Adequate funding in agriculture could bring significant changes

09May 2017
Muharram Macatta
The Guardian
Adequate funding in agriculture could bring significant changes

Financial institution’s role in agricultural development involves ways and means by which a farmer obtains the entire necessary fund required in order to carry out agricultural production.

And it also deals with the supply of demand for funds in agricultural sector of the economy.
Where a farmer has a sufficient capital of his own to carry out farm production he can then obtain credit from the best available sources.

Agricultural finance is playing significant role in the development of the agricultural sector because adequate finance is required by farmers to establish economic size farms or large scale farms, and to expand existing farms.

Adequate finance also brings significant changes in the structure of agriculture to comply with ‘Kilimo Kwanza’ policy. This is because finance enables the acquisition of machinery and farm equipment to substitute labour use and the purchase of other farm inputs. The use of finance in farming leads to rapid increase in farm land value which necessitates the farmers to look outward for funds.

Agricultural finance from co-operative societies is very important in communities where credit institutions such as commercial banks are lacking; farmers who belong to a cooperative society can often get inputs against liens over produce for sale through the societies. Credit is normally limited to goods and services, but cash loans are sometimes made.

However, agriculture is very important in most developing countries. The purpose of agricultural or land banks is to help in the development of agriculture with the supply of credit. It requires providing short and long term loans to farmers to carry their relevant activities efficiently and satisfactorily.

Industrialization is often essential for economic growth, and for long-run poverty reduction. The pattern of industrialization, however, impacts remarkably on how the poor benefit from growth.

Pro-poor economic and industrial policies focus on increasing the economic returns to the productive factors that the poor possess, e.g. raising returns to unskilled labour, whereas policies promoting higher returns to capital and land tend to increase inequality, unless they also include changes in existing patterns of concentration of physical and human capital and of land ownership.

Use of capital-intensive methods instead of labour-intensive ones tends to increase income disparities, as does the employment of skill-based technologies, especially where the level of education is low and human capital concentrated.

Also, the location of industrial facilities has an impact on overall poverty reduction and inequality. As enterprises are often concentrated in urban areas--because of ready access to skilled labour force, better infrastructure, larger markets and technological spillovers, industrialization may increase inequality between urban and rural areas.

Promoting development of rural non-agricultural activities, like production in small and medium-sized enterprises (SMEs), may decrease this disparity.

The degree of economic openness of a country can have an important influence on its pattern of specialization and industrialization.

If countries are open to trade they should specialize in the production of commodities in which they have a comparative advantage.

In labour-abundant countries, trade liberalization would tend to shift production from capital-intensive import substitutes towards labour intensive exportable commodities.

Due to this change, domestic inequality in those countries is expected to decline because of the increased demand for labour, whereas inequality would increase in countries with an abundant endowment of capital.

Liberalization of foreign direct investment can also decrease inequality in capital-importing countries, but that depends in part on the degree of skill-bias of technologies employed by foreign invested firms.

In several countries, trade and investment liberalization has, indeed, decreased absolute poverty and sometimes also inequality. For example, analyzing the determinants of inequality in some developing countries and conclude that the phased removal of trade protection in manufacturing reduces the income of the richest “20 per cent of the population and increases the income of the poorest 60 per cent.”

We have examined impacts of increased trade on growth and inequality, found changes in growth rates to be highly correlated with changes in trade volumes.

No systematic relationship between changes in trade volumes and changes in household income inequality was found, and we have to conclude that on average greater globalization is a force for poverty reduction.

Still, the impact of trade liberalization is likely to vary between countries, depending for instance on factor endowments, and liberalization creates both winners and losers.

Similarly to international trade, the impact of foreign direct investments on income inequality is likely to vary between countries. Any foreign direct investment (FDI)-inequality relation depends e.g. on the sectoral composition of FDI, its impact on demand for unskilled workers, the skill bias of technical change induced through FDI, and the regional distribution of FDI.
However, the governments still have a primary role in promoting sustainable economic growth and especially poverty-reducing growth.

In addition to ensuring political stability, well-functioning institutions and appropriate legislation (e.g. labour laws), other essential government actions are related to skills formation, technology support, innovation financing, infrastructure development, and provision of a variety of public goods.

All these have an impact on the growth and trade performance of a country. Rapid economic growth as such tends to decrease poverty. Rapid growth may increase income inequality, but this is not inevitable.

Whether or not it does, depends not only on the skill bias of technical change in an economy but on human capital formation measures and on the nature of taxation revenue and expenditure policies.

In addition to promotion of job creating industries and Small or Medium Enterprises and supporting the creation of domestic linkages, inequality can be decreased e.g. by subsidized access to education, subsidized housing, progressive taxation or economic asset redistribution like land reforms.

It is important to become aware of, however, that technological change is not only relevant to manufacturing, but similarly has significant impacts in other sectors of the economy.

A good example of this is increased productivity in agriculture, which has been essential for accelerated economic growth in many developing countries.

Job creation has shifted towards the private services sector, in both highly remunerated activities (financial services, telecommunications, etc.) and activities with low barriers to entry, such as informal commerce and personal services.

Top Stories