Ecology, Capitalism and the New Agricultural Economy

Darsh Sharma

Ecology, Capitalism andthe New Agricultural

Economy

Darsh Sharma

Published by Vidya Books,

305, Ajit Bhawan,

21 Ansari Road,

Daryaganj, Delhi 110002

Darsh Sharma

ISBN: 978-93-5429-499-0

This book contains information obtained from authentic and highly regarded sources. All chapters are published with

permission under the Creative Commons Attribution Share Alike License or equivalent. A wide variety of references are

listed. Permissions and sources are indicated; for detailed attributions, please refer to the permissions page. Reasonable

efforts have been made to publish reliable data and information, but the authors, editors and publisher cannot assume any

responsibility for the validity of all materials or the consequences of their use.

Trademark Notice: All trademarks used herein are the property of their respective owners. The use of any trademark in this

text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such

trademarks imply any affiliation with or endorsem*nt of this book by such owners.

The publisher’s policy is to use permanent paper from mills that operate a sustainable forestry policy. Furthermore, the

publisher ensures that the text paper and cover boards used have met acceptable environmental accreditation standards.

Contents

Chapter 1 Introduction Agricultural Economics ..................................... 1

Chapter 2 Economic Analysis of Agricultural Projects ........................ 23

Chapter 3 Agriculture, Industry and Services ....................................... 86

Chapter 4 Quality Theories ...................................................................... 93

Chapter 5 Education and Agricultural ................................................. 113

Chapter 6 Sales, Expenditure and Debt ................................................ 123

Chapter 7 Status in Employment in the Agricultural Sector ............. 152

Chapter 8 Agriculture and Macroeconomy ......................................... 172

Chapter 1

Introduction

Agricultural Economics

W H AT IS AGRICULT URAL ECON OM ICS

Agricultural economics is the study of applying economic management principlesto food farming. The result, ideally, is anagriculture industry that better understandsefficiency, sustenance and market demand. The field of agricultural economics looksat all elements of food production and applies rational thought and planning as awhole. From crops, livestock, land usage and soil content, all aspects of farm life areexamined, including how its connection to one another can be strengthened. Manytimes, this involves learning about the latest technology to help crops or livestock,but it also might require a knowledge of what has and has not worked in the past.

Agricultural economics is a relatively new field, considering the countless yearsthat people have been farming. Interest began to mount in the early 1900s, whenmany economic thinkers around the globe began focusing attention to agriculture.Noting that the act of planting, harvesting and distributing crops and livestock wasinefficiently performed, academics believed thatfarms around the world could seegreater yields and profits with a change of thought. Additionally, many universitiesand colleges opened agricultural economics programmes with the intent of preparingstudents for a career in this field. Careers in economical agriculture are as wide rangingas the crops produced around the world. The principles of farm economics, agriculturalproduction and management can be directly applied to being a successful farmer, butthere are a multitude of other options. Seed and chemical companies utilize agriculturaleconomic thought in their production and development, grain elevator companiesand equipment manufacturers must understand the economic landscape for each cropin order to stay relevant, and salesmen use agricultural economics to better servetheir clients with the products they demand.

Since its inception, agricultural economics has helped further the science behindfarming, too. Advances in food preservationand shipping techniques have allowed amyriad of fruits, vegetables and meats to reach grocery stores. Currently, manyeconomists see the implementation of microcomputers in agriculture as another steptowards streamlining farmland economics. Agricultural economics is not a term thatfits neatly within a single definition. It is the accumulation of many schools of thoughton practically every aspect of agriculture, from planting a seed to serving food on adinner table. It contains many different careers and needs that are constantly evolvingas technology and economic thought grow.

The Programme

The agricultural economics programme emphasizes decision making, technicalexpertise and communication with a focus on agriculture and the food industry.Students are trained to be decision makers through course work and practicalexperience in agriculture, analytical and communication skills, team building, economictheory and agricultural policy. The agricultural economics programme is flexible.Students may complement required courses with classes from within the Departmentof Agribusiness and Applied Economics, as well as from other programmes acrosscampus. Students planning careers in production agriculture are encouraged to enrollin courses in crop and livestock sciences, agricultural systems or other production–oriented courses within the college. Students wanting careers in the food industrymay select courses in food science and food safety, transportation or business. Studentswishing to work in agricultural education, communication or extension can add coursesin production agr iculture, education or communication to their programmes.Regardless of the students’ selection of elective courses, the agricultural economicsprogramme contains a common core of classes introducing students to economictheory, farm management, agr icultural finance, crop and livestock marketing,quantitative methods, and laws and policies important to agriculture. The Departmentof Agribusiness and Applied Economics also offers majors in agribusiness and ineconomics and offers a minor in agribusiness and economics.

The Faculty

The department has 20 faculty involved in teaching, research and extension. Ourfaculty have received numerous prestigious teaching and research awards includingthe Burlington Northern Foundation Faculty Achievement Award; the Fargo Chamberof Commerce Distinguished Professorship Award; the Chancellor ’s Award forAcademic Leadership; the Western Agricultural Economics Association’s OutstandingEducator Award; the Premier Forecaster Award; the Eugene R. Dahl Excellence inResearch Award, Senior Faculty; and the Teaching Award of Merit from the NationalAssociation of Colleges and Teachers of Agriculture. Faculty expertise varies across awide range of specialties including agricultural marketing, production, natural resourcemanagement, economic development, trade, finance, cooperatives and agriculturallaw.

Career Opportunities

Agricultural economics graduates have become loan officers; managers of farmsupply, equipment firms and grain elevators; sales representatives with chemical, seed,feed and fertilizer companies; economists with state and federal agencies; andcommodity merchandisers. About 30% of the graduates choose to farm and ranch.While many graduates remain in North Dakota or M innesota, others begin careersthroughout the nation and the world.

Financial Aid and Scholarships

Several $500 scholarships are available to outstanding freshmen who enter theprogramme fall semester. Contact area high schools or the department for an

Ecology, Capitalism and the New Agricultural Economy

application form. Scholarships also are available for transfer students. The departmentannually awards $50,000 in scholarships (ranging from $500 to $1,000) to agriculturaleconomics and agribusiness majors. Contact the department for information andapplication forms. The College of Agriculture, Food Systems, and Natural Resourcesawards additional scholarships each year. Contact the Office of the Dean, College ofa*griculture, Food Systems, and Natural Resources, NDSU, for information andapplication forms. Student loan, grant and work–study information is available fromthe NDSU Office of Student Financial Services.

UNEQUAL TRADES IN AGRICULT URE

From the perspect ive of winning t r ade wars, the United States has aninsurmountable advantage in agriculture. However, sales of most U.S. agriculturalproducts are not only unnecessary, they are morally wrong. While multiplying exportersGDP, these exports destroy native agriculture by usurping their local markets. Thesmaller level of circulating money within the economy (the sabotage of the multiplierfactor) due to paying for imported food limits the development of, or even destroysindustries in, other sectors of the economy. Overseas markets are developed for U.S.farmers because they must sell, not because others must buy.

A lot of attention is being paid these days to the developing world as a primegrowth market for American farmers…. The United States has become more dependenton the developing world with more than 58 per cent of total agricultural exportsgoing to these countries in 1986–87…. Virtually every trade analysis by the USDAstresses the potential sales among developing nations in Latin America, Africa andAsia…. Agriculture Secretary Richard E. Lyng said he most wanted freedom for farmers“to produce what they want to produce” and that to accomplish that would involvesolving international trade problems….James R. Donald, chairman of the department’sWorld Agricultural Outlook Board, emphasized “The developing countries likely willcontinue to increase global grain imports and could be a source of expansion for U.S.agricultural exports.”

One of the most sacred illusions of America is that its agriculture is above allreproach. Not only is the United States the “breadbasket of the world,” but thedeveloping world is somehow incapable of emulating America’s productive farmingmethods. There is one thing Americans are sure about, without their food andgenerosity, much of the rest of the world would starve. Yet 40% of the developingworld that was once plagued by severe food shortages-China, Guinea – Bissau and-until impoverished by embargoes-Cuba and North Korea produced and distributedthe 2,300–to–2,400 calories per day required to sustain an adult. India has finallyachieved and maintained self–sufficiency. Angola, Mozambique, and Nicaragua hadalso achieved self–sufficiency, but their economic infrastructures were sabotaged byanti–government rebels organized, trained, and armed by U.S. or allied intelligenceservices.

The countries that are newly self–sufficient in food production have far lesscultivable land per person than most of the countries still suffering from chronic foodshortages. China, for example, has only.13 hectares of arable land per person; theformer North Vietnam had.10; and North Korea (self sufficient before devastation bythe Korean War and the embargo) has.07. Despite having more arable land per person,

Ecology, Capitalism and the New Agricultural Economy

their neighbours are unable to feed themselves. Pakistan has.40 cultivable hectaresper person; Bangladesh has.16; and Indonesia has.15 hectares.

The best–known example of a country that is continually faced with hunger isBangladesh, where “two–thirds of the population suffers from protein and vitamindeficiencies.” Yet the country exists on a fertile plain blessed with plenty of water,and “grows enough in grain alone to provide everyone in the country with at least2,600 calories a day.” It is obvious that nature has provided this country with theability to feed more than the present population.

The reasons for such anomalies become clearer when one studies Africa andSouth America, the two continents with the hungriest populations. The United NationsFood and Agriculture Organization estimates that only 60% of the world’s arable landis farmed. In Africa and South America, the figure averages 20%, and their grainyields are only one–half that of industrialized countries. Brazil, for example, is burdenedwith a large hunger problem, but, even without the destruction of more rainforests, ithas cultivable acres per person. In Brazil, as well as most of South and Central America,one–half the acres being farmed—invariably the best land—currently grows crops forfeeding cattle or for export. The masses are unable to feed themselves because theirland is subtly monopolized. Brazil has ranches with up to 250,000 head of cattle (thatone owned by the Rockefellers) which monopolizes land capable of feeding hundredsof millions of people. Latin Americans and Africans, despite rampant hunger, consumeonly a small percentage of their land’s agricultural potential while a substantial shareis exported.

The remaining hungry nations, mostly in Southeast Asia, have such largepopulations that the land’s capacity to feed the people entails a much smaller marginof safety. Yet, if they controlled their land, these nations could also produce an adequatesupply of food. China, probably the best example of rational land reform, nowadequately feeds 1.3–billion people. But when the population was one–third w hat itis today and the land was monopolized, there were massive famines. Fifteen of thepoorest countries in the world raise and export more agricultural products than theykeep for their own use. Some of these countries, the exported crops, and the percentageof farmland thus removed from local consumption include: Guadeloupe—sugar, cocoa,and bananas, 66%; Martinique—bananas, coffee, cocoa, and sugar, 70%, and Barbados—sugar cane, 77%. Guatemala plants cotton for export in blocks of 50,000 acres. Theseare all familiar developed world consumer items imported from these impoverishedcountries.

In 1973, the United States imported 7% of its beef, much of it from the DominicanRepublic and Central America. Costa Rica alone exported 60–million pounds to theUnited States in 1975, even though its own per–capita beef consumption droppedfrom 49 pounds per year in 1950, to 33 pounds in 1971.

If Costa Ricans had not exported this increased production, their per–capitaconsumption would have been 3–times as high, or 98 pounds per year. While theUnited States imports all this beef, two–thirds of the grain it exports is used to feedlivestock and much of the rest is distilled into liquors, both for elite consumption. Inaddition, it requires 40–cents’ worth of imported oil to produce and transport every$1 worth of agricultural exports. “To produce and distribute ‘just one can of corncontaining 270 calories’ consumes 2,790 calories of energy.”

Ecology, Capitalism and the New Agricultural Economy

During 1992, U.S. food imports are estimated to have been $22–billion and exports$40–billion. Economists teach that there must be balanced trade and, from theperspective of maintaining the status quo, this may be true. However, the status quoreflects the unequal distribution of polit ical and economic power in the world; the“geography of world hunger” is specifically the consequence of entire populationshaving lost control of their land, and thus their destiny. The impoverished world doesnot need America’s, or Europe’s, surplus food.

They only need the right to control their own land, the r ight to industr ial capital,and the right to grow their own food. Given those rights, they will not generally behungry. However, because only the affluent have money to purchase this production,monopolization of land diverts the production of social wealth to those already welloff. “The world can simply produce more than those who have money to pay for itcan eat.”11 The results are small well–cared–for elite groups, primarily in the developedworld, and hunger for the dispossessed.

Hunger is Determined by W ho Controls the Land

The often–heard comment that, “There are too many people in the world, andoverpopulation is the cause of hunger,” is the same myth expounded in 16th–CenturyEngland and this social–control–paradigm (“framework of orientation”) has beenrevived continuously since.

Through repeated parliamentary acts of enclosure, the peasants were pushed offthe land so that the gentry could raise more wool for the new and highly productivepower looms. They could not have done this and allowed the peasants to retain theirhistorical entitlement to a share of production from the land. Massive starvation wasthe inevitable result of this expropriation.

There were ser ious discussions in learned cir cles that decided peasantoverpopulation was the cause of poverty. This was the accepted reason because socialand intellectual elites were doing the rationalizing and they controlled the educationalinstitutions that studied the problem. Naturally the conclusions (at least thosepublished) absolved the wealthy of any responsibility for the plight of the poor. Theabsurdity of suggesting that England was then overpopulated is clear when one realisesthat “the total population of England in the sixteenth century was less than in anyone of several present–day English cities.”

The hunger in undeveloped countries today is equally tragic and unnecessary.The European colonizers understood well that ownership of land gives the ownerscontrol over what a society produces. M ilitary power is the foundation of all law andthe more powerful colonizers redistributed the valuable land tit les to themselves,eradicating millennia–old traditions of common use.

If r ights in common had ever been reestablished, the “rights” of the new ownerswould have been reduced. For this reason, much of the land was unused or under–used until the new owners could do so profitably. Profits meant selling primarily tothe developed world, the local populations, being far underpaid, had no buying powerto purchase from each other (short–circuiting the multiplier factor).

This pattern of land use characterizes most developing world countries today.What causes hunger is external control guiding agricultural production to the wealthydeveloped world, instead of internal control managing production for indigenous use.

Ecology, Capitalism and the New Agricultural Economy

These conquered people are kept in a state of relative impoverishment. Permittingthem any meaningful share of social wealth would negate the historical reason forconquest, which is ownership of that wealth.

The M arket Economy Guides the W orld’s Production to Imperial–Centers–of–Capital

Currently the purchasing power of the poor keeps falling further and furtherbehind that of the wealthy and powerful. André Gorz, in his book Paths to Paradise,explains why a market economy can only work efficiently when the purchasing powerof the poor is increased:

This is what we have to understand—growing soya for our and other wealthynations’ cows is more profitable for the big landowners of Brazil than growing blackbeans for the Brazilian masses. Because our cows’ purchasing power has risen abovethat of the Brazilian poor, soya itself has got so expensive in Brazil that a third of thepopulation can no longer afford to buy either its beans or oil. This clearly shows thatit is not enough to ensure the developing world gets ‘a fair price’ for its agriculturalexports. The relatively high prices that we would guarantee might merely aggravatehunger in the developing wor ld, by inciting the big landowners to evict theirshareholders, buy agricultural machines, and produce for export only. Guaranteedhigh prices have positive effects only if they can be effectively used to raise thepurchasing power of the poor.

Thus the market guides the world’s production to those with money. The defeated,dispossessed, dependent, and impoverished have no money because their labour isfar underpaid, and historically there has been no serious intent to let them haveagricultural and industrial capital to produce their own wealth and pay themselveswell. The world’s natural wealth automatically flowed to the money–center countrieswhere these basic commodities were processed into consumer products by high–paidindustrial labour to produce both consumer products and buying power which is theessence of a wealthy society.

The industrialized world is the prime beneficiary of this well–established system.Great universities search diligently for “the answer” to the problem of poverty andhunger. They invariably find it in “lack of motivation, inadequate or no education,” orsome other self–serving, social–control–paradigm. They look at everything exceptthe cause; the powerful own the world’s social wealth.

The major beneficiaries have much to gain by perpetuating the myths ofoverpopulation and cultural and racial inferiority. The real causes of poverty must beignored; how else can this systematic siphoning away of others’ wealth throughinequality of trades be squared with what people are taught about democracy, rights,freedom, and justice? If people have rights to their own land and the industr ial capitalto produce the tools to work it, every region in the world could feed itself.

This access would have to be permanent and consistent. Any alienation of landrights, or underselling of regional agricultural production with cheap imports, disruptsfood production, retards industrial development, and ensures hunger and poverty.

With capital and undisturbed access to their land, the developing world wouldhave little need for the surplus food of the United States. Consequently, there wouldbe no reason to plant the one–quarter of U.S. crops that are for export. The current

Ecology, Capitalism and the New Agricultural Economy

U.S. agricultural export multiplier of possibly $100-billion (60% of $50-billion in exportswhich go to the developing world times an estimated multiplier of 3.5) would then beworking its magic in developing countries as they produced, processed, and distributedtheir own food as well as other consumer products for which the increased buyingpower would create a market.

Stevia: Sweeter than Sugar

Subsidies, acreage permits, and import restrictions to protect the developedworld’s beet and cane sugar industries are well–recorded history. But the Indians ofSouth America have known of the leaves of a plant today called Stevia which is 30-times swe eter than sugar and it does not require expensive processing as does sugarbeets and sugar cane. Needing only harvesting, drying, and grinding into powder orsqueezing out the oils, the labour costs of raising and processing Stevia are minimal.Requiring one–thirtieth as much to sweeten foods even as it costs roughly 10% asmuch to raise and process, this natural sweetener would sell for a fraction of the costof sugar. Scientifically tested for safety and used extensively in Japan, Brazil, andChina, Stevia is kept out of American markets by classifying and regulating thisbeneficial leaf as an herb.

Besides the elimination of substantial amounts of unnecessary labour spentproducing sugar, sugar is undoubtedly the primary cause of most developed world healthproblems (diabetes, overweight). Through replacing sugar with Stevia here would be ahuge savings to the world’s health care industry while simultaneously increasing thequality of life. Where many monopolies are hard to bypass, the sugar monopoly is not.Using Stevia (or a couple of other similarly sweet plants in Africa) as a sweetenerthroughout the world would quickly raise the quality of life both by being able tosimultaneously enjoy sweet foods and good health.

Beef: “A Protein Factory in Reverse”

In Diet for A Small Planet, Frances Moore Lappé teaches that:• The human body can manufacture all the 22 amino acids that are the building

blocks of protein, except eight (some say nine)—these are called the essentialamino acids;

• These nutrients are found in grains, vegetables, and fruits but not all eight(nine) amino acids exist in any one non–meat food;

• If any essential amino acid is missing or deficient in a person’s diet, that setsthe limit on the human body’s ability to build protein; when consumingvegetables, grains, and fruits that include all eight (nine) essential amino acidsin adequate amounts, the body builds its own protein; to fulfill the need forhuman protein, an amino acid is an amino acid whether it is in meat orvegetables;

• Chemically there is no difference between an essential amino acid, such aslysine, whether the source is meat, vegetables, grains, or fruits.

Ms. Lappé points out that vegetables, grains, and fruits—properly balanced foramino acids—can provide more protein per acre than meat. Each 16 pounds of perfectlyedible human food in the form of grain fed to cattle produce only one pound of beef.This is “a protein factory in reverse.” Lappé’s calculation is conservative; prime–fed

Ecology, Capitalism and the New Agricultural Economy

cattle have 63% more fat than standard grade, and much of it is trimmed off, cookedaway, or left on the plate. Even the fat that is eaten is usually not wanted. Subtractingthe unwanted fat demonstrates that it requires more than 16 pounds of grain toproduce one pound of meat.

Cattle are ruminants with multiple stomachs that efficiently convert roughage(grass) into muscle. But they are inefficient converters of grain to meat and, in thateffort, consume large amounts of this human food. If the grains fed to cattle wereconsumed directly by the world’s hungry, the available protein from those foods wouldincrease by 16–times, 1,600%. But when fed to cattle, the overwhelming share ofgrain is converted into worthless fat, bone, intestines, and manure. Professor DavidPimentel of Cornell University estimates that the grain now fed to livestock worldwidewould feed 1–billion people.

While cattle are efficient consumers of roughage, the grain fed to them issubtracting from, not adding to, the already short supply of protein. With a digestivesystem designed by nature for that purpose, if cattle were fed only roughage, and thehigh–quality grains they once consumed were consumed by the human population,hunger would be eliminated while reducing the pressure on the environment. If thedeveloped world returned to the practice of growing cattle on roughage and feedinggrain for only a short time before slaughter, the quality of the beef would be higher(measured by leanness, not by marbling) and the quantity available only slightlyreduced. At 1991 prices, just eliminating the last 2 weeks of cattle feeding (finishing)would have saved American consumers at least 40–cents per pound.

Counting the grain required to produce the meat they eat, the consumption bythe well to do of 8,000–to–10,000 calories per day is a major cause of world hunger.Global production exceeds 3000 calories of food per day for each person, while thedaily need is only 2,300–to–2,400 calories, and the potential world calorie productioncould be raised much more by planting high–protein, high–calorie, crops. On theaverage, the proper combination of leafy vegetables produces 15–times more proteinper acre than grain–fed beef, while peas, beans, and other legumes produce 10–timesmore, and grain produces only five–times more. By ignoring the multiplier factor andsubsidies, highly mechanized farms on large acreages can produce units of food cheaperthan even the poorest paid farmers of the developing world.

When this cheap food is sold, or given, to the developing world, their local farmeconomy is destroyed. If the poor and unemployed of the impoverished world weregiven access to land, access to agricultural tools, access to industrial tools, andprotection from cheap imports, they could plant high–protein, high–calorie, cropsand become self–sufficient in food. Consumers would buy their food from localproducers, those farmers would spend that money in the community, and theproducers of those products and services would spend it on their needs.

Purchasing of local production multiplies by however many times that moneycirculates within an economy. Although the multiplier factor varies, for simplicity,350% is a good figure to use. Because the circulation of money energizes productionand creates wealth, reclaiming their land and utilizing the unemployed would costthese societies almost nothing, feed them well, and save far more money than theynow pay for the so–called “cheap” imported foods.

Ecology, Capitalism and the New Agricultural Economy

Conceptually Reversing the Process of Free Food

If American farmers were undersold by subsidized agricultural surpluses fromanother society or that imported food was given to American consumers, U.S. farmerscould not sell their crops.

They would go bankrupt, the tractor and machinery companies would gobankrupt, the millions of people depending on these jobs would be without work,resources and production of remaining industries would have to be sold to othersocieties to pay the import food bill, and America would quickly become impoverished.

In a country not yet industrialized, the natural resources must be sold to pay forfood and consumer products from the industrialized world and debt traps are put inplace to maintain that dependency.22 This process is currently at work in Mexico. Astheir food imports rose to 60% of their needs, wages fell drastically, industr ialproduction shrunk substantially, and debts increased dramatically.

Many believe that the developing world “does not understand and will neverchange.” But they do not consider that massive subsidies permitting underselling ofregional agricultural production shatter already weak economies. Thus sincere, butmisinformed, people go on producing for others what they could produce forthemselves if permitted the technology. This process siphons the wealth from thealready poor and perpetuates their poverty.

Because they do not have industrial capital to produce manufactured wealth fromtheir natural wealth, undeveloped countries have much bigger problems. To pay fortheir “cheap” imported food, their natural resources must be sold to pay for that foodand other consumer products from the industrialized world and trade rules and debttraps have been put in place to maintain that dependency. Once those monopolies are inplace, “free trade” is simply a method to siphon the wealth of the periphery, or evendefeated powerful nations to the victorious imperial–centers–of–capital. Witness whathappened to the former Soviet federation whose resources are now pouring into the Westto feed their industries.

The Periphery of Empire is a Huge Plantation Providing Food and Resources to the Imperial Center

That the periphery of empire functions as a huge plantation system providingagricultural products and resources to the imperial center can be determined byanalyzing who consumes those agricultural products and resources. While Somozawas kept in power in Nicaragua by America, 22 –times more farm land was utilizedto produce crops for exports than was used for domestic consumption and 90% of allagricultural credits financed those agricultural exports. Running the same statisticalanalysis on the agriculture of many countr ies on the periphery of empire will exposesimilarly high percentages of their land providing food for the imperial center. Thesame analysis on natural resources (timber, iron, copper, diamonds, et al.) on theperiphery will show an even higher level of consumption by the imperial center andlower level of consumption by the periphery.

World hunger and poverty exists because:• Colonialism, mercantilism and neo–mercantilism (now transposed into

corporate imperialism) dispossessed hundreds of millions of people from theirland. The current owners are the new plantation managers producing forthe mother countr ies.

Ecology, Capitalism and the New Agricultural Economy

• The low–paid undeveloped countr ies sell to the highly–paid developedcountries because there is no local market—the defeated, dispossessed, andunderpaid have no money. Thus it is highly unequal pay for equally–productive work that creates invisible borders guiding the world’s wealth toimperial–centers–of–capital.

• And—as the periphery producing food and resources for the developing worldrequires exports to the center to pay for those imports—cheap, subsidized,agriculture exports from the wealthy world is part of the process of strippingthe natural wealth from the impoverished world to provide exotic foods,lumber, minerals, and—so long as the developed world financiers andintermediaries still maintain control of the direction of the flow of money—even manufactured products for the imperial center. To eliminate hunger:– There must be equalizing managed trade to protect both the developing

world and the developed world, so the dispossessed can reclaim use oftheir land. The simplest reclamation of those rights would be societycollecting the landrent. Under that Henry George philosophy only themost productive would own that land and absentee ownership woulddisappear.

– The currently underfed people can then produce the more labour–intensive, high–protein, high–calorie, crops that contain all eight essentialamino acids.

– And those societies must adapt dietary patterns so that vegetables, grains,and fruits are consumed in the proper amino acid combinations, withsmall amounts of meat or fish for protein and flsvour. Though populationcontrol must be practiced so as to take the pressure off of dwindlingresources and the environment, with similar dietary adjustments amongthe wealthy, there would be increased, improved, and adequate food foreveryone.

With highly–subsidized food exported from the wealthy world to the impoverishedworld leading to typically 40% to 70% of their food being imported and their localagriculture impoverished, developing world farmers and common labour understandwell that, through the multiplier factor running in reverse, every hundred dollars ofimports subtracts several hundred dollars from their economy and, through thatmultiplier factor in forward motion, adds several hundred dollars to the exportingnation’s economy. They also recognize that this is true of every commodity produced.For a healthy economy, every nation or region requires, on balance, sovereignty overtheir food supply, their fibre, their shelter, and consumer products. Sovereignty canonly be attained through equal sharing of resources, technology, and markets, andequal pay for equally productive labour.

AGRICULT URAL ECON OM IC POLICY

Introduction

The analysis of the effects of price and price distorting policies on the agriculturalsector has received a great deal of attention in the economic literature pertaining to

Ecology, Capitalism and the New Agricultural Economy

Sub–Saharan Africa. This literature suggests that inappropriate price and price–relatedpolicies have been the key impediment to agricultural growth and development inmost Sub–Saharan countries. This finding appears to have had a significant influenceon the design of structural adjustment programmes (SAPs) in which getting thestructure of relative prices right was considered to be the leading operational objective.Liberalization of input, output and service prices, marketing and trade, privatizationof most public enterprises, devaluation of local currencies and disengagement of thestate from most support services were primarily meant to achieve this objective.

With respect to privatization of parastatals, policy reforms implicitly assumedthat the private sector will take over all the functions performed by these parastatalsin a more efficient and cost–effective manner. It is, however, important to observethat the advocates of reforms appear to have paid little attention to some key questionsrelated to the privatization process. Litt le attempt was made to identify functionsthat are best performed by government agencies and those that are best handled bythe private sector or to assess the private sector base in each country concerned.

The failure to examine these and other related key questions has made it difficultfor the designers of the structural adjustment reforms to propose appropriate policymeasures and actions that could help strengthen and foster the development of theprivate sector in order to enable it to effectively handle various functions that werepreviously carried out by parastatals in the economy. In addition, these policy reformsalso failed to be specific about the timing and sequencing of the privatization processin order to avoid the disruption of agricultural and other economic activit ies.

Furthermore, structural adjustment programmes appear to have paid limitedattention to reforming government public goods, institutional and human capitaldevelopment policies. These policies are even more central to the long–termdevelopment process of the economy than the stabilization and adjustment policiesthat have been the focus of the structural adjustment programmes in Sub–SaharanAfrica. Since the main objective of SAP was to get the structure of relative pricesright, a question one may wish to address is did these policy reforms achieve thisoperational objective. What is clear here is that limited attention was paid to theimpact of external factors on the structure of relative prices. The whole SAP packageseems to have over–estimated the magnitude of leverage national governments inSub–Saharan Africa have to affect the domestic agricultural terms of trade and hencethe growth of agricultural output and income.

In fact, the failure of structural adjustment programmes to improve the economicsituation in Sub–Saharan Africa is now recognized both explicitly and implicitly bythe opponents and designers of this policy reform package. As one of the most seasonedAfrican economists put it “the continent” (Sub–Saharan Africa) has the dubiousdistinction of being the only developing region of the world that experiences zeroaverage per capita growth over the last thirty years, including negative growth ratesover the last two decades (Elbadawi 1995). Embedded in the last two decades of thenegative per capita growth is more than ten years of implementation of structuraladjustment programmes in most of Sub–Saharan Afr ica. After such a period of time,it is now appropriate to assess the impact these policy reforms have had on theagricultural sector.

This chapter attempts to evaluate the impact of economic policies undertaken

Ecology, Capitalism and the New Agricultural Economy

since the 1970s including structural adjustment policy reforms on domestic terms oftrade of major tradable agricultural commodities and in so doing to establish theextent of leverage governments in Sub–Saharan Africa have to affect the structure ofrelative prices facing their economies. More specifically, the examines the movementsof domestic agricultural terms of trade and its major components in the light ofeconomic policy reforms initiated in Sub–Saharan Africa; assesses the impact ofexternal factors and domestic policy variables on the real exchange rate, one of thekey components of the domestic terms of trade of tradable commodities; and finallyestimates the contribution of external factors and domestic policies to change in thedomestic terms of trade of agricultural tradables.

This study is based on historical data. Three West African countries, Côte d’Ivoire,Niger, and Senegal, were selected for the study. As can be seen, this sample of countriesis made up of one coastal non–sahelian country (Côte d’Ivoire), one coastal saheliancountry (Senegal), and one landlocked sahelian country (Niger). These countries areall members of the West African Economic Monetary Union (WAEMU) They havethe same currency that is linked to the French franc by a fixed nominal exchangerate. This exchange rate which was pegged at 50 CFA francs for one French francsince the 40’s was changed on January 11, 1994 to 100 CFA francs for one Frenchfranc. This policy change has been one of the major macro–economic policy reformsinitiated collectively by these and other countries of the Union. The following cropsare selected for the study, cocoa, cotton and rice in Côte d’Ivoire and, groundnut,cotton and rice in Senegal and Niger. It should also be observed that in Niger cottonand groundnut are the major export crops, while rice is the main importable foodcrop. Likewise in Côte d’Ivoire, cocoa is the major export commodity and cotton isan important raw material for local textile industry, while rice is the major importablefood crop. Despite its decline, groundnut still remains a leading export crop in Senegal,while cotton, a relatively new export crop, presents significant potential for growth.With respect to r ice in Senegal, it is not only the most important importablecommodity, but a leading food crop.

The second section reviews the economic policies followed during the last twodecades. The third section develops the analytical framework. The fourth sectionanalyses the movement of domestic terms of trade of selected agricultural tradables.The fifth section evaluates the impact of external factors and domestics variables onthese terms of trade. Finally, the last section provides some policy implications andconcludes the study.

Economic Policies in the Study Countries

Côte d’Ivoire: The agricultural sector has played and continue to playa leadingrole in Côte d’Ivoire’s economic development and the sector’s rapid growth in the1960s was the basis of what has been called the “Ivorian economic miracle.” Althoughthe Ivorian economy is relatively diversified, it remains dependent on agriculture,which contributes almost one–half of GDP and employs about 54 per cent of theeconomically active population. Two major crops dominate this sector: coffee andcocoa.

Coffee contr ibutes about 50 per cent of the country’s export revenue and Côted’Ivoire was the second largest African producer in 1992 after Ethiopia. Coffee farms

Ecology, Capitalism and the New Agricultural Economy

are 98 per cent small in size and the robust type dominates production. Cocoaproduction doubled in the 1970s and Côte d’Ivoire became the world’s largest producerin 1977–1978 when its production over–took Ghana’s.

A state marketing agency, the Caisse de Stabilization et de Soutien des Price desProductions Agricoles (CAISSTAB) traditionally purchased all coffee and cocoaproduction before its privatization in early 1990s. Furthermore, Côte d’Ivoire hasmanaged to diversify production in r ice, cotton and rubber and the country hasachieved self–sufficiency in almost all the food crops, except r ice.

Cote d’Ivoire has experienced four episodes during the 1965–93 period. The 1965–73 sub–period was marked by high rate of growth of agricultural output and grossdomestic product. The government development strategy was based on externalborrowing and extraction of agricultural surplus to increase investments in basicinfrastructure and other sectors. The CAISSTAB played a major role in this area bypaying producer prices which were below the international level.

The 1974–78 sub–period was marked by various policy developments. The mostnotable development was the proliferation of state–owned companies. The sub–periodwas also characterized by an unprecedented boom in primary commodity prices andsubsequent increasing export earnings. The latter helped the country to enlarge itsindustrial base in the areas of energy (Kosson dam), agro–based industries (sugar,palm oil, coffee and cocoa processing). In the agricultural domain, the country decidedto diversify production into new crops (cotton, rubber, sugar) and extending exportand food crops out of the cocoa belt. The 1973–74 oil shock did not force Côted’Ivoire to reduce investment expenditure, instead the country resorted to heavyexternal borrowing in order to maintain high investment rate. At the end of this sub–period, the country started to experience difficulties to service its heavy external debt.

This sub–period was characterized economic and financial crisis which promptedthe country to apply austerity measures. Incapacity to reimburse external debt wasone of the factors which led Côte d’Ivoire to negotiate an economic recoveryprogramme in 1980 with the IMF. This helped the country to obtain its first series ofdebt rescheduling in 1983, 1984 and 1986. But new adverse developments in exportrevenues led to further deterioration of economic and financial situations. Theoccurrence of drought in 1983 and 1984 caused production reduction in agriculturewith coffee being one of the most affected.

Furthermore, a prolonged collapse of primary commodity prices on internationalmarkets led to a severe decline in export revenues. Despite this, Côte d’Ivoire decidedto increase producer prices in mid–1980s and the replanting programme wasmaintained. Faced by shrinking export revenues, the government reacted to worldprice collapse by attempting to stockpile cocoa production. This unsuccessful attemptled to further erosion of the country’s financial liquidities and subsequent increase indomestic and external debt arrears. Therefore, the country has no choice but to adoptthe structural adjustment programme.

The 1989–93 sub–period was marked by government’s efforts to apply structuraladjustment programmes and a reverse producers’ price policy was adopted. Thestructural adjustment policies focused on extended financial stabilization measuresand structural reforms in order to create a competitive environment for the country.Stabilization measures were reflected in public investment and public employment

Ecology, Capitalism and the New Agricultural Economy

reduction. Other structural measures included, inter alia, the liberalization of externaltrade, reduction of corporate tax and reduction of government role in the productivesectors. The latter led to the privatization of some of the largest public enterprisessuch as water and electricity utilities, opening of private participation in CAISSTAB.

With regard to producer prices, further deterioration in world prices for primarycommodities led to reducing coffee and cocoa producer prices by half, while thegovernment encouraged producers to increase food crop production in areas whereself–sufficient was yet to be achieved. Despite these measures, improvement in leadingeconomic indicators including the level of the country’s competitiveness was ratherlimited. This led the country to accept along with other member countries in theWAMEU to devalue their commonest currency the CFA in January 1st, 1994.

AGRICULT URE AND RURAL DEV ELOPM EN T

Stabilization and Structural Adjustment Policies (SAPs) have been pursued inSub–Saharan Afr ica (SSA) since the early 1980s to restore internal and externalequilibria by controlling aggregate demand, and by liberalizing markets to reinstatethe role of the price mechanism in efficient resource allocation.

Within the SAP framework, financial sector reform/restructuring consisted of:• Liberalization of nominal interest rates from a fixed controlled regime to a

market–determined regime, to mobilise savings and allocate loanable fundsto projects with the highest returns on investment;

• Removal of credit allocation quotas and interest rate ceilings to particularsectors, including agriculture, to allow financial services to flow to the mostproductive uses;

• Privatizing parastatal banks and other financial insti tutions, to removeadministrative inefficiencies and bankruptcy due to government bureaucracy,political interference and rent–seeking activities;

• Tightening of banks supervision to ensure profitability by enforcing therecovery of non–performing assets, and solvency by increasing the equitybase and tightening prudential regulations.

Implemented as such, financial sector restructuring was expected to promotelong–term economic development. Since the relationship between financial sectorrestructuring and economic development has been examined by five papers sponsoredunder the research network, “African Perspectives on Structural Adjustment,” it willnot be re–examined here. In this financial sector restructuring is affecting long–termagricultural development and off–farm activities in the rural sector, which is the largestsingle sector in the SSA economies. An evaluation of the World Bank’s early experienceover the period by Jayarajah and Branson reveals that the approach to financial sectorrestructur ing is practical ly independent of agr icultural sector reform. Withinagriculture, the reforms focused upon: decontrol of producer prices, removal of theimplicit tax on agricultural exports by liberalizing the nominal exchange rate;dismantling state marketing monopolies; and inflation control to improve the rural/urban terms of trade.

For financial sector restructuring, the reforms concentrated on: removing financialrepression; rehabilitating the formal banking system; and getting capital markets

Ecology, Capitalism and the New Agricultural Economy

started. While it was acknowledged by Jayarajah that “Financial sector reform in manydeveloping countries is more a process of development than reform” this developmentelement was not explicitly incorporated into the restructuring of the financial sectorin order to meet the development needs of the single largest real sector of the SSAeconomies.

In the World Bank Report covering the most recent period, Adjustment in Africa:Reforms, Results, and the Road Ahead, agriculture and financial sector restructuringdo not show any change in the direction of the World Bank’s policy thrust. Whereasthe need for adequate availability of credit, to sustain the SAPs price–based incentivesto promote agricultural sector growth, is acknowledged, in the second volumeAdjustment in Africa: Lessons From Country Case Studies, the how to provide theneeded credit is neither elaborated nor linked to financial sector restructuring.

Meanwhile, M ontiel’s review covering seven SSA countries: Ghana, Gambia,Kenya, Nigeria, Malawi, Tanzania and Uganda, is sounding a discordant note. Theexperience to–date in these countries, according to the review, suggests that theprocess of financial sector restructuring has not achieved much success: “ financialliberalization, though recently undertaken in various countries of the region, has beententative, and has thus far not appeared to be very successful.” The key researchableissue, therefore, is whether the way in which this process is being conducted canpromote long–term economic development, while omitting the largest rural sector,that is, “The issue confronting policy makers in sub–Saharan Africa is not whetherfurther financial liberalization is desirable, but rather when and how it should bebrought about.” The purpose of this is to examine this issue systematically with respectto agriculture and off–farm activities in the rural sector, taking Uganda as a casestudy.

Uganda is chosen because it is lately considered the most successful implementerof the SAPs on the SSA continent by the Institutions. The macro–economic successindicators over the period include: a real GDP growth rate of 5–6% p.a., a slashedinflation from over 300% to just around 10% p.a., and a parallel market exchange ratepremium of over 300% reduced to zero, for example. The Uganda economy is basicallyrural. Agriculture provides over 60% of rural household income, with the rest comingfrom a wide range of off–farm activities: brewing local beer, fishing, handicraft, brickand charcoal making, construction and maintenance of owned–occupied dwellingsetc. The Agricultural sector employs around 80% of the entire active labour force:this contributed 45% to real GDP in constant 1991 prices in 1996/97, and 90% toexports revenue. Agriculture is 90% organised by scattered small holders; estates areconfined to tea and sugar production.

Amid the successful macroeconomic achievements, Uganda started financialsector restructuring in 1993 to remove financial repression, strengthen the bankingsystem, and open a capital market. Yet the review of this financial sector restructuringprogramme by the Republic of Uganda, Agricultural Policy Committee states thatthis programme has no special action to help development of the rural financial market.In fact, the rationalization of the branch network and liberalization of credit allocationcan have a negative impact on the role of the banks in rural credit. The liberalizationof credit allocation has had the tendency ofcrowding out agriculture from the banks’loan portfolio. Faced with this brewing crisis by 1996, three years after the start of

Ecology, Capitalism and the New Agricultural Economy

restructuring the financial sector, a number of proposals and studies are on the tabledebating how to provide rural financial services. “The challenge facing the bankingsystem is therefore how to expand and broaden the financial intermediation in ruralareas since the agricultural sector is crucial for economic development. This is aserious ongoing debate addressing a major defect in the design of the SAPs.

This is set out to contribute to the debate as follows:• First, it describes the importance of financial services for the economic

development of the rural sector, which must be appreciated first, in order toput the gravity of the omission of these services in financial sectorrestructuring into proper perspective.

• Second, it outlines the peculiar characteristics of rural SSA, including Uganda,which must be taken into account to deliver financial services effectively;these characteristics put a limit on how much can be learned as relevantlessons from elsewhere in Asia and Latin America with different rural settings.

• Third, it reviews the theoretical literature and best practices in rural financeto promote economic development; presents the Uganda case study; with acri t ical evaluation of the likely adequacy and relevance of the currentproposals being debated to address the financial needs of Uganda’s ruralsector.

Rural Financial Services and Economic Development

Rural financial services are needed for three purposes: to provide rural credit forproductive activities and allied services; to provide a savings facility for the ruralpopulation; and to provide a payments mechanism to transfer purchasing powerbetween economic agents within the rural sector itself, and between the rural sectorand the rest of the economy.

Rural Credit

Within agriculture, credit is needed for direct production activities: for short–term periods up to one year, to purchase variable inputs and meet working capitalrequirements; for medium–term needs for investments of 3 to 5 years to purchaseproductive assets and invest in land improvements; and for long–term needs 10 to 15years to establ ish shambas, ir r igat ion schemes, and other long–term farminfrastructure, etc.

Indirect Agricultural Credit is Needed: To finance the distribution of inputs on atimely basis, by wholesalers and retailers; to provide crop finance for the purchase,storage, processing and marketing of agricultural produce; and export credit to facilitateinternational shipments. Non–agricultural credit is needed for both the short andmedium term to facilitate micro enterprises that provideconsumer goods and servicesto rural areas (e.g., radios, bakeries), and off–firm employment, which is particularlyimportant in the utilization of off–season labour, and the diversification of rural incomesources.

A Rural Savings Facility

The bulk of the literature that stresses the need for rural credit overlooks that ofa savings facility, with the result that the rural sector is forced to save in kind (in

Ecology, Capitalism and the New Agricultural Economy

animals, birds, etc), or in idle cash in pots, within the informal sector mechanism,which may not bear interest. To Promote Economic Development, the Rural SectorNeeds a Savings Facility: To earn interest in order to accelerate accumulation; tomeet a wider range of contingencies and respond to investment opportunities withoutthe delay caused by looking for a customer to translate savings in kind into cash; andto generate internal loanable funds for credit schemes, rather than rely on donorsand governments for continuous injection of funds into these schemes, which is notsustainable.

Payments M echanism

The rural sector is often inconvenienced by having to carry large sums of cashfor payments of school fees, bulky purchases, crop–finance, transfer payments ofpension schemes, facilitation of NGO operations, etc. Often this cash is stolen on theway, or poorly counted at the expense of the rural customer. The rural sector needs apayments mechanism to facilitate all the enumerated transactions.

The Peculiar Problems of the Rural Sector in SSA for the Provision of Financial Services

The provision of rural financial services has three peculiarit ies in the SSAenvironment to contend with.

Risk

Agriculture is the single most important sector in SSA economies accounting forbetween 30% and 60% of real GDP and dominating the rural sector as a source ofincome and employment, food security, exports, tax revenues, and raw materials forthe agro–allied import–substitution industries. M ost SSA agriculture is rainfed andyields depend on variation in weather, turning out to fluctuate over wide margins.Second, there is no effective technology to fight pests and diseases; this opens roomfor large losses. Institutions for crop and livestock insurance or credit guarantee areparticularly hard to manage since they have to cover a wide area of varied climates inorder to avoid covariant r isk.

These institutions hardly exist in SSA, and where they are attempted there is adanger to go bankrupt when all customers fail to repay their loans for no fault of theirown. Third, the best hedge against risk is individual land title of ownership. In manyparts of SSA, however, land is communally owned.

Seasonality

A rural financial institution must be able to manage the large cash in–flow asfarmers sell their harvest, the preceding equally large cash out–flows as traders borrowfor crop finance, as well as the demand for financing inputspr-ocurement at the timeof planting. What makes the management of seasonality even more difficult is thethin or practical absence of financial integration; the rural financial institutions arecut off from their urban counterparts which could have provided the large cash needsfor crop finance, and gainfully utilized the large inflows of savings from farmers asthey market their harvest.

The Scattered Low–Income Populations

Ecology, Capitalism and the New Agricultural Economy

The SSA household settlement patterns are highly scattered, unlike the densepopulat ions of Asia and par ts of Lat in Amer ica. Shifting cult ivation or/ andtranshumance are still practiced.

This makes the collection of information on customers to identify bankableprojects, supervise and collect loans, and servicing of small deposits, particularlyexpensive. Also the required modem physical plants, such as bank offices, computers,etc., to serve customers efficiently become impractical to operate since they have tostay idle or under–utilized in certain migration seasons or have to handle very smallbusinesses where populations are thin, making it impossible to benefit from economiesof scale.

Rural infrastructure is particularly thin in SSA, with adverse consequences onthe provision of financial services. The high cost of transport due to poor feederroads lowers profitability and competition, leading to low farm–gate prices, a retreatinto subsistence with only a small marketable surplus to meet contingencies, and aretreat by men from Agriculture altogether, leaving food production to women. Thereduced volume of business exasperates rural poverty and increases the cost of bankingin the rural sector. According to the Food and Agricultural Organization of the UnitedNations (FAO) Training Manual, farmers in SSA receive only 30% –60% of the marketprice for their produce because of the thinner and poorer road network, comparedwith their colleagues in Asia whose share is 75% –90%. Over two–thirds (66.1%) ofthe difference between the consumer and producer prices in SSA is explained bytransport costs 39.1% and 27.0% by transaction costs.

The different needs for credit, saving facility and payments mechanism to matchthe peculiarities of rural SSA are ana1ysed later when we examine the criteria forbest–practice in providing financial services.

Financial Sector Restructuring and Economic Development: An Evaluation of theLiterature from the Standpoint of Its Relevance to Promoting Long–term EconomicDevelopment in Rural SSA A vast literature sprung up in the mid–1980s and early1990s regarding the relationship between financial sector restructuring and economicdevelopment in rural areas.

The Pro–Keynesian Perspective

According to the pro–Keynesians, moderately expansionary but regulated financialpolicies are what promotes higher and more stable economic growth and employment.Under such policies, institutional finance for Agriculture and rural development shouldbe expanded through the participation of the public sector, along with the privatesector, to increase the volume of business in rural areas, lower transaction costs andreap benefits fromeconomies of scale; lower the r isk of default by making theenvironment more conducive to collecting information; provide a variety of forms oforganization and types of service to meet the rural customers’ multiplicity of needs.

Along this reasoning, the following six organizational principles were proposed:1. Promoting M ultiples of RFIs: That is, more than one RFI for a given service

area;2. Encouraging a variety of forms of organization of these institutions;3. Ensuring vertical organization of the structure of RFIs from local to regional

and national levels;

Ecology, Capitalism and the New Agricultural Economy

4. Encourage high geographical density of the field–level offices of the RFIs;5. Ensuring that a high proportion of rural clients are reached by them;5. Romoting diversified and multiple functions that horizontally integrate the

agricultural production, input distribution, marketing and processing systemsfor the benefit of their clients and themselves. (Desai and Mellor 1993:3).

Capital and reserve requirements should be modest, interest rates should have aceiling and credit should be targeted to socially desirable sectors and projects whichcannot attract it on their own from the open market (small holder agriculture, forexample).

The development rationale underlying the pro–Keynesian hypotheses were:• That lower interest rates would stimulate investment demand, since the real

interest rate is a cost, and investment is inversely related to the real interestrate;

• That low interest rates would faci l itate the financing of governmentexpenditure for infrastructural and para statal investments, this beingparticularly relevant for rural development;

• That credit ceilings, by sector, would assist in the transfer of resources tosectors with a higher positive social compared to private rate of return, suchas small holder agriculture, which would otherwise be “rationed out” of thecredit market because of risk, rurality, and seasonality;

• That overall growth would promote savings from higher incomes.

Evaluation of the Pro– Keynesian Perspective

A major contribution of the Pro–Keynesian School was to identify the organisationprinciples for the desirable institutional structure. The multiplicity of institutions wasto ensure competition; the variety of forms were to meet the multiplicity of needs ofrural customers; the density of coverage was to ensure an adequate volume of businessto reap economies of scale, and to lower information costs; the multiplicity of functionswas to promote the emergence of linkages and structural change of the rural economy,with the vertical linkages to facilitate the payments mechanism and to integrate therural and urban financial sectors into a unified structure to reduce dualism.

Unfortunately, the pro–Keynesians underestimated the negative effects of publicinvolvement, using fixed interest rates and credit quotas, on rural financial institutions.According to Adams, fixing interest rates led to financial institutions bankruptcybecause they could not charge rates that would cover the cost of the services; thesame fixed interest rates made financial institutions unsustainable because they couldnot raise voluntary savings and had to rely on donor or budgetary injections for loanablefunds.

Political interference led to the award of credit as patronage or rents to supporterswith no seriousness to pursue loan repayment: this led to the accumulation of non–performing assets.

The rural poor in whose favour public involvement was supposed to distributecredit were instead rationed out of the credit market since they lacked politicalconnections and clout. The adherence to political criteria destroyed the incentive todevelop professionalism in the running of rural financial institutions.

What the Keynesians sought was a supply–driven policy of making rural financial

Ecology, Capitalism and the New Agricultural Economy

services available to stimulate economic development. Unfortunately the methods ofimplementation, particularly the political involvement into rural sector finance, hadso many negative effects that they prevented the emergence of viable and sustainablerural financial institutions; they also excluded the poor rural clients. Because of bothof these defects, the pro–Keynesian approach became regarded as a failure inpromoting long–term economic development.

However, the development content of the pro–Keynesian contributions still remainvalid to the SSA context. Financial sector development has to ensure horizontal andvertical integration of the entire national financial structure to promote inter–sectoraland inter–seasonal movement of resources to cope with risk and seasonality. A criticaldensity of financial institutions is also still required to reduce market failure byincreasing information flow, and to reduce unit costs by increasing the volume ofbusiness. We shall return to these contr ibutions when we evaluate the Ugandanproposals in the concluding section.

The Neoclassical Perspective

The neo–classical economists, in refuting the pro–Keynesian perspective, focusedparticularly on the problems created by the repressed interest rates:

• They encouraged investment in low–net return projects, thus misallocatingscarce capital and reducing potential growth;

• They discouraged the mobilization of savings, to finance investment, sincesavers were not compensated for parting with their liquidity; under inflationand fixed nominal rates, real interest rates were negative;

• They Distributed Income Against Small Economic Agents: these were unableto borrow because the cost of collecting information on small loans exceededthe income to be earned from the low fixed interest rates; the small economicagents also earned practically nothing on their savings, which were on–loanto larger economic units.

The overall emerging reaction was for liberalization of the entire financial sector,which went beyond the de–regulation of nominal interest rates, to include liftingcredit allocation controls to specific sub–sectors, including agriculture, privatizationof parastatal rural banks and other financial institutions. The most provocative neo–classical work that provided the theoretical framework for the financial sectorrestructuring policy package under the SAPs is edited by Adams, Graham, Pinske; itargues that rural development should not be undermined with cheap credit!

The Limitations of the Price Mechanism in Providing Rural Financial Servicesfor Economic Development The liberalized interest rate, as a price for financial servicesis essential for viability and sustainability of the financial sector generally since itenables financial institutions to charge a price that is sufficient to cover the directcost of their services and the opportunity cost of loanable funds.

However, the role of the interest rate under the liberalized SAPs framework whilenecessary, is not sufficient to ensure the provision of rural financial services. Theexperience of many SSA countries, reviewed in the work edited by Frimpong–Ansahand Barbara Ingham indicates the following problems:

• Whereas repressed interest rates “crowded out” small economic agents,especially in rural areas, the liberalized interest rates regime, in an overall

Ecology, Capitalism and the New Agricultural Economy

deregulated environment, is likely to “crowd out” the rural sector even moreseverely. Commercial banks are no longer required to operate rural: either tocollect savings; or provide credit; or administer the payments mechanism.

Instead, commercial banks concentrate on urban and peri–urban sectors,particularly trade and commerce where higher interest rates can be charged, whereloan collection can be done at shorter gestation periods than in agriculture subject toseasonality, and where there is no risk from weather, pests and diseases.

Privatization of the parastatal–banks led to closure of rural branches. This raisedthe risk of rural finance by reducing inter–bank information flow; it also raised theunit cost of doing business and reduced the gains from economies of scale by loweringthe overall volume of rural business. In other words, liberalization introduced a privatefinancial institutions’ response that run counter to the six organizational principles ofrural finance outlined by the pro–Keynesians (Desai and M ellor 1993), with thedevelopment content thrown out.

Higher interest rates did not appear to lead to an increase in the volume offinancial saving either. Paying interest rates on small deposits is a cost to commercialbanks which carefully avoid it by raising minimum deposit requirements. The smallsavers, with fewer formal financial institutions to turn to, continue to save in kind,perpetuating economic dualism. Investment did not benefit from higher interest rateseither. The pro–Keynesian hypothesis remains valid, investment is inversely related tothe real interest rate.

Banks that attempted to expand investment in productive sectors hurt theeconomies in two ways: first, by undertaking riskier projects from which they expectedto earn a higher interest rate, without careful evaluation of risk; this has made thefinancial sector less stable. Second, the new projects paying higher interest rates in animperfectly competitive setting, by passing on this cost to their customers, contributeto “cost–push inflation.” In the midst of the above criticisms, the excess demand forcredit for productive rural investments, has remained;the high interest rates underthe SAPs have failed to clear the market for loanable funds.

The Structuralist Perspective

According to the structuralists, the role of the interest rate in cleaning rural creditmarkets is over–stated by the neoclassical school.

The rural credit market is dualistic: the formal segment provides credit fromdonors and government sources at below market interest rates; the informal segmentrelies on credit from private individuals who include, for example, professional moneylenders, traders, landlords, friends and relatives (Hoff and Stiglitz 1993).

The informal credit market uses direct rationing to solve the screening andenforcement problems by lending to only those clients from whom it can collectinformation and over whom it can exert sanctions to recover the loans. This is to say:the trader lends to those farmers from whom produce can be collected at harvesttime to pay the loans; the fr iend and kin lend within the known circles whereinformation on credit worthiness is available, and within which peer pressure can beexerted to repay the loans. The professional money lender cultivates loyalty from thecustomers to repay the loans, and collects information on their creditworthiness. Giventhe direct mechanisms for screening and enforcement, informal credit is available to

Ecology, Capitalism and the New Agricultural Economy

only limited segments of the population: the ability of the lenders to charge high interestrates does not clear the market.

In the formal credit market, the interest rate is used for screening andenforcement, but only up to a point. Charging higher interest rates increases theprofitability of lending: simultaneously, however, as interest rates go up, the risk ofdefault increases. It follows that a formal financial institution will only lend up to apoint where profitability exceeds the r isk of default. Beyond this, the rising demandfor credit, as reflected in r ising interest rates, will not lead to credit expansion; insteadthe financial institution will ration out the extra customers by non–price mechanismssuch as excessive paper work. The disequilibrium in the credit market persists despitederegulated interest rates.

A rise in interest rates in the formal financial market should attract savings fromthe informal sector, which is not rewarding savers: this movement of resources wasexpected to increase the volume of loanable funds in the economy to financeinvestment, according to the prediction from the neo–classical school. However, theliterature summarized by Simmons indicates that unless the funds from the informalsector are “idle”, their flow into the formal sector reduces investment in the informalsector; and, at the margin, there may not be any net expansion in overall investmentin the economy.

Owen and Solis–Fallar have argued that the movement of funds from the informalto the formal financial sector should expand investment, on the grounds that thelatter allocates these funds more efficiently in a competitive environment, unlikemonopolistic competition in the informal financial market. However, this crit iquedoes not address the problem of r isk aversion which prevents rural formal creditmarkets from clearing.

The Contribution of the Structuralist Critique

The focus of the structuralist perspective on market segmentation, persistentdisequilibr ium and credit rationing, has contr ibuted the following: Liberalization ofinterest rates will not by itself lead to the integration of rural financial markets toequilibrate demand and supply for financial services. The problems of screening andenforcement, related to r isk aversion due to insufficient information, must be tackleddirectly. The neoclassical view has not been able to resolve this contention. Publicsector involvement will not eliminate the excess demand for rural financial serviceseither, unless it too addresses the information problem directly. Given the possibleadverse effects of such involvement, the emerging view from the literature is thatpublic involvement would be more useful if it addressed the structural obstacles torural finance directly, such as:

• Improve rural infrastructure to increase farm–gate prices and farm incomeby lowering transaction costs: as income increases, the r isk of defaultdiminishes;

• Promote technological change through research and extension, which too inturn increases agricultural profitability and farm income, and lowers the riskof default;

• Improve the legal framework, especially the definition and enforcement ofproperty rights, so that collateral can be used more.

Ecology, Capitalism and the New Agricultural Economy

Chapter 2

Economic Analysis

of Agricultural Projects

IDEN TIFYIN G PROJECT COSTS AN D BENEFITS

Economic analyses of agricultural projects to compare costs with benefits anddetermine which among alternative projects have an acceptable return. The costsand benefits of a proposed project therefore must be identified. Furthermore, oncecosts and benefits are known, they must be priced, and their economic valuesdetermined. All of this is obvious enough, but frequently it is tricky business. Whatcosts and benefits in agricultural projects are, and how we can define them in aconsistent manner. In this we will examine how we can obtain market prices. Afterthe financial analyses are discussed, the economic analysis is addressed with adiscussion of how to adjust market prices to reflect the real resource flows.

Objectives, Costs, and Benefits

In project analysis, the objectives of the analysis provide the standard againstwhich costs and benefits are defined. Simply put, a cost is anything that reduces anobjective, and a benefit is anything that contributes to an objective. The problemwith such simplicity, however, is that each participant in a project has many objectives.For a farmer, a major objective of participating is to maximize the amount his familyhas to live on. But this is only one of the farmer’s interests. He may also want hischildren to be educated; as a result, they may not be available to work full time in thefields. He may also value his time away from the fields: a farmer will not adopt acropping pattern, however remunerative, that requires him to work ten hours a day365 days a year. Taste preference may lead a farmer to continue to grow a traditionalvariety of r ice for home consumption even though a new, high–yielding variety mightincrease his family income more.

A farmer may wish to avoid risk, and so may plan his cropping pattern to limitthe risk of crop failure to an acceptable level or to reduce the risk of his dependingsolely on the market for the food grains his family will consume. As a result, althoughhe may be able to increase his income over time if he grows cotton instead of wheator maize, he would rather continue growing food grains to forestall the possibilitythat in any one year the cotton crop might fail or that food grains might be availablefor purchase in the market only at a very high price. All these considerations affect afarmer’s choice of cropping pattern and thus the income–generating capacity of theproject. Yet all are sensible decisions in the farmer’s view. In the analytical system

presented here, we will try to identify the cropping pattern that we think the farmerwill most probably select, and then we will judge the effects of that pattern on hisincremental income and, thus, on the new income generated by the project.

For private business firms or government corporations, a major objective is tomaximize net income, yet both have significant objectives other than simply makingthe highest profit possible. Both will want to diversify their activit ies to reduce r isk.The private store owner may have a preference for leisure, which leads him to hire amanager to help operate his store, especially during late hours. This reduces theincome–since the manager must be paid a salary–but it is a sensible choice. For policyreasons, a public bus corporation may decide to maintain services even in less denselypopulated areas or at off–peak hours and thereby reduce its net income. In theanalytical system here, we first identify the operating pattern that the firms in theproject will most likely follow and then build the accounts to assess the effects of thatpattern on the income–generating capacity of the project.

A society as a whole will have as a major objective increased national income,but it clearly will have many significant, additional objectives. One of the mostimportant of these is income distr ibution. Another is simply to increase the numberof productive job opportunities so that unemployment may be reduced–which maybe different from the objective of income distribution itself. Yet another objectivemay be to increase the proportion of savings in any given period so there will be moreto invest, faster growth, and, hence, more income in the future. Or, there may beissues to address broader than narrow economic considerations–such as the desire toincrease regional integration, to upgrade the general level of education, to improverural health, or to safeguard national security. Any of these objectives might lead tothe choice of a project (or a form of a project) that is not the alternative that wouldcontribute most to national income narrowly defined.

No formal analytical system for project analysis could possibly take into accountall the various objectives of every participant in a project. Some selection will have tobe made. In the analyt ical system here, we wil l take as formal cr i ter ia verystraightforward objectives of income maximization and accommodate other objectivesat other points in the process of project selection. The justification for this is that inmost developing countries increased income is probably the single most importantobjective of individual economic effort, and increased national income is probablythe most important objective of national economic policy.

For farms, we will take as the objective maximizing the incremental net benefit–the increased amount the farm family has to live on as a result of participating in theproject–derived as outlined. For a private business firm or corporation in the publicsector, we will take as the objective maximizing the incremental net income, to whichwe will return. And for the economic analysis conducted from the standpoint of thesociety as a whole, we will take as the objective maximizing the contr ibution theproject makes to the national income–the value of all final goods and services producedduring a particular period, generally a year. This is virtually the same objective, exceptfor minor formal variations in definition, as maximizing gross domestic product (GDP).

It is important to emphasize that taking the income a project will contribute to asociety as the formal analytical criterion in economic, analysis does not downgradeother objectives or preclude our considering them. Rather, we will simply treat

Ecology, Capitalism and the New Agricultural Economy

consideration of other objectives as separate decisions. Using our analytical system,we can judge which among alternative projects or alternative forms of a particularproject will make an acceptable contribution to national income. This will enable usto recommend to those who must make the investment decision a project that has ahigh income–generating potential and also will make a significant contribution toother social objectives. For example, from among those projects that make generallythe same contribution to increased income, we can choose the one that has the mostfavourable effects on income distr ibution, or the one that creates the most jobs, orthe one that is the most attractive among those in a disadvantaged region.

Thus, in the system of economic analysis discussed here, anything that reducesnational income is a cost and anything that increases national income is a benefit.Since our objective is to increase the sum of all final goods and services, anything thatdirectly reduces the total final goods and services is obviously a cost, and anythingthat directly increases them is clearly a benefit. But recall, also, the intricate workingsof the economic system. When the project analysed uses some intermediate good orservice–something that is used to produce something else–by a chain of events iteventually reduces the total final goods and services available elsewhere in theeconomy.

On the one hand, if we divert an orange that can be used for direct consumption–and thus is a final good–to the production of orange juice, also a final good, we arereducing the total available final goods and services, or national income, by the valueof the orange and increasing it by the value of the orange juice. On the other hand, ifwe use cement to line an irrigation canal, we are not directly reducing the final goodsand services available; instead, we are simply reducing the availability of an intermediategood. But the consequence of using the cement in the irrigation project is to shift thecement away from some other use in the economy.

This, in turn, reduces production of some other good, and so on through thechain of events until, finally, the production of final goods and services, the nationalincome, is reduced. Thus, using cement in the project is a cost to the economy. Howmuch the national income will be reduced by using the cement for the project is partof what we must estimate when we turn, to deriving economic values. On the benefitside, we have a similar pattern. Lining a canal increases available water that, in turn,may increase wheat production, and so on through a chain of events until in the endthe total amount of bread is increased.

By this mechanism, the project leads to an increase in the total amount of finalgoods and services, which is to say it increases the national income. Again, part of theanalyst’s task in the economic analysis is to estimate the amount of this increase innational income available to the society; that is, to determine whether, and by howmuch, the benefits exceed the costs in terms of national income. If this rather simpledefinition of economic costs and benefits is kept in mind, possible confusion will beavoided when shadow prices are used to value resource flows, a matter taken up.

Note that, by defining our objective for economic analysis in terms of change innational income, we are defining it in real terms. (Real terms, as opposed to moneyterms, refer to the physical, tangible characteristics of goods and services.) To animportant degree, economic analysis, in contrast to financial analysis, consists in tracingthe real resource flows induced by an investment rather than the investment’s monetary

Ecology, Capitalism and the New Agricultural Economy

effects. With these objectives defined, we may then say that in financial analysis ournumeraire–the common measurement used as the unit of account–is a unit ofcurrency, generally domestic currency, whereas in economic analysis our numeraireis a unit of national income, generally also expressed in domestic currency. We willreturn to this topic in our discussion of determining economic values.

In the economic analysis we will assume that all financing for a project comesfrom domestic sources and that all returns from the project go to domestic residents.This is one reason why we identify our social objective with the gross domestic product(GDP) instead of the more familiar gross national product (GNP). This convention–almost universally accepted by project analysts–separates the decision of how good aproject is in its income–generating potential from the decision of how to finance it.

The actual terms of financing available for a particular project will not influencethe evaluation. Instead, we will assume that the proposed project is the best investmentpossible and that financing will then be sought for it at the best terms obtainable.This convention serves well whenever financing can be used for a range of projects oreven versions of roughly the same project. The only case in which it does not holdwell is the rather extreme case in which foreign financing is very narrowly tied to aparticular project and will be lost if the project is not implemented. Then the analystmay be faced with the decision of implementing a lower–yielding project with foreignfinancing or choosing a higher–yielding alternative but losing the foreign loan.

“With” and “Without” Comparisons

Project analysis tr ies to identify and value the costs and benefits that will arisewith the proposed project and to compare them with the situation as it would bewithout the project. The difference is the incremental net benefit arising from theproject investment. This approach is not the same as comparing the situation “before”and “after” the project. The before–and–after comparison fails to account for changesin production that would occur without the project and thus leads to an erroneousstatement of the benefit attributable to the project investment.

A change in output without the project can take place in two kinds of situations.The most common is when production in the area is already growing, if only slowly,and will probably continue to grow during the life of the project. The objective of theproject is to increase growth by intensifying production. In Syria at the time the FirstLivestock Development Project was appraised, for example, production in the nationalsheep flock was projected to grow at about 1 per cent a year without the project. Theproject was to increase and stabilize sheep production and the incomes of seminomadicflock owners and sheep fatteners by stabilizing the availability of feed and improvingveterinary services. With the project, national flock production was projected to growat the rate of 3 per cent a year. In this case, if the project analyst had simply comparedthe output before and after the project, he would have erroneously attributed thetotal increase in sheep production to the project investment. Actually, what can beattr ibuted to the project investment is only the 2 per cent incremental increase inproduction in excess of the 1 per cent that would have occurred anyway.

A change in output can also occur without the project if production would actuallyfall in the absence of new investment. In Guyana, on the north coast of South America,rice and sugarcane are produced on a strip of clay and silt soil edging the sea. The

Ecology, Capitalism and the New Agricultural Economy

coast was subject to erosion from wave action. Under the Sea Defence Project, thegovernment of Guyana has built seawalls to prevent the erosion. The benefit fromthis project, then, is not increased production but avoiding the loss of agriculturaloutput and sites for housing. A simple before–and–after comparison would fail toidentify this benefit.

In some cases, an investment to avoid a loss might also lead to an increase inproduction, so that the total benefit would arise partly from the loss avoided andpartly from increased production. In Pakistan, many areas are subject to progressivesalinization as a result of heavy irr igation and the waterlogging that is in partattr ibutable to seepage from irrigation canals. Capillary action brings the water to thesurface where evaporation occurs, leaving the salt on the soil. If nothing is done tohalt the process, crop production will fall. A project is proposed to line some of thecanals, thus to reduce the seepage and permit better drainage between irrigations.The proposed project is expected to arrest salinization, to save for profitable use theirrigation water otherwise lost to seepage, and to help farmers increase their use ofmodern inputs. The combination of measures would not only avoid a loss but alsolead to an increase in production. Again, a simple before–and–after comparison wouldfail to identify the benefit realised by avoiding the loss.

Of course, if no change in output is expected in the project area without theproject, then the distinction between the before–and–after comparison and the with–and–without comparison is less crucial. In some projects the prospects for increasingproduction without new investment are minimal. In the Kemubu Irrigation Project innortheastern Malaysia, a pump irrigation scheme was built that permitted farmers toproduce a second rice crop during the dry season. Without the project, most of thearea was used for grazing, and with the help of residual moisture or small pumpssome was used to produce tobacco and other cash crops. Production was not likely toincrease because of the limited amount of water available. With the project now inoperation, r ice is grown in the dry season. Of course, the value of the second ricecrop could not be taken as the total benefit from the project. From this value must bededucted the value forgone from the grazing and the production of cash crops. Onlythe incremental value could be attr ibuted to the new investment in pumps and canals.

Another instance where there may be no change in output without the project isthe obvious one found in some settlement projects. Without the project there may beno economic use of the area at all. In the Alto Turi Land Settlement Project innortheastern Brazil, settlers established their holdings by clearing the forest, plantingupland rice, and then establishing pasture for production of beef cattle. At the timethe settlers took up their holdings the forest had not been economically exploited–nor was it likely to be, at least for many years, in the absence of the project. In thiscase, the output without the project would be the same as the output before theproject.

Direct Transfer Payments

Some entries in financial accounts really represent shifts in claims to goods andservices from one entity in the society to another and do not reflect changes in nationalincome. These are the so–called direct transfer payments, which are much easier toidentify if our definition of costs and benefits is kept in mind. In agricultural project

Ecology, Capitalism and the New Agricultural Economy

analysis four kinds of direct transfer payments are common: taxes, subsidies, loans,and debt service (the payment of interest and repayment of principal).

Take taxes, for example. In financial analysis a tax payment is clearly a cost.When a farmer pays a tax, his net benefit is reduced. But the farmer’s payment of taxdoes not reduce the national income. Rather, it transfers income from the farmer tothe government so that this income can be used for social purposes presumed to bemore important to the society than the increased individual consumption (orinvestment) had the farmer retained the amount of the tax. Because payment of taxdoes not reduce national income, it is not a cost from the standpoint of the society asa whole. Thus, in economic analysis we would not treat the payment of taxes as a costin project accounts. Taxes remain a part of the overall benefit stream of the projectthat contributes to the increase in national income.

Of course, no matter what form a tax takes, it is still a transfer payment–whethera direct tax on income or an indirect tax such as a sales tax, an excise tax, or a tariffor duty on an imported input for production. But some caution is advisable here.Taxes that are treated as a direct transfer payment are those representing a diversionof net benefit to the society. Quite often, however, government charges for goodssupplied or services rendered may be called taxes. Water rates, for example, may beconsidered a tax by the farmer, but from the standpoint of the society as a whole theyare a payment by the farmer to the irrigation authority in exchange for water supplied.Since building the irrigation system reduces national income, the farmer’s paymentfor the water is part of the cost of producing the crop, the same as any other paymentfor a production input. Other payments called taxes may also be payments for goodsand services rendered rather than transfers to the government. A stevedoring chargeat the port is not a tax but a payment for services and so would not be treated as aduty would be. Whether a tax should be treated as a transfer payment or as a paymentfor goods and services depends on whether the payment is a compensation for goodsand services needed to carry out the project or merely a transfer, to be used forgeneral social purposes, of some part of the benefit from the project to the society asa whole.

Subsidies are simply direct transfer payments that flow in the opposite directionfrom taxes. If a farmer is able to purchase fertilizer at a subsidized price, that willreduce his costs and thereby increase his net benefit, but the cost of the fertilizer inthe use of the society’s real resources remains the same. The resources needed toproduce the fertilizer (or import it from abroad) reduce the national income availableto the society. Hence, for economic analysis of a project we must enter the full cost ofthe fertilizer.

Again, it makes no difference what form the subsidy takes. One form is thatwhich lowers the selling price of inputs below what otherwise would be their marketprice. But a subsidy can also operate to increase the amount the farmer receives forwhat he sells in the market, as in the case of a direct subsidy paid by the governmentthat is added to what the farmer receives in the market. A more common means toachieve the same result does not involve direct subsidy. The market price may bemaintained at a level higher than it otherwise would be by, say, levying an importduty on competing imports or forbidding competing imports altogether. Although itis not a direct subsidy, the difference between the higher controlled price set by such

Ecology, Capitalism and the New Agricultural Economy

measures and the lower price for competing imports that would prevail without suchmeasures does represent an indirect transfer from the consumer to the farmer.

Credit transactions are the other major form of direct transfer payment inagricultural projects. From the standpoint of the farmer, receipt of a loan increasesthe production resources he has available; payment of interest and repayment ofprincipal reduce them. But from the stand–point of the economy, things look different.Does the loan reduce the national income available? No, it merely transfers the controlover resources from the lender to the borrower. Perhaps one farmer makes the loanto his neighbour. The lending farmer cannot use the money he lends to buy fertilizer,but the borrowing farmer can. The use of the fertilizer, of course, is a cost to thesociety because it uses up resources and thus reduces the national income. But theloan transaction does not itself reduce the national income; it is, rather, a direct transferpayment. In reverse, the same thing happens when the farmer repays his loan. Thefarmer who borrowed cannot buy fertilizer with the money he uses to repay the loanhis neighbour made, but his neighbour can. Thus, the repayment is also a directtransfer payment.

Some people find the concept of transfer payments easier to understand if it isstated in terms of real resource flows. Taking this approach in economic analysis, wesee that a tax does not represent a real resource flow; it represents only the transferof a claim to real resource flows. The same holds true for a direct subsidy thatrepresents the transfer of a claim to real resources from, say, an urban consumer to afarmer. This line of reasoning also applies to credit transactions. A loan representsthe transfer of a claim to real resources from the lender to the borrower. When theborrower pays interest or repays the principal, he is transferring the claim to the realresources back to the lender–but neither the loan nor the repayment represents, initself, use of the resources.

COSTS OF AGRICULT URAL PROJECTS

In almost all project analyses, costs are easier to identify (and value) than benefits.In every instance of examining costs, we will be asking ourselves if the item reducesthe net benefit of a farm or the net income of a firm (our objectives in financialanalysis), or the national income (our objective in economic analysis).

Physical Goods

Rarely will physical goods used in an agricultural project be difficult to identify.For such goods as concrete for irrigation canals, fertilizer and pesticides for increasingproduction, or materials for the construction of homes in land settlement projects, itis not the identification that is difficult but the technical problems in planning anddesign associated with finding out how much will be needed and when.

Labour

Neither will the labour component of agricultural projects be difficult to identify.From the highly skilled project manager to the farmer maintaining his orchard whileit is coming into production, the labour inputs raise less a question of what than ofhow much and when. Labour may, however, raise special valuation problems that callfor the use of a shadow price. Confusion may also arise on occasion in valuing family

Ecology, Capitalism and the New Agricultural Economy

labour. Valuing family labour will be discussed with farm budgets and the overallquestion of valuing unskilled labour will be taken up.

Land

By the same reasoning, the land to be used for an agricultural project will not bedifficult to identify. It generally is not difficult to determine where the land necessaryfor the project will be located and how much will be used. Yet problems may arise invaluing land because of the very special kind of market conditions that exist whenland is transferred from one owner to another. These valuation problems will also beconsidered with farm budgets and with determining economic values.

Contingency Allowances

In projects that involve a significant init ial investment in civil works, theconstruction costs are generally estimated on the initial assumption that there will beno modifications in design that would necessitate changes in the physical work; noexceptional conditions such as unanticipated geological formations; and no adversephenomena such as floods, landslides, or unusually bad weather. In general, projectcost estimates also assume that there will be no relative changes in domestic orinternational prices and no inflation during the investment period. It would clearly beunrealistic to rest project cost estimates only on these assumptions of perfectknowledge and complete price stability. Sound project planning requires that provisionbe made in advance for possible adverse changes in physical conditions or prices thatwould add to the baseline costs. Contingency allowances are thus included as a regularpart of the project cost estimates.

Contingency allowances may be divided into those that provide for physicalcontingencies and those for price contingencies. In turn, price contingency allowancescomprise two categories, those for relative changes in price and those for generalinflation. Physical contingencies and price contingencies that provide for increases inrelative costs underlie our expectation that physical changes and relative price changesare likely to occur, even though we cannot forecast with confidence just how theirinfluence will be felt. The increase in the use of real goods and services representedby the physical contingency allowance is a real cost and will reduce the final goodsand services available for other purposes; that is, it will reduce the national incomeand, hence, is a cost to the society. Similarly, a rise in the relative cost of an itemimplies that its productivity elsewhere in the society has increased; that is, its potentialcontribution to national income has risen. A greater value is forgone by using theitem for our project; hence, there is a larger reduction in national income. Physicalcontingency allowances and price contingency allowances for relative changes in price,then, are expected–if unallocated–project costs, and they properly form part of thecost base when measures of project worth are calculated.

General inflation, however, poses a different problem. As we will note in discussingfuture prices, in project analysis the most common means of dealing with inflation isto work in constant prices, on the assumption that all prices will be affected equallyby any rise in the general price level. This permits valid comparisons among alternativeprojects. If inflation is expected to be significant, however, provision for its effects onproject costs needs to be made in the project financing plan so that an adequate

Ecology, Capitalism and the New Agricultural Economy

budget is obtained. Contingency allowances for inflation would not, however, beincluded among the costs in project accounts other than the financing plan.

Taxes

Recall that the payment of taxes, including duties and tariffs, is customarily treatedas a cost in financial analysis but as a transfer payment in economic analysis (sincesuch payment does not reduce the national income). The amount that would bededucted for taxes in the financial accounts remains in the economic accounts aspart of the incremental net benefit and, thus, part of the new income generated bythe project.

Debt Service

The same approach applies to debt service–the payment of interest and therepayment of capital. Both are treated as an outflow in financial analysis. In economicanalysis, however, they are considered transfer payments and are omitted from theeconomic accounts. Treatment of interest during construction can give r ise toconfusion. Lending institutions sometimes add the value of interest during constructionto the principal of the loan and do not require any interest payment until the projectbegins to operate and its revenues are flowing. This process is known as “capitalizing”interest.

The amount added to the principal as a result of capitalizing interest duringconstruction is similar to an additional loan. Capitalizing interest defers interest cost,but when the interest payments are actually due, they will, of course, be larger becausethe amount of the loan has been increased. From the standpoint of economic analysis,the treatment of interest during construction is clear. It is a direct transfer paymentthe same as any other interest payment, and it should be omitted from the economicaccounts. Often interest during construction is simply added to the capital cost of theproject. To obtain the economic value of the capital cost, the amount of the interestduring construction must be subtracted from the capital cost and omitted from theeconomic account. In economic analysis, debt service is treated as a transfer withinthe economy even if the project will actually be financed by a foreign loan and debtservice will be paid abroad. This is because of the convention of assuming that allfinancing for a project will come from domestic sources and all returns from theproject will go to domestic residents. This convention, as noted earlier, separates thedecision of how good a project is from the decision of how to finance it. Hence, evenif it were expected that a project would be financed, say, by a World Bank loan, thedebt service on that loan would not appear as a cost in the economic accounts of theproject analysis.

Sunk Costs

Sunk costs are those costs incurred in the past upon which a proposed newinvestment will be based. Such costs cannot be avoided, however poorly advised theymay have been. When we analyse a proposed investment, we consider only futurereturns to future costs; expenditures in the past, or sunk costs, do not appear in ouraccounts. In practice, if a considerable amount has already been spent on a project,the future returns to the future costs of completing the project would probably be

Ecology, Capitalism and the New Agricultural Economy

quite attractive even if it is clear in retrospect that the project should never have been begun. The ridiculous extreme is when only one dollar is needed to complete a project, even a rather poor one, and when no benefit can be realised until the project is completed. The “return” to that last dollar may well be extremely high, and it would be clearly worthwhile to spend it. But the argument that because much has already been spent on a project it therefore must be continued is not a valid criterion for decision. There are cases in which it would be preferable simply to stop a project midway or to draw it to an early conclusion so that future resources might be freed for higher–yielding alternatives.

For evaluating past investment decisions, it is often desirable to do an economicand financial analysis of a completed project. Here, of course, the analyst would comparethe return from all expenditures over the past life of the project with all returns. Butthis kind of analysis is useful only for determining the yield of past projects in the hopethat judgments about future projects may be better informed. It does not help us decidewhat to do in the present. Money spent in the past is already gone; we do not have asone of our alternatives not to implement a completed project.

TAN GIBLE BENEFITS OF AGRICULT URAL PROJECTS

Tangible benefits of agricultural projects can arise either from an increased valueof production or from reduced costs. The specific forms in which tangible benefitsappear, however, are not always obvious, and valuing them may be quite difficult.

Increased Production

Increased physical production is the most common benefit of agricteulturalprojects. An irrigation project permits better water control so that farmers can obtainhigher yields. Young trees are planted on cleared jungle land to increase the areadevoted to growing oil palm. A credit project makes resources available for farmersto increase both their operating expenditures for current production–for fertilizers,seeds, or pesticides–and their investment–for a tubewell or a power thresher. Thebenefit is the increased production from the farm. In a large proportion of agriculturalprojects the increased production will be marketed through commercial channels. Inthat case identifying the benefit and finding a market price will probably not provetoo difficult, although there may be a problem in determining the correct value to usein the economic analysis.

In many agricultural projects, however, the benefits may well include increasedproduct ion consumed by the farm family itself. Such is the case in irr igat ionrehabilitation projects along the north coast of Java. The home–consumed productionfrom the projects increased the farm families’ net benefit and the national incomejust as much as if it had been sold in the market. Indeed, we could think of thehypothetical case of a farmer selling his output and then buying it back. Since home–consumed production contributes to project objectives in the same way as marketedproduction, it is clearly part of the project benefits in both financial and economicanalysis. Omitting home–consumed production will tend to make projects that producecommercial crops seem relatively high–yielding, and it could lead to a poor choiceamong alternative projects. Failure to include home–consumed production will alsomean underestimating the return to agricultural investments relative to investmentsin other sectors of the economy.

Ecology, Capitalism and the New Agricultural Economy

When home–consumed crops will figure prominently in a project, the importanceof careful financial analysis is increased. In this case, it is necessary to estimate notonly the incremental net benefit–including the value of home–consumed productionand money from off–farm sales–but also the cash available to the farmer. From theanalysis of cash income and costs, one can determine if farmers will have the cash inhand to purchase modern inputs or to pay their credit obligations. It is possible tohave a project in which home–consumed output increases enough for the return tothe economy as a whole to be quite attractive, but in which so little of the increasedproduction is sold that farmers will not have the cash to repay their loans.

Quality Improvement

In some instances, the benefit from an agricultural project may take the form ofan improvement in the quality of the product. For example, the analysis for theLivestock Development Project in Ecuador, which was to extend loans to producersof beef cattle, assumed that ranchers would be able not only to increase their cattleproduction but also to improve the quality of their animals so that the average liveprice of steers per kilogram would rise from S/5.20 to S/6.40 in constant value termsover the twelve–year development period. (The symbol for Ecuadorian sucres is S/ .)Loans to small dairy farmers in the Rajasthan Smallholder Dairy Improvement Projectin India are intended to enable farmers not only to increase output but also to improvethe quality of their product. Instead of selling their milk to make ghee (cooking oilfrom clarified butter), farmers will be able to sell it for a higher price in the Jaipurfluid milk market. As in these examples, both increased production and qualityimprovement are most often expected in agricultural projects, although both may notalways be expected. One word of warning: both the rate and the extent of the benefitfrom quality improvement can easily be overestimated.

Change in Time of Sale

In some agricultural projects, benefits will arise from improved marketing facilitiesthat allow the product to be sold at a time when prices are more favourable. A grainstorage project may make it possible to hold grain from the harvest period, when theprice is at its seasonal low, until later in the year when the price has risen. The benefitof the storage investment arises out of this change in “temporal value.”

Change in Location of Sale

Other projects may include investment in trucks and other transport equipmentto carry products from the local area where prices are low to distant markets whereprices are higher. For example, the Fruit and Vegetable Export Project in Turkeyincluded provision for trucks and ferries to transport fresh produce from southeasternTurkey to outlets in the European Common Market. The benefits of such projectsarise from the change in “locational value.” In most cases the increased value arisingfrom marketing projects will be split between farmers and marketing firms as theforces of supply and demand increase the price at which the farmer can sell in theharvest season and reduce the monopolistic power of the marketing firm or agency.Many projects are structured to ensure that farmers receive a larger part of the benefit

Ecology, Capitalism and the New Agricultural Economy

by making it possible for them to build storage. Facilities on their farms or to bandtogether into cooperatives, but an agricultural project could also involve a privatemarketing firm or a government agency, in which case much of the benefit couldaccrue to someone other than farmers.

Changes in Product form (Grading and Processing)

Projects involving agricultural processing industries expect benefits to arise froma change in the form of the agricultural product. Farmers sell paddy rice to millerswho, in turn, sell polished r ice.

The benefit to the millers arises from the change in form. Canners preserve fruit,changing its form and making it possible at a lower cost to change its time or locationof sale. Even a simple processing facility such as a grading shed gives rise to a benefitthrough changing the form of the product from run–of–the–orchard to sorted fruit.In the Himachal Pradesh Apple Marketing Project in northern India, the value of theapples farmers produce is increased by sorting; the best fruit is sold for freshconsumption while fruit of poorer quality is used to make a soft drink concentrate. Inthe process, the total value of the apples is increased.

Cost Reduction Through M echanization

The classic example of a benefit arising from cost reduction in agricultural projectsis that gained by investment in agricultural machinery to reduce labour costs. Examplesare tubewells substituting for hand–drawn or animal–drawn water, pedal threshersreplacing hand threshing, or (that favourite example) tractors replacing draft animals.Total production may not increase, but a benefit arises because the costs have beentrimmed (provided, of course, that the gain is not offset by displaced labour thatcannot be productively employed elsewhere).

Reduced Transport CostsCost reduction is a common source of benefit wherever transport is a factor.

Better feeder roads or highways may reduce the cost of moving produce from thefarm to the consumer. The benefit realised may be distributed among farmers, truckers,and consumers.

Losses Avoided

In discussing with–and–without comparisons in project analyses earlier we notedthat in some projects the benefit may arise not from increased production but from aloss avoided. This kind of benefit stream is not always obvious, but it is one that thewith–and–without test tends to point out clearly. In Jamaica, lethal yellowing isattacking the Jamaica Tall variety of coconut.

The government has undertaken a large investment to enable farmers to plantMalayan Dwarf coconuts, which are resistant to the disease. Total production willchange very little as a result of the investment, yet both the farmers and the economywill realise a real benefit because the new investment prevents loss of income. TheLower Egypt Drainage Project involves the largest single tile drainage system in theworld. The benefit will ar ise not from increasing production in the already highlyproductive Nile delta, but from avoiding losses due to the waterlogging caused by

Ecology, Capitalism and the New Agricultural Economy

year–round irr igation from the Aswan High Dam. Sometimes a project increasesoutput through avoiding loss–a kind of double classification, but one that in practicecauses no problem. Proposals to eradicate foot–and–mouth disease in Latin Americaenvision projects by which the poor physical condition or outright death of animalswill be avoided. At the same time, of course, beef production would be increased.

Other kinds of Tangible Benefits

Although we have touched on the most common kinds of benefi ts fromagricultural projects, those concerned with agricultural development will find otherkinds of tangible, direct benefits most often in sectors other than agriculture. Transportprojects are often very important for agricultural development. Benefits may arise notonly from cost reduction, as noted earlier, but also from time savings, accidentreduction, or development activities in areas newly accessible to markets. If newhousing for farmers has been included among the costs of a project, as is often thecase in land settlement and irrigation projects, then among the benefits will be anallowance for the rental value of the housing. Since this is an imputed value, there arevaluation problems that will be noted later.

Secondary Costs and Benefits

Projects can lead to benefits created or costs incurred outside the project itself.Economic analysis must take account of these external, or secondary, costs and benefitsso they can be properly attributed to the project investment. (Of course, this appliesonly in economic analysis; the problem does not arise in financial analysis.)

When market prices are used in economic analysis, as has been the custom inthe United States for water resource and other public works projects, it is necessaryto estimate the secondary costs and benefits and then add them to the direct costsand benefits. This is a theoretically difficult process, and one easily subject to abuse.There is an extensive and complex literature on secondary costs and benefits thatspecifically addresses this analytical approach. For those who would like to reviewthis literature, which outlines the historical development of the discussion. A highlytechnical review of the arguments can be found in M ishan.

Instead of adding on secondary costs and benefits, one can either adjust the valuesused in economic analysis or incorporate the secondary costs and benefits in theanalysis, thereby in effect converting them to direct costs and benefits. This is theapproach taken in most project analyses carried out by international agencies, in thesystems based on shadow prices proposed in more recent literature on project analysis,and in the analytical system presented here.

Incorporating secondary costs or benefits in project analysis can be viewed as ananalytical device to account for the value added that arises outside the project but is aresult of the project investment. In the analytical system here, as will be explained inmore detail, every item is valued either at its opportunity cost or at a value determinedby a consumer’s willingness to pay for the item. The effect is to eliminate all transfers–both the direct transfers discussed and the indirect transfers that arise because pricesdiffer from opportunity costs. By this means we attribute to the project investment allthe value added that arises from it anywhere in the society. Hence, it is not necessaryto add on the secondary costs and benefits separately; to do so would constitute

Ecology, Capitalism and the New Agricultural Economy

double counting. One qualification must be made. If a project has a substantial effecton the quantity other producers are able to sell in imperfect markets–and most marketsare imperfect–there may be gains or losses not accurately accounted for.

Squire and van der Tak cite the example of an improved road that diverts trafficfrom a railway that charges rates below marginal cost. This diversion entails a socialgain from reduced rail traffic (in avoiding the social losses previously incurred on thistraffic) in addition to the benefits to the road users measured directly. In agriculturalprojects, this is a rather infrequent case because prices generally are more flexiblethan in other sectors of the economy. In any event, in the practice of contemporaryproject analysis the size of these gains or losses is generally assumed to be insignificant,and no provision is made for them in the analysis.

Although using shadow prices based on opportunity costs or willingness to paygreatly reduces the difficulty of dealing with secondary costs and benefits, there stillremain many valuation problems related to goods and services not commonly tradedin competitive markets. One way to avoid some of these problems is to treat a groupof closely related investments as a single project. For example, it is common to considerthe output of irrigation projects as the increased farm production, since valuingirrigation water is difficult.

Another example is found in development roads built into inaccessible areas. Itis argued that the production arising from the induced investment activities ofotherwise unemployed new settlers should be considered a secondary benefit of theroad investment. One way of avoiding the problem is to view this case as a landsettlement project in which the road is a component.

New production is then properly included among the direct benefits of the projectand can be included in the project accounts at market or shadow prices, and noattempt need be made to allocate the benefits between road investment and the otherkinds of investment that must be made by settlers and government if settlement is tosucceed.

Another group of secondary costs and benefits has been called “technologicalspillover” or “technological externalities.” Adverse ecological effects are a commonexample, and the side effects of irrigation development are often cited as an illustration.A dam may reduce r iver flow and lead to increased costs for dredging downstream.

New tubewell development may have adverse effects on the flow of existing wells.Irrigation development may reduce the catch of fish or may lead to the spread ofschistosomiasis. When these technological externalities are significant and can beidentified and valued, they should be treated as a direct cost of the project (as mightbe the case for reduced fish catches), or the cost of avoiding them should be includedamong the project costs (as would be the case for increased dredging or for investmentto avoid pollution).

It is sometimes suggested that project investments may give rise to secondarybenefits through a “multiplier effect.” The concept of the multiplier is generally thoughtof in connection with economies having excess capacity. If excess capacity exists, aninitial investment might cause additional increases in income as successive rounds ofspending reduce excess capacity. In developing countries, however, it is shortage ofcapacity that is characteristic. Thus, there is little likelihood of excess capacity givingrise to additional benefits through the multiplier. In any event, most of the multiplier

Ecology, Capitalism and the New Agricultural Economy

effect is accounted for if we shadow–price at opportunity cost. Since the opportunitycost of using excess capacity is only the cost of the raw materials and labour involved,only variable costs will enter the project accounts until existing excess capacity is usedup.

It is also sometimes suggested that there is a “consumption multiplier effect” asproject benefits are received by consumers. Consumption multipliers are very difficultto identify and value. In any case, they presumably would be much the same foralternative investments, so omitting them from a project analysis would not affect therelative ranking of projects.

IN TAN GIBLE COST S AND BENEFITS

Almost every agricultural project has costs and benefits that are intangible. Thesemay include creation of new job opportunities, better health and reduced infantmortality as a result of more rural clinics, better nutrition, reduced incidence ofwaterborne disease as a result of improved rural water supplies, national integration,or even national defence. Such intangible benefits are real and reflect true values.They do not, however, lend themselves to valuation. How does one derive a figure forthe long–term value of a child’s life saved, or for the increased comfort of a populationspared preventable, debil i tat ing disease? Benefi ts of this kind may require amodification of the normal benefit–cost analysis to a least–cost type of analysis, atopic we will take up when we discuss valuation. Because intangible benefits are afactor in project selection, it is important that they be carefully identified and, whereat all possible, quantified, even though valuation is impossible. For example, howmany children will enroll in new schools? How many homes will benefit from a bettersystem of water supply? How many infants will be saved because of more rural clinics?

In most cases of intangible benefits arising from an agricultural project, the costsare tangible enough: construction costs for schools, salaries for nurses in a public healthsystem, pipes for rural water supplies, and the like. Intangible costs, however, do existin projects. Such costs might be incurred if new projects disrupt traditional patterns offamily life, if development leads to increased pollution, if the ecological balance is upset,or if scenic values are lost. Again, although valuation is impossible, intangible costsshould be carefully identified and if possible quantified. In the end, every project decisionwill have to take intangible factors into account through a subjective evaluation becauseintangible costs can be significant and because intangible benefits can make an importantcontribution to many of the objectives of rural development.

PRICIN G PROJECT COSTS AND BENEFITS

Once costs and benefits have been identified, if they are to be compared theymust be valued. Since the only practical way to compare differing goods and servicesdirectly is to give each a money value, we must find the proper prices for the costsand benefits in our analysis.

Prices Reflect Value

Underlying all financial and economic analysis is an assumption that prices reflectvalue–or can be adjusted to do so. In this we will discuss how to find these prices.Before proceeding, however, it is necessary to define two economic concepts crucial

Ecology, Capitalism and the New Agricultural Economy

to project analysis: marginal value product and opportunity cost. Consider a Filipinofarmer who applies nitrogenous fertilizer to his rice. In the 1979–80 season thisfertilizer cost him P3.98 per kilogram of elemental nitrogen (N), and he receivedP1.050 for every kilogram of paddy rice he sold. Table shows the responsiveness ofhis rice to fertilizer. At low levels of application, fertilizer has a great effect on riceyield. Increasing the application from no fertilizer to 10 kilograms of elemental nitrogenincreased the farmer’s.

T able. Crop Response to N itrogen

Fertilizer in the Philippines

Paddy Rice Shelled M aize

Nitrogen Yield Value M VP Yield Value M VP

(kgs/ha)(kgs/ha) (kgs/ha)

0 3,442 3,614 2,600 2,688

10 3,723 3,909 29.50 2,830 2,926 23.80

20 3,971 4,170 26.10 3,040 3,143 21.70

30 4,187 4,396 22.60 3,230 3,340 19.70

40 4,370 4,588 19.20 3,400 3,516 17.60

50 4,520 4,746 15.80 3,550 3,671 15.50

60 4,637 4,869 12.30 3,680 3,805 13.40

70 4,721 4,957 8.80 3,790 3,919 11.40

80 4,772 5,011 5.40 3,880 4,012 9.30

90 4,791 5,031 2.00 3,950 4,084 7.20

100 4,777 5,016 –1.50 4,000 4,136 5.20

110 4,030 4,167 3.10

120 4,040 4,177 1.00

130 4,030 4,167 –1.00

Personal communication from Pedro R. Sandoval, University of the Philippinesat Los Banos, September 1980. Rice responses are based on Changes in Rice Farmingin Selected Areas of Asia (Manila: International Rice Research Institute, 1978), p. 61.Maize responses are based on University of the Philippines at Los Banos ExperimentStation records.

Prices are frotem the Bureau of Agricultural Economics, M inistry of Agriculture,Republic of the Philippines:

• The farm–gate price of elemental nitrogen (N) in 1979–80 was F3.98 perkilogram.

• The farmgate price of paddy rice in 1979–80 was F1.050 per kilogram.• The marginal value product is the extra revenue that comes from increasing

the quantity of an input used by one unit, all other quantities remainingconstant. In this instance, the marginal value product is the increased valueof paddy rice or shelled maize from using 1 additional kilogram of elementalnitrogen. Note that in this table the interval between levels of elementalnitrogen is 10 kilograms. Thus, the marginal value product of elementalnitrogen applied to rice between the 60– and 70–kilogram levels of applicationis the difference in value of output between the two levels divided by 10, or

Ecology, Capitalism and the New Agricultural Economy

P8.80 [(4,957–4,869)–10 = 8.80].• The farm–gate price of shelled yellow maize in 1979–80 was P1.034 per

kilogram.• Beyond application of 100 kilograms of elemental nitrogen, all marginal value

products for paddy rice are negative; therefore, figures for these applicationsof nitrogen to rice are not reported. yield from 3,442 kilograms to 3,723kilograms per hectare and increased the value of his output by P295, fromP3,614 to P3,909. Thus, for every additional kilogram of elemental nitrogenthe farmer applied at this level, he received P29.50 in return (3,909–3,614) _10 = 29.50. The extra revenue from increasing the quantity of an input used,all other quantities remaining constant, is the marginal value product of theinput. In this case, then, the marginal value product of a kilogram of fertilizeris P29.50.

If the farmer could buy fertilizer for P3.98 a kilogram and use it to increaseoutput by PP9.50, it obviously would have paid him to apply more. But as the intensityof application increases, each additional kilogram of fertilizer has less and less effecton production. If the farmer had increased his application from 80 to 90 kilogramsper hectare, he would have increased the value of his production by only P20, fromP5,011 to P5,031, and the marginal value product of a kilogram of fertilizer wouldhave fallen to only P2.00 (5,031–5,011)–10 = 2.00. Since he would have had to payP3.98 per kilogram, it clearly would not have been worthwhile to apply fertilizer atthis rate. In fact, it would only have paid the farmer to apply fertilizer up to the rateat which the marginal value product just equaled the price. For this Filipino farmer, itwould have paid him to apply approximately 80 kilograms of nitrogen: between 70and 80 kilograms the marginal value product of each additional kilogram was someP5.40, whereas between 80 and 90 kilograms it fell to P2.00. Thus, the farmer wouldhave expanded his fertilizer use until he reduced the marginal value product of thefertilizer to its market price, and the market price, therefore, is an estimate of themarginal value product of the fertilizer.

The optimal amount of fertilizer to use will change, of course, when the price offertilizer changes relative to the price of rice. If the relative price of fertilizer were torise, the farmer would respond by reducing the amount of fertilizer he applies,increasing the marginal value product of the fertilizer (but reducing the total amountand value of production) until the marginal value product of the fertilizer again justequals its price. Suppose fertilizer were to double in price to P8.00 per kilogram ofelemental nitrogen, and rice prices remained unchanged. Then, table indicates thefarmer should reduce the amount of fertilizer applied to a hectare from 80 kilogramsto 70 kilograms, since between 60 and 70 kilograms the marginal value product wassome P8.80 but between 70 and 80 kilograms it was only some P5.40. In practice,because of risk and limited resources, the farmer would probably not have appliedthe amounts indicated here. We may consider that the farmer reduces his expectedreturn by some “risk discount.” Even so, the principle we are illustrating remains thesame: the farmer equates the expected marginal value product less some risk discountto the price of fertilizer. If this farmer also grew maize, for which in 1979–80 hewould have received P1.034 per kilogram of shelled grain, table 3–1 indicates it wouldhave paid him (in the absence of risk) to apply some 100 kilograms of elemental

Ecology, Capitalism and the New Agricultural Economy

nitrogen to each hectare, because between 90 and 100 kilograms the marginal valueproduct of a kilogram of nitrogen applied to maize was P5.20, whereas between 100and 110 kilograms the marginal value product fell to P3.10, below the price of fertilizer.

Now, suppose the farmer had limited resources and could not obtain sufficientcredit to increase his fertilizer application on both rice and maize to where the marginalvalue product equaled the price. Suppose the farmer had only 2 hectares, 1 planted inrice and 1 in maize, and resources sufficient to purchase just 80 kilograms of nitrogen.How should he have used it? Should he have put it all on rice and none on maize? Ifhe did, he would have applied fertilizer to his rice at the level where the marginalvalue product was just about equal to its market price. But suppose he had shiftedsome fertilizer, instead, to maize. If he had shifted 10 kilograms, he would have reducedthe value of his rice production by P54– from P5,011 to P4,957, or by P5.40 for eachkilogram shifted–but he could have obtained some P238 for the 10 kilograms appliedto maize, since the marginal value product between 0 and 10 kilograms was someP23.80 per kilogram. In other words, at these levels each kilogram of nitrogen shiftedwould reduce the rice value by P5.40 but increase the value of maize output by someP23.80.

In the language of economics, the opportunity cost of fertilizer shifted from riceto maize was P5.40. Opportunity cost, thus, is the benefit forgone by using a scarceresource for one purpose–in this case applying fertilizer to maize–instead of for itsbest alternative use–in this case using the fertilizer to produce rice. Said another way,the opportunity cost is the return a resource can bring in its next best alternative use.What would be the opportunity cost if the farmer were to move a kilogram of fertilizerin the other direction, back from maize to rice? He would have given up P23.80 togain only P5.40–not a very attractive proposition–and the opportunity cost, obviously,would be some P23.80.

Given his limited resources, it would pay the farmer to shift fertilizer from riceto maize until the marginal value product of fertilizer applied to both crops is thesame. In the case of the Filipino farmer who could buy only 80 kilograms of fertilizer,if on the one hand he were to move 40 kilograms to maize, reducing his applicationon r ice from 80 kilograms to 40 kilograms, he would have increased the marginalvalue product of the fertilizer on his rice to some P15. On the other hand, the 40kilograms shifted away from rice and put on maize would have decreased the marginalvalue product of nitrogen applied to maize also to about P15.

At these levels, there would be no advantage in shifting fertilizer between thetwo crops–the opportunity cost of shifting more fertilizer from rice to maize wouldbe about P15, but the gain would also be only about P15–and the farmer would havereached the optimal level of application to both crops. Note, however, that if thefarmer could somehow have bought as much fertilizer as he wanted at the marketprice of P3.98 per kilogram–perhaps through a credit programme–then the marketprice of fertilizer would have become its opportunity cost, and (in the absence of arisk discount) he should have increased his application to 80 kilograms on rice and100 kilograms on maize.

From a single farmer to the economy as a whole, the same principles apply. In a“perfect” market–one that is highly competitive, with many buyers and sellers, all ofwhom have perfect knowledge about the market–every economic commodity would

Ecology, Capitalism and the New Agricultural Economy

be priced at its marginal value product, since every farmer will have expanded hisfertilizer use to where its marginal value product equals its price, and the same willhave happened for every other item in the economy. That is, the price of every goodand service would exactly equal the value that the last unit utilized contributes toproduction, or the value in use of the item for consumption would exactly balancethe value it could contribute to additional production.

If a unit of goods or services could produce more or bring greater satisfaction insome activity other than its present use, someone would have been willing to bid upits price, and it would have been attracted to the new use. When this price system isin “equilibrium,” the marginal value product, the opportunity cost, and the price willall be equal. Resources will then have been allocated through the price mechanism sothat the last unit of every good and service in the economy is in its most productiveuse or best consumption use. No transfer of resources could result in greater outputor more satisfaction. Without moving further into price theory, we can consider somedirect implications for agricultural projects of the assumption that prices reflect value.

First, as everyone knows, markets are not perfect and are never in completeequilibrium. Hence, prices may reflect values only imperfectly. Even so, there is agreat deal of truth in this price theory based on the model of perfect markets. Ingeneral, the best approximation of the “true value” of a good or service that is fairlywidely bought and sold is its market price. Somebody in the economy is willing to paythis price. One can presume that this buyer will use the item to increase output by atleast as much as its price, or that he is willing to exchange something of value equalto the price to gain the satisfaction of consuming the item. Hence, the market priceof an item is normally the best estimate of its marginal value product and of itsopportunity cost, and most often it will be the best price to use in valuing either acost or a benefit. In financial analysis, as we have noted, the market price is alwaysused. But in economic analysis some other price–a “shadow price”–may be a betterindicator of the value of a good or service; that is, a better estimate of its trueopportunity cost to the economy. When prices other than market prices are used ineconomic analysis, however, the burden of proof is on the analyst.

Finding M arket Prices

Project analyses characteristically are built first by identifying the technical inputsand outputs for a proposed investment, then by valuing the inputs and outputs atmarket prices to construct the financial accounts, and finally by adjusting the financialprices so they better reflect economic values. Thus, the first step in valuing costs andbenefits is finding the market prices for the inputs and outputs, often a difficult taskfor the economist. To find prices, the analyst must go into the market. He mustinquire about actual prices in recent transactions and consult many sources–farmers,small merchants, importers and exporters, extension officers, technical servicepersonnel, government market specialists and statisticians, and published or privatelyheld statistics about prices for both national and international markets. From thesesources the analyst must come up with a figure that adequately reflects the goingprice for each input or output in the project.

Point of First Sale and Farm–Gate Price

Ecology, Capitalism and the New Agricultural Economy

In project analysis, a good rule for determining a market price for agriculturalcommodities produced in the project is to seek the price at the “point of first sale.” Ifthe point of first sale is in a relatively competitive market, then the price at which thecommodity is sold in this market is probably a relatively good estimate of its value ineconomic as well as financial terms. If the market is not reasonably competitive, ineconomic analysis the financial price may have to be adjusted better to reflect theopportunity cost or value in use of the commodity.

For many agricultural projects in which the objective is increased production ofa commodity, the best point of first sale to use is generally the boundary of the farm.We are after what the farmer receives when he sells his product–the “farm–gate”price. The increased value added of the product as it is processed and delivered to amarket arises as a payment for marketing services. This value added is not properlyattr ibuted to the investment to produce the commodity. Rather, it arises from thelabour and capital engaged in the marketing service. Usually the price at point of firstsale can be accepted as the farm–gate price; even if this point is in a nearby villagemarket, the farmer sells his output there and thus earns for himself any fee thatmight be involved in transporting the commodity from the farm to the point of firstsale. But if any new equipment is necessary to enable the farmer to do this–say, a newbullock cart or a new truck–then that new equipment must be shown as a cost incurredto realise the marketing benefit in the project.

In projects producing commodities for well–organized markets, the farm–gateprice may not be too difficult to determine. This would be true for most food grainstraded domestically in substantial quantities. One may think of wheat in most countriesof the M iddle East and South Asia, of rice in South and Southeast Asia, and of maizein much of Latin America. It would also be true of farm products for which theprocessor is generally the first buyer (such as fresh fruit bunches for palm oil inMalaysia or milk in Jamaica), where the price quoted to the farmer is the price on hisfarm, and the firm responsible for the marketing comes to the farm to pick up theproduct.

In many cases, however, the prices in a reasonably competitive market or in theprice records kept by the government statistical service will include services notproperly attributable to the investment in the project itself. This may happen, forinstance, when the only price series available for a product records the prices at whichit has been sold in a central market–such as the price for eggs in Madras, for melonsin Tehran, or for vegetables in Bogota. In that case, the project analyst will have todig deeper to find out how to value the marketing services. Then he can adjust thecentral market price to reduce it to the farm–gate price. The farm–gate price isgenerally the best price at which to value home–consumed production. In some casesit may be extremely difficult to determine just what a realistic farm–gate price is for acrop produced primarily for home consumption because so little of the crop appearson markets. This is the case, for example, for manioc and cocoyam in Africa. On theone hand, some argue that the true value of the crop is overstated if the market priceis used as a basis for valuation because such a small proportion of the product isactually sold. On the other hand, the same crop in different situations may not be sodifficult to value. Manioc is sold extensively in Nigeria to make gari flour, and it iscommonly traded in local markets in tropical Latin America and the Caribbean.

Ecology, Capitalism and the New Agricultural Economy

The farm–gate price may be a poor indicator of the true opportunity cost wewant to use in economic analysis. In Ghana the Marketing Board takes some proportionof the cocoa price as a tax for development purposes. In Thailand, a rice “premium”–that is, a tax on rice exports–effectively keeps the domestic price well below what theinternational market would pay. In these cases, when the commodity is traded itseconomic value would have to be considered higher than the actual farm–gate price,and this price distortion will have to be corrected in the economic analysis. In othercases, just the opposite happens. In Mexico the price of maize is maintained at a highlevel to transfer income to ejidatarios, the small farmers. In M alaysia, the price of riceis supported above world market levels to encourage local production and to reduceimports. In these cases, part of the price does not really reflect the economic value ofthe product–its cost if it could be imported–but rather an indirect income transfer tosmall farmers. Again, this price distortion will have to be corrected in the economicanalysis.

Pricing Intermediate Goods

By emphasizing the point of first sale as a starting point for valuing the output ofour projects, we are also implying that imputed pr ices should be avoided forintermediate goods in our analysis. An intermediate good is an item produced primarilyas an input in the production of another good. If an intermediate good is not freelytraded in a competitive market, we cannot expect to obtain a price established by arange of competitive transactions. Fodder produced on a farm and then fed to thedairy animals on the farm is an example of such an intermediate product. If increasedfodder production is an element in the proposed agricultural project, the analyst wouldavoid valuing it. Instead, the analyst would treat the whole farm as a unit and valuethe milk produced at its point of first sale or value the calves sold as feeder cattle.Treatment of intermediate products will vary from project to project depending onthe particular marketing structures.

In some countries it would hardly make sense in an egg production project tovalue the pullets produced in a pullet production enterprise and then “sell” thesepullets to the egg production enterprise on the same farm. But in other countriesthere might be an active market in pullets, which would mean that we could expectto find a reasonably competitive price to use in the economic analysis. To avoid mostof the problems that might be introduced by trying to impute values for intermediateproducts, the financial accounts in agricultural projects are based on budgets for thewhole farm instead of on budgets for individual activities on the farm; that is, on thebudget for the egg farm as a whole rather than on the budget for a pullet productionactivity.

A frequently encountered intermediate good in agricultural projects is irrigationwater. The “product” of an irrigation system–water–is, of course, really intended toproduce agricultural commodities. The price farmers are charged for the water isgenerally determined administratively, not by any play of competitive market forces.If the analyst were to try to separate the irrigation system from the production itmakes possible, he would be faced with a nearly impossible task of determining thevalue of irr igation water. Hence, it is not surprising that the economic analyses ofmost irr igation projects take as the basis for the benefit stream the value of the

Ecology, Capitalism and the New Agricultural Economy

agricultural products that are offered in a relatively free market at the point of firstsale.

Other Problems in Finding M arket Prices

Considerable confusion often arises in determining the values for two importantinputs in agricultural projects, land and labour. This happens primarily when theanalysis moves from the financial project accounts to the economic analysis. In theaccounts prepared for the financial analysis, the treatment of prices for land andlabour is quite straightforward: the price used is the price actually paid. Thus, if thefarmers in a settlement project are expected to pay the project authority a price forthe land they acquire, perhaps through a series of installments, then the actual pricein the year it is paid is entered in the project accounts. In the financial analysis, we donot question whether this is a “good” price in economic terms. Similarly, if land mustbe bought for the right–of–way for canals in an irrigation project, the actual price tobe paid is entered in the project accounts in the financial analysis. Or, if the projectincludes tenant farmers who will receive help in increasing wheat production, then inthe financial accounts for these tenant farmers the analyst will enter the rent paideach year at the amount actually paid, or at the farm–gate value of the wheat deliveredto the landowner if the tenants pay rent in kind.

If farm accounts are laid out on a with–and–without basis following the formatsuggested in those instances where the project involves only changing the croppingpattern, the cost of the land (in this instance an opportunity cost) need not beseparately entered because of the form of the account. When the net benefit withoutthe project is subtracted from the net benefit with the project, the contribution of theland to the old cropping pattern is also subtracted and only the incremental valueremains.

In valuing labour for the financial analysis accounts, again, the problems arisewhen the financial accounts are adjusted to reflect economic values. For financialanalysis, the analyst enters the amounts actually paid to hired labour, either in wagesor in kind, in the farm budgets or project accounts.

Family labour is treated differently. It is not entered as a cost; instead, the “wages”for the family become a part of the net benefit. Thus, if our project increases the netbenefit, it also in effect increases the family’s income or “wages” for its labour. Again,if we follow the format the account will automatically value the family labour at itsopportunity cost, and the incremental net benefit will reflect any increased return thefamily may receive for its labour. Prices for agricultural commodities generally aresubject to substantial seasonal fluctuation. If this is the case, some decision must bemade about the point in the seasonal cycle at which to choose the price to be used forthe analysis. A good starting point is the farm–gate price at the peak of the harvestseason. This is probably close to the lowest price in the cycle. The line of reasoninghere is that as prices rise during the cycle at least some part of that rise is a result notof the production activities of the farmer but of the marketing services embodied instoring the crop until consumers want it.

But, markets being what they are, there may be an element of imperfection inthe harvest price level. M arket channels may become so glutted that merchants tryactively to discourage farmers from immediately bringing their crop to the market by

Ecology, Capitalism and the New Agricultural Economy

offering a price that even the merchants themselves would admit is too low. Even so,the need to sell immediately to meet debt obligations may force farmers to offer theircrops despite these artificially low, penalty prices.

In some cases, therefore, a price higher than the farm–gate price in the harvestseason may be selected. But there is an obligation here to justify the price chosen asmore valid than the lowest seasonal price. One way to resolve this problem may be toinclude an element of credit in the project design. This would permit farmers towithhold their product from the market until prices have had a chance to rise fromtheir seasonal lows but at the same time to have enough money to meet their cashobligations and family living expenses. The credit element may also include credit forbuilding on–farm storage so that farmers will have a safe place to store their productionuntil they decide to market it at a better price.

Prices vary among grades of product, of course, and picking the proper price forproject analysis may involve making some decisions about quality of the product. Ingeneral, it can be assumed that farmers will produce in the future much the samequality as they have in the past and will market their product ungraded. In manyagricultural projects, however, one objective is to upgrade the quality of productionas well as to increase the total output. Small dairy farmers, for instance, may be ablewith the help of the project investment to meet the sanitation standards of the fluidmilk market and to command a higher price; or reduced time for delivery may holddown sucrose inversion in sugarcane; or better pruning will increase the average sizeof the oranges Moroccan farmers can offer European buyers. In such cases, the properprice to select is the average price expected for the quality to be produced.

A special problem occurs in pricing housing. If project investment includeshousing construction, as would be the case for a settlement project, then one benefitarising from the investment is the rental value of the house. Since the rental valuewill usually be an imputed value rather than a real market price, care must be exercisedin determining it. No more should be allowed for the rental value than would normallybe paid by a prospective tenant family. Nor should more rental value be allowed thanthe family would be expected to pay for a comparable house in the vicinity or in asimilar area elsewhere (if the new settlement is in a distant locale). In particular, thetemptation should be avoided to take as a rental value some arbitrary proportion ofthe housing cost. Otherwise, overly elaborated housing construction might be justifiedsimply by assigning it an unrealistically high imputed value.

Project Boundary Price

Prices used in analyzing agricultural projects are not necessarily farm–gate prices.The concept of a farm–gate price may be expanded to a “project boundary” price if aproject has a marketing component or if it is a purely marketing project. Many projectshave a marketing component, perhaps because there is no competitive channel reachingdown to the farm–gate level for the unprocessed product. Of concern in these projectsare both the farm–gate price (on which to base the estimates of the net benefit to thefarmer) and the price at which the processed product is sold in the market (afterbeing handled in the facilities financed by the project). Such a case is found in theRahad project in the Sudan.

There the Roseires dam on the Blue Nile will provide irrigation water for the

Ecology, Capitalism and the New Agricultural Economy

production of cotton, which will be ginned in new facilities financed by the project.The analyst, of course, is interested in the price of cotton paid to the farmers so thattheir incomes can be estimated. But, since this price is set administratively, it couldnot be used directly in the economic analysis of the project. The analyst is alsointerested in the price of ginned cotton because that is the first product the projectwill actually sell in a reasonably competitive market. In this case, the point of firstsale is f.o.b. (free on board) Port Sudan, and the price there becomes the basis for thebenefit stream.

Predicting Future Prices

Since project analysis is about judging future returns from future investment, asanalysts we are immediately involved in judging just what future prices may be. Thisis a matter of judgment, not mechanics. No esoteric mathematical model exists tocome to the aid of the project analyst; like everyone else he must take into considerationall the facts he can find, seek judgments from those he respects, and then come to aconclusion himself.

It tends to be a rather unsettling process. The only consolation is that careful,considered judgment about the course of future prices is better than giving the matterno thought at all and wasting scarce resources on incompletely planned projects. Wehave been discussing how to find market prices, and it is from these current pricesthat we begin. The best initial guess about future prices is that they will retain thepresent relationships, or perhaps the average relationship they have borne to eachother over the past few years. We must consider, however, whether these averagerelationships will change in the future and how we will deal with a general increase inthe level of prices owing to inflation.

Changes in Relative Prices

We may first raise the question of whether relative prices will change. Will someinputs become more expensive over time in relation to other commodities? Will someprices fall relatively as supplies become more plentiful? Not easy questions to dealwith, but some approaches to answers can be made. In financial analysis, of course, achange in a relative price means a change in the market price structure that producersface either for inputs or for outputs.

A change in a relative price, then, is reflected directly in the project’s financialaccounts. A rise in the relative price of fertilizer reduces the incremental net benefit–the amount the farm family has to live on. It is thus clearly a cost in the farm account.The same line of reasoning can be applied in the financial analysis for any othergroup participating in the project.

A change in the relative price of an item implies a change in its marginalproductivity–that is, a change in its marginal value product–or a change in thesatisfaction i t contr ibutes when i t is consumed. In economic analysis, wheremaximizing national income is the objective, a change in the relative price of an inputimplies a change in the amount that must be forgone by using the item in the projectinstead of elsewhere in the economy; it is therefore a change in the contr ibution theoutput of the project makes to the national income. Thus, changes in relative priceshave a real effect on the project objective and must be reflected in project accounts inthe years when such changes are expected.

Ecology, Capitalism and the New Agricultural Economy

There are several kinds of commodities subject to future changes in relative prices.Most agricultural project analysts would probably agree that the relative price ofenergy–intensive agricultural inputs is likely to continue to rise over the next severalyears, just as it has done over the past few years.

Thus, on the input side the project accounts might show an annual increase, atleast for the first decade or so, in the cost of fuel for tractors, for transporting theharvested crop, for drying grain, and for such petroleum–based inputs as fertilizersand chemical pesticides. On the output side, there may be some commodities thatwill probably continue to be in short supply and whose prices will rise as incomesincrease–one might think of mutton from fat–tailed sheep in Iran, or, for that matter,of most meat products worldwide. How much will pr ices increase relative to those ofother products? Certainly a difficult question, but one the project analyst mustconfront. For a range of products–from industr ial crops such as fibres or oilseeds tofood grains and vegetables–judgments will have to be made on the best possible basis.

In some countr ies, relat ive wages of rural labour may r ise as economicdevelopment proceeds during the life of a project. This will have implications notonly for the prices assumed for hired labour, but also for the incentive effect exertedby a given change in net benefit and for the technology assumed as a basis forprojections in the farm budgets and project accounts.

Inflation

In the past few years, virtually every country has experienced inflation, and theonly realistic assessment is that this will continue. No project analyst can escapedeciding how to deal with inflation in his analysis. The approach most often taken isto work the project analysis in constant prices. That is, the analyst assumes that thecurrent price level (or some future price level–say, for the first year of projectimplementation) will continue to apply. It is assumed that inflation will affect mostprices to the same extent so that prices retain their same general relations. The analystthen need only adjust future price estimates for anticipated relative changes, not forany change in the general price level.

By comparing these estimates of costs and benefits with the constant prices, heis able to judge the effects of the project on the incomes of participants and its income–generating potential for the society as a whole. Although the absolute (or money)values of the costs and benefits in both the financial and the economic analyses willbe incorrect, the general relations will remain valid, and so the measures of projectworth may be applied directly.

Working in constant prices is simpler and involves less calculation than workingin current prices; for the latter, every entry has to be adjusted for anticipated changesin the general price level. It is quite possible, however, to work the whole projectanalysis in current prices. This has the advantage that all costs and benefits shownwould be estimates of what the real prices will be in each year of the project.Furthermore, estimates of investment costs will be in current terms for the year inwhich they are expected to occur, so that the finance ministry can more easilyanticipate these needs and budget the amounts necessary to finance the project onschedule. The problem in this approach is that it involves predicting inflation rates.

Ecology, Capitalism and the New Agricultural Economy

For items to be imported, some help is available in the World Bank report onPrice Prospects for Major Primary Commodities, which is published biennially andupdated in six–month intervals and includes an estimate of inflation in developedcountries. For domestic inflation rates in developing countries, other sources willhave to be consulted, but obtaining an estimate in which one can place even minimalconfidence will be difficult, to say the least. Even casting the project analysis in currentterms may raise problems for the project analyst. Many governments have policygoals that call for greatly reduced inflation, and they cannot permit the circulation ofofficial documents that assume rapid inflation will continue.

The mere mechanics of using current prices presents no analytical problem inproject analysis, although it does complicate the computations. When we considermeasures of project worth, some means of deflating future prices must be adoptedfor comparing future cost and benefit streams in terms that are free from the effectsof general price increases. Even when constant prices are used in the more conventionalapproach to project analysis, a table estimating the budgetary effects of the project incurrent terms that will prevail at least during the investment phase should be includedeither in the analysis or as a separate monetary.

. It would list in current prices domestic currency needs, foreign exchangerequirements, and subsidies. The finance ministry would then have better estimatesto work with, and delays because of budgetary shortfalls could more easily be avoided.

Prices for Internationally Traded Commodities

For commodities that enter significantly in international trade, whether inputsor outputs, project analysts usually obtain price information from various groups ofspecialists who follow price trends and make projections about relative prices in thefuture. In many countries where agricultural exports are important, there are groupsin the agriculture ministry or the finance ministry whose help may be sought.

There are also several international organizations and trade groups to which theanalyst may turn. The World Bank, for instance, publishes its projections under thetitle Price Prospects forMajorPrimary Commodities.

The Food and Agriculture Organization (FAO) sponsors intergovernmental groupsthat publish price information on rice; grains (other than rice); citrus; hard fibres;fibres (other than hard fibres); oilseeds, oils and fats; bananas; wine and wine products;tea; meat; and cocoa. Information may be obtained from the secretary of the relevantintergovernmental group at the FAo headquarters in Rome or from the FAorepresentative in individual countr ies.

Several international commodity organizations keep detailed price informationfor the products of their interest. These include the International Tea Committee,the International Cocoa Organization, the International Wool Secretariat, theInternational Coffee Organization, the International Association of Seed Crushers,the International Rubber Study Group, and the International Sugar Organization, allwith headquarters in London; the International Olive Oil Council in Madrid; and theInternational Cotton Advisory Committee in Washington.

Some individual nations systematically collect production and price informationfor crops and livestock products of interest to them, and they often are willing toshare this information with analysts in other countries without charge or restriction.

Ecology, Capitalism and the New Agricultural Economy

The United States Department of Agriculture–probably the most important ofthese–publishes detailed studies about most major crops traded in internationalmarkets. Information may be obtained from agricultural attaches in Americanembassies, or directly from the department’s Foreign Agriculture Service. TheCommonwealth Secretariat in London publishes information about price trends forcommodities of interest to i ts member nat ions. A detailed list of “Sources ofInformation on World Prices” is available from the World Bank (Woo 1982).

Financial Export and Import Parity Prices

In projects that produce a commodity significant in international trade, the priceestimates are often based on projections of prices at some distant foreign point. Theanalyst must then calculate the appropriate price to use in the project accounts, eitherat the farm gate or at the project boundary.

If the farm–gate or project boundary prices for the internationally tradedcommodities in the project are already known, and the prices in the particular countrytend to follow world market prices, the farm–gate prices may be adjusted by thesame relative amount as indicated, say, by the medium trend projected in the futurerelative prices supplied by one or another international organization. Also, in financialanalysis, if the farm–gate price is set administratively and is not allowed to adjustfreely to world prices, the relevant price to use is the administratively set price. Simplyadjusting domestic prices by the same relative amount as foreign prices often arr ivesat figures too rough for project analysis. The approach ignores the fact that marketingmargins in commodity trade tend to be less flexible than the commodity pricesthemselves.

There are also many instances in estimating the economic value of a tradedcommodity that involve deriving a shadow price based on international prices. Insuch instances it is necessary to calculate export or import parity prices.

These are the estimated prices at the farm gate or project boundary, which arederived by adjusting the c.i.f. (cost, insurance, and freight) or f.o.b. prices by all therelevant charges between the farm gate and the project boundary and the point wherethe c.i.f. or f.o.b. price is quoted. The elements commonly included in c.i.f. and f.o.b.are given in table.

T able: Elements of C.i.f. (Cost, Insurance, Freight)

and F.o.b. (Free on Board)

I tem Element

C.i.f. Includes:

F.o.b. cost at point of export

Freight charges to point of import

Insurance charges

Unloading from ship to pier at port

Excludes:

Import duties and subsidies

Port charges at port of entry for taxes, handling,

storage, agents' fees and the like

Ecology, Capitalism and the New Agricultural Economy

All costs to get goods on board–but still in harbor of

exporting country

Local marketing and transport costs

Local port charges including taxes, storage, loading,

fumigation, agents' fees and the like

Export taxes and subsidies

Project boundary price

Farm–gate price

All costs to get goods on board–but still in harbor of exporting country:Localmarketing and transport costsLocal port charges including taxes, storage, loading,fumigation, agents’ fees and the likeExport taxes and subsidiesProject boundarypriceFarm–gate price. One common case for which an export parity price has to becalculated is that of a commodity produced for a foreign market. Table gives anexample based on the Rahad project in the Sudan. It shows the generalized elementsfor calculating export parity prices so that the same methodology can be applied inother cases. As noted earlier, the Rahad project included cotton gins.

Since the gins produce lint and cottonseed for export and scarto, a by–productof very short fibres not suitable for export and sold locally, the analyst needed threeprices. For the lint and seed estimates, he began with forecasts of the 1980 c.i.f. pr icesin current terms at Liverpool, which were available from World Bank publications.From these c.i.f. prices, he then deoucted insurance, ocean freight, export duties, porthandling costs, and rail freight from the cotton gin at the project site to Port Sudan,thus obtaining the export parity prices at the project boundary: LSd 178.650 for lintand LSd18.097 for seed. (The symbol for Sudanese pounds is LSd.) The price forscarto, which was not exported, was based on the prevailing domestic price.

To illustrate, we may continue to calculate the export parity price at the farmgate, al though in the Rahad example, where the farm–gate pr ice was setadministratively, this calculation was not made. The computations are laid out in thepart of table that continues from the entry for “Equals export parity price at projectboundary.” Here a new issue arises. The three products that the gin produces–lint,seed, and scarto–must be converted into their seed cotton equivalents, since it is seedcotton that the farmer sells. Similar conversions have to be made in many otherinstances–for example,

T able. Financial Export Parity Price for Cotton, RahadIrrigation Project, Sudan

Step in the Relevant step Value Per Ton

Calculation in the Suda–

nese example

Lint Seed Scarto

C.i.f. at point C.i.f. Liverpool US$6– US$–

of import (taken as esti– 39.33 103.39

mate for all

European

Deduct unloading ports)Freight

at point of import and insurance

Deduct freight to 39.63 24.73

F.o.b. Includes:

Ecology, Capitalism and the New Agricultural Economy

point of import

Deduct insurance F.o.b.Port

Sudan

Equals f.o.b. at F.o.b. Port US US$point of export Sudan 599.70 78.66

Convert foreign Converted at LSd LSd

currency to official excha– 208.809 27.389

domestic currency nge rate of LSd

at official 1.000=US$

exchange rate 2.872

Deduct tariffs Export duties 17.813 1.000

Add subsidies (None)

Deduct local Port handling 5.564 1.510

port charges costLint: LSd

5.564 per

tonSeed: LSd

1.510 per ton

Deduct local Freight to Port 6.782 6.782

transport and Sudan at LSd

marketing costs 6.782 per ton

from project to

point of export

(if not part of the

project cost)

Equals export Export parity LSd LSd

parity price at priceat gin at 178.650 18.097

project boundary project site

Conversion allow– Convert ot 71.460 10.677 1.102

ance(if Necessary) seed cotton

(LSd 178.650

x 0.4 + LSd

18.097 x 0.59

+ LSd 110.200

x 0.01)

Deduct local Ginning, baling, 15.229storage, trans– andstorage (LSd

port, and marke–15.229Per

ting costs (if notper ton)

part of project

cost)

Collection and 1.064

internal transfer

(LSd 1.064 per

ton)

Equals export Export parity price LSd 66.946

Ecology, Capitalism and the New Agricultural Economy

parity price at at the farm gate

farm gate

Rice milling or groundnut decortication. For the Rahad project, a weighted price ofLSd83.239 forthe seed cotton was calculated using a ginning outturn of 40 per cent lint,59 per cent seed, and 1 per cent scarto. From this weighted price were deducted theginning, baling, and storage charges and the costs of collection and transport from thefarm gate to the gin, thus arriving at the farm–gate export parity price of LSd66.946. Aparallel computation leads to the import parity price. Here the issue is the price atwhich an import substitute can be sold domestically if it must compete with imports.

T able. Financial Import Parity Price of Early–Crop M aize, CentralAgricultural

Development Projects, N igeria

Steps in the calculation Relevant steps in Value

the NigerianPerExample Ton

F.o.b. at point of export F.o.b. U.S. Gulf ports, US$116

No. 2 U.S. yellow corn

in bulk

Freight and insurance

Add freight to point C.i.f. Lagos or Apapa US$147

of import

Add unloading at

point of import

Add insurance

Equals c.i.f. at point

of import

Convert foreign currency Converted at official N91

to domestic currency exchange rate of N1

rate = US$1.62

Add tariffs none

Deduct none

subsidies Landing and 22

Add local port port charges (including

charges the cost of bags)

Add local transport and Transport (based on 18

marketing costs to a 350–kilometer average)

relevant markets

Equals price at market Wholesale price N 131

Conversion allowance (Not necessary)

if necessary

Deduct transport and Primary marketing (includes –14

marketing costs to assembly, cost of bags, and

relevant market intermediary margins)

Transport (based on a

350–kilometer average) – 18

Ecology, Capitalism and the New Agricultural Economy

Deduct local storage, Storage loss (10 percent

transport, and market of harvested weight – 9

–ing costs (if not part

of the project costs)

Equals import parity Imported parity price at N 90

price at farm gate farm gate

Begin with the f.o.b. price at the point of export–in this case U.S. ports on the Gulfof Mexico–derived from World Bank commodity estimates. To this we add freight andinsurance to obtain the c.i.f. price at either Lagos or Apapa, the two Nigerian portsconcerned. Then we would add any tariffs and subsidies (in this case there are none);add local port charges for harbor dues, fumigation, handling, and the like; and add localtransport to the relevant inland market. The result is the wholesale price of importedmaize. It is this wholesale price of maize in the inland market that is the focal point ofour calculation.

The alternative to project production is not to import the maize and transport it tothe project area. Rather, the alternative is to import it and market it directly on theinland market. Thus the price the farmer can expect to receive in the absence of tariffs,subsidies, or an import ban is the wholesale price less the cost of moving his maize tothe market. If the project had included processing facilities, then the relevant projectboundary price would have been this wholesale price less handling costs from theprocessing facility to the wholesale market. In the Nigerian project, no processingfacilities were included, so the relevant import parity price is the farm–gate price. Aswe move back from the wholesale market to the farm gate, we would have to providefor any conversion allowance. In this case none is necessary, since it is assumed thatthe farmer will sell shelled maize. From the wholesale price, then, we deduct localmarketing costs including assembly, bags, and intermediary margins, transport fromthe farm to the market, and storage losses, thus obtaining the import parity price atthe farm gate of N90. (The symbol for Nigerian naira is N.) This is the maximumprice the farmer could expect to receive, again in the absence of tariffs, subsidies, oran import ban.

DETERM ININ G ECON OM IC VALUES

Once financial prices or costs and benefits have been determined and entered inthe project accounts, the analyst estimates the economic value of a proposed projectto the nation as a whole. The financial prices are the starting point for the economicanalysis; they are adjusted as needed to reflect the value to the society as a whole ofboth the inputs and outputs of the project.

When the market price of any good or service is changed to make it more closelyrepresent the opportunity cost (the value of a good or service in its next best alternativeuse) to the society, the new value assigned becomes the “shadow price” (sometimesreferred to as an “accounting price”). In the strictest sense, a shadow price is anyprice that is not a market price, but the term usually also carries the connotation thatit is an estimate of the economic value of the good or service in question, perhapsweighted to reflect income distr ibution and savings objectives.

For purposes of project analysis, we took the objective of a farm to be to maximizethe farm family’s incremental net benefit, the objective of the firm to maximize its

Ecology, Capitalism and the New Agricultural Economy

incremental net income, and the objective of the society to maximize the contr ibutiona project makes to the national income–the value of all final goods and servicesproduced in the country during a particular period. These objectives, and the analysisto test their realization, were seen in financial terms for farms and firms. But economicanalysis of a project moves beyond financial accounting. Strictly speaking, we may saythat in financial analysis our numeraire–the common yardstick of account–is the realincome change of the entity being analysed valued in domestic market prices and ingeneral expressed in domestic currency.

But in economic analysis, since market prices do not always reflect scarcity values,our numeraire becomes the real, net national income change valued in opportunitycost. As we will note below, one methodology expresses these economic values indomestic currency and uses a shadow price of foreign exchange; the shadow priceincreases the value of traded goods to allow for the premium on foreign exchangearising from distortions caused by trade policies. Another method in use expressesthe opportunity cost value of real national income change in domestic currencyconverted from foreign exchange at the official exchange rate and applies a conversionfactor to the opportunity cost or value in use of nontraded goods expressed in domesticcurrency; the conversion factor reduces the value of nontraded goods relative to tradedgoods to allow for the foreign exchange premium.

Before a

prices that reflect real resource use or consumption satisfaction and that are adjustedto eliminate direct and indirect transfers. These values will be market prices whenmarket prices are good estimates of economic value or they will be shadow priceswhen market prices have had to be adjusted for distortions. When we adjust financialprices to reflect economic values better, in the vast majority of cases we will use theopportunity cost of the good or service as the criter ion.

We will use opportunity costs to value all inputs and outputs that are intermediateproducts used in the production of some other good or service. For some final goodsand services, however, the concept of opportunity cost is not applicable because it isconsumption value that sets the economic value, not value in some alternative use. Inthese instances, we will adopt the criterion of “willingness to pay” (also called “valuein use”). We need to do this, however, only when the good or service in question isnontraded (perhaps as a result of government regulation) during some part of the lifeof the project–a point to which we will return later in our discussion. Because theultimate objective of all economic activity is to satisfy consumption wants, allopportunity costs are derived from consumption values, and thus from willingness topay.

An example may clarify our use of willingness to pay and opportunity cost.Suppose a country that is a rather inefficient producer of sugar has a policy to forbidsugar imports to protect its local industry. The price of sugar may then rise wellabove what it would be if sugar were imported. Even at these higher prices, mostconsumers will still buy some sugar for direct consumption–say, in coffee or tea–even though they may use less sugar than if the price were lower. The domestic priceof sugar will be above the world market price and will represent the value of the sugarby the criterion of willingness to pay. If we were now to consider the economic valueof sugar from the standpoint of its use in making fruit preserves, its value wouldbecome the opportunity cost of diverting the sugar from direct consumption, wherewillingness to pay is the criterion and has set the economic value.

Economic analysis, then, will state the cost and benefit to the society of theproposed project investment either in opportunity cost or in values determined bythe willingness to pay. The costs or values will be determined in part by both theresource constraints and the policy constraints faced by the project. The differencebetween the benefit and the cost–the incremental net benefit stream–will be anaccurate reflection of the project’s income–generating capacity–that is, its netcontribution to real national income.

The system outlined here will make no adjustment for the income distribution effects of a proposed project nor for its effect on the amount of the benefit generated that will be invested to accelerate future growth. Rather, the economic project analysis, stated in efficiency prices, will judge the capacity of the project to generate national income. The analyst can then choose from those alternative projects (or alternative formulations of roughly the same project) the high–yielding alternative that in his subjective judgment also makes the most effective contribution to objectives other than maximizing national income–objectives such as income distribution, savings generated, number of jobs produced, regional development, national security, or whatever. The choice about the kind of project will of course be made rather early in the project cycle. Thus, it may be determined early on that for

Ecology, Capitalism and the New Agricultural Economy

Although the system outlined here makes no adjustment for income distributioneffects or for saving versus consumption, it is compatible with other analytical systemsthat do. In particular, Squire and van der Tak recommend evaluating proposed projectsfirst by using essentially the same efficiency prices that will be estimated here andthen by further adjusting these prices to weight them for income distribution effectsand for potential effects on further investment of the benefits generated.

The systems in Little and M irrlees and the uxmo Guidelines for Project Evaluation,with minor departures, also propose evaluating the project by first establishing itseconomic accounts in efficiency prices and then by adjusting these accounts to weightthem for income distr ibution and savings effects. M aking allowances for incomedistribution and savings effects involves somewhat more complex adjustments thanthose necessary to estimate efficiency prices; it also unavoidably incorporates someelement of subjective judgment. Although these systems have attracted widespreadinterest among economists, their application has been only partial or on a limitedscale. The system of economic analysis using efficiency prices that is outlined here isessentially the one currently used for all but a few World Bank projects and also theone used for most analyses of projects funded by other international organizations.

The economic analysis follows on the financial analysis presented will be basedon projected farm budgets similar to those on projected accounts for commercialfirms and on projected government cash flows. Since these accounts are projected forthe life of the project, there will be no separate allowance for depreciation. Instead, asnoted earlier, the costs will have been entered in the years they are incurred and thereturns in the year they are realised. In the economic analysis, we will want to workwith accounts cast on a constant basis; thus we will want to be sure that any inflationcontingency allowances have been taken out. As noted however, physical contingencyallowances and contingency allowances intended to allow for relative price changesare properly incorporated in the economic accounts, even when the accounts are inconstant prices. Of course, any of the items included among the contingencies maybe revalued, if necessary, to adjust them from their market prices to economic values.

The projected financial accounts will usually not have any entry for cash. Instead,they will show separately the cash position of the farmer or note a cumulative cashsurplus or deficit. It is possible, however, that some accounts may have a cash balanceincluded in an entry for working capital or the like. If such an entry exists, it must beremoved from the economic analysis; since we will be working on a real basis in theeconomic accounts, we will show real costs when they occur and real benefits whenthey are realised.

Determining the Premium on Foreign Exchange

Adjusting the financial accounts of a project to reflect economic values involvesdetermining the proper premium to attach to foreign exchange. That determinationquickly involves issues of obtaining proper values and of economic theory. Fortunately

reasons of social policy a project will be preferred that encourages smallholder agriculture rather than plantations. Then, the choices will likely be several projects or variants of projects that encourage smallholders; the analytical technique presented here can determine from among the projects that will further the desired social objective the ones that are more economically efficient.

Ecology, Capitalism and the New Agricultural Economy

for most agricultural project analysts, the answer to the question about how todetermine the foreign exchange premium is simple (and simplistic): ask the centralplanning agency. The point is that if various alternative investment opportunitiesopen to a nation are to be compared, the same foreign exchange premium must beused in the economic analysis of each alternative. Otherwise we will be mixing applesand oranges and cannot use our analysis reliably to choose among alternatives.Sometimes, however, the analyst will be forced to make his own estimate of the foreignexchange premium.

A practical approach, along with some of the theoretical and applied problems ofthe computation, is given by Ward. Little and M irrlees, Squire and van der Tak andthe UNIDO Guidelines also outline in considerable detail how to make the conversionbetween foreign exchange and domestic currency when their analytical systems areused.

The need to determine the foreign exchange premium arises because in manycountries, as a result of national trade policies (including tariffs on imported goodsand subsidies on exports), people pay a premium on traded goods over what they payfor nontraded goods. This premium is not adequately reflected when the prices oftraded goods are converted to the domestic currency equivalent at the official exchangerate.

The premium represents the additional amount that users of traded goods, on anaverage and throughout the economy, are willing to pay to obtain one more unit oftraded goods. Since all costs and benefits in economic analysis are valued on the basisof opportunity cost or willingness to pay, it is the relation between willingness to payfor traded as opposed to nontraded goods that establishes their relative value.

The premium people are willing to pay for traded goods, then, represents theamount that, on the average, traded goods are mispriced in relation to nontradeditems when the official exchange rate is used to convert foreign exchange prices intodomestic values. By applying the premium to traded goods, we are able to comparethe values of traded and nontraded goods by the criter ion of opportunity cost orwillingness to pay. Although this premium is commonly referred to as the foreignexchange premium, it should be recognized that the premium is actually a premiumfor traded goods; foreign exchange itself has no intrinsic value. The premium fortraded goods is a premium on the particular “basket” of traded goods that the presentand projected trade pattern implies.

Of course, future patterns of trade could change the exact composition of thebasket, and thus the premium would change; to estimate these changes involves aknowledge of elasticities–the way demand and supply of goods and services vary whenprices change–that is generally not available. Where such elasticities are known, it ispossible for a well–trained economist to provide the project analyst with a moreaccurate estimate of the expected premium on foreign exchange. If traded items wereto be taken into the project analysis at an economic value obtained by simplymultiplying the border price by the official exchange rate without adjusting for theforeign exchange premium, imported items would appear too cheap and domesticitems too dear.

This would encourage overinvestment in projects that use imports. For example,if combine harvesters look cheap because no allowance is made for the premium on

Ecology, Capitalism and the New Agricultural Economy

traded goods, then imported combines might displace local harvest labour, even thoughthe local labour might have no other opportunities for employment.

There are two equivalent ways of incorporating the premium on foreign exchangein our economic analysis. The first is to multiply the official exchange rate by theforeign exchange premium, which yields a shadow foreign exchange rate. Note thatthis derivation of the shadow exchange rate is appropriate for efficiency analysis ofprojects and thus has a discrete definition. Other definitions of the shadow exchangerate are appropriate depending on the uses to which the rate will be put. Bacha andTaylor discuss some of these alternatives. The shadow exchange rate is then used toconvert the foreign exchange price of traded items into domestic currency.

The effect of using the shadow exchange rate is to make traded items relativelymore expensive in domestic currency by the amount of the foreign exchange premium.(An alternative arithmetic formulation is to convert the foreign exchange price intodomestic currency at the official exchange rate and then multiply by 1 plus the foreignexchange premium stated in decimal terms.) The shadow exchange rate approachhas been used in the past in most World Bank projects when adjustments have beenmade to allow for the foreign exchange premium on traded goods, and it is also usedin the UNIDO Guidelines.

An alternative way to allow for the foreign exchange premium on traded itemsthat is increasingly coming into use is to reduce the domestic currency values fornontraded items by an amount sufficient to reflect the premium. This is sometimescalled the “conversion factor” approach. In its simplest form, based on straightforwardefficiency prices, a single conversion factor–the “standard conversion factor” of Squireand van der Tak–is derived by taking the ratio of the value of all exports and importsat border prices to their value at domestic prices. In this form, the standard conversionfactor bears a close relation to our shadow exchange rate; indeed, the standardconversion factor may be determined by dividing the official exchange rate by theshadow exchange rate or by taking the reciprocal of 1 plus the foreign exchangepremium stated in decimal terms. M arket prices or shadow prices of nontraded itemsare then multiplied by this standard conversion factor, and this reduces them to theirappropriate economic value.

Litt le and M irrlees and Squire and van der Tak both adopt the conversion factorapproach. In addition, both pairs of authors recommend deriving specific conversionfactors for particular groups of products that will allow for any difference betweenmarket prices and opportunity costs and for the foreign exchange premium on tradeditems.

As a result, their specific conversion factors may always be applied directly todomestic market prices. These authors also recommend that their conversion factorsbe calculated in social prices by including distribution weights.

In the valuation system followed here, all items are valued at efficiency priceswithout allowance for distribution weights (the issue of selecting projects to achievedistributional objectives is treated as a subsequent decision). This being the case,consideration of the distribution–weighted conversion factors proposed by Little andMirrlees and Squire and van der Tak may be left aside, and we may focus our discussionon the Squire and van der Tak standard conversion factor as it relates to efficiency

prices. The relation between the official exchange rate (in the equations below , OER),

Ecology, Capitalism and the New Agricultural Economy

the foreign exchange premium (Fx premium), the shadow exchange rate (SER),and thestandard conversion factor (SCF) is perhaps easier to understand in equation form:

OER×(1+premium)=SERand

SCF1 FXpremium

so that, as Squire and van der Tak note,

OERSER

SCF

and

OERSER

SER

We may illustrate these relations by an example taken from the AgriculturalM inimum Package Project in Ethiopia. At the time the project was appraised, theanalyst knew that the official exchange rate of Eth$2.07 = US$1 failed to account for aforeign exchange premium of at least 10 per cent. (The symbol for the Ethiopiandollar is Eth$; since this project was appraised the name of the currency unit hasbeen changed to birr.) Thus, the analyst multiplied the official exchange rate by 1plus a 10 per cent foreign exchange premium to obtain a shadow exchange rate ofEth$2.28 = US$1 (2.07 x 1.1 = 2.28) that he rounded up to Eth$2.30 = US$ 1. Theshadow exchange rate was then applied to all’traded items in the financial accounts,thereby increasing their relative value. If the domestic currency is worth more perunit than the foreign exchange, the arithmetic is somewhat different.

At the time the Nucleus Estate/Smallholder Oil Palm Project in Rivers State, Nigeria,was appraised, the official exchange rate was N 1 = US$1.54. (The symbol for Nigerian nairais N.) The project analysts were given a shadow exchange rate of N1 = US$1.27 to use intheir economic evaluation. If, however, they had simply been informed that the foreignexchange premium was 21 per cent, they could have determined the shadow exchange rateby dividing the dollar value by 1 plus the premium stated in decimal terms (1.54–1.21 =1.27). Of course, the effect of applying the shadow exchange rate to the traded itemsin the Ethiopian project was to make all nontraded items 10 per cent less expensivein relation to the traded items in the economic accounts as opposed to the financialaccounts. Now, instead of increasing the relative value of traded items, we couldreduce the value of all nontraded items appearing in the financial accounts so that inthe economic account they are relatively 10 per cent less expensive.

To do this we calculate the standard conversion factor, which is 1 divided by 1plus the amount of the foreign exchange premium stated in decimal terms. In thiscase, the result is a factor of 0.909 (1–1.1 = 0.909). To obtain the eco4ic values, wewould then multiply all financial prices for non–traded items by this factor if thesemarket prices have been judged good estimates of opportunity cost or good estimatesof economic value on grounds of willingness to pay. For nontraded items such aswage rates for unskilled labour for which it is felt that the market price has overstatedthe economic values, we would first determine a good estimate of the economic valuein domestic currency and then multiply that by the standard conversion factor.Financial prices for traded items, whether imports or exports, would be left unchanged

Ecology, Capitalism and the New Agricultural Economy

in the economic accounts except that any transfer payment included in these priceswould be taken out. To get all values into the same currency, we would convert allforeign currency prices to domestic currency values using the official exchange rate.

When we turn to determining measures of project worth, we will find that theabsolute value of the net present worth differs depending on which approach we use,shadow exchange rate or conversion factor, but that the relative net present worthsof different projects analysed by the same approach will not change. Whicheverapproach is used, the internal rate of return, the benefit–cost ratio, and the net benefit–investment ratio do not change. (Using a number of disaggregated conversion factors,rather than a standard conversion factor, can give different values for the measures ofproject worth. Hence, for projects at the margin of acceptability, using specificconversion factors rather than a standard conversion factor or a shadow exchangerate may result in a different decision on whether to accept or reject, but such casesare infrequent.)

Adjusting Financial Prices to Economic Values

Let us now proceed with the adjustments necessary to convert financial prices toeconomic values.

Step 1. Adjustment for Direct Transfer Payments

The first step in adjusting financial prices to economic values is to eliminatedirect transfer payments. Direct transfer payments are payments that represent notthe use of real resources but only the transfer of claims to real resources from oneperson in the society to another. In agricultural projects, the most common transferpayments are taxes, direct subsidies, and credit transactions that include loans, receipts,repayment of principal, and interest payments. Two credit transactions that mightescape notice are accounts payable and accounts receivable. All these entries shouldbe taken out before the financial accounts are adjusted to reflect economic values.

Many important subsidies in agriculture operate not by means of direct paymentsbut through mechanisms that change market prices. These subsidies are not directsubsidies treated as direct transfer payments but rather are indirect subsidies. Thefinancial price of an item for which the price has been changed because of an indirectsubsidy is converted to an economic value according to the procedures outlined belowfor traded items in step 2 and, as appropriate, for nontraded items in step 3.

Step 2. Adjustment for Price Distortions in Traded Items

The second step in adjusting financial prices to economic values is the adjustmentfor distortions in market prices of traded items. Traded items are those for which, ifexports,f.o.b. price > domestic cost of production, or the items may be exportedthrough government intervention by use of export subsidies and the like, and, ifimports,domestic cost of production > c.i.f. price. Conceptually–and usually in practice,too–prices for traded items in project analysis are more easily dealt with than thosefor nontraded items. We begin the valuation by determining the “border price.” Forimports, this normally will be the c.i.f. price and, for exports, normally the f.o.b. price.The border price is then adjusted to allow for domestic transport and marketingcosts between the point of import or export and the project site; the result is theefficiency price to be used in the project account.

Ecology, Capitalism and the New Agricultural Economy

If the proposed project produces something that can be used in place of importedgoods–that is, if it produces an “import substitute”–the value to the society is theforeign exchange saved by using the domestic product valued at the border price, inthis case the c.i.f. price. But if the project uses items that might otherwise have beenexported–that is, if it uses “diverted exports”–then the opportunity cost to the societyof these items is the foreign exchange lost on the exports forgone valued at the borderprice, this time the f.o.b. Price.

If we are using conversion factors to allow for the foreign exchange premium,the economic value of a traded item would be obtained by converting the foreignexchange price to its domestic currency equivalent using the official exchange rate. Ifwe are using the shadow exchange rate to allow for the foreign exchange premium,the economic value of a traded item would be obtained by converting the foreignexchange price to its domestic currency equivalent using the shadow exchange rate.

To illustrate how these computations are made, we may take as an example animported item such as a combine harvester for which the c.i.f. Price is US$ 45,000. Inthe financial accounts, we will convert this price to domestic currency using the officialexchange rate of, say, ` 10 = US$1, obtaining a c.i.f. price in domestic currency of `450,000 (45,000 × 10 = 450,000). To this would be added any import duty, say 10 percent, or ` 45,000 (450,000 × 0.10 = 45,000); the price of the combine in our financialaccounts would therefore be ` 495,000 (450,000 + 45,000 = 495,000). (The costs ofmoving the harvester to the project site would also be added; see the subsection on“Economic export and import parity values,” below.)

If we are using the conversion factor approach to allow for the foreign exchangepremium in our economic accounts, we would enter the combine in the accounts atthe c.i.f. Price expressed in domestic currency converted at the official exchange rate,or ` 450,000 (45,000 × 10 = 450,000). There would be no allowance for the dutybecause that is a transfer payment. If we are using the shadow exchange rate approachto allow for the foreign exchange premium, however, we would increase the price ofthe imported items to reflect the premium. Suppose we assume the foreign exchangepremium to be 20 per cent; our shadow exchange rate thus becomes ` 12 = US$1 (10× 1.2 = 12). Now the ` 495,000 item in our financial accounts becomes ` 540,000 inour economic account (45,000 × 12 = 540,000). We could have accomplished thesame thing, of course, by multiplying our domestic financial price (net of transferpayments) by 1 plus the foreign exchange premium (450,000 × 1.2 = 540,000). Theeffect of our computation, obviously, is to make imported items more expensive inour economic analysis.

The same logic works in reverse for exports. The ton of wheat that is worth $176a ton f.o.b. At the port of export will be entered in the financial accounts by convertingthe foreign exchange price to its domestic currency equivalent using the officialexchange rate. This gives a value of ` l,760 (176 × 10 = 1,760), assuming that there isno export subsidy. The same rupee value would be entered in the economic accountsif we are using the conversion factor approach to allow for the foreign exchangepremium. If we are using the shadow exchange rate approach to allow for the foreignexchange premium, we multiply the foreign exchange border price of the wheat bythe shadow exchange rate instead of the official exchange rate to calculate the

Ecology, Capitalism and the New Agricultural Economy

economic value expressed in domestic currency. This increases the relative value ofthe wheat, which now will be valued at ` 2,112 (176 × 12 = 2,112). We could haveaccomplished the same thing, of course, by multiplying our financial domestic priceby 1 plus the foreign exchange premium stated in decimal terms (1,760 × 1.2 = 2,112).Now the ton of wheat, like other exported goods, is valued at its opportunity cost andis seen to be relatively much more valuable.

Diverted exports and import substitutes are valued by the same line of reasoning,except that for a diverted export we would take the f.o.b. price as the basis for valuationand for import substitutes we would take the c.i.f. price. In the examples of the previousparagraphs, if the country exported combines but diverted them to a domestic project,the opportunity cost would be based on the f.o.b. price instead of the c.i.f. price weassumed for imported combines. Similarly, if the wheat produced were to substitutefor imports, we would base its value on the c.i.f.Price of wheat rather than on thef.o.b. price we assumed for the case of exports.

In practice, values for most traded items are determined by taking the borderprice as we have been using it and then either subtracting or adding the domestichandling costs to obtain an economic value at the farm gate or project boundary–theeconomic export or import parity value. Also, many items that are locally producedincorporate a significant proportion of imported components and may be consideredindirectly imported items.

To determine either parity values or values for indirectly traded items involvesvaluing separately not only the traded component but the nontraded component aswell, so we will defer detailed discussion of these values until we have discussed valuingnontraded items.

Step 3. Adjustment for Price Distortions in Non-traded Items

The third step in adjusting financial prices to economic values is the adjustmentfor distortions in market prices of nontraded items. Nontraded items are those forwhich c.i.f. price > domestic cost of production > f.o.b. price, or the items are nontradedbecause of government intervention by means of import bans, quotas, and the like.Often, nontraded items will be bulky goods such as straw or bricks, which by theirvery nature tend to be cheaper to produce domestically than to import but for whichthe export price is lower than the domestic cost of production. In other instances,nontraded items are highly perishable goods such as fresh vegetables or fluid milk fordirect consumption.

In general, these are produced under relatively competitive conditions–they areproduced either by many small farmers or by a few industrial producers for whomentry into the market is relatively easy; thus prices cannot rise too far out of linebefore new competition appears. If we are using the shadow exchange rate approachto allow for the foreign exchange premium, and if the market price of a nontradeditem is a good estimate of the opportunity cost, or willingness to pay is the criter ion,we will accept the market price directly as our economic value. Otherwise, we willadjust the market price to eliminate distortions by the methods outlined in this sectionand then use the estimate of the opportunity cost we obtain as the shadow price to beentered in the economic accounts.

Ecology, Capitalism and the New Agricultural Economy

If we are using the conversion factor approach to allow for the foreign exchangepremium, an additional step is necessary. All prices for non–traded items are reducedby multiplying them by the appropriate conversion factor. When willingness to pay isthe criter ion or when the market price is considered to be a good estimate ofopportunity cost, the market price is accepted as the basis for valuation and thenreduced by multiplying it by the conversion factor to obtain the economic value. Butif we are using the standard conversion factor and the market price must be adjustedto obtain a better estimate of the opportunity cost, then the opportunity cost must, inturn, be multiplied by the standard conversion factor.

(If specific conversion factors have been developed, as Little and M irrlees andSquire and van der Tak suggest in their systems, then these factors incorporate theadjustments for nontraded goods distortions, opportunity costs, and distributionweights; the market price need only be multiplied by the specific conversion factor toreach the economic value.) Whether we use a shadow exchange rate or a standardconversion factor to allow for the foreign exchange premium, the adjustments wemake to allow for distortions in market prices of nontraded items are essentially thesame; only the step of multiplying the market price or the opportunity cost by thestandard conversion factor differs.As we said earlier prices for traded items are moreeasily adjusted to economic values than are prices for nontraded items. The followingsubsections treat some of the difficulties encountered in determining economic valuesfor various nontraded items.

M arket Prices as Estimates of Economic Value

In a perfectly competitive market, the opportunity cost of an item would be itsprice, and this price would also be equal to the marginal value product of the item. Ifa nontraded item is bought and sold in a relatively competitive market, the marketprice is the measure of the willingness to pay and is generally the best estimate of anopportunity cost. M ost agricultural projects are expected to meet a growing demandfor food or fibre and are small relative to the total agricultural production of thenation. If that is the case, in general we can accept the market price directly as ourestimate of the economic value of a nontraded item. Also, if we are valuing adomestically produced project input that is produced by a supply industry operatingnear full capacity, we can generally accept the market price of the input as its economicvalue.

In some instances more common in industrial and transport projects than inagricultural, the output of the project is large relative to the market. The output fromthe project may therefore cause the price to fall. But the economic value of the newproduction, despite the fall in price, is not lower to the old users of the product; tothem, it is still worth what the price was without the project. Yet to new users, theproject output is not worth what the old price was; otherwise, the price would nothave fallen. Under these circ*mstances, the economic value of the new output isneither the old price nor the new; rather, it is estimated by some weighted average ofthe old and new values. In technical economic terms, the total value of the new outputis measured by the additional area under the demand curve as project output isincreased, and the marginal value in use for each new buyer is measured by the demandcurve at the point the buyer enters the market.

Ecology, Capitalism and the New Agricultural Economy

The problem is that the precise shape of the demand curve is rarely known. As aresult most project economists, when dealing with a project whose output is largerelative to the market, adopt a simplifying rule of thumb–they assume that the demandcurve is linear and downward sloping at 45 degrees. They then take the new estimateof the average value in use or opportunity cost–hence, of economic value–to be theaverage of the price without the project and the lower price with the project.

Sometimes a project will be proposed that does not meet new demand but replacesother goods or services in the market. Again, this is more common in industrial andtransport projects than it is in agricultural. In such situations, if the project accountsare cast on a with–and–without basis, the economic value of the incremental netbenefit stream would reflect only the saving from the new project compared with theold. This is because one of the costs of the new project would be the benefit forgonefrom the old production no longer realised and because one of the benefits would bethe cost avoided for the old production. Such a case might arise, for instance, if aninefficient food processing plant were to be replaced by a more modern and efficientone, or if a high–cost railway branch line were to be replaced by bus and truck transportalong an existing highway.

Occasionally, however, a project will be proposed for a new plant that will replaceexisting output, and the analyst fails to recognize the with–and–without situation.Instead, he values the output from the new plant as if it were meeting new demandand forgets to charge as a cost to the project the benefit forgone from the productionof the old plant that is to be displaced. If the project is not to be cast on a with–and–without basis, then the analyst must take as his gross benefit only the economic valueof the resources saved by replacing the old plant, not the economic value of the outputfrom the new plant. Note that some nontraded items may involve using significantamounts of imported raw materials. These will be considered below, in the discussionof indirectly traded items. Such items might include machinery assembled domesticallyfrom imported components or electricity that is generally nontraded but that mayrequire imported generating equipment and traded fuels for production.

One nontraded item that can sometimes lead to confusion is insurance. At firstglance, insurance might look like a transfer payment and thus would not be includedin the economic accounts of the project. We may, however, look upon insurance as akind of sharing of the risk of real economic loss. This would be the case for fireinsurance if project buildings were to be pooled with many other buildings in thesociety. In the event of a fire, there is a real economic cost. The resources used toreplace a burned building, or the output forgone because a building no longer isavailable, reduce the amount of final goods and services available to the society andthus create a real reduction of the national income.

Therefore, to the extent an insurance cost represents sharing of risk, it representsa proportionate sharing of real economic cost and should be included in the economicaccounts. The insurance rate is usually based on the probability of a real loss and thevalue of the item insured. Although the market price can frequently be accepted as agood estimate of the economic value of a nontraded item, for institutional reasons ofone kind or another the market price can vary significantly from the opportunity costof the item to the society. Two such nontraded items are important in most agriculturalprojects: land and labour.

Ecology, Capitalism and the New Agricultural Economy

Valuing Land

The opportunity cost of land is the net value of production forgone when the useof the land is changed from its without–project use to its with–project use. Thesimplest case to value is one in which land changes use but not management control,either because an owner–operator is farming the land or because the same tenantcontinues to farm it. This is a common case in agricultural projects in which farmersare simply encouraged to adopt a more productive technology. If the analyst has laidout the financial accounts to show the situations with and without the project forfarm budgets as suggested, then the incremental net benefit (that is, the incrementalcash flow) of the project, when financial prices have been converted to economicvalues and the accounts aggregated will include an allowance for the net value ofproduction forgone by changing the land use.

Take, for example, the Kemubu Irrigation Project in M alaysia in which newirr igation water permitted changing the land use in the dry season from ratherunproductive pasture to second–crop paddy rice production. The contribution of theland to the value of the pasture–hence, its opportunity cost–would be properlyaccounted for when the value of the weight gain of the livestock pastured on the landwithout the project is subtracted from the value of the paddy r ice produced on theland with the project. Converting project financial prices to economic values–say,changing the market price of the weight gain of the animals on the pasture and themarket price of paddy rice to their economic equivalents if these are seen to be differentfrom the market prices–automatically revalues the opportunity cost of the change inland use from financial to economic terms.

In other instances, however , the financial accounts must show a cost forpurchasing land or the right to use it. Here problems arise because in many countriesagricultural land is hardly sold at all, and, when it is, considerations of investmentsecurity and prestige may push its price well above what the land could reasonably beexpected to contr ibute to agricultural production. In these instances, we will not wantto accept the market purchase price as a good estimate of the economic opportunitycost of the land and must search for an alternative. Many times that alternative willbe to take the rental value of the land.

In a number of countries, although land is infrequently sold, there is a fairlywidespread and competitive rental market. This may be true if there is considerabletenancy in the country, of course, but it may also hold true if the dominant form ofland tenure is the owner–occupied farm. Older farmers may not wish to cultivate allof their holdings themselves and will be willing to rent a field to a younger neighbouringfarmer; widows may not wish to operate their holdings themselves; or a farmer sufferingfrom an illness may wish to rent part of his farm for a season while he recovers.When such a rental market exists, it probably provides a fair ly good indication of thenet value of production of the land and, hence, of the opportunity cost if the land useis changed.

A renter is not likely to pay any premium for prestige or investment security andthus will not pay a rent higher than the contribution the land can make to the crophe proposes to grow. That rental value may then be entered in the project’s financialaccount year by year as a cost. Alternatively, it may be capitalized by dividing the rentby an appropriate rate of interest stated in decimal terms; the capitalized value is

then entered in the first year of the project’s financial accounts.

Ecology, Capitalism and the New Agricultural Economy

The appropriate rate of interest actually would be the economic rate of return,but this may well involve repetitive computations. Some analysts prefer to use theopportunity cost of capital. If this rate were, say, 12 per cent and the going rental ratewere ` 525 a hectare, then the capital value of a hectare would be ` 4,375 (525–0.12 =4,375). If we were using the conversion factor approach to allow for the foreignexchange premium, this capitalized value would be, in turn, multiplied by a conversionfactor. If the standard conversion factor were 0.909, for instance, the land would thenhave an economic value of ` 3,977 (4,375× 0.909 = 3,977). At the end of the project,the same value of the land could be credited to the project as a residual value.

Inevitably, however, there will be instances in which neither the purchase pricenor the rental value is a good estimate; we then will have to make a direct estimate ofthe productive capability of the land. Such a direct estimate is not difficult if idle landis to be used for a settlement project. In the projects financed by the World Bank inthe Amazon basin at Alto Bene in Brazil and in the Caqueta region of Colombia, theland without the project would in effect have produced no economically valuableoutput at all. Hence, the net value of production forgone was clearly zero, and novalue for the land was entered in the project economic accounts.

If settlers were required to pay the government a purchase price, either all atonce or in installments, the farm budgets at market prices in the financial analysiswould have to show those payments as a cost. When these financial farm budgetswere converted to economic values, however, there would be no cost entered for theland because there was no reduction in national income as a result of shift ing its usefrom jungle to farmland. (Of course, the cost of clearing jungle land should be reflectedsomewhere in the project costs.)

In other cases it will not be so simple. The analyst will have to make a directestimate of the net value of production forgone for bringing the land into the project.A straightforward approach is to take the gross value of the land’s output at marketprices and deduct from that all the costs of production–including allowances for hiredand family labour and for the interest on the capital engaged, again all at marketprices. The analyst can assign the residual as the contribution of the land to theproduction of the output and take that as the opportunity cost of the land in financialterms. This set of computations can then be converted to economic terms by usingeconomic values for each of the input and output entr ies. For those familiar with thetechnique, estimating a production function would provide a much more accurateestimate of the contribution of the land to the value of the output than the directmethod described here and thus is a preferable approach.

Valuing Labour

Wage rates for labour in many developing countries may not accurately reflectthe opportunity cost of shifting labour from its without–project occupation to itswith–project use. The price of labour in a perfectly competitive market, like otherprices in that impossible place, would be determined by its marginal value product.That is, the wage would be equal to the value of the additional product that oneadditional labourer could produce.

It would pay a farmer to hire an additional labourer–for harvesting, for example–

Ecology, Capitalism and the New Agricultural Economy

so long as that extra worker increased total output by a value more than the wage thefarmer had to pay him. Even in labour–abundant societies, there are probably peakseasons at planting and harvesting when most rural workers can find employment. Atthose seasons, the market wage paid rural labour is probably a pretty good estimateof its opportunity cost and its marginal value product; therefore, we could accept themarket wage as the economic value of the rural labour.

The problem of course is that, except for the peak seasons, in many crowdedcountries the addition of one more labourer may add very little to the total production–in an extreme instance, nothing at all. That is, if there is a surplus of agriculturalworkers, there may be very little or virtually no productive outlet for their energies inthe off–season. In technical language, we may say that the marginal value product ofsuch labour–the amount such labour adds to the national income–is very close tozero. Because the marginal value product of labour is also the opportunity cost oflabour in the economic accounts, we may make another statement: if we take a laboureraway from a farm community where he is producing very little or nothing and puthim to work productively in an agricultural project that produces something of value,we do not have to forgo very much to use this labour to realise new production. Thisbeing the case, we can consider the cost of the labourer to be very low–someeconomists would say even zero. By this line of reasoning, the proper value to enterin the economic (not financial) account as the cost of labour would be very small,perhaps only a fraction of the going market wage. If the opportunity cost of labour inan agricultural project is properly priced at a very small amount, then it is likely thatthe rate of return on the project will look very favourable in comparison, say, with acapital–intensive alternative project that uses labour–saving tractors or expensiveimported harvesting machinery.

Note that the validity of this reasoning is not changed by the fact that agriculturallabour is, in fact, paid a wage well above its opportunity cost. A common example ofa “wage” paid, even though little productive work is available on the margin, is foundin the case of family labour. Older children and the farmer’s wife will be entitled to ashare of the family income even if the family farm is too small to give them anopportunity to be productive. In this instance, if an older son were to find productiveemployment elsewhere, the total production on the farm might be reduced by verylitt le or none at all. Yet, because the older son is entitled to a share of the total familyincome, he would accept new employment far away from his home only if he wereoffered a wage in excess of his share–and that might be well above what his marginalvalue product would be and the reduction in farm output that would occur if he wereto leave.

Rural wages may be above the marginal value product because of a traditionalconcept of a “proper” wage or because of social pressure on the more prosperousfarmers in a community to share their wealth with their less fortunate neighbours. Inparts of Java, for example, social custom prevents even quite small farmers fromharvesting their own rice. Instead, they permit landless labourers to do the work,even though the farmer himself may well have the time to do it. This is explicitly seenby the community as a means of providing at least something for the poorestagricultural labourers. Unfortunately, increasing economic pressures on small farmersand continued population growth are leading to a break–down of this system.

Ecology, Capitalism and the New Agricultural Economy

Virtually all economists now agree that the marginal value product of agriculturallabour on an annual basis worldwide is more than zero, so that in every instance ouropportunity cost of labour, at least in some season or another, will be positive–eventhough it may still be very low.

To begin our discussion of how actually to determine an economic value forlabour, we can take the easiest case. In most instances, skilled labour in developingcountries is considered to be in rather short supply and would most likely be fullyemployed even without the project being considered. Hence, the wages paid workerssuch as mechanics, foremen, or project managers are in general assumed to representthe true marginal value product of these workers, and the wages are entered at theirmarket values in the economic accounts.

The rationale here is that, if those skills are in such scarce supply that they wouldbe worth more than the going wage, then someone in the society would be preparedto pay more, and the skilled worker would then move to where he could earn thathigher wage, thus establishing a new equilibrium. This convention of accepting marketwages as good estimates of economic value may substantially undervalue skilled labouror the management skills of such top civil servants as extension specialists and projectmanagers–or project analysts!

Note too that, as we consider the opportunity cost of labour and how to estimateit, if we set the financial accounts so they correctly show the situations with andwithout the project, then the opportunity cost of family labour will be appropriatelypriced in financial terms. Suppose that, in the dry season without the project, a farmeralong the north coast of Java could find essentially no gainful employment. With theadvent of the Jatiluhur Irrigation Project he now is able to produce a second crop ofrice, and his net benefit rises accordingly. When we subtract his without–project netbenefit (which would be essentially only what the family could earn for a rainy–seasonrice crop) from the with–project net benefit (which will include earnings from twocrops), the incremental net benefit will correctly show the labour return the familyhad to give up during the dry season (essentially nothing) to participate in the projectand produce a second crop of rice. Shifting the financial prices in the farm budget toeconomic values also automatically converts the opportunity cost of family labour toeconomic values.

To make our farm budgets work this way, we must remember to include anyoff–farm earnings in the accounts. Suppose we assume that the farmer from the northcoast of Java goes to Jakarta and finds employment in the construction industry duringthe dry season, as many such farmers do. The without–project net benefit will thusbe increased by the amount of the farmer’s off–farm earnings. If he wishes to useJatiluhur irrigation water to produce a second crop of rice, he must now give up theconstruction wages he could otherwise have earned in the dry season. In turn, whenwe subtract the without–project net benefit from the with–project net benefit, whichincludes the returns from two crops of rice, the incremental net benefit will be smallerby the amount of the opportunity cost of labour at the market wage, that is, by theamount of construction earnings the farmer must forgo. We may proceed to convertthese financial accounts to economic terms by revaluing the appropriate entries attheir shadow prices. In doing so, however, we must remember that one shadow pricewill be the shadow wage rate for the construction earnings the farmer had to forgo. Itis to estimating this shadow wage rate that we now may turn.

Ecology, Capitalism and the New Agricultural Economy

In most discussions of the marginal value product of labour–hence, of its economicopportunity cost–the standard is the productivity of the marginal agricultural labourer.This is true not only for agricultural projects but also for projects in other sectors,since it is assumed that additional manufacturing employment, for example, will tendto reduce the number of unemployed agricultural labourers. This would be true evenif it is urban workers drawn from some other urban occupation who actually take thenew factory jobs, since it is assumed the jobs they vacate will, in turn, be filled byworkers drawn from agriculture.

Cast in this form, our estimate of the shadow wage rate must now focus on how

to estimate the marginal value product of agricultural labour without the project. We

can begin by noting that in most agricultural communities there is usually a season

when virtually everyone who wants work can find it. Even unemployed urban labourers

may return to their home villages in these peak seasons to help their families or to

work as hired labourers. This happens at harvest time in Java, and may happen at the

peak planting time in other areas where transplanted r ice is grown. Thus, we may

reasonably assume that this peak season labour market is a relatively competitive

one, that labour is in relatively short supply at this period, and that the daily wage at

this period is a good indicator of the daily marginal value product of the labour

engaged.With this accepted, a good estimate of the annual shadow wage for agricultural

labour is the number of days in the year when most rural labour can expect to findemployment, multiplied by the daily wage rate at such times, and reduced by aconversion factor if appropriate. If an agricultural worker’s daily wage at harvest were` 7.50, and during harvest and other peak seasons most people in the rural work forcecould find employment for 90 days, then his annual shadow wage might be ` 675 ifwe are using the shadow exchange rate approach to allow for the foreign exchangepremium (7.50 × 90 = 675), or ` 614 if we are using the conversion factor approachand the factor is 0.909 (7.50 × 90 × 0.909 = 614). Now if we wanted to hire anagricultural labourer to work in our project for 250 days a year, all the society wouldgive up in production–the opportunity cost–would be ` 675 if we are using the shadowexchange rate approach, or Rs614 if we are using the conversion factor approach.This opportunity cost is the economic value of the annual earnings of the labourerwithout the project. Note that we surely would have to expect to pay a wage muchgreater than this amount, and thus our financial accounts at market prices wouldhave quite a different cost for this same agricultural labourer. It is possible, for instance,that the hired labourer would expect a wage of ` 7.50 a day for all 250 days he workedduring the year, or an annual wage of ` 1,875 (7.50 × 250 = 1,875). More probably, hewould be willing to work for rather less a day outside the harvest season–say, Rs5.00a day. Thus, his annual wage might be something more on the order of ` 675 for 90days and ` 5.00 a day for the remaining 160 days, or an annual total wage of ` 1,475(7.50 × 90) + (5.00 × 160) = 1,475. The project analyst would clearly have to form ajudgment of the shadow wage of hired labour on the best basis he could, just as hemust for every other price estimate he makes.

Of course, in many agricultural projects labour is not engaged on a year–roundbasis. Rather, the work is quite seasonal, and we must consider in which particular

Ecology, Capitalism and the New Agricultural Economy

season hired labour would be engaged. If our new cropping pattern calls for work tobe done during the peak season, then we will have to consider that the peak seasonmarket wage is probably a good estimate of the marginal value product, and we couldnot justify using a lower wage as the basis for our shadow wage rate, even thoughthere might be considerable unemployment in the off–season. In Egypt, for example,a common rotation calls for both r ice and cotton to be harvested in October. If wewere to propose a project incorporating these crops–or another crop requiring hiredlabour at this period–then the going wage (in 1975 about E^0.30 a day; the symbol forEgyptian pounds is E^) would be paid.

Since even in a country as populous as Egypt most rural labour can findemployment at this peak season, the use of a shadow wage rate derived from a basisless than the market wage would be unjustified. But suppose our project called forgrowing maize, which is planted in May when there is little other agricultural workavailable and harvested in August before the peak harvest season for rice and cotton.Then we might find that, on the margin, many agricultural labourers were eitherunemployed or not very productively engaged at that season and that to draw theminto maize planting might entail an opportunity cost considerably less than the goingwage, although it would perhaps not be zero. Thus, we might estimate that at thisseason the combination of being able to work only two or three days a week on theaverage, and then at jobs of rather low productivity, would justify taking a shadowwage rate based on half the going market rate. This would mean the equivalent ofE^0.15 in 1975 if we are using the shadow foreign exchange rate approach (0.30–2 =0.15), or E^0.14 if we are using the conversion factor approach and the conversionfactor is 0.909 (0.30–2 × 0.909 = 0.14), even though our farm budget at market priceswould continue to show a wage for hired labour of E^0.30.

All of these considerations will have to be adapted to fit the circ*mstances of anygiven project. For example, in India nationwide we might expect a shadow wage ratefor agricultural labour rather less than the going wage rate. But using a nationwideshadow wage rate in particular projects might underestimate the true opportunitycost of the labour actually engaged in a project. The peak season in the Punjab, forinstance, finds virtually all agricultural labour fully engaged, but in the neighbouringstate of Haryana the marginal labour in agriculture is not fully engaged.

While many labourers from Haryana do migrate in search of peak seasonemployment in the Punjab, not enough do so to meet the demand for labourcompletely. Using a very low shadow wage rate for a project in the Punjab might beunjustified because at the peak season the project would have to bid labour awayfrom harvesting. Thus, although the shadow wage rate might not be as high as theharvest wage (but it might), neither would it be as low as conditions in neighbouringHaryana might otherwise indicate.

This discussion of how to value labour applies whether labour is to be paid amoney wage or is to be compensated in kind. The discussion so far has emphasizedthat it is the opportunity cost that determines the value of labour in the system ofeconomic analysis we have adopted. The value of the payment actually made to labour–whether in money or in kind–is not the issue. If we shadow–price labour, we alreadyare acknowledging that the wage the labour receives is different from the benefitforgone by using that labour in the project instead of in its next best alternative use

Ecology, Capitalism and the New Agricultural Economy

without the project. It is the opportunity cost of the labour, not the form of payment,that sets the economic value of labour. Hence, it is irrelevant in a determination ofthe economic value of labour whether labour is paid a money wage or is compensatedin kind–for example, in food grain, even though the food grain may be a tradablecommodity and even though the food grain itself might need to be shadow–priced ifit is to be valued.

Excess Capacity

In some projects, a domestically produced input may come from a plant that isnot operating at its full capacity. If that is the case, then the opportunity cost of usingthe input in a new project is only the marginal variable cost of producing the input,and no allowance need be made for the fixed capital cost of the plant itself. If thenational cement industry is operating at less than its full capacity and it is proposedto line irr igation canals with cement, then the cost of the cement for the canals wouldbe only the marginal variable cost of producing the cement. This would be less thanthe average cost of cement production, which would include some allowance for fixedcosts of production.

Situat ions such as these are more common in industr ial projects than inagricultural projects. When they do occur, however, they may influence the timing ofprojects. A canal–lining project might be quite attractive if it is begun soon, whilethere is excess cement–manufacturing capacity, but much less attractive later, whendemand has caught up with the cement industry’s capacity. To supply cement forcanal lining later, after demand has picked up, would entail constructing an additionalcement plant. At that time, new fixed as well as variable costs would be incurred, andthe analyst would include all costs, both fixed and variable, plus an estimate of the“normal” profit in calculating the cost of cement.

Tradable but nontraded items. In the system of project analysis presented here,we lay out the economic accounts as best we can to reflect the real resource costs andbenefits of the proposed project. The project will be carried out within a frameworkof economic policies set by the government. The project analyst must make the bestjudgment about what those policies are and will be, not just what they ought to be,and work the economic analysis accordingly. This can lead to difficult choices whenthe analyst must evaluate the real effects on resources of a project that involves itemsthat could be traded but probably will not be because of government regulation. Theseitems, which are “tradable but non–traded” across national boundaries, are valued asnontraded.

Such items would usually be imported were it not for an import quota.00

indicates that to some buyer the imported item is worth more than its domesticequivalent. If our project will use one of these engines, the economic value is not aprice based on the world market as if the engines could be relatively freely traded.Rather, it is the higher domestic market price of the imported engine, which indicatesits high opportunity cost. Upon reexamination, of course, we might consider changingthe project design to use the domestic engine–for example, we might do so if we findthe domestic engine to be less costly when valued at shadow prices.

For the domestic equivalent of an imported item, the market price usually willclosely approximate the real resource use that went into producing it. But if there is ashortage and the price is bid up, in the absence of additional imports the marketprice will rise above the cost of production. In this case, the opportunity cost of theitem will not be determined by the resources used to produce it but by its marginalvalue product in its best alternative use. If the price is higher than is justified by theresources used to produce the item, it may well be because to someone that high pricefor the domestic engine is worth it–for this buyer’s purposes, the marginal valueproduct of the scarce engine at least equals the market price.

If we wish to bid that engine away for use in our project, we are denying its useto the other potential buyer. If we use the engine in our project, the economy mustforgo the productive contribution of the engine in the alternative use the otherpotential buyer had in mind–our standard concept of opportunity cost. Again, in thisinstance the opportunity cost is most likely well estimated by the market price; if itwere not, other buyers would not have bid the price up so high for the limited numberof engines available.

If there is an import ban on an imported final good or service, then we will basethe economic valuation on the criterion of willingness to pay and accept the marketprice as a good indicator of the economic value of the product–provided that weexpect the trade ban to remain in force throughout the life of the project. Earlier wecited the example of a ban on sugar imports that would force the domestic price ofsugar above its border price. If the ban on imports will continue, then the higherprice of sugar indicates a willingness to pay that, in turn, is an indicator of the economicvalue set on sugar by the consumers. In the project analysis, we would accept thismarket price as the economic value, not a border price as if the sugar were beingtraded.

For both kinds of import substitutes we have cited, the analyst may want to prepare an analysis that will indicate the effect on the proposed project of lifting the import ban. We will discuss this topic further below, and value each separately. Take locally assembled tractors, for example. We may be told that the market price of ` 65,000 includes a 30 per cent local component (in other words, 30 per cent of the market price represents domestic value added) and that 70 per cent of the market price represents the imported component, which includes a 15 per cent tariff.

Thus, the local component will amount to ` 19,500 (65,000 × 0.3 = 19,500), andthe imported component including the tariff will amount to ` 45,500 (65,000 × 0.7 =45,500). The domestic value added will most likely arise from sources such as wagespaid domestic skilled labour and domestically manufactured items that use mainlydomestic raw materials. If so, we probably can accept the market price as a goodindicator of the opportunity cost to the economy of these items.

Ecology, Capitalism and the New Agricultural Economy

To determine the economic value of the imported component of the tractor, thetariff must first be eliminated. This may be done by dividing the value of the importedcomponent including the tariff by 1 plus the percentage of the tariff stated in decimalterms; this calculation gives a value for the imported component without the tariff of` 39,565 (45,500 1.15 = 39,565). This is, of course, the c.i.f. price converted to itsdomestic equivalent at the official exchange rate.

Now, if we are using the shadow exchange rate to allow for the foreign exchangepremium, we will want to revalue the imported component of the indirect import(after the tariff has been eliminated) to reflect the distortion in the prices of tradedgoods. To do this, we can take the c.i.f. price converted at the official exchange rateand multiply it by 1 plus the foreign exchange premium stated in decimal terms. Ifthe official exchange rate is ` 10 = US$1 and the foreign exchange premium is 20 percent, then for the imported component of the tractor we derive a value of ` 47,478(39,565 × 1.2 = 47,478). (We could, of course, have taken the c.i.f. Puivalent by theshadow exchange rate; this would have given the identical result.) The shadow priceof the tractor is now the market price of the domestic component, which we calculatedto be ` 19,500, plus the shadow–priced value of the imported component of ` 47,478–or a total economic value of ` 66,978 (19,500 + 47,478 = 66,978).

If we are using the conversion factor to allow for the foreign exchange premium,the economic value of the imported component will be the c.i.f. price converted tothe domestic currency equivalent at the official exchange rate after eliminating thetariff, or ` 39,565. To obtain the economic value of the domestic component we willneed to multiply it by the conversion factor. For efficiency prices, we would use thestandard conversion factor of 1 divided by 1 plus the foreign exchange premium statedin decimal terms. In this instance, the foreign exchange premium is 20 per cent, sothe standard conversion factor becomes 0.833 (1–1.2 = 0.833). Applying this to thedomestic component of the tractor, estimated to be ` 19,500 at market prices, gives usan economic value of ` 16,244 (19,500 × 0.833 = 16,244). The shadow price of thetractor now becomes the sum of the imported component valued at c.i.f. converted atthe official exchange rate and the shadow price for the domestic component, or ` 55,809(39,565 + 16,244) = 55,809).

In some agricultural projects, electricity is an important cost that may raisevaluation problems. Electr icity is usually thought of as a nontraded commodity. Inreality, part of the value of electricity in most developing countries arises from theimported generating and transmission equipment and, perhaps, from imported fuel.Thus, in our system of project analysis, electricity might be an indirectly traded item.The first difficulty is that the price charged for electricity is not competitively set,since there is no competition in electricity. Rather, electricity rates are administeredprices, and electricity prices thus may bear little relation to marginal value product orto opportunity cost. No easy means exists to resolve this problem.

Some average rate, or perhaps some weighted average rate, will probably have tosuffice as an estimate of opportunity cost at market prices. Once a rate is accepted,an estimate will have to be made of the domestic and imported components, and thecomponents revalued using the shadow exchange rate or a conversion factor asappropriate, just as for any other indirectly imported item (and as we illustrated earlierby the example of tractors assembled from imported components). These calculations

Ecology, Capitalism and the New Agricultural Economy

would usually not be undertaken by agricultural project analysts. The planning officeshould estimate a shadow price for electricity and other utilities to be used in allproject analyses.

For some agricultural projects, new generating facilities will be required. In thesimplest case, we might think of a project remote from the electric grid, such as asettlement project, in which a diesel generating unit might be included as a cost ofthe project. In that instance, there would be no particular problem of valuation. Whennew generating facilities would be needed to meet the demand on the power gridarising from an irrigation project, however, the problem would not be so simple.

Here, the best approach would probably be to ask the electricity authority for anestimate of the additional cost the authority would incur for this particular project,and then to treat that cost–properly shadow–priced to allow for the importedcomponent–as the opportunity cost. The cost of the additional facilities needed forthe project will probably have to be reduced to a kilowatt–hour basis (using, perhaps,the capital recovery factor to estimate the annual charge for the new facilities).

We have contrasted use of a shadow exchange rate and a conversion factor tocorrect for price distortions caused by import and export tariffs and subsidies, andwe have noted that the same correction can be realised whichever approach is used.This is illustrated in table, in which an economic account for a hypothetical project isdrawn up using both a shadow exchange rate and a standard conversion factor. Whenindirectly traded items will be used repeatedly in projects, it may be convenient tohave specific conversion factors that, once they are derived, can be directly applied tothe same class of indirectly traded items.

T able. Use of Shadow Exchange Rate and Standard Conversion Factor Compared

Economic Value (` )

Financial Using Using Remarks

Values Shadow Standard

Exchange Conversion

Rate‘ Factor

I tem

` US$

Inflow

Gross value of 1,750 175 2,100 1,750 Traded wheat produced

item

Total 1,750 175 2,100 1,750

Outflow

Unskilled labor 600 60 300 250 Nontraded(shadow wage

item

rate= 50%market wage)

Imported 200 20 240 200

fertilizer

Tractor services

75% imported 90 9 108 90 Traded component

item

Indirectly

Ecology, Capitalism and the New Agricultural Economy

25% domestic

component 30 3 30 25

traded item

Total 920 92 678 565

Net benefit 830 83 1,422 1,185

Ratio of inflow 1.90 1.90 3.10 3.10

to outflow

` = Indian rupees; US$ =U.S. dollars.

• The official exchange rate is assumed to be ` 10 = US$1. Financial prices areconverted by this official exchange rate.

• The foreign exchange premium is assumed to be 20 per cent. As in note a,the official exchange rate is assumed to be ` 10 = US$1.

• The shadow exchange rate is the official exchange rate of ` 10 multiplied by1 plus the percentage of the foreign exchange premium stated in decimalterms, or ` 12 (10 × 1.2 = 12), so that ` 12 = US$ 1. Foreign exchange pricesare converted into domestic currency values by multiplying the foreigncurrency price by ` 12.

• The standard conversion factor is the reciprocal of 1 plus the foreign exchangepremium stated in decimal terms, or 0.833 (1–1.2 = 0.833). Foreign currencyprices are converted into decimal currency values at the official exchangerate. Domestic currency prices are multiplied by the standard conversionfactor of 0.833.

And van der Tak suggest, and both sets of authors recommend that some centralagency prepare specific conversion factors for project analysts to use. It is possible ina parallel manner to derive “specific shadow exchange rates” that may then be appliedrepeatedly, although in practice this has rarely been done. Instead, when the shadowexchange rate approach is followed, nontraded items are decomposed into their tradedand nontraded elements and each is valued separately. Use of a specific conversionfactor can be illustrated by referring to table. Suppose we planned a number of projectsin which tractor services would be important and we wanted a specific conversionfactor for tractor services. Once we had the conversion factor in hand, we couldmultiply the domestic market price of items in each project by the same specificconversion factor to obtain the various economic values.

In table, in the column illustrating use of the standard conversion factor, we havea value for the imported component of the tractor services of ` 90, which was convertedat the official exchange rate. The domestic component was multiplied by the standardconversion factor to obtain an economic value of ` 25. If we accept this as a goodestimate of the value of the domestic component, then by adding the two we reach aneconomic value for the tractor services of ` 115. If we divide this economic value bythe domestic price, we obtain a specific conversion factor of 0.958 (115–120 = 0.958).In the future, we can simply multiply the market price of tractor services by thespecific conversion factor to obtain the economic value directly.

Economic Export and Import Parity Values

The economic value of a traded item–either an export or an import–at the farm

Ecology, Capitalism and the New Agricultural Economy

gate or project boundary is its export or import parity value. These values are derivedby adjusting the c.i.f. (cost, insurance, and freight) or f.o.b. (free–on–board) prices(converted to economic values) by all the relevant charges (again converted toeconomic values) between the farm gate or project boundary and the point where thec.i.f. or f.o.b. price is quoted. The general method of calculating export and importparity prices. When these financial prices are adjusted to derive their economicequivalent, both traded and nontraded elements must be valued simultaneously.

The methods for deriving import and export parity values are parallel. Thus, it isunnecessary to discuss the method for both; instead, we will discuss only derivationof the import parity price as an example because import parity values tend to be a bitmore complicated to derive. We may return to the example of the imported combineharvester used earlier to illustrate economic valuation of a traded item. In our financialaccounts, the c.i.f. pr ice of US$45,000 was converted to its domestic currencyequivalent at the official exchange rate of ` 10 = US$1, to which we would add, say, a10 per cent duty, ` 1,500 in domestic handling and marketing charges, and Rs2,250 ininternal transport costs to the project site–for an import parity price at the farmgateof ` 498,750 (45,000 × 10) + (45,000 × 10 × 0.10) + 1,500 + 2,250 = 498,750.

To obtain the economic import parity value at the farm gate or project boundarywhen using the shadow exchange rate to allow for the foreign exchange premium, wewould make the same computations except that we would use the shadow exchangerate and omit the tariff, which is a transfer payment. In the illustration of valuingtraded items, we assumed that the foreign exchange premium on the imported combinewas 20 per cent, and so we assumed a shadow exchange rate of ` 12 = US$1 (10 × 1.2= 12). Now, to obtain the import parity value of the harvester, we would convert thec.i.f. price to its domestic equivalent using the shadow exchange rate, omit the tariff,and then add the value of the nontraded domestic items. To simplify matters, we willassume that all costs of moving the combine to the project site reflect only nontradeditems–although that might not be acceptable if, say, the transport costs includedsignificant amounts of petroleum fuel. We now reach an economic import parityvalue of ` 543,750 (45,000 × 12) + 1,500 + 2,250 = 543,7501.

If we are using the conversion factor to allow for the foreign exchange premium,the foreign exchange would be converted to its domestic currency equivalent in theeconomic accounts by using the official exchange rate, and every nontraded itemwould be reduced by the conversion factor. Recalling that the standard conversionfactor is 1 divided by 1 plus the foreign exchange premium stated in decimal terms,we obtain a standard conversion factor of 0.833 (1–1.2 = 0.833). Now, to obtain theeconomic import parity value of the harvester at the farm gate or project boundary,we convert all foreign exchange costs to domestic currency at the official exchangerate and reduce all prices of nontraded items by applying the standard conversionfactor. Again, we will assume that the transport costs are predominantly made up ofnontraded items. As before, we will omit the tariff because it is a transfer payment.The economic import parity price thus becomes ` 453,124 (45,000 × 10) + (1,500 ×0.833) + (2,250 × 0.833) = 453,124.

In certain instances, the value in local currency of an imported item at the projectsite will be known, as will the rate of tariff and local transport charges from the pointof import to the project site. If this is the case, to determine the economic value it is

Ecology, Capitalism and the New Agricultural Economy

necessary to determine the c.i.f. price, take out the tariff, and allow for the cost ofdomestic transport. Using our previous values, we may know, for example, that acombine harvester delivered to the project site costs ` 498,750, that the tariff onimported harvesters is 10 per cent, and that local transport and domestic handlingfrom the point of import to the project site costs Rs3,750. We know that the officialexchange rate is Rs10 = US$1 and that the foreign exchange premium is 20 per cent,so the shadow exchange rate would be ` 12 = US$1 (10 × 1.2 = 12) and the standardconversion factor 0.833 (1–1.2 = 0.833). We deduct the cost of local transport toobtain a financial value of Rs495,000 at the point of entry, which includes the c.i.f.price plus the duty (498,750–3,750 = 495,000). To take out the duty, we divide by 1plus the percentage of the duty stated in decimal terms to obtain.

` 450,000 (495,000–1.1 = 450,000). This is the c.i.f. value at the official exchangerate. We can then divide by the official exchange rate to obtain the c.i.f. value inforeign exchange of US$45,000 (450,000–10 = 45,000). If we are using the shadowexchange rate to allow for the foreign exchange premium, we can obtain our c.i.f.economic value by multiplying by the shadow exchange rate of ` 12 = US$1 to obtaina value of ` 540,000 (45,000 × 12 = 540,000). Then, to obtain the economic value atthe project site, we would add the cost of transport from the point of entry to theproject site; this yields an economic import parity value for the harvester at the farmgate or project boundary of ` 543,750 (540,000 + 3,750 = 543,750). If we are using theconversion factor to allow for the foreign exchange premium, the economic value ofthe combine at the port will be the c.i.f. foreign exchange price converted at theofficial exchange rate, or ` 450,000 (45,000 × 10 = 450,000). To obtain the economicimport parity value at the farm gate or project boundary, we would add to this c.i.f.value the cost of domestic transport and domestic handling, reduced by the standardconversion factor, to obtain an economic import parity value of ` 453,124 450,000 +(3,750 × 0.833) _ 453,124.

It is clear that to derive the import and export parity values in the economicanalysis we must omit transfer payments, allow for the foreign exchange premium,and use shadow prices for those domestic goods and services for which prices areinaccurate indicators of opportunity cost.

Trade Policy Signals from Project Analysis

Up to this point, we have been discussing an analytical system that estimates thecontribution of a proposed project to national income within a policy framework thatthe project analyst considers will exist during the life of the project. We have assumedthat the project analyst has very little influence on trade policies, for this is true inthe agriculture sector in most countries. Questions often arise, however, about theeffects on a proposed project if trade policies were to change, and about whetherchanges in trade policies should be recommended.

Unfortunately, when assessing the effects on a project of policies that would liftor impose a ban on trade, the analytical issues become very complex, and the analysisof a single project is of limited usefulness. The limitations of project analysis ininfluencing policy arise from the partial nature of project analysis and from theassumption that the project investment does not significantly change price relationsin the economy as a whole. Two important cases involving trade policy often arise

Ecology, Capitalism and the New Agricultural Economy

that cause soul–searching among project analysts. The first is when a quota orprohibitive tariff prevents entry of a crucial input–perhaps fertilizer.

T able. Economic Export Parity Value of Cotton, Rahad I rrigation Project, Sudan

(1980 Forecast Prices)

Value Per Ton

Steps in the Relevant Steps in

Calculation the Sudanese Lint Seed Scarto

Example

Using shadow exchangeC.i.f. at point

C.i.f. Liverpoolof entry

taken as estimate

US$ US$

for all European

639.33 103.39

ports)Deduct unloading

at point of import

Deduct freight to Freight and

point of import insurance –39.63 – 24.73

Deduct insurance

Equals f.o.b. at

F.o.b. Port

US$ US$

point of export

Sudan

599.70 78.66

Converted at

shadow

exchange

rate of

Convert foreign

LSd1.000 =

LSd LSd

currency to

US$2.61lb

229.682 30.126

domestic currency

at shadow exchange

rate

Port handling cost

Deduct local Lint: LSd

port Charges 5.564 per ton – 5.564

Seed: ^Sd

1.510 per ton – 1.510

Scartoa

Conversion Convert to 86.934 12.882 1.102AllowanceCotton Seed

if necessary (^Sd217.336 × 0.4

+ ^Sd21.834 × ^Sd10

0.59+ ^Sd110.200 0.918

× 0.01)°

Deduct local Ginning, baling, and

storage,

transport, and storage (^Sd15.229

marketing per ton) – 15.229

costs (if not

part of project cost)

Collection and

internal

transfer (^Sd

1.064

per ton) – 1.064

Equals export Export parity

parity value

value at farm at farm gate ^Sd

gate 84.625

Using conversion

factors

C.i.f. at point C.i.f. Liverpool

of entry (taken as

estimate for all

European ports) US$ US$

639.33 103.39

Deduct unlo– Freight and

ading at point

of import

Deduct freight to – 39.63 – 24.73

point of import

insurance

Deduct insurance

Equals f.o.b. at

point

of export F.o.b. Port US$ US$

Sudan 599.70 78.66

Convert foreign Converted

currency at official

to domestic exchange

currency rate of

at official ^Sd1.000 = ^Sc120 ^Sd2

exchange US$2.8726 8.809 7.389

Ecology, Capitalism and the New Agricultural Economy

Rate

Steps in the Relevant steps ValueLint per ton Scartoa

Calculation inthe Sudanese Seed

example

Convert non Converted using

traded goods standard conve–

to equivalent rsion

domestic

value using f actor of 0.909 conversion

FactorsDeduct local port Port handling cost

Charges Lint: ^Sd5.564 5.058

per ton

Seed: ^Sd 1.510 1.373

per ton

Deduct local Freight to Port

transport Sudan

and marketing at ^Sd6.782 6.165 – 6.165

per ton

costs from

project to

point of export

(if not

part of project

cost)

Equals export Export parity

parity value

value at project at gin at project

Boundary site ^Sd– – 197.586 19.851

Conversion Convert to 79.034 11.712 1.002

allowance seed cotton

if necessary (^Sd197.586 I I

× 0.4

+ ^Sd19.851

× 0.59

+ ^Sd110.200

× 0.909 ^Sd

91.748

part of project cost)

Collection and internal

transfer (^Sd1.064

per ton) – 0.967

removed, then the project investment would look quite different.A change in trade policy, however, will have implications ranging far beyond the

boundary of the project itself, implications for both efficiencies in the economy andfor noneconomic objectives. A change in trade policy may bring a wide range ofchanges in other prices in the economy as well as in the price of fertilizer used onnonproject farms, and to be valid an investment analysis would have to be run withthe new price relations and include nonproject farms. Predicting these changes couldbe very difficult if the change in trade policy were significant.

At best, the project analyst could run his analysis again using a c.i.f. price forfertilizer and making a broad guess about what the changes might be in the rest ofthe economy both within and outside agriculture., He could then turn to thoseresponsible for trade policy and say that his project analysis signaled a need to considerwith care removing the quota against fertilizer. But note that the project analysis isonly a signal, not a criterion for decision; much, much more must go into a reevaluationof trade policy than the analysis of one project. The other important case in which achange in a quota proves very difficult for the project analyst is that of a quota againstimports that would compete with the output of a proposed project. If the imports areprohibited, the output of the project will sell for more in the protected market, andwhat otherwise might not be a very attractive project may now make sufficientcontribution to national income to be justified.

Again, i f policies are not going to be changed,

regional development; national considerations such as national integration or nationalsecurity; and environmental considerations that can be both ecological and aesthetic,such as the preservation of productive ecosystems, recreation benefits, or famousspots of scenic beauty.

The question of how to treat intangible factors most often arises when we areconsidering the benefits of a project. Many development projects are undertakenprimarily to secure intangible benefits—education projects, domestic water supplyprojects, and health projects are a few common ones. Intangible benefits are usuallynot the major concern in agricultural projects, although many agricultural and ruraldevelopment projects include components such as education or rural water supplyfrom which intangible benefits are expected. Whether in agricultural projects or inother kinds of projects, intangible benefits, even though universally agreed to bevaluable, are nevertheless virtually impossible to value satisfactorily in monetary terms.Yet costs for these projects are in general tangible enough, and the considerations offinancial and economic valuation we have discussed earlier apply unambiguously.

Intangible costs are not uncommon, however, and prove just as difficult to bringwithin a valuation system as benefits. Often costs are merely the inverse of the benefitsthat are sought: illiteracy, disease, unemployment, or the loss of a product iveenvironment or treasured scenic beauty. Some costs in agricultural projects, whiletangible, are very difficult to quantify and to value. Siltation, waterlogging, salinization,and soil loss are examples. These costs should not be ignored, and if they are likely tobe substantial they should be treated in the project analysis in a manner analogous tointangible costs. When considering projects in which intangible benefits or costs areimportant, the least the project analyst can do is to identify them: lives that will besaved, jobs created, kind of education provided, region to be developed, location of apark, ecosystem or kind of scenery to be preserved. Very often, the analyst can alsoquantify intangibles: number of lives saved, number of jobs created, number of studentsto be enrolled, number of people expected to use a park. Even such simple quantificationis often a substantial help in making an investment decision. Economists have triedrepeatedly to find means to value intangibles and thus bring them within the compassof their valuation system. The benefits of education have been valued by comparing theearnings of an educated man with those of one who is uneducated. Health and sanitationbenefits have been valued in the number of hours of lost work avoided by decreasingthe incidence of disease. Nutrition benefits have been valued in terms of increasedproductivity. Population projects have been valued by attaching a value to the birthsavoided.

Although work in these areas continues–especially with regard to environmentalimpact–few applied project analyses in developing countries currently attempt to usesuch approaches to valuing intangible costs and benefits. For one thing, such effortsgenerally greatly underestimate the value of the intangibles. The value of an educationis much more than just the increase in income–ask any mullah, monk, or priest.Good health is a blessing far in excess of merely being able to work more hours. Goodnutr ition is desirable for more reasons than just increased productivity. Moreover,the methodological approaches used to value intangibles turn out to be unreliableand open to serious question. Finally, there may be moral issues involved–many whosupport population programmes do so out of considerations that extend far beyond

any benefit–cost calculation.

Ecology, Capitalism and the New Agricultural Economy

In contemporary practice of project analysis in developing countries, the only

method used to any extent to deal with intangible benefits is to determine on a present

worth basis the least expensive alternative combination of tangible costs that willrealise essentially the same intangible benefit. This is often referred to as “least–cost

combination” or “cost effectiveness”. If the same education benefits can be providedby centralized schools that realise economies of scale but require buses or by more

expensive smaller schools to which students can walk, which schools are cheaper?Can the same health benefits be provided at less cost by constructing fewer large

hospitals but more clinics manned by paramedical personnel? By constructing a

waterborne sewerage system or by installing low–cost household sanitation facilities

that do not require sewers? Can the same number of lives be saved more cheaply by

buying up all the property rights in a flood plain and moving people out than by

constructing dykes and levees? Given two park sites that would give similar recreation

benefits–perhaps one that would require buying warehouse sites and another that

would require extensive filling and flood control along a river–which would be cheaper?Once it is determined that the least expensive alternative has been identified and itscosts valued, then the subjective question can be more readily addressed: is it worthit?

Interestingly enough, electricity projects are customarily analysed using least–cost combination. The marginal value product of electricity is in general consideredgreatly understated by the administered price charged; in any event, much electricityis used for home lighting that is very difficult to value. In practice, most power projectssimply compare alternative means of producing the same amount of power: steamgenerating stations versus a hydroelectric dam; a large generator with transmissioncosts and several years of idle capacity versus a series of smaller stations close to thedemand centers.

A variation of the least–cost combination method can be used to deal withintangibles in multipurpose projects. From the total cost of the project are deductedall those costs that can be directly attributed to tangible benefits–flood damage avoided,irrigation, navigation, and the like. These costs are compared with their associatedbenefits to determine if the purpose is worthwhile at all. Is the flood damage avoidedworth the direct costs incurred? Finally, the residual costs for the project are comparedwith the residual, intangible benefits. Is the number of lives saved by the projectworth the residual cost that must be incurred? The problems with valuing intangiblesare more common and more difficult to deal with in sectors other than agriculture.In agricultural projects, most of the benefits usually are tangible and can be valued.The costs and benefits can be compared directly to choose the highest–yieldingalternative. There are, however, several aspects of intangible benefits that are frequentlyencountered in agricultural projects. Agricultural extension services, for example, aresometimes considered to give an intangible benefit in greater farmer education. Forthe most part, it is best to treat such costs that may give rise partly to intangiblebenefits–or, at least, the incremental amount of such costs–as necessary within aproject if the total, tangible benefits are to be realised. If a dairy production projectrequires helping farmers to learn better sanitation procedures, then the extensionagents who teach the procedures are essential to the success of the project, and the

Ecology, Capitalism and the New Agricultural Economy

benefit of their effort is the tangible one of more and better milk.In rural development projects, there are often components that are hardly essential

to the main production objectives and that produce generally intangible benefits. Thisis the case when village schools, rural water supplies, rural clinics, or even agriculturalresearch costs are included in a project. If these components are relatively small incomparison with total project costs, as they often are, then the problem of valuingthe benefits may be ignored. But if such components form a significant part of totalproject cost, they probably should be separated out and treated on a least–costcombination basis. This procedure was followed in the analysis for the Korea RuralInfrastructure Project. The project included irr igation, feeder roads, communityfuelwood plots, rural domestic water supply, and rural electr ification. Finally, if theproposed project is one in which the output is wholly intangible, a least–costcombination approach is appropriate. This would probably be the case for agriculturalprojects in which the major investment is in extension, agricultural education, ruralwater supply, rural health improvement, or research.

Decision Tree for Determining Economic Values

Most issues of economic valuation in agricultural projects are covered by thisdiagram. The decision tree is used by taking an item to be valued in an agriculturalproject and tracing through the tree, following each alternative as it applies to theitem until the end of the tree is reached, where a suggestion about how to value theitem will be found.

To illustrate, we may trace through a few common elements in agriculturalprojects. Take fertilizer to be used in an irrigation project that will produce cotton.The fertilizer is tangible, involves real resource use, is traded, is a project input, andwould be imported without the project. Therefore, it is valued at the import parityprice. Or take agricultural labour to be used to apply the fertilizer. It is tangible,involves real resource use, is nontraded, is a project input, is nonproduced, is labour,and would be underemployed without the project. Therefore, it is valued by takingthe marginal value product of the labour in its without–project employment. (Notethat labour is defined as a tangible item, a possible source of confusion in using thedecision tree.) Or take a tax on the fertilizer. It is tangible, is a direct transfer payment,is a payment to or from government, and is a tax. Therefore, it is omitted from theproject economic account. Or, finally, take the cotton to be produced in the project.It is tangible, involves real resource use, is traded, is a project output, and will be anexport. Therefore, it is valued at the export parity price.

Ecology, Capitalism and the New Agricultural Economy

Chapter 3

at low prices under the pressure of circ*mstances. Often in farming families, everyoneis working–but is there any calculation of their labour value in pricing? Enacting thisreform will ensure stability in the lives of farmers.

This will necessitate changes in the economic system, but will have tremendousbenefits for the small farmer. This change in economic emphasis recognizes theimportance of farmers and their livelihood. Though food prices may rise in proportionto industrial goods, this does not mean that purchasing capacity will be less. Pre andpost–production agricultural industries (agrico and agro industries) must also betreated in a similar way. This will ensure the stability of the agricultural economicsector and pave the way for all–round economic prosperity based on a solid agriculturalfoundation.

Agricultural Cooperatives

PROUT recognizes the cooperative system as ideal for agriculture. It has beennoted that the cooperative system was a failure in communist countries. The largecooperatives in the Soviet Union and especially China had very low rates of productionand resulted in drastic food shortages. These state–run communes, however, are notthe cooperatives envisioned by PROUT. Their defects were many. Most importantly,they failed to create a sense of worker involvement by denying private ownership andnot providing incentives. Secondly, planning was made by central authorities and thelocal people had no say over their own work. Forceful coercion, including death, wasused to implement the commune system.

PROUT does not advocate the seizing of agricultural land or forcing farmers tojoin cooperatives. Rather, it is recognized that various factors are required for thesuccess of such a cooperative system. For example, it requires an integrated economicenvironment, common economic needs and a ready, local market. Furthermore, aphase–wise implementation process is also needed. In the first phase, an evaluationof economic holdings would be made. Those farmers owning profitable land wouldmaintain the rights of private ownership if desired, while those with insufficient ordeficient land (uneconomic holdings) would be encouraged to join cooperatives.

They would also retain the ownership of their land. Those who work as employeeson privately owned farms would be entitled to a percentage of net produce or profitsas well as salary. For cooperatives, compensation would be a combination of ownershipand labour, with roughly equal emphasis on both– i.e. shares would be based uponlabour and upon the percentage of land owned within the cooperative. There wouldalso be a bonus system based upon profits.

Hence people’s inherent desire for ownership and self–determination would notbe violated. There would also be a system of elected management with remunerationfor outstanding skills. The following chart gives an example of percentages of profitthat accrue to members in a cooperative, based upon their investment and/or labour,depending upon productivity.

Acres Per cent of Percentof

Owned Total Yield Shares Labour Profit

Farmar A 2 7.4% 7.4% 33% 9.86%

Farmer B 5 14.8% 14.8 33% 19.73%

Farmer C 10 33.3% 33.3 33% 44.39%

Ecology, Capitalism and the New Agricultural Economy

44.4% 44.4 0% 26.02%

One of the immediate benefits of cooperatives would be the utilization of landcurrently used for boundaries. In areas where agricultural land is limited or wherepopulation density is high, a good amount of land is wasted on boundary fences andunderutilized borders. Another major benefit would be the collective purchasing offarm equipment currently beyond the means of the individual farmers. Throughcollective capital or loans, irrigation facilities, dams, and other modern equipmentcan also be purchased or developed. Collective planning can also take place for thedevelopment of previously infertile land.

In the second phase of forming cooperatives, all would be requested to join themon a voluntary basis as there would be many successful examples and obvious benefits.In the third phase, there would be re–evaluation and rational distribution of land.The minimum amount of land necessary for an agricultural family to earn a decentliving, and the capacity of the people involved to utilize land will determine ownership.In the ideal stage, ownership of land will be less of a consideration as a true collectivespir it develops. This can be achieved only by phase–wise implementation along withall–round human development.

Ideal and Integrated Farming

PROUT recommends a system of integrated farming techniques for increasedproduction, higher produce quality, and environmental sustainability. Insofar asPROUT advocates that each block should be self–sufficient, especially in foodproduction, it is best if farming projects integrate many different products. M onocropagro–industry is viable only with a massive and wasteful distribution system–not tomention its environmental damage and low–quality produce. What is needed isdecentralized, integrated farming that will incorporate all types of agriculturalproduction and cottage industries. Only then can real self–sufficiency and sustainabilitydevelop. Integrated farming could include many areas such as agriculture, horticulture(orchards), floriculture (flowers), sericulture (silk), lac culture (for ceramics), apiculture(bee–keeping), dairy farming, animal husbandry, pisciculture (fish), pest control,fertilization, and related areas. It is best if the processing of any agricultural productstakes place locally for maximum efficiency and self–sufficiency. If energy production(bio–gas, solar, wind, etc.), water management, and developmental research take placelocally, self–sufficiency and sustainability will certainly be possible.

The maximum utilization of land is one of the main objectives of integratedfarming. The mass breeding of animals for slaughter is both cruel and from a foodperspective, inefficient. Land that could easily feed many people on a vegetarian dietcan feed only a few people if it is used for rearing animals for slaughter. There isincreasing awareness of the ill health effects of meat–based foods in the present age,and growing recognition of the damage caused by mass cattle rearing. From thisstandpoint alone, PROUT suggests that as far as possible, society should reduce andfinally eliminate the usage of meat. While advocating this goal in principle, it isnecessary to recognize that people’s psychology can be changed only through innerconviction, rather than imposition.

To achieve maximum utilization of land, three main crop systems are recognized:mixed cropping, supplementary cropping, and crop rotation. M ixed cropping involves

Farmer D 15

Ecology, Capitalism and the New Agricultural Economy

the selection of complementary crops for simultaneous growth. This technique canimprove space utilization, reduce erosion, conserve water, and utilize the naturalcomplementary plant relationships. For example, one plant uses nitrogen while anotherreplenishes it. Plant groups may include many interrelationships. In supplementarycropping, one plant is considered main and another minor or supporting. Crop rotationis the alternation of crops that have different suitable growing seasons. Crop rotationresults in less soil depletion, and ensures that land is productive year round, dependingupon climate.

PROUT advocates a system of sustainable agriculture and ecological balance. Asfar as possible, organic fertilizers should be used which maintain soil fertility. Advancedcomposting and plant combination techniques, along with a strong focus on research,will create considerable harmonious progress in agriculture. Many independent groupsand individuals are developing and implementing techniques and systems such asorganic and bio–dynamic farming, permaculture, microbial composting, radionics,and much more.

Decentralized agriculture is much more conducive for such techniques. Watermanagement is a key issue in sustainability. Riverside and lakeside tree planting, massafforestation, desert afforestation, rainfall capturing, artificial pond and reservoircreation, and other techniques would be implemented in a Proutistic agriculturalframework. As far as possible underground water reserves would be conserved tomaintain ecological balance.

Rural Development: Agro and Agrico Industries

Rural poverty is a major problem facing most areas of the world. Under capitalism,little attention has been given to the development of rural economies. Industrializationhas proceeded in a centralized manner, draining the populations of rural areas andcreating ever–expanding urban centers. These cities, especially in third–world nations,give rise to numerous social and ecological problems, and in many respects, fail toprovide a decent quality of life to their inhabitants.

There also seems to be no immediate solution to the rural exodus and globalurbanization crisis in the current economic setup. Hence, measures are needed todevelop rural economies and provide incentives for the diffusion of urban populationsinto smaller, more sustainable and humane communities.

While the long term solution to urbanization and rural poverty is an integrated,decentralized economy, the creation of pre– and post– agricultural productionenterprises (agrico and agro industr ies) is an important step to rural economicvitalization. In most impoverished rural economies, production or extraction of rawmaterials is the primary source of income, whether food production, plant fibreproduction or mining. What is needed is to bring all industries related to the processingand production of these resources to the rural areas themselves.

This will create a demand for skilled labour in rural areas and raise the livingstandards. Food preservation and processing, the production of finished fabric fromraw materials, oil production, milling, fertilizer manufacturing, tool manufacturing,etc can all be accomplished in rural areas. Combined with educational efforts and theintroduction of non–agricultural cottage industr ies, this will diversify and vitalize theeconomies and make a decent living standard possible. Combined with modern

Ecology, Capitalism and the New Agricultural Economy

communicat ions technologies and informat ion accessibil ity, the possibi li ty ofdecentralized economies and smaller communities emerges.

INDUSTRY

Decentralization and Self–Sufficiency

According to PROUT, economic planning has to begin at the grassroots level inorder to make use of and develop the experience and expertise of the local population.This implies that the optimal form of an economy is a decentralized one, rather thanthe centralized form which is present in both capitalist and socialist countr ies.Decentralization is preferred as it is the system which best allows local people toretain power over their own economic destiny. And as previously discussed,decentralization is a crucial ingredient for economic democracy. In order fordecentralization to exist successfully, there must be a cooperative economic structure.In such a structure the profit motive would be replaced by the desire to producegoods to meet the needs of the local people.

The desire for profit is often at odds with this idea of production for consumption.Capitalists start industr ies only where favourable conditions for production and salesexist. They therefore often ignore the real needs of a population insofar as profits areoften made at the expense of local people and the local eco–systems. Under thecooperative economic structure, self–supporting economic units will be the norm.Such units must be nurtured and strengthened. This requires a decentralized approachto industry as well as agriculture. Self–sufficiency does not mean only the localproduction of food– the industrial sector is highly important as well, and cannot beneglected. Hence PROUT advocates the existence of a full range of industries, mostlyon a small scale, for every socio–economic unit.

Three–Tiered Ownership and Economic Democracy

Under the Proutist economic system there are three different scales on whichindustry can be organized: key industries, cooperatives and private enterprises. Thelargest of these are the key industries, followed by cooperatives and then individualbusinesses. Key industries are those which require large capital investment and areon a large scale. Examples might be the railway system or steel mill. Key industriesmay also function on different levels of decentralization. While the railway systemmay be administered at the federal level, energy production or raw material extractionwould be administered by a local government.

It would be difficult to operate key industries on a cooperative basis due to sizeconstraints or their central role in economic production. As such the governmentneeds to control these industries on behalf of the population. These key industriesshould be operated on a no–profit, no–loss basis, while providing enough workerincentive to maximize efficiency, quality, and worker happiness.

It is a basic r ight in an economic democracy for workers to be involved inmanagement. As in agriculture, this is best accomplished through the cooperativesystem. Producer and consumer cooperatives form the mainstay of a PROUT economy.They are involved in the production and distr ibution of clothing, housing, food,medicines, appliances, personal transportation, etc. To serve the larger producer

Ecology, Capitalism and the New Agricultural Economy

cooperatives, many smaller satellite cooperatives should be formed. For example, manyof the component parts needed in automobile manufacturing can be produced by asatellite cooperative, and then shipped off to the car manufacturing plant for finalassembly. In this way, highly decentralized, specialized industries can be developedon a small scale. There is a high degree of autonomy and individual franchise in sucha system.

Entrepreneurs or small businesses form the third tier of a PROUT economy.These may be involved in the production of non–essential or luxury goods and services.Goods such as handicrafts or jewelry, and services such as restaurants might beappropriate for this. If anyone is privately employed in such an enterprise, there willbe incentive for the owner to compensate well and provide incentive, for at any timethe employees could leave to join a cooperative arrangement. And if a private industrybecomes too large it will be required to make a transition to cooperative management.

Rationalization (Scientific Planning and Development)

Under a capitalist system, the benefits of scientific advancement in an industryusually accrue only to the stockholders and often results in a loss of jobs. This is dueto the outlook that profits are to be maximized and that human beings are nothingmore than another capital input. Since the goal of PROUT is to satisfy the needs ofthe people instead of maximizing profits, any invention that increases productivitywill either lead to an increase in the workers’ compensation or increased leisure timewithout a resultant loss in income. A reduction in working hours, however, woulddepend not only on increased production, but also on demand for the product andthe availability of labour.

We have seen a call for a reduction of the average working hours from time totime in the industrially developed countries. Under PROUT such measures would bebuilt–in. PROUT strongly advocates regional self–sufficiency, yet it is clear that notall regions are blessed with equal resources. Advances made in science, however canhelp deficient areas to overcome a lack of natural resources. This will come aboutthrough advances in the production of synthetic raw materials, and through newmethods of utilizing existing resources.

SERVICES

Taxation and the Banking System

Instead of taxing income, as is customary at the present time, PROUT proposesthat taxes be levied at the point of production. Essential commodities would be taxfree. Hence, there would be less bureaucratic involvement, reducing governmentexpenditure, and the government’s income would accurately reflect the activity in theeconomic sector. The banking system would be under the control of cooperatives.There would, however, also be a central bank controlled by the government. Twopoints are important to remember in regards to the banking system; the first is thatbanks exist to serve the people, not to increase the wealth of a few select individuals.As such, careful regulations must exist concerning the income of banks. This problemis also partially solved by using the cooperative or credit union system. Secondly, inthe Proutist banking system, money will not be printed unless there is sufficient bullion

Ecology, Capitalism and the New Agricultural Economy

in the governmental treasury. To do otherwise contributes greatly to the spiral ofinflation and all of its attendant problems.

Banks will lend money to agricultural or industrial cooperatives and possiblyindividuals for productive enterprises– i.e. only for such endeavors which promise togenerate revenue. The maxim of a Proutist banking system is, “Keep money rolling.”The more that money circulates the greater its productivity. Idle money makes nocontribution to keeping an economy vital. It is, in fact, one of the causes of economicdepressions. Therefore, let purchasing and investment be ever increasing, with moneymoving more and more quickly. The more it changes hands, the more it increases thepurchasing capacity of the people and economic vitality. The only factor that shouldcurb the speed of the circulation of money is the sustainability of the biological diversityof the region.

Service and Buyers’ Cooperatives

Service cooperatives are considered very important in PROUT. Service providers,such as doctors, dentists, plumbers, etc., may decide to join forces and formcooperatives in the cases where the individual service provider is unwilling or unableto open their own practice. Thus, there is the scope for certain services to be offeredeither by private business or by the cooperative system. Buyer’s cooperatives wouldbe responsible for the distribution of most essential commodities. As far as possible,PROUT seeks to eliminate middle men who take profits but do not contribute toproductivity. In a decentralized economy, buyer’s cooperatives become very practicaland important. Food cooperatives have become quite popular in many places already,and this success should be extended to other aspects of the basic necessities.

Ecology, Capitalism and the New Agricultural Economy

Chapter 4

Quality Theories

IN TRODUCTION

With agricultural products it is particularly clear that quality is important indetermining price and even market structure, and for this reason agriculturaleconomics was the first to develop the economics of quality, starting with the hedonicapproaches following from Waugh. M ost of these theories are based on the realitiesof agricultural products in agricultural markets. There is, however, another set oftheories which is based on the assumption of rational economic man (REM) makingoptimal choices between goods on the basis of the objective characteristics of thesegoods, with perfect knowledge about the level of these characteristics and their prices.Some REM theories, such as the characteristics approach, come directly from theagricultural economists’ normative models for mixing animal feeds, using them asdescriptions of how rational economic man behaves.

There are now well over 10,000 papers in this research tradition which dependcrucially on the fundamentals laid down in the seminal papers even though additionalassumptions and a long chain of logic means that the theory may look very differentat first glance. These dominate the mainstream economics approach to quality andare also important in agricultural economics and marketing. In this paper the REMtheories are examined at a fundamental level in order to identify weaknesses commonto the whole REM research programme. Repeated reference is made to Lancasterbecause he provided the logical foundation for the research programme and his analysisis detailed, clear and rigorous. His work is the most cited in the economics of qualityand, indeed, his 1966 paper is one of the most cited in economics.

It will be shown here that the fundamental assumptions are not simplificationsbut conflict with observed reality. The boundary assumptions and ad hoc assumptionsare so restrictive as to forbid any real life situations. Conceptual and logical errorsmean that the conclusions do not follow from the assumptions. It is formally impossibleto test the theories by their predictions and no attempt has been made to do so. Thiscombination of weaknesses is fatal under any of five very different epistemologicalapproaches used by economists. These weaknesses are at a very basic level so theyaffect all theories and models sharing this common basis of assumptions, conceptsand logic.

This paper does not present any alternative to REM theories of quality, becausethere are already many established and in general use. There are, for instance, thehedonic approach, compensatory models, perceived quality, behavioural, behaviouristand heuristics approaches and the composite and complex approaches of agricultural

marketing economics (e.g. Bowbrick, 1992) and the new mainstream economics (e.g.Earl 1986). One may weed the garden without first breeding new orchid hybrids.

FUNDAM EN TAL ASSUM PTION S

In agricultural economics it is normally held that theory must be based onassumptions that are both realistic and non–tr ivial. Some simplification is necessaryand, indeed, desirable, but assumptions contrary to observed reality are not acceptable.

If trivial or unrealistic assumptions are used, an infinite number of theories canbe generated, and it would be absurd to test the predictions of all such theories, asthere is no reason to believe that they will be good predictors. Such theories are notnormally included in the canon of agricultural economics. (Some less commonepistemological approaches are discussed in the final section of this paper). Thefundamental assumptions are ones that cannot be changed without reworking thetheory from the beginning. In the seminal papers that set out the foundations for theresearch programme, it is not possible to get beyond the first stage of the analysis ifthese assumptions are changed. With those papers published today, which build along chain of analysis from these fundamental assumptions, the conclusions can bechanged radically if there is even the slightest change to the fundamental assumptions–‘for the want of a nail a kingdom was lost’.

It is not necessary to drop the assumption or change it radically The commonfundamental assumptions of the REM research programme are on,

• Consumer preferences,• Characteristics space,• Supply price,• Objectivity.Theor ies develop in many di fferent direct ions from these fundamental

assumptions, with different further assumptions, boundary assumptions and ad hocassumptions.

Assumptions on Consumer Preferences

REM theory is concerned with ‘characteristics’, which are the objective propertiesof goods. A good is a unique mixture of characteristics, so one combination of colour,seedlessness, juiciness, sugar and acids makes the ‘good’ Washington Navel Orange.Oranges in general are a ‘group of goods’. The theory is not concerned with anindividual’s subjective preference or ‘attributes’.

The research programme assumes that each consumer always prefers a goodwith more of at least one characteristic, so that an indifference curve between twocharacteristics in characteristics space looks like the traditional indifference curvebetween two goods in goods space.

This fundamental assumption has been formalized by Lancaster who shows thatit is necessary to assume transitivity, completeness, continuity, str ict convexity, non–satiation and all characteristics positively desired, in order ‘that the consumer’spreferences can be expressed in terms of an ordinal utility function of the neo–classicalkind with all its first order partial derivatives positive’. The intention is to ‘simplycarry over traditional preference theory, applying it to collections of characteristicsinstead of collections of goods’.

Ecology, Capitalism and the New Agricultural Economy

A basic conceptual error arises here, as a result of applying theory appropriate togoods to a completely different situation, characteristics. In standard economics weare talking of two goods which may be bought separately to be consumed separately,steak and ice cream, or bread and wallpaper, for instance. When we are talking ofquality, the characteristics are necessarily bought together and usually consumedtogether. One does not buy the creaminess, the sweetness and the flavour of an icecream separately, one buys ice cream.

Figure shows an extreme example, chosen to be favourable to REM theory. Heretwo characteristics of a good are consumed together. The pleasure the consumer getsfrom more peppermint flavouring in the ice cream is independent of the amount ofvanilla flavouring.

The consumer buys a premixed product and can buy different goods (flavours ofice cream) but cannot change them once bought. In this example it is assumed thatmarginal utility first increases with the level of the characteristic, then becomesconstant, then falls. The result is that when there is increasing marginal utility, theindifference curve is concave to the origin, rather than convex as REM theory demands.People prefer to have all one characteristic or all the other.

As quantities increase, a bull’s eye appears, surrounding the optimum productmix. In order to get indifference curves like those of Figure, it is necessary to assumethat there is a positive but declining marginal utility for all products at all levels andthat this is true for all characteristics at all times. This is contrary to observed reality.

In practice, consumers seldom value quality characteristics independently. Thepreferred amount of peppermint in ice cream depends on the level of other flavours,on the cream and sugar content and so on. The utility obtained from one characteristicdepends on the level of other characteristics, so ratio and proportion of characteristicsare important. This can be seen in Figure which shows a consumer’s preferences forthe characteristics ‘sugar’ and ‘acid’ in an orange. This consumer prefers an orangethat is medium sweet, medium acid, so the highest indifference curve is at the centreof a bull’s eye. If it is more acid, it will be perceived as sour, if less acid as bland, andeither way it will be on a lower indifference curve. This is in stark contrast to thetheories of Lancaster, Rosen and others in the REM research programme, which implythat consumers will always prefer the orange with the maximum amount of acid andsugar.

It also raises the possibility of buying fewer oranges of a preferred characteristicsmix, which these models do not allow. The fundamental assumptions of str ictconvexity, non–satiation, and all characteristics positively demanded clearly do nothold. In the previous example, it was shown that indifference curves like those couldbe obtained when there was a positive but declining marginal utility, when thecharacteristics were valued independently. Here it has been shown that this is not

Ecology, Capitalism and the New Agricultural Economy

usually so when the characteristics are valued together.A wide range of indifference curves can be expected in practice. There is one

utility peak for medium–acid, medium–sugar dessert apples and another one for high–acid, high–sugar cooking apples like Bramleys. The two peaks occur because thereare two end uses, but the claimed advantage of REM models based on objectivecharacteristics is that they work regardless of end uses and consumer perceptions.Multiple–peak indifference surfaces are common and some are caused by the laws ofphysics, not by idiosyncratic consumer preferences. For example, a chord consistingof two notes as characteristics gives most utility when the notes are identical or anoctave apart, and less utility at the discords in between. These multiple peak surfacesconflict with all the fundamental assumptions of REM theory.

All agricultural products may be contaminated. M ilk is valuable when pure, butless so when contaminated by insecticides, manure, kerosene, etc. The contaminantsthemselves may be valuable when ‘pure’ and not mixed with milk. Obviously, anyonewho buys a bottle of milk must consume the milk with the contaminants–it is notpossible to extract the insecticides or kerosene at this stage.2 If no contamination isacceptable, and pure milk and pure diesel are valued, the indifference curves consistof points where the axes meet the diagonal. Since contamination is a problem with allagricultural products, curves like this will occur between some axes of all products.

Fundamental Errors on Characteristics Space

REM theories of quality consist of analysis in ‘characteristics space’ with axes ofthe form ‘Level of Characteristic A’ and ‘Level of Characteristic B’. Conceptual andlogical errors in the fundamental assumptions on characteristics space invalidate thetheory. There is not, in fact, one single characteristic space of this form. Clearly anyanalysis that is valid for one of these characteristics spaces is invalid for any other.

Lancaster uses up to fourteen such spaces interchangeably:• Total amount of characteristic in total consumption. This requires the

assumptions of linearity and additivity. It appears to be the characteristicsspace used for the basic paradigm case.

• Total amount of characteristic in the diet.• Total amount of characteristic in a single unit of a good. This is the space

used for the automobile example.• One axis being ‘Cleaning power per dollar’ for goods in the product group

detergent This conflates two characteristics and introduces concepts like valuefor money. It does not appear in Lancaster.

• Level of characteristic obtained from one or more goods in one product group.This appears to be the characteristics space used for most of the analysis,including that which at first sight uses the paradigm case.

Ecology, Capitalism and the New Agricultural Economy

• Characteristics per unit of a good.• A space with a ‘normalized’ efficiency frontier, implying some kind of

‘normalized’ definition of characteristics. This is used for his second paradigm case. In fact different ‘normalized’ spaces may be created starting from any of the six previous spaces and be related to total consumption, to an auto mobile etc. so there are many more than seven spaces used. 3

It is not possible to proceed to Lancaster’s second paradigm case of ‘normalizedcharacteristics’ without the boundary assumptions of linearity, additivity, perfectknowledge etc. which are discussed below.

Fundamental Assumptions on Supply

The supply assumptions of REM theory are also fundamental, as they are necessaryfor the first stage of the analysis, determining an individual’s optimum purchase. Thefundamental assumption is that the supply functions for all characteristics of everygood are of the same form. It will be shown here that there are few products forwhich this is true of all or even most characteristics. In traditional analysis based onseparate goods it was reasonable to assume that all goods were positively priced andthat one could get more of a good by paying more for it. REM quality theory carriedthis assumption over, assuming that characteristics were positively priced. One couldonly get a good with more of one characteristic by paying more (and the origin of thetheory in agricultural economics stock feed mixing models is obvious here). Theseassumptions are no longer reasonable when dealing with a good whose characteristicsare necessarily supplied together. Why should it cost any more to buy a good justbecause it has more of one characteristic? REM theory would require for instancethat an orange with more acid content necessarily costs more. The constant outlaycurves are highest around a medium–sweet, medium acid orange, as market demandis concentrated on these. The very acid and very sweet oranges are cheaper.

This bull’s eye constant outlay curve is very different to the curve assumed byREM theory. The indifference curve of one individual, also a bull’s eye, is shown nextto this set of constant outlay curves. This individual’s optimum choice is clearly madeat a point where both constant outlay curve and indifference curves are concave tothe origin and there will be a trade off between quantity and quality. This is contraryto the whole of REM theory which assumes that the acid in oranges is always positivelyrequired, and is always positively priced so that the most acid oranges are preferredand are the most expensive. It also has an optimum choice where the indifferencecurve is convex to the origin.

Most agricultural markets are price taking, and prices are determined by demandin the short run, so preferences like those will lead to prices quite unlike those assumedby REM theory. Similarly, when input characteristics are different from the outputcharacteristics, as in art, agriculture and most industry, there is no obvious reasonwhy it should cost more to produce a good with a higher level of one characteristic.With many agricultural products those farmers with the skill to produce ‘higher quality’from the same inputs earn an economic rent.

Price making markets seem more promising at first sight. If a good is made bymixing ingredients and those ingredients are characteristics (as with feedstuffs), thenthe assumptions appear to hold. However, it is not possible to operate such price–

Ecology, Capitalism and the New Agricultural Economy

making markets under the REM assumptions that all buyers perceive the samecharacteristics in each good and are perfectly informed on price etc. It is not possibleto plot an individual’s multidimensional indifference surface from observed purchases,especially in cases.

This would require a very large number indeed of purchases in directly comparablesituations–with all other factors, including prices of alternative goods, held constant.It is seldom that an individual makes even a dozen purchases that would meet thiscriterion.

Fundamental Assumptions on Subjective or Objective Quality

REM theories of quality are attractive because the analysis is based on objectivecharacteristics, and ignore psychology, subjective preferences and so on. Theapproaches promise to be much cheaper and easier as a result.

The fundamental assumptions of most such theories are:• A good has objective characteristics, and consumers’ decisions are made solely

on these;• All individuals see the same characteristics in each good and perceive them

identically;• Individuals may value the characteristics differently. The REM theories

explicitly ignore subjective attributes and may ignore characteristics whichare difficult to measure.

These assumptions are rejected by the whole of marketing and market economicsand many branches of economics including information economics, the economics ofadvertising and the theory of monopolistic competition.

One approach used widely in marketing but inconsistent with the REM approachis that:

• Quality is in the mind of the consumer,• Consumers value a good purely for the characteristics they attr ibute to it

subjectively.

Choices are not made on the objective characteristics but on subjective attributes.The characteristics may or may not be related to the attributes, but advertising, brandimage etc. M eans that the relationship is seldom simple. Even if the consumers cansee some characteristics, they may or may not use them as a proxy for characteristics.Hedonic theory is usually based on assumptions incompatible with REM theory. Oneformulation is ‘I, the researcher, subjectively perceive that the goods on the markethave certain attributes (that is to say I have no objective knowledge of which arecharacteristics as defined by REM theory and, accordingly, no way of measuring them).Regression shows that goods with more of attributes A, B and C get a higher price. Ipredict that if the marginal producer switches to producing a product with a higherlevel of A, B or C, then he or she will get a higher price.’ This can produce accuratepredictions when consumers use something akin to the researcher’s attributes as cuesor proxies for their own, possibly very different, attributes.

It is not necessary that the researcher knows the characteristics as defined inREM theory, or that the consumer values them. Another common formulation is‘Market research shows that consumers ascribe certain levels of attribute to each

Ecology, Capitalism and the New Agricultural Economy

good in this product group. Regression analysis shows that the goods with the highestlevel of attributes X, Y and Z fetch the highest price. It is predicted that if the marginalproducer can increase the level of X, Y or Z, whether by changing productionspecifications or by changing the brand image, then he or she will get a higher price.This formulation does not require any knowledge of objective characteristics by theresearcher or anyone else.

If the assumption of objectivity is dropped, then REM theory falls away. ‘If differentindividuals were to “see” the same goods in fundamentally different ways, there wouldbe little point in devising an analysis to take account of the objective properties ofgoods. For then either it is meaningless to speak of “objective” properties, or thoseproperties which are objective are irrelevant to people’s relationship to goods.’.

The REM approach can only work if it is possible to plot the indifference curvesof all individuals on the same set of axes, and if each individual faces the same supply.

This is not possible under any of the following conditions: individuals:• Perceive different characteristics in a good,• Perceive nonexistent characteristics like dietary fibre in beef,• Ignore ‘objectively important’ characteristics like dangerous food additives,• Perceive a different set of a good’s characteristics as being relevant,• Value the same set of characteristics but perceive and measure them in

different ways–even with perfect knowledge of an automobile’s power, forinstance, individuals might perceive it in terms of engine capacity, top speed,acceleration from a standing start or ability to pull a trailer.

In all these cases, neither the preferences of different individuals nor the supplyfacing them can be plotted on the same diagram.Consumer preference for an attribute,like'refreshing' for an orange may be linear and positive even when the preference forobjective characteristics like acids, sugars and juiciness is not. This makes hedonictheory more applicable for attributes than with REM theory.

A further set of constraints arises because subjectivity implies that people do notperceive characteristics correctly. In principle an individual could plot his or her ownindifference curve, against attr ibutes like ‘My perception of attribute A’ or even ‘Myperception of characteristic B’. If these diagrams are brought together onto anotherdiagram with axes l ike ‘Perceived level of At tr ibute A’ or ‘Perceived level ofCharacteristic B’, the difference in perception means that a single good will occupymany different positions, perhaps as many as there are individuals. Similarly, priceand budget lines will occupy different positions, depending on the ‘quality’ they areperceived to apply to.

If a researcher were to replot the diagrams against his or her own perceptions, sothat the same point always applied to the same good, the shapes of the indifferencecurves would change.

The smooth indifference curves presented here would become very jagged,showing that someone thought that two boxes of brand X were equivalent to one boxof brand Y with identical ingredients, for instance. In this case, none of the REMassumptions of str ict convexity, transitivity, completeness, continuity, non–satiationand all characteristics positively desired, can be expected to apply.

One of the biggest attractions of REM theory is that it claims to predict saleswhen the objective characteristics of a product are changed. In practice, attributes

Ecology, Capitalism and the New Agricultural Economy

may change while characteristics remain constant because of advertising etc., or brandimage may remain constant through repeated re–formulations of the product.

This analysis confirms Lancaster’s belief that REM theory cannot work ifsubjectivity is allowed. It is not possible to reach even the basic paradigm case wherethe preferences and decisions of different individuals are compared on the samediagram. In practice even those who work within REM theory find it very difficult toavoid using attributes, which suggests that the theory has no practical application.

BOUNDARY ASSUM PTION S

Boundary assumptions set out the domain in which a theory is intended to work,and each of the REM theories has different boundaries. Surprisingly, these are seldommade explicit. The example of Lancaster is used here as he sets out his boundaryassumptions and other assumptions rigorously and completely, as his formulationremains the paradigm case and as it is the dominant theory of quality today.

Among the assumptions are:• One unit of characteristic gives the same satisfaction whatever good it is

part of. Chilli powder gives the same satisfaction in ice cream as in chilli concarne.

• It is the level of characteristic in total consumption that determines thesatisfaction achieved: the level in any good is irrelevant. It does not matterwhether the chilli powder is eaten neat, by the pound, or as a seasoning tomany dishes.

None of his optimization or aggregation procedures apply where these assumptionsdo not hold. These assumptions are wrong if they are self–contradictory or if, as headmits is true of his 1975 paper, they rule out all reality. These assumptions limit theapplication of his theory to situations like the perfectly informed farmer mixing chickenrations, (ignoring most of the constraints) and this is the theory from which REM theoryevolved. It cannot be used elsewhere. Hendler, Ladd and Zober and Lucas stronglycriticized this theory for its over restrictive boundary assumptions but, worryingly, only1.5% of the people who have cited Lancaster in recent years have cited these criticisms.

Ad Hoc Assumptions

Ad hoc assumptions are ones added to a theory because the theory will not workotherwise. They are not to be confused with fundamental assumptions, boundaryassumptions or realistic assumptions made to fit a theory into a model of a real worldsituation. Typically each ad hoc assumption is an unrealistic assumption that limitsthe number of real life situations the theory can apply to. Each explicit ad hocassumption introduces implicity assumptions. The more ad hoc assumptions thereare, the less likely it is that the theory will apply to any real world situation. Lancasteris one of the few writers attempting to make his assumptions explicit. There are 40–60 explicit ad hoc assumptions in Consumer Demand with sixteen in Some are

It is not possible to determine whether or not the assumptions apply in any case,to determine an individual’s transformed indifference curves in specification–quantityspace for instance. Formally, they are no different from assumptions about how manyangels can dance on the end of a pin. Surprisingly, Lancaster in Variety, Welfare andEfficiency draws from these assumptions a wide range of conclusions on ‘welfare,

Ecology, Capitalism and the New Agricultural Economy

100

variety and the GNP’, ‘intra industry trade between identical economies’, ‘variety incapital goods’, ‘the optimal division of labour’, and ‘variety and economic development’.

Two Stage M odels

Lancaster’s two–stage model was abandoned as unworkable in his later work. Ithad the infinitely more restrictive assumption that characteristics are derived fromconsumption activities in which goods, singly or in combination are the inputs. It canonly work if, for instance, all consumers eating meals prepared from a shopping basketperceive the same output characteristics, regardless of which set of meals is preparedfrom it, or who cooks them.

HEDONIC PRICES

In the preceding sections reference has been made to hedonic analysis whichgoes back to Waugh, which was market based, not REM based. This was established35 years before most REM theory and is logically independent of it. NeverthelessRosen is an attempt to justify Waugh from a REM standpoint and Lancaster issometimes seen to have the same objective. Rosen’s fundamental assumptions areclose to Lancaster’s, though the analysis develops in a different direction.

The failings of REM theory discussed above mean that this support is invalid. Inaddition, however, REM theory uses different prices from that used in hedonictheory.7Hedonic prices are defined as the implicit prices of attributes and are revealedto economic agents from observed prices of differentiated products and the specificamount of characteristics associated with them. Econometrically, implicit prices areest imated by the first–step regression analysis (product pr ice regressed oncharacteristics) in the construction of hedonic price indexes.

If most transactions had taken place in the SW quadrant, the prices of bothcharacteristics would appear to be positive, if in the NE both would appear to benegative. If most transactions were in the SE or NW, one characteristic would bepositively priced, one negatively. There would be a poor fit if transactions werescattered randomly. Yet this is a situation where there is a clear, consistent and logicalrelationship between the price of goods and the level of their characteristics. Whywould a consumer with a price list wish to know the regressions or the ‘price of eachcharacteristic’? M arket research suggests that people are more likely to rank goods bytheir characteristics or attributes and then by their prices and after this make a choice.REM theories and hedonic theories deal with different types of prices so REM theorycan neither support nor refute hedonic theory.

CAN PREDICTION S BE TESTED

It is not possible to test economic theories directly, as they are not presented in away that applies to the real world. Instead they must be tested indirectly. Do modelsof real world situations and markets using Theory A predict better than models,otherwise identical, using Theory B? This test is possible if and only if there is nodoubt that all the assumptions of the theory apply. If this were not so, inaccuratepredictions could be taken as evidence that the assumptions did not hold in this case,rather than that it was bad theory.

It is no criticism of a theory that it does not work outside its boundaries. It has

Ecology, Capitalism and the New Agricultural Economy

101

been shown above that there is a strong reason to believe that the assumptions do nothold in any real situation. It is further shown that it is not possible to determine inany market that most individuals have the preferences assumed (though it may beeasy to show that they do not). Accordingly it is not possible to say in any case whethera prediction was wrong because the assumptions of the REM theory did not hold, or.

Hedonic prices are defined as the implicit prices of attributes and are revealed toeconomic agents from observed prices of differentiated products and the specificamount of characteristics associated with them. Econometrically, implicit prices areest imated by the first–step regression analysis (product pr ice regressed oncharacteristics) in the construction of hedonic price indexes. The REM analysis isconfusing: Rosen appears to assume that the set of prices facing buyers is at the sametime:

• A market clearing price.• An average equilibr ium price at the end of a day's trading.• The price facing each buyer and each seller at all periods through the day.Whether a good prediction occurred precisely because a bad theory was used in

the wrong place. Some of the epistemologies discussed below do not require realisticassumptions or correct logic: they require only that the predictions of a theory havebeen tested repeatedly and have been found to be consistently good predictors. Thismay be modified to the statement that they have been found to be good predictors inX% of cases, which requires that a much greater sample has been tested.

It would be extremely difficult and expensive to carry out such a programme oftests in the necessary systematic fashion. Several extensive literature searches havefailed to show any evidence of such a programme for any one of the REM theories ortheir variants. Even if a programme had been attempted, it is doubtful whethermeaningful results would have been obtained as there are well–recognized problemsidentified by the Victorians,8 Hutchinson, M achlup and ‘sophisticated falsificationists’(including Popper) in refuting a theory in this way.

Very few uses of the theory have been designed as tests: rather researchers haveused the theory as a tool to make a prediction. The situations chosen have not beenselected as random samples of a specific type of situation from a known population,and very few of the uses are reported–some gave ‘negat ive’ results and areunpublishable and others are commercial secrets. One cannot therefore, comb theliterature and show that Theory X gives a better prediction in y% of cases.

How Serious are These Weaknesses

The following weaknesses have been identified:

Fundamental Assumptions

• The fundamental assumptions on preferences are wrong. They are contraryto observed fact. They are not simplifications of reality. It is improbable thatany individual will have preferences like those assumed for any product group.

• Serious logical errors arise from confusions about characteristics space.

• The fundamental assumptions on supply are wrong in most cases. They mayapply in price making markets but here other REM assumptions do not apply.

• The REM theories depend crucially on assumptions of objectivity. M ost

Ecology, Capitalism and the New Agricultural Economy

102

economists and market researchers think it essential to include subjectivityin any analysis.

Other Assumptions

• Boundary assumptions rule out most of the real world.'The ingenuity of thesenineteenth century writers knew no bounds when it came to giving reasonsfor ignoring apparent refutations of an economic prediction, but no grounds,empirical or otherwise, were ever stated in terms of which one might rejecta particular theory' Blaug.

• The large number of ad hoc assumptions means that the theories do notapply to any real world situation.

Do the Assumptions Apply

• It is not possible to say in any situation that the fundamental, boundary orad hoc assumptions apply, though it may be possible to say they do not. It isnot possible to plot a multi dimensional indifference surface for an individual,or in practice the prices facing an individual. Accordingly, bad predictionsmay arise because the theory is operating outside its domain, not because itis a bad theory.

Has the Theory Been Tested

• There has been no programme of crucial tests on any of the REM theories ortheir variants.

Are These Weaknesses Fatal

REM theory fails in its own terms: all REM theory is constructed in the beliefthat there is a special virtue in applying str ict logic to stated assumptions. Agriculturaleconomists usually believe that there is a virtue in working from what we know–observed facts about agricultural markets–to what we do not know–predictions. Manycan expect to lose their jobs if they make patently false assumptions, that beef growson trees, for instance, however accurate the predictions of the resulting model. Fromthis epistemological viewpoint the REM theories must be rejected because they conflictwith observed reality.

The idiosyncratic belief that theories can only be tested by their predictions, andthat assumptions are irrelevant, is strange in a discipline where it is easy to testassumptions and very difficult to test predictions. Even under this epistemology, thelack of testing means that we have no reason to prefer these theories to any of aninfinite number of possible alternatives. Even under Friedman’s approach, acceptedby some economists, the fact that assumptions are contrary to observed reality makesthese the least attractive of the untested theories.

AGRICULT URAL AND ANIM AL SCIEN CES

Introduction

Agriculture is the mainstay of the Indian economy. The agricultural sector todayprovides livelihood to about 64 per cent of the labour force, contributes nearly 26% ofGross Domestic Product and accounts for abut 18% share of the total value of the

Ecology, Capitalism and the New Agricultural Economy

103

country’s exports. It supplies bulk of wage goods required by the non–agricultural sectorand raw materials for large sections of industry. It is but natural, therefore, that facilitiesfor agricultural education are expanding at various levels. The Government had alsocreated a Department of Agricultural Research and education (DARE) in the M inistryof Agriculture to coordinate educational and research activities. As an apex body of theNational Agricultural Research System (NARS), the Indian Council of AgricultureResearch (ICAR) located in this Department is entrusted with national agriculturalresearch agenda.

Education in the area of Agricultural and Animal Sciences covers AgriculturalSciences, Veterinary Science and Animal Husbandry (which along with Animal ProductTechnology such as Dairying is now known as Animal Science), Fisheries, Horticulture,Sericulture, and Forestry and Wild Life. Home Science is also considered a part ofa*gricultural education and, therefore, most of the Home Science Colleges are affiliatedto Agricultural Universities. In addition, Food Science and Technology is also treatedas a subject allied to agricultural science. When India attained Independence in 1947,there were about 15 institutions in the country providing agricultural and veterinaryeducation with a total intake capacity of around 1500 students. These institutionswere established by the State governments and were managed by the respectivedepartments of agriculture and animal husbandry of the concerned States.

In 1954, the Government of India appointed a Joint Indo–American Team tomake a comparative study of the institutions dealing with agricultural educationresearch in the United Stated and India. The Team which submitted its report in1955, made recommendations, among others, the adoption of the pattern of highereducation as in Land Grant Colleges of American Universities. This recommendationled to the establishment of separate agricultural universities. The first agriculturaluniversity, Govind Ballabh Pant University of Agriculture and Technology, modelledafter the Land Grant Colleges of USA was set up in 1960 at Pantnagar in Uttar Pradesh.This was followed by the establishment of State Agricultural Universities (SAUs) inother States.

At present, there are 29 agricultural universities located in 18 States of which threeare specialized in nature–Dr Yashwant Singh Parmar University of Horticulture andForestry, Tamil Nadu Veterinary and Animal Sciences University, and West BengalUniversity of Animal and Fishery Sciences. Besides, there are six deemed University ofAnimal and Fishery Sciences. Besides, there are six deemed universities viz., AllahabadAgricultural Institute, Indian Agricultural Research Institute (New Delhi), IndianVeterinary Research Institute (Izatnagar, UP), National Dairy Research Institute (Karnal,Haryana), Central Institute of Fisheries Education (Mumbai), and Forest ResearchInstitute (Dehra Dun, UP). Except the Allahabad Agricultural Institute and the IndianAgricultural Research Institute, all deal with specialized areas.

All the agricultural colleges and colleges in specialized areas like, fisheries, forestry,animal sciences, horticulture, dairy science and technology and home science earlieraffiliated to general universities had been transferred to agricultural universities astheir constituent colleges. Nine general universities also have agricultural faculties,viz., Al lahabad University, Annamalai University, Banaras Hindu University,Bundelkhand University, Chaudhari Charan Singh University, M eerut, Dr Bhim RaoAmbedkar University, Agra, M aharshi Dayanand Saraswati University, Ajmer,

Ecology, Capitalism and the New Agricultural Economy

104

Mahatma Gandhi Chitrakoot Gramodaya Vishwavidyalaya, Nagland University, andVisva–Bharati.

Educational Opportunities

Education is offered by agricultural universities at graduation, post graduationand doctoral levels in eleven fields:

1. Agriculture,2. Veterinary Science and Animal Husbandry (Animal Science),3. Agricultural Engineering,4. Home Science,5. Fisheries Science,6. Dairy science and Technology,7. Agricultural Management (including Marketing, Banking and Cooperation),8. Forestry,9. Horticulture,10. Sericulture, 11. Food Science and Technology.Of the six deemed universities, four viz., Indian Agricultural Research Institute,

Indian Veterinary Research Institute and the Central Institute of Fisheries Educationand Indian Forest Research Institute offer only postgraduate and doctoral courses.The other two, viz., the National Dairy Research Institute and the Al lahabadAgricultural Institute have courses at all the three levels and also at the diploma level.A few general universities offer postgraduate courses in biological sciences whichhave a bearing on agricultural and animal sciences, such as, agricultural botany,agricultural zoology, agricultural biochemistry, forestry, fisheries, sericulture, foodsciences.

Each state has its own system of admission to the first degree programmes e.g.,in Andhra Pradesh there is a common entrance test EAMCET for the selection ofcandidates for engineering, agriculture and medical courses. The Indian Council ofa*gricultural Research (ICAR) conducts an All–India Entrance Examination for fillingup 15% of the total number of seats in all branches except Veterinary Science in StateAgricultural Universities (SAUs), and the Central Agricultural University, Imphal(Manipur) and all seats in National Dairy Research Institute, Karnal (Haryana). From2000 AD the system of direct nomination of candidates by the Council had beenabandoned.

To encourage students to opt for pursuing courses in any State other than theirhome State, National Talent Scholarship of ` .800.00 per month is awarded on thebasis of the results of the Entrance Examination. The IARI also conducts a CombinedExamination for the award of Junior Research Fellowships and admission to Master’sDegree programmes in SAUs, Central Agr icultural University (CAU), Imphal(Manipur) and the four deemed universities viz., the Indian Research Institute. Twentyfive% of the seats in SAUs and the CAU and all the seats in the four deemed universitiesare filled up on the basis of this examination. Students who opt to join Master’sDegree programmes in universities and institutions other than from where they haveobtained the Bachelor’s degrees are awarded Junior Research Fellowships. The valueof the fellowship is ` .5,000.00 per month for graduates in Veterinary Science and

Ecology, Capitalism and the New Agricultural Economy

105

` .3,600.00 per month for graduates in other disciplines. In addition, a ContingentGrant of ` .6,000.00 per annum is also given. The Veterinary Council of India alsoconducts an All–India Common Entrance Examination for filling up 15% of totalnumber of merit seats in veterinary colleges for the first degree programme. Till 1999,the examination used to be conducted by the ICAR.

The duration of the courses is four years except animal sciences and home science.In some universities Honours degree course in Agriculture needs six months ofinternship. The duration of animal science courses is five years including a compulsoryinternship of six months. Home Science course is of three–year duration. All thecolleges follow either semester or trimester system. All universities follow grade pointaverage (GPA) system for grading students qualifying in the examinations.

The entry requirement for all the first degree programmes, except dairy technologyand agricultural engineering, is a pass in 10+2 examination with physical and biologicalsciences or vocational courses in agriculture, fisheries, veterinary science instead ofeither biological science or physical science. Mathematic and physical sciences areessential qualification requirements for dairy technology and agricultural engineering.Most universities insist on a minimum of 55% marks in the aggregate. M inimum ageof entry is generally 17 years.

Agricultural Science

There are at present 66 colleges and university agricultural faculties within theagricultural university system. Besides, eight general universities also offer agriculturalscience courses. M ost of the colleges and agricultural faculties provide first degree,postgraduate degree and doctoral degree progrmmes in agricultural sciences. Thenomenclature of the first degrees awarded by most of the universities is either B.Sc(Agriculture) or B.Sc (Agriculture) (Honours). Only two universities, viz., ChandraSekhar Azad University of Agriculture and Technology and Govind Ballabh PantUniversity of Agriculture and Technology award B.Sc (Agriculture and AnimalHusbandry), incorporating the Animal Husbandry component in the course.

At the Masters and Doctoral levels courses are available in a wide range ofspecialisations. M.Sc (Agriculture) course is of two–year duration. gives an illustrativelist of subjects offered at the Master’s degree level. Non–agricultural graduates arealso admitted to the M.Sc (Agriculture) programmes in some universities (e.g., IndiraGandhi Krishi Vishwavidyalaya, Jawaharlal Nehru Krishi Vishwavidyalaya and IndianAgriculture Research Institute) in some selected specialisations, such as, agriculturalphysics, agronomy, agro–meteorology, agricultural economics, biotechnology, plantpathology, plant breeding and genetics, agricultural botany, agricultural biochemistry,agricultural chemistry, entomology. They must, however, have studied the cognatebranches of natural sciences, social sciences and technology. In some universitiesthey are also required to take stipulated remedial courses in Agricultural disciplinesfor Master’s degrees. Courses in M.Sc in Agricultural Biotechnology are now beingintroduced in several universities exclusively for agriculture graduates with the standardfinancial assistance of the Department of Biotechnology (DBT).

Animal Sciences

The number of universities offering courses in animal sciences is 27 They include

Ecology, Capitalism and the New Agricultural Economy

106

two universities exclusively devoted to animal sciences viz., Tamil Nadu Veterinaryand Animal Sciences University (Chennai) and West Bengal University of Animaland Fisheries Science (Calcutta), and the Indian Veterinary Research Institute (IVRI)(Izatngar, UP), IVRI offers only postgraduate and doctoral courses. Like agriculturalsciences, most of the animal science colleges offer, besides first degree programme,Master’s Degree programme is of two–year duration. The nomenclature of the firstdegree award is either Bachelor in Veterinary Science (BVSc) or Bachelor in VeterinaryScience and Animal Husbandry (BVSc & AH).

Though the term Animal Husbandry does not occur in the nomenclature BVSc,the subject indeed is a part of the course. At the Master’s and Doctoral degree levels alarge number of specialisations are offered by most of the colleges. for an illustrativelist). Several universities offer omnibus M.Sc degree courses in Animal Sciences, e.g.,Bharathiar University, Hyderabad University (Life Science–Animal Science), M JPRohilkhand University (Plant and Animal Sciences). Although there are now separatecolleges for dairy science and technology, traditionally, several Veterinary Science collegeshave been offering MVSc courses in dairy related subjects. This has been discussed in(Dairy Science and Technology).

Poultry Science

Poultry Science is one of the subjects of study in the BVSc & AH courses. It isalso offered at the Master’s level (MVSc & AH or M.Sc) in a number of universities,e.g., Acharya N G Ranga Agricultural University, Hyderabad, Chandra Sekhar AzadUniversity of Agriculture and Technology, GB Pant University of Agriculture andTechnology, Indian Veter inary Research Inst i tute, Jawahar lal Nehru Kr ishiVishwavidyalaya, Kerala University, Konkan Krishi Vidyapeeth, Rajasthan AgriculturalUniversity, Tamil Nadu Veterinary and Animal Sciences University, and Universityof Agricultural Science, Bangalore. Dr BV Rao Institute of Poultry Management (Pune)is a specialized institution recognized by the Konkan Krishi Vidyapeeth.

Agricultural Engineering

Agricultural engineers apply engineering principles to problems in agriculture.They design and develop agricultural equipment and machinery and also work onsoil and water conservation, irrigation and drainage systems. Agriculture engineerscontribute to making agricultural farming easier and more productive and profitablethrough the introduction of new farm machinery and through advancements in soiland water conservation. There are 19 universities which offer agricultural engineeringcourses at the first degree level. Of this 10 offer postgraduate degrees in the subject.The only institution outside the agricultural university system which has introducedthe course is the Indian Institute of Technology (Kharagpur).

The nomenclature of the degree is either BE (Agriculture) or B.Tech (AgriculturalEngineering) at the first degree level and ME/M.Tech at the postgraduate level. givesan illustrative list of subjects offered at the postgraduate level. Unlike Master’s degreecourses in other agricultural disciplines which are of one and a half–year duration,ME/M Technology courses in agricultural engineering (Nabi Bagh, Berasia Road,Bhopal–462038) under the ICAR conducts research in the subject.

Ecology, Capitalism and the New Agricultural Economy

107

Fisheries Science

There are 12 agricultural universities which offer first degree course in FisheriesScience of four–year duration (BFSc of B.Sc Fisheries). Six universities have introducedMaster’s degree course of two–year duration (MFSc). Only two universities offer PhDcourse. The list of universities which offer fisheries courses at all the three levels isgiven in Outside the agricultural university system several institutions also offerMaster’s degree courses in fisheries–some specialized in nature. The most importantone is the Central Institute of Fisheries Education and research in fisheries. Twoother institutions–Central Marine Fisheries Research Institute (CMFRI) at Kochi andInland Fisheries Training Centre (IFTC) at Barackpore (West Bengal) are associatesof CIFE. All the three institutions offer only postgraduate programmes. CIFE offersMFSc courses in Fisheries Resources Management, and Inland Aquaculture while theCMFRI offers MFSc course in Mariculture. IFTC offers PG Certificate Course inFisheries Development and Administration of one year duration.

Admission to all these programmes are made on the basis of an All–IndiaCompetitive Examination. Entry requirement is BFSc as well as B.Sc (Fisheries) degreewith zoology, botany, chemistry and fisheries. CIFE earlier used to offer a two–yearPG Diploma course in Fisheries Science which had been discontinued since 1998.Only three universities had introduced PhD programmes.

Universities outside the agricultural university system conducting fisheries sciencecourses are:

• Barkatullah Vishwavidyalaya (Bhopal)–M .Sc (Fish Genetics), MFSc (at itsDepartment of Applied Aquaculture);

• Cochin University of Science and Technology (Kochi– M.Sc (IndustrialFisheries), M.Sc (M arineculture) (at its Faculty of Marine Sciences);

• Andhra University (Vishakapatnam)– M.Sc (Capture and Culture Fisheries),and M .Sc (Coastal Aquaculture and M ar ine Biotechnology), KeralaUniversity–M.Sc (Aquatic Biology and Fisheries);

• Annamalai University (Annamalai Nagar)–M.Sc (Coastal Aquaculture). Inall thee course, students possessing B.Sc degrees with biological sciences arealso admitted.

Other Courses in Fisheries Science: A subject which has a bearing on fisheriesscience is Limnology is the study of freshwater ecosystem (specially in lakes and ponds)including its chemical, physical and biological aspects. A lthough traditionally,Limnology is closely related to Hydrobiology, it has a great bearing on fishery.Barkatullah Vishwavidyalaya has set up a Department of Limnology.

The Department offers two M.Sc courses in Applied Limnology and FisheryTechnology and Aquatic Environmental Science (Water Resource Management andPollution Control). The other university which offers M.Sc (Limnology) course is theRajasthan Agricultural University. Fisheries Science is also offered as one of the subjectsin the vocational stream at the 10+2 and B.Sc degree levels. Central Institute ofFisheries Nautical and Engineering Training (CIFNET) at Kochi, Chennai andVisakhapatnam offers career training to candidates to become Master of Fishing Vesseland Engine Driver of Fishing Vessel. The course of 18 months duration leads to theaward of Certificate of Competency.

Ecology, Capitalism and the New Agricultural Economy

108

Forestry

B.Sc (Forestry) degree course of four–year duration is offered by 12 agriculturaluniversities. M.Sc (Forestry) course is available both in agricultural and non–agriculturaluniversities. Master’s degree course is of two–year duration. Forest Researchh Institute(FRI), (ICFRE, New Forest, Dehra Dun–248195), a deemed university offers six forestrelated courses:

1. M.Sc Forestrry (Economics and Management),2. M.Sc (Wood Science and Technology),3. M.Sc (Environmental Management,4. PG Diploma in Plantation Technology (one–year duration),5. PG Diploma in Pulp and Paper Technology (one–year duration), 6. Postgraduate Diploma in Biodiversity Conservation.Admission to all the courses is made on the basis of an entrance test conducted

on an all–India basis.The eligibility requirements are:• M.Sc Forestry (Economics and Management): Bachelor’s degree in Science

with at least one of t he subjects, viz., Botany, Chemistry, Geology,Mathematics, Physics and Zoology or a Bachelor’s degree in Agriculture orForestry.

• M .Sc in Wood Science and Technology: Bachelor’s degree with Physics,Mathematics and Chemistry or B.Sc degree in Forestry.

• M.Sc in Environment Management: Bachelor’s degree in any branch of basicor applied sciences or Bachelor’s degree in Forestry or Agriculture or BE inEnvironment Science.

• Postgraduate Diploma in Plantat ion Technology: (one–year duration):Postgraduate degree in Chemistry or Applied Chemistry or Industr ialChemistry and must have studied Botany at the graduate level or M.Sc inAgriculture.

• Postgraduate Diploma in Pulp and Paper Technology: (one–year duration)–Postgraduate degree in Chemistry or Applied Chemistry or Industr ialChemistry and must have studied Physics at the graduate level.

• Postgraduate Diploma in Biodiversity Conservation: (one–year duration)–M.Scin any discipline.

Two universities, viz., Birsa Agr icultural University (Ranchi) and GujaratUniversity offer diploma level course in forestry. The two–year diploma course of theBirsa Agricultural University is open to candidates who have passed 10+2 examination.The qualification requirement for the one–year diploma course of the GujaratUniversity is a B.Sc degree. Forestry, as a subject is also available for study in thevocational streams both at 10+2 and B.Sc levels.

Forestry, Ecology and Environment

Wildlife Science and certain aspects of ecology and environment are closely relatedto forestry.–Environmental Science). Such courses are mostly offered by the universitiesoutside the agricultural university system. The Wildlife Institute of India (Dehra Dun),affiliated to Saurashtra University (Rajkot) has introduced an M.Sc degree course inWildlife Science.

Ecology, Capitalism and the New Agricultural Economy

109

The courses in this area are: PG Diploma in Social Forestry–School of Life

Sciences, Dr B R Ambedkar University, M.Sc (Wildlife)–Aligarh Muslim University,

M.Sc (Forestry, Wildlife and Ecodevelopment)–Guru Ghasidas University, MVSc

(Wildlife Science)– Madras Veterinary College, Tamil Nadu Veterinary and Animal

Science, Dr B R Ambedkar University, PG Diploma (Forestry M anagement)–

Department of Environmental Biology, A P S University, (Rewa–480003), M.Sc

(Agroforestry)–Bundelkhand University (Jhansi–284128), M .Sc (Forestry)–Pt

Ravishankar Shukla University (Raipur–492010). As stated above, the FRI has two

environment oriented forestry courses, viz., M .Sc (Environment Management), andPG Diploma in Biodiversity Conservation.

Forestry Management: It may be mentioned here that besides the M .Sc Forestry

(Economics and M anagement) offered by the FRI, the Indian Institute of Forest

Management (IIFM), Bhopal, a specialized management institution set up by the

Government of India has introduced a unique postgraduate diploma course of two–

year duration. The award is equivalent to Master’s degree in the subject.

Food Science and Technology

As stated earlier, Food Science and Technology is considered as a subject alliedto agriculture science. Courses in Post harvest Processing and Food Engineering isoffered at the Master’s Degree level in several agricultural engineering colleges. Thiscourse is also offered as a branch of technology in several non–agricultural universities.Engineering and Technology). At the first degree level, the College of AgricultureTechnology (Parbhani–431402) of the Marathwada Krishi Vidyapeeth offers B.Tech(Food Science). The College of Agriculture Engineering (Coimbatore–641003) of theTamil Nadu Agricultural University offers B.Tech (Food Processing Engineering).

At the Master’s degree level four courses are available in:• Allahabad Agricultural Institute: M .Sc (Foods, Nutrition and Dietetics),• Kerala Agricultural University: M .Sc (Food Science and Nutrition),• College of Agricultural Technology (Parbhani):M .Tech (Food Science),• Govind Ballabh Pant University of Agriculture and Technology: M .Tech

(Postharvest Process and Food Engineering),• Marathwada Krishi Vidyapeeth: M .Tech (Food Science),• Allahabad Agricultura Institute M .Sc (Food Science and Applied Nutrition),• Maharshi Dayanand Saraswati University: M .Sc (Food and Nutrition),• Tamil Nadu Agricultural University: M .Sc (Food Science and Nutrition),• Bundelkhand University: M .Sc (Food Science and Technology).In a number of Home Science Colleges, Food and Nutr it ion is one of the

specialisations in the Master of Home Science programmes.

Horticulture

Dr Y S Parmar University of Horticulture and Forestry is the only Universityexclusively devoted to horticulture and forestry. Horticulture courses are offered bothat first degree (B.Sc Forestry) levels. The duration of the courses are four years andtwo years respectively. Dr Y S Parmar University of Horticulture which is open tocandidates qualified in vocational courses in horticulture, and food preservation and

Ecology, Capitalism and the New Agricultural Economy

110

processing. The gives a list of universities which offer the courses. It includes twouniversities viz., Chaudhary Charan Singh University, Meerut and Nagland University,outside the agricultural university system which offer M.Sc degree course in the subject.Horticultural Science (BHSc) course through distance learning mode. The course isopen to candidates who have passed the Class 10 examination. The course consists ofthree diploma courses in Fruit Production, Vegetable Production, Floriculture andLandscape Gardening. The degree is awarded on successful completion of all thethree diploma courses.

Floriculture

This subject is included in the B.Sc (Horticulture) curr iculum. Only a smallnumber of agricultural universities offer the course at the Master’s degree level, e.g.Dr Y S Parmar University of Horticulture and Forestry (also a PhD course), PunjabAgricultural University (Landscaping and Floriculture), University of AgriculturalScience, Bangalore (Floriculture), Allahabad Agricultural Institute.

Sericulture

Course in Sericulture is available both at the agricultural and non–agriculturaluniversities. Sri Padmavati Mahila Vishwavidyalayam (Tirupati) and the University ofa*gricultural Science, Bangalore offer B.Sc (Sericulture) course. M.Sc (Sericulture)courses are available at the Assam Agricultural University, Karnataka University,Central Sericulture Research and Training Institute (Mysore) affiliated to the MysoreUniversity, Sri Padmavati Mahila Vishwavidyalam.

Sri Krishna Devaraya University, Tamil Nadu Agricultural University, andUniversity of Agricultural Sciences, Bangalore (at its College of Sericulture). Diplomalevel courses are offered by Babasaheb Bhimrao Ambedkar University (Lucknow),and Tamil Nadu Agricultural University. Sericulture is also offered as a subject ofstudy in vocational stream at 10+2 and B.Sc levels.

Agricultural M anagement

A new development in the field of agricultural education is the introduction ofmaster’s degree programmes in agricultural management which is known in USA asagribusiness management. Two universities– Universities of Agricultural Sciences(Bangalore and Dharwar), made a beginning by offering B.Sc courses in agriculturalmarketing and cooperation.

Kerala Agricultural University introduced B.Sc and M.Sc courses in Cooperationand Banking. The Indian Institute of Management (Ahmedabad) was the first tointroduce Postgraduate Diploma in Agribusiness M anagement (earlier known asSpecialisation Package in Agriculture). A number of agricultural universities have nowintroduced management courses in agriculture and related subjects.

Other Agricultural Courses

While ManyNnon: Agricultural universities offer postgraduate courses related toagriculture, a number of agricultural universities have introduced agricultural coursesrelated to other disciplines. Some of the important ones are: agricultural Chemistry(oriented to soil science, agricultural economics, agricultural statistics, and agro

meteorology.

Ecology, Capitalism and the New Agricultural Economy

111

Career Opportunities

On obtaining a graduate or a postgraduate degree in a discipline of agricultureand allied sciences, there are a wide range of options and opportunities of a career inteaching, research and transfer of technology areas in SAUs, State Departments ofa*griculture and Animal Husbandry, NGOs and in industry.

Even banks which advance credit and loans for agro–based projects employagricultural specialists. The Union Public Service Commission conducts an annualcompetitive examination for recruitment in the Indian Forest Service. The employmentopportunities are really multifaceted for competent persons.

The Indian Council of Agricultural Research (ICAR) (Krishi Anusandhan Bhavan,Pusa, New Delhi–110012), an autonomous body under the Department of AgriculturalResearch and Education (DARE) is one of the largest employers of scientific manpowerin the country.

The research set–up includes 45 Central Institutes, four National Bureaux, 10Project Directorates, 30 National Research Centres and 80 All–India CoordinatedResearch Projects. For effective communication of research findings among farmers,the ICAR maintains a network of 261 Krishi Vigyan Kendras, along with eight ZonalCoordinating Units. M ore than 6,500 research scientists work directly in ICAR’sresearch establishments and about 5,000 work in SAUs, and projects funded directlyby the ICAR.

Recruitment to these positions constituting the Agricultural Research Service(ARS) are made by the Agricultural Scientist Recruitment Board (ASRB) in 61disciplines through a nation–wide competitive examination followed by a personalinterview. These 61 disciplines apart, agricultural, animal and allied sciences includebasic and fundamental sciences, home science and engineering.

This is, however, a combined competitive examination not only for recruitmentin ARS but also used as National Eligibility Test (NET) for appointment of AssistantProfessors and Lecturers in SAUs and for awarding Senior Research Fellowships.Generally, the competitive examination is held in October every year for whichnotification is made latest by April. The National Academy off Agricultural ResearchManagement (NAARM) at Hyderabad imparts foundation training to new entrantsin the ARS.

Scientific placements in ICAR are classified into Scientists, Scientists (SelectionGrade). Senior Scientists and Principal Scientists. Promotion from Scientists to thelevel of Senior Scientists is through performance appraisal and the length of servicein the previous grade. Lateral entry into these positions is open to scientists fromother organisations and the SAUs. There is also ample opportunity for training andskill upgradation and active participation in research both within the country andabroad. Opportunities are also available for obtaining higher degrees for in–servicecandidates with study–leave benefits.

Ecology, Capitalism and the New Agricultural Economy

112

Chapter 5

Education and Agricultural

DESCRIPTION

The agricultural education major prepares students to teach at the secondary,post–secondary and adult levels in agricultural education programmes. North DakotaState University is designated by the State Board of Career and Technical Educationas the recognized institution for preparing teachers of agricultural education.

The Programme

The agricultural education major is designed to combine general studies, preparationfor effective teaching and a broad background in the various disciplines in agriculture.Those preparing to become teachers of agriculture are expected to possess a broad generaleducation necessary for them to function as citizens and educators in our dynamic society.

Courses in natural sciences, mathematics, social sciences, humanities, English,communication and speech will help provide a general education and the skills neededfor more advanced courses in agriculture and other areas. Courses in agriculturaleconomics, agricultural systems management, animal and range science, plant sciences,horticulture and soil science provide the necessary background in agriculture. Electivesalso are available in entomology, veterinary science, plant pathology and cereal science.Skills in organizing, planning, communicating and teaching are developed by takingcourses in psychology, sociology, education and a series of courses in various aspectsof agricultural education.

Early Experience

Either concurrently or shortly after taking an introductory course in education,students will have an opportunity to secure a brief exploratory experience in asecondary agriculture programme. This helps students relate course work to actualteaching situations.

Student Teaching

Student teaching is a highlight of the teaching programme. Students will have anopportunity to apply skills acquired in college courses and to learn with the directionand assistance of a successful teacher of agricultural education.

Occupational Experience

An appropriate background of work experience in agriculture is essential for thoseplanning to teach agriculture. Students lacking this experience will need to seek such

experience through employment and other means. Cooperative Education experiencesare available. A background in high school agriculture and FFA also is helpful, althoughnot required.

Student Advisem*nt

Students are assigned individual advisers who will work closely in programmeplanning and in other ways to advise and assist them. Students are encouraged toseek their advisers’ help whenever needed.

Certification

Upon completing this programme, students are eligible for certification to teachagricultural education in most states. The programme is accredited by the NationalCouncil for Accreditation of Teacher Education.

Selective Admission

All new students must first submit an NDSU application for admission, alongwith transcripts and ACT or SAT scores. Students should indicate the teachingspecialty they want on the appl ication. Dur ing or immediately fol lowing theintroductory professional education course, students apply for formal admission tothe School of Education. The application must be approved before students may enrollin any 400–level professional education courses. Students must be admitted to theSchool of Education at least one semester prior to the student teaching semester. Alleducation majors must complete a professional education programme and then applyfor certification/ licensure from the state in which they wish to teach. In order to berecommended for certification/ licensure by NDSU, students must complete an NDSUeducation–based degree, have an overall grade point average of 2.75 and satisfactorilycomplete an exit portfolio.

Career Opportunities

For several years there have been favourable employment opportunities for thoseprepared to teach agricultural education. Other graduates seek employment inCooperative Extension, farming, agricultural finance, agribusiness, government agenciesin agriculture or continue their studies at the graduate level.

Collegiate FFA/ Post–Secondary Agriculture Students

The primary purpose of the Collegiate FFA is to prepare graduates in agriculturaleducation to serve as advisers of secondary FFA. Students majoring in agriculturaleducation are encouraged to participate actively in the activities of the NDSU CollegiateFFA. The Post–Secondary Agriculture Students provides an opportunity to competein various competition on state and national levels.

Financial Aid and Scholarships

Students seeking financial aid should contact the Office of Student FinancialServices. Additional information concerning specific scholarships is available fromthe Dean of the College of Human Development and Education or the Dean of theCollege of Agriculture, Food Systems, and Natural Resources.

Ecology, Capitalism and the New Agricultural Economy

114

Sample Curriculum

Students may choose an agricultural education major with or without a biologicalsciences minor. Students enrolling in the agricultural education programme will beexpected to complete course work in the following areas:

General Education RequirementsCredits

First Year Experience

HD&E 189–Skills for Academic Success 1

Communication

Comm. 110–Fund of Public Speaking 3

Engl. 110, 120–College Composition I, II 3, 3

Engl. 358–Writing in the Humanities and Social Science 3

Quantitative Reasoning 3

Science & Technology

Biol. 315, 315L–Genetics and Genetics Lab 3,1

Chem. 117, 117L–Chemical Concepts and 3, 1

Applications and Lab

Chem. 121, 121L–General Chemistry I and Lab 3, 1

PlSc. 110–World Food Crops 3

Humanities & Fine Arts 6

Social and Behavioral Sciences

Econ. 201–Principles of M icroeconomics 3

Econ. 202–Principles of Macroeconomics 3

wellness 2

Cultural Diversity –

Global Perspective

Econ. 201–Principles of M icroeconomics –

Total 40

College/Department Requirements Credits

Biol. 150, 150L – General Biology I and Lab 3, 1

Totals 2

M ajor Requirements Credits

AgEc. 242–Introduction to Agricultural Management 4

ANSC 114–Introduction to Animal Science 3

ANSC 123–Feeds and Feeding 3

ASM 125–Fabrication and Construction Technology 3

IME 335–Welding Technology 2

PlSc. 210–Horticulture Science 3

PlSc. 211–Horticulture Science Lab 1

Soil. 210–Introduction to Soil Science 3

Engineering Electives 5

Electives 18

Totals 46

Professional Education Requirements Credits

Ecology, Capitalism and the New Agricultural Economy

115

Educ. 321–Introduction to Teaching 3

Educ. 322–Educational Psychology 3

Educ. 381–Early Experience 1

Educ. 451–Instructional Planning, Methods and Assessment 3

Educ. 486–Classroom M anagement for Diverse Learners 2

Educ. 489–Native American and Multicultural Instruction 3

H&CE 232–Philosophy and Policy 3

H&CE 341–Leader and Presentation Techniques 3

H&CE 444–Planning the Communication Program in 3

Agricultural Education

H&CE 481–Methods of Teaching Agriculture 3

H&CE 483–Student Teaching Seminar 1

H&CE 487–Student Teaching 9

H&CE 488–Applied Student Teaching 3

Totals 40

Curriculum T otal 131

This sample curriculum is not intended to serve as a curriculum guide for currentstudents, but rather an example of course offerings for prospective students. For thecurriculum requirements in effect at the time of entrance into a programme, consultwith an academic adviser or with the Office of Registration and Records.

COM PARISON OF THE AGRICULT URE SECTOR W ITH OTHERSECTORS OF THE ECON OM Y

Introduction

This provides a backdrop to the patterns and trends discussed elsewhere in thereport. It provides an assessment of the agricultural sector relative to the other majorsectors of the economy on the basis of the data available from Census ’96. In this, theabbreviation ‘agriculture’ refers to the ‘agriculture, hunting and fishing sector’ as awhole. As a result, the distributions reported here may be marginally different tothose reported in earlier to the agriculture and hunting sub–sector only. The discussionbegins by focusing on the age and education profile of people employed in agriculturecompared with other sectors of the economy. Then reviews the pattern of employmentby status of employment by type of employment (i.e. whether self–employed, employee,working in a family business or as an employer), by occupation status and finally byincome.

Age Profiles in the M ajor Economic Sectors

The youthfulness of the Afr ican population among the employed labour force inagriculture, compared to those employed in the rest of the economy, is reflected inthe age profile illustrated in Figure. According to Census ’96, the percentage of 15–19year olds (5%) in the agriculture sector is double that among other employed people(2%). In addition, while 15% of people employed in agriculture are 20–24 years old,10% among other employed people in the rest of the economy fall into this age category.

Ecology, Capitalism and the New Agricultural Economy

116

Fig. Age Profile of Employed People in Agriculture Compared

With the Rest of the Employed Labour Force,

Reflecting the age profile illustrated earlier, Figure shows that, in the agriculturesector, the percentage of those in the broad age category 15–29 years, is higher thanin any other sector of the economy. Nearly two in every five (37%) employed peoplein agriculture are 15–29 years compared with 21% and 22% who fall into this categoryin the mining and private household sectors respectively. As a consequence, a smallerproportion of employed people in agriculture (39%) fall into the 30–44 year age categorythan in any other sector of the economy.

Fig. Age Profile of People Employed in Agriculture Compared With Other Sectors of the

Economy,

Educational Attainment in the M ajor Economic Sectors

Figure shows that the distribution of people employed in the agriculture sectorby level of educational attainment is markedly different compared with other employedpeople. The results of Census '96 indicate that, in the agriculture sector, the proportionof people without schooling (32%) is more than three times higher than among otheremployed people (10%). At the other end of the education ladder, only 3% of peopleemployed in agriculture have 'matr ic or higher' qualifications compared with 13% in

the rest of the economy.

Ecology, Capitalism and the New Agricultural Economy

117

Fig. Level of Education Attainment Among People in the

Agriculture Sector Compared with Other Employed People,

According to Census '96, the level of educational attainment in the agriculturesector tends to be lower than in every other major sector of the economy. For thecountry as a whole, 12% of the 9,1 million employed people reported that they had noschooling at the time of Census '96. In agriculture, as noted earlier, 32% fell into thiscategory. By comparison, 22% of people employed in private households (which includedomestic workers), 3% of those employed in the finance sector and 4% of thoseemployed in community services had no education.

Fig. Level of Education Attainment Among People Employed in Agriculture Compared with

Other Sectors of the Economy,

Employment Status in the M ajor Economic Sectors

Figure shows that, compared with men, a larger proportion of women wereemployed on a par t-time basis in every major sector of the economy exceptconstruction. The gender gap is largest in agriculture.

For the country as a whole, 13% of employed women and 7% of employed mendid part-time work. However, in agriculture, while the proportion of men (6%) wassimilar to the national average, the proportion of women engaged on this basis was19%–the highest of all the sectors.

Ecology, Capitalism and the New Agricultural Economy

118

Fig. Part–Time Employment in the Major Sectors of the Eco nomy,

Type of Employment in the M ajor Economic Sectors

In every sector, according to Census '96, the vast majority of employed peoplewere employees. For the country as a whole, 88% of the 9,1 million employed peoplewere employees, 6% were self–employed, and 5% were employers. Relatively few (2%)worked in a family business.

The self–employed accounted for the largest number of jobs in the trade (12%)and construction (10%) sectors, and the smallest number in the agriculture (3%) andmining (1%) sectors.

Fig: Type of Employment in the Major Sectors of the Economy,

Occupations in the M ajor Economic Sectors

Census '96 results suggest that the distr ibution of occupations in the agriculturesector is less–even when compared with the rest of the economy.

The low level of education that people employed in the agriculture sector havereceived is reflected in the large proportion of jobs that are categorised as 'elementary'

Ecology, Capitalism and the New Agricultural Economy

119

or routine. Elementary occupations accounted for more than one in every two jobs inagriculture (58%) followed by skilled agricultural work (30%).

Fig. Distribution of Employed People by Occupation in Agriculture Compared with Other

Sectors Combined,

In the rest of the economy, a substantially lower proportion of employed people(26%) did jobs classified as elementary. M oreover, only 1% of people in agriculturehad managerial positions and an additional 1% had professional or technical positions.

By comparison, in the rest of the economy, 5% and 12% respectively of theemployed labour force fell into these categories. For ease of analysis, Figure identifiesfour broad occupational categories as follows: the highest is managers, which groupspeople in managerial positions with those in professional and semi–professional(technician) posts.

The second highest occupation category (clerical) includes sales and serviceworkers. In the third broad category, artisans, craft, skilled agricultural workers,machine operators and people doing assembly work are grouped. The last category(elementary) includes domestic workers in private households.

The notable features of Figure are as follows:• Only in Private Households: W hich include domest ic workers– is the

distribution of occupations more inequitable than in the agriculture sector.

Fig: Distribution of Occupations in the Egriculture Sector Compared with Other Sectors in

the Economy,

Ecology, Capitalism and the New Agricultural Economy

120

• The Association Between Low: Skilled work and agricultural employment isalso reflected in the sectoral distribution of jobs in the higher occupationcategories. For example, 56% of people employed in services–which includegovernment workers–are in the highest occupation categories (as managers,professionals or technicians). The finance sector (41%) has the second highestproportion of people at this occupational level. By comparison, only 3% ofa*gricultural jobs fall into this category.

Income Distribution in the M ajor Economic Sectors

Reflecting the education and occupation profiles discussed earlier, Figure shows

large disparities in the income distribution of people employed in the agricultural

sector compared with employed people elsewhere in the economy. The majority of

people in the agriculture sector had monthly incomes of R5 or less, so that the income

distribution is skewed markedly to the left of the graph.

Fig. Distribution of Income in the Agriculture Sector

Compared with all Other Sectors Combined,

Figure shows the extent of the disparities in the income distribution in the

agriculture sector compared with other economic sectors. Of the major sectors in the

economy, the agriculture sector had the largest proportion of people (69%) in the

lowest income range. Even in private households–which include domestic workers–a

smaller proportion (64%) of people had incomes in this range.At the higher end of the income ladder, more than one in every three employed

people in the finance sector (34%) received monthly incomes of R3 501 or more,compared with 5% of agricultural workers who fell into this income bracket.

Ecology, Capitalism and the New Agricultural Economy

121

Fig. Distribution of Incomes of Employed People in the M ajor Economic Sectors of the

Economy,

The key socio–economic variables, the situation of people employed in theagriculture sector tends to be less favourable than every other major sector of theeconomy.

In terms of education, Census '96 indicates that, compared with other sectors,the level of education attainment of people in the agriculture sector is skewed towardsthe lower end of the education hierarchy. For example, more than 60% of those engagedin agriculture have no schooling or have not completed primary education.

Part–time employment among women employed in agriculture is the highestamong the sectors and the majority of jobs in the sector are of an elementary orroutine nature at the bottom of the occupational ladder. Only in the private householdsector (where domestic work is dominant) is the proportion of elementary or routineoccupations higher than in agriculture. These disparities in the circ*mstances of peopleemployed in the agriculture sector are reflected in their income distribution comparedwith other sectors.

Ecology, Capitalism and the New Agricultural Economy

122

Chapter 6

Sales, Expenditure and Debt

IN TRODUCTION

The overall trends in the commercial farming sector with regard to gross incomefrom the sale of agricultural products, expenditure and debt. The discussion thenfocuses on the pattern of income generation by both commercial farmers andhouseholds in the former homelands.

On the basis of the annual commercial agricultural surveys, trends in the incomesof farmers in the commercial sector from the sale of agricultural products, and thetype of agricultural products that generate this income, are discussed. Thereafter, thesituation regarding sales of agricultural products and type of products sold byhouseholds in the former homelands is assessed on the basis of the rural surveyconducted in 1997. The subsequent section reviews the patterns of expenditure acrossthe two survey instruments.

Related to the level and composition of income and expenditure in the agriculturesector, is the issue of farming debt. The annual commercial agricultural surveys indicatethat, in 1988, income from the sales of agricultural products by commercial farmers 1billion) was marginally higher than expenditure.

Figure shows that, during the period 1990–1993 total expenditure (including remuneration to employees) was similar to the gross incomes received by commercial farmers.

However, since 1994, the income generated from the sale of agricultural products in the commercial farming sector has outstripped total spending by around R3 billion each year. During the overall period farming debt increased from R10,5 billion to R18,9 billion.

Fig: Gross Income, Total Expenditure and Farming Debt in

the Commercial Farming Sector, 1988–1996

Income from Sales: Commercial Farms

On the basis of the annual commercial agricultural surveys, Figure shows that thetrend in total gross income from the sale of agricultural products rose steadily duringthe period 1988 to 1996. In 1988, the total gross income in the commercial farmingsector was R14,1 billion; by 1996, it had more than doubled to R32,9 billion, largely onaccount of a 37,8% increase in gross income in 1994. In the commercial farming sector,the trend for each of the major types of agricultural sales was also upward over theperiod 1988–1996. There was, however, a downturn in gross income from the sale offield crops in 1993. Income from horticulture sales rose particularly strongly over theperiod as a whole–from R2,5 billion in 1988 to R9,1 billion by 1996.

The annual commercial agricultural surveys also indicate that, in the commercialfarming sector, gross income from the sale of animals and products still accountedfor the largest share of total income each year.

Fig: Source of Income From Sales in the Commercial FarmingSector by Type of Product, 1988–1996

Ecology, Capitalism and the New Agricultural Economy

124

However, these sales declined from 48% of total gross income in 1988 to 40% in1996. The proportion of income generated from the sale of field crops also decreasedfrom 30% to 26% during the period 1988 to 1996.

Fig: Source of Annual Income from theSale of Agriculture

Produce in the Commercial Farming,

As a consequence of the rapid growth in horticulture sales, its contribution to

gross annual income rose from 18% in 1988 to 28% in 1996. By 1996, horticulture was

the second most important source of income for commercial farmers after animals

and animal products. The results of the annual commercial agricultural surveys suggest

that in the commercial farming sector there is a strong association between particular

types of agricultural sales and particular provinces. As illustrated in Figure, in 1996

field crops were the single largest source of income in the commercial farming sector

in two provinces, accounting for 35% of the annual income of commercial farmers in

Mpumalanga, and 54% of the annual income of commercial farmers in Free State.• By comparison, in 1996, horticulture accounted for more than half (51%) of

the gross annual income of commercial farmers in Western Cape. In four of

the other eight provinces, horticulture also accounted for more than 30% of

the gross annual income of commercial farmers.• The sale of animals and animal products was the single largest source of

income for commercial farmers in six provinces, accounting for 41% of the

gross income of commercial farmers in Gauteng, 43% in KwaZulu–Natal,

47% in North West, 50% in Northern Cape, 51% in Northern Province and59% in Eastern Cape.

Ecology, Capitalism and the New Agricultural Economy

125

Fig: Source of Income Earned by the Commercial

Farming Sector by Province,

Income from Sales: Former Homelands

This section reviews the patterns of income generated from the sales of agriculturalproduce in the former homelands on the basis of the rural survey conducted in 1997.

The few households that actually sold produce are pointed out; income earnedfrom the most important types of produce is highlighted; finally, provincial distributionof income is discussed in relation to livestock, crops and chickens.

According to the results of the rural survey in the former homelands, only asmall proportion of households that engaged in farming activities (2%) kept recordsof their farm–related income and expenditure in the 12 months prior to the survey ofJune 1997.

As a consequence, the discussion that follows is broadly indicative, rather thandefinitive, of the income and expenditure patterns of households in these areas.

Reflecting the subsistence nature of agricultural production in the formerhomelands, the results of the rural survey indicate that, although 902 000 householdsowned livestock, 766 000 owned chickens and 1,2 million grew field crops, relativelyfew had surpluses to sell. Figure illustrates the incomes received in the 12 monthsprior to the survey by households that had surpluses to sell.

Among the 16 000 households in the former homelands that sold animal products,75% earned annual incomes of R200 or less from such sales. In terms of the 63 000households which sold chickens, 70% also earned incomes in this range. The sale offield crops and livestock tended to be associated with higher incomes.

For example, 21% of the 98 000 households that sold field crops earned R201–R500, and 18% earned R1 000 or more from such sales in the 12 months prior to therural survey. In terms of livestock, nearly half of the 165 000 households who soldlivestock (49%) received R1 000 or more from such sales.

Of the 165 000 households in the former homelands that sold livestock, 39% were inEastern Cape, 28% in Northern Province and 13% in KwaZulu–Natal.

Ecology, Capitalism and the New Agricultural Economy

126

Fig. Annual Income from the Sale of Animal Products Among the Few Households Selling

These Items in the Former Homelands by Type of Product,

Less than 5% of households which sold livestock were situated in either Free State orMpumalanga. As a consequence, the distributions shown in Figure should be interpretedwith caution since the sample sizes for provinces such as Free State and Mpumalangamay be too small for meaningful analysis.

Fig: Annual Income from the Sales of Livestock Among the relatively Few Households Selling

These Items in the Former Homelands by Province,

Figure shows that, except in Northern Province, the majority of the relatively fewhouseholds that sold livestock earned R1 000 or more from such sales, ranging from49% of households actually selling livestock in Eastern Cape to 66% in Mpumalanga.In Northern Province, only 37% of households that sold livestock earned incomes inthat range. More than one–third (37%) of households in Northern Province earnedR200 or less from livestock sales in the 12 months prior to the rural survey.

A total of 98 000 households in the former homelands earned an income fromthe sale of field crops in the 12 months prior to the rural survey of June 1997. Ofthese households, 28% were in Eastern Cape, around 25% in each of KwaZulu–Nataland Northern Province, while only 3% were in Free State. Figure shows the pattern offield–crop sales by province.

Ecology, Capitalism and the New Agricultural Economy

127

Fig:Annual Income from the Sale of Crops Among the Relatively Few Households Selling

These Items in the Former Homelands, by Province,

Among the households in each province that sold field crops, more than one–half (53%) of those in Northern Province earned R200 or less, compared with morethan one in every three in Mpumalanga (37%) and Eastern Cape (38%). Notably, only11% of households in Eastern Cape and 51% in North West that sold field crops earnedincomes in the highest category (R1 000 or more). In terms of chicken sales, as noted earlier,of the 766 000 households in the former homelands that owned chickens, only 63 000actually sold any in the 12 months prior to the rural survey conducted in June 1997. Figureshows that the income earned from such sales was modest by comparison with either livestockor crop sales. Among households which sold chickens, around one–half in Northern Province(53%) earned R200 or less, compared with more than three–quarters of households whichsold chickens in Eastern Cape (76%), KwaZulu–Natal (88%) and Mpumalanga (93%) thatearned incomes in this range.

Fig: Annual Income from the Sale of Chickens Among the Relatively Few Households Selling

These Items in the Former Homelands by Province,

Ecology, Capitalism and the New Agricultural Economy

128

Expenditure: Commercial Farms

This section highlights important aspects of the level and trend in expenditure

(excluding salaries/wages and payments in kind) in the commercial farming sector on

the basis of the annual commercial agricultural surveys. The results of the annual

commercial agricultural surveys indicate that total expenditure in the commercial

farming sector rose from R10,5 billion in 1988 to R24,0 billion in 1996, largely on

account of the r ise in current expenditure. Over the period as a whole capitalexpenditure also rose, from R1,9 billion in 1988 to R3,9 billion in 1996. However,capital spending still only accounted for 16% of total spending in 1996. These figures

do not take inflation into account.

Fig. Expenditure in the Commercial Farming Sector,

Figure shows the 1996 breakdown of current expenditure in the commercialfarming sector on the basis of the annual commercial agricultural surveys. Total currentexpenditure by commercial farmers in 1996 amounted to R20 billion, of which stockand poultry feed was the single largest expenditure item, costing farmers R3,8 billion–equivalent to 19% of their total expenditure. Repairs and maintenance was the nextsingle largest item of current expenditure in 1996 (R2,5 billion), followed by interestpayments (R2,0 billion).

Fig: Current Expenditure in the Commercial Farming Sector,

Ecology, Capitalism and the New Agricultural Economy

129

In terms of the composition of capital expenditure by commercial farmers, overall,since 1988 capital spending has risen steadily–from R1,8 billion in 1988 to R3,9 billionin 1996. However, over the period, expenditure on equipment has almost doubledwhile at the same time expenditure on new development work tripled from R281million in 1988 to R942 million in 1996.

Fig: Type of Capital Expenditure in the Commercial Farming Sector, 1988–1996

Figure reflects these trends. The figure also indicates that , in 1996, newdevelopment work in the commercial farming sector accounted for 24% of the totalcapital spending of farmers, rising from 15% in 1988. Reflecting the capital intensityof farming operations in the commercial sector, expenditure on equipment hasaccounted for more than half of total capital spending every year since 1988.

Expenditure: Former Homelands

The scale and spending patterns of households engaged in farming activities inthe former homelands are markedly different compared with the commercial farmingsector. In terms of households in the former homelands that were engaged in farmingactivities, current expenditure on agricultural inputs relates to spending on itemssuch as fertilizer, manure, seeds, seedlings and insecticides.

On the basis of the rural survey in the former homelands, Figure shows thatnearly half of the households that were engaged in farming activities (45%) spentR100 or less on all types of inputs; an additional 14% spent between R101 and R200and a similar proportion (14%) spent R201 and over. Notably, a substantial proportionof households that were engaged in farming activit ies (26%) reported that they spent.

Nothing On Inputs: Ranging from 18% of households in Eastern Cape to 31% inKwaZulu–Natal, Northern Province and North West. Moreover, more than one in everyfive households that were engaged in farming activities in North West (83%), NorthernProvince (88%) and Free State (88%) spent R100 or less on agricultural inputs during

Ecology, Capitalism and the New Agricultural Economy

130

to the rural survey. The vast majority of these households (82%) purchased hand–heldtools.

Fig: Gross Annual Expenditure on All Types of Inputs in

the Former Homelands, June 1997

Farming Debt

The income and expenditure patterns reviewed earlier with regard to commercialfarming operations are linked to the level and composition of farming debt. Thissection focuses on the level and type of outstanding debt of commercial farmers onthe basis of the annual commercial agricultural surveys.

Given that, as indicated in the rural survey, the farming operations in the formerhomelands are mostly of a subsistence nature, and the lack of credit facilities is aproblem for many households, this discussion does not extend to the formerhomelands. For example, in the former homelands, only 68 000 of the 1,6 millionhouseholds that were engaged in farming activities reported that they had any farmingdebt in the 12 months prior to the rural survey conducted in June 1997.

In addition, as many as 28% of households that were engaged in farming activitiesstated that access to finance was the main area in which they needed assistance. Inthe commercial farming sector, the annual commercial agricultural surveys indicatethat the level of farming debt outstanding rose by 79% during the period 1988 to1996, from R10,5 billion in 1988 to R18,9 billion in 1996.

the 12 months prior to the rural survey. Capital spending by households in the formerhomelands that were engaged in farming activities was also not substantial. Overall,98% of the 1,6 million households that engaged in farming activities spent nothing onbuildings. In terms of equipment, while 175 000 households had incurred suchexpenditure, 78% spent R100 or less on agricultural equipment in the 12 months prior

Ecology, Capitalism and the New Agricultural Economy

131

Fig: Farming Debt Outstanding in the Commercial Farming Sector,

In terms of the type of debt, Figure shows that commercial banks were the singlelargest creditors of the commercial farming sector, accounting for R7,0 billion (37%)of total debt outstanding in 1996, followed by the Land Bank's R3,1 billion (17%) andco–operatives R3,0 billion (16%). Debt outstanding to government accounted for onlyR435 million (2%) while loans from private persons accounted for R1,5 billion–8% oftotal farming debt outstanding.

In terms of the provincial debt patterns in 1996, commercial banks accountedfor the highest proportion of the outstanding farming debt of farmers in WesternCape (41%) and Mpumalanga (43%). Co–operatives accounted for 29% of farmingdebt outstanding in North West and Mpumalanga. The level of outstanding farmingdebt is directly related to the market value of farming assets such as land andimprovements, vehicles, machinery and equipment, and animals and poultry.According to the results of the agricultural surveys of 1994–1996, the market value ofsuch assets in the commercial farming sector rose from R60,4 billion in 1988 to R78,3billion in 1996.

Fig: Farming Debt by Type of Creditor, 1996

Figure shows the debt profile of the commercial farming sector relative to themarket value of farming assets. The ratio of farming debt to assets rose from 17,4% in1988 to 25,2% in 1991 and then declined to around 24% in subsequent years.

The provincial pattern of debt/asset ratios in the commercial farming sector varies

Ecology, Capitalism and the New Agricultural Economy

132

markedly. For example, in 1996, the debt/asset ratio was 18,5% in Mpumalanga andover 25% in North West (26,9%), Free State (30,3%) and Northern Province (33,1%).

Fig: Farming Debt to Assets Ratio in the Commercial

Sector, 1988–1996

The sales and expenditure pattern of commercial farmers reflects the large–scalenature of their operations compared with the farming activities of households in theformer homelands that are predominantly small–scale and of a subsistence nature. Interms of gross income from the sale of agricultural products, the annual commercialagricultural surveys indicate that commercial farmers earned R32,9 billion in 1996.Of this, R13,2 billion (40%) was from the sale of animals and products and R8,5 billion(26%) was from the sale of field crops. By comparison, among the households in theformer homelands that sold livestock in the 12 months prior to the rural survey of1997, 50% earned incomes of R1 000 or less; among the households that sold fieldcrops, 44% earned R200 or less.

The annual commercial agricultural surveys also suggest that expenditure in thecommercial farming sector has been on a steady upward trend since 1988. Althoughcapital spending has increased over the eight years to 1996, it only accounted for 16%of total spending in 1996 (excluding salaries and wages). Nonetheless, and reflectingthe capital intensive nature of commercial farming operations, equipment such astractors, milking machines and harvesters accounted for the largest share of the capitalbudget. By comparison, in the former homelands, the rural survey conducted in June1997 indicates that the pattern of expenditure among households that were engagedin farming activities was markedly different in scale and in composition. Given thesubsistence nature of farming activities and the miniscule areas under cultivation,98% of households in the former homelands that were engaged in farming activitiesspent nothing on buildings. Among those households that purchased equipment, 78%spent R100 or less in the 12 months prior to the rural survey, most of which was forthe purchase of hand–held tools.

In terms of farming debt, commercial banks were the single largest creditor offarmers in the commercial sector, accounting for 37% of the R18,9 billion farmingdebt outstanding in 1996. But while the level of outstanding debt has risen steadilysince 1988, so too has the market value of farming assets. As a consequence, the debtto assets ratio has remained at an average of around 24% since 1990.

LABOUR M ARKET PAT TERN S

Ecology, Capitalism and the New Agricultural Economy

133

Introduction

This patterns discussed in the wider context of the South African labour market.The labour market is a major source of interest because levels of employment andunemployment have far–reaching social and polit ical implications. The discussionfocuses on various aspects of the labour market on the basis of Census '96 and therural survey. A strong association between population group, gender, location andthe conditions of employment (such as employment status, occupation and income)underlies much of the analysis.

In particular, it is important to examine the extent to which:• The major economic sectors provide job opportunities for the working–age

population;

• There are shifts in the pattern of full–time employment towards part–timeemployment;

• There is displacement of regular employment with casual labour;

• There are possibilities for self–employment.

Most importantly, the extent to which the economy does not provide jobs isreflected in the level and rate of unemployment, and also in summary measures suchas the labour force participation and labour absorption rates.

These key labour market variables are related to the socio–economic anddemographic characteristics of the population discussed. The linkages between age,education and employment are as critical as are those between age, education andthe lack of employment.

The New Official Definition of Unemployment

Since the population census conducted in October 1996, and the rural surveyconducted in June 1997, Stats SA has changed its definition of unemployment. Thedefinition of the International Labour Organisation (ILO), now adopted as the officialdefinition by Stats SA, is utilised by more than 80 per cent of both developed andless–developed countries and by South Africa's major trading partners.

The unemployed are defined as those within the economically active populationor labour force who:

• Did not work during the seven days prior to the interview;• Want to work and are available to start work within four weeks after the

interview; • Have taken active steps to look for work or to start some form of self–

employment in the four weeks prior to the interview.According to this definition, the new official unemployment rate is calculated as

the percentage of the economically active population (aged 15–65 years) which isunemployed. The expanded definition includes (a) and (b) but not (c). The analysishere is based on the expanded definition rather than the new official one, since thenew definition was introduced after the questionnaires and the fieldwork for both thecensus and the rural survey were completed.

The Working–Age Population

At the time of the 1996 population census, there were 24 million people aged

Ecology, Capitalism and the New Agricultural Economy

134

15–65 years–the working–age population–in the country. Viewed from anotherperspective, this group is regarded as comprising the labour market. Figure, based ondata from Census '96, shows that the distribution of women and men in the labourmarket is markedly different.

• Whereas 5,5 million men were employed (48% of all men of working age)only 3,5 million women had jobs (equivalent to 29% of all working–agewomen).

• As a result, the proportion of not economically active women (51%) was largerthan that of men (34%).

• The not economically active comprised mainly housewives (14%), students/scholars (21% male and 19% female) and pensioners (4% male and 5% female).

Fig. The labour Market in South Africa, October 1996

Figure shows the major labour market categories in the former homelands asfound in the rural survey.

• In common with Census '96 data, there were more women compared withmen of working age (15–65 years) in the former homelands.

• Among the 2,8 million working–age men, 37% were employed compared with34% of the 3,7 million working–age women in the former homelands.

• A slightly larger proportion of women (45%) were not economically activecompared with men (42%).

• This pattern differs from that in the country as a whole, since women in therural survey were often engaged in subsistence or small–scale farming, asdiscussed below.

Fig. The labour Market

Ecology, Capitalism and the New Agricultural Economy

135

Labour Force Participation

Taken together, the number of employed plus unemployed men aged 15–65 yearswas 66% of the total number of working–age men in the South African labour marketduring Census '96. This summary measure is called the labour force participationrate (LFPR).

Among women, the LFPR was substantially lower at 50% largely on account ofthe much lower proportion of women who were classified as employed. LFPRs alsovaried markedly by population group. Among Africans, the LFPR during Census '96was 55,1% rising to 64,9% for coloureds and 66,6% for whites. Notably, LFPR's(particularly among Africans) would have been substantially higher but for the largenumber of students/scholars engaged in full–time education who were reported as'not economically active' during Census '96.

In terms of the former homelands, overall the LFPR was 56,7%: it was 58,4% formen, and 55,4% for women. In terms of the provinces, the LFPR was highest inKwaZulu–Natal (66,7%) and lowest in Free State (51,5%).

Patterns of Unemployment

Based on data from Census '96, Figure shows a large variation in provincialunemployment rates and also large differences by gender:

• The unemployment rate (using an expanded definition) for the country as awhole was 33,9%, but for women it was 42,0%, while for men it was somewhatlower at 27,1%.

• Census '96 results suggest that in every province the unemployment rateamong women was higher than that among men. The gender differential inunemployment rates was largest in North West and M pumalanga. Forexample, the unemployment rate among men in Mpumalanga (23,4%) wasaround half that among women in the province (45,7%).

• The poorest and least urbanised provinces, i.e. Northern Province and EasternCape, had the highest unemployment rates (among both men and women)compared to the wealthier and more urbanised provinces of Gauteng andWestern Cape.

Fig: Unemployment Rates by Province and Gender,

Ecology, Capitalism and the New Agricultural Economy

136

• Among women, unemployment rates were highest in Northern Province(56,0%) and lowest in Western Cape (21,3%).

• Among men, the rate of unemployment was highest in Eastern Cape (44,7%)and lowest in Western Cape (15,1%).

In terms of the former homelands, Figure based on the rural survey, shows thatthe provincial pattern of unemployment rates also varies markedly.

• The overall unemployment rate was 38,5%, but 39,3% of the female labourforce were unemployed, compared with 37,5% of the male labour force.

• In four of the six provinces covered in the rural survey, the femaleunemployment rate was higher than that of men. However, the unemploymentrate among men in Eastern Cape and KwaZulu–Natal was higher than amongwomen.

• Data on these areas derived from Census '96 reflects a lower unemploymentrate than data on the same areas from the rural survey. This is largely becauserespondents in Census '96 tended not to report subsistence and small–scaleagriculture as employment.

• Seasonal var iation may also part ial ly explain the differences betweenpopulation census and rural survey results.

Fig: Unemployment Rates in the Former Homelands,

Labour Absorption

The labour absorption rate provides an alternative indication to the unemploymentrate regarding the lack of job opportunities in the labour market. The labour absorptionrate is the proportion of the working–age population aged 15–65 years that isemployed.

• According to Census '96, labour absorption rates are sharply divergent byprovince. Smaller proportions of working–age men and women in NorthernProvince and Eastern Cape were employed than in Gauteng or Western Cape.

• For example, among working–age men in Northern Province, 31% had jobs,whereas on 17% among working–age women in the province were employed.

Ecology, Capitalism and the New Agricultural Economy

137

By comparison, 61% of working–age men in Gauteng, and 65% in WesternCape, had jobs, whereas only 41% of working–age women in Gauteng and46% in Western Cape were employed.

• In terms of the rural survey, labour absorption rates in the former homelandsare also sharply divergent. For example, 48% of working–age people in KwaZulu–Natal were employed while in Free State only 25% had jobs.

Unemployment and Level of Education

Figure, based on Census '96 data, highlights the large disparities in unemploymentrates by education level and gender.

• In every education category, according to Census '96, the unemployment rateamong women is higher than that of men.

• The gender gap is largest among those without any schooling and those whohad not completed secondary education.

• For example, among economically active males with some secondary education,28,1% were unemployed; however, among economically active females withsimilar qualifications, as many as 46,3% were unemployed. The differencebetween male and female unemployment rates narrows only for those whohad attained a matriculation or higher qualification.

Fig: Unemployment Rates by Level of Education and Gender,

Figure, based on the rural survey, shows a different pattern in unemployment ratesby education level compared with Census '96 in two key respects. Firstly, the difference inrates between men and women tends to be substantially smaller. Secondly, it would appearthat in the two lowest education categories, the unemployment rates among men arehigher than among women.

• According to the rural survey, the unemployment rate among women in theformer homelands without schooling was relatively high (32,4%); but it washigher among men in similar locations (36,5%).

Ecology, Capitalism and the New Agricultural Economy

138

Fig. Unemployment Rates by Level of Education

in the Former homelands,

• By comparison, according to the results of Census '96, the unemploymentrate among women without schooling was substantially higher (52,5%) thanamong men without schooling (34,1%).

• As we shall see, women mostly undertake subsistence and small–scalefarming. This may be the main reason for the differences in census datacompared with the rural survey, since Census '96 did not focus on subsistencefarming.

Assessing the Differences in Labour M arket Variables

There are large differences in labour absorption rates, labour force participationrates and unemployment rates reported in Census '96, which covered the wholecountry, and in the rural survey, which covered only the former homelands. Evenwhen the rural areas in the former homelands are selected from the census data,these differences persist.

• Census '96 was conducted in October 1996 while the rural survey occurredduring June–a peak period for maize farmers.

• The former homelands were the focus of the rural survey, while the censuscovered the entire country.

As a result, it appears that the rural survey captured a peak period for maizeharvesting. It also picked up subsistence agriculture and small–scale farming, whileCensus '96 picked up more–general employment trends. Figure compares the averageunemployment rates calculated from Census '96, with the rural survey. Notably, Census'96 data refer to 'tribal' areas in the six relevant provinces since these areas are broadlythe same as those covered in the former homelands on the basis of the rural survey.

• In each of the six provinces, the unemployment rates in tribal areas (basedon Census '96) are higher than those in the former homeland areas withinthe same provinces (based on the rural survey).

• The differences are largest in Eastern Cape, KwaZulu–Natal and NorthernProvince. For example, in Eastern Cape the unemployment rate in tribal areasaccording to Census '96 was 71,5%. However, according to the rural survey,the unemployment rate in the former homeland areas of Eastern Cape was

32,4%.

Ecology, Capitalism and the New Agricultural Economy

139

• This breakdown shows the large number of households engaging insubsistence and small–scale farming which consider themselves as beingunemployed or not economically active.

Fig: Differences in Unemployment Rates Between

Tribal Areas in the 1996

Population Census and the 1997 Rural Survey

Some of the variation is also likely to be attributable to seasonal factors given theimportance of maize as a staple, and given that subsistence farming accounts for thehighest proportions of the employed labour force in Eastern Cape, KwaZulu–Nataland Northern Province.

Household Incomes in the Former Homelands

In this section, the pattern of household income in the rural survey is consideredusing two groups of households. The first contains households in which at least onemember was employed, while the second contains households in which no–one wasemployed. Figure shows large differences in the principal source of income ofhouseholds depending on whether or not household members were employed.

• More than half of all households (52%) that had 'employed' members, i.e.people working for pay, profit or family gain, depended on a salary or wageas the main source of income (this probably excludes subsistence farming).

• By comparison, 12% of households that had no employed person living withthe household reported that salaries and wages were the principal source ofincome. Income derived in this way may be the result of seasonal or casualemployment over a limited period.

• Nearly half of all households without anyone 'employed' (49%) depended onpensions as the main source of income; an addit ional 33% rel ied onremittances as their principal means of survival.

Ecology, Capitalism and the New Agricultural Economy

140

only 2% reported that farming activities were the principal source of income.

Fig: Principal Source of Income of Households in Which Employed People Live Compared

with Households which Have no Employed Persons,

Figure shows the proportions of households which depended on each type of incomesource. Among all households that depended on pensions as the major source of income,as many as 46% had members of the household that were employed.

• Among the relatively few households that did depend on small–scale farming activitiesas the main source of income, 77% had household members that were employed.

Fig: Distribution of Household Income in Households with Employed People Compared with

Households Without Employed People,

Figure shows that a substantially larger proportion of households without employedpeople fell into the lowest income brackets compared with households in which at least oneperson was employed.

• Relatively few households depended on farming activities as the main sourceof income. For example, even among households without anyone 'employed',

Ecology, Capitalism and the New Agricultural Economy

141

Fig: Distribution of Income of Households with and Without Employed Members,

As a result, the distribution of income of households with employed people was moreeven than that of households in which no–one was employed. For example, 27% of householdsin which at least one member was employed had a monthly household income of R400 orless, compared with 42% of households in which no–one was employed. This overalldistribution masks important provincial differences. In Eastern Cape and KwaZulu–Natal,where for over one–third of all households the only employed members are subsistencefarmers, the differences in income compared with households in which no–one is employedare smaller compared to the overall distribution. For example, in Eastern Cape, amonghouseholds in which there was at least one employed person, 26% had incomes of R400 orless compared with 29% of households in which no–one who fell into this income rangewas employed. This suggests that the incomes earned by employed household membersin these provinces do not contribute substantially to overall household incomes. Figureshows that the proportion of households that had members who were employed varies byprovince. For example, in KwaZulu–Natal, 83% of the 253 000 households in the formerhomelands reported that at least one person was employed. This contributed to the lowerthan expected unemployment rates in the former homelands. The dominance of subsistencefarmers in the labour force of KwaZulu–Natal (and Eastern Cape), and the source andlevel of household incomes in these provinces, suggest that 'employment' is not necessarilyassociated with a secure livelihood in the former homelands.

Fig. The Distribution of Households in Which

Employed People Live by Province,

This differences in key labour market variables across the two survey instruments–

Ecology, Capitalism and the New Agricultural Economy

142

Census '96 and the rural survey are likely to be the result of several factors. Agriculturalactivity is typically very seasonal and the two instruments were administered duringdifferent periods of the year. The provinces in which the largest differences occur arealso those in which the proportion of subsistence farmers in the provincial labourforce is highest.

Subsistence and small–scale farming are not necessarily viewed as employmentby respondents in Census '96. The lower than expected unemployment rates in theformer homeland areas of Northern Province, KwaZulu–Natal and Eastern Cape arelikely to be largely a consequence of the importance of maize as a staple in theseareas and the rural survey being conducted at a peak period for maize farmers. Thenet effect of these factors is higher than average employment in these provinces. Thisresulted in lower unemployment rates than were reported in Census '96 (conductedin October) and higher than expected labour absorption and labour force participationrates.

CH ARACTERIST ICS OF AGRICULT URAL W ORKERS

Introduction

This size and structure of the agricultural sector on the basis of the data availablefrom the three instruments used: the population census of 1996 (Census '96), therural survey of 1997, and the annual commercial agricultural surveys. This is followedby an analysis of the age–sex structure and level of educational attainment of peopleworking in the agricultural sector on the basis of Census '96 data (adjusted by a post–enumeration survey) compared with people employed on subsistence and small–scalefarms in rural areas in the former homelands.

The questions in the rural survey to determine employment status in the formerhomelands were specifically designed to obtain information from three groups ofemployed people, i.e.

Those employed in:• Farming, mainly on subsistence or small–scale farms,;• The formal sector (possibly including some commercial farms);• The informal sector (mainly its non–farming components).Among these three broad groups, it is not possible to determine the economic

sector people were employed in (for example, whether employed in the agriculturalor manufacturing or service sectors) since the relevant question was not asked in therural survey.

However, it is likely that all those who reported that they were employed onfarms were in fact in the agricultural sector. In this report, we regard people employedon farms as a good proxy for the agricultural sector, although among those whor*ported that they worked in the formal and informal sectors there may well be someagricultural workers.

Employment in Agriculture

On the basis of Census '96 results, the number of employed people in the labourforce in the ten major sectors of the economy was 9,1 million, of whom 814 000 (10%)worked in the agriculture, hunting, forestry and fishing sector.

Ecology, Capitalism and the New Agricultural Economy

143

Figure shows that, within the broad sector of agriculture, hunting, forestry andfishing, the agriculture and hunting sub–sectors together accounted for 92% of allemployment opportunities. Relatively small numbers of people were employed inforestry and logging (6%) or in fishing and fish–farm operations (2%).

In terms of the rural areas of the former homelands, the rural survey of June1997 suggests that a total of 2,2 million people were employed.

As noted above, three categories of employed people can be identified from thissurvey: those engaged mainly in farm work–1,2 million (52%)–which included someworking on commercial farms, but consisted mainly of those engaged in small–scaleand subsistence agriculture; formal sector workers–869 000 (39%); and informal sectorworkers–220 000 (10%).

Fig: The Structure of the Agricultural Sector, October 1996

Figure shows the provincial distribution of workers in the three broad employmentcategories identified in the rural survey. The proportion of the employed labour forceengaged in farm work is highest in the former homeland areas in KwaZulu–Natal(73%) and lowest in Free State (10%). The formal sector provides the most jobopportunities in the former homeland areas of North West, where 75% of all jobsoccur in this sector.

Fig: Pattern of Employment in Rural Areas of the

Former Homelands by Province,

The annual commercial agricultural surveys provide insights into the trend in

Ecology, Capitalism and the New Agricultural Economy

144

employment in the large–scale commercial sector. Since 1988, there was a downwardtrend in employment, from 1,2 million in 1988 to 914 000 in 1996. This is a decline of25,0% over the period, equivalent to an annual average fall of 3,5%. Despite the overalldownturn since 1988, employment increased by 8,4% in 1993 and by 2,6% in 1996.

Figure shows large provincial differences in the propor tions employed oncommercial farms, when compared with the small–scale farms in the formerhomelands. Of the 914 000 workers on commercial farms in 1996, 21,7% were inWestern Cape followed by 13,3% in Northern Province and 13,0% in Free State.

By comparison, total employment on mainly small–scale and subsistence farmsin the former homelands, according to the rural survey, was 1,2 million, of which 38%lived in Eastern Cape, 29% in Northern Province and under 5% in Free State, NorthWest and M pumalanga.

Fig: Comparison of the Provincial Pattern of Employment in Commercial Farming

Size of Farming Units

This section focuses on the relative sizes of farming units in the commercial

sector (as indicated in the annual commercial agricultural surveys) compared with

the former homeland areas (as indicated in the rural survey). Figure shows litt le

variation in the average size of farming units in the commercial sector since 1988. In

1988 there were 62 428 farming units covering 84 621 000 hectares. On average, the

size of a farming unit was 1 355 hectares.

Fig: Average Size of Farming Units in the Commercial Sector,

Ecology, Capitalism and the New Agricultural Economy

145

households (50%) cultivated an area of less than one hectare, 22% cultivated an areaof between one and two hectares while relatively few (1%) had 10 hectares or more

under cultivation.

Fig: Size of Arable Land Under Cult ivation or Lying Fallow Among Households Engaged in

Crop Farming in the Former Homelands,

The Age Profile of People Engaged in Agriculture by Sector

Figure shows marked differences in the age profile of employed people in theagricultural sector (based on Census '96) compared with those employed on farms inthe rural areas of the former homelands (based on the rural survey).

By comparison with the commercial farming sector, the land under cultivation

in the former homelands is very small. Of the 2,4 million households in the former

homeland areas, 1,4 million engaged in crop farming. Of these, one in every two

Ecology, Capitalism and the New Agricultural Economy

146

Fig: Age Profile of Employed People

The age pyramid on the left side of Figure reflects the age profile for agricultureand hunting, based on Census '96 data; while the age pyramid on the right shows theprofile on farms in the former homelands, based on data from the rural survey. Asillustrated in Figure, the employed labour force in agriculture, based on Census '96, ispredominantly male. By comparison, people engaged in farm work (on the basis ofthe rural survey) are predominantly female, largely on account of the inclusion ofsubsistence workers in the specialised rural survey.

A total of 1,2 million people in the rural survey answered 'yes' to the question'Does the person work on a farm or on the land, whether for a wage or as part of thehousehold's farming activit ies?' Of these, as many as 823 000 were classified assubsistence farmers (586 000 women and 236 000 men). Put another way, for every100 men working in subsistence farming, there were more than 200 women. Bycontrast, data on the agricultural sector from Census '96 showed that for every 100men employed in the sector only 42 women had jobs.

A substantially larger proportion of people engaged in farm work in the formerhomeland areas were in the older age groups (11% aged 60–65 years), compared withthe data from the agricultural sector in Census '96 (4%). Among employed people, arelatively small proportion were in the youngest age category (15–19 years), either onfarms in the former homeland areas (8%), or in the agricultural sector as reported inCensus '96 (5%).

Figure shows the age profile of employed people in the formal and informal sectorsliving in rural areas of the former homelands. The age pyramid on the left reflects theinformal sector profile, while the one on the right portrays the profile in the formal sector.The figure demonstates that informal sector workers are predominantly female, whereasformal sector workers are predominantly male. For example, of the 219 000 informalsector workers, 124 000 were female and 95 000 were male. By comparison, among formalsector workers (869 000), 330 000 were female and 539 000 were male.

Ecology, Capitalism and the New Agricultural Economy

147

Fig: Age–Sex Profile of Those Employed in the Former

Homelands, June 1997

The Age Profile by Population Group

Virtually all respondents in the rural survey were African. As a result, differencesin the age profile among the population groups cannot be illustrated. However, datafrom Census '96 provides insights into the age distribution by population group. Figure,based on Census '96, shows a marked variation in the age profile of those employedin the agriculture and hunting sub–sector by population group. The Afr ican andcoloured population groups tend to be more youthful, compared with Indians andwhites.

Ecology, Capitalism and the New Agricultural Economy

148

Fig: Age Profile of Those Employed in the Agriculture and Hunting Sub–Sector by Population

Group, October 1996

For example, among Africans working in the sector, 21% were 15–24 years old,compared with 25% among coloureds and only 12% among Indians and 10% amongwhites.

Level of Education

Education is widely regarded as an important determinant of living standards. Thissection examines the level of education attainment among employed people in theagricultural sector countrywide on the basis of Census '96, compared with the three broademployment categories (farm, formal and informal) in the former homelands identified inthe rural survey. Figure shows large disparities in the level of educational attainmentamong people employed in the agricultural sector by population group on the basis ofCensus '96. Among Africans employed in the agriculture and hunting sub–sector, 41%had no schooling, whereas among whites as many as 77% employed in the sector hadobtained 'matric or higher'.

Fig: Level of Educational Attainment Among Those Employed in the Agriculture and Hunting

Sub–Sector by Population Group, October 1996

According to Census '96, provincial disparities are also marked. Figure shows the provincialdistribution among people employed in the sub–sector who reported that they had no schooling.Those who were in this education category ranged from 17% of people employed in the

Ecology, Capitalism and the New Agricultural Economy

149

agriculture and hunting sub–sector in Western Cape, to 44% in Mpumalanga and NorthernProvince and 45% in North West.

Fig: Proportion of Employed People Without Schooling in the Agriculture and Hunting Sub–

Sector in Each Province, October 1996

Figures illustrate the education profile of employed people living in the formerhomeland areas, based on the results of the rural survey.

Fig: Pattern of Educational Attainment Among Employed

People in the Former Homelands,

As noted earlier, there were 2,2 million employed people in the former homelandareas. Of these 1,1 million reported they worked on farms, 868 000 said that they were

employed in the formal sector and the remainder (219 000) worked in the informal sector.On the basis of the rural survey, Figure shows that the level of educational attainment ofemployed people in the formal sector is markedly different from that of workers in eitherthe informal or farm sectors of the former homeland areas. For example, whereas 29% offormal sector workers had attained matric or higher, only 9% of people engaged on farmsand 13% of informal sector workers had achieved this result.

Ecology, Capitalism and the New Agricultural Economy

150

Fig: Proportion of People Employed on Farms in the Former Homelands with no Education,

Figure shows that, according to the rural survey, in every province covered in theformer homelands, the proportion of people employed in the farming sector with noeducation tends to be lower than the education level recorded among employed peoplein the agriculture and hunting sub–sector during Census '96. A comparison of thelevel of education of people living in tribal areas (i.e. former homelands) in Census'96, and in the rural survey, shows that education for these areas is similar. Access toeducation in the former homelands was somewhat better than on commercial farmsduring the apartheid era, leaving farm workers on commercial farms less educatedthan those working in various sectors of the former homelands.

Farming units vary markedly in the commercial farming sector compared withthose in the former homeland areas. The average farm size of commercial units isaround 1,3 thousand hectares. By comparison, the land under cultivation by householdsin the former homeland areas is very small–as many as 72% of the 1,4 millionhouseholds engaged in crop farming cultivate areas of less than two hectares.

The demographic and educational characteristics of the employed labour force,derived from both Census '96 results and rural survey data, provide important insightsinto the underlying patterns and trends discussed. In terms of the age profile ofa*gricultural workers, Census '96 results for the entire country suggest a predominantlymale labour force in the agricultural sector. By comparison, in the former homelandareas, the analysis presented is based on the rural survey suggests that, whereas workersin the formal sector are predominantly male, people engaged in farm work particularlysmall–scale and subsistence farming and informal sector workers are predominantlyfemale.

Ecology, Capitalism and the New Agricultural Economy

151

Chapter 7

Status in Employment in

the Agricultural Sector

IN TRODUCTION

This patterns and trends based on Census '96 and the annual commercialagricultural surveys for specific variables related to full–time, part–time, casual orseasonal employment. Household members in the rural survey were not required toanswer an equivalent question regarding employment status.

Status of Employment by Population Group and Province

Census '96 suggests that among people employed in the agriculture and huntingsub–sector, 90% were full–time and the remainder (10%) worked on a part–time basis.Figure shows the variation in full– and part–time employment by population groupand gender. As illustrated in Figure full–time employment in the agricultural andhunting sub–sector was highest among white men and lowest among African andcoloured women. According to Census '96, among white men employed in theagriculture and hunting sub–sector, 97% had full–time jobs compared with 83% amongAfrican women and 75% among coloured women.

Census '96 results also indicate large provincial differences in the patterns offull– and part–time employment in the agriculture and hunting sub–sector. Figureshows that there is a notable gender bias in terms of part–time employment. Thedifference in the proportion of men to women employed part–time is smallest inGauteng and largest in Free State and Northern Cape.

Fig. Full–Time and Part–Time Employment of People in the Agriculture and Hunting Sub–

Sector by Population Group and Gender, October 1996

Figure shows that, according to Census '96, the proportion of women employedon a part–time basis (19%) was three times higher than men (6%) employed on thisbasis. Part–time employment among women was highest in Northern Cape (39%)and lowest in Gauteng (10%). By comparison, among men employed part–time in theagriculture and hunting sub–sector, differences ranged between 10% in Northern Capeand only 4% in Mpumalanga.

Fig. Part–Time Employment in the Agriculture and Hunting

Sub–Sector by Province and Gender,

Regular and Casual Work

The casual and regular employment categories discussed below in relation to

commercial farming activities are not directly comparable to the full–time and part–

time categories reviewed earlier, because they refer to different concepts and are used

in separate datasets. To be a casual or seasonal worker, a person can be in full–time

employment for a limited time period, or else one could be in part–time employment

for a limited period. However, they do provide an indication of the security of

employment in the commercial farming sector.Figure shows that, on the basis of the annual commercial agricultural surveys,

the number of employees engaged in regular work on commercial farms declined

from 724 000 in 1988 to 610 000 in 1996, a decline of 15,7% over the period as awhole. As discussed earlier, since total employment fell by a larger percentage, the

proportion of people engaged in regular employment was substantially higher in 1996

(67%) than in 1988 (59%). Nonetheless, in actual numbers, there were fewer regular

employees in 1996 (610 000) than in 1988 (724 000) (On this, see also the NDA case

study, pp. 34–38).

Ecology, Capitalism and the New Agricultural Economy

153

Fig. Regular and Casual Work in the Commercial Farming Sector,

On the basis of the annual commercial agricultural surveys, Figure shows largeprovincial differences in regular and casual/seasonal employment in the commercialfarming sector. Of the total 914 000 employees on commercial farms during 1996,67% were employed on a regular basis, while 33% were engaged as casual/seasonalworkers. However, in terms of the provinces, regular employment in the commercialfarming sector ranged from 86% of the workforce in Gauteng, to 42% in NorthernCape.

Fig: Regular and Casual Employment on

Commercial Farms by Province,

Part–time work cannot be equated with seasonal and casual work. In addition,large seasonal variations in employment are a characteristic feature of the agriculturesector. This makes comparisons between Census '96 and the annual commercialagricultural surveys difficult since the census data relate to October 1996, while theemployment data from the annual commercial agricultural surveys are annual averages.However, definition and timing issues aside suggests that the security of employmentin terms of those who have regular jobs in the commercial farming sector or full–time jobs in the agriculture and hunting sub–sector varies enormously by province.

Case Study

Recent t rends in employment in the agr icultural sector by the Nat ionalDepartment of Agriculture The Presidential Job Summit, held in October 1998,resolved that each economic sector should hold its own job summit. Because ofdifficulties in accurately tracking all employment trends in agriculture from the

Ecology, Capitalism and the New Agricultural Economy

154

available surveys, the National Department of Agriculture (NDA) undertook a casestudy based on a mail survey to some commercial farmers to provide up–to–dateinformation regarding the employment situation in agriculture. The case study aimedto provide data which could inform the discussion at the M inister's Indala on jobcreation, held in October 1999. The questions asked in the mail survey were alsodesigned to identify trends in various categories of employment within agriculturefrom 1994/95 through to 1998/99.

The Questionnaire

The questionnaire included five questions:1. Which of these categories represents the largest portion of the gross income

from your farming operations?– Field crops (summer and winter crops, sugar cane, tobacco, lucerne and

other field crops);– Horticultural products (viticulture, fruits, vegetables, potatoes, tea and

flowers);– Livestock products (wool, mohair, ostriches, livestock, poultry and dairy);– M ixed farming (field crops and livestock products or hort icultural

products and livestock products).2. How many farm workers were employed during the financial years 1994/95,

1996/97, 1998/99?– Regular farm workers (defined as a worker employed permanently during

the year);– Seasonal farm workers (defined as a shearer, reaper, fruit picker etc.,);– Family farm workers (defined as a paid or unpaid worker but not included

under regular or seasonal farm workers).3. From those regular farm workers that you employed, how many were?

– Skilled (defined as a worker with experience and/or training);– Unskilled (defined as a worker without experience and/or training).

4. Did you hire contract workers (employed on contract but not seasonal) duringthese years?

5. What sources did you use in order to determine the above information?– Memory;– Records;– Both.

Issues Covered by the Case Study

• The level and trend in employment of regular, seasonal and family farmworkers by commercial farmers.

• The level and trend in employment of skilled and unskilled regular farmworkers.

• The level and trend in employment of contract workers.The level and trend in employment in agriculture with respect to field crops,

horticulture, animal production and mixed farming activit ies.

M ethodology

Ecology, Capitalism and the New Agricultural Economy

155

In the absence of an adequate sampling frame, the NDA constructed a list frame basedon two sources of information: details of commercial farmers available within the NDAitself (11 114 names and addresses); and a list obtained from Agri SA of 6 518 names andaddresses of farmers in the commercial farming sector. After eliminating duplication in thelists, the sample size was set at 10 000 commercial farmers of which 5 000 were randomlyselected from each of the two address lists available to the NDA. Completed questionnaireswere received from 4 149 commercial farmers. Since it was a mail survey, it was easy toimplement and provided an up–to–date picture of employment in the agriculture sector incritical respects. However, the list frame from which the sample was drawn was not completeand only covered some farmers in the commercial sector. As a consequence, the resultscannot be generalised to the overall population since the sample was not representative.The results of the case study are therefore only broadly indicative.

Results

In spite of the weaknesses of the survey methodology, the results of the casestudy by the NDA provide important insights about recent developments in the patternof employment in the agriculture sector. Figure A shows that, among both regularworkers and those employed by their family, employment continued a downwardtrend since 1994/95. Even though seasonal employment has been on upward trend inthe past four years, the rate of increase slowed between 1996/97 and 1998/99.

• For example, in 1998/99 the number of regular workers in employment hadfallen by a cumulative 7,6% since 1994/95. However, the decline of 2,9% in1996/97 was less steep than occurred in the subsequent two–year period whenemployment fell by 4,8%.

The decline in employment of family workers on commercial farms was minimal in1996/97 (down 0,8% since 1994/95). However, by 1998/99 employment of these workersfell by as much as 4,5%. As a result, the decline in employment of family workers wasdown 5,3% between 1994/95 and 1998/99.

• Employment of seasonal workers rose by 2,2% in the two years to 1996/97and by an additional 1,2% in the two years to 1998/99 such that over theperiod 1994/95 to 1998/99 the number of seasonal workers had increased by3,4%.

• Figure B shows the percentage change in employment on farms by type ofmajor activity of the commercial farmers included in the NDA case study.

• Over the period 1994/95 to 1998/99, the percentage decline in employmentof seasonal workers (down 9,3%) was highest among farmers whose mainsource of gross income from farming operations was animal production. Bycontrast, while over the same time period seasonal workers in mixed farmingoperat ions was also down 4,2%, hor t icultural farmers increased theemployment of seasonal workers by 17,3%. Farmers who derived the mostincome from the sale of field crops also increased their employment ofseasonal workers (up 6,3%) over an equivalent period.

The results of the NDA case study suggest that, over the period 1994/95 to 1998/99, commercial farmers engaged in almost all types of farming activities reduced theiremployment of regular workers.

Ecology, Capitalism and the New Agricultural Economy

156

But for horticulture (up 1,2%), employment of regular workers fell in every othermajor type of farming operation covered by the case study. For example, amongcommercial farmers whose main source of income was field crops, employment ofregular workers declined by 6,1%. Among those whose main source of income waseither mixed farming or animal production, the decline was even steeper–11,9% and14,4% respectively

In terms of the employment of family members, the greatest decline over theperiod 1994/95 to 1998/99 was among those commercial farmers whose main sourceof income was animal production (down 27,6%). Among commercial farmers whosemain source of income was field crops, the number of family members employed fellby 5,3%. The decline in employment of family members by farmers whose principalsource of income was mixed farming was minimal (down 1,1%).

Notably, horticultural farmers increased the number of family members theyemployed by 9,5% over the period 1994/95 to 1998/99. In terms of contract workers,commercial farmers included in the NDA case study reported that, they accountedfor an increasing proportion of the agricultural labour force, r ising from 18,8% in1994/95 to 21,6% in 1996/97 and 24,2% in 1998/99. Figure C highlights the upwardtrend in employment of skilled workers among commercial farmers included in theNDA case study. In 1994/95, 60% of workers employed by commercial farmers wereskilled, rising to 63% in 1996/97 and 65% by 1998/99. This upward trend is reflectedin the commensurate decline in the proportion of unskilled workers over the sameperiod, from 40% in 1994/95 to 35% in 1998/99.

The results of the NDA case study conducted in 1999 among some commercialfarmers suggest that employment of regular workers declined by 7,6% during theperiod 1994/95 to 1998/99, equivalent to an annual fall of 1,8% over the period. Thegrowth of employment of seasonal workers was strongest among farmers engaged inhorticulture (up 17,3% from 1994/95 to 1998/99) and field crops (up 6,3%) over anequivalent period. The number of seasonal workers employed by farmers whose mainsource of income was from animal production and mixed farming declined by 9,3%and 4,2% respectively over the period 1994/95 to 1998/99. At the same time, thenumber of family workers decreased for field crop farmers and animal producers, butincreased substantially (up 9,5%) for producers of horticulture. Notably, among thecommercial farmers included in the NDA case study, contract workers hired by thesefarmers accounted for an increasing share of those in employment over the periodunder review.

TYPE OF EM PLOYM EN T IN AGRICULT URE

Introduction

This noteworthy patterns in the type of employment (whether self–employed, anemployer, an employee or working in a family business) reported in the agricultureand hunting sub–sector during Census '96, and in the rural areas of the formerhomelands according to the rural survey of 1997.

Type of Employment by Population Group and Province

On the basis of Census '96, Figure shows that the distribution of Indians and

Ecology, Capitalism and the New Agricultural Economy

157

whites in the agriculture and hunting sub–sector by employment type is markedlydifferent from that of Afr icans and coloureds. Figure shows relatively small provincialdifferences. For example, among Indians employed in the agriculture and huntingsub–sector, 14% were self–employed and an additional 11% were employers. Amongwhites, 13% were self–employed and 39% were employers. By contrast, among Africansand coloureds employed in the sub–sector, only 2% were either self–employed oremployers, the vast majority (95%) worked as employees. Provincial differences in thetype of employment available in the agriculture and hunting sub–sector are illustratedin Figure. Census '96 indicates that 90% of people employed in agriculture and huntingwere employees, an additional 5% were employers and 3% reported that they wereself–employed. However, 92% of the employed labour force in Western Cape andFree State were employees compared with 86% in Northern Cape where 9% of theagricultural labour force were employers.

Fig. Type of Employment in the Agriculture and Hunting

Sub–Sector by Population Group,

Fig: Type of Employment in the Agriculture and Hunting

Sub–Sector by Province,

Ecology, Capitalism and the New Agricultural Economy

158

Type of Employment in the Former Homelands

Those who reported in the ru ral survey in the former homelands that theywere employed on the farm or the land, whether for a wage or as part of the householdfarming activities are regarded as a good proxy for employment in small–scale orsubsistence farms. In the discussion that follows, this group is compared with thosewho reported that they worked in the formal and informal sectors of the labour market(mostly non–agricultural work).

Figure shows that more than half of all employed people on small–scale andsubsistence farms (54%) in the former homeland areas worked in a family business,an additional 25% were self–employed, 19% were employees and a relatively smallproportion (2%) were employers.

This pattern of employment reflects the subsistence nature of much of theagriculture that occurs in the former homeland areas. As expected, most employedpeople in the informal sector were self–employed (67%) although 21% worked asemployees. In the formal sector, 92% of all employed people were employees.

Fig: Type of Employment in the Former Homelands

by Broad Employment Category,

When looking at the provinces according to where former homelands weresituated, Figure shows large provincial differences in the type of employment amongpeople engaged in farm work in the former homelands according to the rural survey.In the former homeland areas of Eastern Cape, 72% of people working on farms didso as part of the family business, compared with 12% in the former homeland areas inFree State.

Ecology, Capitalism and the New Agricultural Economy

159

Fig: Type of Employment Among Farm Workers in the Former Homelands by Frovince,

Fig: Type of Employment Among Informal Sector Workers in the Former Homelands by

Province,

Figure shows that, among informal sector workers in the former homelands, in

every province, self–employment ranks highest. Over half of all informal sector workers

in the former homelands in each province were reported as being self–employed. In

contrast to the type of employment among either people working on farms or in the

informal sector, Figure shows that formal sector workers living in the former homeland

areas were predominantly employees. In every province except Eastern Cape, more

than 90% of people working in the formal sector were employees.

Ecology, Capitalism and the New Agricultural Economy

160

The analysis suggests that, using Census '96 data, most employed people in thecommercial agricultural labour force are employees. In terms of the four majorpopulation groups, Census '96 also indicates that, in the agriculture and hunting sub–sector, the distribution of jobs by employment type is more even among Indians andwhites than among Africans or coloureds. Nine in every ten Africans or coloureds areengaged as employees. By comparison, one in every four Indians are either self–employed or employers. Notably, nearly two in every five whites are employers.However, on the basis of the specialised rural survey conducted in the formerhomelands, there are notable differences in the type of employment among the threebroad employment categories identified in this survey (i.e. farm, formal and informal).Whereas formal sector workers in the former homelands tend to be predominantlyemployees, people engaged in small–scale and subsistence farm work tend to workmainly in family businesses, while the largest proportion of informal sector workersare self–employed.

OCCUPATION OF PEOPLE IN AGRICULT URE

Introduction

The occupation status of labour force participants is related to their age–sexstructure and level of education attainment This highlights occupational patternsamong those employed in the agriculture and hunting sub–sector, on the basis ofCensus '96 results, and then discusses the occupations of people employed in theformer homeland areas, on the basis of the results of the rural survey.

Occupations in Agriculture and Hunting

As shown in Figure, the results of Census '96 suggest that whites and Indians arehigher in the occupation hierarchy than Africans or coloureds. According to Census '96,among the relatively few coloured people employed in agriculture, 82% were found inelementary jobs such as fruitpicking and weeding. Among the preponderant group ofAfricans employed in the agriculture and hunting sub–sector, 58% were in jobs classifiedas elementary compared with 22% among Indians and only 12% among whites. At thehigher end of the occupation hierarchy, 15% of Indians and an equivalent proportion ofwhites (15%) were employed as managers, professionals or technicians compared withonly 1% of either Africans or coloureds.

Fig: Type of Employment Among Formal Sector Workers in the Former Homelands byProvince,

Ecology, Capitalism and the New Agricultural Economy

161

Fig: Occupations in the Agriculture and Hunting Sub–Sector by Population Group,

Reflecting the dominance of Africans in the agricultural labour force and the lowlevels of education they have attained, Figure shows the distribution of men and womenin the agriculture and hunting sub–sector by occupation status on the basis of Census'96. More than two in every three women (70%) in the agriculture and hunting sub–sector did jobs classified as elementary, while 55% of men fell into this occupationcategory. The second largest occupation category among both men and women wasskilled agricultural work accounting for 32% of jobs among men and 22% amongwomen.

Fig: Occupations in the Agriculture and Hunting

Sub–Sector by Gender,

Occupations in the Former Homelands

Figures illustrate the differences in occupational status among the three broademployment categor ies discussed earlier i.e. farm, informal and formal sector

Ecology, Capitalism and the New Agricultural Economy

162

farming activities–are regarded as a good proxy for the agriculture sector. The vast

majority of these people working on farms were in subsistence or small–scale

agriculture. On the basis of the rural survey, this section compares the occupation

status of those who were working on farms with people who reported that they were

either employed in the formal or informal sector in the former homelands.Reflecting the importance of subsistence farming in the former homelands, Figure

shows that among people engaged in farm work, the single largest occupation categoryamong both men and women was skilled agriculture.

• Four out of every five (80%) people working on farms in the former homelandswere engaged in 'skilled agriculture'. But, as shown in Figure, more than fourout of every five (83%) women had such jobs compared with 74% of men.

• The second largest occupation category among both men and womenemployed on farms in the former homelands was elementary work, accountingfor 12% of employment opportunities among women and 10% among men.

Fig: Occupation Status of People Doing Farm

Work in the former homelands,

Figure, based on the rural survey, shows that elementary work requiring lowlevels of education and skill is the single largest occupation category among bothwomen and men who are informal sector workers in the former homelands.

Overall, the rural survey indicates that, in the former homelands, one in everytwo workers in the informal sector (50%) was engaged in routine work classified as'elementary'. But, as shown in Figure nearly two in every three (63%) women had suchjobs compared with 35% of men.

The second largest occupation category among both men and women in the informalsector was craft and related work, accounting for 14% of jobs among women and 30%among men.

employment, on the basis of the rural survey of 1997. As noted earlier, in the absence

of a specific question regarding the economic sector in which people worked, people

who stated that they worked on farms–whether for a wage or as part of the household's

Ecology, Capitalism and the New Agricultural Economy

163

Fig: Occupation Status of Informal Sector

Workers in the Former Homelands,

Figure, based on the results of the rural survey, shows that among formal sectorworkers in the former homelands, elementary work was also the single largestoccupation category among both men and women.

As illustrated in Figure, one in every three (33%) formal sector workers in theformer homelands had the occupation status 'elementary'.

This type of routine work accounted for 46% of jobs among women and 25%among men. Craft and related work was the second largest occupation category amongmen (22%), while one in every five women (20%) was employed as a professional(which includes teachers).

Fig: Occupation Status of Formal Sector Workers in the Former Homelands,

Overall, Figures shows that the distribution of jobs by occupation in the formerhomelands was more even among formal sector workers than either those engagedon farms or people employed in the informal sector. For example, whereas 14% ofworkers in the formal sector were professionals, only 3% of informal sector workersand 1% of people engaged in farm work fell in this occupation category.

Domestic Workers

In the rural survey, 126 000 people living in the former homelands reported that they

Ecology, Capitalism and the New Agricultural Economy

164

were domestic workers. This is 6% of the 2,2 million people who were employed. The vastmajority of domestic workers (81%) were classified in the formal sector, 15% worked onfarms and 4% worked in the informal sector. Other notable features of domestic workersincluded the following:

Ninety per cent of all domestic workers were women of whom 15% were betweenthe ages of 50–59 years.

• Twenty: Nine per cent of domestic workers had no schooling and an additional68% had achieved 'less than matric'.

• Ninety: Five per cent of domestic workers were employees.Census '96 suggests that 11% of employed people were engaged in private

households as domestic workers. The large differences in the level of educationalattainment by population group were discussed. Reflecting this, the analysis on thebasis of Census '96 results, that the distribution of jobs by occupation is overwhelminglyof a routine or 'elementary' nature in the agriculture and hunting sub–sector. In theformer homelands, the rural survey suggests that whereas people employed on farmsare in skilled agriculture, the single largest occupation category among informal sectorworkers is routine or elementary work. Although occupations in the formal sector ofthe former homelands tend to be more evenly distr ibuted, in all three sectors womentend to feature more predominantly at the lower ends of the occupational hierarchy.

IN COM E AND REM UNERATION IN AGRICULT URE

The remuneration received by employed people–whether as cash wages andsalaries or as payment in kind–is related to their age, level of education and occupationstatus. This patterns and trends in remuneration in the agricultural sector on thebasis of the data from Census '96, as well as with respect to the annual commercialagricultural surveys, relating to the commercial farming sector.

Individual incomes of employed people in the rural survey were not measuredsince the principal focus of this survey was the household, and the incomes of employedpeople within households are not reported separately. Nonetheless, the scope of thediscussion has been broadened by grouping people into households in which employedpeople live and those in which no household members are employed. This enables anassessment of the level and source of incomes of households in which employed peoplelive in the former homeland areas.

Individual Income by Population Group and Province

Figure illustrates the distribution of monthly incomes by population group amongemployed people in the agriculture and hunting sub–sector, as reported in Census'96. The census question was phrased in terms of all types of income: as a result, theincome bands reported include remittances, payments in kind and all types of grants.However, the value of home produce, for example growing maize or other productsfor home consumption, is not taken into account. Among Africans employed in thesub–sector, according to Census '96, the vast majority (79%) had monthly incomes ofR500 or less, falling to 67% among coloureds and 18% and 10% among Indians andwhites respectively. By comparison, whereas 46% of whites received monthly incomesin the highest income bracket (R3 501 and more), only 1% of Africans and 18% ofIndians had incomes in this range.

However, there are even larger inequities in the distribution of income by gender.

Ecology, Capitalism and the New Agricultural Economy

165

Census '96 indicates that, in the agriculture and hunting sub–sector, as many as 83%of all women fell into the lowest income bracket (R0–R500) compared with 65% ofmen who had incomes in this range. Differences also emerge sharply in relation tothe income distribution by population group. For example, among African men in theagriculture and hunting sub–sector, 76% had monthly incomes in the lowest incomebracket compared with 88% of African women. But relatively few white men (9%) orwomen (17%) fell into this income bracket. Instead, among white men, more thanhalf (52%) had incomes in the highest income bracket (R3 501 and more).

Fig: Monthly Income of People Employed in the Agriculture and Hunting Sub–Sector by

Population Group,

According to Census '96, the provincial distribution of monthly incomes of peopleemployed in the agriculture and hunting sub–sector also showed a marked variation.In the wealthier provinces of Gauteng and Western Cape, a smaller proportion ofpeople were in the lowest income band (R0–R500). For example, among the relativelyfew people employed in the sub–sector in Gauteng, 53% had monthly incomes ofR500 or lower, and in Western Cape 56% had incomes in this range. By comparison,more than four out of every five people employed in the sub–sector in Free State(81%) and Northern Province (81%) were in this income category (R500 or less).

Fig: Monthly Income of People Engaged in the Agriculture and Hunting Sub–Sector by

Province,

Ecology, Capitalism and the New Agricultural Economy

166

Remuneration in the Commercial Farming Sector

This section discusses patterns and trends, derived from the annual commercialagricultural surveys, in remuneration in the commercial farming sector. Although genderdistinctions are not made in these surveys, differences in remuneration by populationgroup and between regular and casual/seasonal employees are indicated. This is becausethe number of employees is an average for the relevant year while remuneration relates tothe last day of February each year. On the basis of the annual commercial agriculturalsurveys, Figure illustrates the trend in average remuneration since 1988 and also the trendsin remuneration of both casual and regular employees in the commercial farming sector.As illustrated in Figure, the average monthly remuneration of employees in the commercialfarming sector more than tripled over the period 1988–1996, from R142 in 1988 to R524in 1996. This trend does not take inflation into account. Although the trend for bothcasual and regular employees has also been upward, remuneration levels among casualworkers in 1996 were still substantially lower than among regular workers. By 1996, theremuneration received by casual workers in the commercial farming sector was only arounda quarter (26%) of that received by regular employees (up from 19% in 1990).

Fig: Average Monthly Remuneration of Employees in the Commercial Farming Sector,

Figure shows that, in the commercial farming sector, there are large differences inaverage remuneration levels and trends by population group. The results of the annualcommercial agricultural surveys indicate that, in the commercial farming sector, the averageremuneration for all employees is closer to that for Africans and coloureds and markedlydifferent from that of either Indians or whites. This reflects the dominance of Africansamong employees in the commercial farming sector, and the low level of wages theyreceive. Figure shows that, apart from Indian employees, monthly remuneration increasedin both 1995 and 1996 for Africans, coloureds and whites. The increase in remunerationamong African employees over the period 1994–1996 was 28,9% compared with 14,9%among white employees during the same period. However, in 1996, the level ofremuneration among Africans was barely 12% that of whites.

Ecology, Capitalism and the New Agricultural Economy

167

Fig. Average Monthly Remuneration of Regular Employees in

the Commercial Farming Sector, 1994–1996

Figure shows that, according to the annual commercial agricultural surveys, 'in–kind'payments (such as free housing, rations and clothing) constituted a larger proportion ofthe remuneration paid to Africans than any other population group. For example, in 1996,'in–kind' payments accounted for one quarter (25%) of the remuneration paid to Africansemployed on a regular basis in the commercial farming sector. This type of payment fellto 21% among coloureds and 11% among whites.

Fig: Payment in Kind to Regular Employees,

The annual commercial agricultural surveys also indicate that, in the commercial farmingsector, the distribution of average monthly remuneration varies substantially across the nineprovinces. For example, in 1996, the monthly remuneration (including 'in–kind' payments)among employees in Gauteng (R820) was nearly two–and–a–half times higher than inNorthern Cape (R341).

Fig: Average M onthly Remuneration to Employees in the

Commercial Farming Sector by Province, 1996

Ecology, Capitalism and the New Agricultural Economy

168

Figure shows that, in the commercial farming sector, the proportion of 'in–kind'payments tended to be generally lower in the provinces where average remuneration washighest. For example, in 1996, employees on commercial farms in Gauteng received thehighest monthly remuneration of R820 of which only 14% was payment in kind. Bycomparison, in 1996 the average remuneration of employees in Free State (R388) andNorthern Cape (R341) was the lowest of the nine provinces, yet 'in–kind' paymentsaccounted for 27% and 24% respectively of total remuneration in these provinces.

Fig: Payments in Kind to Employees in the

Commercial Farming Sector,

Household Incomes in the Former Homelands

As noted earlier, the rural survey reported only on household incomes in theformer homelands. Of the 2,4 million households covered in the former homelands,1,6million had members that were engaged in farming activit ies.

This section reviews the income distribution of households engaged in farmingactivities divided into two broad labour market categories: households with at leastone employed person, and households in which no member is employed. However,the conclusions drawn must be interpreted with caution because the householdincomes reported do not include a valuation of 'own–consumption'.

Even in the rural survey, there are some households engaged in subsistencefarming activities where respondents reported that they were unemployed. In thefirst instance, the discussion focuses on the main source of income that was reportedby these two types of households in the rural survey of 1997.

This is followed by a discussion of the distribution of income of the two broadcategories of households identified above. Among households engaged in farmingactivities in the former homelands, the rural survey indicates that 71% (1,2 million)had at least one employed household member.

In the remaining 29% (475 000 households), no–one was employed although someof these people could have been engaged in subsistence activit ies.

Figure shows large differences in the dependence on various sources of incomeby each of these two broad categories of households.

• As expected, the rural survey indicates that, in the former homelands, salariesand wages were the most important source of income for those householdsin which at least one member was employed. Two out of every five (43%) ofsuch households depended on a salary/wage.

Ecology, Capitalism and the New Agricultural Economy

169

• Even in households in which at least one member was employed, more thana quarter of such households (26%) depended on pensions as the principalsource of income while an additional 19% depended on remittances.

• Among households in which no household member was employed, pensionswere the most important source of income. More than half (53%) of suchhouseholds relied on pensions as the principal source of income and anadditional 28% depended on remittances.

• The rural survey results indicate that, in the former homelands, farmingactivities were not the principal source of income for either type of household.For example, in households with employed people, only 4% depended onincome from farming activit ies as the main source of income, and inhouseholds without employed people 3% depended on such activities as themain source of income.

Fig: Principal Source of Income of Households Engaged in Farming Activities by Broad

Labour M arket Status, June 1997

Figure shows that, in the former homelands, among the 253 000 households whichdepended on pensions as the main source of income, 55% had household membersthat were employed. In the remaining households (45%), no household member wasemployed, but this figure could have included some form of subsistence farming.Among the 63 000 households which depended on farming activities as the mainsource of income, 77% had household members who were employed.

Fig: Principal Source of Income of HouseholdsEngaged in Farming Activit ies,

Ecology, Capitalism and the New Agricultural Economy

170

Figure shows that, among those households in the former homelands that wereengaged in farming activities, a larger proportion of households in which no memberwas employed fell into the lowest income brackets compared with households in whichat least one person was employed.

Fig: Income Distribution of Households Engaged in Farming Activit ies,

• Among the 1,6 million households in the former homelands that reportedthat they were engaged in farming activities during the rural survey, 475 000reported that no household member was employed. Nearly two out of everyfive of these households (39%) survived on monthly incomes of R400 or less–equivalent to R4 800 or less on an annual basis.

• By comparison, among those households in which at least one person wasemployed, 26% reported monthly incomes of R400 or less.

• Reflecting the importance of pensions as the main source of household incomein the former homelands, for both types of households similar proportions(33% and 35%) were in the R401–R800 monthly income category.

On the basis of Census '96 results, suggests that, among people employed in theagriculture and hunting sub–sector, the income distribution of Africans (and to alesser extent, coloureds) is markedly different from that of Indians or whites. Accordingto Census '96, almost one in every four Africans received monthly incomes of R500or less, while almost half (46%) of all whites employed in the sub–sector receivedmonthly incomes in excess of R3 500. These incomes exclude remuneration in kind.Provincial differences in the distribution of income are also marked. These patterns(indicated by Census '96 results) are similar to the average remuneration of employeesin the commercial farming sector on the basis of the annual commercial agriculturalsurveys. Although average monthly remuneration in the commercial farming sectorrose steadily in the three years to 1996, the remuneration of Africans was only 12% ofthat paid to whites in 1996. In terms of the former homelands, the rural surveyconducted in 1997 suggests that more than one–quarter of all households (26%) inwhich at least one member was employed survived on a monthly household incomeof R400 or less.

Ecology, Capitalism and the New Agricultural Economy

171

Chapter 8

Agriculture and M acroeconomy

M ACROECON OM IC PROJECTION S

Introduction

Projecting the future course of economic development is a risky business; it isparticularly risky to project the medium–term prospects for Guyana beyond the year2000 given the range of uncertainties it faces. Perhaps the most significant influenceon the course of future economic developments will be the speedy and effectiveimplementation of the macro and sectoral policies that have been described in thisStrategy in order to overcome key constraints and to unlock the door for renewedeconomic expansion and opportunities for every Guyanese. Assuming that thesepolicies will be implemented, and recent experience would argue in favour of such anassumption, another important influence would be the Government's commitment toaddress some of the more troublesome structural, regulatory and legal deficiencies.

As already outlined above, this will mean the creation of an economic policyframework conducive to creating and maintaining international competitiveness,sustaining the high GDP growth rates in recent years, and reversing the rate ofenvironmental degradation. This suggests a range of possible future developmentscenarios, but only two will be outlined here. The first and best case scenario offuture growth prospects is based on the assumption that the Government willimplement the Development Strategy along the lines described in the document andwill create an enabling environment for expanded growth at a sustainable level andthe international economic environment will not turn unfavourable. The second andless optimistic scenario is based on the assumption that the Government fails to takethe full range of measures necessary to revitalise the Guyanese economy and that theinternational economy is less propitious for Guyana's development.

In quantitative terms, the two scenarios bracket an aggregate economic growthrate of 6 per cent per year. To illustrative the importance and cumulative impact ofachieving such growth on a sustained basis, it can be observed that 6 per cent annualgrowth over twenty years leads to more than a tripling of incomes per capita. To beprecise, after twenty years of such growth, incomes would be 320 per cent of theircurrent level. This is mere arithmetic, but it shows why several East Asian countrieshave been able to rise to prosperity within the time span of a generation or slightlymore. Compounding is a powerful effect if sustained. This kind of growth is not outof Guyana's reach, provided that decisive, growth–oriented policies measures areimplemented in a consistent manner, at both macroeconomic and sectoral levels.

The External Environment

Growth prospects for Guyana are dependent in part on growth performance inits major external markets. Present projections for the OECD countries suggestscontinuing growth of their output with a slight improvement in the rate, from 2.6 percent in 1995 to 2.7 per cent in 1997–2001. These growth rates, if attained, will stimulateincreased demand for Guyana's exports. In other words, any constraints to exportexpansion would be found on the side of domestic policies and production. Similarly,for the remainder of the 1990s, inflation in US dollars is projected to average about2.1 per cent, while the US dollar is expected to depreciate slightly against majorcurrencies. Given that a large proportion of Guyana's imports come from the U.S.,such an outcome would be beneficial because it would make such imports cheaperrelative to imports from the rest of the world.

However, as discussed in threatening clouds hover over the future of thepreferential prices that Guyana receives for its primary exports, viz., sugar and r ice,and therefore the policy reforms for those sectors suggested are urgently required.Diversification of Guyana's export base also is essential in order to realise the country'sgrowth aspirations.

Future Growth Scenarios

The H igh Growth Scenario

The first scenario, which takes an optimistic but not unrealistic view of futuredevelopments, is predicated on the assumption that the Government will take earlyaction to introduce trade reforms and investment and land development policies andalso begin to correct the existing structural, legal and regulatory deficiencies asdescribed throughout this Strategy.

Specifically, it is assumed that Government will:• Hold the line on the local component of public sector capital expenditures

and raise revenues to bring the overall balance to about 2.9 per cent of GDPby 2004;

• Rapidly increase nominal wage rates in the public sector so as to reduce thedifferential between private and public sector wages to about 15 per cent;

• Carry out the needed reforms in education and training, giving greateremphasis to primary education and involving the private sector in decisionson labour force training;

• Continue to work towards achieving a more competitive real exchange rate;• Privatise GEC and carry out the prescribed improvements in harbours, roads

and air transport facilit ies;• Implement Far: Reaching trade policy reforms so as to reduce the anti–export

bias of the current incentive structure;• Promote increased savings through financial sector reforms and measures

for public expenditure reduction;• Move quickly to clarify and codify investment incentives;• Simplify and make more uniform the tax regime;• Simplify the registration procedures for small businesses;

Ecology, Capitalism and the New Agricultural Economy

173

• In the natural resource sectors, put into place new measures for introducinggreater security of land tenure, flexibility in land markets, longer forestryconcessions and better management of fisheries stocks;

• Undertake measures needed to maintain a balance between the environmentand production.

The successful implementation of these measures would, in the short term, gofar towards maintaining the existing growth rates. Moreover, the shift in relative pricesfavouring tradeable goods, brought about by an exchange rate policy that is morepropitious for growth, should lead to increased utilisation of resources towards findinga niche in the world market in the context of efficient export–oriented growth. Onbalance, in this more favourable scenario, the economy is projected to grow at anaverage annual rate of 7.3 per cent during 1996–1999, and 6.8 per cent thereafter.

Prospects for Guyana maintaining its sugar and rice quota, given projections ofrecovery in the European Union are favourable. Nevertheless, the outcome alsodepends, in the case of rice, on the continuity of the current arrangements of riceexports to the EU through the OCT. There are some concerns that this loophole maybe closed. Even so, the assumption is that there will be positive resolution of thisissue, thereby generating the same outcome of rice exports. Beyond 2000, however,the projections assume that there will be no preferential market arrangements forrice. Thus, the growth in r ice production is predicated on the industry taking earlyactions in reducing cost of production, improving yields, and processing rice intocereals and other r ice based products for markets in the Caribbean. For sugar, theassumption is that some protocol with the EU would exist after 2002, but that thereal price will continue to slip.

T able. M edium–T erm Prospects, H igh Growth Scenario

Preliminary Projections

1995 1996– 99 2000–2004

Annual Percentage Growth Rates

(1994 constant prices)

Gross Domestic Product 5.1 7.3 6.8

Agriculture 7.2 6.4 5.4

Industry 0.9 11.8 9.8

Services 3.0 3.0 3.0

Exports (GNFS) 9.4 5.4 5.1

Imports (GNFS) 5.8 6.9 5.7

Total Expenditure 1.4 8.1 6.8

Consumption –3.5 8.8 8.1

Investment 17.5 6.0 2.2

Gross Domestic Income 9.8 7.8 6.4

Gross Domestic Savings 63.1 0.6 0.3

Memorandum Items

Per capita GDP 4.8 7.0 6.5

Per capita GNP –4.0 9.4 6.6

Per capita total –3.8 8.5 7.8

Ecology, Capitalism and the New Agricultural Economy

174

consumption

Per capita private –7.6 6.0 9.9

consumption

In addition, capitalisation of the sugar industry, and cost reductions and efficiencygains at the farm and factory level, are expected to improve Guyana's competitivenessat least in the Caribbean.

Thus, rationalisation of the industry in the next few years will be critical inattaining the medium–term objectives for the entire economy. Based on these factors,the volume of sugar production is expected to decline by a third in 2000 and thereaftergrow at an annual rate of 2.5 per cent over the medium term. The mining sectoroutput is projected to grow at 9 per cent over the medium term on account ofconclusion of investment agreements between the Government and investors fromCanada and Australia. The formulation of a clear mining policy in addition to recentreforms in sale and gold exports are expected to generate more domestic interest ingold exploration and mining. Between 1996 and 1999, the manufacturing sector'soutput is projected to remain fair ly constant as the sector undergoes restructuring.

From 2000 onwards, as incent ives shift towards export oriented activit ies,manufacturing output is projected to expand at an average annual rate of 8.3 perannum. Services, in particular banking, are expected to respond positively to theprojected increases in manufacturing and mining output. Beyond 2000, diversificationand industr ial value–added could contribute to continuing expansions of domesticoutput.

The expenditure policies discussed above are projected to reduce real growth ofthe local component of the capital programme below that of GDP and, jointly withfinancial sector reforms, enable domestic savings to increase from 30.2 per cent in1995 to about 35.5 per cent of GDP in 1998 and to 31.1 per cent by 2004. Publicsavings are projected to average about 7.9 per cent of GDP throughout the projection.Apart from high wage increases, the restrained growth of local investment programmesenvisioned in the medium term will be necessary to establish and maintain viablemacroeconomic balances.

Over the medium term, it is anticipated that the implementation of the policiesproposed will stimulate private sector investment in the core productive sectors aswell as new investments to improve physical infrastructure. Thus, gross investment isprojected to reach 44.2 per cent of GDP by 1999 and thereafter decline steadily to37.8 per cent of GDP by 2004. The incremental capital– output ratio will declinefrom its high level of 9 in 1995 to about 6.9 in 2004.

Balance of Payments and Financing Requirements

Another important element of the medium–term economic outlook is the viabilityof the balance of payments. The terms of trade are not projected to improve over themedium term, based on the World Bank's current long–term price projections andcurrent preferential trade agreements. If implemented in a timely basis, the impact ofmacroeconomic and trade policies on sectoral outputs would offset the negative effectsof the deteriorating terms of trade. Under the high–growth scenario, real exports ofgoods and non–factor services are projected to grow at 5.1 per year between 1996and 1999 and 3.5 per cent per annum thereafter.

Ecology, Capitalism and the New Agricultural Economy

175

Real imports, on the other hand, are projected to grow at 5.2 per cent per yearbetween 1996 and 1999 and 3.8 per cent per year thereafter. The current accountdeficit of the balance of payments is projected to decline from 12.4 per cent of GDPin 1995 to 7.6 per cent of GDP in 2004. Guyana's past debt strategy has led to increasedforeign indebtedness and high debt service ratios.

As a result, the country has become vulnerable to debt servicing problemsespecially if access to external finance were to become unduly restr icted. However, itis assumed that with viable macroeconomic balances, access to concessional financingfrom the IFIs and bilateral agencies will be enhanced.

The projected fairly steady medium– and long–term disbursem*nts have beenassumed to consist mainly of concessional financing from the IFIs. Predicated on thetimely adoption of the above measures, debt servicing is not projected to create unduestrain to the economy. The debt service–to–export ratio is projected to decline from39.0 per cent in 1995 to 15.9 per cent in 1999 and to average 16.5 per cent per yearthereafter. The interest burden ratio is projected to decline sharply from 19 per centin 1995 to about 7.0 per cent in 2004.

The ratio of debt service to government revenue is a useful measure of the burdenof debt, since the only way in the long run that a government can honour its debt isthrough payment out of its revenues. A long–run ratio of debt service to governmentrevenue more than 20 per cent would impose significant pressure on public sectorfinances and limit capacity to undertake needed public sector reforms. On average,debt service to revenue is projected at 33 per cent implying less flexibility than isdesirable for Government in the use of its revenues. It also implies that efforts willhave to be redoubled to improve revenue administration and collection.

T able. Balance of Payments under the

H igh Growth Scenario

Preliminary Projections

1995 1996–1999 2000–2004

US$ millions

Resource balance 17.8 –26.5 –58.6

Exports of GNFS 423.6 516.9 713.3

Imports of GNFS 441.3 543.4 771.9

Net factor payments –93.2 –63.2 –88.2

of which interest on

public debt –86.0 –48.9 –55.2

Net transfers 23.7 27.8 31.1

Current account balance –77.7 –50.9 –102.4

Long–term capital inflows

Direct foreign investment 27.0 27.6 57.1

Net long–term loans 11.0 62.2 51.9

Disbursem*nts 44.0 81.6 91.7

Repayments 61.0 30.3 45.9

Other long–term inflows 28.0 10.8 6.1 (net)

Changes in reserves 64.8 –29.0 –23.1

(– = increase)

Ecology, Capitalism and the New Agricultural Economy

176

Ratios

Memorandum items

External debt indicators

Debt/GDP 326.8 193.1 114.3

Debt service/XGS 39.0 19.8 16.7

The Low Growth Scenario

In contrast to the scenario described above, the low growth scenario envisagesan economy operating at a reduced scale, generating lower rates of output, employmentand income growth. This scenario will also require as a minimum, policy measures toimprove Guyana's competitiveness, except that some of the more structural constraintswould not be addressed. The scenario envisages a fiscal effort of lesser magnitude, inparticular with revenue generation which keeps the overall deficit at about 5.8 percent of GDP throughout the projection period. In this low growth scenario, no majorrationalisation and realignment will take place at Guysuco, and issues with the powergeneration and distribution system will take longer to resolve. Investment is assumedto grow modestly at about 39 per cent of GDP over the projection period. Furthermore,the efficiency of investment is expected to fall as a result of continued distortions inthe incentive framework.

T able. M edium–T erm Prospects, Low Growth Scenario

Preliminary Projections

1995 1996– 99 2000–2004

Annual Percentage Growth Rates

(1994 constant prices)

Gross Domestic Product 5.1 6.1 4.9

Agriculture 7.2 6.4 5.4

Industry 0.9 11.8 9.8

Services 3.0 –2.8 –14.8

Exports (GNFS) 9.2 5.1 3.5

Imports (GNFS) 5.2 5.2 3.8

Total Expenditure 1.4 6.1 5.2

Consumption –3.5 6.2 6.3

Investment 17.5 6.0 2.2

Gross Domestic Income 9.8 6.6 4.5

Gross Domestic Savings 63.1 5.7 0.06

Memorandum Items

Per capita GDP 4.8 5.8 4.6

Per capita GNP –4.0 8.2 4.8

Per capita total –3.8 5.8 6.0

consumption

Per capita private –7.6 2.8 8.0

consumption

Since this scenario does not assume a full measure of cost reduction policies in

Ecology, Capitalism and the New Agricultural Economy

177

Guyana's export products nor a significant reduction in the anti–export bias of thesystem of tariffs and the exchange rate, the export and overall economic potential ofthe economy would be limited. Exports of GNFS will grow at an average annual rateof 5.5 per cent throughout the projection period and imports of GNFS by 4.3 percent.

As a result of slowed growth of exports, the current account of the balance ofpayments is projected to improve between 1996–1999 and thereafter deteriorateaveraging 6.2 per cent of GDP between 2000–2004. The larger financing requirementsthat this scenario would require would make it difficult to implement some of crit icalpublic sector reforms that are essential for implementation of policies and programmes.

T able. Balance of Payments Under the Low Growth Scenario

Preliminary Projections

1995 1996– 1999 2000– 2004

U.S.$ million

Resource balance –17.8 –19.1 –36.8

Exports of GNFS 423.6 514.6 670.9

Imports of GNFS 441.3 533.7 707.7

Net factor payments –93.2 –62.7 –78.3

of which interest –86.0 –48.8 –34.4

on public debt

Net transfers 23.7 27.2 28.1

Current account balance –77.7 –46.9 –73.9

Long–term capital inflows

Direct foreign investment 27.0 17.4 19.7

Net long–term loans 11.0 52.4 19.2

Disbursem*nts 44.0 71.9 59.0

Repayments 61.0 30.3 45.9

Other long–term 28.0 10.8 6.1

inflows (net)

Changes in reserves –64.8 –29.1 –22.7

(– = increase)

Concluding Remarks

Guyana requires rapid and sustainable economic growth, and the projectionsdeveloped demonstrate that it is feasible. For it to take place, a shift has to occurfrom the policy preoccupation with short–term issues of crisis management andstabilisation to fundamental issues regarding the ways to encourage durable and rapidgrowth which benefits all segments of the population. Policy decisions require a longer–term orientation and need to be based on a clear analytic framework such as thatdeveloped in this Strategy.

On the side of international markets, the long–term outlook for Guyana's majorexport commodities viz, sugar and rice is unclear. To overcome this obstacle andother constraints, the effort required will have to be massive and well–coordinated,and must fit into a well–defined, well–comprehended, overall Strategy.

In this regard, the quest to achieve macroeconomic stability should not be viewed

Ecology, Capitalism and the New Agricultural Economy

178

as an end in itself but a means to spur and support economic growth. It has to berecognised that, however, genuine and well–intentioned the restructuring effort maybe, nothing will survive on a sustainable basis, unless there is macroeconomic order.This complementarity can best be achieved through a properly sequenced and phasedmacroeconomic programme. However, no programme of macroeconomic stabilisationcan succeed unless appropriate structural changes are introduced.

The link is a crit ical one and has to be preserved in order to prevent reversalsand failures. The recommendations made in this Strategy take cognisance of all theabove. To ensure a continuation of sound policy formulation, there must be amechanism for regular monitoring and crit ical evaluation of the policy measuresadopted and procedures to utilise this feedback for developing further rounds of policyreforms as they are required.

THE M ACROECONOM Y: UNEM PLOYM ENT AND INFLATION

• How is the unemployment rate defined and measured?• What is the cost of unemployed resources?• What is inflation? Why is it a problem?• What is frictional unemployment? And why is it not harmful?Unemployment is the number of adults (16 and over) who are willing able to

work and actively seeking jobs though they could not find one. The population is divided into three groups: those under age 16 or institutionalized those not in the labour force, which includes the sum of the employed and the unemployed. Labour force = all U.S. residents -residents under 16 years of age–institutionalized adults–adults not looking for work.–You are in the labour force if you are working or actively seeking work but did notfind one. Therefore, labour force is the sum of the employed and the unemployed.

• In 1997 total population 267,90,000• Less under 16 and/or institutionalized –64,767,000• Less not in labour force –66,837,000• Equals labour force 136,297,000• Employed 129,558,000• Unemployed 6,739,000• Unemployment rate = (6,739,000) (136,297,000)* 100=4.9%.

Full time students, homemakers and retiree are excluded from the labour force.Therefore, unemployed rate is the percentage of the labour force that is not working.Take look at the historical prospective of unemployment rates from 1890 to the presenttime on p.143 of your textbook. Unemployment rate was very low less than 2% duringWWI and WWII, but higher than 25% during great depression. Unemployed criteria:A job looser is a person who was involuntarily laid off (40–60)% of the unemployed.A job leafier is a person who voluntarily ended employment (10–15)% Duration ofunemployment: the duration of unemployment is inversely related to the overall levelof economic activity.

That is as economic activity contracts, cyclical unemployment increases and asgrowth occurs cyclical unemployment decreases. The U.S. Bureau of labour statistics

Ecology, Capitalism and the New Agricultural Economy

179

(BLS) determines who is employed and who is not by a nationwide random survey.Discouraged workers (hidden unemployment) are individuals who have stop

seeking for jobs because they believe that they can not get jobs. The number ofdiscouraged workers is large during recession than prosperity. By not countingdiscouraged workers as unemployed it understates the unemployment rate. Officialdata include that all part–time workers as fully employed. However, some economistargue that people who work part t ime, but are willing to work full time should beconsidered as semi–hidden unemployed. Therefore, the BLS data understates theunemployment rate. Labour participation rate is the proportion of working age personswho are in the labour force. Labour force participation rose from around 60% in 1950to about 70% today.

Types of Unemployment

• Frictional unemployment: those searching for jobs or waiting to take jobssoon. The problem is that individuals do not have information about jobvacancies that can fit their qualifications (e.g. after your graduation you arelooking around to what offer you will take).

• Structural unemployment is due to changes in the structure of the economyor demand for labour. For example, the changes may be due to technologicalchange when certain skills become obsolete (unneeded). The change may bealso due to geographic distribution of jobs.

• Seasonal unemployment is the unemployment that fluctuates with the seasonsof the year.

• Cyclical unemployment is caused by the recession phase of the business cycle(deficit demand unemployment).

Full employment is the level of fr ictional and structural unemployment. Fullemployment does not mean zero unemployment. T he ful l employment ofunemployment rate is also referred to as the natural rate of unemployment. The naturalrate of unemployment is the unemployment that would exist in the absences of cyclicalunemployment. The natural rate of unemployment is achieved when labour marketsare in balance. That is the number of job seekers equals the number of job vacancies.At this point the economy's potential output is being achieved. The natural rate ofunemployment is not fixed but depends on the demographic make up of the labourforce and the laws and customs of the nations. Wait unemployment is unemploymentthat is caused by wage rigidities (minimum wage laws and negotiated wages by labourunions). What is the value of the natural rate of unemployment in the U.S.?

In the 1950s and 1960s the council of economic advisors agreed on 4%, whereas1970s that rate went up to 5%. The rate again changed to 6–7% in the early 1980s and5% by the late 1980s. Particularly 1986, the council agreed on 6.5% and today it is lessthan 5%. Therefore, the natural rate of unemployment varies over time within a rangefrom 4–7%. The recent drop in the natural rate of 6.5% to less than 5% was de to theaging of the work force and increased competition in product and labour markets. Itwill also vary across countries, as labour markets and macroeconomic policies differ.

W hat is the Cost of Unemployed Resources

The cost of being unemployed is more than the loss of income and status suffered

Ecology, Capitalism and the New Agricultural Economy

180

by the person who is out of work. If resources are unemployed, the economy willoperate inside its production possibility curve rather than on the curve. This loss ofoutput can be measured in terms of the Gross Domestic Product (GDP) gap. GDPgap = potential real GDP–actual GDP. Potential GDP is the level of output produced(non–labour resources are fully utilized) at the natural rate of unemployment (=unemployment rate). Potential GDP measures our capability of producing at the naturalrate of unemployment. Therefore, the cost of unemployment equals GDP gap. Thegap widens in times of economic contractions (recessions) and narrows in times ofeconomic expansions. This economic measurement is known as the Okura's law. Hedescr ibed the relat ionship between unemployment and GDP: forever 1% ofunemployment above the natural rate, a 2% GDP gap occurs.

Non economic costs include loss of self–respect and social pressure:• Unequal burdens of unemployment it terms of occupation, age, race, gender,

education, duration may happen.• International comparisons: In 1987–97, unemployment rates in 5 industrial

nations (U.S., U.K., France, Japan, and Germany) were compared. U.S.unemployment rate was below the rates in France, Germany and U.K. in thelast 10 years.

Inflation: Is the sustained rise in the overage level of prices. That is when theaverage of all prices of goods and services is r ising. Inflation is measured by thepercentage change in prices level. Prices of some goods rise faster than others, whichmeans that relative prices are changing at the same time that absolute prices arerising. The measured inflation rate records the average change in absolute prices. Tomeasure inflation, subtract last year's price index from this year's price index anddivide by last year's indexes, then multiply by 100 to express as a percentage.

Purchasing power of money is the amount of goods and services it can buy or thedollar value in terms of buying goods and services. Therefore, during inflation thepurchasing power of a dollar falls, and vice versa for deflation. Deflation is a situationwhere the average of all prices of goods and services is falling. International comparisonof inflation rates for five industrial nations. Although in the late 1970d, U.S. inflationrates increased to double–digit inflation (13–13%), inflation rate came back to 2–4%over the last 10 years.

In this period, inflation rates of U.S. were neither high nor low relative to otherindustrial nations. In 1996, some nations experienced double–digit and even triple–digit inflation: annual inflation rate in Venzuela, 120%; in Bulgaria, 123%; inTurkmaistan, 992%; and Angola 4145%. In 1993 annual inflation rate in all industrialnations, 2.8%; all developing nations, 52.9; in Brazil, 2,148%; and in Zair, 1,987%%; inU.S., 3%; and Japan, 1.3%. Inflation can also be measured by computing a price index.Price index = cost of market basket in current year divided by cost of market basketin base year. That is the cost of a market basket today expressed as a percentage ofthe cost of that market basket in the base year.

Types of price indexes:• Consumer Price Index (CPI) is a weighted average of prices of a specified set

of goods and services (650 items) purchased by urban consumers (the cost ofliving index).

• Producer Price Index (PPI) is a weighted average of prices of commoditiesthat firms buy from other firms.

Ecology, Capitalism and the New Agricultural Economy

181

• GDP Deflator measures the changes in prices of final goods and servicesproduced by the economy. It is a broader measure of price change.

Causes of Inflation

• Demand: Pulls inflation (inflation as a result from demand side). That isspending increases faster than production, will cause the average level of pricesto r ise. For example in resources are fully employed (i.e. the economy isproducing at maximum capacity), in the short run it may not be possible toincrease output to meet the increased demand. The rest will be that risingprices ration the goods and services.

• Cost: Pushes Inflation Supply Side: Firms raise prices to avoid losses becauseof rise in per– unit production costs.

• Suppliers Who Want to Increase Their Profit Margins Faster Than Their CostIncrease Create Profit: Push pressures by rising prices. That is supply shocksmay happen as a result of unexpected increases in the price of raw material.

• Wage: Push pressures as a result of labour unions and workers who are ableto increase their wages faster than their productivity.

Anticipated vs Unanticipated Inflation

If the rate of inflation that most of the people expect matches the actual inflationrate, then inflation is fully anticipated. If the actual rate of inflation is greater thanthe expected one, then inflation is not anticipated (you have unanticipated inflation).Individuals can protect themselves from inflation if it is anticipated. The problem isthat both anticipated and unanticipated can not be calculated.

Inflation and Interest Rate

Nominal interest rate is the market interest rate expressed in today's dollars.Real interest rate: the nominal interest rate minus the anticipated rate of inflation.The real rate of interest can be positive, negative or zero.

Redistribute effects of inflation: If nominal income rises faster than prices, thenyour real income will increase (real wage = W/P).

• Fixed: Income groups will be hurt because their nominal income does notrise in inflationary times, for example, private pension, families living on fixedwelfare.

• Savers(or lenders, creditors) will be hurt by unanticipated inflation, because interestrate my not cover the cost of inflation. Note that the U.S. has indexed social securitybenefits, which means that these payments increase when consumer price indexincreases.

However, borrowers (debtors) can be helped by unanticipated inflation, becausetheir interest rate payments may be less than the inflation rate. Therefore, theyborrowed dear money and are paying back cheap dollars that have less purchasingpower. Protecting against inflation can be done when inflation is anticipated becauselenders start increasing nominal interest rates by the amount of expected inflation.Similarly, workers demand cost of living adjustments (COLAs). That is an increase inwages to cover the price level increases. What is business cycle (fluctuations): Business

Ecology, Capitalism and the New Agricultural Economy

182

cycle is pattern of rising real GDP followed by falling real GDP(the ups and downs ofthe economic activity). The business cycle contains 4 phases:

The expansion (boom) is when real GDP is increasing; the peak, which marks the end of an expansion and the beginning of a contractions. The contraction (recession) is when real GDP is falling; and the trough, which marks the end of a contraction and the beginning of an expansion. A depression is a prolonged period of severe economic contractions(more than one year). Leading indicators: a variable that changes before real output changes. For example of new orders for industries, have new building permit signal new construction, the prices of stocks, and so on. External shocks (Factors that can increase or decrease in the level of economic activity).

• Wars: Stimulates demand for goods and services and leads to an economicexpansion.

• Weather conditions: A bad weather (or hurricanes) can influence agriculturaloutput and hence can lead to a recession.

• Oil Shocks: In the 1970–75 and 1979–80, OPEC countr ies increasedinternational price of oil, which led to recession.

Ecology, Capitalism and the New Agricultural Economy

183

FAQs

How does capitalism affect agriculture? ›

The expansion of capitalism has induced farmers to specialize and export their farms' yields. The cultivation of commodity crops typically depends upon industrialized growing methods, which involve the application of chemical inputs that pollute the land, water, and air.

Get More Info Here ›

What is the environment capitalism? ›

Eco-capitalism, also known as environmental capitalism or (sometimes) green capitalism, is the view that capital exists in nature as "natural capital" (ecosystems that have ecological yield) on which all wealth depends.

What is the meaning of green capitalism? ›

Green Capitalism. ■ Refers to a wide range of modern financial and investment tools that corporations utilise in channelling financial investments into sustainability projects/sustainable energy.

Tell Me More ›

Can capitalism be greened? ›

Today, most companies have adopted their own forms of eco or green capitalism, with many implementing cost-cutting measures in manufacturing, energy consumption, packaging, and transportation.

Get More Info ›

How does capitalism affect ecology? ›

In short, the market mechanisms under capitalism do not provide incentives for preserving the environment. Firms are constantly threatened by market competition to cut costs and optimize profit. The environment thus falls pray to the compulsive market behaviour of the capitalist mode of production.

Find Out More ›

What is capitalism in agriculture? ›

Agrarian capitalism is a mode of production in which the forms of production vary according to the internal distribution of property rights and market involvement.

View Details ›

How is capitalism good for the environment? ›

As a country prospers, its citizens are better able to care for the environment and reduce pollutants emitted from industrial growth. When America and the rest of the world embrace policies rooted in economic freedom, both prosperity and the environment flourish.

Get More Info ›

Why is eco-capitalism important? ›

Today, eco-capitalism or green-capitalism has become a necessary integration in businesses and major companies. Everyone wants to choose the most environmentally friendly solutions on the market. Therefore, corporations must find ways to provide sustainable products to its consumers or they risk a loss of demand.

What are the 4 pillars of natural capitalism? ›

Resource productivity – using resources more efficiently. Biomimicry – redesigning industrial systems along biological lines. Service and flow economy – following purposes between business and consumers.

Tell Me More ›

What is an example of eco-capitalism? ›

Eco-capitalism requires innovation and entrepreneurship. This is exemplified by TerraCycle which is an eco-friendly recycling company that has become a global leader in recycling typically non-recyclable waste such as cigarette butts, industrial waste, cartridges, automotive parts, etc.

Show Me More ›

Can capitalism and environmentalism coexist? ›

Even if capitalism, as the dominant economic model, incorporates natural capital into its cost–benefit analysis, nature still loses out; unlimited human growth—the central tenet of capitalism—and sustainable development are incompatible (Rull, 2010b).

View Details ›

What are 3 types of capitalism? ›

These include laissez-faire or free-market capitalism, anarcho-capitalism, state capitalism, and welfare capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, obstacles to free competition, and state-sanctioned social policies.

Do the rich get richer in capitalism? ›

No, it is not true. For many decades, the myth that in a capitalist country the rich become richer while the poor become poorer has been spreading all over the world – despite the fact that a quick glance over the facts would show that the economically freer the country, the less poor it is.

Discover More Details ›

How to stop being a capitalist? ›

How to Make Individual Choices to Embrace a Post-Capitalist Lifestyle

Conscious Consumption: Make informed purchasing decisions. ...
Minimalist Living: Embrace minimalism by reducing unnecessary possessions and consumption. ...
Community Engagement: Participate in local community initiatives.

More items...

Jan 6, 2024

Learn More ›

Does capitalism have to grow? ›

According to Marxist theory, a coercion for firms to "grow or die" is due to economic competition. According to these Marxists, capitalism "cannot stand still, but must always be either expanding or contracting".

Ecology, Capitalism and the New Agricultural Economy - [PDF Document] (2024)

FAQs

How does capitalism affect agriculture? ›

Can capitalism and environmentalism coexist? ›