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2.2 Agriculture and its contribution to poverty reduction

There is a lot of evidence that agriculture can contribute to poverty reduction beyond a direct effect on farmer's incomes. Agricultural development can stimulate economic development outside of the agricultural sector, and lead to higher job and growth creation. Increased productivity of agriculture raises farm incomes, increases food supply, reduces food prices, and provides greater employment opportunities in both rural and urban areas. Higher incomes can increase the consumer demand for goods and services produced by sectors other than agriculture. Such linkages (or the 'multiplier effect') between growth in the agricultural sector and the wider economy has enabled developing countries to diversify to other sectors where growth is higher and wages are better.

Diversification outside of agriculture is important to a country's development. This is particularly true in rural areas where about 70% of the world's poorest people live (IFAD 2011a). Haggblade et al (2002) estimate that across developing countries, as many as a quarter of the rural population is employed full time outside of agriculture, which constitutes 35-40% of rural incomes. This is not only a pattern amongst the wealthier rural population - the poorest 20% of the population earn an average of 30% of their incomes from non-farm sources (DFID 2005).

2.2.1 The agricultural sector in economic growth and transition

The general pattern for least developed countries who diversify and reduce poverty is:

  • Early stage: agriculture is a large share of gross domestic product (GDP) and food is a high percentage of the poor's expenditure.
  • As agricultural productivity increases, the non-farm sector develops and countries are less dependent on agriculture for their economy (although this may not occur in all areas of the country, where the non-farm sector is not as well developed).
  • Agricultural growth contributes to wider growth and poverty reduction, to what degree is dependent on the changes in productivity and the size of farms. Increases in land and labour productivity can be central to pro-poor growth. Initially land and labour productivity must rise to reduce poverty, but land productivity should rise faster... to create additional employment on farms which benefits the poor and leads to demand for non-farms goods and services.
  • As growth increases, there are more employment opportunities outside of agriculture, and labour moves outside of agriculture thus wage rates for farm labourers rise. At this stage, it is important to increase labour productivity to maintain food supply and prices.

Source: adapted from DFID (2005)

Agricultural productivity can therefore be seen as a first step or engine of growth leading to greater income for a country. It is interesting to note that historically no poor countries have reduced poverty only through agriculture, but almost none have achieved it without increasing agricultural productivity in the first instance. Agricultural growth is an essential complement to growth in other sectors (DFID 2005).