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Title: Food price policy and income distribution in low-income countries
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Permanent Link: http://ufdc.ufl.edu/UF00085390/00001
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Title: Food price policy and income distribution in low-income countries
Physical Description: 26 p. : ;
Language: English
Creator: Mellor, John Williams, 1928-
International Food Policy Research Institute
Publisher: IFPRI,
Place of Publication: Washington
Publication Date: 1978
Copyright Date: 1978
Subject: Developing nations
Low income groups
Food prices   ( lcsh )
Nutrition policy   ( lcsh )
Income   ( lcsh )
Agriculture -- Research   ( lcsh )
Consumer economics
Food production
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
Summary: Abstract: The component parts of a general equilibrium analysis relating price policy to income distribution is delineated. Data relative to the effects of price change on a variety of these component parts are presented. Discussion is focused on five major topics: direct effects of foodgrain price changes on distribution of income among consumers; direct effects of foodgrain price changes on distribution of income among producers; effect of relative changes in agricultural prices on agricultural production; effects of agricultural price policy on equipment; and major policy implications.
Bibliography: Includes bibliographical references.
Statement of Responsibility: J. Mellor.
General Note: Reprinted from Economic Development and Cultural Change, vol. 27, no. 1, October 1978.
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Bibliographic ID: UF00085390
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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Resource Identifier: oclc - 06308691

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Full Text

v 013

Food Price Policy
and Income Distribution
in Low-Income Countries

John W. Mellor

Reprinted from
Economic Development and Cultural Change
Vol. 27, No. 1, October 1978

v IE ~oWas ington, D.C.003

Economic Development and Cultural Change
Volume 27, Number 1, October 1978

Food Price Policy and Income Distribution
in Low-Income Countries

John W. Mellor*
International Food Policy Research Institute

Change in relative food prices is, in the short run, one of the most im-
portant determinants of change in the relative and absolute real income
of low-income people. They spend a high proportion of their income on
food and depend directly or indirectly on agriculture for a high propor-
tion of their employment and income. In the longer run, food price
policy may affect shifts in the supply function for wage goods and there-
by influence the extent to which total wage employment and hence in-
come of the laboring classes can be expanded.
Thus, there are important trade-offs and conflicts among various
direct short-run influences and indirect long-run effects of price policy
on the real incomes of the poor. Similarly, if the aggregate supply of
food is fixed, there are direct income trade-offs for low-income families
between change in prices and change in employment as market devices
for providing the equilibrium consumption level.
Because the interrelationship among price, supply of wage goods,
pattern of production, and income distribution are so complex, only a
general equilibrium analysis can unequivocably determine the various
effects of specific food price policies on income distribution. In contrast,
the substantial literature on agricultural price policy is dominated by
analysis of the partial relation between relative agricultural prices and
production. Further, economists have not only concentrated their anal-
yses of agricultural prices on production relations rather than on distri-
butional effects but have given least attention to those aspects of pro-
duction, such as marketable surplus, risk-uncertainty relationships, and
shift of resources among enterprises of varying labor intensity, which

I am grateful to Shakuntala Desai for her assistance in developing the data
and references; to Uma Lele, S. D. Tendulkar, Mohinder Mudahar, C. Ranade,
B. M. Desai, and G. Doraswamy for a careful reading and set of comments; and
to an anonymous reviewer for most helpful specific as well as general comments.
1978 by The University of Chicago. 0013-0079/79/2701-0001$02.07

Economic Development and Cultural Change

are most relevant to the absolute and relative incomes of low-income
consumers and producers.1
The purpose of this paper is to delineate the component parts of
a general equilibrium analysis relevant to the relation of price policy
to income distribution; to present data as to the relation of price change
to a variety of those component parts; and to suggest the nature of the
various interactions among those parts. The presentation commences
with the more standard, relatively simple, and very limited questions of
price influence on income distribution and provides the empirical basis
for answers to those questions. It then proceeds to successively more
complex questions, indicating the bases for judgments on those matters,
but falling increasingly short of a definitive position.
Perhaps the most straightforward question about prices and in-
come distribution is, given that all other influences are constant, what
is the effect of a change in relative food prices on the absolute and rela-
tive levels of income of various consumer income classes? Part I ex-
plores that question first by using consumer budget data to estimate the
income effect of a change in grain prices on income, on grain consump-
tion. and on consumption of other goods for various income classes.
The possible secondary effects of those same changes in consumption
patterns on employment are noted, and the modifying influence of sub-
stitution effects is discussed. Finally, the analysis is broadened to show
through the same consumer budget data the effect of a change in supply

1 The complexity of the issues and the weight of analysis toward narrow
short-run production considerations is reflected in the differences and controversy
in the following: M. L. Dantwala, "Incentives and Disincentives in Indian Agri-
culture." Indian Journal of Agricultural Economics 22 (April-June 1967): 1-25;
V. M. Dandekar, "Agricultural Price Policy," Economic and Political Weekly 3
(March 16. 1968): 454-59; John W. Mellor, "The Functions of Agricultural
Prices in Economic Development," Indian Journal of Agricultural Economics 23
(January-March 1968): 23-37; John W. Mellor, "Agricultural Price Policy in the
Context of Economic Development," American Journal of Agricultural Economics
51 tDecember 1969): 1413-20; Uma J. Lele, "Agricultural Price Policy," Eco-
nomic and Political Weekly 4 (August 1969): 1413-19; Uma J. Lele, Food Grain
Marketing in India (Ithaca, N.Y.: Cornell University Press, 1971); Uma Lele,
"Considerations Related to Optimum Pricing and Marketing Strategies in Rural
Development." 16th International Conference of Agricultural Economists, Nai-
robi. Kenya, July 26-August 4. 1976: Raj Krishna, "Agricultural Price Policy and
Economic Development," in Agricultural Development and Economic Growth, ed.
Herman H Southworth and Bruce Johnston (Ithaca, N.Y.: Cornell University
Press. 1968); Theodore W. Schultz, Transforming Traditional Agriculture, Studies
in Comparative Economics no. 3 (New Haven, Conn.: Yale University Press,
1954); E. S. Mason, Economic Development in India and Pakistan (Cambridge,
Mass.: Center for International Affairs, Harvard University, 1966). For an effort
to look directly at the effects of agricultural price changes on income of various
socioeconomic classes, see Roberto Echeverria, The Effect of Agricultural Price
Policy on Intersectoral Income Transfers, Occasional Paper no. 30 (Ithaca, N.Y.:
Department of Agricultural Economics. Cornell University-USAID Employment
and Income Distribution Project, June 1970).

John W. Mellor

of foodgrains on the real income of various consumer classes. Note is
made of the effect of various simplifying assumptions.
Part II shifts to the distributional effects of price changes on pro-
ducers of different income classes. The analysis commences with the
simpler but generally less relevant case-a change in price with no
change in production. Data for various farm-income classes are used
to analyze this effect. The analysis is then broadened to explore the
effect of concurrent changes in production and prices, with alternative
assumptions about demand elasticities.
Part III takes up the far more complex question of the effect of
prices on agricultural production, first in the context of static technology,
and then in the more relevant but less understood context of techno-
logical change. The production effects are, of course, relevant to income
distribution because of the constraint which the supply of wage goods
may provide to growth in employment of low-income people. This part
of the analysis serves to bring together the very limited literature on
the relation between various aspects of price policy and technological
change in agricultural production.
Part IV briefly presents a number of considerations relating food
prices to employment in the agricultural and nonagricultural sectors.
The discussion, on a subject of as great importance as that in earlier
parts, reflects the extreme thinness of conceptual and empirical work
in this area. The discussion serves to underline once again the complex-
ity of the considerations underlying an optimal food price policy and
the weak data base for improving such decisions.
Part V summarizes major policy implications which may be drawn
from the various partial analyses.

I. Direct Effects of Foodgrain Price Change on Distribution of Income
among Consumers
Change in foodgrain prices causes a larger percentage change in the real
incomes of low-income consumers, but a larger absolute change in the
real incomes of high-income consumers. The absolute effect on the in-
comes of high-income consumers may have secondary effects on the
poor through changes in consumption of other goods and services and
a consequent change in employment in their production.
Thus, in India, the top 5% in the income distribution spends over
two and a half times as much per capital on foodgrains as the lowest
two deciles in the income distribution (table 1).2 However, despite its
large absolute expenditure, this upper-income class allocates only 15%
2 In India, foodgrains represent a major portion of total expenditure and ex-
hibit sharply different marginal propensities to consume across income classes. The
same analysis is relevant to countries with higher incomes than India if the subset
of food items is defined sufficiently more broadly than foodgrains as to maintain
these two characteristics.

Economic Development and Cultural Change

of its total expenditure to foodgrains, compared with 54% for the lower-
income class (calculated from table 1).
Table 2 presents data as to the income effect of an increase in
foodgrain price. For high-income nations, this effect is normally con-
sidered negligible; but it is a major factor in low-income nations, where
the proportion of family income spent on foodgrains is much higher.
The analysis uses Indian data because of its availability, because food-
grains are dominant in Indian consumption patterns, and because of the
low levels of income. After analysis of the income effect, alternative
assumptions with respect to substitution effects will be discussed. The
income effect of a price change is analyzed by using cross-section data,
collected by the National Council of Applied Economic Research from
a large sample of Indian households, to compare initial expenditure pat-
terns with those of the different total expenditure classes entered as a
result of changes in real income due to changes in foodgrain prices.
For the data presented, if foodgrain prices rise by 10%, the lowest
two deciles in expenditure, which initially spend Rs 4.830 per capital
per month on foodgrains, experience a real total expenditure decline of
Rs 0.494 per capital per month (table 2). The decline in total real ex-
penditure is, in fact, slightly greater than 10% of the initial expenditure
on foodgrains because the proportion of total income spent on food-
grains increases in successively lower income classes. In this case, as-
suming all other prices as well as the proportion of income saved as
constant and expressed in constant price terms, the new real expenditure
will be Rs 8.44 per capital per month, or a decline of 5.5%.
In contrast, the top 5% in the expenditure distribution experiences
a decline in real total expenditure of Rs 1.01 or somewhat over twice
as large an absolute decline as that of the lower-income class; but at
only 1.2% of the initial expenditure, there is less than one-quarter as
large a percentage decline as that experienced by the lower-income class.
The expenditures of the poor on foodgrains are, of course, far more
elastic with respect to the income effects of price than are those of the
rich. For the bottom two deciles in the income distribution, the elasticity
of response of real expenditure (assuming no substitution effect) to
change in foodgrain prices is 0.55, compared with 0.12 for the top 5%
(table 2).
A number of other relationships important to income distribution
are illuminated by this exercise. It is significant that in response to a
price increase both the absolute and the percentage decline in real ex-
penditure on foodgrains is greater the lower the income class. Thus, for
a 10% increase in foodgrain prices, the bottom two deciles reduce their
real expenditure on foodgrains by 5.9%, compared with a reduction of
only 0.2% by the upper half of the tenth decile (calculated from tables
1 and 2). More important, this top income class reduces its absolute


Bottom Lower 1/2 Upper 1/2 Mean for
Two Deciles Deciles 6, of of All
Deciles Decile 3 4 and 5 7, and 8 Decile 9 Decile 10 Decile 10 Classes

Per capital monthly consumer ex-
penditure ................... 8.93 13.14 17.80 24.13 30.71 41.89 85.84 24.43
Monthly per capital expenditure on:
Foodgrains. ................... 4.83 6.84 8.31 9.58 10.45 11.37 12.80 9.68
Milk and milk products......... .19 .58 1.13 1.94 2.79 4.15 8.58 1.98
Meat, eggs, and fish............ .10 .22 .36 .56 .76 1.08 2.20 .57
Other foods .................... 1.19 1.34 1.64 2.16 2.78 3.98 10.16 2.19
Tobacco....................... .19 .25 .32 .39 .47 .59 1.00 .40
Vanaspati ..................... .01 .04 .11 .23 .36 .59 1.25 .23
Other oils ..................... .14 .34 .56 .81 1.02 1.28 1.84 .82
Sweeteners ..................... .16 .36 .58 .85 1.08 1.40 2.17 .86
Cotton textiles ................. .47 .84 1.20 1.64 2.04 2.63 4.34 1.66
Woolen textiles................. .01 .03 .06 .11 .20 .79 .06
Other textiles .................. .01 .01 .02 .04 .09 .66 .02
Footwear ...................... .06 .10 .15 .21 .30 .59 .16
Durables and semidurables...... .07 .11 .17 .27 .40 .68 2.45 .28
Conveyance................... .04 .09 .16 .30 .49 .94 4.12 .30
Consumer services .............. .11 .19 .30 .48 .68 1.09 3.19 .48
Education ..................... .04 .08 .15 .29 .49 .94 4.23 .30
Fuel and light ................. .57 .89 1.19 1.56 1.89 2.37 3.82 1.57
House rent ................... .02 .05 .15 .30 .69 3.38 .15
Miscellaneous (approx.)......... .82 .87 1.43 2.71 4.35 7.52 18.17 2.72

SouRCE.-The data source is the National Council of Applied Economic Research, All-India Consumer Expenditure Survey,
vol. 2(New Delhi: NCAER, 1967). These data provide expenditure elasticities of foodgrains and milk and milk products consistent with
those from the National Sample Survey (NSS) of 1963-64 when fitted to the function used here. R2 for equations estimated from
grouped data for different commodities varied between .742 and .981. The NCAER data provide more detailed breakdown of expendi-
ture than the NSS, but for a sample biased toward higher-income groups. The mathematical functional form used for these calculations
was: log y = a + b/x + c log x where y = per capital monthly expenditure on a commodity in each expenditure class x and x = per
capital monthly total expenditure in each expenditure class. For a more complete discussion of the data, see B. M. Desai, Analysis
of Consumption Expenditure Patterns in India, Occasional Paper no. 54 (Ithaca, N.Y.: Department of Agricultural Economics, Cornell
University-USAID Employment and Income Distribution Project, August 1972).



Bottom Lower 'A Upper /2 Mean for
Two Deciles Deciles 6, of of All
EXPENDITURE CATEGORY Deciles Decile 3 4 and 5 7, and 8 Decile 9 Decile 10 Decile 10 Classes

Initial total per capital monthly ex-
penditure................... 8.93 13.14 17.8 24.13 30.71 41.89 85.84 24.43
Decline in monthly per capital ex-
penditure due to the income ef-
fect of a 10% rise in foodgrain
Foodgrains.................... .285 .260 .208 .153 .115 .068 .026 .147
Milk and milk products......... .034 .074 .105 .125 .196 .132 .113 .124
Meat, eggs, and fish............ .013 .021 .026 .03 .031 .032 .030 .030
Other foods ................... .004 .037 .061 .085 .104 .131 .210 .085
Tobacco ...................... .008 .010 .011 .012 .012 .012 .011 .012
Vanaspati ..................... .003 .008 .013 .020 .022 .022 .015 .019
Other oils ..................... .020 .033 .037 .340 .030 .023 .010 .034
Sweeteners..................... .022 .034 .038 .038 .034 .028 .006 .037
Cotton textiles ................. .043 .057 .062 .062 .058 .055 .042 .062
Woolen textiles ................ t .002 .004 .006 .003 .011 .021 .006
Other textiles .................. t .001 .001 .002 .003 .006 .033 .002
Footwear ................... .. t .006 .007 .008 .009 .008 .008 .008
Durables and semidurables...... .004 .007 .012 .017 .023 .032 .067 .017
Conveyance .................. .004 .010 .015 .025 .034 .052 .062 .024
Consumer services............. .009 .015 .021 .029 .035 .044 .072 .028
Education..................... .005 .009 .015 .025 .035 .054 .135 .025
Fuel and light ................. .040 .049 .051 .051 .050 .052 .036 .05
House rent .................... t .005 .009 .019 .029 .046 .101 .018
Absolute decline in total expenditure .494 .638 .696 .741 .772 .808 1.01 .728
Decline in total expenditure (%)..... 5.53 4.86 3.!9 3.07 2.51 1.93 1.18 2.98

SOURCE.-For data source and mathematical function used, see table 1.

NoTE.-Let the demand function for the ith commodity be

Qi = Qi(P,, .., P, ..., Pn, Y) (1)
where Pi = price of the ith commodity; i = 1,..., N; and Y = total expenditure. The effect of change in the price of ith commodity
on the demand for any commodity, sayjth, is given by the Slutsky equation as follows:

utilityy = constant Q prices = constant. (2)
This can be written as
-P'=Qj -- (apj) utility = constant Q, p--j prices = constant. (3)

In terms of elasticity, eq. (3) can be written as:
Eii = cji bin, (4)
where E,, = uncompensated price elasticity of demand forth commodity with respect to the price of ith commodity, c, = compensated
price elasticity of demand for jth commodity with respect to the price of ith commodity, b, = budget share of ith commodity, and 7, =
expenditure elasticity ofjth commodity. We further know that

cji = o and cji = ci, (5)
for all iandj. Thus, if the ith commodity is foodgrains, then the assumption that all the cross price elasticities are zero would imply that
cji = 0 (6)
for all j and i whenever either the jth or ith commodity is foodgrains. Substituting eq. (6) into eq. (4) we get
Eji = -biji (7)
for all j. Alternatively, the change in consumer expenditure on the jth commodity as a result of a 10% change in foodgrain prices is
given by the product of the expenditure on thejth commodity, the expenditure elasticity of the jth commodity, the proportion of expendi-
ture on foodgrains, and the proportionate change in foodgrain prices.
Assumes no change in the percentage saved. C
t Negligible.

Economic Development and Cultural Change

real expenditure on foodgrains by only Rs 0.03, compared with over
10 times as large an adjustment by the lower-income class (table 2).
These data illustrate that in a market economy the bulk of adjustment
to reduced supplies of foodgrains is made by low-income consumers.3
Given the low initial level of foodgrain consumption in the lower-in-
come deciles, the privation imposed on them by rising grain prices is
very great. But any measures which seek to insulate the poor from the
necessity to adjust to reduced supplies will force the need for adjustment
to those whose demand is much more inelastic-thereby causing pro-
portionately much greater, and perhaps explosive, price increases. It is
clear from this analysis that it is essentially impossible to protect the
poor from the major income effects of a short crop by market measures.
Further adverse consequence for the poor of a change in relative
foodgrain prices may follow from the effects of such a change on the
consumption of other commodities. As a result of a rise in foodgrain
prices, the absolute decline in expenditure for almost all nonfoodgrain
commodities is greater for higher-income classes than for lower-income
classes, although of course the percentage decline in expenditure is much
greater in each case for the lower-income classes. For example, in re-
sponse to a 10% increase in foodgrain prices, the lowest two deciles in
the income distribution reduce consumption of milk and milk products
by 33%, compared with a reduction of 9% by the top 5%, though the
absolute reduction by the higher-income class is over three times as
great as for the lower-income class (tables 2 and 3). Overall, while
foodgrain consumption declines only 4%, consumption of most other
commodities declines between 10% and 30% (calculated from table 3).
These relationships suggest, first, that an increase in foodgrain
prices may lead to substantially reduced consumption by the poor of
agricultural commodities of high nutritive value. It is, of course, con-
ceivable, but neither logical nor likely, that the poor would respond to
increased foodgrain prices by some substitution of higher-quality foods
which, though more expensive, had not increased in price.
Second. the large absolute reduction in consumption by higher-
income groups of goods and services other than foodgrains, and par-
ticularly of livestock products and vegetables (the production of which
is in Asian countries generally highly labor intensive), reduces employ-
3 These calculations in effect assume equating of total expenditure and total
income. If the higher-income classes reduce savings, or the lower-income classes
increase dissaving, in response to higher foodgrain prices, then the expenditures on
various categories of goods will be even less responsive to price. If, as is usually
assumed to be the case, the marginal propensity to save is higher for high-income
than low-income classes, then of course the proportion of the total adjustment
which must be made by the lower-income classes is even greater. Similarly, the
greater the extent to which foodgrain expenditure of higher-income consumers is
for relatively more demand-elastic services associated with the foodgrain, the more
this conclusion will be reinforced.


Bottom Lower 1/2
Two Deciles Deciles 6, of Upper 1/2
Deciles Decile 3 4 and 5 7, and 8 Decile 9 Decile 10 of
(Less (.50- (1.00- (5.00- (10.00- (15.00- Decile 10 Mean for
than .49 .99 4.99 9.99 14.99 29.99 (30.00+ All
Acres) Acres) Acres) Acres) Acres) Acres) Acres) Classes

Mean per capital monthly consumer
expenditure (Rs)............. 8.93
Expenditure elasticities for:
Foodgrains.................... 1.04
Milk and milk products......... 3.34
Meat, eggs, and fish............ 2.34
Other foods................... .06
Tobacco....................... .74
Vanaspati .................... 5.41
Other oils .................... 2.68
Sweeteners .................... 2.54
Cotton textiles ................. 1.68
Woolen textiles................ 3.94
Other textiles .................. *
Footwear .................... 2.43
Durables and semidurables...... 1.02
Conveyance.................... 2.06
Consumer services.............. 1.50
Education ..................... 2.12
Fuel and light ................ 1.29
House rent ..................... 5.94

13.14 17.80 24.13 30.71 41.89 85.84 24.43

SOURCE.-See table 1.
* Negligible.

Economic Development and Cultural Change

ment. To the extent that such reduction in employment reduces incomes
and hence demand by the poor, the increase in price of foodgrains will
be dampened. This indirect effect of foodgrain price changes of course
complicates empirical analysis: the greater the employment effect, the
less will be the price increase. But either way the poor pay-in terms
of lower real wages as prices rise or in reduced employment caused by
the decline in real income of the upper-income classes.
The foregoing partial analysis is based on the calculation of the
income effect of a relative price change. The extent to which observed
behavior is consistent with it depends on the extent of the substitution
effects and, of course, on the extent to which countervailing or rein-
forcing employment, income, and stocking effects occur. Substitution
effects of relative price changes cannot be determined on an a priori
basis and empirically cannot be separated from several other influences.
However, useful observations can be made as an extension of the pre-
ceding analysis.
First, to the extent that foodgrains are an inferior good for the
poor, the income effects will be reinforced. In assuming an inferior-
good status, it should be remembered nevertheless that the poor have
already reduced consumption of other goods to a very low and perhaps
biologically minimal level.
Second, to the extent that higher-income groups have positive sub-
stitution effects, the income effects will, of course, be reduced by the
substitution effects. However, although in the short run higher-income
consumers may substitute livestock products, fruits, and vegetables for
grain, the aggregate impact is likely to be small-first, because the same
factors of weather and demand are likely to raise prices of those com-
modities also; and second, because in the longer run those commodities
will compete with grain for the same production resources. It seems
less likely that strong substitution effects would prevail between grain
and nonfood commodities.
Finally. it should be remembered that grain is itself not a homo-
geneous category, so substitution of lower-priced for higher-priced va-
rieties may allow reduced expenditures without a commensurate reduc-
tion in quantity, though with a possible reduction in nutritive value. In
the short run. the supply of the inferior types of grain will be inelastic,
and the search for a cheaper mix of grains will simply reduce the qual-
ity-related price disparities, rather than mitigate the effects on consump-
Substitution effects are probably less important in reducing the
effect of production changes on price than are storage effects and em-
ployment effects. The market is usually insulated to some extent from
declines in the current production of foodgrains by the availability of
carryover stocks, unless there is a very large change in production or

John W. Mellor

a succession of bad harvests. There is clear evidence that farmers build
stocks in good years and deplete them in poor years.4 Thus, in India,
the price response to poor crops was much more substantial in 1966-67
than in 1965-66, a much "worse" year; similarly for 1973-74 com-
pared with 1972-73.
As pointed out above, the secondary effects on employment of an
increase in foodgrain prices could be as important in depressing the
real incomes of the poor as the direct effects of price on consumption.
With these important caveats in mind, table 4 is of interest in
suggesting the distributive impact on consumers of a 10% decline in
the supply of foodgrains, using the elasticities implicit in the preceding
analysis, and assuming no compensating decline in employment or sec-
ondary effects from the effect of the price change on producers' incomes.
In this analysis, the lowest two deciles in the income distribution
of consumers suffer a 36.6% decline in real income compared with a
decline of 7.9% for the top 5% in the income distribution (table 4).
Similarly, the lowest-income deciles experience a 39.5% decline in
foodgrain consumption, compared with 1.3% for the top income group
(calculated from tables 1 and 4). The large reduction in consumption
of nonfoodgrain commodities shows clearly that there would be large
secondary effects on employment, greatly reducing the foodgrain price
increases (table 4).
The foregoing data show one additional relationship between food-
grain prices and low-income consumers. The poor spend a high pro-
portion of increments to income on foodgrains: the bottom two deciles
in the income distribution spend 59% of increments to income on food-
grain, compared with only 2% for the top half of the tenth decile (cal-
culated from tables 1 and 3). Thus, the role of price on the supply
function for this crucial wage good must enter importantly into a full
analysis of the relation between price and income distribution, particu-
larly given the important role of employment in determining the income
of lower-income families.

II. Direct Effects of Foodgrain Price Change on Distribution of Income
among Producers
The effects of relative price changes on agricultural producers differ
from the effects on consumers in two important respects. First, the in-
come effect, assuming production is constant, is in the same rather than
in the opposite direction as the price change. Second, the largest effects,

4 For an analysis of this point and estimates of magnitudes, see John W.
Mellor and Ashok Dar, "Determinants and Development Implications of Food-
grains Prices, India, 1949-50 to 1963-64," American Journal of Agricultural Eco-
nomics 50 (November 1968): 962-74.


Deciles Deciles 6,
Decile 3 4 and 5 7, and 8

Lower /2 Upper 1/
of of
Decile 9 Decile 10 Decile 10

Per capital monthly consumer ex-
penditure. ...................
Expenditure on:
Foodgrains ...................
Milk and milk products..........
Meat, eggs, and fish ............
Other foods ...................
Vanaspati ................... .
Other oils ................... ..
Cotton textiles .................
Woolen textiles .................
Other textiles ..................
Durables and semidurables......
Conveyance ...... .............
Consumer services..............
Education ................... ..
Fuel and light .................
House rent .................. .
Total decline in real income in each
class. ................... ....
New real expenditure .............
Decline in real expenditure (%) ....





13.14 17.80 24.13 30.71 41.89 85.84 24.43





4.17 4.670 4.90 5.27 5.38 6.77 4.89
8.97 13.13 19.23 25.44 36.51 79.07 19.95
31.7 26.7 20.3 17.2 12.8 7.9 20.0

SOURCE.-See table 1.
NOTE.-The percentage rise in the prices of foodgrains due to a 10% decline in supply is calculated, and then the adjustment made
in consumption of all commodities due to the rise in the price of foodgrains is shown in this table. (i) The percentage rise in price of
foodgrains = [(dQ/Q) X 100]/e, where dQ/Q is a proportionate decline in the foodgrains supply and e is the price elasticity of de-
mand for foodgrains in the mean class. From table 2, the decline in expenditure on foodgrains corresponding to mean class as a result
of a 10% rise in the price of foodgrains is 0.147, implying a 1.52% decline in foodgrains consumption expenditure. Therefore, the
percentage rise in the prices of foodgrains = 10/.15 = 67%. (ii) This 67% rise in the price of foodgrains is reflected in the decline in the
consumption expenditure on all commodities. See the footnote to table 2 for the basis of calculation of the decline in expenditure on each


Mean for


John W. Mellor

both relative and absolute, fall on the producers with the largest mar-
ketings (and presumably with the higher incomes).
The effect of a price change which occurs independently of change
in the volume of domestic production is easier to analyze than the effect
of a price change in response to a production change, perhaps induced
by variations in the weather. These two somewhat different cases will
be discussed in order, followed by analysis of the effects of price change
on production.

The Effect on Producers of Change in Relative Prices with
Production Constant
The relationships described below refer to effects of price changes on
producers when quantity produced stays constant, as could happen if
the price changes were due to a foreign food-aid program. It could also
happen as a result of commercial trade, although in that case the rela-
tionships are more complex because change in imports and exports of
foodgrains would presumably be offset by trade in other commodities,
with further price and income effects.
The effect of relative change in agricultural prices on producers'
incomes depends on (i) the quantity they produce, (ii) the quantity
of home consumption and hence of marketing, and (iii) the quantity of
purchased production inputs. The effect of price changes is much greater
in both absolute and percentage terms on larger farms than smaller
farms-the larger farms normally produce more, market a higher pro-
portion of their production, and have a higher proportion of output
represented by purchased inputs.
Table 5 illustrates these relationships by relating size classes of
farms to level of production, home consumption, and marketing. For
the smallest farmers, a price increase actually decreases income, because
they are net purchasers of foodgrain, presumably paid for largely by
working as laborers. It is only in the fourth and fifth deciles and above
that a substantial rise in income occurs. In the upper income deciles,
the price effect is more nearly proportionate to income since the bulk
of production is marketed-it is actually less than proportionate because
of the fixed share of output assumed to be retained for feed, seed, and
waste and because the calculation relates to gross value of output rather
than to the value of output net of cash production costs.
The absolute increase in income resulting from a 10% price in-
crease is about 60% larger for the ninth decile than the average for the
sixth, seventh, and eighth deciles and over six times larger in the upper
half of the tenth decile than the average for the sixth, seventh, and eighth
Thus, if a foodgrain price increase is seen as a simple transfer of
income from consumers to producers, it largely takes place between


Bottom Lower Upper
Two Deciles Deciles 6, 1/ of 1/2 of
Deciles Decile 3 4 and 5 7, and 8 Decile 9 Decile 10 Decile 10

1. Average gross acres sown per reporting holding............ .29 .98 3.85 8.05 12.57 20.70 45.50
2. Gross value of foodgrains production* ................... 4.06 13.72 53.91 112.72 176.01 289.85 637.11
3. Foodgrain consumption expenditure. .................... 4.83 6.84 8.31 9.58 10.45 11.37 12.80
4. Value of foodgrains marketed .......................... -1.38 4.83 37.51 86.23 139.16 235.00 538.74
5. Effect of 10% rise in price of foodgrains, with no change in
production, on value of foodgrains marketed .............. -.14 .48 3.75 8.62 13.92 23.50 25.87
6. Row 5 as a percentage of gross value of foodgrains production -3.4 3.5 7.0 7.7 7.9 8.1 8.3
7. Effect of 10% decline in production and 5% rise in foodgrains'
price on value of foodgrains marketed ..................... -.44 -.99 -2.93 -5.75 -8.75 -14.05 -30.42
8. Row 7 as a percentage of gross value of foodgrains production -10.8 -7.2 -5.4 -5.1 -5.0 -4.8 -4.8
9. Effect of 10% decline on production and 10% rise in food-
grains price on value of foodgrains marketed ............... -.52 -.80 -1.29 -1.91 -2.54 -3.53 -6.69
10. Row 9 as a percentage of gross value of foodgrain production -12.8 -5.8 -2.4 -1.7 -1.4 -1.2 -1.1
11. Effect of 10% decline in production and 20% rise in food-
grains' price on value of foodgrains marketed........ ...... -.70 -.44 2.01 5.75 9.88 17.52 40.77
12. Row 11 as a percentage of gross value of foodgrain production -17.2 -3.2 3.7 5.1 5.6 6.0 6.5

SOURCES.-Government of India, Cabinet Secretariate, The National Sample Survey, 18th Round, February 1963-January 1964, no. 142, tables
with notes on consumer expenditure, 1968; and The National Sample Survey, 17th Round, September 1961-July 1962, no. 162, tables with notes on
some features of land holdings in rural areas, 1969.
NOTE.-In this analysis, expenditure on foodgrains is assumed to remain the same irrespective of changes in production and prices of foodgrains.
The difference between production and consumption is due to a 10% allowance for feed, seed, and waste. For row 1, the cumulative percentage of rural
population in various landholding classes was calculated from National Sample Survey (NSS) of landholdings for 1961-62. Similarly from NSS, 1963-64,
data on consumer expenditure for rural households, the cumulative percentage distribution of rural population in various expenditure classes was
calculated. The two cumulative distributions were matched to ascertain the approximate correspondence between level of expenditure and landholding.
Then the average area cultivated per reporting holding in each consumer expenditure class was obtained. For row 2, the gross output of rice was ob-
tained on the assumption that all the acreage was planted to rice. Hence, it is considered as gross output of foodgrains. Taking the all-India average
yield of rice as 1,078 kg. per hectare and the price of rice as Rs 1.925 per kilogram as the price of all foodgrains, the gross value of foodgrain production
per annum was obtained. Further, assuming that the average farm family size was five, the gross value of foodgrain production per capital per month was
obtained. For row 3, see table 1. For row 4, the value of foodgrain marketing per capital per month = the gross value of foodgrain production per
capital per month retentions. Retentions = seed + feed + waste + consumption. Seed, feed, and waste is taken to be 15% of gross value of output.
Per capital per month for this and all subsequent categories.

John W. Mellor

high-income consumers, who expend the largest absolute amount on
food, to high-income producers, who market the largest absolute quan-
tities. In terms of a percentage change in income, the transfer causes
the largest percentage decline in the income of low-income consumers
and the largest percentage increase in the income of high-income pro-

The Effect on Producers of Concurrent Change in
Production and Price
Changes in the relative price of foodgrains more usually occur as a
result of changes in domestic output, due to either short-term weather
changes or more permanent technological changes, and thus the effects
of price changes on producers are usually offset wholly or in part by
production changes.
While a production change in response to the weather or a techno-
logical change affects producers' incomes in direct proportion to their
levels of production, the countervailing price change is more nearly pro-
portional to marketing. Thus, if price increases by the same percent-
age as production declines, the incomes of all producers decline at least
slightly. If the price increase is half as large in percentage terms as the
production decline, producers' incomes, of course, decline more precipi-
tously. In both cases, the percentage decline in income is greater for
low-income than high-income farmers. However, if the price increase
is larger than the production decline, then farmers in the upper-income
classes will experience an increase in income while the lowest-income
farmers may still experience a decline in income.
These relationships are illustrated in table 5, which depicts the
effects of a 10% production decline combined with price increases of
respectively 5%, 10%, or 20%, giving the effects of alternative as-
sumptions as to the price elasticity of demand. In general, the price
change will be counter to the production change, and since demand is
inelastic the change in price will presumably be more than proportion-
ate to the change in production. Given a 10% decline in production,
a 10% increase in price is consistent with unit elasticity; a 20% increase
in price is consistent with an elasticity of -0.5; and a 5% price increase
is consistent with an elasticity of -2.0. The elasticity of -0.5 has often
been justified on theoretical and empirical grounds.5 The price rise of
only 5% is included to illustrate the comparative effects of a price sta-
bilization program.
Two caveats are in order in assuming a price elasticity of demand.
First, the national magnitude depends to a large extent on how the in-
come effect of changes in prices is distributed, especially if adjustment

5 See, e.g., L. M. Goreux, Demand Analysis for Agricultural Products, Agri-
cultural Planning Study no. 3 (Rome: FAO, 1964); Mellor and Dar.

Economic Development and Cultural Change

to price change occurs largely through the income effect. The income
or expenditure elasticities vary greatly among income groups (table 3).
Second, where private carryover stocks exist, change in prices with re-
spect to change in production will be muted. This implies that efforts
to influence price fluctuations by providing subsidized government buf-
fer stocks may, in part, only displace private stocks, making the public
cost of such programs much higher than the cost of just the increments
to national stocks.
It should be noted from the above that price stabilization pro-
grams destabilize small producers' real incomes and stabilize consumers'
incomes and large producers' incomes. Thus, it is significant that the
introduction of a less unstable price (row 8 compared with row 12 of
table 5) increases the decline in income in years-of-production decline
for the third through the fifth deciles in the income distribution. Re-
duced price instability stabilizes income for the lowest-income farmers
because they are net consumers, and for the highest-income producers
because they market a high proportion of what they produce.

HI. The Effect of Relative Changes in Agricultural Prices
on Agricultural Production
A slow rate of increase in food production is increasingly recognized as
a major limitation to increase of employment and income of low-income
families.6 Without a commensurate increase in the supply of food,
growth in paid employment and the consequent rise in demand for wage
goods will cause an increase in food prices, the effects of which may
substantially neutralize the benefits from increased employment and
indeed force a reversal of high-employment policies. Adequate addi-
tional supplies of such wage goods can rarely be mobilized through re-
allocation of existing domestic supplies or through international trade.
Thus, policies on employment, agricultural production, and agricultural
prices must be closely linked. Change in relative prices plays at most
a very limited role in increasing agricultural production in the context
of traditional technology. But if used to complement technological
change in agriculture, price policy may speed the growth of production
significantly. In this context, too, price policy may encourage the adop-
tion of income-increasing innovation by low-income producers through
its influence on profitability as well as on risk and uncertainty.
6 For a full exposition of these relations, see John W. Mellor, The New Eco-
nomics of Growth: A Strategy for India and the Developing World (Ithaca, N.Y.:
Cornell University Press, 1976). For a more theoretical presentation, see Uma J.
Lele and John W. Mellor, Technological Change and Distributive Bias in a Dual
Economy, Occasional Paper no. 43 (Ithaca, N.Y.: Department of Agricultural
Economics, Cornell University-USAID Employment and Income Distribution
project, June 1971). For a briefer, more policy-oriented statement, see Uma J. Lele
and John W. Mellor, "Jobs, Poverty and the 'Green Revolution,'" International
Affairs 48 (January 1972): 20-32.

John W. Mellor

Prices and Production in the Context of Static Technology
With technology given, an increase in relative agricultural prices in-
creases the supply of agricultural commodities by movement along the
production function. Such an increase in production is, by definition, at
an increasing real cost in resources and shifts the distribution of income
against low-income consumers. Agriculture in low-income countries is
commonly operating near the top of the total product curve, with low
marginal returns to added inputs, and is, consequently, often a sector
of highly inelastic aggregate supply.7
The extent to which the income effect of increased wage employ-
ment of the poor will be neutralized by increased food prices depends
on (i) the incremental budget share allocated to foodgrains by those
in wage employment, (ii) the elasticity of supply of foodgrains, and
(iii) the cross-elasticities of demand for foodgrains. Income increases
will be nullified by food price increases as the incremental budget share
approaches one, the supply elasticity approaches zero, and the cross-
elasticity approaches zero. In a low-income country for which the in-
cremental budget share allocated to foodgrains by the laboring classes
may be 0.59 (calculated from tables 1 and 3), the aggregate supply
elasticity for basic foodgrains is as low as -0.1; and the cross-elasticity
low, the income increase to the laboring classes from employment may
be largely eliminated by the consequent price increases.
The literature dealing with agricultural supply response is much
greater with respect to substitutions among individual commodities than
with respect to the more complex, but here more relevant, problem of
aggregate supply of foodgrains and of agricultural wage goods more
generally. What literature there is suggests quite inelastic aggregate sup-
ply, on the order of -0.1 to -0.2.8
The supply of basic agricultural wage goods is perhaps likely to be
most elastic if a substantial proportion of land and other resources is
devoted to annual crops consumed either domestically by high-income
people or exported. A transfer of acreage may then be effected with
little decline in marginal productivity. In such a case, the use of a price
increase policy to encourage food-crop production, and the maintenance
of high relative prices as a means of implementing that policy, may be

7 For a more complete discussion, see John W. Mellor, Economics of Agri-
cultural Development (Ithaca, N.Y.: Cornell University Press, 1966), chap. 11.
8 For an analysis of aggregate supply elasticities, see Robert Herdt, "A Dis-
aggregate Approach to Aggregate Supply," American Journal of Agricultural Eco-
nomics 52 (November 1970): 512-20; Howard Barnum, "A Model of the Market
for Foodgrains in India, 1948-64," Technical Report no. 23 (Berkeley: Project for
the Evaluation and Optimization of Economic Growth, Institute of International
Studies, University of California, 1970); Krishna; Mellor, Economics of Agricul-
tural Development, chap. 11.

Economic Development and Cultural Change

A few countries have, at times, followed price policies which have
depressed agricultural prices substantially relative to international rela-
tionships (e.g., Thailand), with consequent low levels of input use by
international standards and consequent discouragement of production
for the market.9 Particularly if the production functions are essentially
linear, except for near the bottom and top of the function, rectification
of such policies may have dramatic effects on input use and on pro-
In the face of inelastic domestic production, the supply of food-
grains may, of course, be augmented by imports, depending on the
elasticities of supply and demand for exports to pay for them and on
the elasticity of supply of foodgrains for import. However, the coeffi-
cients for these variables too may be quite inelastic, particularly for
large countries or large aggregates of small countries. As an alternative
policy, the marginal redistribution of income effected by fiscal policy
is also unlikely to achieve an adequate transfer of food from high-in-
come to low-income classes, because of the highly disparate marginal
propensities to consume at the various income levels.
Thus, one may conclude that in the context of static agricultural
technology the gains to the poor from expanded employment are likely
to be substantially offset by increased prices of food as increased de-
mand exerts its pressure on an inelastic supply. It is these relationships
that turn attention to technological change generally and the role of
price policy to technological change in agriculture more specifically.

Prices and Production in the Context of Technological Change
Efficiency increasing technological change in agriculture allows an in-
creased supply of wage goods without an increase in price.10 Thus, in-
comes of low-income people may increase through employment without
an offsetting effect of rising wage-good prices. The benefits-of-scale
neutral technological change will be distributed among producers more
nearly in proportion to output than to marketing and, thus, need be
less skewed toward larger producers in their benefits than increased
prices. Scale neutral technological change is, of course, directly a prod-
uct of development of institutions for research, education, input distri-
bution, etc., and not of policy for price changes. However, increased
prices may play an important indirect role in the adoption of new tech-
nology. Insofar as that is the case, there may be a trade-off between
short-run losses by the poor from higher agricultural prices and long-

9 See Jere R. Behrman, Supply Response in Underdeveloped Agriculture
(Amsterdam: North-Holland Publishing Co., 1968).
10 For a wide range of examples, see John W. Mellor and Uma Lele, "Growth
Linkages of the New Foodgrains Technologies," Indian Journal of Agricultural
Economics 28, no. 1 (January-March 1973): 35-55.

John W. Mellor

run gains from a shift of the agricultural production function, a larger
supply of wage goods with favorable employment implications, and even-
tually lower agricultural prices as equilibrium is reached in agriculture
with lower costs of production.
Despite its importance to both growth and income distribution,
there is little empirical evidence as to the relation between agricultural
prices and the pace of technological change. Of course, increased rela-
tive output prices increase further the disequilibrium induced by the
lower costs of new technology, thereby accelerating output increase.
That influence is thought in agriculture to be particularly strengthened
by effects which reduce the incidence of uncertainty. Higher prices re-
duce the probability of loss from an innovation by increasing expected
average profitability. More stable prices may also reduce uncertainty for
some farmers.
In a substantial analysis of farm management data, G. M. Desai
shows considerable underutilization of fertilizer in certain Indian states
in circumstances in which the rate of return on investment is high but
the absolute return per farm is low." Reasoning from a regression anal-
ysis of cross-section data on fertilizer use per acre and relative fertilizer
prices from several states in India, he suggests that under these con-
ditions adoption of fertilizer is highly responsive to price.
The relation between price policy and variance in agricultural in-
comes is highly complex. High variance in net income, at the very least,
has an unfavorable effect on income distribution by skewing the pat-
tern of adoption toward already higher-income farmers-reflecting their
greater risk-bearing capacity.
Such is clearly documented by Schluter in a study of the Surat
District, India, in which he finds a clear trade-off between variance and
income, with small farmers choosing low-value, low-variance crops, as
compared with larger farmers.12 Expected value-variance (E-V) fron-
tiers estimated for nine representative farms by Schluter show that ob-
served incomes are generally much lower than the maximum levels
corresponding to economic efficiency, while the observed cropping pat-
terns are close to the estimated E-V frontiers. In a sample of 33 farm-
ers, three have points on the E-V frontiers, and 14 would increase real
income less than 5% if they shifted on to the E-V frontiers, given the
same level of risk. The increase in income that could be achieved by

11 Gunvant M. Desai, Growth of Fertilizer Use in Indian Agriculture: Past
Trends and Fu'ure Demand, Bulletin no. 18 (Ithaca, N.Y.: Cornell International
Agricultural Development Program, 1971).
12 Michael G. G. Schluter, Interaction of Credit and Uncertainty in Deter-
mining Resource Allocation and Incomes on Small Farms, Surat District, India,
Occasional Paper no. 68 (Ithaca, N.Y.: Department of Agricultural Economics,
Cornell University-USAID Employment and Income Distribution Project, Febru-
ary 1974).

Economic Development and Cultural Change

such a shift is between 5% and 10% for 12 of the farmers and over
10% for only four farmers.
Schluter's data show that an increase in net income can be achieved
by increasing the proportion of acreage planted to cash crops, but that
in such a transfer, a Rs 100 increase in net income typically entails
greater than a Rs 100 increase in the absolute deviation of income from
its expected value. It is clear why poor farmers may choose crops which
yield lower returns but are less risky, particularly subsistence crops.
New high-yielding varieties of food crops have many of the character-
istics of traditional cash crops, including high-cash production costs and
a high proportion of output marketed, and thus might be expected to
evidence similar behavior.
However, in agriculture, yield variation due to weather is generally
a more important source of variance than price. This is particularly true
when a large proportion of output is retained for domestic consump-
tion. And, the extent to which price stabilization even increases the
stability of producers' incomes is, in practice, dependent on several
factors, important among which is the extent to which movements in
price are inversely related to movements in production. At the micro-
level, that depends on the extent to which production changes in a par-
ticular area are similar to changes in national aggregates and on the
degree of national integration of markets. Thus, Schluter, in a simu-
lation of the effect of changes in price variance, using actual farm data
from the Surat District, India, found that in four out of six situations
price stabilization actually increased the coefficient of variation of
Finally, in selecting a price policy to facilitate efficiency increasing
technological change in agriculture, it must be remembered that in-
creased profitability and reduced variance in income may be achieved
by appropriate investment in such items as research, education, and
irrigation-quite possibly on a more cost-effective basis than through
price policy and with lesser short-run deleterious effects on income dis-

IV. Effects of Agricultural Price Policy on Employment
Throughout this paper, emphasis has been placed on the trade-off be-
tween inverse change in agricultural prices and employment in influ-
encing the income of low-income families. In Part I, note was made of

1s The data were for rice and cotton (for each, fertilized and unfertilized),
sorghum, and groundnuts. For 1962-72 the coefficient of variation of revenue
(price X yield) was reduced slightly with both fixed prices at the mean and prices
fixed at 50% of the mean for sorghum and groundnuts; the coefficient of variation
of revenue was increased by a much larger margin in the other four cases (Schlu-

John W. Mellor

the income effect of agricultural price changes on the level and pattern
of consumption of other commodities and consequent indirect employ-
ment effects. Part III discussed the potential influence of agricultural
price policy on agricultural production, the supply of wage goods, and
the potential employment level. The new high-yielding crop varieties
are noted for their generally low elasticity of employment with respect
to output. Thus, the primary significance for employment of the new
foodgrain technologies lies in their potential to relax the wage goods'
constraint and to generate increased farm incomes, which may promote
a secondary increase in employment.14 In this section, three further as-
pects of the relation between agricultural prices and employment are
explored: (a) the effect of relative agricultural prices on the labor in-
tensity of the agricultural output mix; (b) the effect of relative agricul-
tural input prices on the choice of technique in agricultural production;
and (c) the effect of relative agricultural prices on the level and struc-
ture of nonagricultural employment.

Prices and the Agricultural Output Mix
Choice of cropping pattern is one of the most important factors influ-
encing labor requirements in agriculture, and, thus, because of the rela-
tive magnitude of the agricultural sector, it is one of the most impor-
tant determinants of overall employment in a low-income country. B. M.
Desai in a detailed analysis of farm-management data from the Surat
District, India, calculates that 90% of the differences in income per
acre among farms is due to differences in cropping pattern, which affect
income largely through differences in labor input, rather than to differ-
ences in the intensity of inputs' use in specific crops.15 Desai and Schlu-
ter show from farm management data for the Surat District, India, that
human labor use is 60 and 37 days per acre on groundnuts and cotton,
respectively.16 A transfer of one-quarter of the cotton acreage to ground-
nuts would add over 2.1 million man-days of employment per year in
the Surat District. That is about eight times as much employment to be
added in that district as by the special "crash scheme for rural employ-
ment" intended as a major source of rural employment. In this case, not
only do the two crops compete for the same set of nonlabor resources
and have substantial differences in labor requirements, but a portion of

14 Mellor and Lele, "Growth Linkages."
15 B. M. Desai, Relationship of Consumption and Production in Changing
Agriculture: A Study in Surat District, India, Occasional Paper no. 80 (Ithaca,
N.Y.: Department of Agricultural Economics, Cornell University-USAID Tech-
nological Change in Agriculture Project, February 1975).
16 G. M. Desai and Michael G. G. Schluter, "Generating Employment in
Rural Areas," in Seminar on Rural Development for the Weaker Sections (Bom-
bay: Indian Society of Agricultural Economics, May 1974), pp. 143-52; and Mel-
lor, New Economics of Growth, p. 86.

Economic Development and Cultural Change

the domestic supplies of each commodity is also imported. Thus, the
relative domestic prices, production, and aggregate employment can be
influenced by import policy.
The data cited from Schluter in Part III, showing the clear trade-
off between average income and variance in income in the choice of
crop combination has relevance to employment since the higher-income-
generating crops were more labor intensive. Thus, effort to reduce vari-
ance in income would in that case increase employment, particularly
on the smaller farms with relatively larger labor supply.
Despite the importance of agricultural output mix on employment
and the substantial literature showing significant elasticities of output
substitution at the farm level, there has been little policy analysis of
this issue. Needed study would examine not only employment and elas-
ticities of substitution among crops but, equally important, would ana-
lyze potentials to shift trade policy and domestic demand toward more
labor-intensive commodities. Most simply, export and import policy
may be used marginally to facilitate a shift in relative domestic prices
and production toward more labor-intensive commodities. Temperate-
zone nations have done this particularly in the case of sugar-histori-
cally, a labor-intensive crop. India, in the earlier example, could shift
the product mix from cotton toward groundnuts by importing more
cotton and less vegetable oil, with a consequent increase in employment.
Export subsidies on vegetables could have a similar effect. Such poli-
cies are particularly attractive if they compensate for the effects of the
labor market and other imperfections, causing suboptimal utilization of
labor on small farms.
Domestic demand structure may also be influenced toward more
labor-intensive commodities through tax and subsidy schemes. Related
and perhaps more important, demands for relatively labor-intensive
agricultural commodities tend to be relatively elastic with respect to
income, providing a significant opportunity for rising incomes to favor
rising employment. Unfortunately, there is a tendency, because of the
bulky, perishable nature of many such commodities, for marketing
bottlenecks to result in restraint of consumption through price increases
which are not transmitted to the farm level. Institutional credit gaps at
the farm level, for commodities with generally high working-capital re-
quirements, may also inhibit the desired expansion of demand. Thus,
as for other aspects of agricultural price policy, programs must go
beyond the price policies and indicators to substantive aspects of mar-
keting and production. In this context, an employment-oriented price
policy should (a) recognize the employment implications of alternative
price relationships among agricultural commodities, (b) see that overt
price policies do not discriminate against the relatively labor-intensive
commodities, and (c) use movements in market-determined prices as

John W. Mellor

indicators of marketing and production bottlenecks that may be dealt
with through other policies.

Relative Input Prices
The dramatic displacement of labor often occasioned by farm mecha-
nization and its frequent association with effective subsidization of farm
machinery prices relative to labor has prompted a substantial litera-
ture.17 Given that extensive treatment, attention is here brought to two
features which make the statement of effective policy difficult in this
First, although inappropriate pricing policy is frequently deplored,
there is still controversy as to whether market prices of labor adequately
reflect the equivalent of perfect market supply prices.18 It is thus diffi-
cult to know whether or not compensating taxes on machinery may be
in order.
Second, and related to the first, considerable controversy exists
as to the precise nature of the labor supply, particularly given the com-
plexities of seasonal cycles in both demand and supply of labor.19 Thus,
Donovan shows with a linear programming analysis based on farm-
management data for an area in Mysore, India, that the introduction of
hand tractors allows a substantial increase in total employment.20 It
does so by shortening land preparation time sufficiently to allow a not
otherwise possible second crop. It follows that at such time as mecha-
nization is appropriate for breaking labor bottlenecks it may be as ap-
propriate a recipient of price subsidy and other facilitative measures,
particularly for small farmers, as any other element of production and
labor-absorbing technological change. The full complexities of policy
in this area are underlined by Donovan's analytic position that seasonal
labor migration, which of course brings other problems, can meet the
labor bottleneck as effectively as mechanization.
Finally, it should be noted that fertilizer and other chemical inputs
also substitute for labor, and, hence, subsidization of their prices will
reduce employment unless ancillary policies ensure an aggregate in-
crease in output, with a set of direct and indirect employment effects
as elaborated in preceding sections.

17 H. Rao, "Farm Mechanisation in a Labour Abundant Economy," Eco-
nomic and Political Weekly 7, annual no. (February 1972): 393-400.
18 See, e.g., the review and analysis in Mellor, New Economics of Growth,
chap. 4.
19 Ibid.
20 Graeme W. Donovan, Employment Generation in Agriculture: A Study
in Mandya District, S. India, Occasional Paper no. 71 (Ithaca, N.Y.: Department
of Agricultural Economics, Cornell University-USAID Employment and Income
Distribution Project, June 1974).

Economic Development and Cultural Change

Agricultural Prices and Nonagricultural Employment
The basic relationships between agricultural price policy, technological
change in agriculture, supply of wage goods, and employment were dis-
cussed in Part III. In that argument, relatively low agricultural prices
are seen as desirable in the longer run not only to an immediate raising
of the real incomes of the poor but also in stimulating longer-term em-
ployment growth-as long as technological change effects a continuous
upward shift of the supply curve for agricultural commodities.
Relative agricultural prices are often depressed by import and
foreign-exchange pricing policies specifically intended to encourage in-
dustrial growth. Clearly, such policies may directly encourage industrial
employment while in the longer run discouraging production of the basic
agricultural wage goods, with a consequent deleterious effect on employ-
ment potentials. Whether such policy is desirable hinges on an argu-
ment for industry essentially analogous to that for relatively higher
agricultural prices intended to encourage accelerated application of effi-
ciency increasing technological change in agriculture. Policies which
boost the domestic production of industrial consumer goods which are
relatively efficient and labor intensive, and eventually effect a reduction
in the prices of these goods, need have only short-run adverse effects
on relative agricultural prices and agricultural production. As they ex-
pand, they generate increased demand for agricultural wage goods from
increased industrial employment, tending to raise relative agricultural
However, the effects may be quite different when import restric-
tions are introduced to protect capital-intensive, low-efficiency indus-
trial processes. Protection of this kind generates little increase in em-
ployment or in demand for food, and so the depression of relative agri-
cultural prices continues, potentially reducing production in the tradi-
tional agricultural sector and weakening incentives for technological
change in agriculture.21 Such an effect may continue indefinitely if those
industries remain inefficient relative to foreign sources of supply.

V. Conclusion
The data presented demonstrate dramatically that the income effect on
low-income people of food price changes is large, and that the bulk of
adjustment to reduced food supplies is made by low-income people.
Conversely, of course, changes in the income of low-income people are
reflected to a large degree as change in the demand for food.
Change in food prices causes a larger percentage change in the real
incomes of low-income consumers but a larger absolute change in the

21 For an analysis of such an effect in the Indian context, see Mellor, New
Economics of Growth, chap. 7.

John W. Mellor

real incomes of high-income consumers. Thus, there is potential for
substantial secondary effects on employment and incomes of the poor
arising from the primary effects on the consumption pattern of the more
The effects of relative price changes on agricultural producers dif-
fer from the effects on consumers in two important respects. First, the
income effect, assuming production is constant, is in the same rather
than in the opposite direction as the price change. Second, the largest
effects, both relative and absolute, fall on the producers with the largest
marketing (and presumably with the higher income).
Demand for food may be effectively brought into balance with de-
ficient supply through reduction in employment rather than an increase
in price. High-income consumers may prefer policy measures of that
type. Similarly, if the increased demand for food accompanying the in-
creased employment of low-income people is not met by an increased
food supply, the employment-based increase in real income will be sub-
stantially reduced by price increases. Thus, an employment program,
or an income-transfer program for the poor, will be inefficient in assist-
ing them unless provision is made for an enlarged supply of basic food
commodities. It follows that in designing income and employment pro-
grams attention needs to be paid to the material balances and not just
the fiscal balances. From the data in Part I, it can be seen that one
monetary unit of income transferred from the richest to the poorest
classes releases demand for 0.02 units of foodgrain but creates a new
demand for 0.59 units, an imbalance in the ratio of 30 to 1. To state
the position clearly, barring a strict rationing system, increased agricul-
tural production may be a necessary precondition for improving the
incomes of the poor. It follows, of course, that a program of foreign
food aid and, to a lesser extent, commercial imports can be effective
in facilitating an employment increase, particularly in the short run.
The importance of an increased supply of food to the effectiveness
of employment programs in raising the income of low-income families
suggests the appropriate consideration in the analysis of production
effects of agricultural price policy. The preponderance of the evidence
shows that in the context of traditional technology aggregate food sup-
ply will normally be highly inelastic, and, hence, an upward shift in
demand for food will result in magnified upward movements in food
prices, with the consequent distribution effects shown in Part I. How-
ever, in the context of technological change, higher prices to producers
may counterbalance the added risk and uncertainty associated with such
change. If experience with new technologies itself reduces risk and un-
certainty, higher prices may induce a shift to a new technology, which
will not be reversed if prices later decline. Of course, domestic policy
may so depress relative agricultural output prices as to virtually elimi-

Economic Development and Cultural Change

nate use of certain key inputs, such as fertilizer, for market production,
and in that case supply may be highly responsive to even modest
changes in prices. Such a situation is often the result of government
monopoly pricing. Changes in policy will be most effective if such policy
has held production close to the subsistence level. The effect will be
further enhanced if there is close interaction of such input use and new
Research and education which dramatically reduce production costs
may serve as an alternative to higher prices to induce innovation. Such
measures do not have such deleterious effects on low-income consumers
as higher prices, can also induce more permanent increases in produc-
tivity, and may have a less skewed distribution of net benefits to pro-
ducers. Thus, price policy may be viewed as a competitor to other
measures as well as a complement.
Relative agricultural prices affect employment through the labor
intensity of the agricultural output mix, the labor intensity of agricul-
tural technology, and the level and structure of nonagricultural employ-
ment. In each case, the importance of interactions of agricultural price
policy with other policy measures is important.
Finally, the extent to which a change in terms of trade between
agriculture and industry benefits the poor depends very much on the
extent of the structural adjustments it encourages. A turn against in-
dustry will redress itself if it induces accelerated technological change
in agriculture and consequent linkage effects with industry through re-
laxed wage-goods constraint and increased consumer demand. Converse-
ly, a turn against agriculture will redress itself if it encourages acceler-
ated industrial employment growth, consequent greater demand for agri-
cultural wage goods, and increased efficiency of industrial production.
A lack of the conditions for technological change in agriculture and
a lack of the conditions for employment growth in industry will cause
either of the respective price policies to fail.

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