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A natural growth if rooted in agricultural demand

by Anthony Mutsaers

The Third World agricultural development system - the myriad of bilateral donors, governmental and non-governmental, the network of multilateral donors (the UN specialized agencies, especially the World Bank and FAO), their respective multiple domestic power bases, and on the recipient side, Third World governments and their ministries - represents a politically diverse and complex set of well-established bureaucracies. Any change would require a broad-based consensus among all parties concerned that current means and approaches are not reaching proposed objectives. In fact, experience shows that nothing less than a serious crisis in the attainment of objectives is required to shift donor policies toward Third World agriculture.

In the early 1970s, the most important example of such a crisis was the events leading up to the World Food Conference of 1974. The Conference was primarily the result of the realization that in too many countries population growth continued to exceed growth in food production and that little or no progress was being made on the "poverty" front, a message which at that time was powerfully delivered in the form of a series of devastating famines, especially in Africa, and to a lesser extent in Asia. These famines were well publicized on television in all developed countries. The additional severe oil shock at this critical moment paralysed non-oil-exporting less developed countries (LDCs). They did not initiate any corrective action, and the scene was set for a major new policy.

These world events were reacted to by an unlikely coalition of the US Secretary of Agriculture, Earl Butz; US Secretary of State, Henry Kissinger, and a "rebel" Third World faction within FAO which formulated the position that famines and financial shocks necessitate "National Food Self-Sufficiency" through increased domestic food production by the developing countries. Butz felt that one way to reduce costly US farm support programmes would be by shrinking US grain imports by LDCs through increasing LDC food production. Kissinger supported the idea of a conference to soften the blow from the oil shock to non-oil-exporting LDCs. In turn, this US and LDC coalition was instrumental in generating the support of OECD and Arab oil-exporters.

The resulting World Food Conference of 1974, the first and probably the last of its kind, was attended at the highest level by more than 150 countries. It created, among other items, a US$1 billion "International Fund for Agricultural Development" (IFAD) with the specific aim of assuring national food security, especially for the poorest of the poor.

Given the subsequent dubious record of the LDC agricultural sector, it now seems that the crisis of 1974 has not been adequately addressed, the Conference's good intentions notwithstanding. In fact, the situation has actually deteriorated, particularly in Africa. With regard to per caput food production, between 1974 and 1984 of 23 "low-income African countries" (1984 population 260 million) only two (population 12 million) saw per caput food production exceed population growth. Four witnessed no growth (population 76 million) and in 17 (population 172 million) population growth rates exceeded food production growth. In all eight "medium-income African countries" (population 188 million), population growth exceeded food production growth. In Asia, exactly the opposite occurred. Only in Nepal did population growth exceed food production growth, whereas in Bangladesh and Pakistan, the two rates were equal. In all other countries, but especially in China, there was net per caput growth in food production. In Latin America, only Brazil and Honduras showed an improvement out of the eight countries in the region. It is estimated that all in all in 44 out of 65 countries (representing the bulk of LDC population, China excluded) population growth exceeded food production growth.

Tripled dependence on imports. This poor performance is reflected in the overall figures for food imports and public debt. Low-income and medium-income African and middle income Asian countries doubled and tripled their dependence on cereal imports between 1974 and 1984, in the middle-income African countries up to 80 kg per caput. The levels of agricultural exports dropped dramatically. Financially the African and Latin American countries have increased their external public debt about tenfold and face severe repayment problems. Public budget deficits rose as a result of the phenomenal rise of the expenditure on public administration and defence and the related investments in parastatals.

When it comes to poverty, statistics are confusing and vague. The World Conference on Agricultural Reform and Rural Development (WCARRD) papers of the 1987 FAO Conference suggest that absolute poverty diminished in Asia and the Near East, changed little, if at all, in Latin America, and worsened in Africa. Still, about two-thirds of the world's poor are in Asia. In total, these numbers (high estimate) increased from 460 million in 1969/71 to 512 million in 1983/85. WCARRD econometric analysis shows a close correlation between poverty and per caput food production, suggesting that increasing per caput food production is a priority item for economic development.

There are problems however. WCARRD population projections show an increase in the rural population of the developing countries by 162 million between 1980 and 1985. Of this total, 96 million were added to the agricultural population, but only 12 million hectares of additional land was brought under production, which suggests that farms are getting smaller all the time. At the same time, 66 million were added to the rural population, of which, according to ILO, only 25 per cent could find employment. In brief, the rural areas are increasingly characterized by fragmented farms and rural landlessness, the manifestations of poverty.

The future prospects, at least in the medium term, for improvement in both per caput food production and poverty, are worse than ever. Africa was poorer in resources in 1985 than it was a generation ago in 1960. The Near East saw cuts in public expenditures and food subsidies. Non-oilexporting countries fared badly, with slackening emigration, decline of remittances, and dwindling financial and import capability. The economic crisis was most severe in Latin America considering the devaluations, inflation, public budget cuts and lower employment wages.

It is clear from these data that most developing countries are now even less prepared to cope with providing food self-sufficiency and eradicating poverty than they were at the time of the World Food Conference.

There appears little hope that Official Development Assistance (ODA) will fill the gap. Between 1974 and 1984 net annual disbursements of ODA to agriculture from all sources increased only from $7.1 billion in 1978 to $8.0 billion in 1983. Africa's share during this period increased slightly, from 24 per cent to 26 per cent of the total. External private financial flows to agriculture took a nose-dive, especially in Africa and Latin America, and now represent about 15 per cent of the ODA total and are almost exclusively in the agro-industrial manufacturing sector. Nor are there any reasonable chances for major increases in foreign aid flows, given the difficult economic situation in the OECD countries. IFAD's replenishment struggle, placing in doubt for some time the very survival of the Fund which concerns the poorest of the poor, is an all too clear manifestation of this reality.

All this suggests that we are once again facing a grave crisis and that the time has come to look at the possibility of doing more with the available means, of reviewing the efficiency of established ways instead of simply crying for more money. Solutions for survival are now up to industry. Creative development is the word.

The role of agriculture and the rural sectors in the development process. If the food self-sufficiency and poverty problems of the rural sector are to be resolved, LDC governments must be provided with powerful arguments to legislate and enforce policies favourable to agriculture and to the rural sector as a whole and, probably, as part of this policy, to increase significantly agriculture's share of the total investment budget.

Powerful reasons are required because well-embedded historical beliefs have left conscious or even subconscious biases against agriculture, the "traditional" sector, as opposed to the industrial and mining, or "modern", sectors. The inclusion of these two words "modern" and "traditional" are ingrained in the economic development literature for the industrial and agricultural sectors respectively. Together these two words sum up the widespread attitude, in the developed and developing world alike, toward the two sectors.

In the early history of the developing world, the development of the agricultural sector development consisted in the colonial power's strategy of limiting the Third World to the role of supplier of cheap raw materials for its own highly successful industrial development. Undoubtedly, this strategy goes far to explain the urgency with which many newly independent LDCs embraced industrial development as the principal road to their economic salvation. Since these were agricultural societies, such a strategy required the exploitation of agriculture to provide surplus labour and cheap food to keep down industrial wages as well as various forms of agricultural taxation to generate the necessary capital surpluses. Typically, export-oriented cash crops were favoured over domestic foodcrop production, as these both generated foreign exchange and allowed for easy taxation in the form of export taxes.

To stimulate further industrial development and generate the necessary financing, the countries undertook expansionary monetary and fiscal policies (including heavy foreign borrowing) and adopted various related policies to protect "infant" industries through import controls favouring industrial capital and intermediate inputs and food.

As artificially high profits were thus generated in the industrial sector, resources shifted out of agriculture in search of higher returns. Since the expansionary policies usually led to inflation levels higher than world levels, the currencies became overvalued, thus penalizing agricultural exports while lowering the domestic cost of imported industrial sector imports. Cheap imported food lowered farmgate prices for locally consumed agricultural output, while prices of locally produced protected farm inputs rose. The terms of trade turned sharply against agriculture.

The preference for industrial development over agricultural development, however, was more than a simple reaction to colonialism or a result of the belief that industrial development ensured economic growth and modernization.

There was also the issue of access to capital and entrepreneurship. Industrial development is to a large extent predisposed toward private capital and private entrepreneurship. The growth of the industrial and mining sectors requires a minimum of public investment in research, infrastructural support, or marketing. These sectors come essentially as self-contained and sustained private investment packages. Likewise, the investment in the actual production technology itself, the factory, the mine, is essentially private. In contrast, in the agricultural sector, all these activities are, to a large extent, public. If one reviews official IMF, World Bank, or OECD statistics on the sectoral breakdown of foreign private investment, the agricultural sector is conspicuous by its absence.

Then there is the issue of technology. The agricultural sector was dependent on unpredictable nature: there was the need to manage large numbers of producers, widely scattered geographically, with the related problems of access and communications; agricultural technology was dependent on local research and local conditions. It may be understandable that most of the countries considered it safer to depend on industry, safely confined within factory walls in one or a few cities, with known well established technologies based on long and proven history in the developed world, and run essentially by an independent, self-financing dynamic private sector.

Furthermore and these considerations may possibly be the most important - urban aspects of industrial development have obvious political advantages. Given the nature of the democratic base of many LDC governments, satisfying the more vocal, physically concentrated urban population with industrial employment, cheap food and, last but not least, "modern" imported consumer goods, is overriding.

Then there is the actual record of success of such early Newly Industrialized Countries (NlCs) as Japan, the Republic of Korea, the City States (Singapore, Hong Kong), Taiwan province, and, to a lesser extent, Malaysia with their industrial policies. Right now, these serve as role models for many aspiring LDCs, although the possibility of following their examples may currently be very much curtailed.

In these successful exporting countries, the industrialization base was laid in the early 1950s and 1960s, during a period of import substitution. Import substitution creates the first experience with satisfying consumer demand and mass production behind protective barriers. Once domestic demand is satisfied, the industry is prepared to enter international markets.

Strong supporters of export-led development strategies feel that entry in the world export market gives the domestic economy a leanness and an international know-how (technical and managerial skills) and most important, the discipline that comes with a demanding competitiveness of succeeding in such markets. Such characteristics, they reason, are why countries with an export-led strategy, like Korea or Japan, survived the international financial and oil crises. They simply exported themselves out of the crises.

These countries, on the whole, also pursued a more benign policy toward agriculture. The terms of trade were not against agriculture; exchange rates and export taxes did not discourage agricultural exports. Taxation was not excessive and did not discourage agricultural growth. At the same time, public investment budgets for the sector remained high. There were strong policies to assure asset distribution (effective land reform) and to introduce rapid technological change.

Countries like Brazil, the Philippines, Turkey, and Mexico, dominated in the 1960s and early '70s by import substitution policies, did not, by definition, have the export capacity to generate the necessary foreign exchange to avoid the financial crises. The problems of these countries at that time were that reliance on import substitution policies behind comfortable import barriers led to inefficiency, overcapitalization, and managerial laziness, and, as it involved an overvalued domestic currency, an overall misallocation of resources within the economy which was subsequently combined with capital flight. A related negative was that incentives for import substitution, through foreign exchange rationing, increased the cost of imports, making exporting less profitable. The agricultural sector, with the greatest possibilities for exports, suffered most.

Although, since the middle 1970s, these countries have begun to turn toward a balanced, or even export promotion, policy, shedding many of the structural problems created by excessive import substitution, they experienced a very high entry cost. The adoption of the export-led strategy leads to major increases in foreign borrowing in the early periods for imports of intermediate and capital goods; only late in the development process does industry become a net contributor of foreign exchange. These late blooming Newly Industrialized Countries (NlCs) were thus caught in the double bind of having to support high levels of imports without the necessary compensating export levels and with diminishing access to external financing.

A related major problem for these countries was, and still is, that the current world trade environment, with protectionism on the rise, compares unfavourably with the expanding world free trade picture of the 1970s when the early NlCs made their entries.

Alain De Janvry suggests an inward looking change in policy for future aspiring countries: "Given this context of export scepticism and much more orthodox trade and price policies resulting from stabilization efforts, it is clear that expansion of the domestic market to generate final demand for industry will have to play a much greater role than in the previous three decades.

"In an open economy with industrial export scepticism, imperfect substitution between domestic and imported capital goods, binding foreign savings, and significant import substitution possibilities in agriculture without necessary protectionism, productivity growth in agriculture becomes an important new source of economic reactivation."

In fact, in Japan, between 1914 and 1965, 58 per cent of GDP growth (increasing 28-fold during this period) was generated through domestic demand. Studies carried out on Turkey, Korea, and Yugoslavia found that domestic demand accounted for between 63 and 95 per cent of GDP growth. Such considerations now inhibit the wholehearted adoption of an export-led policy on behalf of aspiring newcomers.

An inward-looking orientation would not necessarily imply a total exclusion of the role of exports. Even in the examples cited there remains a critical role for the export sector, but such an orientation rather suggests that a major development thrust would be to activate domestic production for the domestic market. In the agricultural sector this still leaves substantial scope for improving the competitiveness of agricultural exports (especially in Africa), which may have positive spill-over effects for the production for the local markets. World Bank studies show that the development of cash-crop production raises the quality of farming in general (largely thanks to improvement in the input/output system) and thus benefits food crops as well.

The relationship between agricultural and industrial growth. There are other sobering statistics which suggest that an industrial export-led strategy often involves the neglect or exploitation of agriculture because such a strategy ignores the capacity of the agricultural sector to generate industrial demand.

A recent publication, "Investing in Development" (Baum and Tolbert) neatly ranks, with stunning results, about 50 countries by their bias against agriculture (measured by the extent of price distortion) and the related annual GDP growth rate, the domestic savings income ratio, and the annual rate of agriculture and others, as summarized in the table.

As the distortion increases, agricultural and GDP growth rates fall, along with domestic savings. The World Bank, in its 1986 World Development Report, finds a perfect correlation between the industrial growth rate and the agricultural sector growth rate for most of 41 countries, the exceptions being the exporters of oil and minerals. In all other cases, low agricultural growth rates correspond to low industrial growth rate and vice versa. The report concludes, "Agriculture's intimate connections with growth and the wider economy mean that the costs of discrimination against agriculture are not borne by farming alone."

All this suggests that foreign aid should probably be oriented strongly in favour of pro-agricultural policies. It is interesting to note, however, that aid-flows by themselves appear to have a limited effect on agricultural development. Many countries depend heavily on aid; in fact, donors dominate the operating and investment budgets of many African countries and some smaller Asian countries as well. Yet in countries where cereal production growth far exceeds population growth, like China, India, the Republic of Korea, and Indonesia, aid per caput varies from $1 in China to $4 in Indonesia. On the other hand, in low-income food deficit African countries, aid per caput varies from $20 to $30 per year and up to $70 in Somalia. While it may be true that the food-deficit countries would have done worse without aid and that the food-surplus countries could have done even better with aid, it follows that aid does not appear to be essential to agricultural growth.

Agricultural demand led industrial growth (ADLI). The inward-looking development strategy, as presented by Adelman or Mellor does not, like the previous industrial import substitution policies, depend on creating artificial import barriers. Rather it hinges on the development of the agricultural sector and on the demand which a prosperous agricultural sector would generate.

Adelman puts the case as follows:

- Prosperous farmers would require large volumes of inputs from the industrial sector: fertilizer, insecticides, weed-killers, water pumps, agricultural tools and equipment, creating effective domestic demand and employment in these sectors.

- Increased agricultural production calls for increased agro-industrial processing operations, further strengthening industrial output and possibly exports.

- A prosperous rural sector would create a lucrative market for locally made industrial products and related employment. Urban consumers demand more imported goods.

- Demand for rural transport and construction and related materials would increase.

- Per unit of output, the technology of agricultural development, especially of small owner-operated farms, is much more labour-intensive than industrial development technology, and conversely much less capital-intensive. That is, it increases employment and lowers the need for capital, both foreign and domestic.

- Agricultural development requires much less in imports, also per unit of output, than industrial development, since it uses traditionally locally available resources.

- A strong, healthy agricultural sector would produce surplus for exports, which would provide foreign exchange for agricultural inputs.

To assure emphasis on labour-intensive technology and a reduction of imports per unit of output, emphasis should be on small- and medium scale agriculture, as large farms and mechanized government farms usually use imported capital-intensive inputs. Smaller farmers are also more likely to consume local products, including clothing, footwear, and simple consumer durables (bicycles, sewing machines) than larger farmers who might prefer motorcycles and automobiles with a higher import component.

Adelman gives figures to support these arguments. Working with a Computable General Equilibrium (CGE) model for the Republic of Korea, he shows that, with agriculture contributing 50 per cent to GDP and industry 25 per cent (a typical LDC situation), and an industrial demand multiplier of income originating in agriculture of 1.4 per cent, a 3 per cent agricultural growth rate would generate a 8.4 per cent industrial output growth rate.

Mellor makes essentially the same point by suggesting that the introduction of "technological change" would generate the necessary agricultural growth, and that the resulting increased agricultural production could (a) substitute for imports, (b) be absorbed domestically through accelerated growth in employment and thus purchasing power (in the backward and forward linkage industries serving agriculture), or (c) as a third possibility, be sold on international markets. This resulting increased agricultural income would generate demand for low capital intensity and industrial sector goods and services. Either increased agricultural exports or import substitution would generate or free the foreign exchange to sustain the import of intermediate inputs.

The policy is attractive in that it addresses both agricultural production and the question of near and complete landlessness (agricultural labourers) in the rural areas, by absorbing the rural poor in the backward and forward linkages of the agricultural service sector. It is a sensible recognition of the close interdependence between the agricultural and rural service sectors. The FAO and World Bank literature contains overwhelming evidence that agricultural growth is extremely limited not only by lack of adequate infrastructure, especially roads which affect market costs and producer prices, but also by inadequate and untimely supplies of appropriate fertilizer, improved seeds, and chemicals; easily accessible banking or savings and loan services; appropriate equipment and tools; by inadequate repair and maintenance facilities, improper on-and-off farm storage facilities, underdeveloped wholesale and retail activities, related product advice, and a lack of access to consumer goods. A well-developed agricultural service industry would certainly be one of the most reliable ways to increase agricultural production and raise rural employment. Intensive market penetration would assure high volumes of input supply and output marketing, which would place these goods and services at the disposal of even the smallest farmer, that is, the poorest farmer. Monopolistic profit making would disappear once there is a large, thriving, competitive sector which will try to reach even the smallest farmer, now very often neglected or not reached by the integrated rural development projects, which often benefit larger farmers.

An agricultural development policy such as ADLI could provide the necessary framework for an agriculturally oriented development process which emphasizes food selfsufficiency considerations and poverty elimination. For such a policy to be implemented, the country and the donor community would need to agree on and execute a programme that would:

- Avoid an overvalued exchange rate.
- Adjust effective protection for industrial goods.
- Avoid subsidies and pricing policies which favour larger farmers and create instead agricultural input/output price ratios conducive to owneroriented farm surplus production.
- Keep interest rates sufficiently positive to attract and assure rural savings.
- Keep a balance between urban/ rural wage differentials.
- Price infrastructure at true costs to allow for cost recoveries and infrastructural growth.
- Avoid inflation rates inducing capital flight.
- Increase the public budget investment share of agriculture to about 25 per cent of the total.
- Target the ADLI programme to small owner-operated farmers.

Mathematical modelling is now sufficiently advanced for economists to develop acceptable Computable General Equilibrium (CGE) models which would reflect existing baseyear conditions on which the specifics of such future alternative development strategies as outlined above could be realistically simulated. This would provide local and donor policy-makers with a view of what the possible sectoral growth, equity, (employment) public revenue and expenditure, and balance of payments implications are of a variety of agricultural and other policies.

To institutionalize such a capability would require a reorientation for ministries of planning, which are often involved in the preparation of medium-term plans, including lists of projects for up to five years in the future. Such plans in practice reduce at best to "shopping lists" for donors, but have otherwise limited impact. The projects are usually too general and too superficially identified and, in many cases, obsolete after some years, to be considered as serious investment proposals.

A more suitable division of labour would be for such ministries to emphasize macro-policy analysis frameworks within which various sector strategies and investment proposals of the technical ministries may be evaluated.

A stop-gap measure would be the organization of working seminars with participating local governments, donor representatives, and concerned UN agencies. The necessary quantitative framework could be provided by the academic community. Various universities have at their disposal well proven computerized general equilibrium models - CGE models - which can create realistically any variety of quantitative scenarios regarding various industrial/agricultural policy adjustment (exchange rates, taxes, etc.). The model would generate quantified scenarios proposed by the participants on a variety of variables selected by them for discussion among them. Through various iterations, this process could lead, eventually, to an impartial consensual macro policy formulation.

Conditions for a successful adaption of ADLI. Assuming that the intersectoral issues raised above would be addressed at the macro national planning level, there looms large the specific agricultural-sector constraints which currently obstruct the successful implementation of ADLI. There is first the question of the availability of a suitable technology which could be easily and quickly absorbed by the farmer; there are the problems of overcoming current institutional constraints and the question of the management of a greatly improved agricultural support industry (the input-output system). There is, above all, the question of finance. Additional investment funds will have to be generated to set the whole system in motion; increased exports may help, but would most likely not suffice. The second half of this article will address these issues and outline alternative solutions in the next issue.

Issues of agricultural technology. ADLI would require a substantial absorptive capacity of technology to create the rapid and efficient growth required. Given the well-known difficulty development projects have in motivating farmers to adept new technology, this absorptive capacity is often seriously questioned. In response, one should first consider that there is by now sufficient evidence to indicate that farmers respond positively to new technology, provided the incentives are right. Considering risk and other factors, farmers require substantial safety margins in order to invest in new technology. With a positive macro policy toward agriculture, which would improve on the existing farm cost/benefit ratios, one may expect increased demand for inputs at existing levels of technology. In fact, there are many indications that there exists currently in the rural areas, a substantial pent-up demand for additional inputs and improved marketing services. The post-Second World War succession of projects, in combination with mass communications and rural-urban migration, has familiarized the majority of the farmers, even in the most backward areas, with the benefits of fertilizer, pesticides, and other inputs.

Even with the division of most countries into donor coordinated integrated rural development projects, and the myriad of other donor projects, only a fraction of the small farmers are benefiting from reliable access to extension and related input supply and output marketing facilities. It is a fallacy to think that one or even several successive projects suddenly transform a backward primitive shifting-cultivation agricultural area into a modern, high-tech farming community. The typical project can do just so much; everything takes time. If an IRD project can assist 30-50 per cent of the farming community, it already has accomplished a lot.

The situation generally deteriorates, even for the privileged, when the project is terminated or scaled down, or underfunded or mismanaged, all likely events. In all of these cases, the end result is that the government is unable to maintain the project's standards, and often the situation quickly breaks down to preproject conditions, including the total breakdown of the project-supported input supply/output servicing.

All this implies a substantial disequilibrium in the agricultural sector, that is, there is a substantial input supply and related servicing absorptive capacity in the short to medium term at existing levels of technology. To continue to generate demand beyond this period would require the generation of a consensual technology, generally accepted by the epistemological society of experts. Given that the introduction of new technology, is, to a very major extent, a donor affair, substantial improvement in donor coordination would be required to reach the point where ADLI could be based on such a consensual technology.

For example, there are very few homogeneous agro-ecological areas for which agronomists agree on a scientific "technical package". Agronomists associated with agricultural investment project identification, preparation, and appraisal are often put in a situation where they simply put together a package based on long-term personal experience, which, while representing the best of the state of the arts, does lead to the situation where recommendations for the technical package vary from one agronomist to another, from one committee of agronomists to another committee, from one organization to another.

Thanks to the creation of the Consultative Group on International Agricultural Research (CGIAR) (a network of internationally financed international research systems and regional research stations; IITA, in Nigeria, ICRISAT in the Niger, and WARDA in Cd'Ivoire), and other efforts in the Sudan, one may expect improved crop varieties to come along. Already, there have been, for the African continent, Asian rice green-revolution-type breakthroughs in hybrid palm oil in West Africa, cotton in the Sahel, and maize in East Africa. However, in all too many project identification missions, regional research is not always replicated at a national level; and if it is, there are still the applied research experiments to be done for the specific sub-agroecological zone in question, and the on-farm trials.

Summarizing this point, on the donor side, it is not that the multitude of different development experiences and opinions among organizations and within organizations is bad in and of itself. On the contrary, the donor community has benefited from a very rich, very fruitful learning experience. The core of the problem is that very little of this experience is shared; each donor applies only a fraction of what is potentially available. Technology remains too compartmentalized and confined within the learning curve of each actor. There is too little cross fertilization, obstructing severely the rapid development and adoption of new technology for agricultural growth.