eJADE

electronic Journal of Agricultural and Development Economics

Agricultural Development Economics Division (ESA) FAO

available online at www.fao.org/es/esa/eJADE

Vol. 4, No. 1, 2007, pp. 47-65

Transformations in agriculture and their implications for rural

development

Peter Hazell
Visiting Professsor
Centre for Environmental Policy, Imperial College London, Wye Campus e-
mail: [email protected]

Abstract: The paper reviews the implications for rural development of current
transformations in agriculture. It first identifies some of the driving forces - in addition to the
impact of rising incomes in some but not all developing countries - behind the transformation
process: changing market chains, shifts in public policy, OECD agricultural policies and
HIV/AIDS. It then discusses some strategic issues for assisting the rural sector and small
farms in developing countries: increasing the productivity of food staples, diversification into
higher value products, organizing small farmer for marketing, agricultural services, non-
farm opportunities and migration and targeting the vulnerable. It emphasizes the need for
integrated interventions if small farm development is to offer a viable pro-poor option for
agricultural development.

Introduction

Historically, agriculture has played a key role in kick-starting economic growth and reducing
poverty and hunger in many developing countries. Moreover, most of the countries that have
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 failed to launch an agricultural revolution remain trapped in poverty, hunger, and economic
stagnation. But the conventional conclusion that developing countries should continue to
invest in their agricultural development, and particularly in food staples and small farms, is
being challenged. In an era of globalization, trade liberalization, changing market structures
and demand, and ample world food supplies, a new breed of agricultural skeptics argue that
poor countries should now downplay the importance of food staples and small farms and
focus instead on commercial farms, higher-value agriculture, and rural income diversification
through migration and nonagricultural development (e.g. Maxwell et al., 2001; Ellis and
Harris, 2004). Some even advocate that poor countries take advantage of the global glut in
food staples to leap frog agricultural development altogether. Yet others note that rapid
growth in urban–rural linkages and rural income diversification are making agriculture
largely irrelevant for the rural poor. These arguments have merit, but they can also trigger
simplistic and generalized conclusions that overlook the diverse needs and opportunities
facing developing countries today. Not only are there still many viable opportunities for
small farms, but the kinds of state withdrawal from agriculture being promoted by some
could lead to a massive and premature exodus of small farms that could overwhelm the
capacity of many developing countries to cope.

These changes are a normal part of the economic transformation and are not new. However, part
of the global change we are seeing today arises because this transformation is happening on an
unprecedented scale. Today there are over 3 billion people, mostly in Asia, living in developing
countries whose national incomes are growing at 5-10% per year. This is leading to
unprecedented pressure for tens of millions of small farms to adapt and/or find exit strategies.
Europe is still struggling to solve the remnants of its own small farm problem after several
decades of highly expensive interventions, yet the scale of Europe’s total problem was tiny
compared to what countries like China and India face today.

But this is only part of the change that we are seeing today. New driving forces, particularly
globalization, seismic shifts in development policy paradigms, and HIV/AIDS, are fundamentally
changing the economic landscape within which the agricultural transformation must take place in
developing countries. We are now seeing a situation in which small farms in all kinds of
countries are threatened, even in countries where the normal economic transformation is not very
advanced. Even larger and more commercialized farms must become nimble and well informed
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entrepreneurs if they are to remain competitive in today’s changing and fickle markets. Today we
face the prospect of a mass exodus of workers from agriculture in all kinds of countries.

Changing market chains. Marketing chains are changing in all types of countries with trade
liberalization and globalization. Developing country farmers are increasingly being asked to
compete in export and domestic markets that are much more demanding in terms of quality and
food safety, more concentrated and integrated, and much more open to international competition.
Supermarkets, for example, are playing a more dominant role in controlling access to retail
markets (Reardon et al., 2003) and direct links to exporters or importers are often essential for
accessing high value export markets. As farmers struggle to diversify into higher value products,
they must increasingly meet the requirements of these demanding markets, both at home and
overseas. These changes offer new opportunities to farmers who can successfully access and
compete in these transformed markets, but they are also a serious threat to those who cannot.
Unfortunately, most small farms are likely to be excluded if markets are left to themselves.

Shifts in public policy. Fundamental shifts in the internationally accepted development

paradigm have transformed public sector policies in ways that have left many farmers
without adequate access to markets and key inputs and services, including farm credit. As
part of the structural adjustment programs, state agencies have been removed from
providing many direct marketing and service functions to farmers, leaving a vacuum that the
private sector has yet to fill in many countries (Kherallah et al., 2002). The removal of
subsidies has also made some key inputs (e.g. fertilizer) prohibitively expensive for many
farms, and the removal of price stabilization programs has exposed farmers to much more
downside risk in farm gate prices. These problems are especially difficult for small farms
living in more remote regions with poor infrastructure and market access. While this change
in paradigm may well work for many high value markets, there are typically too many
failures in food staples markets during the early stages of economic development to ensure
efficient outcomes (Dorward et al, 1998).

OECD agricultural policies. Despite the enthusiastic support by rich countries for policy
reforms and market liberalization in developing countries, their own protectionist
agricultural polices are reaching new heights in creating unfair competition for farmers in

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developing countries. Developing country farmers not only have limited access to rich
country agricultural markets, but they also face unfair competition in their own domestic
markets from subsidized imports. The size of these distortions is immense. In 2000, the
producer subsidy equivalent of these policies in the OECD countries was US$330 billion
(World Bank, 2002); equal to Africa’s entire annual GDP that year. These policies are
particularly damaging to small farmers in poor countries because they limit their
opportunities to produce more of the products in which they have comparative advantage.
This is not just a matter of developing country farmers being squeezed out of export markets
for tropical crops like cotton, sugar and tobacco, but they are even pressured in their own
domestic and regional markets for staple foods like cereals and livestock products.

HIV/AIDS is taking a severe and increasing toll among small farms in many developing
countries, reducing the number of able adult workers and leaving many children as orphans with
limited knowledge about how to farm. Many small farms will eventually disappear as a result of
HIV/AIDS, but only after a difficult transition problem during which local communities must
find ways to cope with the human tragedies involved.

These driving forces are particularly challenging for Africa and South Asia, where small farms
account for over 80% of total farms and 40% or more of total agricultural output. Left to market
forces alone, the major beneficiaries of the new high value and liberalized agriculture will mostly
be the larger and commercially oriented farms, and farms that are well connected to roads and
markets. Many small farmers and agricultural workers will need to leave the industry unless there
is a shift back towards more supportive policies. However, it is not at all clear where they are all
supposed to go. Some will find employment on successful farms and some in agriculture related
industries. But most will need to look outside agriculture, either for part time or full time jobs.
Opportunities for exiting agriculture are much more promising in countries that are growing fast
but are much more limited in stagnant economies. The scale of the problem is potentially
immense. The number of small farms is still increasing in most developing countries, including in
fast growing countries like India and China. There is a potential crisis as powerful demographic
forces collide with powerful market forces. We do not seem to have an adequate handle on the
scale of this problem, and do not know how many people must exit agriculture and when or
where they will all go. We do not know what will happen to poverty levels and urban ghettoes as
the exodus occurs.
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If this crisis is to be averted there is need for a concerted effort by governments, NGOs and the
private sector to create a more equitable and enabling economic environment for rural and small
farm development. But the right interventions must be context specific. There are huge
differences, for example, between what is needed today in Africa and Asia. Asia’s dynamic and
growing national economies offer small farmers many more opportunities to diversify into high
value products and nonfarm sources of income, and to exit farming into higher paying
occupations. But in Africa’s poorer and slower growing economies, such opportunities are much
more limited and many smallholders are trapped in subsistence modes of farming supplemented
with low paying off farm activities. It is also crucial to craft different strategies for small farms
with viable commercial futures compared to those who do not, with greater emphasis on safety
nets and exit strategies for the latter. Clearly a one size fits all” approach will not work across all
situations.

I turn now to some of the more important strategic issues for assisting the rural sector and small
farms in developing countries in the contemporary situation.

Increasing productivity of food staples

While much of the attention today is on high value market chains and the challenges of linking
farmers to those chains, we should not overlook the importance of food staples markets and their
own particular support needs. Given a global glut of food staples and historically low prices, and
low growth rates in demand for food staples in many successfully developing countries, it is
tempting to conclude that countries can neglect their food staples sector and rely more on food
imports while focusing their efforts on producing higher value products. This would also be
consistent with the notion that few small farmers are going to get rich growing food staples at
current prices.

In reality, market opportunities are more nuanced than this, and food staples (cereals, roots and
tubers and traditional livestock products) actually offer more important growth opportunities for
small farmers in many low-income countries. For example, in Africa the consumption of food
staples still accounts for about 70% of agricultural output (Table 1) and regional demand is
projected to double by 2020 (Rosegrant et al., 2005). This will add another $50 billion per year to
demand in 1996-2000 prices, a growth of approximately 4% per year. Moreover, with increasing
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commercialization and urbanization, much of this additional demand will translate into market
transactions and not just additional on-farm consumption. There are no other agricultural markets
that offer this kind of growth potential in Africa, and unlike many higher value products, food
staples also have relatively low credence attributes making them much easier products for small
farmers to sell in today’s markets.

Table 1. Size of Africa’s Agricultural Trade And Markets

Market Value
($ billion)
Traditional exports to 8.6
non-Sub-Saharan Africa
Nontraditional exports to 6.0
non-Sub-Saharan Africa
Other exports to nonSub- 1.9
Saharan Africa
Intra-Sub-Saharan Africa 1.9
trade
Domestic markets for 50.0
food staples
Note: All figures are averages for 1996–2000,
except the data for domestic which are 1997 figures.
Source: Diao and Hazell (2004)

Simulations with economy-wide models for several African countries also show that food staples
offer more realistic pathways for achieving growth and poverty reduction within the time frame
of the MDGs (Diao et al., 2006). This strategy is not only more feasible for achieving higher
agricultural growth rates, but also leads to faster rates of poverty reduction than a strategy built
primarily around increasing production of high value products.

It is not only important to recognize that food staples still have a key role to play in many
developing countries, but also to recognize that the markets for food staples are inherently
different from markets for many high value products and need greater public attention. Many
producer markets for high value products have been successfully privatized and this is in part
because of their higher profit margins and greater integration into export and retail markets.
However, hardly any credible evidence exists to suggest that the private sector can successfully
take over the producer market chains for staple foods during the early stages of agricultural
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development. As farmers struggle with low productivity and high subsistence needs, low input
use, low incomes, poor infrastructure, high risks, and the like, the amount of profit to be made in
market chains for food staples remains low and unattractive for much private investment. There is
also a growing body of studies showing that important institutional and market failures are to be
expected at that level of development (Dorward, et al. 1998).

The Asia experience also supports this argument. There the public sector played a key role in
food staple market chains during the early years of the Green Revolution. This role went far
beyond the kind of facilitating role envisaged today and actually provided most key services
itself, including research and development, extension, improved seeds, fertilizer, credit, storage,
and marketing. Moreover, governments intervened to stabilize prices for producers and
consumers alike, and provided subsidies for many key inputs to encourage their uptake.

Recent research on India shows these interventions played a key role in launching the Green
Revolution (Dorward et al. 2004, chapter 3). They also helped ensure that small farmers were
able to participate, and that contributed greatly to the levels of poverty reduction achieved. The
IFPRI calculations show that most of these policies and interventions had favorable benefit-cost
ratios in the early years, but the ratios worsened over time once the interventions had served their
primary purposes. Unfortunately, once institutionalized, removing the interventions has proved
very difficult, and as input use increased the costs to the governments soared. Today, for
example, India spends about $10 billion per year on agriculturally related subsidies that are
basically unproductive.

The international development community seems sufficiently concerned with Asia’s post–Green
Revolution problems that it is asking Africa to launch its own agricultural revolution without
these kinds of public interventions. Africa is being asked to rely almost exclusively on the private
sector and producer organizations, even though there are no successful examples of this approach
working for food staples markets in the early stages of economic development. The international
development community may well be asking for the impossible.

This is not to advocate a return to costly and inefficient parastatals or to hefty and poorly targeted
subsidies. Nor is it an argument against a strong role for the private sector where this can work, as
in many high-value market chains or even in food staples markets in countries that have
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progressed to higher levels of development. But what is really needed is a much better
understanding of those aspects of public intervention that really worked in Asia and why (e.g.,
Dorward et al., 1998; Dorward et al. 2004). Then we can draw the right lessons for developing
new institutional innovations to bring those essential ingredients to Africa. Even most Asian
countries still remain cautious about moving too rapidly towards fully privatized markets for food
staples.

Diversification into higher value products

Small farms with a commercial orientation can benefit enormously from diversification into
higher value foods (fruits, vegetables, oils, fish, livestock products, etc.) and processed and
precooked foods. Demands for these types of food are growing rapidly with rising incomes and
urbanization in many successfully growing countries, offering robust domestic markets. In India,
for example, nontraditional high value agriculture now accounts for more than half the total value
of agricultural output and is growing at double digit rates, mostly for the domestic market. Trade
liberalization is also opening new export opportunities for some of these commodities, providing
new opportunities even in countries that have weak domestic markets. In Africa, countries such
as South Africa, Kenya, Ghana and Uganda have been successful in increasing their exports of
flowers, fruits and vegetables, and for Africa as a whole high value exports now amount to nearly
$6 billion per year (Table 1).

A challenge for this “new” high value agriculture is to make it more pro-poor. Left to market
forces alone, the major beneficiaries of the new high value agriculture will mostly be the larger
and commercially oriented farms, and farms that are well connected to roads and markets. Many
small farms are likely to get left behind unless marketing arrangements can be developed that link
them to the new market chains.

Organizing small farmers for marketing

Small farms have always been at a disadvantage in the market place. They only trade in small
volumes, often have variable and sub-standard quality products to sell, lack market information
and have few links with buyers in the marketing chain. These inefficiencies can all too easily
offset the efficiency advantages of small farms as producers. The problem has been exacerbated
by market liberalization and globalization. Not only has the state been removed from providing
many direct marketing and service functions to small farms, leaving a vacuum that the private
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sector has yet to fill in many countries, but small farmers must now also compete in ever more
integrated and consumer driven markets where quality and price are everything. Small farmers
will need to organize themselves to overcome these problems and to exploit the new
opportunities that these market changes offer; otherwise they risk losing market access.

Conclusions
In many poor countries, small farm development offers a viable and pro-poor option for
agricultural development. However, small farms are seriously challenged today in ways that
make their future precarious. International trade and rising per capita incomes in many countries
are changing the nature and composition of demand for agricultural products. At the same time,
marketing chains are changing and are becoming more integrated and more demanding of quality
and food safety. This is creating new opportunities for higher value production for farmers who
can compete and link to these markets, but for many other small farms the risk is that they will
simply be left behind. In developing countries, small farmers also face unfair competition from
rich country farmers in many of their export and domestic markets, and they no longer have
adequate support in terms of basic services and farm inputs. And the spread of HIV/AIDS is
further eroding the number of productive farm family workers, and leaving many children as
orphans with limited knowledge about how to farm. Left to themselves, these forces will curtail
opportunities for small farms, overly favor large farms, and lead to a premature and rapid exit of
many small farms.

If most small farmers are to have a viable future, then there is need for a concerted effort by
governments, NGOs and the private sector to create a more equitable and enabling economic
environment for their development. This must include assistance in forming effective marketing
organizations, targeted agricultural research and extension, revamping financial systems to meet
small farm credit needs, improved risk management policies, better education and training for
nonfarm jobs and where all else fails, targeted safety net programs. These interventions are
possible and could unleash significant benefits in the form of pro-poor agricultural growth. Many
of the associated public investments could also more than pay for themselves in terms of their
economic and social returns (Fan et al., 2000, 2004).

The alternative is a dramatic increase in rural poverty and waves of migrants to urban areas that
could overwhelm available job opportunities, urban infrastructure and support services.
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