Prevalence of small farms hinders economic growth in developing countries

As small farms grow, productivity initially falls due to the costs of hiring mor

As small farms grow, productivity initially falls due to the costs of hiring more workers, but productivity starts rising when farmers can take advantage of economies of scale by using machinery. (Image: Yale Economic Growth Center)

Consolidating farms in low-income countries like India, where the average farm is less than three acres, would significantly boost economic growth and reduce poverty, according to a study coauthored by Yale economist Mark Rosenzweig.

The study, forthcoming in the Journal of Political Economy , found that if India consolidated its farms to an average size of 24.5 acres, and used the agricultural technology locally available, it would achieve a 42% increase in agricultural production and a 68% increase in income for farmworkers. The research suggests that having too many small farms creates a barrier to growth in developing countries, where agriculture accounts for, on average, more than 25% of GDP and employs at least 40% of the total workforce.

" If we want to understand barriers to growth, our work shows that small farming in India is both a symptom and a cause of under-development," said Rosenzweig, the Frank Altschul Professor of International Economics in Yale’s Faculty of Arts and Sciences.

The study bucks a longstanding consensus among economists and policymakers that increasing farm size in low-income countries lowers agricultural productivity.

For decades, research has shown that the relationship between farm size and productivity differs between developing and developed countries. Larger farms in low-income countries are less productive than the small farms that dominate their agricultural sectors. By contrast, large farms in advanced economies like the United States - where the average farm is about 400 acres - dwarf the productivity of their smaller counterparts.

Using novel data from a panel survey in India that contained a substantial sample of larger farms - those of 10 acres or more - relative to smaller farms, Rosenzweig and coauthor Andrew Foster of Brown University connected the dots. They found that there is a U-shaped curve between scale and productivity, not only across richer and poorer countries, as suggested by previous research, but also within individual low-income countries. Farm productivity in India falls as farm size increases but eventually rises after a threshold where farmers can use machinery, such as motorized harvesters, that have a higher capacity and lower cost than farmworkers.

" In high-income countries, bigger is better when it comes to farming, but in low-income countries, where tiny farms dominate, expanding your small farm by a few acres hurts productivity due to the costs of hiring additional labor," said Rosenzweig, a faculty affiliate of Yale’s Economic Growth Center (EGC). "Our study shows that if farms in India could grow to about 25 acres, then the farmers could begin taking advantage of economies of scale by using machinery, available in India right now, which would substantially increase the amount of food produced and lead to higher pay for agricultural workers."

On India’s smallest farms, those of three acres or less, family members provide sufficient labor to work the land efficiently. When the farms begin to grow, the family needs to find and hire extra workers, which is expensive because hiring workers entails transaction costs, such as paying for laborers’ transportation. Farmers find it is more profitable to avoid those costs by continuing farming with the suboptimal number of family members, Rosenzweig explained.

At a certain point - the bottom of the U shape - the benefits of hiring additional workers will begin outweighing the costs, the study found. At this point, productivity increases as farms grow larger and farmers begin taking advantage of machines that have higher capacity at larger scales, mirroring the economies of scale observed in developed countries, according to the study.

Consolidating farms in India to reach the optimal size of 24.5 acres would decrease the number of farms by 87%, representing about 83 million surplus farms, and reduce the number of farmworkers by 16%, according to the study.

The findings suggest that, contrary to what researchers had previously understood about farming in low-income countries, the smallest farms are not necessarily the most productive and that there are too many small farms, especially in developing countries, the researchers said.

The researchers acknowledge that India’s small-scale farmers are highly unlikely to increase their landholdings to reach the optimal farm size without government intervention; the initial decreasing returns of expansion as well as the enormous level of coordination required to "leap the chasm" from one end of the U shape to the other when all surrounding farms are also very small disincentivizes such a shift.

There is, however, relatively recent historical precedent for government mandating redistribution, Rosenzweig noted. Following World War II, France enacted compulsory land consolidation to increase agricultural productivity. The land consolidation provided an opportunity to modernize French farming practices and yielded affordable food for the French people and trade with other countries, he said.

The idea that having too many small farms hinders economic growth is not new to India, Rosenzweig explained. The study’s findings are consistent with an analysis the Indian government performed in 1947, after the country achieved independence, which concluded that India had too many small farms, which was constraining productivity and increasing poverty. But these findings were subsequently contradicted by hundreds of empirical studies of small farms, until this new study analyzing data on larger farms in India.

A detailed  summary of the study
Mike Cummings

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