- Email: [email protected]
Agricultural development in the third world
Book reviews
201
noted, however, that the comparison of price elasticity of supply of rice for Thailand in Table 6.1 is misleading since the work done by Behrman and Arromdee was on area response and that b y Wong was on production response. In the part on revenue productivity (Chapter 4), the authors make some econometric estimates of tax elasticity and tax buoyancy for all five countries. Although the time periods used for each country are not the same, they are quite close. A serious criticism on this chapter lies in the different methodologies used for each country. The dummy variable technique is used for estimating the elasticity and buoyancy for Indonesia and Thailand. The constant rate structure method is employed for the Philippines and Singapore. And the proportional adjustment method is used for Malaysia. Therefore, part of the differences in the estimates is due to the different methodologies. But the authors seem oblivious to this fact as they proceed to compare the estimates among the countries (pp. !12-115) without any qualifying remarks. At the end (pp. 212-215), the authors bring up the issue of the likelihood of tax harmonization in ASEAN and admit that any form of economic cooperation is quite unlikely. Consider only moving towards a free trade area (let alone a customs union and common market). Singapore and Indonesia present two extreme poles of economic protection with the rest of ASEAN in between leaning, though, towards Indonesia. Being an extremely open economy, Singapore will not benefit from joining any free trade bloc which will confine its trading relationships to a very limited regional grouping. However, if Singapore were to leave ASEAN, the prospect for economic co-operation among the rest would not be any brighter since their economies have limited trading ties and are competitive rather than complimentary. The absence of Singapore would not result in closer economic ties but would obviously diminish the group's diplomatic and strategic role in the Asia-Pacific region. This point is very much appreciated and, perhaps, should have been mentioned at the beginning, not the end, of the book. On the whole, the authors appear to have tried their best to help us to learn about the nature and structure of indirect taxation in the ASEAN member countries. Their effort is to be commended. Rungsan Thanapornpun and Prance Tinakorn Thammasat University, Bangkok
Carl Eicher and John Staatz, eds., Agricultural Development in the Third World (Johns Hopkins University Press, Maryland, USA) pp. 491. This book is a collection of articles on agricultural development written in the 'growth-with-equity' decade (roughly 1973-1982). The editors have
202
Book reviews
attempted to select articles that 'deal with the fundamentals of agricultural development: the role of agriculture in economic growth, intersectoral linkages, mechanisms of agricultural growth, institutional reform, functioning of factor markets, choice of technique, and the generation and social impact of technical change'. The editors' ability to deliver on this ambitious objective is constrained by their attempt to make the collection accessible not only to undergraduates but to non-economists as well. Part I provides an insightful overview of the history of thought in the economics of agricultural development. Staatz and Eicher trace the predominant view of the role of agriculture from the passive provider of an agricultural surplus to a critical stimulator of structural transformation thru demand linkages and other interdependencies. This section and the separate introductions to each of the five sections of the book stand as an exemplary model of how to edit a collection of readings by providing background, overview and some amount of synthesis. Part H begins with Vernon Ruttan's review of 'models' of agricultural development, including the frontier, conservation, urban-industrial impact, and induced innovation models. None of these, with the possible exception of the induced innovation model, has ever been articulated as a well-defined model. Nonetheless, Ruttan's chapter and the following chapter by Lane Holdcraft supplement Part I quite nicely by showing the linkage between popular thinking about agricultural development and the public investment programs from community development to the international centers for agricultural research. One gets the impression from the first three chapters that both public policy and popular thinking about agricultural development have come and gone in waves of fad and fancy. For example, as community development projects fa/led the diffusion idea lost its appeal. But rather than learning from its mistakes, the academic community seems to have been too eager to cough up another panacea. The subsequent skepticism and resentment towards 'development experts' should come as no surprise. The rest of Part II represents an attempt to provide a balanced perspective between the 'neoclassical' and 'neo-Marxian' paradigms. Ruttan and Hayami give a concise version of their induced innovation approach in Chapter 4. This is followed by a critique by Beckford, who, complaining that the R-H assumptions are unrealistic, resorts to some old favorites including dualism and risk minimization. AU this is to little apparent purpose except to indiscriminately dismiss a rich explanatory framework as being superficial. De Janvry follows in the same vein, stressing the destructive nature of commercialization and free trade and employing the rhetoric of blame. ('Generalized rural poverty in rural Latin America is hence the logical outcome of a three-level chain of exploitative relations.') Schuh takes issue with De Janvry's facts and suggests the need to distinguish externally imposed
Book reoiews
203
commercialization and the distortionary effects of national government policies. There are a number of important phenomena outside the purview of neoclassical economics that call for fundamental explanations, and. radical critiques often serve to highlight some of these phenomena. But, as Schuh observes, 'witch hunts and searches for scapegoeats . . . can be counterproductive'. Part III is called 'Policy Analysis in a General Equilibrium Setting'. This is odd because only one of the chapters contains any explicit analysis and that is partial equilibrium analysis of price stabilization schemes (Behrman). But labels aside, the chapters serve to reveal a serious deficiency in current thinking about agricultural prices. Here we have some of the top names in agricultural development policy (Timmer, Mellor, Falcon, Krishna) discussing agricultural prices and no one can resolve the primary pricing problem - - should the government seek to increase or decrease food prices or should it leave them alone? On the one hand, higher prices stimulate agricultural development. On the other hand, lower food prices improve income distribution (Timmer, Mellor, Falcon) and provide both supply and demand incentives to the non-agricultural sector (Mellor). One way of out of the dilemma, apparently favored by these authors, is to promote technological change, thereby promoting both agricultural growth and lower agricultural prices. But searching for panaceas doesn't make the pricing question go away. We still are faced with the question of under what conditions the government should try to raise or lower the food price away from its market clearing level. The apparent dearth of analytical results about the optimal level of agricultural prices is not a failure of the experts per se but a symptom of the infant industry status of agricultural policy analysis. The first step in moving towards better analysis is to be clear about the objectives of agricultural policy. Krishna implicity assumes that policy distortions should deliver a high bang-per-government-buck and therefore that high agricultural price supports should be avoided due to the low price elasticities of agricultural commodities. On the other hand, if policy should be designed to minimize excess burden, then it is precisely the inelastically supplied commodities whose prices can be distorted the most. It appears that substantial progress in this area' can be made by applying Harberger's theory of commodity taxation, consumption externalities, and tax friction to agricultural products. The existing tools of Public Finance themselves need to be extended in order to accommodate some of the other concerns such as linkages with industrial development and the effect of relative price changes on aggregate savings and investment. Chapters 13, 14 and 16, towards the end of Part [II, constitute a useful introduction to the problems of food security. Siamwalla and Vald6z note that food insecurity results when income smoothing mechanisms such as
204
Book reviews
credit are inadequate to manage the fluctuations in food production and prices. Buffer stocks and policies that increase food self-sufficiency are seen to be potentially costly instruments for enhancing food security relative to diversification across trading partners, contracyclical pricing policies, and optimal portfolio management (e.g., stocking foreign exchange in anticipation of food deficits). Since 'the failure of the capital market lies at the root of the food security problem', the analytical principles of food security management are similar at the international, national and household levels. The subsequent chapter by Lele and Candler stresses the important point that rural food insecurity may be more a function of national government mismanagement (especially marketing parastatals) than fluctuations in international market prices and is, moreover, not conducive to management with international food aid. In light of the authors' statement that 'little is known or predictable about the factors that influence food production and marketing...' their call for increased investment in research, extension, input supply, produce marketing, communication and farm household storage appears to be tentative. Also curious is their final conclusion regarding the 'vital need for additional data on total crop production and distribution' without a concomitant call for economic analysis. Lacking a model of the sources of rural food insecurity, one hardly knows what data to collect or what to do with the data once it is collected. In Chapter 16, Behrman introduced the reader to the literature on price stabilization and shows that conclusions about benefits and costs of stabilization policies are sensitive to assumptions about the nature of supply shifts, price elasticities, and market structure. This word of caution is useful, and reflects the rather inconclusive state of the price stabilization literature generally, but gives short shrift to what seems to be the relevant point of departure from basic welfare economics. Private storage and competitive futures markets, or their contractual substitutes, will tend to stabilize market prices and to allow fluctuating production to supply a smooth consumption stream. Policies that inhibit private storage, such as parastatals and government price controls, will destabilize market clearing prices, and the resulting price fluctuations will hurt producers more than they help consumers. 2 In the long run, however, as producers cut back investment in response to the reduced average returns in agriculture, consumers will lose as well. Part IV, 'Agricultural Growth and the Transformation of Rural Institutions', begins with an excha~nge that treats the reader to a bit of d6j/t vu. De Janvry applies the neo-Marxian paradigm again, this time to land 2This result can be obtained by turning the analysis of Massel (1969) on its head, beginning with costless storage and then destabilizing price by banning private storage. If the demand curve is linear in the relevant range, then consumer benefits from destabilizatlon are exactly one half of producer losses. For a more thorough and considerably more general analysis, see Wright (1979).
Book reviews
205
reform, and Bromley objects to the dogmatic causal chain of de Janvry's framework. The neo-Marxian rhetoric is more unfortunate in that it detracts from de Janvry's provocative proposition about the political economy of land reform. De Janvry's implicit theoretical proposition is that if technological change is capital-using and scale-biased, then land-to-the-tiller reform that previously had negligible productivity effects will now cause higher food prices and be resisted by the urban poor. The empirical proposition is that the green revolution, and technological change in general in developing countries, fits this description. A plausible hypothesis is that the two propositions together might account for the dramatic decrease in the political support for land reform. This restatement exposes the nature of the assumptions and deduction that need to be elaborated and the empirical analysis that needs to be done in order to develop a legitimate theory of political support for land reform. De Janvry obscures this research agenda by confounding a plausible theoretical proposition with the definition of land reform: 'A reform is an institutional innovation promoted by the ruling order in an attempt to overcome economic or political contradictions without changing the dominant social relations.' The function of assumptions in economic science is tO facilitate logical propositions about cause and effect. Embedding the causal relationship in the definition forecloses the opportunity for theoretical development and empirical verification. With all the discussion of 'appropriate technology', Chapter 19, 'Choice of Technique in Rice Milling on Java' by Peter Timmer is a welcome addition to the volume. Aided by additional data provided by Collier et al., in 'A Comment' and his own clarification in 'A Reply' (all part of Chapter 19), Timmer shows how discounting and shadow pricing can be used to compare alternative technologies. The result, that the intermediate technology, small rice mills, is more socially efficient than either large-scale rice mills or hand pounding exemplifies two important general lessons. First, the technique advocated by the government (perhaps as encouraged by international donors) is usually too capital intensive. Second, the appropriate technology is not necessarily the one that is most labor intensive, even when shadow wage rates are extremely low. Timmer's conclusion is worth repeating. "Getting prices right" is not the end of economic development. But "getting prices wrong" frequently is.' '
The next subsection in Part IV concerns rural credit. Adams and Graham
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Bookrev/ews
review the evolution of thinking about rural financial markets (RFM's) and the recent history of RFM projects and policies. In the "new view', the poor performance of RFM's is held to be more a consequence of government regulations than of indigenous market structure. In particular, low interest rate policies are thought to decrease the total supply of credit and also to bias theallocation of existing credit away from agriculture, and, as Gonzales-Vega explains in Chapter 22, away from small farmers in particular. Thus it is likely that more liberal banking regulations would benefit small farmers by increasing the availability of credit, even ff it means paying higher interest rates. Rural credit subsidy programs that attempt to offset the bias against agriculture merely serve to add another layer of distortions and only benefit a narrow target group of (relatively wealthy) commercial farmers. The system persists, however, as an efficient scheme for distributing 'administrative profits' to the favored patrons of politicians and government officials. Chapters 23-27 deal with technical change. Schultz and Evenson (Chaptcrs 23 and 24) note the high rates of return to agricultural research and the substantial underinvestment in national research programs. They attribute this to attempts by national governments to free-ride on the results of international centers even though, as Schultz points out, 'even to be a free rider requires a high level of scientific competence'. Even if international centers are fairly successful in developing varieties that are 'widely adaptable', in Evenson's "terminology, national research still 'has good potential to add to the value of the transferred material through local adaptive research'. Economists who are uncomfortable with theories that implicitly assume irrationality, even by governments, may prefer the view that agricultural research is not an effective vehicle for conferring rents on political patrons. Thus the level of agricultural research may be sub-optimal, as evidenced by high marginal efficiency of investment, but politically efficient in terms of the ability of the institutional system to redistribute income in accordance with political influence. Chapter 25, by the CMMT Economics staff, is one of the better contributors to the literature on farming research (FSR). The chapter makes some progress in clarifying what FSR really is, but some confusion remains. Since one of the advertised ad~,antages of FSR is its ability to handle multiple objectives, the amorphous description of FSR's own objectives and the methodology for addressing them is unsettling. Apparent fascination with the 'holistic and interdisciplinary' approach is likely to generate research that is, in Schultz's words, %veak on theory and soft on the quality of research that gets done'. FSR evolved because the previous approach to generating farm re-
Book reviews
207
commendations failed to take proper account of diversity - - diversity across environments, diversity in shadow prices, and diversity in states of the world. While an on-farm approach (OFA) and the involvement of an economist at the early stages of inventive research are steps in the right direction, FSR tries to do too much. Being able to deliver an attractive m e n u of practices would be quite an achievement, but burdening the FSR program with the additional tasks of formulating complete recommendations, demonstrating the 'approved' practices and attempting to provide a political 'voice of the small farmer' can only serve to diffuse scarce technical resources. The CIMMYT approach is more modest, better focused, and therefore more feasible. The basic idea is to facilitate a two-way flow of information that helps researchers better tailor new technology to farmer circumstances and to help farmers recognize newly available technological components that may be integrated with existing farming systems. However, the insistence that farmers trade off 'income-increasing' against 'risk-avoiding' objectives suggests that recommendations may be ultimately based on preconceptions instead of a more fundamental analysis that allows shadow prices to differ, not only across locations and farmers but across states of the world as well. Chapters 26 and 27 focus on the effects of the green revolution on income distribution. Scobie and Posada (Chapter 26) show that despite apparent losses suffered by fewer than 12,000 upland rice farmers in Colombia, the overall effect of new rice varieties was to significantly improve income distribution primarily due to the lower food expenditures by low income consumers. Hayami (Chapter 27) responds to the familiar claim that because the green revolution is scale-biased and labor-saving, it skews income distribution away from workers and towards large commercial farmers. He shows that, at least for the studies cited, the new rice and wheat technologies were roughly scale neutral and either factor neutral or biased in the land-saving and labor-using direction. Hc rightly points out that in the face of population pressure, it would not be appropriate to attribute adverse changes in income distribution to technological change. The demand for labor may indeed be rising but the supply may be increasing even faster. Additional evidence, which has become available after Hayami wrote his review, suggests that the high yielding rice and wheat varieties were landsaving but mildly labor-saving as well. One still should not conclude that the new technology contributed to a fall in real wages,, however. The small substitution effect (capital for labor) has been swamped by a substantial expansion effect such that the overall impact on the demand for labor has been strongly positive. Because of the recent and increasing interest in China and sub-Saharan Africa, the last section of the book highlights the experiences of the People's Republic of China and Africa. Chapters 28 and 29 (by Lardy and Tang)
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Book reviews
show that China's agricultural performance has been less impressive over the past thirty years than is commonly believed. Indeed, the discrimination against and the distortions within China's agricultural sector have limited agricultural growth to less than one-half of 1 percent above the growth from 1952 to 1978. Management of the agricultural sector until the late 1970's was successful, however, in supporting a dramatic expansion of industry through the classic Marxian mechanisms of low food prices and the transfer of agricultural surplus to finance investment in industry. Since 1978, increased farm prices, rural credit, and marketing policies based on comparative advantage have stimulated dramatic production gains, especially in non-grain production. Lardy notes, however, that since the state continued to insulate urban consumers from higher farm prices, it was forced to finance massive subsidies to the farm sector. He suggests that urban consumers and industrial interests will win out in the budget crunch and indeed that the state has already begun to roll back the rationalization policies embraced in 1978 and 1979. This review of China's agricultural policies raises some important general issues that call for economic analysis. It has long been understood that free markets are not the only route to economic efficiency. One can also demonstrate that unregulated markets are a relatively inefficient institution in the face of the political importance given to low food prices and savings available for social capital. Clearly China's agricultural policies in the 1950's, 1960's, and 1970's were too restrictive. But deregulation alone is not consistent with the political objectives. If we take the constraints of (partially) controlled consumer prices and agricultural taxation as given, one candidate for efficient agricultural pricing would appear to be the two-tier scheme that has been practiced in some form in China since the early 1950's. In the two-tier scheme, peasants are constrained to deliver quotas at low state prices but are free to sell additional output in unrestricted markets. This gives the government two instruments (quotas and controlled prices) with which to achieve two targets (lower prices for targeted beneficiaries and an agricultural 'surplus') and simultaneously allows market prices to guide resource allocation at the margin) But there is no such thing as. a free lunch. The more the state increases production quotas and decreases controlled prices, the harder it will be to enforce market separation. There is an economic optimum lurking here, and I hope that some eager analyst will take the bait. The difficulty is not so much a matter of mathematical manipulation as of specifying the enforcement technology in a meaningful and tractable way. 3Lardy's emphasis on average prices (p. 424) seems inappropriate. Indeed the objectiveis to get marginal prices high while keeping average prices low.
Book reviews
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In Chapter 30, Lele argues that the rather dismal performance of economic development in Africa is due in part to the 'modernization now' approach to development which is 'taken to mean mainly industrialization and the commercialization of agriculture, largely through mechanized, largescale farming'. To Lele, Africa's problem 'is not one of not knowing in broad terms what needs to be done to support peasant agriculture' but one of reorienting attitudes of donor agencies and government officials to developing the subsistence rural sector. But knowing what to do in broad terms is not enough. The considerable knowledge that economic analysis has contributed to agricultural development strategies is primarily about structuring research, infrastructure and market signals to foster and guide the development of a largely monocrop agriculture whose farmers make largely autonomous decisions and generally produce a market surplus. In contrast, much of African agriculture is based on mixed cropping systems, use-rights are often communally determined, and farmers are often insulated from the pricing instruments controlled by the national government. Economic analysis is far from useless in such situations, but the usual models (e.g., competitive equilibrium with price distortions) are of limited relevance. Rather than retreating from analysis, however, the development profession must face the conceptual and empirical challenges head on. In the last chapter, Eicher reviews some specific debates relating to Africa's relative neglect of the agricultural sector. He shows that just as conventional neoclassical analysis and the radical dependency theories have both failed to provide useful policy guidance, socialist and capitalistic oriented governments have both failed to develop Africa's small-holder sector. Eicher makes a number of specific diagnostic comments (parastatals 'serve as a sponge for foreign aid') and suggests that foreign aid be devoted to long-term investments in food security (local production, storage and international trade), livestock, colleges of agriculture, food aid/policy reform packages, national agricultural research systems, profitable practices for farming practices, infrastructure, and local managerial skills. Again the lack of focus in this program points to the need for an appropriate conceptual framework to inform policy choices in an economy organized with both market and traditional institutions and where the governing elite specializes in extracting rents from foreign donors. In summary, I recommend the book as an introduction to the economics of agricultural development, as it has been traditionally defined from within the Agricultural Economics profession. For students who are not satisfied with the level of economic analysis contained in the book, I recommend taking a good course in the foundations of Public Finance [as they were laid down by Arnold Harberger and exposited, e.g., in Boadway and Wildasin (1984)] and then applying those analytical constructs to the issues raised by the Eicher and Staatz collection.
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References Boadway, Robin W. and David E. Wildasin, 1984, Public sector economics (Little, Brown and Company, Boston, MA). Massel, B.F., 1969, Price stabilization and welfare, Quarterly Journal of Economics 83, 285-297. Wright, B., 1979, The effocts of ideal production stabilization: A welfare analysis under rational behavior, Journal of Political Economy 87, no. 5, part I.
James Roumasset University of Maryland, College Park, M D
Sanjaya Lall, ed., The N e w Multinationals, The Spread o f Third W o r l d Enterprises ( W i l c y / I R M Series o n Multinationals, Chichestcr, 1983) pp. xvi + 268.
Though the phenomenon of overseas direct investment by enterprisesfrom Third World countries is by no means a new onc, several notablc examples can bc found in Latin America early in the present century, the current wave of such investments (starting perhaps 20 years ago) represents the first to havc occurred on a sustained basis, across quitc a range of industries and from a notably diverse selectionof source LDCs. Following from this wc arc justified in feeling that, whereas each investment early in the century could probably bc adequately attributed to some unique and idiosyncratic cause, wc can now sock a general theoretical explanation for the currcnt wave of Third World investments as a distinctivcsubset of M N E s . Indeed early comment when Third World M N E s had bccn distinguished as a genuine and persistingnew agent in the intcrnationalcconomy was that it represented a challenge to the existing theories of M N E s . By contrast the fact that relativelyearly in its life the phenomenon has proved amenable to extensive and cogent analysis (as exemplified in the book edited by Lall under review here, and also in other valuable volumes by WcUs and K u m a r and McLcod) owes much to the relevance of existing modes of thought on MNEs. The analytical framework implicit in the e~position of Lall (both in the theoretical introduction which opens his book and the chaptcr of summary and conclusions which ends it) is"thc eclectic approach as propounded by Dunning. This approach suggests that three conditions dctcrrninc the propcnsity for the firms of particular country to engage in overseas production. The firstcondition is the extent to which cnterpriscs possess, or arc able to secure access to, assets which providc them with an advantage over local firms in countries in which they may operate. Thcsc ownership-advantages (referred to as 'monopolistic' advantages by Lall) arc necessary to overcome the inherent advantages of indigenous firms in the foreign locations in which
201
noted, however, that the comparison of price elasticity of supply of rice for Thailand in Table 6.1 is misleading since the work done by Behrman and Arromdee was on area response and that b y Wong was on production response. In the part on revenue productivity (Chapter 4), the authors make some econometric estimates of tax elasticity and tax buoyancy for all five countries. Although the time periods used for each country are not the same, they are quite close. A serious criticism on this chapter lies in the different methodologies used for each country. The dummy variable technique is used for estimating the elasticity and buoyancy for Indonesia and Thailand. The constant rate structure method is employed for the Philippines and Singapore. And the proportional adjustment method is used for Malaysia. Therefore, part of the differences in the estimates is due to the different methodologies. But the authors seem oblivious to this fact as they proceed to compare the estimates among the countries (pp. !12-115) without any qualifying remarks. At the end (pp. 212-215), the authors bring up the issue of the likelihood of tax harmonization in ASEAN and admit that any form of economic cooperation is quite unlikely. Consider only moving towards a free trade area (let alone a customs union and common market). Singapore and Indonesia present two extreme poles of economic protection with the rest of ASEAN in between leaning, though, towards Indonesia. Being an extremely open economy, Singapore will not benefit from joining any free trade bloc which will confine its trading relationships to a very limited regional grouping. However, if Singapore were to leave ASEAN, the prospect for economic co-operation among the rest would not be any brighter since their economies have limited trading ties and are competitive rather than complimentary. The absence of Singapore would not result in closer economic ties but would obviously diminish the group's diplomatic and strategic role in the Asia-Pacific region. This point is very much appreciated and, perhaps, should have been mentioned at the beginning, not the end, of the book. On the whole, the authors appear to have tried their best to help us to learn about the nature and structure of indirect taxation in the ASEAN member countries. Their effort is to be commended. Rungsan Thanapornpun and Prance Tinakorn Thammasat University, Bangkok
Carl Eicher and John Staatz, eds., Agricultural Development in the Third World (Johns Hopkins University Press, Maryland, USA) pp. 491. This book is a collection of articles on agricultural development written in the 'growth-with-equity' decade (roughly 1973-1982). The editors have
202
Book reviews
attempted to select articles that 'deal with the fundamentals of agricultural development: the role of agriculture in economic growth, intersectoral linkages, mechanisms of agricultural growth, institutional reform, functioning of factor markets, choice of technique, and the generation and social impact of technical change'. The editors' ability to deliver on this ambitious objective is constrained by their attempt to make the collection accessible not only to undergraduates but to non-economists as well. Part I provides an insightful overview of the history of thought in the economics of agricultural development. Staatz and Eicher trace the predominant view of the role of agriculture from the passive provider of an agricultural surplus to a critical stimulator of structural transformation thru demand linkages and other interdependencies. This section and the separate introductions to each of the five sections of the book stand as an exemplary model of how to edit a collection of readings by providing background, overview and some amount of synthesis. Part H begins with Vernon Ruttan's review of 'models' of agricultural development, including the frontier, conservation, urban-industrial impact, and induced innovation models. None of these, with the possible exception of the induced innovation model, has ever been articulated as a well-defined model. Nonetheless, Ruttan's chapter and the following chapter by Lane Holdcraft supplement Part I quite nicely by showing the linkage between popular thinking about agricultural development and the public investment programs from community development to the international centers for agricultural research. One gets the impression from the first three chapters that both public policy and popular thinking about agricultural development have come and gone in waves of fad and fancy. For example, as community development projects fa/led the diffusion idea lost its appeal. But rather than learning from its mistakes, the academic community seems to have been too eager to cough up another panacea. The subsequent skepticism and resentment towards 'development experts' should come as no surprise. The rest of Part II represents an attempt to provide a balanced perspective between the 'neoclassical' and 'neo-Marxian' paradigms. Ruttan and Hayami give a concise version of their induced innovation approach in Chapter 4. This is followed by a critique by Beckford, who, complaining that the R-H assumptions are unrealistic, resorts to some old favorites including dualism and risk minimization. AU this is to little apparent purpose except to indiscriminately dismiss a rich explanatory framework as being superficial. De Janvry follows in the same vein, stressing the destructive nature of commercialization and free trade and employing the rhetoric of blame. ('Generalized rural poverty in rural Latin America is hence the logical outcome of a three-level chain of exploitative relations.') Schuh takes issue with De Janvry's facts and suggests the need to distinguish externally imposed
Book reoiews
203
commercialization and the distortionary effects of national government policies. There are a number of important phenomena outside the purview of neoclassical economics that call for fundamental explanations, and. radical critiques often serve to highlight some of these phenomena. But, as Schuh observes, 'witch hunts and searches for scapegoeats . . . can be counterproductive'. Part III is called 'Policy Analysis in a General Equilibrium Setting'. This is odd because only one of the chapters contains any explicit analysis and that is partial equilibrium analysis of price stabilization schemes (Behrman). But labels aside, the chapters serve to reveal a serious deficiency in current thinking about agricultural prices. Here we have some of the top names in agricultural development policy (Timmer, Mellor, Falcon, Krishna) discussing agricultural prices and no one can resolve the primary pricing problem - - should the government seek to increase or decrease food prices or should it leave them alone? On the one hand, higher prices stimulate agricultural development. On the other hand, lower food prices improve income distribution (Timmer, Mellor, Falcon) and provide both supply and demand incentives to the non-agricultural sector (Mellor). One way of out of the dilemma, apparently favored by these authors, is to promote technological change, thereby promoting both agricultural growth and lower agricultural prices. But searching for panaceas doesn't make the pricing question go away. We still are faced with the question of under what conditions the government should try to raise or lower the food price away from its market clearing level. The apparent dearth of analytical results about the optimal level of agricultural prices is not a failure of the experts per se but a symptom of the infant industry status of agricultural policy analysis. The first step in moving towards better analysis is to be clear about the objectives of agricultural policy. Krishna implicity assumes that policy distortions should deliver a high bang-per-government-buck and therefore that high agricultural price supports should be avoided due to the low price elasticities of agricultural commodities. On the other hand, if policy should be designed to minimize excess burden, then it is precisely the inelastically supplied commodities whose prices can be distorted the most. It appears that substantial progress in this area' can be made by applying Harberger's theory of commodity taxation, consumption externalities, and tax friction to agricultural products. The existing tools of Public Finance themselves need to be extended in order to accommodate some of the other concerns such as linkages with industrial development and the effect of relative price changes on aggregate savings and investment. Chapters 13, 14 and 16, towards the end of Part [II, constitute a useful introduction to the problems of food security. Siamwalla and Vald6z note that food insecurity results when income smoothing mechanisms such as
204
Book reviews
credit are inadequate to manage the fluctuations in food production and prices. Buffer stocks and policies that increase food self-sufficiency are seen to be potentially costly instruments for enhancing food security relative to diversification across trading partners, contracyclical pricing policies, and optimal portfolio management (e.g., stocking foreign exchange in anticipation of food deficits). Since 'the failure of the capital market lies at the root of the food security problem', the analytical principles of food security management are similar at the international, national and household levels. The subsequent chapter by Lele and Candler stresses the important point that rural food insecurity may be more a function of national government mismanagement (especially marketing parastatals) than fluctuations in international market prices and is, moreover, not conducive to management with international food aid. In light of the authors' statement that 'little is known or predictable about the factors that influence food production and marketing...' their call for increased investment in research, extension, input supply, produce marketing, communication and farm household storage appears to be tentative. Also curious is their final conclusion regarding the 'vital need for additional data on total crop production and distribution' without a concomitant call for economic analysis. Lacking a model of the sources of rural food insecurity, one hardly knows what data to collect or what to do with the data once it is collected. In Chapter 16, Behrman introduced the reader to the literature on price stabilization and shows that conclusions about benefits and costs of stabilization policies are sensitive to assumptions about the nature of supply shifts, price elasticities, and market structure. This word of caution is useful, and reflects the rather inconclusive state of the price stabilization literature generally, but gives short shrift to what seems to be the relevant point of departure from basic welfare economics. Private storage and competitive futures markets, or their contractual substitutes, will tend to stabilize market prices and to allow fluctuating production to supply a smooth consumption stream. Policies that inhibit private storage, such as parastatals and government price controls, will destabilize market clearing prices, and the resulting price fluctuations will hurt producers more than they help consumers. 2 In the long run, however, as producers cut back investment in response to the reduced average returns in agriculture, consumers will lose as well. Part IV, 'Agricultural Growth and the Transformation of Rural Institutions', begins with an excha~nge that treats the reader to a bit of d6j/t vu. De Janvry applies the neo-Marxian paradigm again, this time to land 2This result can be obtained by turning the analysis of Massel (1969) on its head, beginning with costless storage and then destabilizing price by banning private storage. If the demand curve is linear in the relevant range, then consumer benefits from destabilizatlon are exactly one half of producer losses. For a more thorough and considerably more general analysis, see Wright (1979).
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reform, and Bromley objects to the dogmatic causal chain of de Janvry's framework. The neo-Marxian rhetoric is more unfortunate in that it detracts from de Janvry's provocative proposition about the political economy of land reform. De Janvry's implicit theoretical proposition is that if technological change is capital-using and scale-biased, then land-to-the-tiller reform that previously had negligible productivity effects will now cause higher food prices and be resisted by the urban poor. The empirical proposition is that the green revolution, and technological change in general in developing countries, fits this description. A plausible hypothesis is that the two propositions together might account for the dramatic decrease in the political support for land reform. This restatement exposes the nature of the assumptions and deduction that need to be elaborated and the empirical analysis that needs to be done in order to develop a legitimate theory of political support for land reform. De Janvry obscures this research agenda by confounding a plausible theoretical proposition with the definition of land reform: 'A reform is an institutional innovation promoted by the ruling order in an attempt to overcome economic or political contradictions without changing the dominant social relations.' The function of assumptions in economic science is tO facilitate logical propositions about cause and effect. Embedding the causal relationship in the definition forecloses the opportunity for theoretical development and empirical verification. With all the discussion of 'appropriate technology', Chapter 19, 'Choice of Technique in Rice Milling on Java' by Peter Timmer is a welcome addition to the volume. Aided by additional data provided by Collier et al., in 'A Comment' and his own clarification in 'A Reply' (all part of Chapter 19), Timmer shows how discounting and shadow pricing can be used to compare alternative technologies. The result, that the intermediate technology, small rice mills, is more socially efficient than either large-scale rice mills or hand pounding exemplifies two important general lessons. First, the technique advocated by the government (perhaps as encouraged by international donors) is usually too capital intensive. Second, the appropriate technology is not necessarily the one that is most labor intensive, even when shadow wage rates are extremely low. Timmer's conclusion is worth repeating. "Getting prices right" is not the end of economic development. But "getting prices wrong" frequently is.' '
The next subsection in Part IV concerns rural credit. Adams and Graham
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review the evolution of thinking about rural financial markets (RFM's) and the recent history of RFM projects and policies. In the "new view', the poor performance of RFM's is held to be more a consequence of government regulations than of indigenous market structure. In particular, low interest rate policies are thought to decrease the total supply of credit and also to bias theallocation of existing credit away from agriculture, and, as Gonzales-Vega explains in Chapter 22, away from small farmers in particular. Thus it is likely that more liberal banking regulations would benefit small farmers by increasing the availability of credit, even ff it means paying higher interest rates. Rural credit subsidy programs that attempt to offset the bias against agriculture merely serve to add another layer of distortions and only benefit a narrow target group of (relatively wealthy) commercial farmers. The system persists, however, as an efficient scheme for distributing 'administrative profits' to the favored patrons of politicians and government officials. Chapters 23-27 deal with technical change. Schultz and Evenson (Chaptcrs 23 and 24) note the high rates of return to agricultural research and the substantial underinvestment in national research programs. They attribute this to attempts by national governments to free-ride on the results of international centers even though, as Schultz points out, 'even to be a free rider requires a high level of scientific competence'. Even if international centers are fairly successful in developing varieties that are 'widely adaptable', in Evenson's "terminology, national research still 'has good potential to add to the value of the transferred material through local adaptive research'. Economists who are uncomfortable with theories that implicitly assume irrationality, even by governments, may prefer the view that agricultural research is not an effective vehicle for conferring rents on political patrons. Thus the level of agricultural research may be sub-optimal, as evidenced by high marginal efficiency of investment, but politically efficient in terms of the ability of the institutional system to redistribute income in accordance with political influence. Chapter 25, by the CMMT Economics staff, is one of the better contributors to the literature on farming research (FSR). The chapter makes some progress in clarifying what FSR really is, but some confusion remains. Since one of the advertised ad~,antages of FSR is its ability to handle multiple objectives, the amorphous description of FSR's own objectives and the methodology for addressing them is unsettling. Apparent fascination with the 'holistic and interdisciplinary' approach is likely to generate research that is, in Schultz's words, %veak on theory and soft on the quality of research that gets done'. FSR evolved because the previous approach to generating farm re-
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commendations failed to take proper account of diversity - - diversity across environments, diversity in shadow prices, and diversity in states of the world. While an on-farm approach (OFA) and the involvement of an economist at the early stages of inventive research are steps in the right direction, FSR tries to do too much. Being able to deliver an attractive m e n u of practices would be quite an achievement, but burdening the FSR program with the additional tasks of formulating complete recommendations, demonstrating the 'approved' practices and attempting to provide a political 'voice of the small farmer' can only serve to diffuse scarce technical resources. The CIMMYT approach is more modest, better focused, and therefore more feasible. The basic idea is to facilitate a two-way flow of information that helps researchers better tailor new technology to farmer circumstances and to help farmers recognize newly available technological components that may be integrated with existing farming systems. However, the insistence that farmers trade off 'income-increasing' against 'risk-avoiding' objectives suggests that recommendations may be ultimately based on preconceptions instead of a more fundamental analysis that allows shadow prices to differ, not only across locations and farmers but across states of the world as well. Chapters 26 and 27 focus on the effects of the green revolution on income distribution. Scobie and Posada (Chapter 26) show that despite apparent losses suffered by fewer than 12,000 upland rice farmers in Colombia, the overall effect of new rice varieties was to significantly improve income distribution primarily due to the lower food expenditures by low income consumers. Hayami (Chapter 27) responds to the familiar claim that because the green revolution is scale-biased and labor-saving, it skews income distribution away from workers and towards large commercial farmers. He shows that, at least for the studies cited, the new rice and wheat technologies were roughly scale neutral and either factor neutral or biased in the land-saving and labor-using direction. Hc rightly points out that in the face of population pressure, it would not be appropriate to attribute adverse changes in income distribution to technological change. The demand for labor may indeed be rising but the supply may be increasing even faster. Additional evidence, which has become available after Hayami wrote his review, suggests that the high yielding rice and wheat varieties were landsaving but mildly labor-saving as well. One still should not conclude that the new technology contributed to a fall in real wages,, however. The small substitution effect (capital for labor) has been swamped by a substantial expansion effect such that the overall impact on the demand for labor has been strongly positive. Because of the recent and increasing interest in China and sub-Saharan Africa, the last section of the book highlights the experiences of the People's Republic of China and Africa. Chapters 28 and 29 (by Lardy and Tang)
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show that China's agricultural performance has been less impressive over the past thirty years than is commonly believed. Indeed, the discrimination against and the distortions within China's agricultural sector have limited agricultural growth to less than one-half of 1 percent above the growth from 1952 to 1978. Management of the agricultural sector until the late 1970's was successful, however, in supporting a dramatic expansion of industry through the classic Marxian mechanisms of low food prices and the transfer of agricultural surplus to finance investment in industry. Since 1978, increased farm prices, rural credit, and marketing policies based on comparative advantage have stimulated dramatic production gains, especially in non-grain production. Lardy notes, however, that since the state continued to insulate urban consumers from higher farm prices, it was forced to finance massive subsidies to the farm sector. He suggests that urban consumers and industrial interests will win out in the budget crunch and indeed that the state has already begun to roll back the rationalization policies embraced in 1978 and 1979. This review of China's agricultural policies raises some important general issues that call for economic analysis. It has long been understood that free markets are not the only route to economic efficiency. One can also demonstrate that unregulated markets are a relatively inefficient institution in the face of the political importance given to low food prices and savings available for social capital. Clearly China's agricultural policies in the 1950's, 1960's, and 1970's were too restrictive. But deregulation alone is not consistent with the political objectives. If we take the constraints of (partially) controlled consumer prices and agricultural taxation as given, one candidate for efficient agricultural pricing would appear to be the two-tier scheme that has been practiced in some form in China since the early 1950's. In the two-tier scheme, peasants are constrained to deliver quotas at low state prices but are free to sell additional output in unrestricted markets. This gives the government two instruments (quotas and controlled prices) with which to achieve two targets (lower prices for targeted beneficiaries and an agricultural 'surplus') and simultaneously allows market prices to guide resource allocation at the margin) But there is no such thing as. a free lunch. The more the state increases production quotas and decreases controlled prices, the harder it will be to enforce market separation. There is an economic optimum lurking here, and I hope that some eager analyst will take the bait. The difficulty is not so much a matter of mathematical manipulation as of specifying the enforcement technology in a meaningful and tractable way. 3Lardy's emphasis on average prices (p. 424) seems inappropriate. Indeed the objectiveis to get marginal prices high while keeping average prices low.
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In Chapter 30, Lele argues that the rather dismal performance of economic development in Africa is due in part to the 'modernization now' approach to development which is 'taken to mean mainly industrialization and the commercialization of agriculture, largely through mechanized, largescale farming'. To Lele, Africa's problem 'is not one of not knowing in broad terms what needs to be done to support peasant agriculture' but one of reorienting attitudes of donor agencies and government officials to developing the subsistence rural sector. But knowing what to do in broad terms is not enough. The considerable knowledge that economic analysis has contributed to agricultural development strategies is primarily about structuring research, infrastructure and market signals to foster and guide the development of a largely monocrop agriculture whose farmers make largely autonomous decisions and generally produce a market surplus. In contrast, much of African agriculture is based on mixed cropping systems, use-rights are often communally determined, and farmers are often insulated from the pricing instruments controlled by the national government. Economic analysis is far from useless in such situations, but the usual models (e.g., competitive equilibrium with price distortions) are of limited relevance. Rather than retreating from analysis, however, the development profession must face the conceptual and empirical challenges head on. In the last chapter, Eicher reviews some specific debates relating to Africa's relative neglect of the agricultural sector. He shows that just as conventional neoclassical analysis and the radical dependency theories have both failed to provide useful policy guidance, socialist and capitalistic oriented governments have both failed to develop Africa's small-holder sector. Eicher makes a number of specific diagnostic comments (parastatals 'serve as a sponge for foreign aid') and suggests that foreign aid be devoted to long-term investments in food security (local production, storage and international trade), livestock, colleges of agriculture, food aid/policy reform packages, national agricultural research systems, profitable practices for farming practices, infrastructure, and local managerial skills. Again the lack of focus in this program points to the need for an appropriate conceptual framework to inform policy choices in an economy organized with both market and traditional institutions and where the governing elite specializes in extracting rents from foreign donors. In summary, I recommend the book as an introduction to the economics of agricultural development, as it has been traditionally defined from within the Agricultural Economics profession. For students who are not satisfied with the level of economic analysis contained in the book, I recommend taking a good course in the foundations of Public Finance [as they were laid down by Arnold Harberger and exposited, e.g., in Boadway and Wildasin (1984)] and then applying those analytical constructs to the issues raised by the Eicher and Staatz collection.
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References Boadway, Robin W. and David E. Wildasin, 1984, Public sector economics (Little, Brown and Company, Boston, MA). Massel, B.F., 1969, Price stabilization and welfare, Quarterly Journal of Economics 83, 285-297. Wright, B., 1979, The effocts of ideal production stabilization: A welfare analysis under rational behavior, Journal of Political Economy 87, no. 5, part I.
James Roumasset University of Maryland, College Park, M D
Sanjaya Lall, ed., The N e w Multinationals, The Spread o f Third W o r l d Enterprises ( W i l c y / I R M Series o n Multinationals, Chichestcr, 1983) pp. xvi + 268.
Though the phenomenon of overseas direct investment by enterprisesfrom Third World countries is by no means a new onc, several notablc examples can bc found in Latin America early in the present century, the current wave of such investments (starting perhaps 20 years ago) represents the first to havc occurred on a sustained basis, across quitc a range of industries and from a notably diverse selectionof source LDCs. Following from this wc arc justified in feeling that, whereas each investment early in the century could probably bc adequately attributed to some unique and idiosyncratic cause, wc can now sock a general theoretical explanation for the currcnt wave of Third World investments as a distinctivcsubset of M N E s . Indeed early comment when Third World M N E s had bccn distinguished as a genuine and persistingnew agent in the intcrnationalcconomy was that it represented a challenge to the existing theories of M N E s . By contrast the fact that relativelyearly in its life the phenomenon has proved amenable to extensive and cogent analysis (as exemplified in the book edited by Lall under review here, and also in other valuable volumes by WcUs and K u m a r and McLcod) owes much to the relevance of existing modes of thought on MNEs. The analytical framework implicit in the e~position of Lall (both in the theoretical introduction which opens his book and the chaptcr of summary and conclusions which ends it) is"thc eclectic approach as propounded by Dunning. This approach suggests that three conditions dctcrrninc the propcnsity for the firms of particular country to engage in overseas production. The firstcondition is the extent to which cnterpriscs possess, or arc able to secure access to, assets which providc them with an advantage over local firms in countries in which they may operate. Thcsc ownership-advantages (referred to as 'monopolistic' advantages by Lall) arc necessary to overcome the inherent advantages of indigenous firms in the foreign locations in which