Debate on Farm Size and Productivity in the Context of Bangladesh

Submitted By: Sazlin Sabah Samara Ahmad Id: 124092004 Submitted To: Prof. Amir Hussain Dept. of f Economics

United International University

Abstract
Agriculture accounts for only 21 per cent of the country's gross domestic product although the sector employs around 50 per cent of the national workforce. Every person working in the agriculture sector now owns only an average of 0.12 hectares of cropland. There is an already well established relationship between farm size and productivity which is that they r indirect proportionality or rather inverse relationship. But there are certain other issues and findings which bring out various other perspectives and how the relationship is changing with time and countrys state. Technology, labor availability, and fertility are among the main factors that effects the relation of productivity to farm size in countries like Bangladesh. Efficiency measures can help to demonstrate a different angle to this relationship if study is further spread to regional basis. The relationship need not be there for all size groups, for all regions, and for all crops so the indirectness of the relationship cant be generalized. .

1. Introduction
Relationship between farm size and productivity in developing countries is one of the oldest issues in the academic arena for analyzing the agrarian structure. The debate on farm size and productivity relationship intensified, when Sen (1962, 1966) observed an inverse relationship between farm size and output per hectare in Indian agriculture, suggesting that small farms are more productive compared to large ones. This relationship is explained by the relative advantage of using more family labor by small farms that may reduce the monitoring and supervision costs of hired labor. These findings show that equity does matter for efficiency in the agricultural sector, and raise the question of redistributive land reform in most agrarian countries which includes countries such as Bangladesh. Since then, a lot of empirical studies have re-examined the problem from different angles using various statistical techniques in order to test Sens finding, and inverse relationship (IR) has been perceived as a stylized fact 1 of rural development. In favor to the IR, Sen argues that the opportunity cost of a days labor by family members might be well below the daily wage rate of hired labor. Recent emphasis on positive relationship is explained by alluding to various imperfections in the capital market [Heltberg 1998, Swamy 1998, Dyer 1996-7]. Debate on the relationship between farm size and productivity is still a matter of concern especially at the policy level, as in agrarian economies like Bangladesh, redistributive land reform policies have not been successfully implemented and issues related to land rights of the poor are gathering momentum. New explanations for the nature of this relationship are constantly coming up while analyzing. One major emphasis in the recent literature is that the small farms are not as efficient as the large farms in agriculturally developed regions though this may not be the case in agriculturally backward regions. There is, however, a dichotomy in explaining the relationship between farm size and productivity (Toufique K. A., 1998).

Stylized facts are observations that have been made in so many contexts that they are widely understood to be empirical truths, to which theories must fit ( used especially in macroeconomic theory). Considered unhelpful in economic history where context is central.

1.1 Objective
This paper is going to briefly address and review the relationship between the farm size and its productivity in the context of Bangladesh with reference to the existing studies based on this debate.

2.0 Literature Review

The inverse relationship between farm size and productivity in Bangladesh agriculture was established by the contribution of Hossain [1977] and Taslim [1989]. According to Hossain [1977] the cost of family labour is low for small farms and hence they use labour intensively. On the other hand Taslim [1989] brought the issue of high supervision costs of monitoring labour which explains why labour is less intensively used in large farms in comparison to the small ones. Toufique K A [1998] pointed out that both Taslim [1989] and Hossain [1977] did not analyze whether the inverse relationship reverses in agriculturally developed regions. Toufique [1998] points out some drawbacks of Hossain [1977]s study. First, was that the opportunity costs of family labour are low can be seriously questioned for many parts in Bangladesh especially where rapid and frequent out-migration has made the agricultural labor market tight. Second, was that most small farms also hires outside labor and this implies that the opportunity cost of family labor may not necessarily be low, so is the cost of supervising labor. Third, increasing involvement in off-farm activities because of the increase in microfinance will also mean a relatively high opportunity cost of family labor. So these indicate that family labor may not have a low opportunity cost. According to Toufique [1998] drawbacks of Taslim [1989]s study were: First, Taslim [1989] ignores the institutional infrastructure of rural labor markets as it relates more generally to transaction costs and more specifically to supervision costs. These institutional infrastructures will of course vary temporarily as well as spatially but they

have strong impact on decision-making process of the farmers/employers. Second, Taslim [1989] ignores that the small farms also face supervision costs as long as they hire outside labor. Abedin and Bose (1988) found out a positive relationship between farms size and productivity for modern rice production technology because the large farms used higher doses of purchased inputs such as fertilizers and pesticides. In Toufique [1998]s study, he mentions that the negative relationship is explained by recourse to the labour market and the positive relationship is explained by alluding to the differential access to the capital market in context of Bangladesh agriculture. Toufique, K. A. (1998) examined the relationship between farm size and productivity in Bangladesh agriculture by using simple linear regression model. He used hired labor and family labor as input variables and labor hours per decimal by sites and by crops as dependent variable. The major finding of Toufiques paper was that the large farms were more efficient in a high growth area such as Madhupur and small farms were more efficient in low growth area such as Chandina. Labor cost is low in high growth area then in low growth area. The larger the farm size the lower will be the capability to use family labor for supervising hired labor. Thus, the labor market institutions in Chandina were relatively inefficient as compared to the labor market institutions in Madhupur. Good, B. K. et al (2004) examined farming efficiency and the determinants of multiple job holdings by farms operators for the years 1996-2001. He used Lagrange under utility functions. He used hours worked, efficiency, house hold size, career choice, age, risk preference, farm experience, 2001 population per square mile, number of children, education, tenancy as input variables and farm efficiency as dependent variable. The major finding of this paper was that there was an inverse relationship between family efficiency and off farm labor supply. Farmers those were more efficient are less likely to work off the farm. This reflects a higher implicit farm wage for such operators.

One major emphasis in the recent literature is that the small farms are not as efficient as the large farms in agriculturally developed regions though this may not be the case in agriculturally backward regions. In the light of above-mentioned studies it is very clear that farm size and productivity are highly correlated but in different directions in some negative and in some positive. Farm sizes vary from country to country and also productivity. This paper is organized in the following sections: section1 introduction objective, Section 2: Literature Survey, Data analysis and methodology, Section 3: Land statistics of Bangladesh, Inverse Relationship Dogma, Productivity and Efficiency Measures, Section 4: Introduction of Technology, Section 5: Limitation and Recommendation and Conclusion followed by Reference.

2.1 Data Collection & Analysis

Data used and mentioned in this paper is collected from secondary sources mainly from the bureau of statistics, publications and journals available in the internet.

2.2 Methodology
This paper is mainly descriptive and analytical in nature briefly discussing the existing theoretical and empirical papers on the farm size and productivity debate and related issues. Usually the popular formulation used to test the relationship between farm size and a measure of (average) productivity is based on the simple model

Y= + ln A +

Y is the value (or quantity) of farm output per hectare, ln A is the natural logarithm of farm area planted and is the classical disturbance term. A negative value of in this specification represents an inverse relationship between farm size and productivity. Later studies included other regressors to control for the effects of household versus hired labor [Taslim(1989); Frisvold(1994), land quality [Carter (1984); Bhalla(1988); Bhalla & Roy(1988); Benjamin(1995)] & availability of credit [Berry & Cline(1979)]

3.0 The Land Statistics of Bangladesh

Geographical area of Bangladesh is about 56,000 square miles. (143,998 square kilometer) Out of which about 9 million hectares are cultivable land. But every year the cropland is shrinking for human settlement. It is estimated that the growing population pressure will use up 50 percent of the countrys cultivable land by 2025. Urbanization, industrialization and acquisition of land by the government for different purposes have been causing negative impact on the life and conditions of the peasants as well as socioeconomic scenario of the country. Vast areas of land have also been devoured by the mighty rivers of Bangladesh. Moreover, land is fragmented every year in rural and urban areas due to growing population and the law of inheritance. A study conducted by UNDP & World Bank-WB calculated that due to fragmentation of 1.42 hectares into 10 holdings of 0.15 hectares each, the effectiveness of net cropped area are about 1.5 percent to a land owner. Moreover, per capita land that would support the basic needs of the population is fast decreasing. Bangladesh is one of the most densely populated countries of the world where 798 persons live in one square kilometer. Bangladesh agriculture has a very low and declining land-labor ratio. Over time, the average size of farms has become smaller and smaller. For example, in 1960 the average farm size was 1.4 hectares, but in 1984 it was less than one hectare. Along with decreasing farm size one can observe an increasingly unequal distribution of land

holdings and increasing landlessness. In the active tenancy market in Bangladesh, around 25 percent of cultivable land is transferred, so that the distribution of cultivated land is less unequal than the distribution of ownership. Every person working in the agriculture sector now owns only an average of 0.12 hectares of cropland. According to the classification of land, out of the total area, 63 percent are being used for cultivation while 4.38 per cent for rural and urban housing and the rest includes forest & cultivable waste land. The amounts of one-crop, two-crop and three-crop lands are 3.5,3.7 and 0.99 hectares, respectively. Only rice is grown in 80 per cent of the total cultivable land, of which 50 per cent is dedicated to high yielding variety. But because of existing anomaly in land distribution, all khas lands not being recovered and handed over to the landless, and share croppers and small farmers having little or no share in production, the ultra poor and the deprived and the actual landless are suffering most. Official statistics also show that the country is losing more than one per cent or 80,000 hectares each year from its original 13 million hectares of cropland due to urbanization, industrialization, unplanned rural housing and infrastructure building. Agriculture accounts for only 21 per cent of the country's gross domestic product although the sector employs around 50 per cent of the national workforce. Experts said if the trend is not reversed now, the country would permanently lose its food security, making its poor population more vulnerable to volatile international commodity prices. From the 2008 Agricultural Census of Bangladesh the current structure and nature of the agricultural sector can be understood. Agriculture Census is a robust and gigantic work as well as it is one of the largest nation-wide statistical operation. The following table shows that out of total 28.67 million households, the number of agriculture farm households (households operating 0.05 acres of cultivated area) has been recorded at 14.72 million which account for 51.33% of total households. Out of

total 51.33%, only 1.15% agriculture farm is in urban area while 50.18% is in rural areas. Fig .1 Distribution of Agriculture Farm Households by Urban, Rural and Division

Source: Preliminary Report of the Agriculture Census 2008

The highest percentage (65.12%) of agriculture farm has been recorded for Barisal Division followed by Khulna Division (59.09%) and Rajshahi Division (55.83%) respectively. The 2008 Agriculture Census also disclose the fact that out of total 3.31 million urban households, 0. 33 million households (9.97%) are tenant households while out of 25.35 million rural households, 14.38 million households (56.72%) are tenant households.

3.1 Findings
It has been found that a farm size between 7 and 12 acres is the most efficient (overall efficiency) in the contest of Bangladesh agriculture. This has an important policy implication in connection with the ceiling of land ownership in Bangladesh.

It is estimated that the agricultural land is declining by 1% per year and the land quality is deteriorating owing to degradation of soil fertility (e.g. nutrient imbalance), soil erosion and soil salinity. In addition, water resources are also shrinking. In order to produce more food for an increasing population, and raw materials for agro-industries, there is a need for increasing agricultural growth through higher productivity, including increased yield, agricultural intensification and diversification, and value addition. In order to achieve the GDP growth rate of 7% per year, agriculture must grow by at least 4 to 4.5% per year (PRSP, 2005). This is presumably possible through an increase in agricultural productivity (for crops, horticulture, livestock, fisheries and forestry) based on modern agricultural technology and a supply chain linking farmers with consumers in the domestic as well as overseas markets. Small farms dominate the agrarian structure of Bangladesh. Therefore, performance of the sector greatly affects economic progress and peoples livelihood. To reduce rural poverty and improve rural livelihoods, it is necessary to recognize and to develop existing agricultural production system into a more dynamic and viable commercial sector. Agriculture has the potential to reduce food deficit as well as shortage of industrial raw materials, and also to generate employment opportunities with reasonable income, which will in turn help improve the standard of living of the rural people. The growth potential of most of the crops and other agricultural commodities are substantially higher than present level of production.

3.2 The Inverse Relationship Dogma

The inverse relationship was derived based on size class data; and Sen himself was however, aware of the limitation of his conclusion since he was using only aggregated data. Sen (1964) subsequently gave three alternative lines of explanation for this phenomenon, (i) technique-based, (ii) labor-based, and (iii) fertility-based.

10

In labor- based approach the inverse relationship is explained on two strong, if not unrealistic, assumptions: (a) the farmers large and small - are passive in responding to monitoring costs of hiring large doses of labor and (b) the labor market institutions are the same and static in all regions (backward and forward or stagnating and growing). Theoretically, inverse farm size and productivity relationship was based on three main factors. First, imperfection in the labor market, second, land credit and third, cropping intensity. Dual labor market2 hypothesis is the more common explanation for the imperfection in the labor market in relation to inverse farm size productivity relationship. (MPL > W) The rural labor market is divided between family labor and hired labor. Hired laborers will be more efficient (i.e. will provide more labor services per unit of time) when subject to more supervision. Family members a side from being better motivated then a laborer, perform a supervisory role with respect to hired labor. The marginal productivity of labor, in general, was found to be higher than the wage rate. The wage rate of family labor is found to be lower then the wage rate of hired labor. This duality is preserved by institutional restrictions (like the reluctance of women and children to join the labor market) and more importantly by the indivisibility of labor demand especially at harvesting and sowing when full time hired labor can be controlled better than part time hired labor since part time labor, has its own cultivation demands. Small farmers having cheaper inputs can be maximized through more use. According to Madhusudan Ghosh (1989) who looked at the changes in the agrarian structure of rural West Bengal during the seventies, hypothesized that in a dualistic agrarian structure in which large farms under-utilized land due to shortage of family labour and small farms under-utilized family labor due to scarcity of land, a reduction in the degree of inequality in the distribution of operational land would favorably affect agricultural productivity. He suggested that a reduction in inequality of land distribution through appropriate land reforms would result in higher agricultural productivity in West Bengal.
2 Dual labor market is defined as when economy is divided into two main sectors: Primary sector and Secondary sector

11

In his attempt to develop a theory of optimum land reform for dualistic agriculture, Raj Krishna, after examining various Indian studies based on Farm Management data, came to the conclusion that a reduction in the size of holdings and land concentration brought out by land reform, will not be associated with a reduction in output per acre, after a new equilibrium is established. On the contrary the output per hectare and hence the total output of a given area of land is likely to increase [Vijayakrishna (1995).]

3.3 Productivity and Efficiency Measures

Efficiency argument in favor of land reform is provided by the studies of IR in developing countries. However, the relevant comparison regarding the desirability of land reform is not whether smaller farms have higher average productivity (yield or value of output per hectare) but whether they show greater overall economic efficiency. Complete measures of efficiency like total factor productivity (TFP) or quasi-rent (Binswanger, Deininger and Feder; 1993) are used in recent studies for size comparison of farms. Economic efficiency and farm size relationship can be tested by efficiency measures based on distance function3 introduced by Shephard (1953). Data Envelopment Analysis (DEA) helps to disaggregate economic efficiency for each farm into measures of scale and technical efficiency using only input and output quantity data. Hence determination of how relative share of each source of inefficiency alters across farms by size is possible. From DEA, measures of return to scale and technical efficiency can be developed using data on input and output quantities, whereas technical efficiency measured by TFP or profit function estimation relies on price data which is often unreliable. Production based approaches suffer from inconsistency of parameter estimates due to endogeneity of inputs and also needs restrictions for functional form. Distance functions rely on the construction of production frontiers that doesnt require

A distance function is remarkably simple yet powerful concept. This function underpins nonparametric efficiency analysis & is also the basis for nonparametric approach for assessing productivity.

12

choice of functional form. Thus using efficiency measures can prove to be more useful as it serves as an unbiased estimator in such cases.

4. Introduction of Technology
Several economists put their views that the IR remains valid for traditional agriculture. As a result, small farms in most developing countries were perceived as more efficient than large farms before the 1980s. On the other hand, rapid technological changes and the expansion of commercial farming have changed the perception of efficiency toward small farms, suggesting that the IR diminished, when the agricultural sector moved towards modernization through the adoption of more capital intensive technology. Such transformation will pay more attention on other inputs such as fertilizer and modern variety of seeds rather than the importance of farm labor. Small farmers, in this regard, might be unable to compete, especially as the rapid sequence of new technological inputs requires investments that go beyond their capacity. The many technological changes and the expansion of commercial farming seem to have changed the picture. Using the same technology as employed on the large farms, the smallholder was more productive in the past because of his greater labour input. During the 70s, however, progressive and commercial farmers started to employ a higher level of technology. During the initial years, in particular, the new technology was not accessible to the small farmers, and the low level of information led to false investments resulting in financial losses which prevented future investments. An indication of this process is the sequence of rapid technological inputs within the process of the so-called green revolution. The new varieties required the purchasing of expensive seed at the beginning. Soon the existing irrigation facilities had to be improved by the addition of tubewells in order to ensure the availability of a timely and adequate supply of water. The low resistance to insects and pests necessitated the use of chemicals. Once seed and water were under control, the traditional bullock plough proved to be the next bottleneck in the attempt to increase productivity, and thousands of tractors with 13

machines were bought within a short time. This made it unnecessary to employ great numbers of tenants who owned bullocks, and very many were dismissed. This, once again, led to the substitution of herbicides for manual labour, and the introduction of mowing and threshing machines to carry out the harvest work. It is obvious that most of the smallholders could not cope with such a large volume of investment requirements within a short time. Quite a number had to give up farming following financial losses due to failure, or because they realized that they could not cope with the new requirements. This was at least in part due to the absence or imperfection of institutions for assisting smallholders to overcome their limitations. A more efficient cooperative system of credit, supply and marketing as well as of supporting production by group activities, the use of machinery etc., could have led to other results than those which we experienced during the 80s.

The current agricultural technology system of Bangladesh, however, is unable to effectively generate, transfer and promote the use of modern technology to increase agricultural productivity and meet the changing needs of farmers. A dynamic agricultural technology system is vital to ensure national food security and reduce poverty in the face of declining agricultural land base and increasing population. However, the continuing recent trend in agricultural research and extension will have a detrimental impact on the agricultural sector. Among the barriers to an effective national agricultural technology system are low levels of government spending on agricultural research and the inability of agricultural research institutes to generate relevant modern agricultural technology. One major constraint to higher agricultural productivity is the low level of government expenditure on agricultural research. At present, the expenditure is only about 0.2% of Agricultural GDP, compared to 0.6% for other developing countries and over 2% for developed countries. The following graph depicts this reducing trend:

14

Figure: 2

Source: www.worldbank.org.bd

Although aggregate spending on agricultural research and extension appears to have increased slightly, it is mostly due to an increase in spending on agricultural extension (ie, the transfer of technology to farmers). The wide range of recommendations in the study include areas for institutional reforms of the national agricultural research and extension system, ways to increase funding and exploring opportunities for growth of commercial high value agricultural products (such as fruits, vegetables, fish and poultry).

5. Limitations & Recommendations

15

Mentionable limitations of this paper are the following: Due to time constraint detailed inclusion of many important papers were not possible. There was also a page limitation set by the instructor which restricted from diversifying the debate with respect to other related topics. This paper requires further elaboration on different existing models and broad study on current trend of the relationship between farm size and productivity. Study using primary data based on samples taken from the different regions of the country and its diverse farming characteristics would help establish the debate on inverse relationship more profusely. This paper doesnt include the current lending system for the Agricultural Sector and the rules set by the Bangladesh Bank. This could later prove to be a vital aspect regarding the credit access and availability for the rural subsistent small scale farmers and hence show how productivity is affected if further extension of this paper is held. Recommendations in the favor of developing small scale farming which will target more productivity are as follows: Agricultural Extension: This is the key driving force for the growth and development of agriculture in Bangladesh. To increase farm productivity and farmers income access to new technology is required. The role of extension is to deliver services and to speed up farmers access to and adoption of new technology. The Government is mandated to providing efficient and effective need based extension services to farmers to enable them to optimize their use of resource to augment self-sufficiency in food production and to improve their nutritional status. The Government can promote public, private and voluntary extension initiatives to achieve diverse agricultural goals and to address needs of target populations. Extension services should be provided to all categories of 16

farmers: landless, marginal, small, medium, large with special emphasis on women and youths. The Government should decentralize extension activities at the grass-roots level to deliver efficient and coordinated services. Agricultural Education and Training: Agricultural education system, especially at the diploma level will be strengthened and updated. Training should be administered on a regular basis to ensure effective extension-technology transfer and technology design and planning. Training for farmers and officials at all levels as basic mechanism should be implemented for enhancing occupational competence, professionalism and service morale. Agricultural Productivity: The Government can continue and strengthen its support for major crops related to food security and livelihood options. In addition measures should be taken to promote high value crops to enhance farmers income and boost agricultural export. Measures can be taken to increase cropping intensity, especially by bringing fallow land under cultivation. Diversification of agriculture can be pursued to promote food based nutrition security. The Government can monitor the supply and availability of inputs (seed, fertilizer, pesticides, irrigation, etc.) and credit distribution to farmers through DAE, BADC and other service providers. Efforts will be taken to provide micro-credit support at preferential rate for selective crops. Government and NGOs can together help to finance and extend a helping hand to the most grass root level farmers. If extension is possible through Union and Upazilla levels then it will be easier to access the small scale farmers. Non-farm Activities: The Government can promote poverty reduction through creation of employment opportunities in rural non-farm sectors. Necessary support will be provided for non-farm income generation activities for the poor and disadvantaged farmers. All these and many more other steps can be taken in collaborative approach to help the small scale farming more productive and hence efficient for a country like Bangladesh because as we can see land reforms and decentralization and rising population will only result in a decline in per head crop land in the coming years.

17

Conclusions
To sum up, it is often pointed out that the difference in the size of farms is one of the reasons for the difference in yields. It is argued that small cultivators increase cropping intensity on their farms or have multiple crops and that family labour works intensively on such farms thereby increasing output per unit of land. However, studies carried out on the relation between size of farms and productivity show contradicting results. Studies based on aggregated data showed an inverse relationship, but studies based on disaggregated data failed to confirm this. The latter indicates that the inverse relationship exists in certain types of farms, but the relation cannot be generalized. In addition, the relationship need not be there for all size groups, for all regions, and for all crops. The debate thus remains inconclusive. Today it appears as if middle-sized farms turn out the highest productivity, while smallholders are increasingly unable to provide their cultivating family with a decent living. Due to shrinking farm size, they have to look for additional income, thus taking labour input away from the farms. The younger generation in particular is losing interest in cultivation, a process which is likely going to hit peaks unless steps are taken to revive the agricultural reforms with technological improvement and diversification. The vast majority of the worlds poorest households depend on farming for their livelihood. In the past, their earnings were often depressed by pro-urban and antiagricultural biases of their own countrys policies. While progress has been made over the past two decades by numerous developing countries in reducing those policy biases, many trade-reducing price distortions remain inter-sectorally as well as within the agricultural sector of low-income countries. Higher agricultural productivity is an important component of the rural development strategy for raising farm income; reducing poverty and making Bangladeshi agriculture more competitive in the global market.

References

18

Abedin, J. and G. K. Bose, 1988, Farm Size and Productivity Difference-a Decomposition Analysis, the Bangladesh Development Studies, Vol.16, No.3, September, pp. 71-79. Benjamin, Dwayne, (1995) 51-84 Can Unobserved Land Quality Explain the Inverse Productivity Relationship Journal of Development Economics 46 Gilligan D. O, 1998, Farm Size, Productivity, and Economic Efficiency: Accounting for Differences in Efficiency of Farms by Size in Honduras American Agricultural Economics Association Annual Meetings. Hossain, M., 1977, Farm Size, Tenancy and Land Productivity: An Analysis of Farm Level Data in Bangladesh Agriculture, Bangladesh Development Studies, Vol. 3, No.5, pp.285-348. National Agricultural Policy, 2008; Draft 3 Ministry of Agriculture Government of the Peoples Republic of Bangladesh R. Mahesh, 2000, Farm Size- Productivity Relationship: Some Evidence from Kerala KIED Working Paper 2 Rehnuma Amin Roadmap for improving agriculture productivity in Bangladesh www.worldbank.org.bd Sen A. K., 1962, An Aspect of Indian Agriculture, Economic Weekly, Vol.14, Nos. 4-6, pp.243-66. Taslim, M. A., 1989, Supervision Problems and the Size productivity Relation in Bangladesh Agriculture, Oxford Bulletin of Economics and Statistics, Vol. 51, No.1, pp.55-71. Toufique, K. A., 1998, The Relationship Between Farm Size and Productivity in Bangladesh Agriculture: The Role Of Transaction Costs In Rural Labour Markets Preliminary Report Agriculture Census, 2008

19