Structural Change and Small Farm Agriculture in Northwest Portugal 9781501737237

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STRUCTURAL CHANGE AND SMALL-FARM AGRICULTURE IN NORTHWEST PORTUGAL

Food Systems and Agrarian Change Edited by Frederick H. Buttel, Billie R. DeWalt, and Per Pinstrup-Andersen

A complete list of titles in the series appears at the end of this book.

STRUCTURAL CHANGE AND SMALL-FARM AGRICULTURE IN NORTHWEST PORTUGAL Eric Monke

Joao Jesus

Francisco Avillez

Manuela Jorge

Jose Pimentel Coelbo

Mark Fangworthy

Dennis Cory

Margarida Marques

Manuela Ferro

Francisco Martins

Timothy Finan

Manuel de Medeiros

Roger Fox

Scott Pearson

Cornell University Press ITHACA AND LONDON

PUBLICATION OF THIS BOOK WAS MADE POSSIBLE, IN PART, BY A GRANT FROM THE MINISTRY OF AGRICULTURE, PORTUGAL.

Copyright © 1993 by Cornell University All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 14850. First published 1993 by Cornell University Press. International Standard Book Number 0-8014-2640-5 Library of Congress Catalog Card Number 92-54973 Printed in the United States of America Librarians: Library of Congress cataloging information appears on the last page of the book.

© The paper in this hook meets the minimum requirements of the American National Standard for Information Sciences— Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984.

Contents

List of Tables

vii

List of Figures

xi

Preface

xiii

Authors

xvii

1

Structural Change and Small-Farm Development Eric Monke, Francisco Avillez, and Dennis Cory

2

Structural Change and Small Farms in the European Community Eric Monke, Mark Langworthy, and Francisco Avillez

1

7

3

Analysis of Agricultural Change Eric Monke, Mark Langworthy, and Manuela Ferro

27

4

Patterns of Production and Resource Use in the Minho Timothy Finan, Roger Fox, and Manuel de Medeiros

46

5

Returns to Representative Farm Systems Manuela Ferro, Jose Pimentel Coelho, and Timothy Finan

71

6

Farmer Responses to Changed Incentives Mark Langworthy, Eric Monke, and Manuela Jorge

101

7

Land Markets and Policy Dennis Cory, Eric Monke, and Joao Jesus

129

v

Contents

VI

8

Public Investment Policies Francisco Avillez, Scott Pearson, and Francisco Martins

149

9

Public Subsidy Policies Francisco Avillez, Scott Pearson, and Margarida Marques

175

Strategies for Change Eric Monke, Francisco Avillez, and Scott Pearson

193

References

209

Index

213

10

Tables

2.1

Changes in farm structure, 1960-1987

12

2.2

Changes in small farms, 1960-1987

13

2.3

Changes in large farms, 1960-1987

15

2.4

Farm numbers in Portugal, 1968—1987

16

2.5

Shares of cultivated area, by size class, Portugal, 1987

17

2.6

Off-farm employment of heads of farm households, 1987

19

Changes in small farms, 1960-1987

26

4.1

Characteristics for selected freguesias

51

4.2

Distribution of land resources within eight freguesias in Entre Douro e Minho

55

Land ownership characteristics for eight freguesias in Entre Douro e Minho

57

4.4

Frequency distribution of the principal farming systems

65

4.5

Characteristics of representative farm systems

66

5.1

Total agricultural area and number of parcels on representative farms

74

5.2

Sizes of parcels by representative systems

75

5.3

Technical characteristics of crop production alternatives in the Minho

78

A2.1

4.3

vii

viii 5.4

Tables Technical characteristics of animal production alternatives in the Minho

81

Distances from parcels to farmhouse on representative farms

83

5.6

Distribution of measures of parcel access, by zone

84

5.7

Farm structure and production patterns, medium dairy, coastal zone

86

5.8

Costs and returns for medium dairy, coastal zone, 1987

87

5.9

Current returns to farm labor on representative farms

89

Returns to farm labor from projected price behavior between 1987 and 1996

93

5.5

5.10

A5.1

EC and Portuguese price projections, 1987-1996

100

A5.2

Price projections for agricultural products, 1987—1996

100

Simulations of modernization on the representative farm systems

104

Examples of modernization scenarios for the coastal, intermediate, and mountain zones

107

Returns to land and labor, and labor requirements of modernized systems, by representative systems

109

Peak-season labor requirements for base case and modernized systems

110

Annual returns to labor from farming in 1987 and in 1996 with modernization

111

Peak-season labor requirements for larger and modernized farm systems

114

Effects on returns and employment for changes in size of modernized farms, 1996

116

Demographic characteristics of households in eight freguesias of Entre Douro e Minho

1 19

Estimates of average available household labor per household, by zone

122

Off-farm work and the labor available for additional employment

124

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

6.10

Tables 6.11

ix

Changes in capital costs associated with modernization and increased farm size

124

7.1

Farmland sales activity in the Minho, 1974-1987

131

7.2

Parcel sizes and buyer characteristics in the Minho, 1974-1987

133

7.3

Percentage of farms renting land, 1987

134

7.4

Rented parcel characteristics, by farm size in the Minho, 1987

135

Impacts of land consolidation on farm costs and returns, 1996

139

7.6

Causes of fragmented parcels in the Minho

140

7.7

Rental contracting in the Minho, 1987

144

8.1

Government expenditure on agriculture in the Minho and in Portugal (continent), 1980—1985

152

8.2

Components of Minho public investment, 1980—1985

154

8.3

Special Program for the Development of Portuguese Agriculture (PEDAP) main projects in Portugal and Entre Douro e Minho, 1987—1989

157

8.4

PEDAP projects in the Minho, 1987—1989

158

8.5

PEDAP improvement of traditional irrigation systems in the Minho, 1987

160

PEDAP rural and feeder road projects in the Minho, 1987

162

Impact of public investment on the medium dairy system in the coastal zone of the Minho

165

8.8

Impact of feeder road investments on net returns

168

8.9

Impact of irrigation investment on net returns

169

8.10

Impact of electrification investments on net returns

171

8.11

Impact of the combined public investment policies on net returns

173

Regulation (EC) Number 797/85: farm investment subsidies, Portugal and Entre Douro e Minho, September 1986 through December 1989

180

7.5

8.6

8.7

9.1

x

Tables Regulation (EC) Number 797/85: number of projects in Entre Douro e Minho by farm size and type of investment, 1986—1987

182

Animal units and cultivated area in less-favored areas and mountain zones, Portugal and Entre Douro e Minho

185

9.4

Impact of capital subsidies on net returns

187

9.5

Impact of direct income transfers on net returns

190

9.6

Impact of public subsidy policies on net returns

191

10.1

Returns to labor and land from private initiatives

194

10.2

Impact of public initiatives on net returns

198

10.3

Impact of private and public initiatives on net returns

200

10.4

Annual returns to labor from farming, 1987 and 1996

201

10.5

Potential Portuguese budgetary costs of alternative policies

205

9.2

9.3

Figures

3.1

Daily wage rates for unskilled labor, Portugal, 1972—1988

35

3.2

An analysis of agricultural change

37

4.1

Agroclimatic zones in the Minho

48

4.2

Farming systems in the Minho

63

7.1

Impacts of legislation on farmland rental markets

145

xi

Preface

With Portugal’s accession to the European Community (EC) the continued economic viability of small-farm agriculture in the Entre Douro e Minho region of northwest Portugal is in question. The agri¬ cultural sector in Portugal will face financial stress in coming years, both from short-run adjustments to EC membership and from the long-run process of structural change. EC-mandated decreases in commodity prices will cause agricultural profitability to decline by as much as 50 percent in many areas. At the same time, EC accession is expected to accelerate growth of the industrial and service sectors, meaning increased opportunity costs of farm labor and more intense competition for access to investment capital. Economic policy can play a key role in shaping the path of success¬ ful agricultural change. Technological and structural changes will be essential to increase farm returns and maintain competitiveness. Larger farms will almost certainly become more prominent, repeating a pattern of change experienced in many other developed countries. But the availability of off-farm employment in many parts of the Minho and the prominence of relatively lucrative dairy and wine sys¬ tems mean that small and part-time farms have important potential as well. The relative significance of these smaller farms within the agri¬ cultural sector will depend very much on the types and incidence of agricultural policies chosen as well as the decisions made to influence the location and patterns of industrial development. By reducing agricultural returns and spurring industrial investment, EC accession will encourage wider divergences in returns between sec-

XIV

Preface

tors. Such divergences can lead to dramatic, disequilibrating move¬ ments of capital and labor to industries and services, leaving agri¬ cultural areas economically disadvantaged and structurally isolated. Escape from agriculture, rather than the development of agriculture, becomes the principal objective of many farm families. In the urbanindustrial sector, demands for housing, health and sanitation facili¬ ties, and education can become difficult to satisfy. Underemployment and low incomes in rural areas then coexist with unemployment and squalor in urban areas. The specter of such changes helps account for the strong interest of EC and Portuguese policy makers in a development strategy that gives ample attention to agriculture. Attempts to increase returns to labor in both sectors can lead to a more manageable transfer of human and capital resources, thereby avoiding the emergence of wide disparities of income across regions and sectors. The challenge is to identify the best mix of private initiatives and public policies to assist Minho farmers during the transition. Portuguese public policy must simul¬ taneously react to adverse farm impacts associated with accession to the EC and the need to allocate scarce domestic and EC budgetary resources to promote economic development. This book evaluates pri¬ vate and public initiatives in light of these concerns. We develop and empirically estimate a methodology to evaluate the potential eco¬ nomic impacts of alternative policy mixes. This methodology will not only assist policy formation in Portugal but may also find applica¬ tions in other industrializing countries faced with similar economic and structural changes. We owe thanks to a great many institutions, firms, and individuals for their support and cooperation during the research on which this book is based. The Luso-American Development Foundation pro¬ vided funding and administrative support to the project team. The Fulbright Foundation provided a research fellowship that enabled Eric Monke to spend a sabbatical year in Portugal. The Ministry of Agriculture, particularly the Direc^ao Regional de Entre Douro e Minho, supplied guidance in the design and implementation of the fieldwork, lent personnel to the fieldwork and subsequent data anal¬ ysis, and provided financial support for publication of the book. We especially thank Antonio Carneiro for coordinating and promoting our project in the Minho. We thank Jeff LaErance and Bruce Beattie (Department of Agricultural Economics, University of Arizona), Derek Ray (Wye College, University of London), and anonymous ref-

Preface

xv

erees for helpful comments on earlier versions, and we are grateful to Linda Phipps for preparation of the manuscript, tables, and graphics.

Eric Monke et al. Tucson, Arizona Lisbon, Portugal

Authors

Francisco Avillez is a professor in and head of the Department of

Agricultural Economics and Rural Sociology, Instituto Superior de Agronomia, Universidade Tecnica de Lisboa. Jose Pimentel Coelho is an assistant professor at the Instituto Supe¬

rior de Agronomia, Universidade Tecnica de Lisboa. Dennis Cory is a professor in the Department of Agricultural and

Resource Economics, University of Arizona. Manuela Ferro is an assistant professor at the Instituto Superior de

Agronomia, Universidade Tecnica de Lisboa. Timothy Finan is the associate director of the Bureau of Applied Re¬

search in Anthropology, University of Arizona. Roger Fox is a professor in the Department of Agricultural and Re¬

source Economics, LJniversity of Arizona. JoAo Jesus is a research associate at the Instituto Superior de Agronomia, Universidade Tecnica de Lisboa. Manuela Jorge is a research associate at the Instituto Superior de

Agronomia, Universidade Tecnica de Lisboa. Mark Langworthy is an assistant research scientist in the Depart¬

ment of Agricultural and Resource Economics, University of Arizona. Margarida Marques is a research associate at the Instituto Superior

de Agronomia, Universidade Tecnica de Lisboa.

XV111

Authors

Francisco Martins is a research associate at the Instituto Superior de

Agronomia, Universidade Tecnica de Lisboa. Manuel de Medeiros is with the Agricultural Division of the Banco

Pinto e Sotto Maior, Lisboa. Eric Monke is a professor in the Department of Agricultural and Re¬

source Economics, University of Arizona. Scott Pearson is a professor at Stanford University and director of

the Food Research Institute there.

STRUCTURAL CHANGE AND SMALL-FARM AGRICULTURE IN NORTHWEST PORTUGAL

Structural Change and Small-Farm Development Eric Monke, Francisco Avillez, and Dennis Cory

During the 1990s, few sectors of the Portuguese economy will ex¬ perience pressures for change as intensely as will agriculture in Entre Douro e Minho. The Minho, an area of predominantly small farms in northwest Portugal, produces substantial shares of the country’s out¬ put of corn, milk, wine, and beef. Accession to the European Commu¬ nity (EC) and adoption of the Common Agricultural Policy (CAP) will lower real prices of all these products, reducing profitability and making agriculture a less attractive source of employment for domes¬ tic labor and capital (Josling and Tangermann). These changes are an abrupt reversal of recent Portuguese policies; high support prices for corn, milk, and meat and substantial subsidies to marketing (partic¬ ularly of milk) were the principal instruments of government interven¬ tion before Portugal joined the EC in 1986. Membership in the EC is also expected to accelerate growth of the industrial sector. Portugal attracts foreign capital (mainly from other EC countries) by its relatively low labor costs, and EC investment aids will speed up the pace of infrastructural investment in energy, trans¬ portation, and education facilities. Minho agriculture will thus face intensified competition for domestic resources, particularly labor, as agricultural returns to these resources are declining. This book assesses alternative changes that might sustain the com¬ petitiveness of Minho agriculture. Surveys and secondary data are the 1

2

Eric Monke, Francisco Avillez, and Dennis Cory

bases of models constructed to typify the principal commodity mixes, farm sizes, and production technologies in the region. These models are then used to evaluate the potential impacts of new government policies on farming. How do the provision of public goods, subsidies to capital investments and labor, and changed regulations in the land and capital markets alter revenues, costs, and net incomes from farm¬ ing? Can small farms be an attractive source of employment? What are the economic trade-offs within a strategy that emphasizes hetero¬ geneous farm sizes? The answers to these questions are central to the formulation of a successful strategy for agricultural development and serve as the focus of the research reported in this book. In the view of many observers, adverse movements in costs and revenues will only hasten a process of change that is unavoidable— structural transformation and the growth of large farms. The relative decline of agriculture in employment and in national income are inex¬ orable consequences of economic growth in all countries (Kuznets; Johnston and Kilby; Syrquin; Timmer). A concomitant movement to¬ ward fewer and larger farms is seen as necessary to maintain agri¬ cultural competitiveness because farmers can earn incomes compara¬ ble to those earned off the farm only by operating large land areas. In many developed economies, therefore, agricultural policy commonly favors large farms. In the EC and Portugal, examples of these biases are easily found: capital subsidies are provided almost exclusively to full-time farmers; land acquisitions are supported only when the pur¬ chase creates large farms; only large dairy herds are considered viable candidates for modernization programs; and large farms receive pref¬ erential access to the land resources freed under retirement programs. Small farms are given little role in this scenario of successful struc¬ tural change. Some observers assert that small farmers are not inter¬ ested in profits, preferring instead to live an independent (and impov¬ erished) life near to Mother Nature; nonmonetary income is viewed as the main reward for this group. The more common view is that small farmers desire higher incomes but are constrained by market distortions from attaining them. Problems in the capital, land, or la¬ bor markets prevent small farmers from expanding or adopting more profitable technologies, obtaining the information and training neces¬ sary to find jobs outside of agriculture, or selling their land and leav¬ ing the sector. In the presence of such market imperfections, the proper role for agricultural policy in developed economies is to assist small-scale farmers to leave agriculture as quickly and painlessly as possible. In keeping with this view, retirement subsidies and retrain-

Structural Change and Small-Farm Development

3

ing programs have been the principal policy instruments available to small farmers. This book shows that the prospects and policy options for agricul¬ ture in the developed economies, particularly for small-farm agricul¬ ture, are more varied than suggested by the traditional view. The rela¬ tive importance of agriculture in developed economies may decline, but the extent of the decline in any particular country does not follow a narrowly delineated path. Whether marginal resources are kept in the agricultural sector or shift to the service and industrial parts of the economy is very much influenced by agricultural policies that affect the value of outputs, the costs of production, and the technologies used. The set of potential policy interventions is much larger than perennial, distorting subsidies; as in the rest of the economy, there are ample opportunities for efficient policies. Government policy can also influence the distribution of productive capacity among individuals. The technical characteristics of produc¬ tion—scale economies, capacity for input substitution, and the oppor¬ tunity costs of resources—place important constraints on the viability of small farms relative to large ones. But a structure dominated by large farms need not be an inevitable consequence of economic devel¬ opment. The critical problem for agricultural change is not the attain¬ ment of some target income per agricultural worker but instead the generation of adequate (competitive) rates of return to agricultural activities. Small farms may be quite capable of generating rates of return competitive with those earned off the farm. If households occu¬ pying small farms can find additional employment outside their farms to allow them to meet their total income and employment goals, there is no reason (from an efficiency perspective) to bias policies against small farms. The concern of agricultural policy in developed countries is thus much more than simply presiding over the decline and fall of the farm sector. Policy makers can address the desirability of alternative struc¬ tures for the entire economy in which the relative importance of agri¬ culture and rural industry varies considerably. Choices affecting the provision of irrigation, roads, and energy infrastructure, their alloca¬ tion among geographical locations, and the application of credit and land market policies have important influences on the costs of domes¬ tic production and the size of the agricultural sector. Rather than focus on the pursuit of a large-farm structure, policy makers may encourage a heterogeneous structure in which small and large farms actively compete for access to resources.

4

Eric Monke, Francisco Avillez, and Dennis Cory

Organization of the Book The sustainability of a “mixed-farm” development strategy in a high-income economy necessarily depends on both nonagricultural policy and agricultural policy. This interdependence raises broad is¬ sues about the competitiveness of rural services and industries relative to their urban counterparts and the desirability of urban relative to rural growth. We consider such issues in Chapter 2, which describes the interest of both farmers and, more recently, policy makers in rural industrialization. As a result of off-farm opportunities, small farms have been able to retain important roles in the agricultural sectors of most EC member countries. More than one-third of farms in Western Europe are part-time operations. This proportion has shown no ten¬ dency to decline and will likely increase if the interests in rural devel¬ opment and the efforts to promote “counterurbanization” within the EC are successful. The framework we developed to study the potential for change, presented in Chapter 3, is based on the household economics perspec¬ tive. To be sustainable, small farms are required to meet efficiency criteria that show their competitiveness against larger farms and the off-farm economy. Small farms are competitive if they can offer rates of return to labor and capital comparable with those available outside of agriculture. If small farms cannot meet these criteria, they are likely to disappear. We analyze the prospects for change and survival in three sequen¬ tial steps. First, we estimate the magnitude of the adjustment problem by projecting the profits of representative farms under expected 1996 prices. Chapters 4 and 5 describe the agricultural sector of Entre Douro e Minho. Results of previous research and original field sur¬ veys are used to characterize patterns of employment, crop produc¬ tion, processing, and marketing and the operation of land, labor, and capital markets. Although small in geographic terms, the agricultural sector of the Minho is very heterogeneous. We identify three agroclimatic zones—coastal, intermediate, and mountain—along with four¬ teen representative farm types. Second, we evaluate the impacts on farm incomes of potential changes in representative farms. Chapter 6 considers potential inno¬ vations at the farm level—growth in farm size, adoption of available technologies, or specialization in relatively more profitable crops. These changes have already taken place on some farms and will con¬ tinue to occur without any particular action by the public sector. Full

Structural Change and Small-Farm Development

5

compliance with the CAP and growth in off-farm employment oppor¬ tunities will add to pressures to draw farmers out of agriculture, mak¬ ing land available to those remaining. The acquisition of improved information and the imposition of CAP price incentives will hasten the introduction of new techniques and changes in crops. At least in the short run, most technological changes will involve adoption of innovations that are known and available locally. The third step in our analysis focuses on public policies that can alter constraints to change. In many cases, new public policies will be essential complements to successful farm-level changes. Most poten¬ tial responses by farmers involve changes in capital or land re¬ sources—investments in irrigation or improved vineyards, adoption of more mechanized cultivation and animal management systems, or expansion of farm size. The rate of change in capital and land endow¬ ments and the particular types of farms that are able to exploit new opportunities can be heavily influenced by regulatory policy. Because of the household savings obtained from off-farm employment and emigration, regulation of the formal credit market has had only lim¬ ited impact on farmer investment in the past. But the large increases in capital investment needed for modernization are likely to require improved access to credit markets. The wide array of controls over sales and rental of land and the use of formal credit to buy land provide additional constraints to change. Chapter 7 reviews this regu¬ latory structure and assesses its impacts on land market activity. A second group of complementary public policies, considered in Chapter 8, is investments in public goods. Improvements in farm roads, public irrigation, and the rural electricity network will be im¬ portant precursors to profitable technical change in many areas of the Minho. Past investments have been extremely small, but growth in government revenue and the availability of financial resources from the EC have altered the constraints on potential public expenditure. The final potential policy changes are subsidies to capital or labor. Capital subsidies to investments with long gestation periods—for ex¬ ample, restructuring vineyards—may be necessary to encourage farm¬ ers to forgo earnings from existing activities. When they are made available for capital equipment investments, subsidies may encour¬ age farmers to acquire more information about possible technical changes. In addition, capital subsidies reduce input costs and lead di¬ rectly to increased profits, thus serving as transfers to increase farm income. Direct transfers to labor are possible as well—income supple¬ ments and early retirement plans are the most prominent programs,

6

Eric Monke, Francisco Avillez, and Dennis Cory

both supported partially with funds from Brussels. Chapter 9 reviews these programs and assesses their potential effects on farm household incomes. The final chapter of the book synthesizes the results of the previous six chapters to identify feasible paths of change. We examine combi¬ nations of private initiatives and constraint-breaking public programs to assess potential returns from change. Possible paths of change are portrayed as packages of adjustments that would lead to farm returns acceptably close to off-farm earnings. Change can be reinforcing—for example, public investments in farm feeder roads may be much more profitable when they are accompanied by irrigation investments that allow simultaneous changes in production technologies and crop choice. The result is an increase in returns greater than the impact of individual changes. Will such paths be feasible from the government’s perspective? Both the potential effects on farm returns and the impact on interand intraregional distribution of income will influence choices among alternative policies. Political pressures will mandate that all parts of the Minho and all regions in Portugal receive some attention from investment and subsidy policies. Opportunities and obligations in other regions and other sectors of the economy cause potential ab¬ sorption of government funds by Minho agriculture to be well in ex¬ cess of available funds, even with the EC providing a large share of program costs. Policy makers will be forced to make difficult trade¬ offs—between efficiency and distributional effects and between de¬ sires to facilitate a competitive agriculture and the need to support some of Portugal’s most disadvantaged people. Illumination of these trade-offs in the context of alternative strategies for agricultural change is the principal objective of this book.

2 Structural Change and Small Farms in the European Community

,

Eric Monke, Mark Langworthy and Francisco Avillez

The number of farm holdings and total agricultural employment in Western Europe have declined in a pattern common to all developed countries. But such declines have not led to the disappearance of small-scale farming. Although the numbers of small farms decreased at a somewhat faster rate than did those of the larger-size classes, small farms have remained a substantial part of the agricultural sector in most EC countries. That small farms are important in the Mediter¬ ranean member countries comes as little surprise. Much of this area is only beginning to experience rapid economic development. But more unusual are the data showing that small farms retain a prominent role in the higher-income countries, particularly Belgium, Germany, and the Netherlands. Why have small farms survived? Part of the answer lies in the im¬ portance of part-time farming. Reductions in total labor demanded by the agricultural sector are inevitable consequences of structural change. But these reductions need not imply similar declines in the number of people engaged in agriculture. Change in farm employ¬ ment depends instead on how the reductions in labor demand are spread among the work force. Because part-time farms are important, agricultural employment is distributed among a much larger share of the population than is implied by the total employment numbers.

7

8

Eric Monke, Mark Langwortby, and Francisco Avillez

Recent years have witnessed a shift in public and private sentiments about small-farm agriculture. In the past, agricultural policy was largely devoted to the provision of market price support. Attention to small farms, when given at all, focused on the introduction of pro¬ grams intended to ease the transition of small farms out of the agri¬ cultural sector. But the great success of the CAP in encouraging out¬ put has led to a second generation of problems—high program costs and budget constraints, the management of commodity surpluses, and the environmental consequences of intensive agriculture. At the same time, out-migration from rural areas has sparked concerns for the loss of rural amenities and services and fostered perceptions that the pro¬ cess of urbanization in many areas has advanced far enough. In re¬ sponse to these problems and concerns, new rural policy initiatives have emerged to encourage growth of rural employment oppor¬ tunities, both on and off the farm. Agricultural policies are still biased against small farms, but much less so than in past years.

Structural Change in Agriculture Structural change encompasses a number of phenomena associated with the process of economic growth. In the early stages of develop¬ ment, agriculture constitutes a large share of production, exports, and employment. Manufacturing is small, but it offers relatively high re¬ turns to induce movements of labor and capital from the agricultural sector. Along with this shift in the composition of economic activity come migration, urbanization, and changes in comparative advantage (Chenery). Shifts in demand, trade, and domestic factor use interact with the pattern of technical change, the availability of natural re¬ sources, and government policies to determine the pace and type of industrialization in individual countries. But the inverse association between average income level and the share of agriculture in total income and employment is almost universal. In this respect, the expe¬ rience of the developing countries since 1950 is not different from the historical experience of the present-day developed countries (Syrquin). The reasons for the changing role of agriculture are well under¬ stood (Syrquin). First, consumer preferences cannot sustain an exclu¬ sively agricultural economy. The demand for food and agricultural products rises with increasing incomes, but at a rate slower than the growth in incomes (Engel’s Law). This divergence becomes more pro¬ nounced as the level of income grows, and the demand for agricul-

Structural Change and Small Farms in the EC

9

tural products is eventually sated. Some changes in the composition of agricultural output follow from differences among commodities in the income elasticities of demand, but increased consumption of some commodities usually accompanies decreased consumption of others. Growth in domestic population provides some impetus for increased demand, but population growth rates are generally small in developed economies. Increases in agricultural production thus depend largely on the ability to export to new markets. As rates of domestic demand growth decline, no similar pattern emerges with respect to agricultural supply. Instead, invention and the introduction of new technologies provide the basis for increases in production capacity. This technological change is both a blessing and a curse for the economy. By releasing resources (particularly labor and capital) to the nonagricultural sector, technical change in agricul¬ ture assists economic growth. Furthermore, by reducing the labor in¬ put per unit of agricultural output, technological change provides the basis for increased incomes for farmers remaining in agriculture. But technological change increases agricultural output at the same time as food demand is growing sluggishly. Agricultural prices and farm in¬ comes thus tend to decline. These tendencies are especially acute in the developed countries, where rates of agricultural productivity growth are relatively high and rates of growth in demand are partic¬ ularly low. Rural out-migration and declining incomes are the most prominent indicators of the beginning of an extended period of rural decline (Hodge). The young are the most viable emigrants from agriculture, reducing the rate of rural population increase. The demand for rural services falls, further hastening rural decline. Those left behind face relatively low incomes, limited employment opportunities, and re¬ duced access to public services. The income gaps between sectors change in magnitude during the process of development, first widen¬ ing and then narrowing (Kuznets; Syrquin). But they remain substan¬ tial. Recent OECD (Organization for Economic Cooperation and De¬ velopment) comparisons, for example, showed that agricultural labor productivity was only one-third of that in the nonagricultural sector (Schmitt, 1988). These gaps were presumed to reflect a host of bar¬ riers to adjustment, principally immobility of agricultural labor re¬ sources and imperfections in the labor market. The prevailing view of developed-country agriculture as a lagging sector, home to underemployment and relatively low incomes, has been challenged on two fronts. Detailed empirical studies of labor

10

Eric Monke, Mark Langworthy, and Francisco Avillez

markets in developing countries show that most of the traditional wisdom about labor markets is probably incorrect. Urban wages are not higher than rural wages in real terms (corrected for differences in the cost of living, particularly in the cost of housing). Regional wage gaps are instead explained by differences in skill, age, sex, and occu¬ pation. There is very little evidence to support the disequilibrium models of labor migration, in which urban unemployment is high and the informal sector pays inordinately low wages. Where these prob¬ lems are found, the explanations for their persistence appear more a consequence of policies that have segmented the urban labor market than excessive migration from the rural areas or technical rigidities in industrial production. The evidence is thus increasingly supportive of the view that the labor market adjusts very quickly, even in under¬ developed countries (Rogers and Williamson). Problems with data are a second weakness of the structural dis¬ equilibrium perspective. Comparisons of agricultural and nonagricultural productivity are inherently biased. Instead of analyzing wage rates for comparable cohorts of agricultural and nonagricultural workers, proponents of structural disequilibrium have relied on more aggregate measures, such as ratios of sectoral gross domestic product (GDP) to sectoral population. Because many in the farm population are engaged in nonagricultural work (both market and nonmarket varieties), the aggregate estimates of agricultural productivity are underestimated, and the estimates of nonagricultural productivity are overestimated. The productivity gap, therefore, is overestimated (Schmitt, 1988). The above arguments do not exclude the possibility of labor market imperfections in the agricultural sectors of developed countries, nor do they deny the presence of low productivity in some parts of the agricultural sector. But it seems likely that the plethora of potential problems with the agricultural labor market—lack of information about off-farm opportunities, insufficient qualifications for nonfarm jobs, high transport and transaction costs for obtaining employment, the advanced age of farmers, institutional barriers to entry into non¬ agricultural jobs, and preferences for the farming lifestyle—have been used far too often to explain a gap in labor productivity that is more apparent than real. Instead, the view of an efficient labor market, in which farm workers are adept at comparing the returns to farm and nonfarm work and act on this information to eliminate structural dis¬ equilibrium in a relatively short span of time, merits wider considera¬ tion.

Structural Change and Small Farms in the EC

11

Structural Change in EC Agriculture The data relevant to the description of structural change in member countries of the EC are far from perfect. In spite of efforts by the Commission of the European Communities to develop consistency, countries have differed in their definition of a farm, and the defini¬ tions used by some countries have changed over time (Commission of the European Communities, 1982). Problems have arisen in some cen¬ suses with the enumeration of farms, particularly smaller ones, and the treatment of multiple holdings, causing biases in the estimates of farm numbers. Nevertheless, some trends are apparent. Declines in the number of farms and in agricultural employment have been sustained since 1950. In 1950, the ten countries that later became the EC-10 (Spain and Portugal are excluded for lack of data) contained ten million farms larger than one hectare (ha), with Italy and France accounting for about 60 percent of the total (Clout). Most of these farms had less than 5 ha of cultivated area. By the end of the 1980s, farm numbers had fallen by about half, an annual average rate of decline of about 2 percent. Agricultural employment fell by about 3 percent per year, declining from about twenty-five million to less than eight million. By 1988, agriculture accounted for only 7 percent of total civilian em¬ ployment in the EC-12. The rate of decline in the number of holdings peaked in the 1960s, when farm numbers fell about 20 percent (Table 2.1). During the 1970s, farm numbers declined further, by about 14 percent. Although the rate of decline slowed markedly during the 1980s, this result is a consequence of peculiar behavior in Spain, where farm numbers in¬ creased during the 1980s. In the rest of the EC, the rate of decline in the 1980s was only slightly smaller than that of the previous decade. Even with these declines, average farm size, about 10 ha in 1960, had increased only to about 17 ha by 1987. Average sizes are relatively small in Greece, Italy, and Portugal (5 to 8 ha), above average in Denmark, France, and Luxembourg (25 to 32 ha), and well above average only in the United Kingdom (69 ha).

Farm-Size Distribution in the EC

Inspection of the data on size distribution shows that structural transformation has not brought about the elimination of small farms. The smallest size classes have tended to diminish in relative impor-

12

Eric Monke, Mark Langworthy, and Francisco Avillez

Table 2.1. Changes in farm structure, 1960—1987

Belgium Denmark France W. Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain U.K. EC-9 EC-12

No. of holdings (000) 1960 1970 1980 1987

Cultivated area (million ha) 1980 1987 1960 1970

191 194 1,774 1,385

130 143 1,421 1,083

278 2,756 10 230

267 2,173 7 182 495

443

311

7,261

5,717

91 116 1,135 797 752a 223 2,192b 5 129 436 1,524 249

79 86 912 671 703 217 1,974 4 117 371 1,540 243

1.6 3.1 30.2 12.9

1.5 3.0 29.8 12.6

4.8 18.7 0.1 2.3

4.7 16.8 0.1 2.2 3.1

14.2

17.7

4,937 7,649

4,303 6,916

87.8

88.5

1.4 3.1 28.8 12.2 3.4 5.0 16.3 0.1 2.0 3.1 23.4 17.1

1.4 2.8 28.0 11.8 3.7 4.9 15.1 0.1 2.0 3.2 24.7 16.7

86.0 115.9

82.8 114.6

Sources: Eurostat (Statistical Office of the European Communities), Agricultural Struc¬ ture 1950-1976 (Luxembourg: Office for Official Publications of the European Commu¬ nities, 1978); Commission of the European Communities, The Agricultural Situation in the Community—1989 Report (Luxembourg: Office for Official Publications of the European Communities, 1990). Portuguese data were provided by the Instituto Nacional des Estatisticas. a1982 survey. b1977 survey.

tance over time, and the largest size class has grown. But comparisons across countries and within countries over time give little indication that small-size classes are disappearing. The characterization of farms as “small” or “large” is imprecise; for example, “small” is usually intended to describe farms incapable of employing at least one person “full-time.” But such definitions de¬ pend on a number of problematic measurements. First, the size of farm that corresponds to full-time employment varies with the choice of crop (for example, many “small” vineyards, fruit orchards, and vegetable farms are “full-time” operations). Second, technologies vary across countries and greatly affect the amount of farmland that can be managed and cultivated by one person. “Full-time” farms in Portu¬ gal are considerably more labor-intensive than their counterparts in northern Europe; conversely, “small” farms in northern Europe are much larger than “small” farms in Portugal. Finally, seasonality in the agricultural calendar and individual differences in the preference for leisure force the definition of “full-time” to contain a substantial degree of arbitrariness. Claims that “only one-third of the farms in

Structural Change and Small Farms in the EC

13

the EC are capable of providing full-time employment for one per¬ son” (Commission for the European Communities, 1988) are rough approximations at best. Farms less than 20 ha in size can be considered “small” in the aforementioned sense of the word—most farms in this size category generate much less than three hundred days of employment per year. Two exceptions should be noted. Farms in the size class of 10—20 ha represent very large farms in many of the Mediterranean areas, and many of these can be considered “full-time” operations. But these farms do not account for large shares of farm numbers (Table A2.1) and thus do not substantially distort the overall conclusions. More¬ over, in the northern countries many farms larger than 20 ha should also be considered “small”; the average size of part-time farms in the United Kingdom, for example, is nearly 40 ha (Gasson, 1988). Eighty percent of EC farms are smaller than 20 ha; they account for about one-quarter of total agricultural area (Table 2.2). The dis¬ tribution of farm numbers can be categorized into three groups of countries. In the first group (Greece, Italy, Portugal, and Spain), farms less than 20 ha dominate the distribution, accounting for between 84 and 97 percent of the number of holdings. A second group of coun-

Table 2.2. Changes in small farms, 1960-1987 (percent of total) No. of holdings, size class 1—20 ha

Belgium Denmark France W. Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain U.K. EC-9 EC-12

Share of cultivated area, size class 1—20 ha

1960

1970

1975

1980

1987

1960

1970

1975

1980

1987

96 74 74 90

85 63 66 84

39 62 45 63

37 53 25 54 37

45 26 21 42 88 28 50 18 46

59

47

43

70 43 49 69 97 60 94 41 68 95 84 41

55 30 26 52

72 95 58 83 94

75 55 56 76 98 57 94 45 73 95 86 40

69 41 36 63

74 96 76 88

79 59 59 77 98 63 94 49 76

13

7

6

39 20 18 36 86 26 52 13 41 34 28 5

33 15 13 30 77 26 50 10 33 42 27 5

85

80

77

75 80

73 80

43

33

27

25 28

23 26

Sources: Eurostat (Statistical Office of the European Communities), Agricultural Structure 1950—1976 (Luxembourg: Office for Official Publications of the European Communities, 1978); Commission of the European Communities, The Agricultural Situation in the Community—1989 Report (Luxembourg: Of¬ fice for Official Publications of the European Communities, 1990); Commission of the European Com¬ munities, The Agricultural Situation in the Community—1982 Report (Luxembourg: Office for Official Publications of the European Communities, 1983). Portuguese data were provided by the Instituto Na¬ tional des Estatisticas.

Eric Monke, Mark Langwortky, and Francisco Avillez

tries, including Belgium, Germany, Ireland, and the Netherlands, has small-farm shares ranging from 60 to 69 percent. Shares of small farms in total farm numbers are the lowest in Denmark, France, Lux¬ embourg, and the United Kingdom, ranging from 41 to 49 percent. The distributions of cultivated area are more widely dispersed than the distributions of farm numbers, reflecting the wide disparities among countries in the distribution of land. Again, three groups may be identified. The largest shares of total area belong to the small farmers in Greece, Italy, and Portugal; they cultivate between 42 and 77 percent of the total area. In Belgium, Germany, Ireland, the Netherlands, and Spain, small-farm shares are between 26 and 33 percent. In Denmark, France, Luxembourg, and the United Kingdom, small farms account for only 5 to 15 percent of cultivated area. Shares of small farms in total numbers and area have declined over time in all the member countries. Most of the declines occurred in the period before 1975, however. Among the EC-9, the number of small farms fell by about 10 percent during the period 1960—75, but only half as fast after 1975. Shares of cultivated area declined from 43 to 27 percent before 1975, but only to 23 percent thereafter. Among individual member countries, post-1975 declines in the small-farm sector were large only in Denmark, France, and Luxembourg. A simi¬ lar story emerges when the data are divided into finer size categories (Table A2.1). These numbers do not indicate a continuation of the rapid structural transformation observed in the 1950s and 1960s. Small farms, therefore, account for a prominent part of farm num¬ bers and agricultural area in EC agriculture. Whereas comparisons across countries are supportive of the idea that small farms diminish in importance as incomes grow—Greece, Italy, Portugal, and Spain have much larger small-farm populations than the other member countries—a number of the high-income countries, particularly Bel¬ gium, Germany, and the Netherlands, retain important small-farm sectors. Indeed, at least some of the countries with unimportant small-farm sectors are special cases. For example, in Denmark the promotion of full-time farming has been an explicit objective of do¬ mestic policy. In the United Kingdom, the policy of enclosure helped foster structural transformation before the turn of the century (Com¬ mission of the European Communities, 1982). These two countries, along with France and Luxembourg, are the only EC members in which large farms account for a substantial share of the farm popula¬ tion (Table 2.3). As with small farms, rates of change in the largefarm sector have declined drastically since 1975. Between 1960 and

Structural Change and Small Farms in the EC

15

Table 2.3. Changes in large farms, 1960-1987 (percent of total) No. of holdings, size class >50 ha

Belgium Denmark France W. Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain U.K. EC-9 EC-12

Share of cultivated area, size class >50 ha

I960

1970

1975

1980

1987

1960

1970

1975

1980

1987

1 3 6 1

2 6 8 2

25 24 9 7

25 33 14 9 52

17 30 42 17 3 33 32 25 12

19

27

30

6 17 18 6 0 9 2 26 4 2 6 33

13 26 36 12

6 2 4 1 2

4 10 13 4 0 9 2 17 3 2 6 33

10 18 28 10

5 1 2 1

3 8 12 3 0 1 2 9 2

65

79

81

21 40 43 20 4 33 30 40 15 58 55 82

26 46 52 27 10 33 32 56 20 43 55 83

4

5

6

7 6

8 7

29

38

42

44 45

48 49

Sources: Eurostat (Statistical Office of the European Communities), Agricultural Structure 1950—1976 (Luxembourg: Office for Official Publications of the European Communities, 1978); Commission of the European Communities, The Agricultural Situation in the Community—1989 Report (Luxembourg: Office for Official Publications of the European Communities, 1990); Commission of the European Communities, The Agricultural Situation in the Community—1982 Report (Luxembourg: Office for Official Publications of the European Communities, 1983). Portuguese data were provided by the lnstituto Nacional des Estatisticas.

1975, the share of large farms in total area increased by almost half; after 1975, the share increased by only 15 percent.

Farm-Size Distribution in Portugal

Portugal enters the EC with an economy well behind those of the other member states. Its per capita income is little more than half the EC average. Health and education statistics are similar. In 1985, agri¬ culture still accounted for nearly one-fourth of domestic employment (currently about four million), a share nearly triple the EC average. But substantial structural change has taken place in Portugal, and the process appears likely to continue at a robust pace. Since 1960, the share of agriculture in total employment has halved (from 44 to 22 percent). As in other countries, the decline of agriculture has coin¬ cided with growth of the service sector. Buoyed by a stable political climate and accession to the EC, the Portuguese economy has become one of the fastest-growing in Europe; annual growth rates in the late 1980s were in excess of 5 percent. Throughout the process of structural change, small farms have re¬ tained an important role in Portugal’s agricultural sector. A compari-

hoc ON

ro ro r\ — ro to to OC -cf- K ON CO © oc NO NO co t\ co

r\ 0, then w = (7 + |x)/X. The first-order conditions pertain¬ ing to farm work (H) and leisure (L) remain unchanged: if H > 0, then p(dF/dH) = y/X; if L > 0, then (dU/dL) = 7. But the equality (3.9) between the wage rate, the value marginal product of labor in agricultural production, and the marginal value of leisure time now holds only if the Lagrange multiplier (|jl) is equal to zero. Examina¬ tion of the first-order condition, dWdfx, shows that this result occurs only when the off-farm employment constraint is nonbinding: dii/dfx = (N — N) > 0, jjl > 0, fx(d£/d|x) = 0 A binding constraint on off-farm employment (N = N) does not imply the elimination of farm work. The marginal allocation of labor is changed from the behavior implied by equation 3.9 to an equi¬ marginal trade-off between leisure time and farm work. In this cir¬ cumstance, the marginal values of leisure time and farm work are less than the off-farm wage rate: dU/dL dF 7 7 + |X - — p— = - < w = X dFI X X

(3.10)

Equation 3.10 demonstrates another opportunity for part-time farming. Farmers would allocate more time to off-farm work if it were feasible to do so; since it is not (by assumption), they choose to devote some labor to farming. This choice is a second-best option but preferable to a larger allocation of available time to leisure. In addition to part-time farmers, two types of “full-time” farmers will be present in the agricultural sector. One group are those who choose to work a forty-hour week in agriculture; these farmers would have a value marginal product from farming that is equal to the wage rate for off-farm work. Otherwise, labor would migrate between the

Analysis of Agricultural Change

33

off-farm and agricultural sectors, and wage rates would change until the marginal rates of return to labor were equal in the alternative employments. Because this group of farmers chooses not to allocate more time to farming, their value of leisure time must also be equal to the wage rate and the marginal value product from farming. This group thus satisfies the labor allocation rule of equation 3.9. For them, the forty-hour workweek is a superfluous constraint. The second group of full-time farmers are those affected by the offfarm employment constraint. This group finds the total income from off-farm work insufficient and chooses the farming life-style because of the larger total income that can be obtained. They work more than forty hours per week on the farm. This group of full-time farmers follows a pattern like that in equation 3.10; marginal productivity in farming is less than the wage rate but equal to the value of leisure time. If preferences and production technologies of full-time and parttime farms are similar, this group of full-time farmers will have the same incomes as part-time farmers. The only difference is the source of income—one group obtains income only from farming, whereas the other works in farming and off-farm activities. Because the full-time farm population contains some farmers with forty-hour workweeks, on average the full-time farm population will devote less labor per unit area than will part-time farms and will have a higher value marginal product (Gasson’s result). But in this sit¬ uation there is no “problem” in the agricultural labor market, and relatively low value marginal products on small farms do not imply underemployment, underqualified labor, or immobility of agricultural labor. The barrier to increased labor productivity (that may well be unresolvable) is related instead to rigidities in the conditions of indus¬ trial sector employment. These rigidities prevent some part-time farm¬ ers from increasing their participation in off-farm work; they also prevent some full-time farmers from pursuing part-time jobs in the off-farm sector. An implication of this result is that farmers may pursue farming even when the marginal returns to farming are less than the wage rate offered to off-farm employment. In this book, assessments about competitiveness are based on comparison of agricultural returns with expected returns to off-farm activities, and thus the results may un¬ derestimate the competitiveness of agriculture. But it is important not to make too much of labor market imperfections. Although they pro¬ vide useful grist for the theoretician’s mill, there are many reasons to be skeptical of their empirical significance. The forty-hour workweek

34

Eric Monke, Mark Langworthy, and Manuela Ferro

is a fact of life in much of the industrial sector, but developed econ¬ omies are diverse enough to offer ample opportunities to gain income through part-time work, piecework, and overtime.

Agricultural Change Potential competitiveness depends in part on changes in technical characteristics of the farm—changes in farm size, technology of pro¬ duction, or mix of outputs—that can generate returns to domestic factors (particularly labor and capital) commensurate with their op¬ portunity costs. Comparisons of potential profitability with current profitability thus identify alternative paths of development—se¬ quences of change in farm structure or managerial practices that im¬ prove competitiveness. Throughout, the analysis focuses on returns to family labor. If projected returns fall well below the expected oppor¬ tunity costs of labor, out-migration from agriculture will be a more attractive option to farmers than will investment in agricultural change. Farmers might accept returns from agriculture below those received by nonagricultural workers because of the intrinsic value of a rural life-style and the independence of the farming vocation. But research for other countries (Barkley) and observation of current trends in the Minho show clearly that farming returns cannot linger very far below those earned off the farm. Complaints about low income levels, popu¬ lation mobility, and the geographic dispersion of off-farm employ¬ ment opportunities reinforce the importance of relative remuneration in employment choices. Returns to labor thus provide the best indica¬ tor of adjustment in the agricultural sector. Where agricultural re¬ turns are high, the farm sector remains competitive with the off-farm sector; where returns to farming are low, the farm sector serves only as a source of residual employment for labor resources unable to leave. Available aggregate data for Portugal are limited but consistent with an efficient labor market. Sectoral comparisons of family in¬ comes are not available for Portugal; wage rates for agricultural workers, construction workers, and industrial laborers provide the only information from which to draw inferences (Figure 3.1). Throughout the late 1970s and 1980s, industrial sector wages main¬ tained a premium of about 35 percent relative to agricultural and construction wages. This premium is an overestimate of the true dif-

Analysis of Agricultural Change

35

Figure 3.1. Daily wage rates for unskilled labor, Portugal, 1972-1988

ference in real wages because the wage comparisons use a single (ur¬ ban) price deflator. Whatever the magnitude, the differential probably reflects post-Revolution regulations for industrial employment and wage rates. Establishment of lifetime employment guarantees and minimum wages have restricted the inflow of labor to the industrial sector (Pearson et ah, 1987, chap. 4). But even with these regulatory effects, the data do not suggest gross differences between the returns to off-farm work and farm work. Wage rates in these three categories of employment have moved similarly, particularly after 1976. For all groups, real wages have fallen substantially relative to the post-Revo¬ lution period. During the 1990s, substantial growth in nonagricultural labor de¬ mand is expected and wage rates should continue the upward trend

36

Eric Monke, Mark Langworthy, and Manuela Ferro

that began in the mid-1980s. In addition to rising opportunity costs of labor, Portuguese farmers will suffer adversely from the expected changes in commodity prices mandated by the CAP. In this circum¬ stance, farm labor has three alternative strategies to resolve the differ¬ ential between farm returns and off-farm returns: greater use of offfarm employment, expansion of farm size, or introduction of new cropping patterns or technologies (Figure 3.2). These changes are not mutually exclusive, and farm families may implement a mix of these alternative adjustment strategies. All of these changes can be consis¬ tent with the conversion from full-time to part-time farming. But without a successful resolution of the disequilibrium between farm and off-farm returns, many farmers will elect to leave agriculture. Figure 3.2 considers only the active adjustment strategies that may be pursued to sustain agricultural competitiveness. There remains a more passive type of agricultural change—decreases in input prices, especially the price of land. Land rental rates are particularly impor¬ tant in this regard because they are usually determined endogenously within the agricultural sector. As a fixed input with no alternative employment (except in the urban fringe areas), land often is a residual claimant on the profits from farming. Adverse changes in farm output prices could thus be absorbed at least partly by declines in land rental rates. Increases in labor’s opportunity cost could also cause land rents to decline. In the event of declines in land rents, the returns to family labor will be increased, creating the possibility of adequate remuneration to labor in spite of adverse changes in the prices of some outputs and inputs. Because of the flexibility (and unpredictability) of land cost, the analysis of change is better assisted by measuring the joint returns to family labor and land rather than returns to labor alone. This mea¬ sure can be compared with indicators of labor opportunity cost (such as unskilled wage rates in the nonagricultural sector) and the prof¬ itability of alternative representative farms to generate plausible sce¬ narios about the joint evolution of land costs and returns to agri¬ cultural labor.

Working off the Farm

First among farmer responses to worsening relative returns is the shift of all or part of the farm family labor resources out of agricul¬ ture. This response is the most familiar consequence of structural change—the “displacement effect” (Evenson). If returns to labor are

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Farmer Responses to Changed Incentives

117

in the mountain zone are distant from the major processing plants, and roads are poor. Improvements in road networks would reduce transport costs, but the greater distances to markets place the moun¬ tain zone at a disadvantage with respect to the intermediate and coastal zones. Given the excess processing capacity already installed in the coastal region, investment in new dairy plants in the mountain zone is unlikely.

Resources for Farm Change Many Minho farm families have more labor available for agricul¬ ture than they can employ remuneratively on the land to which they have access. Over time, this imbalance is being corrected in three ways. First, rural families have given up farming, moved to urban centers, and secured employment in the nonagricultural sector. Sec¬ ond, families have found off-farm employment, either locally or through emigration, but have continued in agricultural activities. Fi¬ nally, families have acquired more land and expanded the farm opera¬ tion commensurately with family labor availability. The latter strat¬ egy has been followed only rarely outside of the coastal zone. Relative returns will influence a family’s choice among the three strategies; as the previous sections have shown, strategies that main¬ tain agriculture in the family’s portfolio of economic activities are potentially competitive with off-farm opportunities. The rate of growth of part-time farms as compared to full-time farms will then depend on the presence of local job openings and the betterment of transportation facilities so that family members may commute more easily to distant jobs. Prospects appear good for growth in employ¬ ment opportunities and improvements in infrastructure in the interior zones. Infrastructural investments have already been substantial, and major road arteries link the interior cities with Porto. Improvements are also being made in the transport links to Spain, which will ease access to other European markets. By 1996, Portuguese producers are expected to have unrestricted access to the EC market; the free flow of investment resources and the relatively low cost of Portuguese la¬ bor will facilitate growth of the industrial sector as well. Although the location of industry is difficult to predict (and is influenced by the extent and pattern of infrastructural development), the industries that locate in Portugal are expected to be relatively labor-intensive, such as manufacturers of consumer goods.

118

Mark Langworthy, Eric Monke, and Manuela Jorge

Choice of strategy also depends on the availability of domestic fac¬ tor resources. Most of the farm systems in the intermediate zone are not competitive without substantial change, and modernization would have large effects on the returns to labor in the other zones as well. Realization of higher rates of return requires changes in farm endowments of labor, land, and capital. Some farms, such as the me¬ dium and large dairy systems, have already acquired additional land and increased capital intensity. But for other farmers, access to these resources is more problematic.

Availability of Land

The amount of land that will come available for sale or rental places obvious constraints on the extent of change in farm sizes: if more farmers choose to abandon agriculture, more land will come available to the remaining farmers. Three potential sources of land can be identified. The first category is made up of older farmers with¬ out heirs willing to take over the farm. As these farmers retire, their operations will be taken over by other families, although ownership may not be transferred. Second, some households will consider offfarm employment opportunities preferable to expanding farming op¬ erations. This category includes families with very small landholdings who may be unable to adopt modern technologies and families who do not heavily value the nonmonetary aspects of farm life in compari¬ son with the amenities available in urban areas. Long-term emigrants from the Minho provide the third potential source of land resources. Many emigrants own land and often invest part of their remittances in acquiring more land. They have no intention of farming before they return and are at least potentially interested in renting their land for a long period while they are working abroad. Perhaps the most predictable element of land turnover relates to the retirement of older farmers. An indication of the importance of this effect can be obtained from inspection of demographic data on the age of household head and the age distribution of household members (Table 6.8). The average age of household head is fifty-two years, and nearly half the households are managed by farmers fifty-five years or older, the eligibility age for EC early retirement programs. By custom, the elderly and disabled are cared for at home, and the young do not usually leave the household until they are married. Hence, the nuclear family is often characterized by the presence of either elderly parents of the husband or wife or young adults. The young adults are either a

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