INTRODUCTION. Mrs. Abigail A. Adaku & Dr. John Baptist D. Jatoe Dept. of Agric. Econ. & Agribusiness University of Ghana Legon

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1 1 INTRODUCTION Mrs. Abigail A. Adaku & Dr. John Baptist D. Jatoe Dept. of Agric. Econ. & Agribusiness University of Ghana Legon

2 Course description and objectives This course discusses: The economic issues of agriculture in developing countries The structure and organization of agriculture in developing countries The agricultural production function Pricing of agricultural inputs and outputs Technology adoption in agriculture 2

3 3 Course Requirements and Grading The course requires a good background in economic theory The grading will be determined on the following basis: Interim Assessment test Week 8 15% Term paper Week 13 10% Quizzes Check course 5% outline End of Semester Exam 70%

4 4 Course Outline Week Topic Comment 1 Agricultural economics. Term Paper Assigned 2 The role of agriculture in a developing economy 3 Organization and role of agricultural and food systems 4 Demand and Supply for agricultural products 5 Demand and Supply for agricultural products 6 Market equilibrium analysis 7 Market equilibrium analysis 8 Agricultural household models I.A. Test 9 Technological diffusion in agriculture 10 Technological diffusion in agriculture 11 Determinants of agricultural outputs 12 Support for Agriculture Subsidies, Extension, Research, etc. 13 Presentation of Term Papers 14 Revision

5 Term Paper 5

6 6 What is Agriculture? Agriculture is not a homogeneous industry. Agriculture (Agribusiness) industry is composed of a complex series of firms.

7 7 Made up of : family farms, large corporate organizations (plantations, ranches and fisheries), credit and other input supply firms, marketing and processing firms, transportation networks, wholesalers, hotels, restaurants (chop bars), food and fibre retailers (including supermarkets).

8 8 These firms supply inputs to farms, produce farm products, process agricultural products, and market these commodities to the final consumers. Agriculture is no longer thought of as solely the physical and biological production of agricultural commodities. Agriculture directly employs between 30 to 85% of the labour force in developing countries

9 9 Indirectly it accounts for a high % of labour than in other industries. Processing, wholesaling, and retail trade (restaurants, supermarkets, agroinputs). Employs people in export trade Provides inputs/raw materials to other subsectors of the agricultural sector. Provides facilities for scientific research in breeding, biotechnology, genetics, etc.

10 10 Creates human capital through training. Contributes to the beautification of landscapes. Investments in agriculture and other sectors. Medicinal and pharmaceutical products. Management of sanitation conversion of by products into feed or fertilizer Inputs in construction industry Develops new products for humans and animals - e.g. biofuels

11 11 Market for manufactured agricultural inputs and other outputs Welfare and social stability Contributes to government revenue Contributes to land degradation Contributes to air pollution Destruction of beneficial insects Pesticide use in agriculture may cause cancers, reproductive abnormalities and disorders of the central nervous system Contributes to climate change Contributes to mitigation of climate change

12 12 Agricultural Economics Is the social science that deals with the allocation of scarce resources such as land, labour, capital and management among those competing alternative uses found in the production, processing, distribution and consumption of food and fiber.

13 13 The application of economic theory to agricultural problems has gone through a process of slow acceptance The agricultural depression in 1880s sparked the interest of agronomists and horticulturists on the causes and solutions. They realized that it is not only the ability to grow plants and animals. This caused scientific interest to shift to problems of managing the farm.

14 14 The study of enterprise costs and returns begun in 1902 by Hays and Andrews Boss at University of Minnesota Over the years, the survey method evolved into a set of performance standards that sought to determine the most profitable size and type of farm for each area studied

15 15 Ignored early by economic purists and suffering outright rejection by other agricultural sciences at first, the economics of agriculture gained grudging acceptance before winning its present state Early proponents of the usefulness of economic theory in solving agricultural problems drew from Adam Smith, David Recardo, Thomas R. Malthus, Alfred Marshall

16 16 Agricultural economics is an important subject area because it is concerned with society s basic needs. Getting food and fiber to all people in the right form at the right time is a very complex process. About 50% of the worlds population is involved in the basic industry of providing food. Because of the rapid growth in world population, increasing food output will receive greater attention in future years.

17 17 In order to understand the economic relationships that form the conceptual focus, the student must recognize the physical basis of all agricultural production The student must have an understanding of the influence of climatic environments in determining how and which commodities can be produced and distributed. The student should be aware of gov t policies of all types and their impact on production and distribution patterns.

18 ROLE OF AGRICULTURE IN DEVELOPMENT ECONOMICS Most western development economists in the 1950s did not view agriculture as an important contributor to economic growth. 18 Because leading DE of the 1950s knew little about tropical agriculture or rural life. Development was often equated with the structural transformation of the economy, with decline in agriculture s relative share of the national product and of the labour force.

19 19 The role of DE was seen as facilitating that transformation by discovering ways to transfer resources, especially labour, from traditional agriculture to industry engine of growth. Agriculture itself was often treated as a black box from which people, food, and perhaps capital could be released DE throughout the 1950s and 1960s was strongly influenced by W. Arthur Lewis s 1954 article.

20 Economic development with Unlimited Supplies of Labour 20 Lewis presented a general equilibrium model of expansion in an economy with two sectors a modern capitalist exchange sector and an indigenous non-capitalist sector, which was dominated by subsistence farming. The distinguishing X tics of the capitalist sector were its use of reproducible capital, its hiring of labour, and its sale of output for profit.

21 Capitalist enterprise could be owned privately or by the state. 21 The subsistence sector was pictured as the selfemployment sector, which did not hire labour or use reproducible capital. Lewis s model focused on how the transfer of labour from the subsistence sector (where marginal productivity of a labour approached zero as a limiting case) to the capitalist sector

22 22 facilitates capitalist expansion through reinvestment of profit. The labour supply facing the capitalist sector was unlimited in the sense that when the capitalist offers additional employment opportunities at the existing wage rate, the numbers willing to work at the existing wage rate will be greater than the demand: the supply curve of labour is infinitely elastic at the ruling wage

23 23 The expansion continuous until earnings in the two sectors were equalized, at which point a dualsector model was no longer relevant; growth proceeded as in a one-sector neoclassical model. Lewis pointed out that the capitalist sector did not need to be industry (it could be mining and plantation) and that the non-capitalist sector could include handicraft

24 24 Many analysts, however, equated the capitalist sector with industry and the non-capitalist sector with traditional agriculture and argued that surplus labour and other resources should be transferred from agriculture to industry in order to promote growth. Many DEs concluded that since economic growth facilitates the structural transformation of the economy in the long run, the rapid transfer of resources from agriculture to industry was an appropriate short run economic development strategy.

25 25 Lewis s analysis was later extended by Ranis and Fei (1961, 1963, 1964) and Jorgenson (1961) Johnston observed that this preoccupation with surplus labour often seems to have encouraged neglect of the agricultural sector as well as a tendency to assume too readily that a surplus can and should be extracted from agriculture, while neglecting the difficult requirements that must be met if agriculture is to play a positive role in facilitating overall economic growth (Johnston 1970).

26 26 The propensity of the DE ists to give relatively little attention to agriculture s potential positive role in facilitating overall economic growth was based in part on the empirical observation that: agriculture s share of the economy inevitably declines during the course of development for at least two reasons:

27 First, the income elasticity of demand for unprocessed food is less than one and declines with higher incomes; hence the demand for raw agricultural products grows more slowly than consumption in general. 27 Second, increasing labour productivity in agriculture means that the same farm output can be produced with fewer workers, implying a transfer of labour to other sectors of the economy.

28 Because agriculture s share of the economy was assumed to be declining; many economists downplayed the need to invest in the agricultural sector in the short run. 28 The relative neglect of agriculture in the 1950s was reinforced by two other developments. Raul Prebisch and Han Singer independently formulated the thesis that there is a secular tendency for the terms of trade to turn against countries that export primary products and import manufactures.

29 29 From this they concluded that the scope for growth through agricultural and other primary exports was very limited. Prebisch and his colleagues therefore advocated that priority be given to import substitution of manufactured goods rather than to production of agricultural exports. The secular-decline hypothesis became article of faith for some development economists and planners, and thus the tendency to downplay agriculture s potential role in development was introduced

30 30. The second important event affecting development economists view of agriculture was the publication of Albert Hirschman s influential book The Strategy of Economic Development (1958).

31 31 Hirschman introduced the concept of linkage as a tool for investigating how, during the course of development, investment in one type of economic activity induces subsequent investment in other income-generating activities. Hirschman defined the linkage effects of a given product line as the investment generating forces that are set in motion, through input-output relations, when productive facilities that supply inputs to that line or utilize its output are inadequate or nonexistent.

32 32 Backward linkages lead to new investment in inputsupplying facilities and forward linkages to investments in output-using facilities (Hirschman 1972, 1977). He argued that government investment should be concentrated in activities where the linkage effects were greatest, since this would maximise indigenous investment in related or linked industries.

33 33 Hirschman asserted that agriculture certainly stands convicted on the count of its lack of direct stimulus to the setting up of new activities through linkage effects the superiority of manufacturing in this respect is crushing (Hirschman 1958) Hirschman therefore argued that investment in industry would generally lead to more rapid and more broad based economic growth than would investment in agriculture.

34 34 Lewis s two-sector growth model in the early 1950s led others to stress the interdependence between agricultural and industrial growth. Jorgenson (1961) argued that growth in non-farm employment depended on the rate of growth of the agricultural surplus. Jorgenson and others showed that food shortage could choke off growth in the non-farm sector by making its labour supply less than infinitely elastic

35 35 These authors therefore concluded that in order to avoid falling into a low-level equilibrium trap, in the early stages of development a country probably needed to make some net investment in agriculture to accelerate the growth of its agricultural surplus. Johnston and Mellor (1961) in their seminal article, the role of Agric. In Econ. Devt drew on insights from the Lewis model to stress the importance of agriculture as a motive force in economic growth.

36 36 They argued that far from playing a passive role in development, agriculture could make five important contributions to the structural transformation of Third World economies: It could provide labour, capital, foreign exchange, and food to a growing industrial sector and could supply a market for domestically produced industrial goods.

37 37 They further argued that the nature of the interrelationships between agriculture and industry at various stages of development had important implications for the types of agriculture and industrialization strategies that would be most likely to succeed. Johnston and Mellor s work and Nicholls (1964) article The Place of Agriculture in Economic Development were instrumental in encouraging economists to view agriculture as a potential positive force in development, and they helped to stimulate debate on the interdependence of agricultural and industrial growth

38 38 This in turn led to a growing interest in the empirical measure of inter-sectoral transfers during the course of development. The work of neoclassical agricultural economists during the 1960s stressed not only the interdependence of agriculture and industry and the potentially important role that agriculture could play in economic development but also the importance of understanding the process of agriculture per se if that potential was to be exploited.

39 Debate among Western Economists about the role of agriculture in development was strongly influenced by the rural development experiences of developing countries. 39

40 40 References Staatz, J. M. and C. K. Eicher (1990) Agricultural Development ideas in historial perspective in Agricultural Development in the Third World. 2 nd Edition. The johns Hopkins university Press pp 3-38 Diao, X, P. Hazell, and J. Thurlow (2010) The Role of Agriculture in African Development. World Development Vol. 38, No. 10, pp Valde s, A. and W. FOSTER (2010) Reflections on the Role of Agriculture in Pro-Poor Growth. World Development Vol. 38, No. 10, pp

Total Test Questions: 80 Levels: Grades Units of Credit:.50

Total Test Questions: 80 Levels: Grades Units of Credit:.50 DESCRIPTION This course focuses on the study of economic problems and the methods by which societies solve them. Characteristics of the market economy of the United States and its function in the world