Agriculture Flashcards
What four characteristics of the agricultural (ag.) sector make it special?
- Agriculture is a dominant sector, in terms of GDP, population and
employment, in the world’s poorest countries - The sector is key to structural transformation as it may provide labor
and capital during the development process - Agricultural production has special characteristics: seasonality; spatial
(geographical) dispersion; sources of risk (the weather); sources of
technical change (Ag. blueprints do not travel well) - Many producers are also consumers of their own produce (non-
separation)
Is agriculture a dominant sector in poor countries?
Yes, relative to rich countries like Denmark which have a more dominant advisory sector.
Outiline the relation between quantity of labor and quantity of total agricultural output from agricultural production in the Lewis model of surplus
The relationship show diminishing marginal returns, the pizza shop example. At some point hiring one extra worker will lead to marginal productivity may be negligible or even zero.
What problem does the owner of the business face, when he lives in a country where there are no state to take care of people who is not employed?
This is found not only in
domestic service, but in every sector of employment […] even in the severest slump the agricultural or commercial employer is expected to keep his labour force. It would be immoral to turn them out, for how would they eat, in countries where the only form of unemployment assistance is the charity of relatives?
This is the idea that in the agriculture sector there would be a minimum wage, that can be higher then MPL. The owner face the problem when hiring a new worker, that without the job they would get nothing, but they might give the owner no gain becuase of low, zero or even negative MPL.
What potential links has agriculture?
“Lewis linkages” work through factor markets; the non-ag sector gets labor
“Johnston-Mellor linkages”: agriculture provides
* “raw materials” for industry,
* “food” for industrial workers,
* “markets” for industrial output, and
* exports to earn “foreign exchange” to import capital goods
Other linkages: higher “human productivity” as nutrition increases, link
between agricultural profitability and household investments in rural
“human capital” which increases labor productivity and facilitates rural-urban
migration.
If these links are “active” then agricultural growth has a multiplier effect
Please outline and describe (graphically) the Lewis model.
The Lewis Model : TWO-SECTOR MODEL OF DEVELOPMENT
If a labor surplus economy starts with its entire population in agriculture, it can remove a large part of that population (pg) and move it to industry or other employment with no reduction in farm output. Industry must pay those workers a wage a bit above subsistence wage (the difference between the vertical distance p´´k in Panel c and p´´h in panel b) to get the workers to move. As long as there is some way of moving the food consumed by this labor from the rural to the urban area, industrialization can proceed without reducing agricultural output, implying an increase in total GDP because the marginal product of these workers in industry is greater than zero.
As industry continues to grow, however, it eventually exhausts the supply of surplus labor. Further removal of labor from agriculture leads to a reduction in farm out<put. A shift in industrial labor demand to m in Figure 16–5c forces industry to pay higher wages to compensate workers for the higher price of food. The rise in the price of agricultural output relative to the price of industrial output (which has not changed) sometimes is described as the terms of trade between industry and agriculture turning against industry and in favor of agriculture. The rising price of food as workers move to industry—that is, the shift in the terms of trade against industry— accounts for the rise in the supply curve of labor between g’’ and i’’ in panel c
Extra
The model holds a number of interesting predictions:
- Gradually shifting labor allocation towards manufacturing (modern sector) during development
- Initially accompanied by modest (or no) increases in wages in manufacturing
- Secularly rising savings rate (percent of national income) during development
- Substantial productivity differences between agricultural and manufacturing sector
Policy implications (for relevant economies):
Support the manufacturing sector during transition
Please describe the “separation hypothesis”
The “separation” hypothesis is an neoclassical economic theory suggesting that, in an ideal market situation, a household that operates a farm will behave in two distinct ways: for production, it will act like any business aiming to maximize profits, while for consumption, it will behave like a typical consumer seeking to maximize satisfaction or utility from the goods and services it consumes.
But is this true?
Bejamin (1992) test this idea
The theory suggests that the makeup of a household should be linked to how labor is distributed on farms, but only if two specific conditions are met:
* Demographic Influence on Household Labor Supply: This means that characteristics like the age and number of people in a household affect the amount of labor that the household can provide.
* Decreasing Labor Demand Function: This refers to a situation where, as wages increase, the demand for labor by farms decreases.
Based on these ideas, the concept of “non-separation” implies that farm operations are closely integrated with household decisions. This integration means that the availability and use of labor on the farm are directly affected by the household’s internal decisions and demographics, rather than being determined purely by market conditions or external factors.
Outline an empirical test to verify
or falsify the Separation hypothesis.
The test
- The model: A labor demand equation.
- The null hypothesis: Farm employment is determined according to the neoclassical labor demand model. Supports the neoclassical separation hypothesis.
- The alternative: Farm employment is correlated with household composition. Support the non-separation idea.
- Identification of non-separation relies on the observation of a correlation between household demographic composition and observed farm employment.
- A critical assumption in the paper: Household endowments (demographics and landownership) are exogenous.
In his 1992 study, Benjamin looked at these relationships and found support for the “separation hypothesis,” which argues that household decisions and farm labor demands are independent of each other. His findings suggest that, typically, farms operate separately from household dynamics, indicating that they hire labor based on market needs rather than the specifics of household composition.
When “non-separation” does occur — meaning household dynamics directly influence farm labor decisions — it indicates that farmers are limited in their ability to hire labor based on the demand-side of the market. This suggests that there is not an excess of labor (surplus labor) available, nor are there significant restrictions on the supply of labor from the households to the farm. This scenario shows an inconsistency with the idea that there is a surplus of unused labor just waiting to be employed on farms, or that significant barriers prevent households from offering their labor to the market. This argues that in the presence of (more than one) market failure, the separation property no longer holds. We need to evaluate household decision models on a case-by-case basis.
Please explain and describe graphically how to reach the result of an inverse
relationship between land size and farming intensity.
As we saw, the separation doesn’t always hold up, especially when there are issues in the labor and land markets. These market failures mean that as a household acquires more land, it often uses that land less intensively. There’s an observed trend where larger farms sometimes have lower productivity per unit of land compared to smaller farms. This is known as the inverse size-productivity relationship, which challenges the notion that bigger always means more efficient in agriculture. Essentially, it suggests that more land does not always lead to proportionally more output, which can be due to a variety of factors, such as less careful management or the inefficiencies that can come with scaling up.
There is some evidence that smaller farms tend to be more efficient. If this is the case, an unequal
distribution of land may lead to lower efficiency, since some farms will be very large. The inverse relationship due to market failures.
The illustration (Picture)
Consider a household with more land than the HH at point A (new production function is the dot-dash line).
Assume they are facing the same wage/labor market constraints. Then the HH with more land should choose to produce and consume at point C given the same cultivation intensity.
If leisure is a normal good, point C will not be chosen. Optimum is at point B where the larger farm HH will cultivate less intensively (Lower L/E ratio)
The HH’s production choice depends on its preferences and its endowment – “The separation property does not hold”.
Explanation:
- Small farmers earn less than desired in the labor market. Therefore, they work on their land even though the marginal productivity is too low compared to the wage rate
- They work on the land until the shadow wage (the marginal productivity of labor on the farm) equals the marginal rate of substitution between consumption and leisure. So they put in more time then the big farms.
Please outline the pros and cons (from an efficiency point of view) of smallholder farming.
Pros:
- Smallholder farming is more efficient, if we belive in the “inverse productivity relationship. But they use more time, discuss.
- In absence of “suitable” conditions regarding those three factors large farm strategies may have unintended consequences (social and environmental risks), which maybee not be as bad with smallholder farming.
○ Suitable conditions - policies and market failures
○ The three factors: Infrastructure, technology, property rights.
- Niche agriculture. Some types of crops is not ment for economies of scale. They are not good for fx plantation.
Cons
- Smallholders do not have the benificial of economies of scale. Market imperfections are generally handled better by larger agricultural entities. So is R&D.
- New agriculture technology is not inventing tools for small-scale farming.
- Plantation crops often found where there are large economies of scale in processing (vertical integration). Value chain structures critically important for the agricultural productivity discussion. Financial Constraints: Limited access to credit and financial services can impede the ability to invest in efficiency-improving technologies or practices.
- Missing property rights.
- Owner (family farm) cultivation and smallholder farming not the same. Owner cultivation may be superior for several reasons:
○ Work effort (family members residual claimants)
○ Local knowledge (however delegated monitoring!!! – but require credit/contract markets to be well-functioning)
○ Easier reallocation of surplus labor
- Integrated supply chains and certification (large fixed costs)
Notes:
Any empirical regularity regarding the inverse productivity relationship requires that sources of economies of scale are outweighed by market imperfections that favor small-holder production.
BUT even if small-holders are more efficient due to malfunctioning markets, why are we promoting smallholder farming instead of trying to improve market structures?
Potential for economies of scale differ across crops.
- BUT some still conclude that ”rapid, science-based, employment-intensive and smallholder-focused agricultural growth provides the most effective way to kick-start growth, reduce poverty, enhance food availability and entitlements and accelerate human development”.
Reason: (i) Earlier unsuccessful efforts in Africa to push large-scale capital-intensive agriculture forward and (ii) agricultural dependence of the poor (dynamic transition too costly and institutions too weak to insure redistribution of benefits).
Most large efficient farms world-wide are owner cultivated.
Discussion
But extreme poor often landless???
Addressing the landlessness of the extremely poor requires a nuanced understanding of agricultural productivity and market dynamics. The inverse relationship between farm size and productivity suggests that small plots managed by the poor could potentially yield more per acre than larger farms. If this holds true, allocating land to the extremely poor could indeed be an efficient step towards alleviating extreme poverty, leveraging their labor to generate more output from less land. Some argue that this is them most effective way to kick-start growth, reduce poverty, enhance food availability and entitlments and accelerate human development.
However, it’s crucial to consider the broader picture. Merely providing land may not be the most effective solution if the market structures that support agriculture are flawed. If smallholders are currently more efficient due to market inefficiencies, it may be wiser to focus on fixing these underlying issues.
Furthermore, if large agricultural firms can streamline their operations, they could offer employment opportunities to the extremely poor. This could be a more immediate solution to poverty than land redistribution, which can be a lengthy and politically complex process. Employment by larger firms can provide steady income and potentially offer better access to technology and modern farming practices.
Therefore, while the distribution of land to the extremely poor can be a part of the solution, it should be considered alongside other strategies that aim to correct market dysfunctions and create employment opportunities within larger, possibly more stable agricultural enterprises.
Discussion
Will technology erode “economies of scale” effect?
Technology could disrupt the traditional advantages of large-scale farming by making advanced tools more accessible to smallholders. Precision farming equipment, information technology, and automation can help smaller farms become more productive and efficient. With improved access to market and weather data, small farmers can make more informed decisions, potentially increasing their yields and profitability.
However, there are still significant challenges. The cost of technology, while falling, may remain prohibitive for small farms. Larger operations can often adopt new technologies more easily due to their financial resources and the ability to spread research and development costs over a larger output. Additionally, the lack of infrastructure, such as internet access in rural areas, can hinder the adoption of technology by smallholders.
Therefore, while technological advancements have the potential to reduce the economies of scale benefitting large farms, various factors like cost, infrastructure, and market power continue to influence the extent of this impact. The evolution of this dynamic will depend on how these challenges are addressed and the rate at which technological innovations become truly accessible to farmers of all sizes.
Please define the “growth multiplier” for agriculture and explain why it may be larger than 1.
The growth multiplier is an attempt to answer the question: “If Agricultural value added increases by $1,
how much does the country’s GDP increase?”. The growth multiplier is the answer to this question.
The growth multiplier may be larger than one due to sectoral linkages between agriculture and the rest
of the economy, which means that agricultural value added gives rise to additional value added outside
agriculture. A good answer should mention one or more of such potential linkages. A particular
important linkage is increased demand from agriculture for products from the rest of the economy.
Please describe how the following aspects of agriculture in developing countries can restrict
agricultural productivity.
a. A failure in the insurance market for agricultural output.
Failure in the insurance market can lead to sharecropping. Sharecropping is a phenomenon where a
person rents a plot of land for the price of a share of the produced output. Since only a fraction of the
marginal product of the person who rents the plot accrues to him/her, that person will tend to reduce
labor input. This reduces production, compared to when the person owns the plot, or the plot is rented
out for a fixed price. Since sharecropping reduces the rental price when the harvest is poor, sharecropping
may be preferred by risk-averse renters of land, especially if insurance against poor harvests is not
available.
Please describe how the following aspects of agriculture in developing countries can restrict
agricultural productivity.
An unequal distribution of land.
First, land can be used as a collateral to obtain credit. Therefore, an unequal distribution of land may imply
that more households will be credit constrained, which can reduce output per worker.
Second, there is some evidence that smaller farms tend to be more efficient. If this is the case, an unequal
distribution of land may lead to lower efficiency, since some farms will be very large.
Third, if there is involuntary unemployment because some workers are not able to sustain a high level of
work output due to a low level of work capacity at the prevailing (piece) wage rate, a land reform may
increase labor supply due to an increase in work capacity at the prevailing wage rate.
