enforcement, regulation).
- Arsenio Balisacan (2007)
Sustainable development
Progress that meets the demands of the present
without compromising the capacity of the future
to meet their own needs
- Our Common Future UN Commission on Environment and Development
thi s impli es:
constant consumption over time
constant stock of resources over time
intra- and intergenerational equity
Producti on Consumpti on
Natural
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Waste
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Waste treated
Waste
recycl ed
Resi dual
waste
The Circul ar Flow Model
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Waste
recycl ed
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waste
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Ecological limits to
economic growth
Ecological limits to
economic growth
Development is
multi-dimensional
Development is
multi-dimensional
Human development
Process of increasing people's choices by
expanding their human functioning, capabilities
and opportunities, as well as raising their level
of well-being in a sustainable manner.
Essentials:
To live a long and healthy life
To acquire knowledge
To have access to resources needed for a
decent living standard
Human development index (HDI)
people and their capabilities should be the ultimate criteria
for assessing the development of a country, not economic
growth alone.
source: http://hdr.undp.org
The Millennium Development Goals (MDG)
Income, employment,
hunger
Education, asset
ownership, employment,
governance
Maternal mortality,
reproductive health care
Forest conservation,
biodiversity protection,
safe drinking water and
sanitation, slum dwellers
Complete primary
education
Under-five mortality rate,
child care
HIV/AIDS, tuberculosis,
malaria
Open-trading,
development aid, debt
problems
source: http://www.un.org
source: http://www.nscb.gov.ph
Core values of economic development
Increase in living standards and environmental
quality
Improvement in functional capability and self-
esteem
Freedom from oppression as well as greater
choice
- Michael Todaro
Elements of economic development
Structural change
Productivity change
Improvement in material welfare
Improvement in literacy and health security
Institutional change
Capacity to generate and sustain GNP growth
Environmental security
Harrod-Domar Growth Model (1930)
Emphasizes the role of savings, investment and
technological change as determinants of growth
Economic growth depends on the level of saving and on
the productivity of the investment that takes place (i.e.
the capital-output ratio)
Virtuous circle: net investment will lead to more capital
accumulation, which generates higher output and
income. Higher income allows higher levels of saving.
Implication: growth will accelerate if the capital-output
ratio can be lowered by policies that encourage saving,
investment, and technological advances.
Harrod-Domar Growth Model (1930)
Households Firms
Consumer Expenditures
Income Rewards
Banks
Savings
Investments
Harrod-Domar Growth Model (1930)
Critici sms
Several factors are also required --- a healthy, educated
workforce, infrastructure, political stability.
Law of diminishing returns --- productivity may be
reduced with each successive unit of new capital,
making investment less productive.
Difficulty to stimulate domestic savings in least
developed countries where income is low.
Foreign borrowing to fill the gap of insufficient savings
could cause debt repayment problems in the future.
Lewis Dual-Sector Model (1954)
Two Sectors:
The traditional agricultural sector:
subsistence in nature with low
productivity, low incomes, low
savings and considerable
underemployment.
The modern industrial sector:
technologically advanced with high
levels of investment operating in an
urban environment.
Underdevelopment is due to the
lack of savings and investment.
Modern industrial sector is
essential.
Lewis Dual-Sector Model (1954)
The industrial sector attracts workers by offering higher
wages. As labor productivity was so low in agriculture,
rural-urban migration will have no impact on rural output.
Rural-urban migration would create rural surplus which
could be sold for higher income and savings. Migrant
workers would also earn higher incomes and generate
more savings.
Trickle down effect: The income generated by the
industrial sector would create demand and also provide
funds for investment, benefitting the whole the economy.
Lewis Dual-Sector Model (1954)
Critici sms
Labor productivity may not be zero since labor demand
in the agricultural sector is seasonal
A constant demand for labor in the industrial sector may
be false because of labor-saving technologies and
declines in industry performance
When the marginal propensity to save is low, funds for
investment and growth will not be made available.
Rural-urban migration has been far larger what the
industrial sector can absorb---urban poverty has
replaced rural poverty.
Lewis Dual-Sector Model (1954)
Some empiri cal evidence
Export-led growth undoubtedly generates employment but
apart from being unsteadythis employment itself
generates unemployment as it interferes with domestically
oriented industry and agriculture and draws more labor into
the cities than the jobs that it createsin Malaysia, the
Philippines and elsewherethis structurally generated
unemployment is increasingly evident.
Frank, A.G.1987. Global Crisis and Transformation in International Capitalism
and Industrial Restructuring.
Lewis Dual-Sector Model (1954)
Some empiri cal evidence
There is a strong monotonic relationship between urban-
rural income differential and migration propensity,
suggesting that urban unemployment have no deterrent
effect on rural-urban migration. While urban employment
expansion remains a valid policyoutput can be increased
only if the supply of labor to urban areas is slowed down
and reabsorbed in alternative employment in agriculture.
Gonzales, E.T. 1990. Rural-Urban Migration: Urban Unemployment and Rural
Urban Disparties in the Philippines. Philippine Review of Economics, Vol. 27
No.2 (1990)
Rostows Five Stages
of Economic Development (1960)
Stage 1 Traditional Society
Characterized by a subsistent, labor-intensive agriculture-
based economy
Low levels of trading (barter)
Resource allocation is determined largely by tradition and
customs
Communal/regional outlook
Political power in the hands of landowners or a central
authority
Rostows Five Stages
of Economic Development (1960)
Stage 2 Transitional Stage (preconditions for takeoff)
Agricultural revolution; increased specialization;
production of surplus for trading
Increased investment in transportation and emergent
manufacturing sector
A more national/international; export of raw material and
import of capital gains momentum
A new class of businessmen emerges.
Rostows Five Stages
of Economic Development (1960)
Stage 3 Take Off
A short period of intensive growth (2-3 decades)
Industrialization begins and radical changes in production
techniques occur
Workers and institutions become concentrated around a
new industry --- entrepreneurship; increased savings and
investment; banks/capital market
The growth is self-sustaining as investment leads to
increasing incomes which in turn generates more savings
to finance further investment.
Rostows Five Stages
of Economic Development (1960)
Stage 4 Drive to Maturity
Takes place over a long period of time, as standards of
living rise and the national economy grows and
diversifies.
Technological innovation is providing a diverse range of
investment opportunities.
The economy is producing a wide range of goods and
services and there is less reliance on imports --- self-
sustaining
Rostows Five Stages
of Economic Development (1960)
Stage 5 High Mass Consumption
The economy is geared towards mass production and
consumerism.
Consumer durable industries flourish.
The service sector becomes increasingly dominant.
Attributes Attributes Traditional Traditional Transition Transition Take off Take off
Drive to Drive to
Maturity Maturity
Mass Mass
Consumption Consumption
Dominant
sector
Agriculture/
subsistence
Agricultural
revolution/
transportation and
manufacturing
Industrialization Diversification in
industry
Dominant service
sector
Outlook Communal/
regional
National/
international
Technology Traditional/
customs/ labor
intensive
Specialized/ labor
intensive
Specialized/
capital intensive
Rapid
technological
innovations
Trade Limited/ barter Expansion of raw
material exports
and capital
imports
Less reliant on
imports; self-
sustaining
Institutions/
ideology
Land owners/
feudalism
Guilds/ emergent
trade sector
Revolution and
independence;
entrepreneurship;
savings and
investments;
State provides
more security
Rostows Five Stages
of Economic Development (1960)
Rostows Five Stages
of Economic Development (1960)
Critici sms
Bias towards western cultures; not applicable to LDCs.
Top-down" or emphasizes a trickle-down modernization
effect from urban industry and western influence versus a
"bottom-updevelopment paradigm which emphasizes
self- sufficiency through local efforts.
Assumes that all countries desire to develop the same
way, disregarding the diversity of values, priorities, and
different measures of development.
Rostows Five Stages
of Economic Development (1960)
Critici sms
All countries do not develop in such a linear fashion;
stages are not mutually exclusive; limited as a predictive
model.
Its mainly highlights the need for investment and is
essentially a growth model. It does not address the issue
of development in the wider context.
Disregards the most fundamental geographical principals:
site and situation --- assumes that all countries have an
equal chance to develop, without regard to population
size, natural resources, or location.
Kuznets Theory
of Modern of Economic Growth (1971)
Kuznets argued that the use of GDP as measure was
not enough
Kuznets defined a new measure, modern economic
growth:
a long-term rise in the capacity to supply increasingly
diverse economic goods to its population, this growing
capacity based on advancing technology and the
institutional and ideological adjustment that it demands
Simon Kuznets, Nobel Lectures, Economics 1969-1980, Editor Assar
Lindbeck, World Scientific Publishing Co., Singapore, 1992.
Kuznets Theory
of Modern of Economic Growth (1971)
Six features of modern economic growth:
High rates of growth of population and output per head.
High rates of increase of multi-factor productivity.
High rates of structural transformation of the economy.
Rapid social, institutional and ideological transformation.
Propensity to reach out to the rest of the world for
markets and raw materials.
Limited spread of modern economic growth to only 25%
of the worlds population.
Kuznets Theory
of Modern of Economic Growth (1971)
Three main components:
Sustained rise in national output is a manifestation of
economic growth, and the ability to provide a wide range of
goods is a sign of economic maturity.
Advancing technology provides the preconditions for
continuous (modern) economic growth --- it is a necessity,
but in itself insufficient.
To realize the potential for growth inherent in new
technology, institutional and attitudinal adjustments must
be made.
Yield per hectare (Kgs)
2,800
3,000
3,200
3,400
3,600
3,800
4,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Years
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Palay pr oducti on (i n mi lli on MT)
75
80
85
90
95
100
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Years
Y
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Self-sufficiency ratio
75
79
83
87
91
95
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Years
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Profit-Cost Ratio
0.15
0.20
0.25
0.30
0.35
0.40
0.45
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Years
P
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Profit-Cost Ratio
0.00
0.10
0.20
0.30
0.40
0.50
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Years
P
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Poverty Incidence for Farmers
0
10
20
30
40
50
2003 2006 2009
Years
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Phil Bicol
Economic Arguments for Economic Arguments for
Development of Agriculture Development of Agriculture
Modernization and mechanization of agriculture
would free labor for industrial development.
Agricultural production can be raised rapidly and
with little capital.
Industrial development requires infusion of
massive capital, support facilities, managerial
and entrepreneurial ability, and institutional
arrangements.
Economic Arguments for Economic Arguments for
Development of Agriculture Development of Agriculture
Capital saving by decreasing needed imports or
increasing saleable exports.
Increased incomes translates to increased
demand for food and non-food commodities.
Agricultural production satisfies the most
urgent and basic felt needs of the majority
It is the most rapid and dramatic indicator of
progress (or the lack of progress).
Food Security
Source of raw materials
Source of surplus labor (for industry)
Capital formation (via savings)
Stimulus to industrial expansion
Foreign exchange contribution
Environmental security
Roles of Agriculture Roles of Agriculture
in Economic Development in Economic Development
Subsistence
low-productivity, subsistence level, peasant farm
Di versifi ed
mixed family agriculture, part for consumption, part for
sales
Special ized
high-productivity modern farm with specialized
agriculture geared towards commercial markets
Three stages of agricultural Three stages of agricultural
development development
Produces mostly staples for family consumption
High labor-capital ratio --- land and labor are the main
factors of production; capital investment is minimal; self-
contained farms
Threatened by environmental and tenurial insecurity
Labor employment is seasonal
Farmers are often resistant to technological innovation
partially due to the limited access to credit, insurance
and information --- high uncertainty and risk involved in
subsistence farming
Subsistence farming Subsistence farming
Surplus production of cash crops like vegetables, tea,
coffee, cotton and fruits, rather staple foods. Also, dairy
and livestocks.
Increased demand and real wages for farm labor.
Lower labor-capital ratio --- use of labor-saving
techonoloy and commercial inputs
Farmers become risk-takers depending on their
capabilities and availability of support institutions
Diversified farming also minimizes the impact of staple
crop failure, providing livelihood security
Mixed and diversified farming Mixed and diversified farming
Profit motive --- a single crop is produced from these
farms (staple crops, cash crops, vegetables and fruits)
Low labor-capital ratio --- technology is capital-intensive
or labor-saving nature.
The farmers rely upon economies of scale to reduce
their costs of production and maximization of profits.
Specialized and commercial farming Specialized and commercial farming
Implications of commercialized farming:
Goods become available to domestic and foreign
consumers at lower prices.
Large-scale production becomes very helpful during
world supply shocks, shortages, and civil conflicts.
As commercial farms require technical innovations, the
industrial sector would also expand, increasing
employment and the national outputs.
Promotes entrepreneurial development --- continual
technical invention and innovations, farm planning and
budgeting.
Specialized and commercial farming Specialized and commercial farming
Requisites for Agricultural Requisites for Agricultural
Development Development
Essentials Essentials Accelerators Accelerators
Technology National planning
Marketing system Education
Incentives (CARP, price) Credit
Transportation Group action by farmers
Availability of local
inputs, supplies, eqpt.
Improving/expanding
agricultural lands
General Approaches to Agricultural General Approaches to Agricultural
Development Development
Frontier Model (CM)
Growth in agriculture is brought about by expanding
area cultivated/grazed
Where soil conditions are good, system of cultivation
is intensified
Where soil conditions are poor, new areas are
opened through shifting cultivation and nomadic
grazing
General Approaches to Agricultural General Approaches to Agricultural
Development Development
Conservation Model (CM)
Evolved from advances in crop and livestock
husbandry and the concept of soil exhaustion
Involves intensive, integrated crop-livestock
husbandry systems; effective use of land and water
resources through capital formation (e.g. irrigation)
Perceives agriculture as a self-contained system:
recycling of plant nutrients and use of animal
manures --- inputs provided by agriculture itself
Accompanied by consolidation and enclosure of
farms and investments in land developments
General Approaches to Agricultural General Approaches to Agricultural
Development Development
Urban-Industrial Impact Model (UIIM)
Urban industrial development impacts on agricultural
labor productivity by facilitating capital flow into and
labor flow out of agriculture.
Problems: achieving satisfactory rate of economic
growth in non-farm economy; non-availability of
technological prerequisites for rapid agricultural
growth alongside expanding agricultural labor force
General Approaches to Agricultural General Approaches to Agricultural
Development Development
Diffusion Model (DM)
The route of agricultural development depends on the
effective diffusion of knowledge through extension
work and narrowing productivity gap between farmers
and regions
Based on observed differences in land and labor
productivity among farmers
Provided impetus for the development of research
and extension facilities
Problem: diffusion bias in the choice of agricultural
development strategies
General Approaches to Agricultural General Approaches to Agricultural
Development Development
High Pay-Off Input Model (HPOIM)
Key to transforming traditional agricultural sector into
a productive source of economic growth is investment
to make modern HPOI available to farmers.
Requires: capacity of agricultural experimental
stations to produce new technology; capacity of
industrial sector to develop, produce and market new
inputs; capacity of farmers to effectively use new
inputs
General Approaches to Agricultural General Approaches to Agricultural
Development Development
Hayamin-Ruttan Induced Innovation Model (IIM)
Farmers are induced by shifts in relative prices to
search for technical alternatives which save the
increasingly scarce factors of production.
They press public research institutions to develop the
new technology and demand agricultural supply firms
to supply modern technical inputs which substitute for
the more scarce factors.
Public research institutions and scientists respond by
making available new techniques and inputs that
enable farmers to profitably substitute the increasingly
abundant factors for increasingly scarce factors.