Agricultural, Food, and Resource Economics  Research > Food Security Group > Ag. Transformation > Definition Paper
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Workshops on Structural Transformation in Africa

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WHAT IS AGRICULTURAL TRANSFORMATION?

by John M. Staatz

Michigan State University

October 29, 1998

Agricultural transformation is the process by which individual farms shift from highly diversified, subsistence-oriented production towards more specialized production oriented towards the market or other systems of exchange (e.g., long-term contracts). The process involves a greater reliance on input and output delivery systems and increased integration of agriculture with other sectors of the domestic and international economies. Agricultural transformation is a necessary part of the broader process of structural transformation, in which an increasing proportion of economic output and employment are generated by sectors other than agriculture.

Chronic hunger derives from low real incomes. Every major country that has substantially improved real incomes has done so through a structural transformation of its economy involving:

A process by which increasing proportions of employment and output of the economy are accounted for by sectors other than agriculture. The economy becomes less agriculturally oriented in a relative sense, although agriculture and, more broadly, the food system continue to grow absolutely and generate important growth linkages to the rest of the economy. Structural transformation thus involves a net resource transfer from agriculture to other sectors of the economy, over the long term.

Movement of the economy away from subsistence-oriented household-level production towards an integrated economy based on greater specialization, exchange, and the capturing of economies of scale. Many functions formerly conducted on the farm, such as input production and output processing, are shifted to off-farm elements of the economy.

One implication of this process is that driving down the real cost of food to consumers requires increased attention to fostering technical and institutional changes in the off-farm elements of the food system. Increasing productivity at the farm level is absolutely necessary but is alone insufficient to assure decreases in the real price of food to consumers. Another implication is that for this process of structural transformation to go forward, the economy must develop low-costs means of exchange. High transaction costs in the economy can choke off structural transformation by making it too costly for people to rely on the specialization and exchange necessary to take advantage of the new technologies in the food system.

Increased access to knowledge systems of the wider world, as embodied in new technologies, management practices, and institutions. In the future, the sources of economic growth will depend increasingly on these types of embodied knowledge.

Role of the Food System in Structural Transformation

Failure to invest adequately in agriculture and the rest of the food system can choke off the process of structural transformation and hunger alleviation. Not only is the food system a major employer of the poor, but it also generates capital, inputs, and demand necessary for expansion of non-agricultural sectors.

Particularly important for transformation are actions that promote intersectoral resource flows from agriculture to other sectors of the economy while still maintaining the profitability of agriculture. Two of the most important transfer mechanisms are voluntary investment of physical and human capital by farmers and landlords in other sectors and "invisible transfers" brought about by lower food prices. Lower food prices increase consumers' real incomes and help employers hold down nominal wage rates, thereby fostering expanded employment.

For both types of intersectoral transfers to be economically sustainable, they must be fueled by increasing productivity throughout the food system. This involves improved marketing, processing, and input delivery technologies and institutions as well as better farm-level technologies.

Challenges to the Food System during Structural Transformation

For each country, one of the dilemmas in developing a food strategy is how much it should emphasize each of the following roles for the food system:

The food system needs to help people feed themselves, either directly or through income generation.

The food system needs to stimulate broader economic growth, especially by serving as a source of resources that can be invested directly in other sectors and by producing low-cost wage goods so that other sectors can have a low-cost labor supply.

The food system needs to keep up with economic growth by developing new products and services in response to urbanization and income growth.

Over-investment in any one role may lead to high costs, in terms of slowing the economic growth that is necessary for alleviating widespread chronic hunger. In particular, exclusive emphasis on promoting local food self-sufficiency in poor-resource zones may be a very costly way of promoting food security.

Challenges for Developing a Strategy to Foster Structural TransformationThe argument outlined above can be summarized as follows:

Chronic hunger is fundamentally a problem of low real incomes, in both rural and urban areas.

The major way to fight hunger is through increasing real incomes and expanding employment.

Historically, countries that have achieved large increases in real incomes have done so through structural transformation of the economies. This structural transformation has involved expanded non-farm employment, increased integration of agriculture with the rest of the economy, and expansion of the off-farm elements of the food system.

Achieving structural transformation requires a downward trend in food prices through productivity growth (keeping agriculture profitable by reducing costs). The reduction of consumer expenditures on food items is essential to expanding real incomes and employment in other sectors of the economy.

Generating the productivity increases needed to bring about these lower food prices requires an ongoing stream of technological and institutional changes throughout the food system. In addition to improved farm-level technology, these include improvements in input and output markets, factor markets, contracting, and tax systems, along with market-supporting infrastructure, such as roads, market facilities, information systems, and reliable systems for contract enforcement.

The transition from farm to non-farm employment is not automatic. Problems often exist with labor markets and new and expanding enterprises. Facilitating the generation of non-farm activities that expand employment and income is an essential complement to improving agricultural production.

Strategic and Tactical Issues

Among the issues governments and donors face in developing a strategy to promote structural transformation are the following:

Developing a coordinated systems approach to changes in policies, institutions, and technologies, and translating that approach into greater coordination among various elements of the world agricultural research system.

Defining what it means to "make research systems more demand driven."

Evaluating the appropriate mix of public and private actions in the food system.

Helping develop appropriate mechanisms to transfer knowledge to, and mobilize capital in, poor countries

Developing ways of dealing with emergencies and helping those left behind in ways that don't hinder structural transformation. For example, how can emergency food aid become a more effective tool for development, given likely changes in food aid availability and data needed to program it.