Measuring the Impact of Agricultural Growth on Economic Transformation

Abstract

This chapter measures the impact of rapid growth in agricultural production on income, employment, and food security. It does so by accommodating the variables described in Chap. 2 in a spreadsheet and calculating and comparing the effect of a six percent and a three percent growth rate in agricultural production. The methodology is presented, followed by application to three percent and six percent agricultural production growth rates and then the effect of converting feudal land holdings to small commercial farms. The applications are to Ethiopia and two quite different provinces in Pakistan. A sensitivity test of change in the employment elasticities is carried out and the results sensitive to that assumption are shown.

Annex

Simplifying Assumptions to Accommodate Date Sources

(1) Area of farm is a proxy for agricultural income. (2) Households are a proxy for employment. (3) A perfectly elastic supply of labor, due to underemployment as above. Mellor and Ranade (2006) model assumptions of rising wage rate, reducing the employment effect, but still leaving a large effect on employment.

Determinant Calculations

The determinant calculations are for the rural non-farm sector , specifically the size of the sector, column 2, and the rate of growth of income in the sector, column 3. They are determined as follows:

• Calculate the rural non-farm base income and growth rate of rural non-farm income which are central to our conclusions, using the formula:

$$ Ire=(Ia)+(Inf) $$

(3.1)

• where Ir is the base income of the rural non-farm class; Ia is agricultural income; and Inf is rural non-farm income.

$$ Inf=(Is)(0.5)(1.25) $$

(3.2)

• and

$$ Irg=\left( Is g\right)(0.5)\left( Is/ Ir\right)(1.25) $$

(3.3)

• where Irg is the average growth rate of income for the rural non-farm sector; Isg is the average income growth rate for small commercial farmers; and Is/Ir is the base ratio of average small commercial farmer income to average rural non-farm income. For an explanation of the latter see the text.

The coefficient of 1.25 is an estimate of the multiplier on spending (20 percent) by the rural non-farm sector, calculated as being spent on itself and iterated until it stabilizes in about five years (1.25).

Summary of Data Sources and Calculations by Column

• Column 1. Base employment—The Rural and Urban sectors are reported in National Income Statistics. The division of rural into the three household sectors is according to the definitions in the text of Chap. 1. Rural non-farm calculated as above. Table 1.2 provides the data for Punjab, Sindh, and Ethiopia.

• Column 2. Base income—Agriculture and non-agriculture are reported in National Income Statistics. For rural non-farm see above.

• Column 3. Growth rate income—Exogenously determined except for rural non-farm, see above.

• Column 4. Employment elasticity—Exogenously determined.

• Column 5. Growth rate employment—Growth rate of income times the employment elasticity.

• Column 7. Percent incremental employment—Growth rate of employment times the base employment and calculate each sector’s percent of the total.

• Column 9. Percent incremental income—Same as above but for income.

Table 3.8 The spread sheet for calculating Tables 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, and 3.7