As the development of countries continues and incomes per capita rise, it is the normal historical experience for workers to leave agriculture to get nonfarm jobs, and for farms to consolidate and become larger and more mechanised. In addition, small farms that do remain either move to high-value production or become part-time (Hazell 2010). Hazell (2010) also argues that if this transition does not occur, farm incomes may fall seriously behind nonfarm incomes, consequently widening rural-urban income inequality.
The theoretical models and experience of agricultural transformation in land-poor countries show that smallholder agriculture plays a shrinking role in the process of industrialisation. In Asia, cereals, mainly rice, served as a leading growth sector during the green revolution in the 1960s to 1980s. However, as some Asian economies successfully industrialise, smallholder agriculture based on rice is becoming less relevant, and thus it is harder to avoid widening the income gaps between sectors and regions (Otsuka 2015). Moreover, Headey at al. (2010) find that the reverse transformation taking place in Asia could potentially result in a backlog of workers who may leave agriculture. In this context, this chapter argues that policy reforms for smallholder agriculture at the middle-income stage need to be designed to improve agricultural productivity through technical change and institutional innovation. In addition, the reforms need to support farmers to find higher-value opportunities in light of the increase in part-time farming, rising rural wage rates and income disparity.
There have been several studies that provide a policy framework supporting the agricultural transformation (Dorward et al. 2004; World Bank 2008; Anderson and Martin 2009; Thapa and Gaiha 2014; Hazell and Rahman 2014). Anderson and Martin (2009) show the declining comparative advantage of Asian agriculture and the application of protection measures at the high-income stage. However, they mainly concentrate on evaluating the effects of price and trade distortions in agriculture, and not the policy frameworks needed to support agricultural transformation. Dorward et al. (2004) review the institutional reforms and policies for pro-poor agricultural
growth, based on the summary of theoretical and empirical evidence. The authors argue that because the market failures change in the course of development, distinguishing policy phases in support of the agricultural sector is useful. Dorward et al. (2004) develop three policy phases to support smallholder agriculture (Figure 1). In Phase 1, the government plays a role in establishing the basics for improving food crop production, such as investments in agricultural research, irrigation infrastructure and land reforms for creating the conditions for pro-poor agricultural growth. This phase is characterised by extensive low-productivity agriculture in a low-income country. Figure 2.6 Policy phases in supporting agricultural transformation
Source: Dorward et al. (2004)
However, the application of productivity-improved technical change is likely to be limited to small farms, with access to seasonal finance and markets once the basic conditions are in place. Thus, Dorward et al. (2004) suggest that the government should intervene in Phase 2 to facilitate farmers reduce transaction costs and risk when accessing seasonal finance and input markets. Furthermore, it is essential to invest in
Phase 1: Establishing the basics
Roads/irrigation
systems/research/extension/land reforms
Extensive, low productivity agriculture
Profitable intensive technology. Uptake constrained by adequate finance, input and output
markets Seasonal finance,
extension, input supply systems
Reliable local output market
Effective farmer input demand and surplus
production
Large volumes of finance and input demand and produce supply. Non-
agricultural linkages Effective private sector
markets Phase 2:
Kick-starting markets
Phase 3: Withdrawal
institutional innovations that supply agricultural services, and in development of input supply systems and reliable output markets. When farm households adapt to new technologies and increase the transaction volumes of credit, input and outputs, transaction costs will decline. The government intervention should then be withdrawn and more attention paid to supporting the development of the rural nonfarm economy (Phase 3).
Figure 2.7 Challenges and policy framework for smallholder agriculture in Asia
Source: Developed from ideas and arguments of Thapa and Gaiha (2014)
The policy phases initiated by Dorward et al. (2004) have no strategies that deal with the emerging challenges for smallholder agriculture in middle-income countries like Vietnam and China. This policy framework emphasises institutional support for
Challenges Policies
Growth of consumption and production of high-value commodities (1)
Transformation of agrifood industry (2)
- Declining productivity growth of major food crops
- Capital moving out of agriculture - Environmental problems
- Land and tenure security
- Impact of climate change and water shortage
- Risk and vulnerability
i) Technical change to address environmental problems and yield growth
ii) Institutional innovations for productivity enhancement and diversification:
- Farmer organizations - Contract farming
- Supply chains and super markets - Fiscal stimulus
labour-demanding technical changes in order to promote growth in poor rural areas. Regarding the agricultural sector in Asia and the Pacific, Thapa and Gaiha (2014) discuss new challenges facing agricultural transformation and suggest. The chapter reviews the ideas presented by Thapa and Gaiha (2014) and expresses these ideas in a policy framework in Figure 2.7.
Figure 2.7 introduces the policy framework for smallholder agriculture in Asia developed from Thapa and Gaiha (2014). It shows two recent transformations in Asia. The first transformation in agriculture is the growth of consumption and the production of high-value commodities - The increase in incomes has led to a shift in food consumption from grains and other staple crops to higher-value products. The second is the transformation of the agrifood industry - processing, wholesale, and retail. The participation of small farms in value chains and the supermarket revolution in the retail sector are born likely to have a substantial impact on agricultural production (Thapa and Gaiha 2014; Hazell and Rahman 2014).
Regarding challenges facing small farm, Thapa and Gaiha (2014) show that the decline in the productivity growth of major crops such as rice or wheat is one of the main concerns of policy makers in the Asian region. Consequently, diminishing returns in grain production result in capital moving out of agriculture. Hazell and Rahman (2014) also find that the displacement of cereal land for other crops or industrial development, and rising costs of production relative to the low price of cereals has made cereal production less profitable. In addition, degradation of the environment and land quality are also emerging challenges resulting from the intensive intensification of cereal production (e.g. three rice crop seasons per year). At the same time, smallholders in Asia and the Pacific must also cope with the negative impact of climate change, which may cause floods, and salt water intrusion threatening crop yield and the livelihoods of farmers (World Bank 2008). Intensive mono-crop systems such as rice system are causing deterioration of the soil and water (Ali and Byerlee 2002).
As regards land and tenure security, Thapa and Gaiha (2014) support equity-oriented land reforms, which seems in contradiction to the problems of small and scattered landholdings. Thapa and Gaiha use the argument developed by Lipton (2006), i.e. small farms tend to be more productive than large farms because of the inverse relationship between farm size and productivity. However, Otsuka et al. (2013) conclude that the agricultural sector in Asia will lose its comparative advantage in the process of industrialisation, and increasing
part-time farming and wage rates if land reforms fail to expand farm size and reduce land fragmentation. In order to deal with new challenges facing smallholders, Thapa and Gaiha (2014) develop a system of policies which include two components: technical changes and institutional innovations. However, these suggested policies mainly focus on maintaining and supporting small farms. The experience of the agricultural transformation in East Asian economies has revealed the importance of land reforms, crop diversification, the development of the rural nonfarm economy, input subsidies, increasing public spending in agricultural research, and rural infrastructure. Suphannachart and Warr (2011) find that public investment in agricultural research and development has a positive and significant impact on TFP growth. In addition, Haggblade et al. (2007) also find that more public spending on rural infrastructure reduces transaction costs and attracts more investment in agricultural production.