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Journal of Development Economics, pre-print, November, Luc Christiaensen, Lionel Demery, and Jesper Kuhl (2010).

This article conducts a valuable review of the literature on agriculture’s impact on economic growth and poverty reduction and then empirically studies this relationship.  The authors find that agricultural growth is particularly effective in reducing poverty among the extremely poor (i.e. those making less than a dollar a day), but that it is less effective in doing so in unequal societies.  Non-agricultural growth is more effective in reducing poverty among the better-off poor (those making less than two dollars a day).  The authors conclude that agriculture is very important in growth and poverty reduction at early stages of development, whereas non-agricultural growth is more important as countries grow wealthier.

The role of agriculture in economic development has been a controversial issue.  The authors begin with a useful review of the academic literature.  Early work argued that agriculture was subsistence oriented and lobbied for national development policies based on industrialization and urban bias (Lewis 1954, Lipton 1977, Krueger et al. 1988).  However, a counterargument developed that agriculture was important in the early stages of development and had multiplier effects in other sectors (Johnston and Mellor 1961, Schultz 1964, Haggblade et al 2007).  Recently, scepticism about the role of agriculture in development has returned due to lagging growth in Sub-Saharan Africa, the multi-decade decline in commodity prices, and the example of East Asia’s development through manufacturing and export.

Recent research has led in several directions.  One school has called for focusing on pro-poor rather than overall growth.  This approach favours agriculture-led development policies in order to stimulate growth with the maximum amount of poverty reduction (Ravallion and Chen 2003, Kraay 2006).  The 2008 Agriculture for Development World Bank report argued that agriculture is an effective engine of growth, while the recent global food price crisis led some to speculate that developing countries might be able to export their way to wealth.  However, others remain sceptical that agricultural growth cannot create broad-based growth, especially in Africa (Ellis 2005, Dercon 2009). 

One critique is that inequality may prevent agricultural growth from leading to poverty reduction.  Some contend that agricultural development can only be led by large farms and will not create wealth for smallholders (Reardon and Berdegue 2002, Maxwell 2004, Collier and Dercon 2009).  Others counter that even if this is the case, the poor might benefit through employment and the growth of the agricultural export sector (Anriquez and Lopez 2007, Maertens and Swinnen 2009).

Having reviewed the existing literature, the authors move on to an empirical assessment.  They suggest that four questions must be asked to assess the role of agriculture in growth and poverty reduction, quoted from page 2:

1. Do investments and policy reforms in agriculture enhance overall growth more than investments and policy reform outside non-agriculture?
2. Is participation by poor people in agricultural growth on average higher than their participation in non-agricultural growth, and if so, under what conditions and for whom among the poor?
3. If a focus on agriculture would tend to yield slower overall growth, but larger participation by the poor, compared with a focus on non-agriculture, which strategy would tend to have the largest pay-off in terms of poverty reduction, and under which circumstances?
4. Does the response differ depending on the poor groups being considered (for example $1-day versus $2-day poverty)? 

 

Their findings strongly support a role for agriculture in both growth and poverty reduction.  However, an important conclusion of the study is that this role is significantly mediated by the country’s level of economic development, inequality, and sectoral makeup.  The authors report that

“The results suggest that agriculture is significantly more effective in reducing poverty among the poorest of the poor (as reflected in the $1-day squared poverty gap).  When societies are not fundamentally unequal, it is also up to 3.2 times better at reducing $1-day headcount poverty in low-income and resource rich countries (including those in Sub-Saharan Africa).  However, when it comes to the better off poor (reflected in the $2-day measure) non-agriculture has the edge.  These results are driven by the much larger participation of poorer households in growth from agriculture which more than compensates for the slower growth of the sector.  They are also influenced by the presence of extractive industries which undermines the poverty reducing effect of non-agriculture.  The indirect growth effects from agriculture are found to be somewhat larger in Sub-Saharan Africa than the reverse linkage effects, an advantage that disappears as countries develop” (2).

Agriculture’s Direct Effect on Growth

In terms of direct growth effects, the existing literature does not support the idea that agriculture is a low productivity endeavour.  Studies of the United States, Australia, and 14 industrialized countries all found that agricultural total factor productivity growth exceeded that in almost every other sector (Jorgenson et al. 1987, Lewis et al. 1988, Bernard and Jones 1996).  A study of 50 low and middle income countries found that the same held in the developing world over 1967-2002 (Martin and Mitra 2001).  The authors put a caveat on this literature review however, stating that “The evidence reviewed here is not taken to support superiority of agriculture in TFP growth per se, but rather to refute the notion of agriculture as a backward sector, where investments and policies are automatically less effective in generating growth than outside agriculture, resulting in a limited direct growth effect on poverty reduction” (4).

They conclude that “In sum, while the direct growth effect of agriculture on poverty reduction will likely be smaller than that of non-agriculture, especially in countries where agriculture is less tradeable and Engel’s Law manifests itself more prominently, i.e. later in the development process, historical experience shows that agricultural productivity and growth can be substantial.  For SSA, the recovery in agricultural TFP over the past decade holds some promise (Pratt and Yu, 2008), and higher agricultural commodity prices over the coming decade (OECD and FAO, 2009), including for cereals, provide new opportunities” (4).

Agriculture’s Indirect Effect on Growth

Early work in the 1960s suggested that agriculture could contribute to growth in other sectors.  Subsequent work supported this contention (Mellor 1976, Tiffin and Irz 2006, Delgado et al. 1998).  Theoretically, agricultural growth influences that in other sectors through three channels: production linkages back to supply sectors and forward to agro-processing, consumption linkages due to increased demand, and wage-good effects, whereby decreased food prices lower the real product wage and therefore increase investment and profitability in other sectors.  In a review of existing studies, Haggblade et al. (2007) find that the multiplier effect of agricultural spending ranges from 1.3-1.5 in Africa and 1.6-1.8 in Asia—i.e. “Every dollar in direct income generated in agriculture triggers another 30 to 80 cents in second round income gains elsewhere in the economy” (5).

Therefore the effect of agriculture on development appears to follow an arc.  This is an “evolving relation of agriculture to the rest of the economy, from encouraging growth elsewhere in the economy at low levels of development (still the case in many SSA countries), developing into a more mutually beneficial relationship as countries grow, to eventually ending up in a state where growth outside agriculture drives growth” (7).

Participation Effects

Which people benefit from agriculture varies according to country characteristics.  Poor people closer to agriculture in rural areas benefit, most obviously (Byerlee et al. 2005).  They also benefit when agriculture is intensive in unskilled labour (Loayza and Raddatz 2010), and when land is distributed more equally.  In particular, growth has more of an effect on poverty when small and medium farmers are responsible for more land and when income inequality is lower (Bourguignon and Morrison 1998).  The contrast between China, India, and Pakistan is illustrative here.  Chinese land distribution is relatively equal, and Chinese agricultural growth reduces poverty four times as much as growth in industry and services (Ravallion and Chen 2007).  Land is distributed much more unequally in India and Pakistan, and agricultural growth has much less of an impact of poverty in those countries (Ravallion and Datt 1996, Dorosh et al 2003). 

In their empirical work, the authors find support for these arguments.  They also find an important mediating effect for extractive industries and inequality, which decrease growth’s effect on poverty.  They find that agriculture is four times as effective as other sectors in reducing $1-day poverty in resource poor countries with a 25th percentile Gini coefficient, however, when that coefficient moves to the 75th percentile, agriculture has no advantage.  This means that agriculture is far more effective in reducing poverty in resource poor countries with a relatively high degree of income equality.

They conclude that “In sum, agriculture is more powerful in reducing $1-day poverty (headcount and poverty gap squared) for the majority of the countries (including SSA), with its advantage declining as inequality increases.  Non-agriculture is more powerful in reducing the $2-day poverty headcount, but not if it is driven by an extractive industry, which dampens its poverty reducing effect.  It is also less effective in the poorer countries” (9-10).

Cross-Country Differences

After identifying the above effects for the full sample of countries, the authors conduct a more detailed analysis by separating countries into groups.  In an examination of middle income, non-SSA low income, and SSA countries and controlling for the size of the agricultural sector, they identify four interesting trends.  Firstly, as long as income inequality is not excessive, agricultural growth “is much more powerful in reducing poverty among the poorest of the poor” (12).  Secondly, non-agricultural sectors are more effective in reducing poverty among the “better-off poor” at the $2-day level in resource poor countries.  Thirdly, growth in the extractive sector decreases the non-agricultural sector’s poverty reduction capabilities.  Fourthly, the impact of agricultural growth on poverty decreases as countries become richer and more unequal.

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