ECON 390 ISSUES AND PROBLEMS IN DEVELOPING ECONOMIES

1
ECON 390 ISSUES AND PROBLEMS IN DEVELOPING
ECONOMIES

• Lecture 15 Rural development Urbanization and
  Rural-Urban migration

2
Goals for today

• Class update?
• Rural Development
• Lewis model effect of technology
• Urbanization and Rural-urban income gap

3
Lewis model (Chp. 3, pg. 108-113)

• Economic development transformation of economy
  from traditional one, reliant on subsistence
  agriculture, to a modern industrialized economy
• Underdeveloped economy consists of 2 sectors
• Traditional and overpopulated rural subsistence
  sector
• High-productivity modern urban industrial sector
• Competitive modern-sector labor market that
  guarantees constant real urban wages until labor
  surplus is exhausted
• Assumes diminishing returns in modern industrial
  sector

4
Traditional sector

• Low productivity assume zero marginal product
  of labor
• Overpopulated gt surplus of labor, which can be
  withdrawn without any loss of output
• Production function

5
Modern sector

• Gradually receives excess labor from traditional
  sector
• Capital stock increases over time as profits are
  re-invested.
• Production function

6
Criticisms of Lewis model

• Four key assumptions do not fit realities of most
  contemporary developing countries
• Rate of labor transfer and job opportunity
  creation in the modern sector is proportional to
  the rate of modern sector capital accumulation
• Surplus labor exists only in rural areas, and
  there is full employment in urban areas

7
Role of agriculture in economic development (Chp.
9)

• Characteristics of agriculture
• During initial development, employs majority of
  population. Later, may serve as source of labor
  supply to modern sector.
• May be tradition-bound
• Crucial importance of land as a factor of
  production

8
Structure of developing economy

• Non-agricultural sector
• Formal sector firms operating under umbrella of
  rules and regulations imposed by the government
• Informal sector loose amalgam of small-scale
  organizations, that do not receive access to
  privileged facilities, escape cover of
  regulations
• Agriculture is often primarily an informal sector
  itself

9
Agricultural growth
10
Role of agriculture in development

• Size gt predominant role in the provision of
  factor inputs to industry and services
• Comparative advantage of countries in early
  stages of development usually lies with natural
  resources and/or agricultural products
• Important market for output of the modern urban
  sector in some cases

11
Patterns of land ownership/use
Latifundios/minifundios in Latin America

• Four types of land holdings
• Latifundio farm large enough to provide
  employment for more than 12 people
• Medium-size farms (provide work for 4-12 people)
• Family farms (provide work for 2-4 people)
• Minifundio farm too small to provide employment
  for a single family of 2 workers

12
Table 9.4
13
Effect of farm size on productivity

• Survey in North-East Brazil
• 0-10 hectares (0 25 acres) had production of
  85 per hectare (33 per acre)
• Over 500 hectares (over 1200 acres) had
  production of only 2 per hectare (0.81 per
  acre)
• Survey in India
• 0-5 acres had output of 737 rupees (16) per acre
• Over 25 acres, only 346 rupees (7.83) per acre

14
Structure of land ownership

• Large scale farming
• Large-scale modern farming/ranching
• Plantations
• Latifundios
• Communal farming
• Collectivized agriculture
• Small-scale farming
• Family farms
• Tenancy/sharecropping

15
Tenure and productivity

• Sharecropping
• a rise in output may cause landlord to threaten
  eviction
• Tenants may lack incentive to maintain/improve
  irrigation systems
• Large-scale farming
• Workers paid hourly wages lack of incentive
• Possible solution pay on a piece-rate basis
• Problems in incentives under communal farming?

16
Land reform

• Taiwan in 1950s 3 stages
• Stage 1 Land rentals reduced from 50 to 37.5
  in 1949
• Stage 2 Sale of Public Land
• Stage 3 Land to the Tiller (began 1953)

17
Land ownership in Zimbabwe

• 1960s
• Zimbabwean whites, made up less than 1 of
  population, owned more than 70 of arable land
• Communal lands characterized by slash and burn
  agriculture

18
Zimbabwe land reforms

• Elections won by Mugabe in 1980
• 1985 Land Acquisition Act
• Spirit of willing seller, willing buyer
• Government had first right to purchase excess
  land for redistribution to the landless
• But, limited funds gt limited effect
• 1992 land reform process sped up by removing
  willing seller, willing buyer clause
• Land Reform and Resettlement Programme Phase
• Compulsory purchase over 5 years of 45 of land
  owned by commercial farmers, multi-national
  companies, churches and NGOs

19
The end of land reforms in Zimbabwe

• 1999 new constitution drafted, clause included
  to compulsorily acquire land for redistribution
• Feb. 2000 defeat of referendum on the new
  constitution
• 2 weeks later pro-Mugabe War Veterans
  Association organized people of like mind to
  march on white-owned farm lands. 110,000 km2 of
  land seized.
• 2005 constitutional amendment, nationalized
  farmland

20
Agricultural progress and technical innovation
stage 1 subsistence farming

• Output primarily designated for family
  consumption, consists mostly of a few staple
  foods
• Low productivity, minimal capital investment
• Tractors per 100 hectares
• Ecuador 1
• South Korea 11
• Often resistant to technological innovation or
  the use of different cash crops

21
How do we explain resistance to technological
improvements?

• Standard theory farms maximize profits gt
  traditional methods are less costly for a given
  output level.
• Small-scale farmers lack access to knowledge
• Technology
• Price uncertainty

22
Figure 9.3
23
Transition to diversified/mixed farming

• Staple crop no longer dominates farm output
• New cash crops fruits, vegetables, coffee, tea,
  etc. Simple animal husbandry
• Simple labor-saving devices
• Jab seeder (developed in Thailand in 1980s), cost
  20
• Manual water pumps

24
Transition to Modern Commercial Farming
25
Different approaches to modern farming

• Mechanical package
• Tractors, combines, etc. substitute for labor
• Limitations substantial investment in capital,
  less adaptable to small-scale farming
• Biological package (Green Revolution)
• Use of improved plant varieties, combined with
  adequate, timely water supplies, increased
  amounts of chemical fertilizer.
• Successfully transplanted to LDCs, beginning with
  2 institutes in Mexico and the Philippines
• Limitations dependent on availability of
  water/fertilizer

26
Role of government policies

• Correction of market imperfections
• Lack of access to credit, agricultural extension
  services, etc.
• Excessively low agricultural prices
• Elimination of inefficient government policies
  public agricultural marketing boards
• Protection of property rights

27
Rural Public Works Projects

• Mobilization of labor to create rural capital
• Roads
• Irrigation systems
• Essential problem Lack of connection between
  effort and reward

28
What do we mean by rural development?

• Rural industrialization
• Increased provision of education and health
  services
• Lessening of rural-urban imbalances
• Increasing capacity of rural areas