Agricultural Productivity, Regional Inequality

and Development Strategies in Latin America and sub-Saharan Africa

James Thurlow, Sam Morley, Alejandro Nin-Pratt and Paul DoroshInternational Food Policy Research Institute

Presentation based on: Thurlow, James, Sam Morley and Alejandro Nin-Pratt, “Lagging Regions and Development Strategies: The Case of Peru” and Dorosh, Paul and James Thurlow (2009), “Agglomeration, Migration and Regional Growth: A CGE Analysis for Uganda”.

Brasilia Conference – June 2010

Agricultural Productivity, Regional Inequality and Development Strategies in Latin America and SSA• In many countries in Latin America and sub-Saharan

Africa, regional inequalities are increasing.– Successful, rapidly growing city economies can increase rural-

urban inequality– Agricultural productivity increases are often concentrated in

ecologically or geographically favored areas (close to major cities or ports)

– Many of the poor may not benefit from national income growth or agricultural productivity growth outside their region

• Given positive agglomeration productivity effects and possibilities of factor mobility (labor migration), what is the role of increasing agricultural productivity in reducing rural poverty?

Plan of Presentation

• Agricultural productivity trends in LA and SSA• Productivity Growth and Regional Inequality in Peru

– Peru’s current growth divergence– Multi-region general equilibrium model– Implications of interventions: reducing transport costs,

expanding social transfers and increasing agricultural productivity

• Reducing regional inequality in Uganda– Uganda’s north/south and rural/urban divides– Implications of interventions: reducing transport costs, urban

investments; increasing agricultural productivity

• Concluding observations

Maize Yields in Latin America and SSA (1970-2008)

Maize annual yield growth (1970-2008): LA (2.7%), SSA (0.7%)Source: Calculated from FAO data.

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1970

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Brazil Latin America Uganda Sub Saharn Africa

Recent growth and poverty in PeruEconomic growth has accelerated rapidly (>5% p.a.)

National poverty has fallen in urban and rural areas

BUT remains virtually unchanged in the Sierra

(so the region’s share of extreme poverty has risen)

Regional inequality and economic development

• Peru has a serious lagging region problem– Sierra/Selva are home to half the population and most of the poor– The regions have weak links to mining and the more dynamic coastal economy

• ‘Theory’ says regional inequality rises and then falls during the development process (i.e., spatial Kuznets curve)– But there is no evidence of regional convergence taking place in Peru

• Four dynamic linkages underpin the hypothesis:1. Regional trade2. Capital movement in response to profit differentials3. Labor migration in response to wage differentials4. Central government policies

• We have measured and modeled the four regional linkages, and assessed alternative growth options

Interventions to reduce regional inequality in PeruThree options

1. Extending social transfers to poor rural households• Provide US$30 per month to all poor rural households in both regions• Increase taxes on urban households to pay for transfers

2. Reducing transaction costs between regions• Building and improving road and marketing networks between the

coastal and inland regions• Increase TFP growth in the regional trade sector in both regions• Increase government spending by the same amount as the social

spending scenario (TFP-to-spending elasticity = 0.1)

3. Increasing productivity in the inland region• Providing extension services, credit, infrastructure, etc• Increase TFP growth in agriculture, manufacturing and local trade• Increase government spending (TFP-to-spending elasticity = 0.1)

Research Findings – Peru Base Simulation

• There are linkages connecting coastal and inland economies (trade, migration, government, etc)

• But these linkages may worsen regional inequality (i.e., coastal growth is at the expense of inland growth)

• Inland welfare s rises as coastal goods become cheaper, but by far less than in the coastal region

• Inland region becomes more dependent on coastal region

• So Peru cannot rely on national growth to ‘trickle-down’ to the inland region

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Total GDP

Rural incomes

Urban incomes

Total GDP

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Change in average GDP growth rate (%)

Coastal region Inland region National

Peru: Interventions to reduce regional inequalityComparison

Transaction costs:

Strong growth-effect at the national level

Weak inland supply response means import competition outweighs export opportunities

Regional inequality worsens

Social transfers:

Regional and rural-urban inequality declines

Slows down national growth rate

Taxes and slower growth reduce urban incomes

Inland productivity:

Positive growth effect at national level and in the Sierra , but weak regional spillover effects reduces coastal GDP.

Increases the national growth rate while reducing regional inequality.

Research Findings – Peru Policy Scenarios

• Social transfers reduces regional and rural/urban inequality, but little ‘growth-effect’

• Reducing transaction costs raises growth but causes the inland to specialize in agriculture because of increased import competition from coast) – makes regional inequality worse (a ‘double-edged sword’)

• Increasing inland productivity raises growth and improves regional equality and rural incomes

• Combining interventions may be optimal (e.g. reducing transaction costs while also raising inland productivity)

Uganda: On track to halve poverty by 2015

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Uganda has performed well since the 1990s:Fast broad-based growth (esp. over recent years)

National poverty rate has fallen (but slower declines in recent years)

Source: WDI, 2007

Despite high population growth, GDP per capita has risen (US$310 in 2005)

55.7 52.2 50.1 48.544.0

33.8 37.731.1

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GDP pc growthPopulation growthPoverty rate

Uganda’s north-south divide

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1992/93 2005/06

National 55.7 31.1

Rural 59.7 34.3

Urban 27.8 13.8

North 72.2 60.8

South 51.7 23.8

Rural and urban poverty rates have fallen, BUT northern poverty remains high and virtually unchanged

Northern regionPopulation share: 19.7%GDP share: 11%Poverty rate: 60.8%Share of poor: 38.5%

Poverty headcount (%)

Poverty is geographically concentrated:

Southern regionPopulation share: 80.3%GDP share: 89%Poverty rate: 23.8%Share of poor: 61.5%

Three strategies to address north/south divide

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1.Kampala growth strategyFocus investments to encourage faster growth and agglomeration in capital city and attract northern migrants

2.Corridor growth strategyInvest in a north-south transport corridor and encourage faster growth in northern major urban centers

3.Rural agriculture strategyRaise investments in agricultural productivity in both northern and southern rural areas

Kampala statsPopulation: 1.7m (6.1% of 27m)GDP growth: 10% p.a.Nat. manuf. share: 60%

Gulu and Lira statsPopulation: 0.2m (0.7%)GDP growth: 4% p.a.Nat. manuf. share: 0.8%

Uganda: Simulation Results

Kampala growth strategy• Raising Kampala’s growth does not generate enough economywide

growth linkages to greatly improve livelihoods in rural areas and other urban centers. – Agglomeration effects are positive but small– Kampala-based growth does not create enough new jobs for rural-urban

migration to have a discernable impact on national poverty over the coming decade.

– As a result, the north-south divide widens.

• THUS, even accounting for regional growth linkages, agglomeration effects, and migration opportunities, the northern region remains largely isolated from national growth process

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Uganda: Simulation Results (2)

Northern corridor scenario• Improving the corridor linking northern Uganda to Kampala greatly

benefits northern urban households, with some spillover to neighboring rural areas

• BUT, corridor has modest impact on national growth and poverty because of the small size of the northern urban centers (i.e., <1% of Uganda’s population) – Low productivity of northern agricultural producers also limits supply

response despite better market opportunities

• Thus, economy-wide positive effects of improving north-south trade linkages are still heavily constrained

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Uganda: Simulation Results (3)

Agricultural productivity scenario• Raising agricultural productivity is positive for rural growth and

poverty• Agricultural growth also:

– Stimulates urban areas (i.e., higher demand for urban products; lower food prices; increased rural-urban migration)

– Causes significant broad-based welfare improvements (esp. for urban poor and rural households in the north)

• Moreover, since north crop yields are far below their potentials, the modest yield gains simulated here (15% increase over 10 years as compared to the 40% CAADP target yield increase) appear to be feasible.

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Uganda model results from the three growth strategiesComparing growth and poverty outcomes (1)

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• “Kampala” and “Agriculture” scenarios are equally effective at generating total GDP growth

• But, agriculture scenario is more effective at reducing national, rural, and north rural poverty (agriculture scenario has a higher poverty-growth elasticity)

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North rural poverty rate

Rural poverty rate

National poverty rate

Annual total GDP growth rate

Change from Baseline

Kampalascenario

Corridor scenario

Agriculture scenario

Uganda: Summary

• Raising agricultural productivity should be a major component of any strategy aimed at substantially reducing poverty and regional inequality in Uganda

• Nonetheless, because of demand constraints (esp. for food crops), it is essential to improve both productivity and market opportunities for rural producers

• Growth in urban centers and the non-agricultural sector is a necessary complement to an agriculture-led growth strategy in Uganda

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Concluding Observations

• Even in rapidly growing economies, income gaps between regions can widen.

– In both Peru and Uganda, rapid growth in major urban centers and coastal (Peru) regions outpaced growth in other regions.

• Model simulations show that increasing agricultural productivity can be an effective way of boosting rural incomes.

– In both countries, simulations suggest agricultural productivity growth slows rural-urban migration and reduces rural poverty much faster than growth in cities and coastal (Peru) alone.

– The best poverty reduction and growth outcomes result from investments in both productivity and lowering transactions costs.

• Ongoing work on Ethiopia explores these issues further, placing a greater emphasis on the costs of alternative strategies.