Lecture notes: Economics of Development Introduction



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Rural development and the environment


One lesson to be learned from the previous lecture is that poverty is a crucial characteristic of subsistence farming as it prevents development. When trying to attain a transition of the rural economy to a system for mixed or specialized farming it is also important that a new agrarian system is in accord with the conditions for sustainable development. This notion will be defined later on, but for the time being we imaging as a necessary condition for this kind of development that it ends the environmental degradation associated with subsistence farming.

In real life, reducing poverty is intimately connected with sustainable development, as poverty both causes environmental degradation and is itself a result of environmental degradation. But usually definitions of sustainable development concern how to safeguard the natural environment in a way that meets the need of the present generation without compromising the needs of future generations. This requires that the stock of overall capital assets remain constant or rises over time. Natural resources or the natural capital is included, but as natural capital can be substituted for other forms of capital only to a certain extent, it is important to incorporate some kind of environmental accounting into any strategy for the growth of mixed farming. Such an account is discussed in T/S, but will not be discussed here.

Two types of environmental degradation will be used to illustrate how the environmental factor can be taken into consideration in a policy for transforming subsistence farming into mixed farming. The first factor is deforestation understood as clearing of forested land either through extension of farmland as shifting cultivation is land demanding or for logging and collection of firewood. The second factor is soil erosion and other types of reductions of the soil quality. When the forest cover decreases, for instance through deforestation, topsoil will blow away or will be washed away by rainfall. Furthermore, when there are no trees, there will be no litter for nourishing the farmland and forests provide catchments for water that can improve the quality of the farmland.

There are many interrelationships between poverty and environmental degradation that produce downward spirals leading away from sustainable development, and, therefore, should be considered in a strategy for transforming subsistence farming into mixed farming. For example, poor people use firewood as their main source of energy, and the collection of firewood is sometimes made the scapegoat of deforestation. Furthermore, to keep the soil quality when land is constantly used it must be maintained by fertilizers but poor people cannot afford to add fertilizers. Consequently, to provide food for a growing population marginal land has to be used. This creates a negative spiral as the well-being of the poor is further reduced because they must live on degraded land that is less expensive.

From this perspective, transforming subsistence farming to mixed farming becomes a matter of identifying positive spirals, where measures reducing environmental degradation increase the well-being of the poor, which, in a second step, lead to further reductions in environmental degradation and so on. T/S are arguing that the most important factor preventing environmental degradation associated with the poor is to provide institutional support for the poor. Land tenure rights may be one example here. In the Gambia, for instance, you are not permitted to plant trees on farmland you rent. Changing this institution giving the landless the right to intercrop trees with other crops (agroforestry) would improve the soil quality and probably also their well-being. Another example is the Gambian government that tries to align the protection of forest resources with the interests of local people by transferring the responsibility for forest resources and legal ownership (secured tenure both on the land and resources) to local populations represented by Community Forest Committees. I will return to this later on.

Before that, I will use theory about the “energy ladder” to illustrate how poor change in their consumption of energy when their income increases, which suggests a positive spiral between reduction of poverty and reduction of environmental degradation. When incomes increase people move up the energy ladder from firewood to charcoal or kerosene and then to butane gas (LPG), natural gas or electricity for cooking. A recent study conducted in urban Ouagadougou confirms these findings (Ouedraogo 2006). Accordingly, the World Bank report argues when population growth overrides increases in incomes people move down the ladder and return to biomass fuel. It might well be that this theory explain behavior of the urban population, But what about poor farmers?

One question arising is if the positive spiral suggested by the theory of the energy ladder can be generalized and applied to the whole society. This brings us to the environmental Kuznets curve, which suggests that at this level the situation is more complex. According to this curve, environmental degradation increases when incomes increase and then decreases like an inverted U-curve. Since this curve describes the development of the whole society, it might well be that the non-poor increase the environmental degradation while environmental degradation by the poor decreases when income increases. The net effect may be negative.

Instead the environmental Kutznets curve is questionable with regard to if there is a turning point, where aggregated environmental degradation begins to decrease. When it comes to greenhouse gases containing carbon, it is rather the reverse that environmental damages increase with increases in incomes. Even if a strategy for transforming subsistence agriculture in developing countries is targeted to increase the forest cover, which will reduce the emission by enhancing the forest carbon stock, this is probably not enough to balance the carbon emissions in the rich countries.


Example of institutional support


Usually, the poor farmers cannot afford to introduce new technology such as using manufactured, synthetic fertilizer to improve the soil quality in a way that bring them from subsistence to mixed farming. Less costly methods for soil management, that can replace slash-and-burn agriculture, has to be found. The soil management system discussed in this example uses forests cover, cashew trees and livestock to increase agricultural productivity (figure 1).

Figure 1: Soil management system considered in the project


2)

Agricultural productivity (livestock and cashew)

6)

5)

4)

3))

1)

Cashew trees

Forest cover

Livestock

Soil quality


The arrows depict:

1) Food supply; 2) Manure; 3) Plant litter, reduced erosion, forest catchment area for water; 4) Pollination; 5) Firebreak protection (against bushfires), 6) Protection against illegal forest degradation

In the spirit of T/S we argue that the soil management in figure 1 cannot be implemented unless the poor is provided by institutional support. Gambian institutions for Community forests that transfer the legal ownership to forests to local populations represented by Community Forest Committees may be an example of this type of support. We may think about these institutions as increasing the forest cover (see figure 1). At the same time, arrow 6) is working back from agricultural productivity to forest cover. It is associated with reduced costs of protecting the forest against illegal forest degradation when farmers’ incomes increase. That is, the costs of counteracting illegal logging are reduced having a positive influence on the growth of the forest cover.

Private and common property


10.4 about economic models of environmental issues are discussed in other courses, for instance in Advanced Micro - and will therefore be excluded. However, as there has been a debate recently about if improved property rights for the poor could help them out of the poverty trap and transform subsistence farming, I will say a few words about the sections on private and common property.

A farmer who do not own the land they use always face a hold-up problem. The landlord can always increase the land rent to a level that the farmer cannot afford. This risk increases if the farmer makes efforts to increase the soil quality increasing the yield of land. Probably, it reduces the interests of the farmer to adopt new technology, plant trees to intercrop with other crops or set up buildings on the land. What about farmers’ rights to land as allocated through the Alkali

In the literature the appearance of co-specialized assets are usually associated with hold-up problems, and it is argued that they are avoided if these assets are owned by the same owner. Property rights that can be given to farmers are characterized by four conditions:

/see page 482/

However, as Elinor Ostrom shows in her book “Governing the Commons” there are resources - common-pool resources (CPR) – that can be allocated efficiently in spite of common ownership. CPR is usually associated with natural resources such as forests, grazing commons or fisheries to which many people have access and thus usually are owned in common.

Forests are used as example to illustrate what in the literature sometimes is called “the tragedy of the common”. If the farmers individually decide how many cows they will send to the forest to have their food inefficiencies will arise. According to neoclassical economic theory this inefficiency is due to an externality that is not taken into account when food supply from the forest is allocated through common ownership. The individual farmer consider the average value of the cows and continue to send cows to the forest as long as this value is larger than the marginal cost, i.e. the cost of buying a cow. However, when sending one cow it will cause a damage to the forest resources that reduces the food supply and value of all cows.

/figure 10.3 page 483/

In the Gambia the tragedy of the common has primarily been associated with state-owned forest which now are transferred into Community Forests to which whole villages have the ownership. Alternatively, the state owned forests could have been divided into smaller lots owned as private property by individual farmers. In theory this solution would solve the problem of inefficiency in figure 10.3. In addition, to increasing the agricultural productivity in figure 1, private forests could also be collateral helping the farmers to get bank loans.

However, in practice it is questionable if privatization would help the poor. Firstly, if they are unable to repay their loans to the bank, they will lose their ownership to the forest and, thus, be equipped with less resources than before when the forest was state-owned. Secondly, it is doubt whether poor farmers are able to protect their ownership as they cannot afford to set up a fence that keep other farmers´ livestock out of the forest or protect the forest against illegal logging. Furthermore, in case of a conflict about property rights, they are probable unable to pay for a lawsuit.

As already mentioned Elinor Ostrom shows that the social optimum in figure 10.3 can be attained even in case of common ownership to the forest (Community Forest) by villagers negotiation binding contracts to commit themselves to a cooperative strategy. The villagers have to negotiate an agreement about the number of cattle each compound is allowed to send to the community forest when the total number is equal to X’’, and they have to agree about an external actor who enforce the agreement. The bargaining costs and the costs of enforcement is paid from the surplus.


International trade and development

Inward- and outward-looking development policies


So far we have neglected the importance of international trade and investments for development strategies. Historically, since long there has been a divide in development economics between advocates of an inward-looking development policy perspective emphasizing trade protection and barriers to FDI. The most extreme example of self-reliance was found in Cambodia after the independence in the 1970. One interesting African example is Algeria after the independence. The government launched a national technology policy to support new industries based on modern technology. The idea behind this strategy for development was to exploit forward and backward technological linkages.

This was an early version of the European Airbus programme. A modern airplane use advanced technology within a lot of areas: IT, material, aerodynamics etc. Through backward linkages the Airbus-program was expected to reduce the technology-gap between Europe and the US and create a platforms for growth within a lot of different areas. Another development strategy with an inward looking perspective are various forms of catch ups like the early Japanese industrial policy of copying technology developed in other countries and at the same time protect the infant industry through trade barriers.

The outward-looking development policy perspective stresses the importance of international trade and FDI as lever for development. Advocates of this perspective usually argue in favor of free trade. One example of special importance for African farmers is EU’s Common Agricultural Policy (CAP) where European farmers are subsidized and protected through trade barriers making it difficult for farmers in developing countries to compete on the European markets. A foreign policy by developing countries trying to remove these subsidies and barriers is an example of outward-looking development policy.

In my final lectures, we will discuss two types of outward-looking development policies: Export promotion and import substitution. The latter can be seen as development through two stages. In the first stage, imported consumer goods are replaced by domestic production. In a first step, a developing country begin replace imported fish for its own consumption by establishing own fisheries. In a second stage, the same country substitutes imported more advanced products, for instance, facilities for cold houses, for cold houses from domestic production. If the second stage of import substitution turns out to be successful, the country can even develop into becoming an exporter of fish.

Import-substitution will be discussed in my next lecture.

Export promotion strategies


Export promotion strategies includes the traditional strategy for many African countries to promote export of primary commodities deriving from mines and plantations (often owned by foreigners). Already before, the “Vent-for-Surplus Theory of Trade” was mentioned /figure 12.2 p. 585/. This theory is based on the assumption that there are resources in the subsistence farming system that are unemployed. But with growing farmer populations and environmental degradation, it is doubtful whether there are any unemployed resources left.

Another problem with primary commodity export (except for oil and some rare minerals) is that they are growing more slowly than total world trade. The reasons are low income and price elasticity for these commodities as well as stagnating population growth. The latter is not through for Africa, where the populations – unlike the development in in Asia and Latin America - continue to grow.

Primary commodity exporting countries suffer from low income- and price elasticity of demand (IED anPED). Therefore, difficulties for developing countries that let their development strategy rely on this type of export, has led to useful tools for analyzing this type of export promotion strategy.

Low IED imply that the growing incomes in the developed countries has not been enough to absorb a growing export of primary commodities. Low PED implies in case of shortages and surpluses on the international markets, cause large and volatile price fluctuations. Erratic movements in export prices cause Export Earning Instability in countries relying on this development strategy.

Another tool for judging strategies for the promotion of export of primary commodities is the Prebish-Singer hypothesis. In this case, we look at the total export earnings ( TE = ) and total exchange expenses associated with import (TI= . A developing country that wishes to increase its import of manufactured goods with high PED and IED, has to reduce the prices of its export of primary commodities considerably, and thereby increase the volumes of its export - also this considerably - to be able to pay for the import. This is due to low IED and PED of primary products.

In looking into this problem more in detail, we define commodity terms of trade as /. The Prebish-Singer hypothesis is that there is a long-term decline in terms of trade of primary- commodity exporters. This is due to low income and price elasticity of primary commodities. To finance a growing import in manufactured goods, they have to increase their export of primary commodities. This increase become larger because of falling .



The solution suggested to the problem decreasing terms of trade of primary-commodity exporters has been a development strategy called import substitution. By replacing part of the import of manufactured goods with domestic production, the need of export earnings to finance expenses for import will be reduced. To some extent this strategy will reduce the Export Earning Instability, as well as the transfer of values from poor to rich countries that follows this unfavorable terms of trade. Another strategy chosen by primary-commodity exporters has been to establish international commodity agreements that set overall output limits, assign quotas to producing nations and stabilize prices.

UN Conference on Trade and Development (UNCTAD) have tried to establish a common fund to finance “buffer stocks”. How can “buffer stocks” serve the interests of primary commodity exporters? (p. 596)
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