PART I: INTRODUCTION

I. THE ROLE OF AGRICULTURAL POLICY ANALYSIS

Interest in the analysis of agricultural policy is a relatively recent phenomenon. Before the mid-1960s, industrialization was seen as the key to economic development in most developing countries. Accordingly, government resources and policies were focused on the promotion of industry, and the agricultural sector was thought of primarily as a pool of resources for the development of the nonagricultural sector. Capital for new industrial investment would be obtained from taxes on the rural population or on agricultural output; labor requirements would be met by the removal of labor from the agricultural sector. Because much of the agricultural labor force was thought to be unproductive, food production would not decline.

Problems soon arose with this industry-first strategy. In many developing countries, the small size of domestic markets forced new industries to compete in international markets. But competing firms in other countries were often more efficient. To sustain the viability of firms, either domestic consumers had to pay prices for industrial output that were higher than world prices or governments had to subsidize production costs to maintain international competitiveness. Often, both policies were used. The result was an increasing burden on the budgets of consumers and governments. A second problem with the industry-first strategy was the absence of surplus resources in agriculture. In most countries, industry had to lure labor away from productive agriculture, and agricultural production declined as industrial production grew. Foreign exchange had to be directed increasingly toward imports of food rather than imports of the inputs essential for industrial development. Government revenues from agricultural taxation declined as well.

Finally, the industry-first strategy encouraged a deterioration in the rural-urban income distribution. Income increases were concentrated in urban areas, and benefits for workers in the agricultural sector were limited largely to the workers who were able to emigrate successfully to urban areas. Because agricultural incomes did not increase, rural demands for industrial sector outputs remained small.

In the past two decades, new development strategies have emerged. Agriculture has been placed at the forefront, and industrial development has become a complement to agricultural growth. Expansion of agricultural production is seen as leading to increases in farm income that fuel the demands for industrial sector outputs. Initially, industrial production is dominated by industries that produce agricultural inputs, low-cost consumer goods, and construction and transportation services. More complex industries develop as the supply of entrepreneurial and managerial talent increases, sustained by public investment in education and infrastructure. In contrast to the earlier approaches, the industrial-growth strategy is determined largely by domestic demand. International markets can still provide opportunities for growth, but these markets are exploited only as competitive industries emerge. Processing of agricultural and other labor-intensive products dominates potential export industries.

In the current strategy, agricultural policy is a critical element in determining the rate and pattern of economic growth. One set of policies-investment in education, health and sanitary facilities, and transportation infrastructure-has a broad impact on agricultural sector productivity. In general, economists, policy-makers, and development institutions have reached a consensus on the importance of these investments. A second set of policies affects particular agricultural commodities or techniques of production. These commodity-specific policies include taxes, subsidies, and quantitative controls on particular outputs and inputs, and policies that affect the macroprices (interest rates, wage rates, and exchange rates). For this set of policies, little consensus has emerged on appropriate levels of use. Analysis of this second category of policies is the principal concern of this book.