The FAO Chief Jacques Diouf recent comments on World Bank and the IMF policies are responsible for dismantling systems to protect farmers has introduced a new chapter to the ongoing debate on food crisis.
It is true that the donor-led policies led to the green revolution, it is equally true that their later policy changes left governments in the developing economies vulnerable to food shocks and troubles.Take the case of Green Revolution that was introduced in the late 1960s and its impact on rice cultivation. Farmers in these economies has had been immensely benefited. Thanks to the introduction wonder seeds such as IRRI-8 and IRRI-20 during Boro (winter) and Aman season (rain-fed). In fact the adoption of new technology averted widespread starvation and helped millions of people to escape hunger. Later, IRRI became the darling of Asian rice growers.
.The wonder seeds is also known as high yielding variety primarily implies use of improved variety of seeds, water, fertilizer and pesticides etc.The cultivation of the same variety during rabi season ( winter) needed deep-tube well, shallow tube well and areas under irrigation projects. The donor agencies played a contributory role in this context since the new variety needed a lot of money requiring credit and supportive investment from the government on flood control and irrigation.
At the later stage it was thought that money saved in subsidy would be reinvested in agriculture, but that did not happen. Interestingly despite the success of green revolution, the contribution of capital increasing land and labour productivity are low because of average savings and capital formation of rural areas are low in certain regions on account of limited average income from agriculture. This should have been considered as an ongoing process.
The World Bank and the USAID then advised the governments to phase out such programmes on the ground that these were not being properly targeted and leakage was high. Take the case of Bangladesh. Reports were prepared with the help of policy entrepreneurs. For example, an IFPRI study funded by the USAID argued that there is a glut of food production worldwide as evinced from the downward trend in the real price of rice and wheat in the world market and building of huge food stocks in neighboring India. Thus emphasis was given on economic efficiency in managing the food programme.
“The emphasis was then that the government can move from a policy of self-sufficiency to self-reliance with the underpinning idea that instead of producing its full requirement of food itself, it can look for import of food grain which was then cheaper on the international market," according to eminent economist Mahabub Hossain . In general the governments in developing economies took the advice and dismantled the food stocking and marketing infrastructure.
In the context of South Asia, public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all economies More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation.
Experts argue that the differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management. The problem is that the said policy entrepreneurs are actually confused with the differences.
In the name of cost, agriculture became neglected by many international development agencies such as including the World Bank, IMF and the Asian Development Bank. In addition farmers’ lobby from US, Canada and Australia played a big role in this change of heart of their governments. The farmers' lobbies argued that the dip in international food price led to their ventures unprofitable and influenced their governments to stop funding Green Revolution.
In recent time many developing economies are transforming and in the process this has created shortages in food grains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Now we have new realization that achievement of MDG goal and poverty reductions are correlated.
The said policy entrepreneurs are vocal now for revival of agriculture. But it has huge cost such as starvation, malnutrition and death. Indeed, the governments of low-income food importing countries are beginning to learn a lesson from the present crisis .It is not wise to depend on the international market for food security as food exporting countries shut their doors as and when there is a crisis in the supply side.
Wednesday, June 11, 2008
Friday, March 21, 2008
Farm Loan Waiver and Agricultural Investment
Arindam Banik and Pradip K Bhaumik
The Rs 60,000 crore agricultural loan waiver by the finance minister has rightly generated widespread debate. The reason goes back to farmers’ debt-related distress and even suicides in India. However, the move has been controversial. If the issue is debt- related misery and distress one must ask why it is so. One can not guarantee that the farmers will not borrow next year. More specifically, long run prospects are sacrificed at the cost of short run gains.
It is established now that the farmer-debtor is generally required to repay his/her debt immediately after the harvest is in. This means that the farmer is trapped in a regressive market mechanism in two ways. First, with no other means to repay the debt, he/she is forced to sell the produce immediately after the harvest – quite often to the creditor or to the creditor's agent – probably at a pre-arranged price or in pre-decided quantities.
Second, sale of crops immediately after the harvest means that the farmer-debtor probably receives less for his/her produce than what he/she could have obtained at a later point in time when the market prices stabilize. As more and more farmer-debtors wish to convert their harvest into cash, the crop prices tend to get further depressed.
While all that has been stated above is true of farmers in general, the case of cash crop farmers deserves special attention. Interestingly, farmers who go for cash crops such as tobacco, sugarcane, or cotton are not the typical small farmers.
They are the ones with relatively large land holdings and risk appetite and for them farming is an act of commerce. The anticipated incentives in the output market are the motivating factors for hard work as well as for high input costs. The results are, however, not always as expected.
During harvest time, supply of crops often overshadows demand and thus price goes down. This is due to the pressure created by both formal and informal lenders for loan repayment immediately after harvest.
As a consequence, not only are marginal input costs higher than the marginal revenue, even average input costs are sometimes higher or just marginally lower than the average revenue, leaving little or no cash surplus for loan servicing.
It is hard to generalize a small farm as one with not more than two hectares of land across the whole of India. Physical land under assured irrigation is much more productive than the area with no assured irrigation. Thus a small farmer with less land but assured irrigation may be financially much better-off than another farmer with much larger land holding but no assured irrigation.
Take the case of Eastern India and some parts of Southern India. The basic unit for organizing production in the rural areas is either the farm or the village, depending on the way in which rural society is structured. In this region agriculture is characterized by small farms in alluvial lowlands, too many people on too little land, production largely for subsistence, and a heavy dependence on cereals and other food staples. Farming with simple handheld tools or ploughs pulled by draft animals is very common. Many farmers are owner-tenants and tenants.
Rice, usually grown under wet conditions, is the staple food crop in this region. Controlled irrigation facilities are poorly developed, yields are often low, and double-cropping (planting and harvesting two crops in one calendar year) is not universally practiced. Although high-yield varieties of wet rice have been introduced since the 1960s, this has not increased production as predicted.
In Northern India irrigation schemes have helped stabilize annual yields and increase overall production, but the average rice yield per hectare in the mid-1990s was only about half that of Japan. Nevertheless, Asian countries produce about 90 percent of the world’s rice. China and India alone account for nearly 60 percent of the world total.
The average rice yield is 2.9 tonnes per hectare in India. In comparison, average rice yield is 6.8 tonnes per hectare in Republic of Korea, 6.2 tonnes in Japan, 6.3 in China, 4.3 in Indonesia, and 3.8 in DPR Korea. A central issue is therefore why productivity has remained so low in India particularly in the eastern region despite availability of modern rice technology.
Experts argue that the above differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management.
Admittedly, achieving food security has been the overriding goal of agricultural policy in India. The introduction and rapid spread of high-yielding rice and wheat varieties in the late 1960s and early 1970s resulted in steady output growth for foodgrains. Public investment in irrigation and other rural infrastructure and research and extension, together with improved crop production practices, has significantly helped to expand production and stocks of foodgrains.
However, success story due to Green Revolution is waning now. Public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all states in India, not just the poorer ones. More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation. The share of input subsidies in public expenditure increased from 44 per cent in the early 1980s to 83 per cent by 1990. Private investment in agriculture has increased modestly in recent years, but not enough to fill the gap left by the decrease in public spending.
The economy is transforming and in the process this has created shortages in foodgrains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Thus we need investment to create more fertile land and water. Otherwise the success story of green revolution may disappear shortly. Unfortunately, the agricultural loan waiver would hardly be used to create these investments.
The Rs 60,000 crore agricultural loan waiver by the finance minister has rightly generated widespread debate. The reason goes back to farmers’ debt-related distress and even suicides in India. However, the move has been controversial. If the issue is debt- related misery and distress one must ask why it is so. One can not guarantee that the farmers will not borrow next year. More specifically, long run prospects are sacrificed at the cost of short run gains.
It is established now that the farmer-debtor is generally required to repay his/her debt immediately after the harvest is in. This means that the farmer is trapped in a regressive market mechanism in two ways. First, with no other means to repay the debt, he/she is forced to sell the produce immediately after the harvest – quite often to the creditor or to the creditor's agent – probably at a pre-arranged price or in pre-decided quantities.
Second, sale of crops immediately after the harvest means that the farmer-debtor probably receives less for his/her produce than what he/she could have obtained at a later point in time when the market prices stabilize. As more and more farmer-debtors wish to convert their harvest into cash, the crop prices tend to get further depressed.
While all that has been stated above is true of farmers in general, the case of cash crop farmers deserves special attention. Interestingly, farmers who go for cash crops such as tobacco, sugarcane, or cotton are not the typical small farmers.
They are the ones with relatively large land holdings and risk appetite and for them farming is an act of commerce. The anticipated incentives in the output market are the motivating factors for hard work as well as for high input costs. The results are, however, not always as expected.
During harvest time, supply of crops often overshadows demand and thus price goes down. This is due to the pressure created by both formal and informal lenders for loan repayment immediately after harvest.
As a consequence, not only are marginal input costs higher than the marginal revenue, even average input costs are sometimes higher or just marginally lower than the average revenue, leaving little or no cash surplus for loan servicing.
It is hard to generalize a small farm as one with not more than two hectares of land across the whole of India. Physical land under assured irrigation is much more productive than the area with no assured irrigation. Thus a small farmer with less land but assured irrigation may be financially much better-off than another farmer with much larger land holding but no assured irrigation.
Take the case of Eastern India and some parts of Southern India. The basic unit for organizing production in the rural areas is either the farm or the village, depending on the way in which rural society is structured. In this region agriculture is characterized by small farms in alluvial lowlands, too many people on too little land, production largely for subsistence, and a heavy dependence on cereals and other food staples. Farming with simple handheld tools or ploughs pulled by draft animals is very common. Many farmers are owner-tenants and tenants.
Rice, usually grown under wet conditions, is the staple food crop in this region. Controlled irrigation facilities are poorly developed, yields are often low, and double-cropping (planting and harvesting two crops in one calendar year) is not universally practiced. Although high-yield varieties of wet rice have been introduced since the 1960s, this has not increased production as predicted.
In Northern India irrigation schemes have helped stabilize annual yields and increase overall production, but the average rice yield per hectare in the mid-1990s was only about half that of Japan. Nevertheless, Asian countries produce about 90 percent of the world’s rice. China and India alone account for nearly 60 percent of the world total.
The average rice yield is 2.9 tonnes per hectare in India. In comparison, average rice yield is 6.8 tonnes per hectare in Republic of Korea, 6.2 tonnes in Japan, 6.3 in China, 4.3 in Indonesia, and 3.8 in DPR Korea. A central issue is therefore why productivity has remained so low in India particularly in the eastern region despite availability of modern rice technology.
Experts argue that the above differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management.
Admittedly, achieving food security has been the overriding goal of agricultural policy in India. The introduction and rapid spread of high-yielding rice and wheat varieties in the late 1960s and early 1970s resulted in steady output growth for foodgrains. Public investment in irrigation and other rural infrastructure and research and extension, together with improved crop production practices, has significantly helped to expand production and stocks of foodgrains.
However, success story due to Green Revolution is waning now. Public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all states in India, not just the poorer ones. More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation. The share of input subsidies in public expenditure increased from 44 per cent in the early 1980s to 83 per cent by 1990. Private investment in agriculture has increased modestly in recent years, but not enough to fill the gap left by the decrease in public spending.
The economy is transforming and in the process this has created shortages in foodgrains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Thus we need investment to create more fertile land and water. Otherwise the success story of green revolution may disappear shortly. Unfortunately, the agricultural loan waiver would hardly be used to create these investments.
Sunday, January 20, 2008
Skill-biased technological change and quality of education in India
Arindam Banik and Pradip K Bhaumik
The geographical contours of global production of goods and services have seen significant shifts in recent times. This has been caused as much by forces of globalization as by technological changes. In fact, the interaction of the two have caused impacts which are an order of magnitude greater than that of either alone. While globalization has made almost all product markets and all factor markets except labour global, technological change is bringing equally massive upheavals in its wake – all of which is still not fully understood. In the midst of such massive changes, the immobility of labour will perhaps continue and all our policy decisions will have to be based on this given feature of the international political economy for the foreseeable future although even fewer services will need to be produced locally.
Most newer technologies entering the market through newer products as well as newer processes are skill-biased in the sense that they use skilled workers more intensively than the older technology. Economists have found that adoption of new technology is affected by relative supply of skilled workers in the region – regions having a higher supply are likely to be quicker in new technology adoption. Also, the real wages of skilled workers are expected to increase as new skill-biased technology is adopted whereas the wages of unskilled workers may remain unaffected or even fall. The issue of supply of skilled labour has therefore been rendered a subject of immense interest in recent time largely due to the rising inequality in the relative wages of skilled and unskilled labour.
At the firm level or even at the level of the economy, new technology can be developed endogenously through innovation. New technology could also be developed exogenously and adopted later in a local firm. As mentioned earlier, the market for technology is slowly emerging as a global market and newer technologies are improving the product quality, improving productivity and in many cases have superior capabilities. To survive in globalized markets firms have no option but to use global technologies. Being skill-biased, the new technologies have bred increased wage inequalities at household level as well as regional level in the Indian context.
It is observed that new technology accompanies certain forms of inward investment which also brings new ideas and processes to a country. But at the initial stage it benefits the relatively skilled and consequently the relatively well-off. Accordingly, higher-skilled people gain by way of better jobs and higher wages at the expense of the lower-skilled. As a result, the adoption of new technology furthers the wage divide between the skilled and the unskilled. Interestingly, the removal of trade barriers has reduced inequality of different kinds including the skill inequality. Incidentally, with foreign direct investment, the increasing income inequality among various skill levels is emerging as a source of concern.
For rich economies, the net outflows of FDI tend to reduce the relative wages of lower skilled workers, while in poor economies inflows of FDI benefit the highly-skilled. This is also prevalent in the Indian context. For example, a company shifting a call centre from a developed economy to India aggravates inequality in both the economies.
The anti-globalisation lobby will then jump into recommending the policy prescription through protectionism. Such policies may be harmful for both the countries. The developed country firms prohibited from pursuing FDI cannot guarantee long-term employment to uncompetitive workers and in fact may endanger their own survival, the consumers of their product or services will have reduced purchasing power as they buy the same product or service at higher than global prices. Similarly, the relatively poor country stopped from receiving the FDI would have lost the chance of receiving investment, creating output and employment. So suppressing FDI or technological change may not be an ideal case and other options to reduce the wage divide may be called for.
One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. Productivity levels in India are generally low partly explained by ineffective education. The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.
Experts argue that skill-biased technological change is responsible for increasing inequality within the top portions of the income distribution. Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled and their quality available in the market. At the household level, ample evidence reveals that the poor face credit constraints which prevent them from investing optimally in their children's education. But this is only part of the story.
On the supply side, the government is equally to be blamed. In the Indian context mostly the government educational institutions are responsible for providing quality education from basic to higher educational level. In general terms they are abysmally poor. At the school level, the difference between the government schools and the private ones is too glaring to be emphasised. Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. Research and publications wise, the performance of the teachers are abysmally poor even in the leading engineering and management institutes. One will have to struggle hard to find an Indian educational institute among the top 250 in the world. In future the country must compete through the quality of her human capital, her innovation and her research and development. Sound educational institutions will be a basic premise for meeting the challenges of skill-biased technologies.
At the primary level the story is even more pathetic. It is not just at the top of the ladder that the rungs are missing – a significant number of schools lack the most basic infrastructure, let alone access to the Internet. In addition non-availability of quality staff aggravates the situation. If we do not quickly upgrade our educational institutions, the demographic advantage that we proclaim so loudly may suddenly appear to be a burden.
The geographical contours of global production of goods and services have seen significant shifts in recent times. This has been caused as much by forces of globalization as by technological changes. In fact, the interaction of the two have caused impacts which are an order of magnitude greater than that of either alone. While globalization has made almost all product markets and all factor markets except labour global, technological change is bringing equally massive upheavals in its wake – all of which is still not fully understood. In the midst of such massive changes, the immobility of labour will perhaps continue and all our policy decisions will have to be based on this given feature of the international political economy for the foreseeable future although even fewer services will need to be produced locally.
Most newer technologies entering the market through newer products as well as newer processes are skill-biased in the sense that they use skilled workers more intensively than the older technology. Economists have found that adoption of new technology is affected by relative supply of skilled workers in the region – regions having a higher supply are likely to be quicker in new technology adoption. Also, the real wages of skilled workers are expected to increase as new skill-biased technology is adopted whereas the wages of unskilled workers may remain unaffected or even fall. The issue of supply of skilled labour has therefore been rendered a subject of immense interest in recent time largely due to the rising inequality in the relative wages of skilled and unskilled labour.
At the firm level or even at the level of the economy, new technology can be developed endogenously through innovation. New technology could also be developed exogenously and adopted later in a local firm. As mentioned earlier, the market for technology is slowly emerging as a global market and newer technologies are improving the product quality, improving productivity and in many cases have superior capabilities. To survive in globalized markets firms have no option but to use global technologies. Being skill-biased, the new technologies have bred increased wage inequalities at household level as well as regional level in the Indian context.
It is observed that new technology accompanies certain forms of inward investment which also brings new ideas and processes to a country. But at the initial stage it benefits the relatively skilled and consequently the relatively well-off. Accordingly, higher-skilled people gain by way of better jobs and higher wages at the expense of the lower-skilled. As a result, the adoption of new technology furthers the wage divide between the skilled and the unskilled. Interestingly, the removal of trade barriers has reduced inequality of different kinds including the skill inequality. Incidentally, with foreign direct investment, the increasing income inequality among various skill levels is emerging as a source of concern.
For rich economies, the net outflows of FDI tend to reduce the relative wages of lower skilled workers, while in poor economies inflows of FDI benefit the highly-skilled. This is also prevalent in the Indian context. For example, a company shifting a call centre from a developed economy to India aggravates inequality in both the economies.
The anti-globalisation lobby will then jump into recommending the policy prescription through protectionism. Such policies may be harmful for both the countries. The developed country firms prohibited from pursuing FDI cannot guarantee long-term employment to uncompetitive workers and in fact may endanger their own survival, the consumers of their product or services will have reduced purchasing power as they buy the same product or service at higher than global prices. Similarly, the relatively poor country stopped from receiving the FDI would have lost the chance of receiving investment, creating output and employment. So suppressing FDI or technological change may not be an ideal case and other options to reduce the wage divide may be called for.
One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. Productivity levels in India are generally low partly explained by ineffective education. The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.
Experts argue that skill-biased technological change is responsible for increasing inequality within the top portions of the income distribution. Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled and their quality available in the market. At the household level, ample evidence reveals that the poor face credit constraints which prevent them from investing optimally in their children's education. But this is only part of the story.
On the supply side, the government is equally to be blamed. In the Indian context mostly the government educational institutions are responsible for providing quality education from basic to higher educational level. In general terms they are abysmally poor. At the school level, the difference between the government schools and the private ones is too glaring to be emphasised. Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. Research and publications wise, the performance of the teachers are abysmally poor even in the leading engineering and management institutes. One will have to struggle hard to find an Indian educational institute among the top 250 in the world. In future the country must compete through the quality of her human capital, her innovation and her research and development. Sound educational institutions will be a basic premise for meeting the challenges of skill-biased technologies.
At the primary level the story is even more pathetic. It is not just at the top of the ladder that the rungs are missing – a significant number of schools lack the most basic infrastructure, let alone access to the Internet. In addition non-availability of quality staff aggravates the situation. If we do not quickly upgrade our educational institutions, the demographic advantage that we proclaim so loudly may suddenly appear to be a burden.
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