Rural Poverty: Old Challenges in New Contexts

Rural Poverty: Old Challenges in New Contexts Stefan Dercon University of Oxford

Purpose of the talk • Revisit briefly some important questions: • Place of rural development and agricultural growth in broad-based growth and poverty reduction? • What are the main constraints on this process? • Has economic theory and recent empirical research given more guidance about what can be done? • My context: some of the poorest countries, e.g. in Africa.

Conclusions • Rural Development, driven by agricultural growth, has a role in broad-based growth trajectories – but let’s not naïvely expect too much from it. • The role of rural development dependent on the context of the rest of the economy. • Time to put forgotten questions back to the centre of analysis, not least rural-urban linkages and migration • Specifically sensitive to sources of possible rural poverty traps.

Background Poverty is still predominantly a rural phenomenon: • Pick a random poor person, • High prob(living in a rural area) • High prob(a farmer, agricultural worker). • Poverty declines in fast growing countries: • ΔRural < ΔUrban Poverty • Growth and Poverty decline smaller for those dependent on agriculture than for those dependent on industry or services.

Background Implications: • It is where the poor are, so needs attention. • But: should it come as a surprise? • Development appears to be linked with getting people out of agriculture; • Moving out of agriculture is correlated with poverty reduction. In this paper: • We argue that focusing on (active) rural development is NOT self-evident; • Some of the findings imply ‘doing more of the same’ – but not all…

Motivating example Some recent insight in rural poverty changes Tanzania, Kagera Region, 1000+ miles from Capital. (“landlocked area within country”) Growth in Tanzania in 1995-2005 substantial. Survey: 913, 6000+ individuals in 1991/94 Attempt to track all surviving individuals in 2004 (so all split-offs), and interview households they now live in. People linked to 863 hh found back, but now living in 2774 households. 96 percent of hhs found back, 83 percent of individuals.

Poverty in Kagera sample (%)

Overview What is the place of rural development in general growth and poverty reduction processes? • Rural Development in Development Economics: a potted history 2. The Place of Rural Development in Development: Macro-story and its implications 3. Growth, Poverty and Rural Development: Micro-macro and policy interactions

1. History of Rural Development Economics With much of the poor living in rural areas, much attention to rural issues within development for a long-time: • Lewis-model: Model of Urban-Rural Interactions • Schultz: Theory of the Rational Peasant • IDS Kenya Group: the emergence of the ‘New Development Economics’ (information, risk and externalities) Given market failures, the Theory of the Rational Institutions • More recently, governance, collective action and political economy issues. Acknowledging differential power, the Theory of Rational People with or without Power

History of Rural Development Policy Link with actual development policy thinking is always at best tenuous. • 50s (if anything) Sectoral Growth, such as surplus extraction • 60s Role of Technological Change (Schultz and others) • 70s Recognition of ‘Market Failures’: more of the same but ‘Integrated’ rural development • 80s Getting Prices Right (Schultz but markets ‘only’ fail due to policy) • 90s Governance and Institutions, including building market institutions, collective action, group-based interventions, gender

Uneasy micro-macro balance Striking fluctuations in relative importance between micro and macro context for what should be our focus 50s = Serving Macro-Growth 60s = To serve growth, need for micro-level technology change 70s = More integrated micro-interventions needed 80s = Macro-context more crucial to get any rural growth 90s = Need to go back to basics, and understand how interventions could ever work (micro-foundations of change)

But what has been forgotten? Forgotten bits of theory: • Lewis and Urban-Rural Interactions Forgotten bits of context: • Increased basic macro-policy reform • In the context of globalization and increased openness • Striking growth experience for some, and total lack of growth for others in the developing world Forgotten bits of evidence: • Poverty in the context of (lack of) growth

But what has been forgotten? (2) Key question: Can rural development be an engine for growth? Can it be an engine for poverty reduction with growth? • This means putting it firmly back into the context of what else is happening in the economy (including Lewis type thinking) • Includes asking old and fashionable questions “the role of agriculture”. ‘Rural Development and Poverty’ thinking and practice needs to take this forgotten context, theory and evidence at its core.

Any role for agricultural growth? • Much thinking on importance of agricultural growth based on simplistic premises • “since poor are in agriculture, agriculture is the basis of poverty reduction”; • “agricultural growth is required for poverty reduction”; • But don’t forget basic ‘law’: “increased prosperity is linked to having fewer people dependent on agriculture for their livelihoods” • How to get them out is the relevant question…

Theoretical framework Based on “Why Poverty Persists in India” and “The Role of Agriculture in Development”, Mukesh Eswaran and Ashok Kotwal. • Lewis within a proper general equilibrium framework. • Without agricultural workers sitting only under trees, and industrial workers eating shirts, and other unrealistic assumptions…

Theoretical framework 2 sector economy (industry and agriculture), 2 goods (shirts and food). CRS production functions (labour, and also land in agriculture). People first need to have enough food before they will buy shirts. Clearing labour markets means that people are indifferent between working in agriculture and industry. Clearing product markets means that demand equals supply in each. Some (rich) have assets; the poor only have labour. At first, poor only eat food, since not enough to satify basic needs; once sated, no more eating. (So maximum level of spending on food) Poverty will go down if labour demand increases increasing real wages. But how?

Theoretical framework Closed economy: Impact of industrial (TFP) progress? • More shirts are being produced for same labour. Prices shirts go down. But the poor don’t care. • No incentive for anyone to move out of agriculture since total food supply would go down and demand up. • In the end it only benefits the “rich” that have enough food and are already consuming shirts: they can consume more of them. • MP industry goes up, but price shirts goes down, keeping wages the same food prices the same, real wages the same. POVERTY UNCHANGED.

Theoretical framework Closed economy: Impact of Agricultural Technological Progress • More food is being produced for same labour. This is of interest to the workers: more food for the same work; • Once more food, some would become interested to buy shirts as well, so shirt prices are pushed up. Firms have incentives to expand production, offering better wages. • Rural wages move up as well, food prices down with less. • Labour moves out and POVERTY DECLINES.

Theoretical framework In sum “in closed economy, growth in agriculture is essential for poverty reduction, while industrial progress has no impact.” The central process: demand linkages, but only via commodities the poor consume. So what if we open the economy? • Central demand/supply constraints do not matter anymore for traded commodities. • Food can be imported, shirts can be exported. • Only world prices matter.

Theoretical framework Open economy: Impact of industrial (TFP) progress? • More shirts are being produced for same labour. Prices shirts remain the same. • Firms have incentive to expand production, so demand for labour and nominal wages up. • Workers can move even though food supply goes down, since imports can go up. So marginal product of labour goes up in agriculture as well, allowing rural and urban wages to be the same again. • More food consumed, and some workers will now also consume some shirts. POVERTY DECLINES.

Theoretical framework In sum, • In closed economy: poverty reduction via technological change in agriculture; • In open economy, poverty reduction via technological change in industry or agriculture, or other means of increased domestic competitiveness relative to the rest of the world. Of course, in case of openness case • Part of process of globalization – with its strengths and pitfalls (scale economies, agglomeration effects, learning by doing…) • Rural story not necessarily relevant: gradual increase in absorption by non-agricultural sector. • There is nothing specific rural about rural poverty, beyond that it is sign of slow or failing ‘growth’ forces.

Limitations to agricultural growth • Productivity increases in agriculture could have place in growth, just like trade and openness, (and there is room for them in many contexts). • Introducing more heterogeneity in labour, production technology and sectors does not change underlying logic. • BUT some unpleasant arithmetic: Much progress in agriculture is a “once and for all change”, not a growth effect • e.g. adoption of fertiliser – increase in yield but not a persistent growth in yield; • Any ‘growth’ effect largely depends on ‘linkages’; • But many of these linkages may not be as strong as some suggest. Especially, supply linkages (such input and output).

Evidence? Datt and Ravallion (1996, 1999), Ravallion (2002) Sectoral decomposition in India of poverty change (until 1994) • agricultural growth delivered substantial poverty reduction • manufacturing growth did not in itself Impact of initial conditions and their changes on poverty decreases in India • Strong impact of yield increases • Strong impact of initial conditions • in both health and education • ‘good’ rural initial conditions (high yields and low landlessness). • Note: India in this period is relatively ‘closed’.

A brief digression: the world as I know it Is India relevant for other parts of the world? The world poorest, low growth countries (especially in Africa) may be considered as having missed the boat, marginalized because of cumulative agglomeration effects in the concentration of economic activity. This will always make it hard to catch up. There is substantial heterogeneity and these countries can be classified as: • Resource-rich economies • Coastal and other well-located countries • Land-locked economies without natural resources

A brief digression: the world as I know it They each have specific problems related to growth and poverty reduction… • Resource-rich economies: managing their wealth! (Dutch disease, governance) • Coastal and other well-located countries: taking advantage of world trade opportunities (trade infrastructure, regulation, skill creation, labour markets) • Land-locked economies without natural resources: suffering from agglomeration effects most, partly because the better located or endowed neighbouring countries are also trading with them/needing them.

So when is agricultural growth essential? How does agricultural growth then fit in earlier framework? Resource-rich countries. • Role of agriculture? Unlikely as a growth engine, rather as one source of diversification, possibly as method of ‘distribution’. Coastal and other well located countries: • Trade opportunities; best placed to take advantage of world economic opportunities; • Managing advantage (markets, skills, regulation); • Role of agriculture: manage the pull out of agriculture.

When is agricultural growth essential? Landlocked, resource-poor countries • Little scope; agricultural base? • Risk of marginalization highest (in terms of staying behind); • What to do? Skills, infrastructure – but dependent on what others do; • Agricultural ‘growth’ is essential – but don’t expect any miracles. • HERE: rural development as part of growth strategy, but again in order to move more people out of agriculture.

Identifying constraints What do we know? [or what do they teach you at graduate school?] A lot of: • Factor markets (land, labour, credit). • Rural institutions and contracts, given market imperfections. Quite a lot of: • Increasingly: risk, collective action and bits of political economy. • Interventions: or at least any interventions you can phrase as a randomized or natural experiment (so unfortunately too few relevant interventions) • Output markets, marketing institutions (only if you are at Agri Econ Grad School) • Innovation and Extension (but only Social Learning if you are Econ Grad School)

Questions A little • How to put this into the bigger picture of growth and poverty reduction? • Why would some in rural areas stay behind even if growth starts picking up? • What may stop any a process of growth starting off? • The more systematic study of urban-rural interlinkages • Migration? Relevant policies? • Are there any lessons from some of the existing evidence?

Locked in Rural Poverty? “Initial poverty and market failures, conspire to keep some persistently poor or even in a poverty trap.” • Access to capital (credit market failure) • Risk (insurance market failure) • Spatial externalities (curse of geography) (see WDR, chapter on impact on investment)

Access to credit • The poor don’t just have fewer productive assets (labour, human capital, land), but can’t use them as efficiently as the rich either. • Large heterogeneity of marginal return to capital (unexploited profits), but poor don’t have access. • Underinvestment is consequence. • With “thresholds”, may result in poverty trap. (WDR) • Even if returns to labour start picking up due to general growth, they may stay locked. • But if rural growth is needed to start growth, persistence is doomsday scenario, without ‘shocks’ via good luck or interventions.

Risk • The poor don’t just have fewer productive assets (labour, human capital, land), but can’t use them as efficiently as the rich either, due to lack of insurance, or insurance-substitutes. • Large heterogeneity of marginal return to capital (unexploited profits), but poor can’t afford to take the risk, due to downside consequences. • Underinvestment is consequence. • With “thresholds”, may result in poverty trap. (WDR)

Spatial Externalities • “economic gains and costs created during economic and other transactions, beyond those taking into account by those involved in the transaction”

Spatial Externalities • Geography of poverty: there are areas that stay behind • e.g. land-locked countries as before, that require agricultural growth • But also WITHIN countries “poor areas” • Most disconcerting form of externalities for the poor: those linked to geography or space (‘location’), and the 2nd degree effects, linked to interaction effects. • Curse of the latecomer: once you miss the boat it is hard to ever catch up.

Poor areas: processes involved • Threshold effect of local endowments (private, public or common property): if you don’t reach that threshold, you will lose ‘forever’… • Evidence from China, Peru, India, Africa • Other way of looking at them, “they are not part of the rest of the economy – lack integration, opportunities” • Growth opportunities may bypass them.

Poor areas: policy? • If ‘threshold’ effects, doing a little won’t be enough. • ‘Agglomeration’ effects: doing more than lifting up to equal level of other areas is required! • Or: Massive scale may be required… • And: creating opportunities to leave poor area may be much better! • Even worse, if migration has start-up costs or entry constraints (thresholds) then they cannot leave either! The real challenge of rural poverty

Getting out and being stuck Putting ‘old’ questions back to the top of the agenda. “Rural-urban interlinkages and unlocking the poor from rural areas, and let them take advantage of opportunities, mainly outside agriculture including via migration.”

Research issues and frontiers Research issues involved • (Internal) migration • ‘Poor areas’, e.g. in Africa • Possible policies in different contexts, including building roads, moving them out of ‘poor areas’, etc. Too little research due to data requirements and problems with analysis. • Panels of migration data, following people after they left; • Panels across high number of clusters for poor areas work • Instruments for careful assessment (it is hard to randomize migration or road building, so it is rarely researched, and rarely taught at graduate school)

Example: back to Poverty in Kagera

Implications? • Does this mean we should move people out of the villages? Build roads? Give vouchers to go? • Of course, not necessarily: observable or unobservable characteristics of the ones that moved out are just different from the ones that stayed behind. (Education, Enterpreneurial, etc.) • Consumption change regression on characteristics (identified via split-offs) suggests ‘moving out’ matters controlling for education matters.

Implications? (2) • But using within-household relational variables (‘age order, link with head, etc) as instruments, we find no effect of ‘moving out’ on consumption changes • OR: “the more able” or “the more enterpreneurial” ones leave, so YOU CANNOT JUST MOVE THEM OUT (as the Ethiopians are doing…). • You may need to invest in rural development to ensure more can leave when growth picks up, including the less able, currently ‘low return’ individuals, if we want to fight rural poverty.

Conclusions What is the place of rural development in general growth and poverty reduction processes? • Rural Development in Development Economics: don’t forget the old questions – Lewis-Todaro, but put them in new context 2. The Place of Rural Development in Development: Macro-story and its implications. Be especially sensitive to contexts where rural development is only hope, while use rural development in other contexts to enable pro-poor growth. 3. Growth, Poverty and Rural Development: Micro-macro and policy interactions. Be aware of poverty traps, and especially “spatial” traps. Invest in better data and research on rural-urban links, migration and forces that can unlock traps.

Rural Poverty: Old Challenges in New Contexts