Agriculture and inclusive growthKey questions and diagnostic tools for country

economists
Mizuho Kida
PRMED
Draft 19 September 2011

Contents

I. Introduction ..............................................................................................................................1

II. Agriculture and growth ...........................................................................................................1

A. Profiling the growth process ..................................................................................3
Example 2.1Sectoral Decomposition of Growth with Structural
Shifts ...............................................................................................................3
B. Understanding the adjustment process ...................................................................5
Example 2.2Understanding the Processes behind Resource Outflows
from Agriculture..............................................................................................5

III. Agriculture and poverty .........................................................................................................8

A. Sectoral decomposition of poverty changes ...........................................................10
Example 3.1Sectoral Decomposition of Poverty ........................................10
B. Role of initial conditions and policies ....................................................................13
Example 3.2Pattern of Growth and Poverty: Role of Initial
Conditions and Policies ...................................................................................13

IV. Agriculture and employment .................................................................................................16

A. Profiling patterns of rural employment ..................................................................16
Example 4.1Profiling Patterns of Rural Employment.................................16
B. Understanding constraints ......................................................................................18
Example 4.2Understanding Constraints ......................................................19
C. Understanding supply-side constraints ...................................................................21
Example 4.3Understanding Supply-Side Constraints: Role of
Geography .......................................................................................................22

V. Conclusion ..............................................................................................................................25

References ....................................................................................................................................26
 I. INTRODUCTION

Agriculture is said to play a key role in promoting inclusive growthby stimulating

economic growth, reducing poverty, and creating employment for millions of people in
developing world. 1

Often, striking statistics are drawn upon to highlight the centrality of agriculture for
inclusive growth: In poor developing countries, agriculture generates on average 29
percent of the gross domestic product (GDP) and employs 65 percent of the labor force;
more than half of the developing worlds population3 out of 5.5 billionlives in rural
areas; and as much as 75 percent of developing worlds poor live in rural areas, most of
them dependent on agriculture either directly or indirectly.

It would seem straightforward to argue that the focus of development policy should be on
promoting agriculture. But it is not so simple (Timmer 2003). The large size of the
agricultural sector does not imply that it must be a leading sector for economic growth
(Gollin 2010). Because agriculture is often the least productive sector in developing
countries, directing public investment to promote agriculture at the expense of other,
more productive sectors cannot be unambiguously good for growth. By showing where
the poor live and the sectors in which they are employed we cannot automatically
assume that rural economic growth is the key to poverty reduction (Ravallion and Datt
1996, 1). In some contexts, the policy priority may not be creating more jobs in
agriculture, but investing in skills and removing barriers to rural workers transition to
more productive jobs in other sectors.

This paper takes a closer look at the three key roles agriculture can play in promoting
inclusive growthstimulating economic growth, reducing poverty, and creating
employmentand discusses analytical tools that can help country economists examine
these links in a specific country context and determine how agriculture can be leveraged
to achieve more inclusive growth in that country. .

II. AGRICULTURE AND GROWTH

As early as Adam Smith (Gollin 2010), economists have recognized the importance of
the structural transformationthe movement of workers and other resources out of
agriculture and into other sectorsin the process of economic growth. There is little

1
For example, see the 2008 World Development Report (WDR) and Byerlee, de Janvry, and Sadoulet
(2009).

1
debate about what happens: as countries develop, there is a movement of labor and other
resources from lower-productivity agriculture to higher-productivity manufacturing and
services, raising the productivity of all sectors including agriculture, and hence, per capita
output. But there has been a long standing debate about how this happens.

There are two influential theories of structural transformationone represented by Lewis

(1954) and another by Johnston and Mellor (1961). Lewis argues essentially that
productivity improvements in industry pull workers out of agriculture, while Johnston
and Mellor argue that productivity improvements in agriculture push workers out of
agriculture.

Lewis assumes that the output of the agricultural sector is used primarily for consumption,
whereas that of industrial sector can be used for consumption and capital accumulation,
so that sustained growth depends on the expansion of industry. He also argues that the
agricultural sector is composed primarily of subsistence farmers, many of whom are
living on family farms, working at low marginal productivity, and available for transfer
to the industrial sector at little cost to agricultural output.

Johnston and Mellerand various others who followed themproposed an entirely

opposite view, in which a dynamic agricultural sector raises labor productivity in the
rural economy, which releases workers and provides cheaper food at lower costs to the
workers in the modern sector, and either increases saving by workers or reduces wages
and increases profits, thereby stimulating investment and accelerating urbanization and
industrialization.

According to both views, agricultural productivity increases and the share of labor in
agriculture decreases, but according to Lewiss argument, industry is the engine of
growth while according to Johnson and Mellors argument, it is agriculture that is the
engine of growth.

After 50 years of theoretical and empirical research attempting to uncover the direction of
causation between agriculture growth and economic growth, no consensus has yet
emerged about which view is correct. Finding a correlation in the data between
agricultural productivity growth and aggregate output growth was easy, but establishing
causation running from agriculture to the rest of the economy turned out to be a much
more difficult task. Gollin (2010), who completed a recent review of the literature, noted
that although [m]any empirical analyses have also attempted to use time series or cross
country studies to demonstrate a causal link [running] from agricultural productivity
levels or growth rates to the broader economy. draw[ing] on a plethora of different
methodological approaches and data types, there is little that meets contemporary
standards of econometric identification. (p. 3850). Gardner and Tsakok (2007), who
completed a similar review a few years earlier, concluded that economists will simply

2
have to face the fact that econometric studies of country data will not be able to establish
causality (p. 1145).

To sum up, the cross country empirical evidence is mixed, and theories rely on strong
assumptions to argue that agricultural productivity growth is a necessary condition for
economic growth. Country economists must therefore investigate the role of agriculture
in the structural transformation and economic growth in a given country context using
country specific data.

A. Profiling the growth process

The first step is to describe the growth process in the country and to estimate how much
agriculture has contributed to growth in the country. The common technique used to this
end is the sectoral decomposition of growth with sectoral reallocation effects (Example
2.1).

Example 2.1Sectoral Decomposition of Growth with Structural Shifts

Bosworth and Collins (2008) look at growth in China and India from 1978 to 2004. Using
primarily data from national accounts, they set up a growth account for each country that
decomposes aggregate growth into contributions from sectoral growth and the gains
associated with the movement of workers between sectors.
To do so, they calculate each sectors growth rate and weight it by its share in
total output at the outset of each period. The difference between total growth and the sum
of the sectoral contributions provides a (residual) measure of the effects of resource
reallocation. The results are reported in Table 1.
A positive resource reallocation effect can be interpreted as the productivity gains
from structural transformationshifting resources from lower productivity sectors to
higher productivity sectors. To give appropriate interpretation of this effect, Bosworth
and Collins also look at additional information on the growth process of the two
countriesthe evolution of sectoral shares in total value added and total employment.
These are shown in Table 2.

Table 1. Sectoral growth in output per worker, 19782004

(percentage contribution to growth)
Total Agriculture Industry Services Reallocation
China
197893 6.4 1.2 2.4 1.1 1.7
199304 8.5 0.7 5 1.7 1.2

India
197893 2.4 0.6 0.5 0.7 0.6
199304 4.6 0.5 0.9 2.1 1.2
Source: Bosworth and Collins (2008)

3
Table 2. Sectoral shares in total value added and total employment, 19782004
Value added (% GDP) Employment (% Labor force)
China
1978 1993 2004 1978 1993 2004
Agriculture 28 17 9 71 56 47
Industry 48 51 58 17 22 23
Services 24 33 33 12 21 31
100 100 100 100 100 100
India
1978 1993 2004 1978 1993 2004
Agriculture 44 33 22 71 64 57
Industry 24 28 28 13 15 18
Services 32 39 50 16 21 25
100 100 100 100 100 100
Source: Bosworth and Collins (2008)

According to Bosworth and Collins (2008), in both China and India, agriculture played a
positive role but not a leading role in driving overall growth (Table 1). Chinas
agricultural sector grew at a very rapid pace, 4.6 percent per year from 1978 to 2004. But
it was industry that contributed most to growth, expanding at a spectacular rate of 10
percent per year. Its service sector also grew as rapidly as industryeven slightly faster
on averagebut because of its smaller share in output contributed less to aggregate
growth. Indias agricultural sector also had strong but less spectacular 2.5 percent growth
over the same period. In India, the main growth driver was services. It accounted for as
much as 50 percent of the growth. Industry growth was surprisingly weak, but still faster
than agriculture growth.

In both countries, the reallocation effect was an important source of growth. The
magnitude of reallocation effect in China is almost three times larger than that for India
during the first sub-period, 19781993, but equal in the second, 19932004. The
acceleration of growth in India after 1993 can be attributed to trebling of the contribution
from services as well as to the doubling of the contribution from resource reallocation.

The magnitude of reallocation effects found in Bosworth and Collins (2008) and their
importance as a source of growth are echoed by Gollin (2010), who looks at a broader set
of developing countries using the same technique. He finds that, among the 68 countries
he studies, 30 derived more of their growth from reallocation between sectors than from
growth in individual sectors.

There is a problem in interpreting the structural transformation effects estimated by the

resource reallocation effect, however. Both Bosworth and Collins (2008) and Gollin
(2010) use an accounting framework that calculates the resource reallocation effect
4
essentially as a residual, much like Solow residual in growth accounting. This has a well-
known limitation: everything not explicitly recognized in the model ends up in the
residual.

There is also a more conceptual problem in interpreting the structural transformation

effects. The debate between competing theories of structural transformation concerns
whether it is the growth in other sectors that pulls underutilized resources out of
agriculture, or whether productivity increases in agriculture that releases resources and
makes them available to other sectors. The accounting framework discussed here cannot
address which underlying process is at work in driving the resource reallocation effect or
productivity gains in agriculture.

B. Understanding the adjustment process

To analyze the adjustment process itself we will need more than just an accounting
framework. Gardner (2000) provides an accessible example to begin unpacking the
mechanisms behind labor adjustments in agriculture (Example 2.2).

Example 2.2Understanding the Processes behind Resource Outflows from

Agriculture

Gardner (2000) studies factors explaining the strong pro-poor growth observed in the US
between 1960 and 1990, when the average income of rural households grew rapidly.
Moreover, inequality within the rural sector also declinedwith farm income at the 20th
percentile growing faster than at the median (Table 3).
Because there was also a significant decline in the number of farm households in
the US over this period, there was the question of whether the gain in income at the
bottom quintile might not be simply the result of selective migrationpoorer farmers
leaving agriculture at higher rates than richer farmers, so that poverty just shifted to
nonfarm locations.
Gardner investigates several alternative hypotheses in addition to (i) selective
migration, including: (ii) greater labor market integrationgrowth in nonfarm
economy benefited low income farmers through greater off farm jobs and opportunities to
leave farming altogether which equalized returns to labor; and (iii) developments
specific to the agriculture sectorsuch as changes in farm size, human capital, and
agricultural productivity at the state level that raised incomes from farming. Using
disaggregated data available from the 1960 and the 1980 Population Census and
Agricultural Census, Garnder studies the experience of 315 US counties. He sets up a
simple, error-correction type model to investigate these alternative hypotheses

G 20t +1,t =b0 + b1 ( ynt yf t ) + b2 ( ynt +1 ynt ) + b3Y 20t + b4 zt +1,t + u

5
where G20 is a countys growth rate of income at the 20th percentile, yft is the countrys
average farm household income, and ynt is the countrys average nonfarm income and t
indexes time. (Subscripts to represent each county-level observation are suppressed, and
all variables are measured in logs).
The coefficient b1 indicates the effect of initial differences in farm and nonfarm
income ( b1 >0 if initial disequilibrium is being corrected). The coefficient b2 is the
elasticity of transmission of nonfarm income to farm income ( b2 = 1 with perfect
integration). Y20 is the countys initial level of income at the 20th percentile, with a
negative coefficient b3 indicating income convergence across counties. 2 Positive and
significant b1 and b2 coefficients would be indicative of strong influence of labor market
integration within counties, while a negative and significant b3 coefficient would be
indicative of labor market integration across countries within the US.
The change of farm population Z t +1, t provides the initial test that selective
migration might be at work. To test more specifically the role of selective migration, the
author introduces additional variables 3 and estimates the model using a two-stage least
squares where the change in farm population Z t +1, t is estimated using these exogenous
variables. The results are reported in Table 4.

Table 3. Growth of farm household real incomes, US, 19601990

Real Income (1990 dollar)

Year of Census Median 20th Percentile
1960 12,580 4,510
1970 22,390 9,200
1980 28,180 12,650
1990 29,510 13,930

2
The author refers to b1 and b2 as weak convergence (within counties) and b3 as strong convergence
(income equalization across all counties in the US).
3
These include: the initial percentage of farm population in the county, initial percentage of farm
population that is nonwhite, trend growth of the countys total population, initial percentage of adult farm
males with less than 6 years of schooling, median schooling of farm adults, growth of TFP in the state in
which the county is located, initial value of sales per farm, and the ratio of farm households to farms.

6
Table 4. Regression results explaining income growth at the 20th percentile of the farm
household income distribution, 311 counties, 19601980 a/
Dependent Variable: Growth of Real Farm-
Household Income at the 20th Percentile
Coefficient (t-statistics)
Independent variables (1)--OLS (2)--OLS (3)-2SLS

Intercept 0.28 0.22 0.28

(29.7) (11.4) (7.7)
1960 income at the 20th percentile -0.034 -0.026 -0.033
(b3) (-25.6) (-11.9) (-9.1)
Growth rate of nonfarm median 0.345 0.434
income (b2) (2.7) (3.2)
1960 ratio of nonfarm-farm 0.021 0.012
income (b1) (4.2) (2.1)
Percent change in farm household -0.061 0.059
numbers b/ (-0.7) (0.2)
1960 percentage of county -0.028
population rural-farm (-2.8)
1960 median schooling of farm 0.00072
males of age 25 and older (0.6)
Multifactor productivity growth, 0.162
state level (0.4)
1959 value of sales per farm 0.0009
(1.2)
Exclusion-bias indicator -0.0065
(-1.6)
R2 0.677 0.694 0.723
a/ Regressions weighted by 1960 number of farm households. b/ In 2SLS regression, predicted value from
reduced-form equation (see text).
Source: Gardner (2000)

Gardner finds evidence that, among the alternative hypotheses, by far the most important
factor is the labor market integration. Growth of nonfarm income has the largest impact
on the growth of farm income at the bottom quintile (Table 4). Other convergence
variables, such as initial disequilibrium in the labor market within a county (weak
convergence) and the catch up of farm income to nonfarm income across the US
(strong convergence) are also important factors in explaining growth of farm income at
the bottom quintile.

Proximity to urban populations also seems to make a difference in the improvement of

the economic condition of low income farm households. The more rural a county is, as
measured by the initial percentage of farm households in the country, the slower is farm
household income growth, which, according to the author, is a further indication of the
importance of off farm earning opportunities (p. 1070) and hence labor market
integration.

7
In contrast, the regression analysis does not find evidence supporting the selective
migration hypothesis. The predicted percentage change in farm household numbers in a
county has an expected (positive) sign (while in the OLS it has a wrong sign), but does
not feature significantly in either model. Surprisingly, agricultural specific variables
such as state level total factor productivity growth in agriculture, initial sales per farm,
and median schooling of farm males, played no significant role in explaining growth of
low income farm households. The author reports having tried other agricultural related
variables, such as farm size, investment in farming, government payments, and farm
targeted programs, but none were found significant. The author concludes that if
government policies are to be credited for this [growth in income of low income farm
households] they are the overall macroeconomic and industrial policies that permitted the
US market economy generally to develop and to flourish (p. 1073).

III. AGRICULTURE AND POVERTY

Many studies have argued that agriculture is more effective in reducing poverty than
other sectors. The WDR 2008, for example, argues that agriculture has special powers in
reducing poverty (Policy Brief on Agriculture and Poverty Reduction, p. 1). Based on
the evidence from several cross-country econometric analyses, it reported that GDP
growth originating in agriculture was on average, at least twice as effective in benefiting
the poorest half of a countrys population as growth generated in nonagricultural sectors.
Ligon and Sadoulet (2007) was one of the cross-country studies contributing to the
evidence. Using data for 42 developing countries between 1981 and 2003, the authors
found that growth in agricultural income had a greater effect on the poorest decile of the
population, while growth in nonagricultural income had a greater effect on richer
deciles. 4 Christiansen and Demery (2007), examining 82 countries over a similar period,
studied the impact of sectoral growth on poverty using a three-sector framework
(agriculture, industry, and services). They find that when weighted by sector shares, the
impact on poverty of growth in agriculture was 1.7 times larger than that of industry, and
5.4 times larger than that of services. After controlling for the position of the poverty line
to allow for poor and rich countries in the sample to have different impacts on poverty
per unit of growth, the share weighted impact of one percent growth in agriculture GDP
per capita was found to be on average 2.6 times larger than that of industry and 7.7 times
larger than that of services.

The cross-country evidence, however, does not seem to be robust across different
datasets, methodologies, and specifications. A number of other studies have failed to find

4
The results discussed here are based on those using robust standard errors (Table 4 in their paper). The
greater impact on growth in non-agricultural income was found on fourth and higher quintile, while the
impact on expenditures of deciles 2 and 3 were not significantly different between agricultural and non-
agricultural income.

8
the special power of agriculture in reducing poverty in cross country data. For example,
Loayza and Raddatz (2006), using cross-country data for 51 developing countries with
comparable measures of poverty changes between 1981 and 2000, find that, when GDP is
decomposed into agriculture, industry, and services, none of the size-adjusted growth
rates of each sector has a significant impact on poverty reduction. When GDP is further
disaggregated into agriculture, services, and industrys four major categories (mining,
construction, utilities, and manufacturing), only manufacturing growth was found to have
a significant impact on poverty reduction. Bravo-Ortega and Lederman (2005), using
cross-country data of 84 countries for the period 19602000 and a two sector model
(agriculture and nonagriculture), 5 find that growth of agricultural GDP per capita was not
as effective in raising incomes of the poor as growth in nonagricultural GDP per capita.
Moreover, richer households are shown to benefit more from growth in agriculture than
the poorest households in a country. 6 Gutierrez et al (2007), using a sample of 39
developing countries and 106 growth spells between 1980 and 2004, and using a three
sector model (agriculture, industry, and services) and a seven sector model (agriculture,
mining and utilities, manufacturing, construction, commerce, services, and transport and
communications), find that only growth in industry and services and their sub sectors
have any impact on poverty while growth in agriculture had no statistically significant
impact. Further tests showed that in neither the three sector nor the seven sector
disaggregation could the equality of coefficients across sectors and subsectors be
rejected, suggesting that in the cross country sample there is no systematic evidence that
patterns of growthwhether growth came from agriculture, industry, or services
matters for aggregate poverty reduction.

The empirical evidence from country level studies also points to important variation
across countries. Ravallion and Datt (1996) and Ravallion and Chen (2004) study the
evolution of poverty in India and China over several decades. They find that in India
growth in services had the most impact on both urban and rural poverty, while in China

5
They used GMM to allow for endogeneity of the sectoral GDPs to estimate their models.
6
Christiansen and Demery (2007) noted that the results in Bravo-Ortega and Lederman (2005) when
correcting for the average share of the sector in overall GDPgrowth in agriculture is found to be 2.8
times more effective in reducing poverty than growth in the non agricultural sectors (page 14). The
average share in of agriculture in GDP in the Bravo-Ortega and Lederman data was 0.22 while that of
nonagriculture was 0.78. Adjusting for the average sectoral share as Christiansen and Demery suggest
would imply that, if the coefficient of agricultural GDP growth was multiplied 4.5 times (1/0.22) while the
coefficient of nonagricultural GDP growth was multiplied by 1.3 times (1/0.78), then the impact of
agriculture is 2.8 times larger than that of the nonagricultural sector. It is not clear such a simple adjustment
can be meaningfully applied, especially since Bravo-Ortega and Ledermans model is more general and
growth in agriculture and nonagriculture are allowed to be correlated, such that growth of nonagriculture
sector is allowed to impact incomes of the poor through its impact on growth in agriculture, and vice versa.

9
growth in agriculture was far more important than growth in industry and services for
poverty alleviation. 7

To sum up, promoting agriculture is not the same as promoting pro-poor growth. While
many influential studies have argued that agriculture is especially effective in reducing
poverty, cross-country evidence is inconclusive and country-level studies highlight
important variations across space and time. Country economists should investigate how
much growth in agriculture has contributed to poverty reduction in the country at issue
and what might explain the differences in performances and patterns found in a specific
country context.

A. Sectoral decomposition of poverty changes

A useful first step, as before, is describing how much agricultural growth reduced
poverty. The widely used technique to this end is the sectoral decomposition of poverty
change. We discuss the examples by Ravallion and others (Example 3.1).

Example 3.1Sectoral Decomposition of Poverty

Ravallion and Datt (1996) and Ravallion and Chen (2004) look at poverty reduction in
China (19812001) and India (19511991). They use data on distributions of household
expenditures from multiple household surveys to calculate a time series of poverty
measures for both rural and urban areas, and use the household surveys as well as
national accounts data to calculate growth in sectoral incomes and GDP. 8
To decompose the change in poverty over time into sectoral effects, they regress
the annual rate of change in head count poverty index on the share-weighted annual rate
of per capita GDP growth in each of three sectors. 9

ln Pt = + 1 (s1 ln y1 ) + 2 (s2 ln y 2 ) + 3 (s3 ln y3 ) + t

where P is the average poverty index, 10 si is sector is share in GDP, and yi is per
capita output in sector i.

7
Well discuss these studies in more detail below.
8
For China, the household survey data comes from the Rural Household Surveys and the Urban Household
Surveys from the National Bureau of Statistics. For India, the household survey data by National Sample
Survey Organization was used to construct a time series of poverty measures.
9
The authors use multiple poverty measures (head count index, poverty gap index, squared poverty gap
index) in their analyses but we report only those relating to the head count ratio for brevity.
10
That is, P = nr Pr + nu Pu where n j and Pj are the population shares and poverty index, respectively, in rural
and urban areas.

10
 The model above allows to test whether the sectoral pattern of growth maters.
Under the null hypothesis that it does not matter, 1 + 2 + 3 = and the model
collapses to

ln Pt = + ln y + t

where y is aggregate GDP per capita. 11 The significance of the sectoral pattern of
growth can be tested by the difference in explanatory power between the two models
(using an F-test, for example), or alternatively, by the significance of individual
coefficients on the sectoral GDP (using t-tests). The results are reported in Table 5.
One reason sectoral patterns of growth may matter is that they affect incomes of
rural and urban households differently. The authors provide additional decomposition of
changes in poverty into those due to rural and urban per capita income (expenditure)
growth

( ) ( ) [ ( )]
ln Pt = 1 stU1 ln CtU + 2 stR1 ln CtR + 3 stR1 stU1 ntR1 / ntU1 ln ntR + t

where are coefficients to be estimated; s is consumption share, n is population share,

and C is the mean consumption of households of rural (R) and urban (U) sectors. The
first two terms in the model capture the poverty impact of (share-weighted) growth in the
mean incomes in the urban and rural areas, respectively, and the third term captures the
impact on poverty resulting purely from shifting people from rural to urban areas without
causing mean incomes of either sector (i.e., distributionally neutral shifts of population
from rural to urban areas, which the authors refer to as Kuznets effects). The results are
reported in Table 6.

11
Notice that the regression coefficient of the GDP growth rate in the first model can be interpreted as
growth elasticity of poverty, while the coefficients of share-weighted sectoral growth rates in the second
model cannotthe latter would have to be multiplied by the output shares to be interpreted as elasticities.

11
Table 5. Poverty reduction and the sectoral composition of growth: China and India
China India
Growth rate of GDP per capita 2.60 n.a. n.a. 0.99 n.a.
(2.16) (3.38)
Primary (share-weighted) n.a. 8.07 7.85 n.a. 1.16
(3.97) (4.09) (2.96)
Secondary (share-weighted) n.a. 1.75 n.a. n.a. 3.41
(1.21) (1.84)
Tertiary (share-weighted) n.a. 3.08 n.a. n.a. 3.42
(1.24) (2.74)
Secondary + tertiary n.a. n.a. 2.25 n.a. n.a.
(2.20)
R^2 0.21 0.43 0.42 0.75

Table 6. Poverty reduction and the urbanrural composition of growth

China India
Growth rate of mean rural income (share-weighted) 2.56 1.46
(8.43) (12.64)
Growth rate of mean urban income (share-weighted) 0.09 0.55
(0.2) (1.37)
Population shift effect 0.74 4.46
(0.16) (1.31)
R2 0.82 0.9
Note: t-ratios in parentheses
Source: Ravallion and Chen (2006) for China (19812001) and Ravallion and Datt (1996) for India (1951
1991).

Note that these regressions are used as decomposition tools rather than causal models of
poverty reduction (Chaudhuri and Ravallion 2006). Deeper explanations must
endogenize growth rates and their composition based on a general equilibrium
framework (p. 8).

As mentioned earlier, their studies of China and India highlight important differences at
the country level. In China, agriculture played an important role in poverty reduction over
the studied period. The share-weighted contribution to poverty reduction of growth in the
primary sector was far higher than that of growth in either the secondary or tertiary
sectors. By contrast, in India agriculture played a relatively minor role and it was growth
in services that delivered most benefit to poverty reduction.

The decomposition of poverty changes into rural-urban income effects (Table 5) provides
interesting additional insights. In both China and India, poverty reduction achieved in the
studied period was primarily explained by growth in rural income. This is not a surprise

12
for Chinawhere agriculture was found to be the primary driver of poverty reduction in
the sectoral decomposition. But it is a surprise for Indiawhere service growth was
found to be the most important force in poverty reduction. The result suggests that the
strong poverty effect of service growth in India (evident in Table 6) is largely channeled
through growth in rural incomefor example, by boosting nonagricultural employment
opportunities for the rural poor. 12 It underscores the importance of not equating rural
income with agricultural growtha topic we will come back to in the next section.

B. Role of initial conditions and policies

What explains the difference in agricultures power to reduce poverty in the two
countries? Ravallion and others, along with a number of other researchers, suggest that
initial conditionse.g., land distribution and human capitalas well as growth and
distributional policies of the two countries matter. The simple decomposition framework
above is not suited for investigating the question, however. We will discuss below an
approach to extend poverty analysis to explore the influences of initial conditions and
policies in accounting for the differential poverty impact of sectoral growth within a
single country framework (Example 3.2).

Example 3.2Pattern of Growth and Poverty: Role of Initial Conditions and

Policies

Ferreira, Leite, and Ravallion (2009) investigate what accounted for differences in the
poverty impacts of growth experienced across states in Brazil. They consider three
candidate explanations: (i) the impact of sectoral patterns of growth (more or less
agriculture, industry, or services intensive), (ii) initial conditions at the state level (more
or less human capital, access to social service, infrastructure, or political participation),
and (iii) policies at the state level (differences in social spending and investment
spending). They also investigate if changes in federal policy in 1994 may have changed
the way growth is translated to poverty reduction (captured by changes in inflation and
social security spending). 13
Using state-level panel data on poverty, sectoral outputs, and public expenditures
for 26 states for the period 19852004, and initial conditions variables taken from the
1970 national census, they use regression models to decompose poverty changes at the

12
The ancillary regression results reported in Ravallion and Datt (1996, Table 3) confirms this
interpretation. They report the impact of sectoral growth on urban and rural poverty separately, and show
that growth in the service sector had a larger impact on rural poverty (2.37) than on urban poverty (0.70),
and more importantly, had a larger impact on rural poverty than that of agriculture (0.86).
13
The authors explain in some detail why 1994 was the obvious point of the regime change. For example, it
was the year of the Real Plan in which inflation was brought under control; fiscal balance was restored;
quotas were replaced by tariffs and then harmonized and lowered; some state-owned enterprises were
privatized, and important changes in pension system were introduced (1995-2004).

13
state level into contributions from each of the four factors. First, they perform a sectoral
decomposition of poverty, as in the previous example, using a similar specification.
Second, they introduce state and federal policy variables into the modelinitially
allowing all coefficients to differ before and after 1994 and then imposing restrictions to
arrive at a more parsimonious specification. Third, they examine the role of initial
conditions at the state level by replacing the state-level fixed effects with a number of
variables that they hypothesize affect the poverty impact of growth (as mentioned above).
Specifically, the models they estimate can be written as

ln Pt = + iB (si ,t 1 ln yi ,t ) I t + iA (si ,t 1 ln yi ,t )(1 I t )

3 3

i =1 i =1
+ 1 ln SOCi ,t 1 + 2 ln INVi ,t 1
+ 3 ln SSAt 1 + 4 ln CPI t 1 + 5 I t + i ,t

where P , si , and yi are as before, I t is a dummy variable that takes the value 1 if the
year is pre-1994, and the superscripts B and A on the coefficients denote before and after
1994. The variables in the first row capture the effects of the sectoral patterns of growth.
The variables in the second row estimate the effects of the state-level policy variables
the state social expenditures (SOC) and investment expenditures (INV). The variables in
the third row estimate the effect of the federal policy variablesfederal social security
spending (SSA) and the rate of inflation ( lnCPI). Subscripts to represent each state-
level observations are suppressed for simplicity, 14 but all and coefficients are
allowed to vary across states. When introducing the state level initial conditions, the state
specific fixed effect ( j ) is replaced by the initial condition variables mentioned above.
The estimation results are reported in Table 7.

14
The corresponding equation in the original paper is Equation (3) on p. 8.

14
Table 7. Regressions for state poverty with initial conditions for human development,
infrastructure, and political participation
Regressions Headcount index
Coeff s.e.
Real agricultural sector output
Before 1994 0.061 0.12
After 1994 0.007 0.19
Real industrial sector output k
Real tertiary sector output 0.603 0.08 **
State specific time trend Yes
Dummy if before 1994 (I) 0.023 0.01 **
Social expenditure (SOC) 0.014 0.01
Investment (INV) 0.003 0.01
Inflation rate (CPI) 0.017 0.01 **
Social security (SSA) 0.058 0.01 **

1970 Census variables at state level

k 4.100 1.64 **
kaverage years of schooling of adult population 0.176 0.3
kinfant mortality rate per 100,000 people 0.766 0.3 **
kshare of labor force employed in industry 0.299 0.18 *
associated with union
(0.3499)
Number of observations 364
Number of groups 26
Time periods 14
Log likelihood 350.41
Source: PNAD 19852004; author's calculation.
Note: **=significant at 5%;*=significant at 10%.

They find a strong impact of the sectoral pattern of growth. Growth in the service sector
was substantially more poverty-reducing than growth in either agriculture or industry,
echoing the findings of Ravallion and Datt (1996) for India. Initial conditions at the state
level also mattered. Growth was more poverty reducing in states where, in 1970, infant
mortality was lower (a measure of access to public services) and workers were more
unionized (a measure of political voice). Policy changes at the federal level had a greater
impact on poverty. Inflation was poverty increasing so its elimination after 1994 turned
off one engine of poverty growth (p. 2), but the actual decline in povertyand there was
little of it during the observed periodcame from the expansion of social security
spending by the Federal Government. Over the same period, state level public spending
was largely inconsequential from the perspective of poverty reduction.

15
 IV. AGRICULTURE AND EMPLOYMENT

As mentioned earlier, more than half of the developing worlds population3 out of 5.5
billionand 75 percent of the worlds poor883 million people at the US$1a-day
poverty levellive in rural areas.,
Contrary to the popular image, people in rural areas are not all farmers. Besides farming
their own land, they may be engaged in wage employment on or off farm, self-
employment in nonfarm economy, or seasonal migration to nearby cities. The
occupational choices of rural people reflect their asset endowments (e.g., land, skills, and
brawn), but also constraints imposed by market failures, government failures, social
norms, and, last but not least, the availability of more attractive employment
opportunities in other sectors. Returns on many of these activities are low and differ
substantially across countries, regions, as well as individualsbetween poor and rich
households, and between men and women (WDR 2009).

An upshot of all this is that a policy prescription that most of the worlds poor are
engaged in farming, so the key focus of development policy should be to raise the income
farmers is likely to be too simplistic. To design policies that can help rural people escape
poverty and participate more fully in a countrys growth process, it is important to
understand which jobs or income strategies rural people in a country currently pursue and
why they choose to pursue them (WDR 2008). This requires country specific diagnostic
and deeper analyses of opportunities and constraints.

A. Profiling patterns of rural employment

A useful first step is to understand the diversity of occupations and income strategies of
the rural population in a given country using household survey data such as Living
Standard Measurement Study (LMSM). Davis and others (2007) provide an example.

Example 4.1Profiling Patterns of Rural Employment

Davis and others (2007) examine the full range of rural occupations and income sources
in 15 countries with comparable data. 15 They identify five main categories of rural
occupationsubsistence farming, market-oriented farming, rural labor market (farm and
nonfarm wage employment, and nonfarm self-employment), migration-oriented
(including receiving transfer from migrants), and diversified (earning less than 75% of

15
The analysis uses the RIGA database, which is constructed from a pool of several dozen Living Standard
Measurement Studies (LSMS) and other household surveys made available by the World Bank through a
joint project with FAO. The 15 countries were selected to ensure geographic coverage across the four
principle development regionsAsia, Africa, Eastern Europe, and Latin Americaand to include a
number of IDA countries.

16
income from any one activity). 16 Figure 1 shows the proportion of rural households
engaged in the different rural occupations for each country.
They then consider relationships between the occupational choice and household
wealth using two methodsdistributions of per capita household income by occupation
(Figure 3.1), and quintile distribution of the average share of income from each
occupation (Figure 3.3).

Figure 1.Percentage distribution of rural households by main occupation

100%

80%

60%

40%

20%

0%

Farm Ag Wage Nonag wge Self Emp Transfers Diverse Income Portfolio
Source: Davis and others (2007).

Figure 2 Distributions of per capita household income by occupation

Ecuador 1995 Nepal 1996

-1000 0 1000 2000 3000 4000 -2500 0 2500 5000 7500 10000
Rupees
'000 sucres
Market-oriented f arming Subsistence-oriented f arming
Labor-oriented Migration-oriented
Diversif ied

16
Davis and others (2007, p.17). The five categories given here are from the results reported in WDR 2008;
the original paper reports results using seven categories: crop production, livestock production, agricultural
wage employment, nonagricultural wage employment, nonagricultural self employment, transfer income,
and other income.

17
Figure 3 Quintile distribution of the average income share of rural occupations
100%

80%
Percent of income

60%

40%

20%

0%
Poorest quintile

Poorest quintile

Poorest quintile

Poorest quintile
4th
5th

4th
5th

4th
5th

4th
5th
2nd

2nd

2nd

2nd
3rd

3rd

3rd

3rd
On-farm Total Ag Wage Labor Non-Agricultural Total Transfers & Other
Source: Davis and others (2007) reported in the WDR (2008)

Davis and others (2007) find that most rural households have diversified income sources.
With the exception of the African countries in the sample, where it is still common for
rural households to be specialized in farm activities, most countries in the sample had the
largest share of rural households earning less than 75 percent of income from any one
activity (Figure 1). Among those households which are specialized, participating in rural
labor market (farm and nonfarm wage employment and nonfarm self-employment) is the
most prominent source of income for most Latin American and some South Asian
countries. Migrant transfers are also a main source of income for some households in
Eastern Europe (Albania and Bulgaria) and Indonesia.

Within each activity, household income varies widely (Figure 2). Those engaged in
subsistence farming tend to have lower incomes, and those engaged in market oriented
farming tend to have higher income. Those receiving migrant transfers also tend to have
higher income. Richer households also tend to have more diversified income.
Distribution of income sources by quintile shows similar patterns (Figure 3). Poorer rural
households tend to be engaged in agricultural wage employment. Wealthier rural
households tend to have a higher share of nonfarm incomes. Migrants transfers also tend
to be regressively distributed.

B. Understanding constraints

Having analyzed rural households choices, the next step is to look for factors that may
explain the choices. As mentioned, the occupational choice of rural households may

18
reflect the asset endowments and constraints. The literature identifies three types of key
assets in this contextland, education, and infrastructure. 17

A common approach to begin investigating the relationship between the occupational

choice and the rural household characteristics is to use a discrete dependent variable
model, such as probit. Elbers and Lanjouw (2001) give a simple example.

Example 4.2Understanding Constraints

Elbers and Lanjouw (2001) examine the occupational choice of rural households in
Ecuador using a household survey from 1995 that provides details of nonfarm activities
undertaken in rural areas.
They consider three types of rural occupation: agriculture, low-skill non-
agriculture, and high-skill non-agriculture. The probability of having a primary
employment in each sector is estimated using three (separate) probit models. The
dependent variable takes a value of 1 if the household is primarily employed in a given
sector (e.g., agriculture) and 0 otherwise, for each of the three sectors.
Almost all explanatory variables used are household characteristics because of the
limitations in the data. But two sets of community level variables are examined to explore
the potential importance of infrastructure. First, the authors disaggregate rural areas into
three subregions: rural periphery (communities immediately surrounding urban centers),
rural amanzanado (communities with some basic infrastructure but a population less
than 5,000), and rural dispersed (remaining rural areas). Second, in a separate
regression looking at a subset of households owning a home enterprise, the authors
introduce three infrastructure-related variables: connection to electricity, telephone, and
water networks. Results are reported in Table 8.

17
Or, more broadlyalthough it often comes down to studying same variablesphysical capital, human
capital, and public capital.

19
Table 8. Probability of nonagricultural employment as a primary occupation
Probit model

All employment in Employment in low- Employment in high-

nonagricultural sector a/ productivity job b/ productivity job b/
Estimate Prob. Estimate Prob. Estimate Prob.
Intercept 1.674 0.0001 1.551 0.0001 3.073 0.0001
Household size 0.006 0.5428 0.020 0.066 0.021 0.1111
Female 0.642 0.0001 0.852 0.0001 0.248 0.0012
Age 0.073 0.0001 0.035 0.0001 0.101 0.0001
Age squared 6E4 0.0001 2E4 0.0013 0.001 0.0001
Quichua speaker 0.102 0.3076 0.007 0.9473 0.156 0.3296
Shuar speaker 0.419 0.2392 0.061 0.895 0.694 0.0894
Pre-primary education 0.186 0.2929 0.248 0.1834 0.025 0.9253
Primary school education 0.253 0.0017 0.053 0.5311 0.435 0.0004
Secondary school education 0.604 0.0001 0.307 0.0066 0.669 0.0001
University education 0.777 0.0045 0.428 0.2268 1.299 0.0001
Other tertiary education 7.344 0.9986 7.493 0.9986 5.070 0.9994
Post-graduate education 5.592 0.9993 5.720 0.9993 6.722 0.9995
Vocational training 0.127 0.4244 0.118 0.4896 0.003 0.9894
Land owned per capita 0.018 0.0056 0.025 0.003 0.003 0.7868
Land owned Squared 2.3E6 0.0394 3.3E6 0.0171 2E5 0.886
Cultivating household (dummy) 1.026 0.0001 0.620 0.0001 0.939 0.0001
Rural periphery 0.784 0.0001 0.416 0.0006 0.812 0.0001
Rural dispersed 0.863 0.0001 0.646 0.0001 0.536 0.0001
Costa 0.247 0.0001 0.293 0.0001 0.002 0.9806
Oriente 0.357 0.0002 0.323 0.0035 0.156 0.216
Migrant during past decade 0.033 0.6695 0.016 0.8497 0.036 0.7151

Log likelihood (model) 1479 1248 815

Log likelihood (constant) 2147 1618 1109

Total observations 4523 4523 4523

Observations at 0 3699 4001 4221
Observations >0 824 522 302

LR test (model) 1336 740 588

Degrees of freedom 21 21 21
Critical 2 32.67 32.67 32.67
Source: Elbers and Lanjouw (2001).
Note: a/ Nonagricultural employment denotes those with wage employment in the nonagricultural sector as
a primary occupation. b/ Low-productivity and high-productivity jobs have been defined as having annual
earnings below or above, respectively, the average annual earnings from agricultural wage labor.

It is worth noting that the analysis of Elbers and Lanjouw (2001) is not aimed at
attributing causality or testing specific hypotheses about relationships between rural
occupations and household or community attributes. Because they only have a cross
section data, the aim of their analyses is purely empirical, looking for patterns of
correlation that may help build specific hypotheses about possible causal relationships
that merit more detailed investigation.

20
According to their estimates (Table 6), land ownership is a significant determinant of
whether or not a household is engaged in agriculture as primary occupation. Those with
greater land holdings are less likely to participate in nonagricultural employment,
especially in low productivity jobs. The evidence suggests that one cannot rule out the
possibility that access to more attractive off-farm employment opportunities is rationed
and is influenced by households wealth (p. 487).

Those with higher education are more likely to be employed in the nonagricultural sector,
particularly in high productivity jobs. At average values of other variables, having
completed primary education raises the probability of employed in a high-productivity
job from 0.3 percent to 1 percent. Having completed secondary education increases this
probability to 5 percent. The probability jumps to 37 percent for individuals who have
completed university education. 18

Controlling for both land holding and education, women are significantly more likely to
be engaged in nonagricultural work, especially in low productivity jobs, than men.

People living in remote rural areas are more likely to be employed in agriculture and less
likely to be employed in the nonagricultural sector. Surprisingly, those living closer to
urban areas are also less likely to be employed in the nonagricultural sector. The authors
speculate that this may be because proximity to larger urban markets may increase
returns to agricultural activities, e.g., by cultivation of perishable food crops to be sold in
the urban markets.

C. Understanding supply-side constraints

Nonagricultural rural employment plays a crucial role in income generation of rural

households. The analyses above highlight that this may be particularly true for those
without land and for women, and indicated constraints that may be important in a
particular country, such as land, skills, gender bias, and possibly, infrastructure. Based on
this micro evidence, policies may focus on removing the barriers that may be holding
back the rural population from more fully participating in available nonfarm job
opportunities (e.g., by investing in education and improving access to land by women).
But an equally important and complementary policy objective would be to increase the
supply of nonfarm employment opportunities available to the rural population.

18
Exogeneity of education variables in these models is in question, as the authors note (p. 486).

21
What determines the supply of nonfarm employment in rural areas? There are many ways
to approach this question, one of which is from a perspective of economic geography. 19
This approach takes a spatial view and focuses on physical attributes of the locations
often within a countryto account for differences in distributions and growth of
employment opportunities. Araujo, de Janvry, and Sadoulet (2002) provides a simple
example of this approach. 20

Example 4.3Understanding Supply-Side Constraints: Role of Geography

Araujo, de Janvry, and Sadoulet (2002) explores the role of geography in explaining the
differences in growth rates of rural nonfarm employment across Mexican municipalities
in the 1990s, based on the 1990 and 2000 Mexican population census. They consider two
types of nonfarm employmentmanufacturing and services.
They model the expansion of employment in a given sector in a particular
municipality over time as

L1is L0is L0
= s + ( s 1) is + s g i + s hi1 + uis
P0 Pis0
is

where LTis and PisT are, respectively, employment level and population level in a
municipality (i) in sector (s) in time period (T=0, 1), g i is a set of municipal level
attributes that affect employment which are time-invariant and hiT a set of those which
are timevarying.
Four types of municipal level variables are considered(i) physical distance to
economic centers (defined as cities of at least 250,000 people and among the top 33
percentile in terms of share of nonagricultural employment in the country in 1990), (ii)
connectedness (access to roads, travel time to markets), (iii) other geographic attribute of
a municipality (flat area, high plateau, near a waterway, near the US border), and (iv)
economic attributes of a municipality (human capital, initial levels of nonagricultural

19
There has been some debate in the literature as to whether agriculture itself is the key to stimulating rural
nonfarm employment or if forces outside agriculture are a more powerful catalyst for stimulating both
agriculture and nonagriculture employment. For a concise review of the literature, see Readon, et al.
(2000). For a fascinating, well-constructed, empirical analysis of this question in the context of India, see
Foster and Rosenzewig (2004).
20
Other examples are found in Lanjouw, Quizon, and Sparrow (2001) for Tanzania; Berdegue et al (2001)
for Chile; Elbers and Lanjouw (2001) for Ecuador; Ferreira and Lanjouw (2001) for Brazil; Winters, Davis,
and Corral (2002) for Mexico; Corral and Reardon (2001) for Nicaragua; Ruben and Van den Berg (2001)
and Isgut (2004) for Honduras; and de Janvry, Sadoulet and Zhu (2005) for China.

22
employment, higher minimum wage, ethno-language mix, presence of diversified
agriculture).
All the explanatory variables are likely to be strongly correlated with each other
and suffer from endogeneity problems. 21 It is therefore important to recognize, again, that
the regression analyses here are not aimed at attributing causality or testing specific
hypotheses but are primarily aimed at looking for patterns of correlation that merit further
analyses.
Because the key focus is on estimating the presence of spatial effects in
nonagricultural employment growth, the model above cannot be estimated by OLS which
assumes independence of observations across space and time. One of the approaches the
authors implement is to estimate the model using robust standard errors which allows for
spatial correlation in errors

u = pWu +

where W is an N N spatial-weighting matrix that parameterizes the distance between

municipalities and centers. The spatial-weighting matrix is estimated as weighted
averages of sample covariances, where the weights decline linearly with distance and are
nonzero for all observations

wi , j = 1 / D(i, j ) i , j , i j ,

where 1 / D(i, j ) is the distance between places i and j. Table 9 reports the regression
results. Figure 4 plots the estimated impact of distance on rural employment growth. 22

21
Even though panel data are used for the analysis and municipal characteristic variables are defined on the
basis of their values in initial year (1990), endogeneity problems are likely to be present in the models they
estimate. Factors that influence the location distribution of economic activity within a country are both
diverse and will be correlated with a long history of policies, institutions, and events which are not
controlled for in the model. Omitted variables and unobserved characteristics of municipalities may interact
with those variables that are included in the model to affect employment allocation and growth. Araujo, de
Janvry, and Sadoulet (2002) recognizes the potential problems but does not address them in this simple
estimation exercise (p.9).
22
The figure comes from their results reported in the WDR 2008 Chapter 9 (Figure 9.13).

23
Figure 4. Estimated impact of distance on rural employment growth
Manufacturing Employment
7%
Annual rate of employment growth

6%
5%
4%
3%
2%
1%
0%
-1% 0 50 100 150 200 250 300

-2%
Kilometers to closest manufacturing center

14% Service Employment

Annual rate of employment growth

12%

10%

8%

6%

4%

2%

0%
0 50 100 150 200 250 300
Kilometers to closest service center

Table 9. Results for cross sectional OLS corrected for spatial dependence
Manufacture Services
Coef. tstat CSD Coef. tstat CSD
Context
Coast -0.47 0.22 4.84*** 8.96
Northern border 8.42 1.59 13.15*** 8.1
Altiplano dummy 5.19*** 3.88 -1.94* 1.73
St.dev. Of altitude in meters -0.01*** 5.84 -0.00002 0

Own attributes
Composition of agricultural output 4.83*** 6.25 2.15*** 2.91
% adults with 9th grade or more 0.53*** 3.95 2.20*** 6.65
% who speak indigenous language 0.07*** 4.13 0.03*** 2.22
1 if higher minimum wage group 5.11*** 2.71 -8.04*** 4.73
Initial employment in sector (thousands) 3.31*** 3.21 -0.03 0.09

Connectedness
% of population served by state raod 0.10*** 11.07 0.08*** 5.89
% of population served by federal raod 0.06*** 6.41 0.07*** 8.49
Mean minutes to closest semi urban town -0.002 0.75 -0.004 1.36

Proximityto centers
1/Distance to closest center 138.92*** 3.27 319.04*** 9.39
Initial sectoral empl. In closest center (thous.) -0.003 0.35 0.02*** 3.26
*(1/Distance to closest center) 5.73*** 8.67 -0.65 1.05
Sum(sector empl. In center i/dist. To i)/1000 -0.28* 1.74 0.24** 2.29
Constant -5.17** 2.48 1.81 0.9
Observations 1883 1883
R-squared 0.19 0.37
Adjusted R-squared 0.18 0.36
Source: Araujo, de Janvry, and Sadoulet (2002).

24
Note: tstat CSD comes from standard errors corrected for spatial dependence.
Significant at: *** 99%, ** 95%, * 90%.

The authors find that nonfarm employment in rural areas depends on the proximity to
large urban centers and smaller intermediate cities (Figure 4). The influence of proximity
to the centers declines until a distance of 150 kilometers, beyond which it disappears.
Proximity is particularly important for manufacturing. In isolated municipalities, there
tends to be stronger growth in services employment than in manufacturing.

Connectedness to infrastructure network also has robust influence on expansion of both

manufacturing and service employment in rural Mexico (Table 9). The variables that
describe the geographical attributes of the municipalities suggest that employment in
manufacturing grew more in the Altiplano (high plateau) as well as in flatter areas.
Employment in services grew more in municipalities on the coast and on the US border.
Municipalities with a large initial employment in manufacturing experienced faster
growth of employment in this sector, suggesting concentration. This was not the case for
employment in services.

V. CONCLUSION

This chapter took a closer look at the three key roles agriculture can play in promoting
inclusive growthstimulating economic growth, reducing poverty, and creating
employment. Its main objective was to help country economists think through different
ways in which agriculture can contribute to or pose a challenge to achieving more
inclusive growth in their own countries, and to equip them to undertake sound diagnostic
work using modern analytical techniques.

Discussions in this chapter highlight three key messages. First, none of the possible links
between agriculture and inclusive growth is automatic or unconditional. It is therefore
paramount for country economists to examine these links in a specific country context
and to understand the factors in their countries that might weaken these possible links.
Second, often a macro perspective is necessary to understand the broader context of the
change that needs to happen in a country and the role that agriculture can play in that
broader context. A macro perspective can help country economists avoid simplistic
notions, such as that growth in agriculture is necessary to poverty reduction because
thats where the poor live and work. Third, at the same time, a micro perspective and
analytical tools are essential to understand the mechanisms through which the poor are
included in or excluded from the growth process. Cross country regressions can identify
general patterns, but not mechanisms.

25
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