Friday, August 8, 2008

Empirical test of poverty trap hypothesis

Here is an interesting paper, An Empirical Test Of The Poverty Traps Hypothesis, written by Francisco Rodriguez and published by the UNDP's International Poverty Center (IPC):

This paper presents an empirical test of a subclass of poverty traps hypotheses. The test is based on the observation that the nonconvexities in the production function necessary to generate multiple equilibria need only be present in the region between the equilibria. Increasing returns should therefore be strongest when the economy is transitioning between steady states than when it is at or near one of those steady states. I implement this idea by estimating the degree of increasing returns during growth accelerations and growth transitions for a panel of developing and developed economies using UNIDO's Database of Industrial Statistics. I find no evidence of systematic differences in economies of scale between transition and non-transition episodes, shedding doubt on the idea that increasing returns in manufacturing generate poverty traps.

Impact of rising food prices on the rural poor

Here some are key facts compiled by the IFAD:

  • The food crisis is real, and it is affecting poor rural people across the developing world.
  • In virtually all countries, food prices have increased in 2007 and early 2008. The extent to which they have increased varies considerably country by country, and indeed within countries, from 10-20 per cent to 200 per cent. Consumer prices have typically increased to a greater degree than producer prices.
  • The factors behind the increased prices include higher input costs, higher transportation costs (both a consequence of increasing fuel prices), in a few countries civil unrest, and above all, agro-climatic conditions. Floods, droughts and frosts led to substantial increases in prices in many countries.
  • Poor rural people, many of whom are absolute or net food buyers, are losing out and are becoming poorer.
  • As consumers, they are responding by reducing the quantity they eat, and are shifting to lower costs – and in some cases lower quality – foods. There are suggestions from a number of countries that malnutrition is on the rise.
  • As producers, they are responding either by withdrawing from the market and reverting to low-input low-output production, for home consumption; or, where they are able, by shifting into higher value market-oriented production, as a means to earn the income to assure their food security.
  • Others in the rural economy are reacting to increased market opportunities, and in a number of regions – above all Latin America – land ownership is becoming increasingly concentrated. The rural poor are already losing out in some cases.
  • To date, government responses to rising food prices have been principally short-term and aimed at urban consumers. A number of countries have also introduced measures aimed at stimulating increased market supply.  Yet poor rural people risk being excluded from both.
  • Norman Borlaug: The man who fed the world!

    Norman Borlaug, father of the Green Revolution and the only man who was awarded the Nobel Peace Prize for contribution in agriculture and food production, is considered as "the man who fed the world" during the 60s, 70s, and 80s, when millions of people in the world (especially in India, Pakistan and China) were under threat from famine. Borlaug is a legend for his contribution in spearheading the agriculture revolution at a time when people were skeptical about the use of fertilizers and hybrid, high yielding seeds.

    image I spent the whole day yesterday reading a biography of Norman Borlaug. The Man Who Fed The World: Nobel Peace Prize Laureate Norman Borlaug And His Battle to End World Hunger is written by Leon Hesser. It is an excellent book and has high relevance to today's rise in global food prices.

    Borlaug is the undisputed father of the Green Revolution--a term coined in 1968 by William S. gaud, the then Administrator of the USAID. He was awarded the Nobel Peace Prize in 1970 for spearheading the Green Revolution. He was was a researcher and always sought answer to how to increase yield and productivity.He defied Malthus' prediction-- unchecked population growth always exceeds the growth of means of subsistence-- by emphasizing in new technology, research, and use of high yielding hybrid seeds to increase production and productivity.

    Bourlaug’s Mexican dwarf wheat varieties and their Indian and Pakistani derivative had been the principal catalyst in triggering the Green Revolution. The unusual breadth of geographic adaptation combined with high genetic yield potential, short straw, a strong responsiveness and high efficiency in the use of heavy doses of fertilizers, an a broad spectrum of disease resistance had made the Mexican dwarf varieties the biological bombshell that launched the Green Revolution.

    Borlaug was not only a pragmatic agronomist and researcher but he also knew that without a fair price for harvest, credit, fertilizers, and infrastructure agriculture revolution was simply not possible. Back in the 70s he argued that infrastructure is key to higher food production and productivity-- clear example is India where fairly good infrastructure, along with credit injection and purchase (from Mexico) and use of high yielding seeds, in Punjab led to boom in food production, which helped India attain self-sufficiency in food production by 1974.

    He also knew that bringing about a drastic change in a developing country is be very difficult. His used to advise his students: "Don't try to change everything at once, they will slit your throat." He was referring to the intransigence of the Indian and Pakistani bureaucracy to change long running faulty and distorted agricultural policies.

    Convincing government officials to change a long running practice is very difficult. Borlaug believed in "Kick-Off Approach", which basically is manipulation of technical, psychological and economic factors to achieve superior, rapid results. He used his research and tests to convince governments to change food policy (technical). He then tested a sample of his seeds to show the people and government that the yield was higher in the same plots and circumstance (psychological). Finally, he forced a change in economic policies so that farmers get a fair price for their produce (economic).

    He favored government intervention/action because depending on free markets alone in the food sector would lead to nowhere and increase chances of more hunger and starvation. Markets are not perfect and the government has to ensure that there are right conditions in place to entice markets to operate in the villages, where most of the food is grown. Sometimes, subsidies and credit facility (basically injection) are required to roll the wheels of market, which is too obsessed with adverse selection and moral hazard. He had realized that the poor lack credit to purchase fertilizers, seeds, and farming equipment-- things the government need to provide in the absence of markets. He said, "What India needs is fertilizer, fertilizer, fertilizer, credit, credit, credit, and fair prices, fair prices, fair prices!" Pakistan and India both did it and they became self-sufficient in 1974 and 1978 respectively.

    Borlaug indicated that government action was needed to assure (a) the availability of the right kind of fertilizer at reasonable prices at the village level six weeks before the onset of the planting season; (b) credit for the farmers to purchase fertilizer and seed before planting, to be paid back at harvest; and (c) an announcement before the initiation of the planting season that, at harvest, farmers would receive a fair price for their grain.

    Fair price for harvest sends a different signal in the market and gives farmers incentive to produce more. When prices are distorted, then farmers would be unwilling to send surplus produce to the market. This is exactly what happened in Pakistan in 1968.

    The problem was that, on the advice of economists, the government had dropped its guaranteed price for wheat by 25%. Speculators were hoarding the crop.

    Borlaug had rightly diagnosed the problem in Africa by pointing out that lack of infrastructure is basically holding back Africa. He argues:

    Lack of infrastructure is killing Africa… Africa needs a much broader network of roads, with many just plain, gravel rural roads, but the continent also needs some surfaced main roads with efficient connections to seaports. Asphalt paving can come later for much for much of the rural road system. Improved basic transport systems would greatly accelerate agricultural production, break down tribal animosities, and help establish rural schools and clinics in areas where teachers and health practitioners are heretofore unwilling to venture… Water resource development has to be high on the development priority list in Africa.

    Borlaug is now partnering with Jimmy Carter and the Nippon Foundation of Japan in a program called Sasakawa Global 2000 to bring a Green Revolution in Africa. And success has already been seen in Uganda and possible Ghana within 2009. The test program is being replicated in numerous sub-Saharan African countries. Borlaug believes that with the right seeds, fertilizers, and agricultural policies, we can

    An extremely good, light-to-read book. Highly recommended for those who are interested in the current food crisis.

    Here is more about Borlaug from the Nobel Prize website. Here is Borlaug's website and information about his foundation.