Agricultural Growth and Poverty Reduction: A Cross Country Synthesis

1. Agricultural Growth and Poverty Reduction: A Cross Country Synthesis Roles of Agriculture Project International Conference

2. Outline of the presentation • Motivations, objectives • Review of the theoretical background • Implementation • Summarizing the results by channels • Elements of a synthesis • Conclusions and what next

3. Why a poverty module?...... • Poverty reduction at core of international debate on national development strategies and development aid • Declining trend in share of resources devoted to agriculture at the national and international level • Q: Is agriculture important in reducing poverty? If yes, why and how much? • Q: Should we care? Markets, social goals, and the role of economists

4. … and what should we get out of it? • Which channels are most critical in translating agricultural growth into less poverty? • Identifying constraints: the role of policies, institutions, and natural factors in molding the link between agricultural growth and poverty reduction. • Derive policy implications

5. Theoretical background in few slidesRamon Lopez, 2002I. Wages, employment, general equilibrium effect • Agriculture uses intensively unskilled labor; • A high share of unskilled labor works in agriculture; • Agricultural wage is opportunity cost for (unskilled) labor sector-wide; • Agricultural growth raises wages and/or employment; • Interact labor demand and supply elasticities, L/K; • Translate labor market effects into poverty changes.

6. II. Real food Prices • High share of food consumption • Real food prices influence poverty line computation • Ideally, separate tradable and non-tradable in food basket • Role of real exchange rate and trade openness • Other factors: non-agricultural output, non food prices.

7. III. Smallholders’ income • Direct effect: raising farm income, household income • Key issue 1: share of farm income into total household income • Key issue 2: the income gap for the average smallholder might be too great • Access to markets and the impact of agricultural productivity on farm revenues

8. IV. Growth Multipliers Conditions for relevance (Delgado et al. 1998) • Agriculture occupies a large share of aggregate employment • Ag growth benefits should be wide-spread • Consumption patterns, high MBS of non-tradables • Elastic supply of underused local resources Then: tradables income shock regional growth spurred by demand for non-tradables Question: how do farm and non-farm tradables multipliers compare?

9. V. Composition of growth and poverty reduction Ravallion and Datt (1996) India: • Agricultural, services growth lead in poverty reduction • Cross sectoral spill-over (rural into urban) • Elasticity of agricultural growth increases from HCR to PG to SPG, i.e. growth reaches poorest of the poor

10. Implementation • Data • …..but also country’s specific conditions matter I guess (a help in final synthesis)

11. I. Wage & employment channel • Chile, Mexico: estimates of labour demand f(Ws,Wu,r,Qa,Qn) • Definition issue: (1) agriculture (primary+ agro-industry); (2) skilled labour • Chile: we saw before: 4.5% Ag growth (ext. definition) leads to –5.5%/-8.6% in HCR (compensated case) • Mexico (as Chile): Agriculture (strictly), higher labour intensity similar results to Chile, weaker due to different sector boundaries • Dominican Republic: Data show that higher Ag. Y/L did not lead to higher Wu: Labour supply very elastic due to Haitian immigration

12. I. Wage & employment channel: tentative conclusions • Labour supply elasticity (DR, Chile): inter-industry labour mobility, labour market rigidities, regulations can limit the impact of Ag.growth on poverty • Output mix: Policy Reforms, commodity booms, Tech. Change output mix, farming systems • Labour supply elasticitywage, employment • Wage effectHCR • …. but employment effectPG

13. II. Food Price Channel: Key results Cointegration analysis: • Chile (NT Food Prices): Ag GDP Elasticity of FPI is –0.8 in short run; -0.18 in long run • Mexico (FPI): very small elasticity, RER dominates • DR: elasticity -0.43 (LR), -0-80 (SR) • Ghana (no cointegration analysis). Ag Labour Productivity Elasticity of urban food prices –1.0 (1 Year) and –0.89 (2 Years)

14. II. Food Price Channel: Key results (cont.) Studies exploring role of infrastructure: • South Africa: Pass-through to farm gate prices (e.g. wheat and maize) substantial • But farm gate to retail disconnected: thus little role for ag growth to reduce food prices in urban areas. Infrastructure bottleneck. • China: 1% Ag. Growth  -0.1% food retail prices. Investment raising productivity of food marketing (farm gate to retail) affects food retail prices

15. II. Food price channel:tentative conclusions • In many countries food prices are critical in moving large shares of population in and out of poverty (e.g. results from Mali, DR, Morocco, India) • Including small poor farmers (e.g. Ethiopia, DR) • Integration into world markets weakens relationship b/w food prices and Ag. Growth • Marketing infrastructure might be as well critical as ag growth • Issue (DR) of broad price stability,food prices, and poverty: does efficiency of food system affect economy wide inflation, hence wage dynamics?

16. III. Growth Multipliers: Key Findings • Chile: use of CGE to compare alternative definitions of multiplier (Hirschman, HD, CGE-flex price) • 1. Except livestock (2.6), multipliers of ag sub-sectors become 2nd order under flex-prices (0.71-1.84) • 2. Difference b/w CGE and HD small for traditional ag sectors (except fruits). Higher for agro-industry. Question: is scepticism (e.g. Delgado et al, 1998) over ag growth multipliers warranted in case of LAC?

17. III. Growth Multipliers: Key Findings (cont.) Ghana: multipliers by income; farm and non-farm tradables multipliers compared • Poorest show highest MBS for non-tradables • Multipliers are higher for Non Farm Tradables shocks than for Farm Tradables (3.2 vs 2.5)… • …but FNT more important than NFNT in overall size of multipliers DR: suggests that NFNT are more important than FNT in size of multipliers. • 1% increase in income of 40% poorest households 1.1% increase in non food items

18. III. Growth Multipliers: Key Findings (cont.) South Africa: Communal areas in Kwa-Zulu Natal • MBS are high for consumer durables fruits, meat and vegetables, not for staple crops (e.g. maize); NB: impact on nutrition • Growth multipliers smaller than expected (1.28 – if discounted by Delgado’s 30% almost no impact) • FNT contribute less than NFNT to multiplier • Linkages are stronger in case of export industry of agricultural processed and non products (e.g. chemical, transport, wood and paper)

19. III. Growth Multipliers: Tentative conclusions Results appear consistent with literature. In particular, multipliers are weaker when: • Few underemployed resources in rural areas • MBS for NT are low, especially FNT • Non tradables are small share of hh budget • Are production linkages more important than consumption linkages depending on trade openness?  See case of Chile’s linkage analysis

20. IV. Small-holders’ income channel South Africa: while agriculture provides buffer against poverty, it is a means of accumulating wealth only when it is done seriously (e.g. a minimum level of commercialisation) Ethiopia: Average farm size is 1.02 (no irrigation) • Farm income growth would have great impact on poverty but: • …agriculture is key because it employs 85% of labour. • …are there conditions for sustained growth? • Demographic pressure cum land policy: maybe there more role for urban growth while reforming land policy

21. IV. Smallholders’ income channel (cont.) China: The constrained importance of ag growth • Rural areas lack infrastructure • Little investment in rural education • Institutional bias against out-migration • Rural poverty->Gov’t investment, but no impact • More investment in rural public goods would reduce importance of ag growth for poverty reduction Chile, Mexico: small farmers’ Y does not affect poverty much

22. IV. Small-holders’ income channel (cont.) India: agricultural growth (per capita income or yield) is important in reducing poverty, but increasing land/man ratio has greatest impact.

23. IV. Small-holders’ income channel: Tentative Conclusions • To lift small holders out of Pov Ag growth may be important but not enough • Where unequal land distribution, ag Y share could be lower for smallholders (Mexico, Chile): agriculture competes with non-ag income sources for limited assets • Incomplete or missing land markets may constrain small holders, e.g. land: but….. • Land reform is expensive if done seriously, and land rental may not increase productivity by much • Where land is equally distributed (Mali, Ghana, Ethiopia) ag growth has strong poverty reduction potential

24. V. Growth Composition • Indonesia. We saw: Elasticity for total poverty is at -1.86 Mexico. • Total food poverty elast:-1.32 (-0.88) • Total moderate poverty elast: -0.56 (-0.48) • No cross-sectoral spill-over • Rural growth reaches the poorest of the poor more than urban growth (inequality reducing)

25. V. Growth Composition (cont.) China: • Ag growth reduces rural poverty significantly • No effect of services,industries: data quality, maybe consistency with smallholders story

26. Preliminary considerations Agriculture is important in reducing both rural and national poverty, • ..but effect on urban poverty might fade as agriculture becomes minor industry Constraints limit some channels and enhance others: • were land is more unequally distributed wage and employment channel might be important depending on labour supply elast.; direct effect is smaller

27. Preliminary considerations (cont.) • Where land is more equally distributed, direct effect is important, wage channel is weaker Food price channel is constrained by infrastructure bottlenecks, trade policy Trade policy and deregulation change output mix and farming systems, production linkages become more important than consumption linkages within multipliers

28. Elements for further discussion • Land administration reform and land ownership reforms: how would channels be affected (e.g. shadow price of family labour in rural areas, consumption patterns) • Labour market policies: is there scope for analysing functioning of rural labour markets? • Trade policies, more broadly policies affecting incentives: • how do these transform farming systems in the long run • How do forward and backward linkages evolve in the process? • how do the roles of agriculture change with that? • How important are food prices in affecting inflation and labour market dynamics?

29. Q: Should agricultural policies incorporate a poverty reduction concern/target or should poverty reduction be left to social welfare policies?