Lecture 2 Rural Development anf Structural Transformation

productivity growth and increased farm incomes are prerequisites for structural transformation.. Increased farm income leads to derived demand for nonfarm products,.[r]

Rural Development and Structural Transformation

Characteristics of the Rurality

Dominated by farmers (peasants) and agricultural production is

the main sector of economy as a primary means for support and sustenance

 The main form of socio-economic organization based on

agriculture and farming activities

Depending upon the urban in many different aspects

Low levels of income, living standards, technological innovation,

democracy, and social equity as compared to that of the urban

Diversity in social, cultural, economic conditions, development

levels, management

Characteristics of the Rurality

Rural societies are part of larger societies, but retain their cultural identities

Rural societies have their own certain cultural attributes in the sense of attitudes, values and other ideological

elements

Characteristics of rural economy:

Rapid population growth

Low labor productivity

High level of poverty

Limited access to land

High Population Growth: Potential problems?

Increasing resource scarcity: less land per capita

Increasing aggregate demand for food

Population is growing faster than growth income (still right?)

High population growth rate vs GDP growth rate

Low labor productivity: Potential problems?

Labor productivity: level of output per unit of labor inputs (hour, day, year)

Less output per a given input

Reducing other opportunities for income generation

Increasing vulnerability

High Poverty Levels: Potential problems?

Lacking accesses to productive resources and services

Insecure livelihoods

Increasing income inequality

Vicious cycle of poverty

Migration

Limited access to land: Problems?

Access to land: Ability to access to land resourses for productivities

Land is one of the most important capital to rural

livelihoods, especially of the poor

Limited access to land  lacking essential agricultural resource – limiting production possibilities

Reduced security of income and food

Average Landholding per Farm Household in

Vietnam (2002)

Poorest Poor Middle Rich Richest

Annual crop land 4,778 3,898 4,333 4,610 4,867 Perrennial crop land 1,114 1,189 1,427 2,239 2,649 Inland fishery land 175 209 335 454 1,181

(Source: Vietnam household living standards survey 2002)

Note: Excluding landless households

Poverty Rate of Farm Household in the Rural

Mekong Delta by Landholding

Household Landholding (m2)

Poverty rate (%) Share of household

Some concepts related to Structural Transformation

 Structure?

 Transition?

 Transformation?

Transition (WB 1996:1, 4-5): The long - term goals of

transition is to build a thriving market economy capable of delivering long-term growth in living standards

[S]ystemic change [is] involved: reform must penetrate to the fundamental rules of the game, to the institutions that shape behavior and guide organizations This makes it a

profound soical transition as well as a passage from one

mode of economic organisation to a throughly different

one [it] must unleash a complex process of creation,

adaptation, and destruction

Economic Transition

Structural transformation is a process by which the relative contribution of non-agricultural sectors to overal economy rises as agriculture‘s share declines in relative terms In

absolute terms, however, agriculture continues to grow and contribute to overal economic growth

Agri productivity growth and increased farm incomes are prerequisites for structural transformation Increased farm income leads to derived demand for nonfarm products,

which in turn leads to growth of small and medium-size enterprises, manufacturing and services in rural areas,

small towns and larger urban areas

Structural Transformation

Lifting the Output per Farm Worker: the Goal in Structural Transformation

The use of biological – chemical -mechanical inputs in the farm process

New technological and organizational knowledge

Access to expanded markets for agricultural products

The Process of Structural Transformation

Mechanism: specialization including both of specialization along specific crop lines among farmers and transferring a host of functions formerly carried out by the households to specialist producers

Increasing income per capita and changing GDP structure: The decline in agricutural sector and the rise of the non-

agri sectors

Increasing division of labor in all economic activity and

change in labor share in agri

Change in rural non-farm activities

Change in farm cash receipts and disbursements

Roles of natural resource endowments less in structural

transformation?

Two dimensions:

1 Changing output shares

2 Reallocation of the labor force

 In both dimensions structural transformation is

characterized by relative decline in agricultural sector, but absolute levels of agricultural output and

employment will rise along the process of structural transformation

Patterns of Stuctural Transformation

1 Changing output shares

 Relative decline in the agriculture sector while the parallel rise in manufacturing as the most dynamic sector until a middle

income levels (from 5-8% to 30-35%), and then increase in

services in high-income levels – Every developing country

traverses this common pathway of structural transformation

 The common pathway can be quite wide Sectoral shares are

influenced by the natural resoruce endowment, the size of

internal markets and economic policies:

 e.g Japan and Tawain: policies favoring manufactured exports

 e.g India and China: the size of internal markets

 e.g Nigeria, Indonesia, Malaysia: natural resources

 Evolving from resource – intensive commodities to

labor-intensive products to capital and skill-labor-intensive goods

Patterns of Structural Transformation

2 Changing labor shares

 The shares of agri labor falls continuously, but wider

range: from 70% - 80% to 2- 6%

 Per capita output in agr tends to rise, productivity growth

in agricultural is more rapid than in any other sector

 Output per agri worker is below national average until late

in structural transformation

 Employment shares in all sectors increase, but in other

sectors than manufacturing sector when it is at the highest growth in productivity

Link between Farm and Non-farm Sector

In lower income countries, scale members of rural

households devote their large portion of time to non-farm tasks (35-50%)

As specialization increases these tasks are shifted away

from rural households

Farm sector supplies food, labor, and share of export

Institutional aspects of structural transformation

1. Market development – commodity, labor, finance

2. Shift from peasant toward commercial agriculture

3. Quality of life indicators

4. Demographic transition

Institutional aspects of structural transformation

1 Market development – commodity, labor, finance

 Commodities markets: from simple to complex

 Labor markets: transferring various functions out of the

households non-farm rural economy emerges  shifts in labor markets; specialization by commodity and by skills

 Financial markets: from informal, small scale to formal and larger scale

Technical change and productivity growth

 Technical change encompasses the inter-connected elements of new technology, augmented labor skills and improved organization efficiency: factor raises long – term productivities

 Land-saving technique (seeds, bio-technology)

 Labor-saving / land-augmenting technique

(mechanization, irrigation)

 Capital-saving technique (manual labor use)

Elements of Social Change

1 Changes in traditional social structure created by:

 Proliferation of firms and public institutions

 The emergence of new technologies and marketing relationships

 Shifts in individual behavior

2 Elements of changes

 From kinship to society: difficult and uneven

 From farming to manufacturing

 From rural to urban

 Demographic transition

 Farewell to reciprocity?

Policy Implications of Structural Transformation

 Specialization and technological change are driving forces that transform an agrarian economy into a diversified and highly productive economy

 Domination of agriculture at the early stage of structural transformation, but a diverse non-farm sector also figures large in unspecialized rural economy

 Mass poverty cannot be eliminated without structural

transformation, but there is a wide range of successful

paths to higher productivity

Policy Implications of Structural Transformation

 A country’s policy choices are more important than

endowments of land, oil, timber, and other natural

resources right policies can sustain productivity growth

 Right policies depend on a country’s stage of structural

transformation

 Markets or government’s interventions get structural

transformation succeed?

Policy Implications of Structural Transformation

 Structural transformation is a process of interaction

between the cultural-institutional system and the

economic subsystem and the nature in which will vary

from country to country depending on preconditions and endowments

 What policies or programs are necessary to ensure

successful rural transformation?