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Rural Development Notes

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Lecture 2 - Rural Development There are issues with establishing causality Y = a + bX + u Estimator of casual effect of X and Y correct if certain assumptions hold. If assumptions don't hold: inconsistent/biased estimators. There are several causes of biased/inconsistent estimators.

• Reverse causality - Y influences X.

• Omitted variables - a third variable that influences both Y and X. The direction of bias depends on whether influence of the omitted variable on X is positive or negative.

• Sample selection - units with certain characteristics (also affecting the outcome) are more/less likely to be included in the sample. Has the same effect as an omitted variable.

• Measurement error - X measured with error: noisy, less informative. Estimates of X's effect are lower. In 2007 3.3billion people lived in rural areas, a quarter of them in extreme poverty. Over two thirds of the world's poorest people are located in rural areas engaged mainly in subsistence agriculture. Types of Agrarian systems LATIN AMERICA Agrarian structures are a basic feature of the entire economic, social and political organization of rural life. The agrarian structure that has prevailed in LA is the pattern of agricultural dualism - latifundiominifundio. Latifundios are very large landholdings (average farm size 16-214 Ha). Usually defined as farms large enough to employ more than 12 people though some employ thousands. Rental contracts are common although there is a hugh land ownership inequality. Have the higher regional Gini coefficients in the world

0.94 for Paraguay, 0.91 for Peru and Venezuala. Issues - large farms have large transaction costs and aren't farmed intensively, small farms are more efficient but cannot offer employment to the whole family. ASIA General issue is too many people crowded onto too little land. Average land size is very small (greater than 4 Ha), and there are different degrees of inequality across countries. 2005 Gini coefficient was 0.42 in Bangladesh but 0.62 in India. Landlords are often absentee owners who live in the town and turn over the working of the land to sharecroppers. Issues - when too small, farms cannot provide subsistence. Deterioration of farmers' conditions due to land fragmentation, population growth, high interest rates, unfavourable tenancy contracts and low wages. AFRICA Subsistence farming on small plots of land is the best way of life for the majority of African people living in agriculture-based economies. Traditional tools are used, no animals (lack of fodder in the long dry seasons) and no irrigation. Only small areas can be planted and weeded by the farm family. Seasonality in labour demand because time of planting is determined by the onset of rains. Communal rights and slash-and-burn agriculture. Issues - not sustainable in the face of population growth: no increase in productivity, decreasing per-capita food consumption. Also land degradation. Constraints to productivity groth in subsistence farming VULNERABILITY TO SHOCKS Potentially high-return investments not undertaken due to risk aversion, lack of investment capacity and savings. On the classic peasant subsistence farm, most output is produced for family consumption. Output and productivity are low, diminishing returns are in operation due to more labour being applied to shrinking parcels of land. Many crops are grown by each households so there is no specialization. Without secure propperty rights, no incentive to invest in long-term productivity growth. Lack of savings, credit and insurance markets limit ability to invest. Land size and productivity Exhibit a positive relationship (increasing returns to scale). Technology with fixed costs (tractors, etc.), better access to capital and credit and the most productive farmers earn more and can buy more land. Exhibit a negative relationship (decreasing returns to scale). Small plots are owner-cultivated, large farms are cultivated by hired labour or sharecroppers (lower incentive to work hard). Relationship between land consttracts and incentives is crucial for productivity.

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