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New thinking on drivers of growth

>> Foreign Aid in the National Interest >> >> Chapter 2

Acknowledgements Foreword Overview: Promoting Freedom, Security and Opportunity Chapter 1: Promoting Democratic Governance Chapter 2: Driving Economic Growth Chapter 3: Improving People's Health Chapter 4: Mitigating and Managing Conflict Chapter 5: Providing Humanitarian Aid Chapter 6: The Full Measure of Foreign Aid 51     Jump to Chapter 2 Sections: >> New thinking on drivers of growth >> Income inequality is declining >> More trade and investment mean faster growth >> Increasing U.S. imports through the African Growth and Opportunity Act >> A microeconomic agenda for development >> How can the U.S. support growth in developing countries >> Background papers >> References Agricultural growth is even better for poor people In recent years many economists have ignored agriculture, arguing that market forces will favor the most appropriate sectors. Moreover, agriculture plays a shrinking role as economies make the structural transformation to urban-based activities and to industry and services. But in many economies agriculture is crucial for connecting poor people to economic growth. Most of the world’s poor people live in or come from rural areas. Rising agricultural productivity offers economywide benefits, the first of which is cheaper food for urban residents. Pursuing agricultural strategies in line with market realities and institutional capabilities would provide many benefits to developing countries, including: Better access to technology. Agricultural exports often pay for imports of foreign technology,mostly machines. Increased capital formation. Income from agriculture can finance investments inside and outside the sector. Although savings may be less productive in government than private hands, public investments in infrastructure and public goods can raise the profitability of private investment in agriculture. If agriculture is more easily taxed than nonagriculture in the early stages of development, it may provide revenue for this important initial stage of public investment. Better social outcomes. Rural education levels are affected by growth in agricultural productivity and rural incomes. Such education can directly increase farm productivity. It can also make moving to cities much easier and more economically rewarding for children who leave the farm. A more supportive environment for growth. There are many reasons economies produce less than they could. Economic growth is slowed by weak institutions, ineffective economic policies, political instability, and lack of economic freedom. How changes in agricultural productivity affect these growth determinants is a matter of much speculation and little empirical evidence. Still, evidence is accumulating on two points. Unstable prices for agricultural products may slow investment. Unstable politics in the form of restless rural populations challenging political leaders if they are left behind during rapid economic growth may have the same result. To continue to be good for poor people, agricultural growth has to be sustainable. As global population and income grow, agriculture must be put on a sustainable footing. Government prices and policies are key determinants of how ecosystems are treated. They direct choices on what to consume and how to manage lands and resources. A farmer deciding what crops to plant and what chemicals to use, or whether to increase cultivated area by clearing adjacent forests, is guided by calculating commodity and pesticide prices as well as other farm costs. Similarly, economic factors drive a developer’s choice on where to locate housing or a factory or a fisherman’s decision on where to fish. The institutions of governance are also important for managing the environment. These institutions control access and enforce private property rights to land, water, and forests. They also help in managing natural assets not suited to private ownership, such as air. Where the institutions of governance are effective, the management of natural assets is also effective. But where they are weak or captured by narrow interests aquifers are depleted, forests are overexploited, and pesticide and fertilizer use is excessive. page 3

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