Policy uses of agricultural economics

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Policy uses of agricultural economics Too much planning, too little impmentation

How well does an education in economics stand up to the practical problems of agricultural economics? It is awkward to admit any deficiencies, and not even necessary: in all practical situations there are always enough unforeseeable and uncontrollable factors to acquit one’s own judgment. But the question does arise as to how far one is applying economics in practical situations and how far one falls back on other, less rational sources of strength. In the old days every doctor’s clinic in India had a man who was even more important than the doctor: he was called the compounder. He made up the mixtures, and his reputation was such that patients often got mixtures from him without going to the doctor. My education in economics reminded me of nothing more strongly than of the art of compounding: one took a pinch of theory, added it to a phial of facts, and in case of doubt one added a generous dose of commonsense. In practice, the cases of doubt were all too numerous, and commonsense was used in gallons. However, it became increasingly unclear whether what was being used in such bulk was commonsense or conventional wisdom.

Three approaches When I was a student in the late 195Os, there were basically three strands in This is an edited version of a paper read at the Oxford Agricultural Economic Symposium, New College, Oxford, 22 March 1977. The author is a Visiting Fellow at the Science Policy Research Unit, University of Sussex.

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agricultural economics. First, there was the old tradition of price studies: elasticities of supply and of demand, price-income relations and related policy questions such as agricultural and free trade vs price support, protection. It was a by-product of Marshallian micro-economics. As the theory of competition took a battering from new theories based on the oligopolistic structures to be found in industry, it found secure shelter in agriculture. In fact, with the advent of computers, Marshallian price theory found a fertile ground for study in agriculture. Secondly, there were the new exercises in agricultural planning. They were a part of the plans of developing countries, and sought to define the investment requirements of agricultural growth. In doing so they relied largely on a curious little invention of the distinguished student of Christ Church, Sir Roy Harrod. Economists of that time used to wave capital-output ratios about as vigorously as the Chinese wave the Red Book. Finally, there was a flourishing little school of structuralists. They concerned themselves with fascinating minutiae of land tenures, usufructuary rights, land distribution, agricultural taxation and other such things. Their tribe was dying out in industrial countries where migration out of agriculture had moved attention from income distribution within agriculture to distribution between agriculture and the rest. But they were still very active in developing countries, and certainly so in India, where the successive reforms of rulers

spread over a few centuries had created enough of a mess to keep agricultural economists busy for a few further centuries.

Grand planning With this basic equipment I went to work in India in the early 1960s. Those were the last days of grand planning in India. The third 5-year Plan ended in 1965; since then planners have never recovered their authority or initiative. A typical project of that period, which was considered a terrible headache at that time and which is a showpiece now that its teething problems are over, was the Bhakra-Nangal project - built at the cost of &600M to irrigate 1M hectares and generate 600MW of power. It had taken longer to build and cost much more than was planned. The explanations given by the numerous official reports and economic studies were basically of two types: poor planning, which implied imperfect foresight, and inefficiency, which encompassed a large number of deficiencies largely considered to be non-economic. Since Bhakra-Nangal I have had occasion to study delays and cost in a number overruns of places, including Nepal and Tanzania, and I have come to doubt the importance of these explanations. Poor plans there undoubtedly have been, and it is almost always possible to improve a plan. But the danger now, particularly for big projects in which the international institutions are interested, is of overplanning because of bureaucratic caution. Inefficiency, on the other hand, is a portmanteau term that can explain everything. I am aware that there are inefficient people in developing countries and that they are often inefficient for selfish reasons. But occasions where people accomplish less than they can when they are expected and enabled to do more work are few and isolated in my experience. Generally, delays and cost overruns are

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Viewpoints concomitant, and arise from the same factors of which two are the most important.

Budgeting

and coordination

First, there are the methods of budgetary control practised in almost all governments of the world, the basic principle of which is that the man on the spot never takes decisions to spend. The decisions are taken by a superior, or worse, a committee of superiors, at the capital, communications with which may often take days, after scrutiny which can consume weeks. The result is that successful projects are always being reined in by financial controls, and resources invested in them are underutilised. On the other hand, annual budgeting creates a strong incentive to spend sanctioned amounts even on projects that are inadequately prepared. Thus it is the worldwide techniques of budgetary control that cause built-in inefficiency. mismatching of Secondly, the supplies of co-operating factors in an overwhelming number of cases leads to idleness of the resources that became available earlier. Commonly it is machinery that holds up the utilisation of other factors, for it may not only arrive late but it may break down at any time, and maintenance facilities are many developing inadequate in countries. Just as no country would think of building a railway line without setting up a railway workshop, it is impossible to build a dam without a construction machinery workshop. If a country wants to build a dam, it has to set up a dam-building industry, and it has to take up a large and long enough programme to keep the industry busy for some decades. Efficiency can only be attained by achieving a large enough scale to maintain a minimum work force and stock of equipment, and keeping them fully engaged for decades at a time. It thus requires the state to concentrate on fewer activities than it is wont to do, and to achieve saturation levels in them over finite periods. The first phase of agricultural planning emphasised big projects: high dams, extensive reclamation, massive colonisation etc. These big projects suffered from the same shortcomings as

big industrial projects, namely high capital costs, long delays and low levels of utilisation. The second phase, the ‘small is beautiful’ phase, is still continuing, and it is too early to make a final judgment. But a few of its features advise caution. First, while small-scale projects - whether dams, tractors, or power looms - undoubtedly employ more labour per unit of output, they do not necessarily save capital: in fact, they seem to require more capital per unit of output. Secondly, a large number of small projects can require more maintenance in more dispersed locations than a small number of large ones, and since maintenance is a bottleneck in developing countries, small projects may suffer more from it. Thirdly, small units can have higher rates of depreciation: small dams, for instance, silt up faster, and are breached more easily if not maintained. Productive investment programmes have met with insuperable frustrations, and there has been a trend towards investment which is not directly or visibly productive, for instance, in infrastructure such as roads and education, and in consumption such as provision of food to the poor, drinking water and health services. These programmes cannot be judged by the same stern criteria as productive programmes; but they have made no visible contribution to production, and an increase in consumption or investment in infrastructure cannot be sustained without an increase in production.

to explain virtually everything, structural explanations are not necessarily poor explanations. But before there is a failure of agricultural development to be explained, there has to be an effort to develop agriculture; and while development programmes are often frustrated by structural obstacles, such obstacles can often be circumvented by practicable tinkering with the structure. Big dams are a case in point. Their irrigation capacity is generally underutilised I, . years because while the government digs the main canals, the channels which are to take the water to the farms remain unconstructed. The channels are not dug because the government does not want to bear their cost, or to make the effort to acquire land for them, settle land claims and distribute the water. The resources and the effort required to make the channels are of the same kind as for the large canals, but the government neither provides them nor organises their provision. Its organisation would be easier under certain types of agrarian structure, for instance, a co-operative or a collective one; but a feudal or capitalist structure does not make the utilisation of a dam impossible: it only creates financial and organisational problems of its own. The income distribution associated with feudal and capitalist structures is often unjust, and generates tensions, but to go by historical experience it does not make agricultural improvement impossible.

Perceptions Structuralist

explanations

The structuralists find good reasons for the failure of agricultural development programmes. In fact, the structuralist explanations are too good. For if the distribution of land or its produce is unequal, it deprives those at the wrong end of inequality of the incentive as well as the ability to improve agriculture. But if it is fairly equal as in some traditional systems of the Pacific or Africa, it means equal poverty for all, and a general inability to invest or to benefit from investment. In spite of this element of overkill, structuralist explanations have considerable appeal today. Although land relations can be used

of wants

US look at a rather different phenomenon. In north-west India one occasionally comes across fair-headed children, who are supposed to be descendants of Alexander’s soldiers. I was, however, surprised when I was working in Behar during the famine of 1966 to come across descendants of Jersey and Holstein cows. However, they looked no better nourished than their Indian sisters, and it was doubtful if they gave more milk. The Agriculture Ministry people said that imported breeding stock was received as a part of aid and given to villages, with the object of increasing milk output and improving the standards of nutrition; but as a Let

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Viewpoints result of uncontrolled breeding and careless husbandry any increase in milk production was doubtful. According to the villagers, foreign stock increased milk production of a cow, but the increase fell off, and besides, such cows were less sturdy. Furthermore, the villagers had little interest in milk except as a minor supplement to children’s diet and as a tea whitener; they were more interested in their draught cattle, whose quality and number were little affected by the import of high-yield cows. Last year I came across a similarly abortive cattle improvement programme in Tanzania. There too the aid administrators thought that breeding stock supplied to Masai cattlemen had had no effect owing to the absence of culling uncontrolled breeding: and according to the administrators, the tribesmen regarded cattle as their wealth, and would not get rid of useless cattle. According to the tribesmen, they had no surplus of cattle considering the risks of drought and disease; in fact, they were always short of cattle, and many of their young men could not afford to marry because they could not muster the necessary bride price in the form of cattle. In both the Indian and the Tanzanian cases I was struck by two features. First, there was the absence of a link between what the rural people wanted and what their benefactors offered them. 1 say ‘wanted’ intentionally because I do not mean ‘needed’. Every population ‘needs’ a large number of things; the Indian villagers certainly ‘needed’ milk, and the Masais ‘needed’ more beef, to sell if not to eat. They also ‘needed’ shoes, umbrellas, dentists and a hundred other things. But of these things there were only a few that they felt a real lack of, that they would have made an effort to get. The Indian farmers would have liked more draught power: the Masais would have preferred a lower and less capricious death rate among their cattle, or more plentiful grass near their watering holes so that they would have to tramp less. But they were offered something quite different. This is partly characteristic of aid; aid does not have to be paid for - at least not immediately - but its recipient has therefore so much less control on what he receives. It is also characteristic of international science which is largely

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financed out of aid to scientific institutions; so much money and glamour goes into genetic research for instance, but village-level resource problems stay relatively neglected. Secondly, the cattle aid experiments confirmed my impression that problems of agricultural development are basically resource problems. In both cases, it was cattle fodder supply that was a constraint. In Tanzania there was no absolute shortage of fodder, but given the sparse growth of grass, so much human and animal effort was lost in feeding that the surplus available in the form of beef was limited. By and large, subsistence agriculture can improve only if either external resources like power, oil and fertilisers are pumped into it or its own resources like land and water are used more intensively.

Marshallian

prescriptions

Price theory, or at least policy prescriptions based on it, were unpopular in developing countries in the late 1950s. It was generally believed that the elasticity of supply of agricultural goods was low, and that supply could be more readily increased through investment in agriculture. Since then, investment planning has run into frustrations and a series of studies have cast doubt on the wisdom of protecting industry at the expense of agriculture in developing countries. The studies organised by Bela Balassa for the World Bank.’ Little, Scitovsky and Scott for OECD* and Bhagwati and Krueger for the National Bureau of Economic all carry or imply the Research,3 message that better terms of trade for agriculture would result in faster and more efficient growth. Whilst the collective counsel of IBRD, OECD and NBER has won few new converts in developing countries, I have witnessed a case of dramatic improvement in the terms of trade of agriculture that should furnish some lessons. There was the rapid rise in agricultural prices following the poor crops of 1965 and 1966 in India; the terms of trade of agriculture against industry improved by 25% between 1965 and 1967, and the improvement lasted well into the 1970s. The change

in terms of trade was followed by, and the green stimulated, undoubtedly revolution. But the green revolution was largely confined to the area irrigated by Bhakra-Nangal dam, and to two crops, namely wheat and millets, where new seed varieties had been developed. It is striking how little the rest of India’s 25 or 30 major crops have been touched by the green revolution. The growth rate of agricultural output was about the same before and after the green revolution, and the overall growth rate slumped badly as a result of an industrial slowdown. Looking at the entire story, it seemed to me that the elasticity of supply of agricultural output depended on past investment, much of which had to be infrastructure investment in irrigation, drainage, roads etc, which was unresponsive to changes in terms of trade. This brings me back to the point that external resources are crucial in the development of agriculture, and it is their efficient allocation and use that govern the prospects of agricultural improvement.

Ineffective aid If external resources are necessary to agricultural development, what explains the ineffectiveness of external aid to agriculture which provides such resources? The explanation must begin with the proposition that the quantum of aid is generally far from adequate. It may look high in relation to the national product or the balance of payments of the recipient; but in terms of development on the ground it means little. Owing to the thin spread of rural population, rural infrastructure investment is more expensive than urban; and developing countries have a large area and some have large populations. Rural electrification was expensive even for the USA in the 1930s and Australia still cannot afford tar roads in most of its area. How much more burdensome infrastructure investment would be for a poor country! If external resources going into agricultural development are inadequate, one might well ask why the return on them is so disappointing. The answer in my view lies in the fact that they are too thinly spread both geographically and functionally.

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Viewpoints Geographically they are too widely distributed because of political factors: any government, however despotic, has supporters to please all over its territory; and largesse being underpriced by definition, the demand for it inevitably exceeds supply. The result is that the government does a little _ too little - everywhere, and hopes that rest the will follow through a demonstration effect. But the difference in resource levels between the aided and unaided sectors is too large to induce any demonstration effect. Besides, the demonstration effect arises only after a certain threshold proportion of the population has adopted a practice or technology or capital asset; and the initial effort of the government does not reach the threshold. The functional reach of aid to agriculture is inadequate because it does not reach down to production decisions, which are taken by farmers. It would be easy to say that the solution is to take away ownership and management from farmers and to vest it in co-operatives. But even co-operatives would have to carry along their members, who would ultimately have to implement whatever changes are necessary. The problem is not different from one of getting workers to accept industrial technological change. It might be made difficult if each worker owned the

machine he worked on. It might be easier if workers owned the factory collectively. But whatever the ownership, changes will be accepted only if they result in additional net income whose distribution meets the approval of those who generate it. The process of getting the approval may be complex if there are joint costs and benefits as with a dam; it will be simple if benefits accrue directly to individuals and all net benefits are positive. But the process is unavoidable, and attempts to avoid it only reduce the net benefits.

Conclusions There are two areas where economics does not get near enough to practical problems which I wish to stress. First, there is a tendency among governments and donors to overextend and disperse their activities, and to follow budgetary techniques that slow down successful projects and push forward failures. The study of public finance needs to be extended to the optimum spread of activities as related to the government’s ability to manage, and to the optimum techniques of expenditure control. Secondly, while there have recently been significant advances in the theory of project evaluation, selection and planning, the danger now is of too much effort going into efficient planning and

too little into implementation. In view of the extreme underutilisation of resources in public projects, there is scope for studies of the optimum management of public works projects. To be fruitful it would have to get away from looking at individual projects and deal with groups of similar projects over long periods. Capacity utilisation of labour and capital in public works offers a large scope for increase if more were known about factors that influence it. Ashok

V. Desai

’ 6. Balassa and associates, The structure of protection in developing countries, published for the International Bank for Reconstruction and Development by Johns Hopkins University Press, Baltimore, 197 1. * I.M.D. Little, T. Scitovsky and M. Scott, Industry and trade in some developing countries.. a competitive study, and companion volumes by various authors on Brazil, India, Mexico, Pakistan, Philippines and Taiwan, published for OECD Development Centre by Oxford University Press, London, 1970. 3 J.N. Bhagwati and A.O. Kruger (codirectors), Special Conference Series on ‘Foreign Trade Regimes and Economic Development’, consisting of volumes by various authors on Brazil, Chile, Colombia, Egypt, Ghana, India, Israel, Philippines, South Korea and Turkey, distributed for the National Bureau of Economic Research, New York, by Colombia University Press, New York.

Accelerating agricultural development The World Food Conference set an ambitious goal for the next decade: that ‘no child should go to bed hungry, no family should fear for its next day’s bread and no human being’s future be stunted by malnutrition’. It further proclaimed that ‘every man, woman and child has the inalienable right to be free from hunger and malnutrition in order to develop fully and maintain their physical and mental faculties’. This humanitarian pledge is likely to continue to be a dream unless bold and to revolutionary approaches and development agricultural particularly to food production are

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devised and implemented, particularly countries. in developing the Demographic pressures have already obliged many countries to consider land and water as a social asset, as against the traditional liberal concept of private ownership. The challenge of meeting the world’s food needs involves on equal terms both national governments and the international community.

Restraints

on production

The inhibiting factors on agricultural production in the developing countries are well known and need no detailed

identification here. They are the classic problems of underdevelopment, such as inadequate systems of land tenure, limited access to modern technology, scarcity of trained personnel, weakness of Governments’ services the (agricultural research, education, extension, credit, marketing, etc), lack of capital for investment, inadequate availability of agricultural inputs (seeds, fertilisers, pesticides, etc), low levels of education of the rural people, weak rural infrastructure, and the like. Governments and the international organisations are fully aware of these problems. Efforts have been made in the

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