Agriculture’s share of output and employment tends to diminish with economic development. Smallholders with limited resource endowments often struggle to compete, or find that they have improved income prospects in other sectors. A strategic framework for smallholder adjustment needs to acknowledge that the long-term future for the majority of smallholders cannot lie exclusively in farming.

 

The most important policies for improving both agricultural competitiveness and income prospects outside the sector may not in fact be agricultural policies. It is therefore important that smallholder policies are framed in an economy-wide context, with agricultural policies a component of the overall policy mix.

Agriculture in the overall economy
The importance of agriculture to the overall economy tends to diminish over time. The experience of agricultural adjustment varies from one country to the next, but has some universal aspects. For countries with a per capita GDP of USD 2000 or less, it is not uncommon for agriculture to account for 30% or more of GDP, whereas the share is typically no more than 2%-3% in high income OECD countries.

This relative decline is associated with a substantial release of labour from the agricultural sector. Over the past 50 years, all emerging countries have shed labour from farming. Moreover, the pace of adjustment is speeding up. In Korea, agriculture’s share of employment fell from 40% to 16% in just 14 years — a transition which took 53 years in the United States and 68 years in the United Kingdom.

Evolution of agriculture’s share of employment in various countries (1961 and 2005)  Click here to view full-size graphic

Why do these changes occur? Income elasticities of demand for food tend to be less than for other consumption, so that the demand for food does not grow as fast as demand for other goods. On the supply side, total factor productivity typically rises faster in agriculture than in other sectors of the economy. Moreover, technical innovation associated with agricultural productivity growth has tended to be labour saving. These combined developments permit the release of resources, especially labour, to other sectors. In most cases, the agricultural sector nevertheless continues to expand.

Pressures for farm resources to shift into other sectors may be lessened by the scope for increased exports in countries with a comparative advantage in agricultural activities, or reinforced by pressure from imports in the case of countries with a comparative disadvantage.

Pressure on smallholders
These changes put pressure on resource-poor smallholders who cannot compete with efficient domestic agricultural businesses or with imports. With technology improving, and more efficient use being made of scarce resources, including the exploitation of scale economies, smallholders who do not participate in sectoral cost improvements will inevitably be subject to pressures on their incomes.

Faced with this pressure, there are two options: join the ranks of efficient commercial producers, or seek to bridge the gap by obtaining additional income from other sources – either by diversifying the household’s income sources or by exiting the sector altogether. Policymakers need to acknowledge that the first option is not a realistic one for many smallholders.

A framework which acknowledges two things is needed. First, the long-term, i.e. inter-generational, future for the majority of smallholders cannot lie exclusively in farming, hence there is a need for policies that enhance households’ opportunities outside the sector as well as within it. Second, in order to improve both agricultural competitiveness and the prospects for earning more outside the sector, the most important policies may not in fact be agricultural. It is therefore important that smallholder policies are framed in an economy-wide context, with agricultural policies a component of the overall policy mix.

Different types of agriculture-dependent households will have different potential pathways to improved incomes over the long term and correspondingly different policy requirements:

Improving farm households’ competitiveness. Farm support, such as price guarantees or input subsidies, pre-supposes a development pathway within agriculture and treats the symptoms of uncompetitiveness rather than the causes. By contrast, investment in public goods does not bias the choice of development pathway. Policies to improve competitiveness need to be targeted at those smallholders with a realistic chance of succeeding within the sector.

Income diversification is a very important strategy for many farm households, particularly the poorest, for which it is likely to provide some insurance. For other farm households, having a family member drawing income from outside agriculture may be the start of a successful move to more remunerative activities. Key policies for diversification are the improvement of human capital and the development of regional and rural infrastructure.

Leaving the sector will ultimately be the best strategy for the majority of households. Labour market policies have an important role in ensuring that core standards of employment are met inside and outside agriculture and in reducing informality. Regional development programmes may also have a role in stimulating balanced development. Social policies can lift those households that are unable to adjust out of poverty, even if they cannot deliver “development”.

 

Development pathways Help farmers become more competitive within agriculture Diversify income sources  - within agriculture  - outside agriculture Leave the sector for off-farm work Social protection for those unable to adjust

Policy challenges
The main challenge is to establish targeted policies that correspond to viable adjustment pathways for different types of household. For instance, policies to improve competitiveness could target potentially competitive regions, and farmers could be required to apply for assistance, rather than just receive it.

• Policymakers need to have a realistic view of which smallholders are potentially viable (competitive) within the farm sector.
• Policies to improve productivity stimulate the transformation and need to be accompanied by broader investments that create wider opportunities in non-agricultural sectors.
• Rural development needs to be balanced in order to avoid the social tensions associated with the release of labour from agriculture.
• Getting the policy mix right is not easy: there are trade-offs and complementarities between government spending in different areas.
  

Potential policy instruments Price policies Input subsidies Credit policies Investment in human capital Investment in infrastructure Research & development and extension Labour market reforms Cash transfers (possibly conditional) Regional policies Develop producers' associations Land policies and property rights

 

 

References

• OECD/Cervantes-Godoy, D. and J. Brooks (2008), "Smallholder Adjustment in Middle-Income Countries: Issues and Policy Responses", OECD Food, Agriculture and Fisheries Working Papers, No. 12.