Motivations

In LDC absence of developed capital and insurance markets leave households and individuals vulnerable to idiosyncratic and covariate or economy wide shocks

In particular the poor are most vulnerable

Perspectives

Does agriculture as a sector offer any help in managing the effects of macro shocks? (Macro perspective)

Does agriculture as an economic activity of the household help in managing the effects of individual/household level shocks? (household perspective)

Definitions of ‘Buffer’ Role

Macroeconomic perspective the sector’s ability to sustain and improve the

economy’s resilience to external shocksHousehold perspective the sector’s ability, as a source of economic

activity of the household, to support informal safety nets that can substitute for non-existent or unavailable formal safety nets, for missing credit and insurance markets

Two overlapping approaches

Macroeconomic perspective Focus is on countercyclical behaviour of agriculture when

other sectors are hit by a shockThat depends on: the type of shock and on… a ‘cushioning’ policy environment the ‘output mix’ of tradables vs NT the transmission of prices the importance of intersectoral linkages (production and

consumption)

Macro perspective (cont.)

But very importantly: The extent to which agriculture is more

labour intensive than other sectors The flexibility with which labour markets

adjust to inter-sectoral difference in wages

Macro perspective (cont.)

Two types of ‘sub’approaches: Focus on intersectoral linkages and labour flows:

Intersectoral approach. Chile, Indonesia, Mali, DR

If agricultural is countercylical, no safety nets in place, no credit or insurance markets, then urban labour market shocks will make movement into agriculture an option

Macro perspective (cont.)

But switch to agriculture has high information and relocation costs: migrants have an advantage as they may have option to return, analogous to an insurance policy

Nota Bene: idiosyncratic employment shocks in urban areas can be managed in short time without relocation. The issue is co-variant (or aggregate) shocks.

Macro perspective (cont.)

If return option is important, then remittances may be seen as ‘premium’ paid by migrant to return productively at farm-home

But remittances have other self-interested motivations (e.g. inheritance) as well as truly altruistic motivations

: Remittance approach DR, Ethiopia, Ghana, China

Household perspective (safety net approach)

Informal safety nets have better chances of emerging ad persisiting when:

1. Shocks are relatively more frequent2. Monitoring costs are lower3. Punishment is credible threat4. Income differences among participants not too wideRural village communities where agriculture is

predominant activity display many of these features Mexico, South Africa

I. Mali – 1994 CFA Devaluation

Maize & millet (NT), rice (T) main staples Price of rice rose 50%, but maize and millet 14% during

94-95 Supply response of maize and millet allowed consumers to

buffer consumption Labour market: Rate of participation increased, especially

women and children; Cotton areas (also fruits and potatoes) absorbed many

migrants: labour intensive, tradable crops with low entry barriers (costs)

I. Indonesia (1997/98 crisis cum devaluation)

Economy recession –13.8%. Agriculture –1.3% Credit crunch in urban areaslabour mkt shock Semi-flexible urban labour mkt implied adjustment via prices (wages)

and hours worked Poverty rose 100% in urban areas, 50% in rural Important to distinguish b/w tradable and NT Response varied spatially, with tradables (except rice in part) increasing

labour demand Switch to agricultural labour mkt may be not so easy (lost skills). Small size of farms in Java also a constraint Non-farm rural activities absorbed labour better (but farmers purchase

non-farm output)

I. Chile (CGE)

CGE model, 23 sectors and 10 income groups Simulate impact of shocks on hh income, with hh ordered by

deciles, and on labour mkts Compares impact with ag ‘frozen’ and ag free Terms of trade shock (oil and copper prices) W/o agriculture (extended definition) income of first 5 deciles fall

by 7% more Labour markets play important role, as well as labour intensity of

agriculture Separate report shows importance of forward and backward

linkages in definition of what is agriculture (output mix again)

I. Dominican Republic (CGE)

Shocks: devaluation and real price of oil

Exchange rate shock (separates export & other crops): Production of sugar, rice and food processing negatively

affected Sugar and rice important for small producers But agricultural export crops increase labour demand, absorbing

expulsed by other industries

Real price of oil shock: Private consumption falls, so does production from EPZ Agrc. Value added increases and real wage falls due to input

substitution

II. Ghana (we saw)

But let me remark evidence on positive replationship between probability of unemployment and remittances

II. Ethiopia: agriculture in crisis offers no buffer

Stark conclusion: Agriculture cannot act as a buffer. Structural crisis due to demographic pressure and land policy

which have lead to small farm size Very low level of urbanization (15% population) 4-fold differential b/w urban and rural labour productivity In spite of high urban unemployment, very little return migration In fact, altruistic motivations seem to dominate in determinants

of remittances (-land size; +female headed hh; +old hh head) Little demand for return option as insurance policy

II. China: hukou and the floating population story

Under houkou, hh need to register residence Urban migrants and rural hh are largely uncovered by social

security in urban areas Access to land is social security in China Land policy complementary to migration policies in shaping

population balance Migrants remit 38% of their income Migrants are mostly male, little education, and young Decision to remit and size of remittances are explored Motivations seem largely altruistic (+ effect of job security,

migrant’s non-remittance income, assets of hh have no impact)

III. Mexico (we saw)

III. South Africa: the social role of commercial farms

ZA’s dualistic structure overlaps with 3 social sectors: traditional (25% of rural population), commercial (35%), other (40%)

Traditional provides informal safety nets, but social networks are weakening (outmigration)

Other sector is near urban areas, has access to social services but at disadvantage with respect to urban households

Commercial sector has 4.5 million people, includes owners of farms, their employees and families (at least one permanent worker)

Social security quite articulated at different levels of government In particular at local level (district, municipalities)

III. South Africa: the social role of commercial farms (cont.)

But rural areas are disadvantaged, and poorest local governemnts provided low quality services if at all

Acccess to social services is regarded as universal righht Commercial farm sector channels formal and informal

social services to families attached to it (eg. Access to schools, health, free loans…)

Labour relatioships are changing fast nowadays and becoming more casual: deregulation, liberalization, increasing vertical integration are reducing permanent workers. The commercial sectors is gradually reducing its social role

Tentative conclusion:

Agriculture acts as a buffer in many circumstances but not all

The buffer role depends on: Intensity of use of unskilled labour Flexibility of labour markets Its productive structure (output mix) Its linkages with rest of economy (labour markets)Institutional features (e.g. access to land by origin

household) shape its function as an insurance policy

Tentative conclusion (cont.)

Agriculture needs to have a minimum level of activity (per capita income) for buffer to be a meaningful concept

Engagement in agriculture improves participation to informal networks.

If crowding out is indeed small, there is space for appropriately structuring social policies in rural areas so as to exploit complementarities and maximize impact of given resources