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Journal ArticleDOI

Patterns of Rural Development: A Cross‐Country Comparison using Microeconomic Data

TL;DR: In this paper, a general pattern of rural development in which increases in per capita income are associated with a decline in the importance of agricultural production and a rise in importance of non-agricultural income sources was proposed.
Abstract: This article proposes a general pattern of rural development in which increases in per capita income are associated with a decline in the importance of agricultural production and a rise in the importance of non-agricultural income sources. Following the approach to examining Engel’s Law, we use data from 15 developing countries and a merged dataset to test whether such a pattern emerges. The analysis shows a strong, positive relationship between per capita income and the share of income earned from rural non-agricultural wage employment and a negative relationship between per capita income and agricultural production.

Summary (2 min read)

A Cross-Country Comparison Using Microeconomic Data

  • While social, political, and cultural factors cause the growth experience to differ across regions, countries, and even urban and rural areas, the fundamental components of an economy tend to be similar across these spaces.
  • One of the difficulties of positing and testing such an ambitious, universal theory is that rural household behavior differs across countries for many reasons.
  • The specific objective of this study is to analyze rural income-generating activities to determine if, on average, certain activities become more important as incomes rise and households develop.
  • Section 5 presents the results and comments on the cross-country analysis.

Conceptual Framework

  • Classical economic studies, such as those by Engel, Lewis, Kuznet, and Chenery and Syrquin, often used intercountry macro-level comparisons to understand the process of economic and social development.
  • The pattern appears to be driven by a process of accumulation of assets and investment in education and infrastructure, contained within the framework of a dynamic rural economy and broader changes in the macroeconomy.
  • On the microeconomic side, there are reasons to expect that income rises occurring in this climate of development lead to a greater emphasis by households on non-agricultural activities and here the authors focus on this aspect of the transitioning rural economy.
  • For poorer, less educated households this may mean high participation rates in agricultural and primary non-agricultural activities.
  • The expectation is that in any rural economy this range of households will be found, but as the overall economy develops and structural transformation of the economy occurs, an increasing proportion of households will be found in the higher levels of household development and less in the lower levels of development.

Description of Data

  • This study uses data from fifteen countries that form part of the RIGA (Rural Income Generating Activities) database, which has been constructed from a pool of several dozen Living Standards Measurement Study (LSMS) and other multi-purpose household surveys made available by the World Bank through a joint project with the Food and Agriculture Organization (FAO).
  • Table 2 presents the countries used in the analysis, the year the survey was administered, the number of observations included and household per capita income by quartile.
  • Income variables measured in national currencies were converted to US dollars using the purchasing power parity exchange rate used by the World Bank in the poverty assessments conducted for each country.
  • These represent the broad categories of activities that households use to earn their income and are suitable for discerning broad patterns of rural development.
  • Another striking feature is the percent of households receiving income from non-agricultural activities and the high share of income from these activities, particularly from the countries in Latin America and Asia.

Empirical Approach

  • Working’s (1943) simple, semi-log approach and Leser’s (1963) modification to evaluating Engel’s Law are well suited for their primary hypothesis.
  • Since their econometric approach is essentially a semi-log model and the authors are primarily interested in the relationship between household per capita income (y) and income shares (Sf), all reported income coefficients are transformed into elasticities.
  • This approach was examined and the second stage yielded similar results to the OLS and censored model and were thus not reported.
  • Houthakker (1957) employed this approach and also noted that Engel himself used the double-logarithmic model.
  • Along with testing this relationship directly, the results of the analysis are compared across countries based on their ranking in terms of GDP per capita.

Results

  • Table 4 presents a summary of the results reporting, for the three specifications, the elasticity of shares with respect to a change in per capita income for the merged data and each country in the data set.
  • Results for agricultural wage shares is even more mixed with the censored specification showing positive results for eight countries and negative results for five countries.
  • As development occurs the elasticities appears to shift from negative to positive values indicating agricultural wage goes from being somewhat of a refuge sector of the poor to an activity that is more highly productive for those that participate in the activity.
  • To allow a greater degree of flexibility in the shape of the curves a log per capita expenditure squared term is included in the specification along with log per capita expenditure (both are significant).
  • Examining participation by level of development , the results suggest that non-agricultural wage employment is even more associated with higher income per capita as development occurs.

Conclusion

  • The authors have posited and tested the presence of micro-level, household development pattern in rural areas in fifteen countries as well as a pooled data set.
  • The pattern of rural development is one in which as per capita income increases households shift from agricultural production and toward nonagricultural wage and self employment.
  • In some countries, particularly those with higher GDP per capita, it is even associated with higher levels of income.
  • One limitation to the study is that the authors examine a limited part of the development spectrum as their sample does not include developed countries since comparable data from these countries is unavailable.
  • Since the analysis focuses on shares of income, these values were censored at zero to avoid negative shares.

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Patterns of Rural Development:
A Cross-Country Comparison Using
Microeconomic Data
Paul Winters, Timothy Essam, Benjamin Davis,
Alberto Zezza, Calogero Carletto and Kostas Stamoulis
ESA Working Paper No. 08-06
August 2008
www.fao.org/es/esa
Agricultural Development Economics Division
The Food and Agriculture Organization
of the United Nations

ESA Working Paper No 08-06
www.fao.org/es/esa
Patterns of Rural Development: A Cross-Country
Comparison Using Microeconomic Data
August 2008
Paul Winters
American University
Washington, DC
USA
e-mail:
winters@american.edu
Timothy Essam
University of Maryland, MD
USA
e-mail:
tessam@arec.umd.edu
Benjamin Davis
Agricultural Development Economics Division
Food and Agriculture Organization
Rome, Italy
e-mail:
benjamin.davis@fao.org
Alberto Zezza
Agricultural Development Economics Division
Food and Agriculture Organization
Rome, Italy
e-mail:
alberto.zezza@fao.org
Calogero Carletto
World Bank
Washington, DC,
USA
e-mail:
gcarletto@worldbank.org
Kostas Stamoulis
Agricultural Development Economics Division
Food and Agriculture Organization
Rome, Italy
e-mail:
kostas.stamoulis@fao.org
Abstract
This article proposes a general pattern of rural development in which rises in per capita
income are associated with a decline in the importance of agricultural production and a rise
in the importance of non-agricultural income sources. Following the approach to examining
Engel’s Law, we use data from 15 developing countries and a merged data set to test
whether such a pattern emerges. The analysis shows a strong, positive relationship between
rising per capita income and the share of income earned from rural non-agricultural activities
and a negative relationship between per capita income and agricultural production.
Key Words: Rural development patterns, structural transformation, rural nonfarm activities,
livelihooods, cross country analysis.
JEL: O12, O13, O57, Q12.
The designations employed and the presentation of material in this information product do not imply
the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the
United Nations concerning the legal status of any country, territory, city or area or of its authorities, or
concerning the delimitation of its frontiers or boundaries.
1

Patterns of Rural Development:
A Cross-Country Comparison Using Microeconomic Data
While social, political, and cultural factors cause the growth experience to differ across
regions, countries, and even urban and rural areas, the fundamental components of an
economy tend to be similar across these spaces. Arthur Lewis (1954) elaborated on the
composition of economies, noting that development is largely a transition from labor-
intensive, agriculturally-oriented enterprises to capital-intensive industries focused on
production of manufactured goods. Expanding on the notion of a two-sector, “dual
economy”, Chenery and Syrquin (1975) showed that as a country grows, the share of GDP
derived from the farm sector shrinks, while GDP from capital-intensive industries expands.
While this pattern appears clear for the overall economy, less certain is the pattern of
development that occurs in the rural areas of the economy.
In rural areas, a shrinking agricultural sector and expanding rural non-agricultural
activities are likely features of economic development. The existence of a large and
expanding non-agricultural sector seems plausible given the currently available empirical
evidence. From Asia, to Africa, to Eastern Europe, to Latin America and the Caribbean,
studies have repeatedly shown the importance of non-agricultural activities in the
livelihood strategies of rural households (see Davis et al. 2007; FAO 1998; Reardon,
Berdegue and Escobar 2001). When considered at this micro level, the structural
transformation of an economy can be analyzed by looking at the income-generating
activities chosen by households at different levels of income. Is it necessarily the case that
2

higher income rural households are, on average, going to be less involved in agricultural
activities and more involved in other activities? If so, this implies that as development
occurs and income per capita increases for rural households, these households will shift
away from agriculture activities and towards other activities.
The existing literature on non-agricultural activities implicitly suggests that rural
households across countries engage in similar activities as household income rises. What
appears to be a defining feature of this process is that as an overall economy develops and
shifts from agriculture to manufacturing and services, rural households invest and
accumulate assets, particularly education, and participation in farm activities declines as
participation in non-agricultural activities intensifies. At these higher income levels, this
leads to a lower share of income per capita from farm activities and a higher share from
non-agricultural activities.
The purpose of this study is to investigate if there exists a universal, micro-level
pattern of rural household development. Previous studies (Lewis 1954; Chenery and
Syrquin 1975) have relied on macro data to establish broad economy-wide development
patterns. However, to our knowledge, no study has tested the presence of a universal
pattern of rural development using microeconomic data. One of the difficulties of positing
and testing such an ambitious, universal theory is that rural household behavior differs
across countries for many reasons. Geopolitical issues, government regimes, resource
endowments, and investment decisions are among the macro factors that influence
household development. Micro-level differences, such as education, religion, and
household demographics further influence a household’s decision making. The resulting
3

development process is unique to each household and country. Moreover, even if macro
and micro factors are similar across countries, the evolution of the rural economy may take
on vastly different forms, thereby making comparison rather difficult. Given this
qualification, one of the objectives of this study is to separate the universal factors
affecting household development from the country-specific characteristics. If this can be
achieved, we believe the structural shift in income-generating activities at the household
level can be outlined in terms of a universal pattern and a micro-level, country-specific
pattern.
Because methodologies of previous studies of rural income generating activities
have typically not been comparable across countries (Lanjouw and Feder 2001), we
evaluate development patterns using a newly constructed cross-country database composed
of comparable variables and aggregates from high-quality household surveys. Other
empirical studies from Latin America and the Caribbean indicate that the share of income
derived from non-agricultural activities increases with household income (Reardon,
Berdegue, and Escobar 2001; Davis et al. 2007), but none to our knowledge, have
econometrically tested this relationship nor have they conducted cross-country micro
analysis. By comparing the composition of household income in 15 countries across the
four principal development regions—Asia, Africa, Eastern Europe and Latin America—
we can separate universal development factors from country-specific factors and document
the evolution of rural income-generating activities as they relate to rural development.
The specific objective of this study is to analyze rural income-generating activities
to determine if, on average, certain activities become more important as incomes rise and
4

Citations
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Cites background from "Patterns of Rural Development: A Cr..."

  • ..., 2012; Bezu and Barrett, 2012, among others), a relationship that holds up in cross country studies and across increasing levels of development (Davis et al., 2010;Winters et al., 2010)....

    [...]

  • ...…rural non-farm activities are richer and have more upward income mobility (Barrett et al., 2001; Bezu et al., 2012; Bezu and Barrett, 2012, among others), a relationship that holds up in cross country studies and across increasing levels of development (Davis et al., 2010;Winters et al., 2010)....

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  • ...…of households’ participation in and returns to different income-generating activities, and the extent and determinants of rural household income diversification (FAO, 1998; Barrett et al., 2001; Lanjouw and Lanjouw, 2001; Haggblade et al., 2007; Winters et al., 2009, 2010; Davis et al., 2010)....

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  • ...The initial exploration of the RIGA database (Winters et al., 2009, 2010; Davis et al., 2010) highlighted a number of regularities concerning household patterns of income diversification in developing countries....

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TL;DR: In this paper, the authors use household surveys to estimate the effects of crop diversification on nutrition (dietary diversity) and on income (crops sold) of rural households from eight developing and transition economies.
Abstract: This study sheds light on the dilemma between food crop specialisation and diversification. We use data from household surveys to estimate the effects of crop diversification on nutrition (dietary diversity) and on income (crops sold) of rural households from eight developing and transition economies. We find that the vast majority of households grow crops despite the modest contribution of agriculture to income. Most agricultural land is devoted to staple food production; high-value commodities such as fruits and vegetables are also produced, but in limited quantities. Both descriptive statistics and regression results show a positive correlation between the number of crops cultivated, household income from crops and the two indicators we use for dietary diversity, also after controlling for household characteristics.

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  • ...…have shown that patterns, regularities and common features constantly emerge, even when conducted in different agroecological, institutional and socioeconomic conditions (for example Davis et al. 2010; Winters et al. 2010; Pica-Ciamarra et al. 2011; Zezza et al. 2011; Zezza and Tasciotti 2010)....

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References
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TL;DR: In this article, the authors present a different framework for solving problems of distribution accumulation and growth first in a closed and then in an open economy, where the assumption of an unlimited labor supply is used.
Abstract: Written in the classical tradition this essay attempts to determine what can be made of the classical framework in solving problems of distribution accumulation and growth first in a closed and then in an open economy. The purpose is to bring the framework of individual writers up to date in the light of modern knowledge and to see if it helps facilitate an understanding of the contemporary problems of large areas of the earth. The 1st task is to elaborate the assumption of an unlimited labor supply and by establishing that it is a useful assumption. The objective is merely to elaborate a different framework for those countries which the neoclassical (and Keynesian) assumptions do not fit. In the 1st place an unlimited supply of labor may be said to exist in those countries where population is so large relative to capital and natural resources that there are large sectors of the economy where the marginal productivity of labor is negligible zero or even negative. Several writers have drawn attention to the existence of such "disguised" unemployment in the agricultural sector. If unlimited labor is available while capital is scarce it is known from the Law of Variable Proportions that the capital should not be spread thinly over all the labor. Only so much labor should be used with capital as will reduce the marginal productivity of labor to zero. The key to the process of economic expansion is the use that is made of the capitalist surplus. In so far as this is reinvested in creating new capital the capital sector expands taking more people into capitalist employment out of the subsistence sector. The surplus is then larger still and capital formation is still greater and so the process continues until the labor surplus disappears. The central problem in the theory of economic development is to understand the process by which a community which was previously saving and investing 4 or 5% of its national income or less converts itself into an economy where voluntary saving is running at about 12-15% of national income or more. This is the crucial problem because the central fact of economic development is rapid capital accumulation (including knowledge and skills with capital). Much of the plausible explanation is that people save more because they have more to save. The model used here states that if unlimited supplies of labor are available at a constant real wage and if any part of profits is reinvested in productive capacity profits will grow continuously relative to the national income and capital formation will also grow relatively to the national income. As capitalists also create capital as a result of a net increase in the supply of money particularly bank credit it is necessary to take account of this. Governments affect the process of capital accumulation in many ways and not least by the inflations which they experience. The expansion of the capitalist sector may be stopped because the price of subsistence goods rises or because the price is not falling as fast as subsistence productivity per head is rising or because capitalist workers raise their subsistence standards.

9,030 citations


"Patterns of Rural Development: A Cr..." refers background in this paper

  • ...Arthur Lewis (1954) elaborated on the composition of economies, noting that development is largely a transition from laborintensive, agriculturally-oriented enterprises to capital-intensive industries focused on production of manufactured goods....

    [...]

  • ...Previous studies (Lewis 1954; Chenery and Syrquin 1975) have relied on macro data to establish broad economy-wide development patterns....

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TL;DR: Deaton as mentioned in this paper reviewed the analysis of household survey data, including the construction of household surveys, the econometric tools useful for such analysis, and a range of problems in development policy for which this survey analysis can be applied.
Abstract: Two decades after its original publication, The Analysis of Household Surveys is reissued with a new preface by its author, Sir Angus Deaton, recipient of the 2015 Nobel Prize in Economic Sciences. This classic work remains relevant to anyone with a serious interest in using household survey data to shed light on policy issues. This book reviews the analysis of household survey data, including the construction of household surveys, the econometric tools useful for such analysis, and a range of problems in development policy for which this survey analysis can be applied. The author's approach remains close to the data, using transparent econometric and graphical techniques to present data in a way that can clearly inform policy and academic debates. Chapter 1 describes the features of survey design that need to be understood in order to undertake appropriate analysis. Chapter 2 discusses the general econometric and statistical issues that arise when using survey data for estimation and inference. Chapter 3 covers the use of survey data to measure welfare, poverty, and distribution. Chapter 4 focuses on the use of household budget data to explore patterns of household demand. Chapter 5 discusses price reform, its effects on equity and efficiency, and how to measure them. Chapter 6 addresses the role of household consumption and saving in economic development. The book includes an appendix providing code and programs using STATA, which can serve as a template for the users' own analysis.

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"Patterns of Rural Development: A Cr..." refers methods in this paper

  • ...4 See Deaton (1997) pages 101-105 for a discussion of the issues associated with using a Heckman two-step model....

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Q1. What are the contributions in "Patterns of rural development: a cross-country comparison using microeconomic data" ?

This article proposes a general pattern of rural development in which rises in per capita income are associated with a decline in the importance of agricultural production and a rise in the importance of non-agricultural income sources.