Agriculture and poverty reduction: making the connection

John FarringtonJohn Farrington

Overseas Development Institute and UK Overseas Development Institute and UK Department for International DevelopmentDepartment for International Development

LondonLondon

Impacts of agricultural growth – in theory

Through:

• profitability gains for farmers

• Labour market gains for labourers

• Product prices for consumers

• “knock-on” effects on demand (inputs, processing, marketing)

• “knock-on” effects on investment

• increase in tax yields

• Increased informal transfers to those chronically unable to engage in the productive economy

Impacts - evidence

Large body of evidence on impacts of impacts of agricultural productivity growth:

• Irz et al, 2003: “each 1% growth in agricultural productivity generates a decrease of between 0.6% and 1.2% in those living on less than $1/day”

• Hazell and Haddad, 2001: including discussion of pro-poor agricultural research prioritisation

• Dorosh and Haggblade, 2003: “investments in agriculture generate the highest impacts on the poor [in sub-Saharan Africa]”

Transmission mechanisms through growth - questions and issues

Transmission mechanisms directly through growth – how well do markets work?

• “market failure is the norm, not the exception, in many parts of Africa” (Omamo, 2003)

• conventional features of market failure – transaction costs raised through lack of transport and communications infrastructure, weak contract enforcement, moral hazard, inadequate insurance markets, high risks which cannot be insured against, externalities, increasing economies of scale, highly imperfect competition…..

• but also those less commonly considered – e.g. segmented and interlocked markets – see below

Transmission via markets: imperfections attributable to

subsidies

• in India, mechanisation subsidies displaced labour and allowed large farmers to capture most of benefit of later stages of Green Revolution

• currently, subsidies in India (canal irrigation, power for pumped irrigation, fertiliser, guaranteed purchase scheme – in total approx 13% of ag GDP) – benefit mainly richer farmers in richer States……(Gulati and Narayanan, 2003)

• they crowd out productive investment, are inequitable, inefficient and environmentally damaging

Impeded transmission via markets: segmentation

• ““any form of non-economic discrimination” – does any form of non-economic discrimination” – does not include discrimination by skills, productivity, not include discrimination by skills, productivity, actuarial risk (in finance and insurance markets), actuarial risk (in finance and insurance markets), but does include:but does include:

• Gender discrimination – paying less to women Gender discrimination – paying less to women than can be justified on productivity grounds; than can be justified on productivity grounds; intra-household constraints on women’s choiceintra-household constraints on women’s choice

• Discrimination on basis of religion or ethnicity Discrimination on basis of religion or ethnicity (e.g. against tribals in India)(e.g. against tribals in India)

• Discrimination on basis of social status (e.g. caste Discrimination on basis of social status (e.g. caste system in India)system in India)

Ref: Deshingkar and Farrington on IndiaRef: Deshingkar and Farrington on India

Impeded transmission via markets: interlocking

• Interlocking as a risk aversion mechanism – landlord or moneylender will help out in crises

• BUT he then sets adverse conditions in markets for finance, labour, products, rental/sharecropping etc

• AND impedes entrepreneurial capacity

Segmentation and interlocking prevent the poor from acting as “free market agents exercising rational choice”

Ref: Deshingkar and Farrington on India

Transmission via social protection, including transfers

In general, agricultural growth can enhance tax yield, but need assessment of the efficiency of taxation and redistribution mechanisms:

To address acute situations – emergency shelter, clothing, food aid….

To trampoline the temporarily poor back into the productive economy (e.g. WB Social Risk Management Framework)

To reach the chronically poor – those unable to engage fully in markets (very elderly, sick, injured, women with large numbers of dependents), and those who are poor across generations

“Trampolines”

risk- and vulnerability-reducing mechanisms:

New forms of crop and livestock insurance (Hess, 2003)

Hedging in markets (Virengis)

Microsavings, microcredit and microinsurance

But money is fungible, so need to address household shocks and stresses via insurance against ill-health, injury, death, and via savings and credit for marriage expenses, funeral expenses…..

Transfers to the chronically poor

transfers in food or in cash? Food transfers are politically popular, but costly to administer, and potentially as corruptible as cash transfers (www.livelihoodoptions.info)

cash transfers have advantage of enhancing demand in local markets; food transfers may diminish it – even the chronically poor engage as consumers

robust transfer mechanisms involve automated payment of small amounts with minimal scope for discretion by local officials

evidence that some transfers (e.g. social pensions in S Africa) are used in part for productive purposes (investment in ag; investment in grandchildren’s education….) AND release informal transfers for productive investment

Conclusions

• Agricultural development is essential for poverty Agricultural development is essential for poverty reduction, BUT….reduction, BUT….

• Market imperfections (including regressive Market imperfections (including regressive subsidies) are pervasive and need to be subsidies) are pervasive and need to be addressed to enhance poverty-reducing impacts addressed to enhance poverty-reducing impacts of agricultureof agriculture

• Enhancing labour productivity without reducing Enhancing labour productivity without reducing job opportunities is the key – what prospect under job opportunities is the key – what prospect under globalisation?globalisation?

• Social protection (including transfers) has Social protection (including transfers) has important roles to play – money is fungible, so important roles to play – money is fungible, so what is absorbed in household shocks and what is absorbed in household shocks and stresses is lost to agric.stresses is lost to agric.

References:

• Deshingkar, P and Farrington, J (forthcoming) Market segmentation and interlocking in Andhra Pradesh and Madhya Pradesh, India. Natural Resource Perspectives Paper. London: ODI

• Dorosh, P and Haggblade, S (2003) Gropwth likages, price effects and income distribution in sub-Saharan Africa. Journal of African Economies, 12 (2) 207-235

• Hazell, P and Haddad, L (2001) Agricultural research and poverty reduction. 2020 Brief #70. Washington DC: IFPRI.

• Hess, U (2003) Innovative Financial Services for Rural India: Monsoon indexed lending and insurance for smallholders. Agriculture and Rural Development Department Working Paper 9, Washington DC: World Bank

• Irz, X, Lin Lin, Thirtle, C and S Wiggins (2001) Agricultural productivity growth and poverty alleviation. Development Policy Review 19(4) 449-466.

• Omamo, SW and Farrington, J (2004) Policy research and African agriculture: time for a dose of reality? Natural Resource Perspectives No. 90. London: ODI

Thank youThank you