This study considers the agricultural policy choices faced by developing countries, focusing on how government policies can raise rural incomes and thereby accelerate progress on poverty reduction and the attainment of food security.

This study addresses the role of agricultural policies in raising incomes in developing countries. Higher incomes are essential for sustained progress on the first Millennium Development Goal (MDG1), which calls for the eradication of extreme poverty and hunger, and includes a specific target of reducing by 50% between 1990 and 2015 the proportion of people living on less than a dollar a day. The aim is to identify ways in which the appropriate set of policies may vary according to a country’s stage of development.

This project is concerned with the role that agricultural policies can play in raising incomes in developing countries, recognising that higher incomes are a pre-requisite for sustained poverty reduction and improved food security. A subsidiary question is whether the pursuit of higher incomes implies a role for agricultural policy which differs systemically from that prescribed for high-income OECD countries, or varies according to a country’s stage of economic development.

In the case of OECD countries, the OECD has used its Policy Evaluation Model (PEM) to examine the “transfer efficiency” of farm support policies in OECD countries, i.e. the effectiveness of alternative instruments in raising the incomes of farm households relative to the cost to consumers and taxpayers (OECD, 2001). A general finding of this analysis is that, when markets function smoothly, policies that interfere with the functioning of those markets, such as price supports and input subsidies, perform poorly in terms of raising the incomes of farm households, with a significant share of the transfer leaking to input suppliers or leading to deadweight efficiency losses.1 Thus, a dollar of market price support raises the incomes of farmers by less than half a dollar, while input subsidies increase farm households’ incomes by just one third of a dollar. By contrast, payments which distort markets less, such as payments based on area, are considerably more effective at raising farm based incomes. That said, no form of payment linked to farming in any way provides the gain in net income that would result from a fully decoupled income payment. A further finding of OECD work is that market interventions also often have perverse distributional effects, paying more to larger and richer farmers than to smaller and poorer ones, and taking money away from consumers and taxpayers to boost the incomes of households whose incomes are already above average (OECD, 2003a).

The process of long-term economic development is characterised by a sectoral transition away from an economic structure based on agriculture to one dominated by manufactures and services.1 The nature of this transition away from agriculture is apparent from the evolution of agriculture’s share of GDP and employment, shown in Figures 3.1 and 3.2 respectively for a range of OECD and emerging economies between 1961 and 2008. Graphs showing the evolution of agriculture’s share of GDP in a wider range of African, Asian and Latin American countries are contained in Annex 3.A.

In proposing a strategic framework for strengthening rural incomes it is helpful to make a distinction between the short- to medium-term issue of how best to support incomes, reduce poverty and tackle food insecurity (beyond immediate questions of humanitarian relief), and deeper long-term questions regarding how best to strengthen incomes via economic development. There may be complementarities, with programmes that are effective in the short term sowing the seeds for longer term development, but there may equally be trade-offs, particularly with respect to public spending, so it is conceptually helpful to distinguish social policy from development policy.

Interest in market stabilisation policies has revived following the 2007-08 food price spike. A large number of developing countries responded to the crisis by seeking to stabilise domestic markets and thereby isolate their consumers from events in world grain markets (Abbott, 2009; Demeke et al., 2008; Jones and Kwiecinski, 2010). Trade policy actions included tariff reductions as well as restrictions on exports via taxes, quantitative restrictions or outright bans. Domestic measures – such as tax cuts on food, subsidies and releases of stocks – were also employed, in order to limit the transmission of world price shocks onto domestic markets.

Input subsidies have been suggested as a way of increasing agricultural production and thereby reducing poverty and improving food security. There has been a particular revival of interest in Africa, where sectoral performance has been relatively poor. The diagnosis has been as follows (see Wiggins and Brooks (2011) for supporting data). Food production in Africa has grown much more slowly than in Asia and Latin America. This has resulted in rising of cereals and other staples, and more people who are hungry and undernourished. Yields of staples have barely risen, largely since farmers have not applied fertiliser in sufficient amounts to take advantage of improved varieties. Farmers have not done so because inputs have been too costly and they have been too poor, with little or no access to credit. In order to break this impasse, it has been argued that it is necessary to subsidise the costs of inputs, thus creating a virtuous circle of higher yields, higher incomes, more food, and less hunger and poverty. Allied to this is the perception that a new generation of “smart” subsidies, such as those applied in Malawi, have managed to unlock this potential.

Income growth is essential for progress on the first Millennium Development Goal (MDG1), which calls for the eradication of extreme poverty and hunger, with specific targets that include halving between 1990 and 2015 the proportion of people living on less than a dollar a day and the proportion of hungry. The MDG1 deadline calls for policies that can be effective quickly, i.e. over the short to medium term in which basic economic structures are essentially fixed.