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Agricultural Diversification in Asia: Should some countries shift out of rice?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1988
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G. Edward Schuh and Shawki Barghouti

Success in agricultural development often creates the need for a major reorganization of resources both within the agricultural sector and between agriculture and the rest of the economy. This is most likely to occur when development is based on the introduction of new technology in the production of a commodity that is a basic food or necessity, and for which international trade is limited. Use of new technology for such a commodity can lead to a paradoxical situation called “immiserizing” growth, under which producers and workers in the sector are actually worse off than they were before the new technology was adopted.

The rice industry in Asia has in recent years found itself in such a paradoxical situation. Improved varieties and other modern inputs have caused supply to increase faster than demand, pushing the price of rice down and leading to lower incomes for rice producers. Policies that facilitate the transfer of resources to other productive activities can alleviate the problem. Because of the inelastic demand for agricultural commodities, success in agricultural development means such adjustments eventually will need to be made.

Observers of the Asian scene have properly called for agricultural diversification as the solution to this problem. Their approach to diversification is too narrow, however, because the shift they envision tends to be limited to other agricultural activities within individual farms. Rational diversification may instead involve a significant degree of regional specialization, an increase in international trade, and within Asia, a sizeable shift of resources—especially labor—out of the agricultural sector.

Effects of increased yields

Many agricultural commodities have low price and income elasticities of demand. This means that neither changes in their prices nor changes in per capita income will have much effect on the quantity demanded. This is particularly true of primary food commodities such as cereals. If trade opportunities are limited and population growth rates modest, these characteristics of demand can create serious income problems for producers if rapid technological change in the sector increases yields. As new technology increases the supply of a commodity faster than the growth in demand, the price of the commodity will tend to decline.

Often, the decline in price will be greater than the increase in productivity that the new technology makes possible, worsening conditions for resource owners, depending on how easily resources—especially labor—can shift to alternative activities. On the other hand, consumers will be better off. For them the decline in the price of the commodity amounts to an increase in real income. Moreover, because low-income consumers spend a larger share of their income on food than do higher-income consumers, the increase in real income will be greater for low-income consumers than for those with higher incomes.

The fact that low-income consumers receive most of the benefits from new technology for food crops is not widely appreciated. On the contrary, there is a widespread perception that producers receive most of the benefits. Nevertheless, if the commodity is a widely consumed staple such as cereal, the benefits will be widely distributed in the economy. This can be a powerful source of economic growth and is one of the reasons that the rate of return on investments in agricultural research is so high.

Comparison of selected Asian agricultural economies
East AsiaSoutheast Asia
JapanTaiwan

Province

of China
Republic

of Korea
MalaysiaThailandPhilippinesIndonesia
Population(In millions)
196598.912.628.59.531.532.6109.5
1985120.819.242.715.752.756.8168.4
Per capita income(In US dollars)
198310,1203,5702,0101,860820760560
Paddy yields(Tons per hectare)
19604.863.272.792.051.391.161.81
19846.355.016.472.661.982.493.87
Share of GDP from agriculture(In percent)
1965922.638303526511
198347.41421232226
Share of rice In GDP
19654.113.218.53.611.35.218.81
19821.41.85.61.75.13.47.8
Share of rice In agriculture
1965465849123220371
1982-833524408221530
Sources: International Maize and Wheat Improvement Center. 1985 CIMMYT World Wheat Facts and Trends (Mexico, 1985); The International Rice Research Institute. World Rice Statistics 1985 (Manila, 1986): and the World Development Report 1985 (New York: Oxford University Press for the World Bank, 1985).

Figures are for 1968.

Sources: International Maize and Wheat Improvement Center. 1985 CIMMYT World Wheat Facts and Trends (Mexico, 1985); The International Rice Research Institute. World Rice Statistics 1985 (Manila, 1986): and the World Development Report 1985 (New York: Oxford University Press for the World Bank, 1985).

Figures are for 1968.

Three conditions may help alleviate the income-depressing effects of such technology on producers and resource owners. First, the new technology may be more labor-intensive than the traditional technology and thus increase the demand for labor. In a modest way, this appears to be so for improved seeds and fertilizer technology. It obviously is not so for mechanical innovations, however, since mechanization for the most part does not increase yields. Rather, its contribution is to reduce the man-to-land ratio, thus raising the productivity of labor.

If production alternatives are available and resources can be shifted easily from one activity to another, this also will help alleviate technology’s income-depressing effects. In irrigated rice, however, resource shifts are difficult because the flooding of rice makes it difficult to grow other crops in neighboring fields. Such shifts tend to be easier in upland rice cultivation, however.

Trade is the third condition that may blunt technology’s income-depressing effects. Although the commodity may be a necessity in the domestic economy, as a result of which its local price elasticity of demand is low, it may also be tradeable. If a country produces a relatively insignificant share of the international market in the commodity, then increases in its exports of the commodity will not significantly affect the price and will, of course, increase export income. Under these circumstances, the country’s producers and middlemen would realize most of the benefits of the new technology. This is not the case for rice, however, because only a small proportion of global production moves in international trade and the international market is very thin. Consequently, small changes in demand and supply can affect the price significantly.

Dimensions of diversification

When agricultural development is successful, the greatest challenge to policymakers is to facilitate the diversification of resources— especially labor—out of agriculture so that wages in that sector do not decline relative to those in the nonfarm sector.

Agricultural diversification is, however, a complex process, with a number of different dimensions, each typically implying a certain amount of specialization. At the farm level, for example, where only one crop might have been cultivated, another crop or livestock activity may be added. A number of forces can motivate diversification at this level. The first are risk and uncertainty, owing to unstable weather patterns or market prices. If, for example, the weather affects the various activities differently and the variations in prices are not correlated, multiple crop and livestock activities are a means of generating a more stable income stream for the producer.

Another reason for diversification is to make fuller use of available resources. The addition of livestock activities to a crop mix often serves this purpose, and makes fuller use of available labor.

A third force driving diversification at the farm level is a decline in price for one commodity, which results in a shift of part of the resources devoted to that commodity to another commodity with a greater income potential. This appears to be the most common form in which diversification is expected to take place in Asia.

The second dimension of diversification is at the sectoral level: the addition or expansion of crop and livestock sectors. Countries at early stages of development tend to depend on cereals and other staples. As per capita incomes rise, however, consumption of fruits, vegetables, oilseeds, and livestock products tends to increase. Such shifts in consumption may be accompanied by parallel shifts in the production pattern, including shifts from food grains to feed grains, and thus lead to a more diversified agriculture. This process is not inevitable, however, because imports rather than changes in domestic production patterns may provide the supplies for the changing pattern of consumption.

Diversification at the regional level is commonly a part of the sub-sector process just described. As crop and livestock sectors expand—say in response to increases in consumers’ per capita income or the introduction of new production technology that gives particular regions a comparative advantage in specific crop or livestock activities—there will tend to be regional specialization in production. Diversification at the national level may thus occur as a consequence of regional specialization without any diversification occurring at the farm level. This means that individual farmers can remain highly specialized. Such regional specialization and increased specialization at the farm level has been an important source of growth in US agriculture.

The fourth dimension of diversification is the national level, which involves the shift of resources (especially labor) out of agriculture and the diversification of the economy as a whole. This is perhaps the most fundamental dimension of the diversification process associated with agricultural development. It involves forces from within agriculture “pushing” the labor to other sectors and forces in the rest of the economy “pulling” the labor out of agriculture. The “push” occurs when technology causes supply to outpace demand with a consequent reduction in price and incomes in agriculture. The “pull” occurs when expansion of the nonfarm sector causes the traditional income gap between the farm and nonfarm sectors to widen, thus attracting a larger flow of labor out of agriculture.

Diversification of the economy as a whole is nearly inevitable as development proceeds. It has been characterized as perhaps the one “iron law” of economics. Such diversification is necessary if per capita incomes in agriculture are to keep up with those in the nonfarm sector. When the number of workers in agriculture starts to decline, it typically requires the reorganization of agricultural resources into larger units—a process facilitated by mechanization, the substitution of capital for labor. Similarly, the efficiency of the intersectoral labor market in transferring labor from agriculture to the nonfarm sector is critical in keeping per capita incomes in the farm sector from declining relative to those in the nonfarm sector—for incomes of farm workers traditionally are significantly lower than those of comparable labor in the nonfarm sector.

The rice industry in Asia

Worldwide, rice is by far the most important source of food. Over a third of the world’s population, predominantly in Asia, depends on rice as a primary dietary staple. Many of these people live in densely populated countries on an average annual income of less than US$100, of which a third or more is typically spent on rice. Millions more grow their own rice and depend on sales of the surplus to provide them with cash to purchase other necessities.

Most Asian farmers are smallholders (3 hectares or less) and use labor-intensive farming practices, rather than machines. Only about a half of the crop enters commercial marketing channels, and less than 5 percent is internationally traded. Two factors explain this lack of trade. First, because calories and protein are more expensive in the form of rice than in the form of wheat, imports of cereals for human consumption tend to favor wheat over rice. Second, a wide divergence in country taste preferences among varieties of rice is a barrier to generalized trade in rice.

In Asia, more farmers are engaged in rice production than in any other activity. In many countries, rice absorbs more than half of the farm labor force and is the single largest contributor to agricultural output. Rice is also the main staple of a large proportion of the working class, although its share in expenditures on food is declining in the rapidly growing countries of the region.

With the exception of the more developed countries of East Asia, the Asian rice economies until a little more than a decade ago lacked the capacity to produce improved varieties or to achieve other technological improvements that would permit growth in rice production. Supported by the International Rice Research Institute in the Philippines, however, the capacity for generating and diffusing technical change in rice production has grown rapidly in the region and new high-yielding varieties have spread widely.

Serious adjustment problems emerged from this technological development. The international price of rice declined by 50 percent during 1980-85. As a result, the real incomes of rice producers of the region fell drastically. A similar decline had occurred earlier in the price of wheat, largely owing to technological progress in its production. In the 1920s, the price of both grains was about the same. By the 1960s, after significant strides had been made in wheat production, the price of wheat was about half that of rice. This ratio of wheat to rice prices tended to prevail until the 1980s, when the price of rice declined significantly relative to the price of wheat.

The demand outlook for rice is not especially bright, except inasmuch as it is driven by population growth. The responsiveness of demand relative to increases in per capita income is low because consumers tend to shift to consumption of other commodities as their incomes rise. In addition, the preparation of rice in the household is time-consuming relative to wheat, as the latter is consumed in processed form, such as bread and noodles, with preparation generally being done outside the household. Thus, as per capita incomes rise in Asia and the opportunity cost of labor to the household rises, we can expect to see consumption shift away from rice towards other commodities, including wheat, livestock products (and indirectly feed grains), vegetable oils, fruits, and vegetables.

Facilitating diversification

Technological developments such as that experienced by the rice industry in Asia in the last 10 to 15 years are a powerful source of economic growth, in part because their benefits are so widely diffused in the economy and favor the poor. The challenge to policymakers is to facilitate the adjustment to such developments so the process can continue and so the benefits can be spread even more widely through the economy. A number of policy measures can facilitate this process.

First, it is important to sustain and strengthen the capacity to produce and disseminate new production technology. Sustaining the capacity to develop new technology for rice is important because rice is still a major food staple in the region and thus a powerful source of economic growth. But the capacity for producing new technology needs to be broadened. Productivity-enhancing innovations also are needed for alternative crops and for livestock activities. Such innovations require research. In general, this additional research capacity should be directed to commodities whose consumption will rise as per capita incomes rise.

In addition, research is needed to help farms adjust. This should include research on ways to facilitate farm enlargement so that the incomes of farmers and the well being of their families can increase. Research should also focus on identifying shifts in comparative advantage so that both policymakers and decisionmakers know what direction resource adjustments should take.

Successful development will involve increased dependence on markets and a decline in self-sufficiency at the farm level. As a result, roads and other physical facilities will be needed. At the farm level, changes in the irrigation and drainage systems also may be needed to accommodate the shift to alternative commodity mixes. While the government also may need to make some of these investments, the private sector can make many of them if domestic capital markets are efficient.

A major challenge to policymakers will be to facilitate the adjustment of labor out of agriculture and to nonfarm activities. The rural labor force is traditionally less educated than its urban counterpart. This gap should be narrowed and eventually eliminated, and training programs that provide vocational skills needed by the nonfarm sector should be expanded significantly. Increasing educational and training opportunities for the rural labor force is probably the most important policy measure needed to facilitate the transfer of labor.

Strengthening the infrastructure in rural areas probably will result in the shift of many nonfarm activities to rural areas where they will be closer to both their markets and to potential labor supplies. Such activities will likely include the production of consumer goods and imports used and consumed by rural families. Some firms will locate in rural areas to be close to the labor supply. This, too, can facilitate the labor adjustment process. In addition, efficient expansion of the nonfarm sector can facilitate the absorption of labor from agriculture. Thus comparative advantage principles should be honored, and protectionism, which induces inefficient nonfarm sectors, should be reduced.

Finally, policies that promote the integration of the national economy with the international economy should be implemented. Technology-based agricultural development can give a country a comparative advantage in a commodity or commodities that it did not enjoy before. Producers in these sectors should be encouraged to compete with their foreign competitors so as to remain efficient. But it should also be recognized that protective barriers for the nonfarm sector make it difficult to realize the benefits of trade. In addition, protection raises the prices of inputs for the agricultural sector, thus making it difficult to compete internationally.

Conclusion

When domestic commodity prices fall, the tendency of policymakers is to implement agricultural support measures to keep prices artificially above what otherwise would be their market-clearing levels. Such tendencies should be avoided. Instead, policies aimed at alleviating the serious income problems farmers often face, owing to successful agricultural development, should concentrate on facilitating the needed adjustments, especially that of labor. That is the only way the full benefits of agricultural modernization and development can be realized. It is also the surest road to more rapid growth in the economy as a whole.

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