Three out of four poor people in developing countries—890 million people—lived in rural areas in 2002. Even with rapid urbanization, the developing world is expected to remain predominantly rural in most regions until about 2020, and the majority of the poor are projected to continue to live in rural areas until 2040 (Ravallion, Chen, and Sangraula, 2007). This reflects a large and persistent gap between the share of agriculture in GDP and the share of agriculture in the labor force due to the slow movement of labor out of agriculture.
The persistent concentration of absolute and relative poverty in rural areas even with rapid economic growth, illustrates the difficulty of redistributing income generated outside of agriculture and the deep inertia in people’s occupational transformation as economies restructure. Migrating out of agriculture to urban areas is often hampered by lack of information, cost, skill gaps, aging, and family and social ties.
There is now overwhelming evidence that growth in the rural economy is essential for reducing poverty in most developing countries. From a simple decomposition analysis, 81 percent of the worldwide reduction in rural poverty during the 1993–2002 period can be ascribed to improved conditions in rural areas; migration accounted for only 19 percent of the reduction (World Bank, 2007). Cross-country econometric evidence indicates that GDP growth generated in agriculture is particularly effective in benefiting the poor. Among 42 developing countries over 1981–2003, one percent GDP growth originating in agriculture increased the expenditures of the five poorest deciles on average by 3.7 percent, far more than the 0.9 percent induced by one percent GDP growth originating in the rest of the economy (Ligon and Sadoulet, 2007). Similarly, Bravo- Ortega and Lederman (2005) find that an increase in overall GDP coming from agricultural labor productivity is on average 2.9 times more effective in raising the incomes of the poorest quintile in developing countries than an equivalent increase in GDP coming from nonagricultural labor productivity.
Similar results hold for the agricultural growth-poverty linkages at the country level. In China, where land is relatively equally distributed, the reduction in poverty was almost four times higher from GDP growth originating in agriculture than from GDP growth originating in industry or services (Ravallion and Chen, 2007). Rapid agricultural development also contributed substantially to the dramatic poverty reduction in Vietnam over the past 15 years and is likely to remain an important pathway out of poverty for many of Vietnam’s poor (van de Walle and Cratty, 2004). But in some countries rural poverty did not decline, despite rapid agricultural growth–for example, in Bolivia, Peru, and Brazil where growth was concentrated in an export-oriented sector of large capital intensive farms.
Some of the impact of agricultural productivity growth on poverty reduction is obtained directly through raising farm incomes, but much of it is indirect through employment and food prices. Econometric studies of India for 1958–94, where many of the rural poor are landless, report price and wage effects of food crop productivity to be more important in reducing rural poverty in the long run than direct effects on farm profits, which dominated in the short run (Datt and Ravallion, 1998). Although lower food prices reduce farm incomes, the experience from the Green Revolution in Asia was that total factor productivity rose faster than the decline in food prices, leading to a win-win for poor producers and consumers (Lipton, 2005). In addition to the urban poor and the rural landless, more than half of poor farm households are typically net food buyers who benefit by lower food prices. When a food crisis hits, a majority of poor smallholders are in fact hurt by rising prices, a somewhat counterintuitive outcome.
With rising incomes, growth is increasingly driven by the rapidly expanding demand for livestock products and high-value crops, which are also more labor intensive. The poverty impact of growth in the agricultural sector will thus depend increasingly on the poor connecting to these new growth processes, either as smallholders or as laborers in large farms. Vertically integrated supply chains and supermarkets pose particular challenges for them, although recent evidence from China suggests that small and poor farmers can take an active part in the rapidly expanding horticulture economy (Wang et al., 2006). A similar pro-poor pattern holds for India’s dynamic dairy industry. Success stories in smallholder competitiveness in high value activities typically depend on membership in effective producer organizations that can address the challenges of economies of scale in marketing and processing.
Agricultural productivity growth also contributes to poverty reduction by stimulating rural nonfarm growth, especially where infrastructure and the investment climate are already in place (Barnes and Binswanger, 1986; Hazell and Haggblade, 1991). In India and Indonesia, growth in rural services was estimated to contribute at least as much as growth in agriculture toward reducing poverty.