CHAPTER 1. - Introduction

The objective of this report is to demonstrate the extent of linkages between farm and nonfarm sectors and between nontradable and tradable goods sectors in Sub-Saharan Africa and to illustrate how these linkages can shape and accelerate rural economic growth. The farm sector is defined here to include all unprocessed agricultural goods, such as raw crops and livestock. Everything else, including processed farm items, is counted in the nonfarm sector. The term "nontradable" is used for goods that at prevailing relative prices are rarely, if ever, traded across the borders of the chosen zone of analysis. Nontradables also must not have close tradable substitutes that are available locally. This implies that the domestic price of the nontraded good is not likely to be well correlated with the domestic price of any tradable good that could play the same role in the consumption basket. By convention, services are always non-tradables, since the service is completely performed locally, and it can neither be imported nor exported. Perishable foods are often nontradable because of the risk of loss in transit. Tradables, on the other hand, can in theory always be imported or exported at a constant price determined by a reference market outside the region in question.

This report contends that output growth in farm tradables that results from the alleviation of supply constraints - from technological progress or better infrastructure, for example - can potentially have major secondary growth effects via the demand created in rural areas for nontradables. Many items consumed in rural areas are in fact nontradables, and many of these nontradables are staple foods. Therefore, policies to improve the production response of producers of nontradables are important for two main reasons. First, an increase in the supply of nontradables would help capture the opportunity for additional income growth from these demand effects. Second, as incomes rise, an increased supply of nontradables that people wish to spend additional income on would help prevent price increases that would put pressure on nominal wages. Such price pressures could lead to higher production costs and reduce output growth in that sector.

This report presents five case studies of demand linkages in a variety of country situations in Sub-Saharan Africa. In each case, researchers examine the mix of farm and nonfarm goods and services that rural Africans purchase, the potential of these expenditure patterns for encouraging growth in rural areas by stimulating demand, and the interventions necessary to sustain overall rural economic growth arising from initial growth in farm tradables stimulated by economic reforms such as structural adjustment programs. From these studies, it appears that the farm sector is potentially better able to propagate income growth than previously thought. Increased household incomes from exports are spent on farm and nonfarm items whose production was constrained by inadequate local demand; this spending in turn has spin-off effects that generate even more new income. The analysis in this report is based on empirical estimation of demand patterns coupled with assessment of the implications of demand parameters with respect to income, using the methodology of fixed-income agricultural growth multipliers.

Growth multipliers indicate the upper limits of the extra net income that could be had in rural areas from new production of nontradable goods and services stimulated by consumer and intermediate spending of new household income originating from the tradable sectors. These increments to income could come from technological progress in the production of tradable items, improvement in export prices, and so forth.

The actual multiplier is a numerical solution to a regional-level model of supply and demand that incorporates household demands and intermediate demands between sectors, and it explicitly models these interrelationships. Like all regional models, in computing costs and benefits, the results depend largely on what is included in the geographical area of interest and what is outside. The study takes the region of interest as "national," but occasionally also cites the results of using multipliers calculated with a more restrictive definition of the region of interest ("local") and a less restrictive one ("regional multicountry").

The choice of the region of interest defines the amount of trade "leakage," so that a larger catchment area, which implies a higher share of nontradables in consumer and intermediate demands, is associated with a higher multiplier. Therefore, there is little analytical interest in directly comparing the result of a change of assumptions. On the other hand, such a comparison is useful for illustrating the sensitivity of results to changes in assumptions about tradability. The national definition of tradability is the most useful definition for the classification procedure used in making assumptions about tradability.

Growth linkages of the type dealt with here occur only if underemployed resources are drawn into production by new local demand. This can only occur if there are underemployed resources and if those resources can be drawn into production to meet additional demand without major price increases. Resources are assumed to be underemployed if there is insufficient demand to purchase what the resources produce, typically because of remoteness and poverty. Local prices for these demand-constrained items exceed what they can be sold for locally for export but are less than would be required to make them a profitable import. Because new effective demand for these nontradable items cannot be met by imports (by definition), they have to be met by increased local production. The additional income created by respending of the initial income on nontradable goods produced by previously underemployed local resources creates a multiplier effect.

Numerical results from fixed-income multiplier models are best thought of as upper limits rather than firm predictions of how much additional growth in nontradables will occur from the initial shock to the tradables sector. This is because they are based on an assumed infinite supply elasticity for nontradable goods: extra demand is met by increased production at a "fixed price" (hence the name for this class of model). In other words, rapid growth in demand for nontradable foods because of an export boom is assumed to result in increased production of nontradable foods, not higher prices for these items. It seems likely that in Africa, rapidly increasing demand for nontradables will be met with less than perfectly elastic supply; part of the increased local spending on nontradables will be accounted for by higher prices rather than increased output. The more local production is constrained by demand, as would be the case where underemployed labor and land are available, the closer the true multiplier effects are likely to be to estimated multipliers.

Multiplier analysis in general and this report in particular build on the tradition, established in the study of Asian development, of exploring the role of agricultural growth in promoting overall rural employment through spin-off effects (Johnston and Mellor 1961; Mellor 1966, 1976, 1986). These effects, or "growth linkages," are created by the addition of substantial new local household purchasing power in periods of rapid agricultural development. This new purchasing power under some conditions stimulates additional production and employment.

Using case studies from Burkina Faso, Niger, Senegal, Zambia, and Zimbabwe, the report demonstrates empirically the importance of rural growth linkages in stimulating rural African economies. In each case study, the research examines the mix of agricultural and nonagricultural goods and services that rural Africans purchase, the implications of these expenditure patterns for the potential to stimulate growth in rural areas, and the conditions necessary to deal with expected surges in demand from growth in tradable agriculture stimulated by economic reforms such as structural adjustment programs.¹ The investigation reveals an agricultural sector that is better able to propagate income growth than previously thought (Hirschman 1958; Hazell and R 1983 - the latter for West Africa), including growth in nonagricultural incomes.

¹The present study is not focused on structural adjustment and therefore uses the term solely as shorthand to connote those economic reforms, recently carried out in many African countries, that are designed to improve the competitiveness of domestic production of tradable goods.

Unlike planners in Asia and Latin America in an earlier era, decisionmakers on development strategy in Sub-Saharan Africa are still debating priorities for achieving rapid growth and specifically the role of agriculture (Delgado 1991). In Asia prior to the 1970s, it was clear that agriculture was a lead sector and that foodgrain production by smallholder farmers was the central priority for agricultural development (Mellor 1966). In much of Latin America, less emphasis was placed on agriculture historically than on import-substituting industrialization (Hirschman 1958). In Africa, debate continues over the role of agriculture in economic development generally, but also about priorities for export versus food crops, large versus small farms, mechanical versus biological technology, and so forth (Delgado, Mellor, and Blackie 1987; Delgado 1996).

Yet the agricultural sector accounted for 40 percent or more of GDP in a third of all Sub-Saharan African countries in 1994 (World Bank 1996). Agriculture accounted for an average of 34 percent of GDP in low-income and 8 percent of GDP in middle-income Sub-Saharan African countries in 1996 (World Bank 1998). In 1993 agricultural products made up 33 percent of the value of exports from low-income, nonoil-exporting, Sub-Saharan African countries (World Bank 1996). Of the 20 countries for which data were available for 1980-92, 13 had at least 50 percent of their economically active male population working in agriculture. Four of those countries had over 75 percent of their male population working in agriculture. For the female population, 14 out of 20 countries reported more than 50 percent working in agriculture (World Bank 1996). Agriculture remains a vital element in the structure of these economies; misconstruing its proper place in the growth process could lead to significantly lower national income levels.

This report argues that the prime entry point for investigating the true importance of agriculture to overall economic development lies in establishing empirically the nature of the linkages between agricultural growth and growth in other sectors of the economy. It also addresses how the importance of these linkages is likely to differ between open and closed economies, given the relative importance of agriculture to overall employment; reviews the growth linkages literature from Asia and Africa; examines in detail the factors that affect the magnitude of growth linkages in Africa; and draws conclusions about the key issues to consider in examining these growth linkages.

Chapter 2 outlines prior work on agricultural growth linkages. Chapter 3 presents an overview of the case study data, the formal model, assumptions, and research methods used in the country studies. Chapters 4, 5, and 6 are devoted to the Burkina Faso, Niger, and Senegal case studies, respectively. Chapter 7 discusses the Zambia case study, with sections to identify similar elements in Zimbabwe, although analysis of Zimbabwe is limited by the lack of fully comparable data. Chapter 8 presents the overall conclusions of the case studies as a group. It should be borne in mind throughout that the empirical analysis is drawn from price effects - income and other nonprice variables are the postulated determinants of demand. Furthermore, agricultural growth multipliers are a normative technique - they show what is possible and desirable, given underlying assumptions, but they do not measure the possibilities.