Rural Poverty: Old Challenges in New Contexts

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Rural Poverty Old Challenges in New Contexts

• Stefan Dercon
• University of Oxford

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Purpose of the talk

• Revisit briefly some important questions
• Place of rural development and agricultural
  growth in broad-based growth and poverty
  reduction?
• What are the main constraints on this process?
• Has economic theory and recent empirical research
  given more guidance about what can be done?
• My context some of the poorest countries, e.g.
  in Africa.

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Conclusions

• Rural Development, driven by agricultural growth,
  has a role in broad-based growth trajectories
  but lets not naïvely expect too much from it.
• The role of rural development dependent on the
  context of the rest of the economy.
• Time to put forgotten questions back to the
  centre of analysis, not least rural-urban
  linkages and migration
• Specifically sensitive to sources of possible
  rural poverty traps.

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Background

• Poverty is still predominantly a rural
  phenomenon
• Pick a random poor person,
• High prob(living in a rural area)
• High prob(a farmer, agricultural worker).
• Poverty declines in fast growing countries
• ?Rural lt ?Urban Poverty
• Growth and Poverty decline smaller for those
  dependent on agriculture than for those dependent
  on industry or services.

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Background

• Implications
• It is where the poor are, so needs attention.
• But should it come as a surprise?
• Development appears to be linked with getting
  people out of agriculture
• Moving out of agriculture is correlated with
  poverty reduction.
• In this paper
• We argue that focusing on (active) rural
  development is NOT self-evident
• Some of the findings imply doing more of the
  same but not all

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Motivating example

• Some recent insight in rural poverty changes
• Tanzania, Kagera Region, 1000 miles from
  Capital. (landlocked area within country)
• Growth in Tanzania in 1995-2005 substantial.
• Survey 913, 6000 individuals in 1991/94
• Attempt to track all surviving individuals in
  2004 (so all split-offs), and interview
  households they now live in.
• People linked to 863 hh found back, but now
  living in 2774 households.
• 96 percent of hhs found back, 83 percent of
  individuals.

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Poverty in Kagera sample ()
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Overview

• What is the place of rural development in general
  growth and poverty reduction processes?
• Rural Development in Development Economics a
  potted history
• 2. The Place of Rural Development in Development
  Macro-story and its implications
• 3. Growth, Poverty and Rural Development
  Micro-macro and policy interactions

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1. History of Rural Development Economics

• With much of the poor living in rural areas, much
  attention to rural issues within development for
  a long-time
• Lewis-model Model of Urban-Rural Interactions
• Schultz Theory of the Rational Peasant
• IDS Kenya Group the emergence of the New
  Development Economics (information, risk and
  externalities)
• Given market failures, the Theory of the Rational
  Institutions
• More recently, governance, collective action and
  political economy issues. Acknowledging
  differential power, the Theory of Rational People
  with or without Power

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History of Rural Development Policy

• Link with actual development policy thinking is
  always at best tenuous.
• 50s (if anything) Sectoral Growth, such as
  surplus extraction
• 60s Role of Technological Change (Schultz and
  others)
• 70s Recognition of Market Failures more of the
  same but Integrated rural development
• 80s Getting Prices Right (Schultz but markets
  only fail due to policy)
• 90s Governance and Institutions, including
  building market institutions, collective action,
  group-based interventions, gender

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Uneasy micro-macro balance

• Striking fluctuations in relative importance
  between micro and macro context for what should
  be our focus
• 50s Serving Macro-Growth
• 60s To serve growth, need for micro-level
  technology change
• 70s More integrated micro-interventions needed
• 80s Macro-context more crucial to get any rural
  growth
• 90s Need to go back to basics, and understand
  how interventions could ever work
  (micro-foundations of change)

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But what has been forgotten?

• Forgotten bits of theory
• Lewis and Urban-Rural Interactions
• Forgotten bits of context
• Increased basic macro-policy reform
• In the context of globalization and increased
  openness
• Striking growth experience for some, and total
  lack of growth for others in the developing world
• Forgotten bits of evidence
• Poverty in the context of (lack of) growth

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But what has been forgotten? (2)

• Key question Can rural development be an engine
  for growth? Can it be an engine for poverty
  reduction with growth?
• This means putting it firmly back into the
  context of what else is happening in the economy
  (including Lewis type thinking)
• Includes asking old and fashionable questions
  the role of agriculture.
• Rural Development and Poverty thinking and
  practice needs to take this forgotten context,
  theory and evidence at its core.

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Overview

• What is the place of rural development in general
  growth and poverty reduction processes?
• Rural Development in Development Economics a
  potted history
• 2. The Place of Rural Development in Development
  Macro-story and its implications
• 3. Growth, Poverty and Rural Development
  Micro-macro and policy interactions

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Any role for agricultural growth?

• Much thinking on importance of agricultural
  growth based on simplistic premises
• since poor are in agriculture, agriculture is
  the basis of poverty reduction
• agricultural growth is required for poverty
  reduction
• But dont forget basic law increased
  prosperity is linked to having fewer people
  dependent on agriculture for their livelihoods
• How to get them out is the relevant question

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Theoretical framework

• Based on Why Poverty Persists in India and The
  Role of Agriculture in Development, Mukesh
  Eswaran and Ashok Kotwal.
• Lewis within a proper general equilibrium
  framework.
• Without agricultural workers sitting only under
  trees, and industrial workers eating shirts, and
  other unrealistic assumptions

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Theoretical framework

• 2 sector economy (industry and agriculture), 2
  goods (shirts and food).
• CRS production functions (labour, and also land
  in agriculture).
• People first need to have enough food before they
  will buy shirts.
• Clearing labour markets means that people are
  indifferent between working in agriculture and
  industry.
• Clearing product markets means that demand equals
  supply in each.
• Some (rich) have assets the poor only have
  labour.
• At first, poor only eat food, since not enough to
  satify basic needs once sated, no more eating.
  (So maximum level of spending on food)
• Poverty will go down if labour demand increases
  increasing real wages.
• But how?

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Theoretical framework

• Closed economy Impact of industrial (TFP)
  progress?
• More shirts are being produced for same labour.
  Prices shirts go down. But the poor dont care.
• No incentive for anyone to move out of
  agriculture since total food supply would go down
  and demand up.
• In the end it only benefits the rich that have
  enough food and are already consuming shirts
  they can consume more of them.
• MP industry goes up, but price shirts goes down,
  keeping wages the same food prices the same, real
  wages the same. POVERTY UNCHANGED.

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Theoretical framework

• Closed economy Impact of Agricultural
  Technological Progress
• More food is being produced for same labour. This
  is of interest to the workers more food for the
  same work
• Once more food, some would become interested to
  buy shirts as well, so shirt prices are pushed
  up. Firms have incentives to expand production,
  offering better wages.
• Rural wages move up as well, food prices down
  with less.
• Labour moves out and POVERTY DECLINES.

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Theoretical framework

• In sum
• in closed economy, growth in agriculture is
  essential for poverty reduction, while industrial
  progress has no impact.
• The central process demand linkages, but only
  via commodities the poor consume.
• So what if we open the economy?
• Central demand/supply constraints do not matter
  anymore for traded commodities.
• Food can be imported, shirts can be exported.
• Only world prices matter.

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Theoretical framework

• Open economy Impact of industrial (TFP)
  progress?
• More shirts are being produced for same labour.
  Prices shirts remain the same.
• Firms have incentive to expand production, so
  demand for labour and nominal wages up.
• Workers can move even though food supply goes
  down, since imports can go up. So marginal
  product of labour goes up in agriculture as well,
  allowing rural and urban wages to be the same
  again.
• More food consumed, and some workers will now
  also consume some shirts. POVERTY DECLINES.

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Theoretical framework

• In sum,
• In closed economy poverty reduction via
  technological change in agriculture
• In open economy, poverty reduction via
  technological change in industry or agriculture,
  or other means of increased domestic
  competitiveness relative to the rest of the
  world.
• Of course, in case of openness case
• Part of process of globalization with its
  strengths and pitfalls (scale economies,
  agglomeration effects, learning by doing)
• Rural story not necessarily relevant gradual
  increase in absorption by non-agricultural
  sector.
• There is nothing specific rural about rural
  poverty, beyond that it is sign of slow or
  failing growth forces.

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Limitations to agricultural growth

• Productivity increases in agriculture could have
  place in growth, just like trade and openness,
  (and there is room for them in many contexts).
• Introducing more heterogeneity in labour,
  production technology and sectors does not change
  underlying logic.
• BUT some unpleasant arithmetic Much progress in
  agriculture is a once and for all change, not a
  growth effect
• e.g. adoption of fertiliser increase in yield
  but not a persistent growth in yield
• Any growth effect largely depends on
  linkages
• But many of these linkages may not be as strong
  as some suggest. Especially, supply linkages
  (such input and output).

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Evidence?

• Datt and Ravallion (1996, 1999), Ravallion (2002)
• Sectoral decomposition in India of poverty change
  (until 1994)
• agricultural growth delivered substantial poverty
  reduction
• manufacturing growth did not in itself
• Impact of initial conditions and their changes on
  poverty decreases in India
• Strong impact of yield increases
• Strong impact of initial conditions
• in both health and education
• good rural initial conditions (high yields and
  low landlessness).
• Note India in this period is relatively closed.

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A brief digression the world as I know it

• Is India relevant for other parts of the world?
• The world poorest, low growth countries
  (especially in Africa) may be considered as
  having missed the boat, marginalized because of
  cumulative agglomeration effects in the
  concentration of economic activity. This will
  always make it hard to catch up.
• There is substantial heterogeneity and these
  countries can be classified as
• Resource-rich economies
• Coastal and other well-located countries
• Land-locked economies without natural resources

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A brief digression the world as I know it

• They each have specific problems related to
  growth and poverty reduction
• Resource-rich economies managing their wealth!
  (Dutch disease, governance)
• Coastal and other well-located countries taking
  advantage of world trade opportunities (trade
  infrastructure, regulation, skill creation,
  labour markets)
• Land-locked economies without natural resources
  suffering from agglomeration effects most, partly
  because the better located or endowed
  neighbouring countries are also trading with
  them/needing them.

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So when is agricultural growth essential?

• How does agricultural growth then fit in earlier
  framework?
• Resource-rich countries.
• Role of agriculture? Unlikely as a growth engine,
  rather as one source of diversification, possibly
  as method of distribution.
• Coastal and other well located countries
• Trade opportunities best placed to take
  advantage of world economic opportunities
• Managing advantage (markets, skills, regulation)
• Role of agriculture manage the pull out of
  agriculture.

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When is agricultural growth essential?

• Landlocked, resource-poor countries
• Little scope agricultural base?
• Risk of marginalization highest (in terms of
  staying behind)
• What to do? Skills, infrastructure but
  dependent on what others do
• Agricultural growth is essential but dont
  expect any miracles.
• HERE rural development as part of growth
  strategy, but again in order to move more people
  out of agriculture.

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Overview

• What is the place of rural development in general
  growth and poverty reduction processes?
• Rural Development in Development Economics a
  potted history
• 2. The Place of Rural Development in Development
  Macro-story and its implications
• 3. Growth, Poverty and Rural Development
  Micro-macro and policy interactions

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Identifying constraints

• What do we know? or what do they teach you at
  graduate school?
• A lot of
• Factor markets (land, labour, credit).
• Rural institutions and contracts, given market
  imperfections.
• Quite a lot of
• Increasingly risk, collective action and bits of
  political economy.
• Interventions or at least any interventions you
  can phrase as a randomized or natural experiment
  (so unfortunately too few relevant interventions)
• Output markets, marketing institutions (only if
  you are at Agri Econ Grad School)
• Innovation and Extension (but only Social
  Learning if you are Econ Grad School)

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Questions

• A little
• How to put this into the bigger picture of growth
  and poverty reduction?
• Why would some in rural areas stay behind even if
  growth starts picking up?
• What may stop any a process of growth starting
  off?
• The more systematic study of urban-rural
  interlinkages
• Migration? Relevant policies?
• Are there any lessons from some of the existing
  evidence?

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Locked in Rural Poverty?

• Initial poverty and market failures, conspire to
  keep some persistently poor or even in a poverty
  trap.
• Access to capital (credit market failure)
• Risk (insurance market failure)
• Spatial externalities (curse of geography)
• (see WDR, chapter on impact on investment)

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Access to credit

• The poor dont just have fewer productive assets
  (labour, human capital, land), but cant use them
  as efficiently as the rich either.
• Large heterogeneity of marginal return to capital
  (unexploited profits), but poor dont have
  access.
• Underinvestment is consequence.
• With thresholds, may result in poverty trap.
  (WDR)
• Even if returns to labour start picking up due to
  general growth, they may stay locked.
• But if rural growth is needed to start growth,
  persistence is doomsday scenario, without
  shocks via good luck or interventions.

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Risk

• The poor dont just have fewer productive assets
  (labour, human capital, land), but cant use them
  as efficiently as the rich either, due to lack of
  insurance, or insurance-substitutes.
• Large heterogeneity of marginal return to capital
  (unexploited profits), but poor cant afford to
  take the risk, due to downside consequences.
• Underinvestment is consequence.
• With thresholds, may result in poverty trap.
  (WDR)

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Spatial Externalities

• economic gains and costs created during economic
  and other transactions, beyond those taking into
  account by those involved in the transaction

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Spatial Externalities

• Geography of poverty there are areas that stay
  behind
• e.g. land-locked countries as before, that
  require agricultural growth
• But also WITHIN countries poor areas
• Most disconcerting form of externalities for the
  poor those linked to geography or space
  (location), and the 2nd degree effects, linked
  to interaction effects.
• Curse of the latecomer once you miss the boat it
  is hard to ever catch up.

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Poor areas processes involved

• Threshold effect of local endowments (private,
  public or common property) if you dont reach
  that threshold, you will lose forever
• Evidence from China, Peru, India, Africa
• Other way of looking at them, they are not part
  of the rest of the economy lack integration,
  opportunities
• Growth opportunities may bypass them.

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Poor areas policy?

• If threshold effects, doing a little wont be
  enough.
• Agglomeration effects doing more than lifting
  up to equal level of other areas is required!
• Or Massive scale may be required
• And creating opportunities to leave poor area
  may be much better!
• Even worse, if migration has start-up costs or
  entry constraints (thresholds) then they cannot
  leave either!
• The real challenge of rural poverty

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Getting out and being stuck

• Putting old questions back to the top of the
  agenda.
• Rural-urban interlinkages and unlocking the poor
  from rural areas, and let them take advantage of
  opportunities, mainly outside agriculture
  including via migration.

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Research issues and frontiers

• Research issues involved
• (Internal) migration
• Poor areas, e.g. in Africa
• Possible policies in different contexts,
  including building roads, moving them out of
  poor areas, etc.
• Too little research due to data requirements and
  problems with analysis.
• Panels of migration data, following people after
  they left
• Panels across high number of clusters for poor
  areas work
• Instruments for careful assessment (it is hard to
  randomize migration or road building, so it is
  rarely researched, and rarely taught at graduate
  school)

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Example back to Poverty in Kagera
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Implications?

• Does this mean we should move people out of the
  villages? Build roads? Give vouchers to go?
• Of course, not necessarily observable or
  unobservable characteristics of the ones that
  moved out are just different from the ones that
  stayed behind. (Education, Enterpreneurial, etc.)
• Consumption change regression on characteristics
  (identified via split-offs) suggests moving out
  matters controlling for education matters.

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Implications? (2)

• But using within-household relational variables
  (age order, link with head, etc) as instruments,
  we find no effect of moving out on consumption
  changes
• OR the more able or the more enterpreneurial
  ones leave, so YOU CANNOT JUST MOVE THEM OUT (as
  the Ethiopians are doing).
• You may need to invest in rural development to
  ensure more can leave when growth picks up,
  including the less able, currently low return
  individuals, if we want to fight rural poverty.

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Conclusions

• What is the place of rural development in general
  growth and poverty reduction processes?
• Rural Development in Development Economics dont
  forget the old questions Lewis-Todaro, but put
  them in new context
• 2. The Place of Rural Development in Development
  Macro-story and its implications. Be especially
  sensitive to contexts where rural development is
  only hope, while use rural development in other
  contexts to enable pro-poor growth.
• 3. Growth, Poverty and Rural Development
  Micro-macro and policy interactions. Be aware of
  poverty traps, and especially spatial traps.
  Invest in better data and research on rural-urban
  links, migration and forces that can unlock traps.

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