OECD versus Ha-Joon Chang on agricultural policy and poverty reduction: I'm with Chang

March 16, 2012 2 By admin

A recent launch discussion at Chatham House (but mercifully on the record) on the new OECD book, Agricultural Policies for Poverty Reduction, (powerpoint presentation by author Jonathan Brooks here – keep clicking til it comes up) provides a nice OECD book covercounterpoint to the FAO study discussed over the last couple of days.  The contrast is pretty striking, especially on the role of the state, where Ha-Joon Chang’s focus on policy space and the virtues of pluralism is replaced with a much more grudging acceptance of deviations from ‘sound policies’, which should preferably be closed down as a country starts to develop.

The OECD line (and it is pretty linear, in its view of history) is deeply influenced by its understandable dislike of US and European farm policies, where it advocates a pretty minimalist role for the state of tackling market failures at source, providing public goods like roads and functioning legal systems and introducing safety nets for those who lose out. But not getting involved in the market directly (so it doesn’t much like the CAP or the US farm bill). It does, however accept that poor countries need a bit more wiggle room:

‘In low income countries, however, it has been suggested that – because of weak institutions and endemic market failures – market interventions might also be warranted. Price support, price stabilisation, and input subsidies have been proposed as ways of addressing short-term objectives with respect to incomes, poverty and food security, and of promoting long-term economic development.

In the short-term, price policies provide an easy lever for government, but are inefficient at addressing income concerns. Price support for food products is a blunt instrument because, among the poor, there are net sellers and net buyers of food – in many poor countries, the majority of farm households are net buyers. Price stabilisation (as opposed to price support) can limit the impact of adverse shocks on producers and consumers, but often proves to be fiscally unsustainable. A preferable option for the poor – both producers and consumers – is targeted social programmes, including cash transfers, although these may be difficult to implement in the poorest economies. At the same time, agricultural investments can improve farmers‘ resilience to risk.

Brazil combine harvester balletOver the long-term, market interventions treat the symptoms of market failure and underdevelopment, rather than the causes. Price stabilisation can provide a more stable investment climate, but thwarts the development of private risk management, and can export instability onto world markets. Input subsidies can redress failings such as the under-development of infrastructure, missing markets for credit and inputs, and a lack of knowledge of the benefits of using improved seed and fertiliser, but can impede the development of private markets. In both cases, the benefits and costs of intervention need to be judged relative to the benefits and costs of tackling the underlying problems directly.

Finally, there are dangers in using market interventions to address multiple economic and social objectives. Such programmes can become an easy target for interest groups, outliving their original justification and becoming a budgetary millstone. An important priority is that expenditures on market interventions should not crowd out essential investments in support of long-term agricultural development.’

This is all reminiscent of the parallel discussion on industrial policy between those (like Dani Rodrik and Ha-Joon Chang – he does get around) who argue that policy space and pluralism are being harmfully infringed by an array of advice, trade and investment agreements, economic orthodoxy etc and those at the World Bank or in G8 governments who go for the ‘grudging acceptance of a tiny bit of wiggle room’ line. Ha-Joon Chang’s analysis  finds a much wider range of paths to success on ag than on industry, producing a more pluralist, less statist conclusion. But the minimalists (grudging wigglists?) sound remarkably similar on both issues.

The launch meeting had some fine interventions by ag policy gurus like Michael Lipton and Steve Wiggins. Lipton has little time for all these general debates and says if you want to understand agriculture you have to get into the details of farming – water, seeds, fertilisers, soils, harvest, markets and all the rest. He sees smallholders as very efficient in what matters, like managing labour and output per hectare and believes this underpins the drift to small farms in developing countries (the opposite of what is happening in the OECD). Smallholder ag’s biggest problem is dealing with the market, which is where the state and aid donors need to help out.

Wiggins expanded on his thoughts by email (as I hadn’t quite got them right first time around):

“Sort out the rural investment climate, provide rural public goods and about 10% of smallholders will be ready to go … but there’s another 25% or so [numbers vary by place, obviously, but they give a sense of scale: they’re probably right plus or minus 10%] who may need a bit more from the state, NGO or socially responsible corporation, if they are to succeed.

What’s ‘a bit more’? Access to credit, technical assistance, help with marketing, etc. — links to supply chains where many smallholders are initially at a disadvantage since they are small fry living remote from cities, sometimes not speaking the same language as the bigger fish, etc. — again it will vary with circumstance.

The big point is this: we need to strive to bring that extra 25% into agricultural development, so we have around one third of smallholders going forward as largely full-time farmers, with decent livelihoods. That then allows a gentle agrarian transition — the other 2/3rds of the rural population can then either increasingly earn their livelihoods from the non-farm economy, or move to towns and cities — many of them still keeping a part-time farm, that with time will increasingly become a hobby farm and a country home as they gradually lend, rent, or sell their land to their full-time farming neighbours.

The alternative, in which up to 90% of the rural population are trying to gain most of their livelihoods off the land would be far less gentle, with rural areas resembling those of England before the 1870s — desperate poverty, many landless labourers struggling on minimal incomes, etc.”

I think I was witnessing a polite academic battering of the OECD’s arguments, but I’m not really sure (witness Steve needing to put me straight) – ag economists have been arguing over this stuff for decades, and speak in code: a single word (e.g. ‘productivity’) can be the signal for a sudden spurt of irritation and antler-locking. Trying to make sense of what’s going on is a bit like watching arguments among Trotskyists or religious sects (cue Life of Brian clip).