Our SAM and CGE analysis of multipliers resulting from changes in rural incomes and agricultural productivity points to three important conclusions. First, the size of village and village/town income multipliers is potentially large. A US$100 injection of exogenous income into village households stimulates increases of as much as US$63 in gross village product in Napizaro and US$123 in the village/town economy (unconstrained SAM models). The total direct-plus-indirect effects on household incomes reach US$161 in Napizaro and US$231 in the village/town economy. Both the magnitudes of these multipliers and the distribution of income gains across household groups and production sectors are sensitive to village and village/town economic structures. In general, the more open the economy, the smaller the income multipliers. The smallest multipliers estimated using SAM models are in Concordia, which sells a large share of its agricultural output to markets outside the village and satisfies a large share of its input, consumption and investment demands from these outside markets. The largest and most unequally distributed multipliers are in Napizaro, which relies heavily on migrant labour markets for income, but which satisfies an important part of consumption and investment demand locally, particularly from a burgeoning and concentrated livestock-production activity.
Second, farm/non-farm demand linkages are important. The great majority of these linkages, however, are with markets outside rather than within villages. The US$100 increases in exogenous household income stimulated increases in village non-farm production between US$0.3 and US$12, while village demand for manufactures from outside markets increased by US$88 to US$103. In the village/town microregion, a US$100 increase in exogenous income stimulated a US$18 increase in village non-agricultural production, a US$74 increase in commerce demand, almost entirely goods bought outside the village, a US$38 increase in village demand for goods sold in the town and a US$22 increase in village demand for goods from outside the village/town economy. These findings offer compelling evidence in support of what Adelman (1984) calls “agriculture-demand-led-industrialization”. In rural Mexico, a large share of rural household demand for purchased inputs and consumption and investment goods is supplied by regional towns, which have proliferated in the last decade and which now account for most of the country’s urban growth. As these findings illustrate, most of the farm/non-farm diversification in rural Mexico is between villages, where agriculture is still the economic mainstay, and these growing regional towns and cities. Nevertheless, village household incomes are diversified away from agriculture, largely as a result of families’ participation in labour markets outside the village, through wage work or in distant towns or abroad, through migration.
Data from the economic census show that between December 1989 and December 1993, real values of fixed assets grew rapidly in the commercial sector of cities located near the villages and town studied here. Trade linkages transfer most of the benefits of income growth in villages to these regional commercial centres. This does not mean, however, that there is necessarily a parasitic relationship between villages and towns, or between villages and the outside world. Town markets are critical to support village crop and non-crop production activities that create value-added for village households, and regional and extraregional labour markets are a major source of wage and remittance income for villages. Our analysis highlights the complex economic interactions between villages and towns in what is probably a mutually beneficial relationship broadly consistent with comparative advantage.
Increasing the income of village households and loosening agricultural supply constraints is important for the growth of the RNFE in towns and small cities. This is illustrated by our results for the microregion. The town commercial sector plays an important role in satisfying village demands for non-agricultural goods. It is a major beneficiary from rising village incomes and reducing village agricultural-supply constraints. In these experiments, the cross-over effect of village income or agricultural supply on town commerce exceeds the own effect of increased town income or agricultural supply. Positive village/town growth linkages, in turn, increase the town’s demand for goods produced in regional cities.
Third, estimated farm/non-farm linkages resulting from rural income changes appear to depend critically on the supply response of agriculture and on model specification, especially the role of prices. In the second set of SAM experiments, it was found that the multiplier effects of changes in rural incomes on production, value-added and village demand for manufactures were considerably smaller when agricultural-supply response was inelastic.
In the arguably more realistic CGE models, supply is assumed to be neither perfectly elastic nor perfectly inelastic: producers face rising marginal costs and thus have upward-sloping supply curves, and prices of local non-tradables change in response to exogenous income and policy shocks. When some goods or factors in the local economy are non-tradables, endogenous price changes transmit the impacts of income changes from households to the production side of the local economy, creating potentially large local production and income multipliers. The village/town CGE model with all goods non-tradable produced estimated impacts of production changes that tended to be in between those predicted by the constrained and unconstrained SAM models, with estimates of total income changes that were large but smaller than those obtained using the unconstrained SAM. That is, estimated total income linkages resulting from exogenous changes in rural incomes tended to be unaffected by the choice of model.
Estimates of the distributional consequences of rural income changes are nevertheless more sensitive to model specification. When agricultural supply is inelastic, loosening agricultural supply constraints results in large increases in production and household incomes. More generally, as in the CGE model, technological changes that increase agricultural productivity generate important real-income linkages in rural farm and non-farm economies. Even though households do not benefit directly from these supply increases, their total incomes rise substantially; village demands for non-farm goods from outside markets increase by a similar magnitude. When prices are endogenous, the terms of trade turn sharply against production sectors experiencing productivity gains. Lower prices for food mitigate the positive income effects of technological change for rural producers, but generate real-income gains for consumers.
In short, where technological and other constraints result in inelastic agricultural supply, measures to increase supply response are critical for strengthening farm/non-farm linkages associated with rural household incomes. Loosening agricultural supply constraints in itself stimulates the non-farm economy by creating rural income multipliers and raises the real incomes of rural and urban consumers.
Further research is needed to inform the design of policies to promote the RNFE. The present study, by constructing village and microregional general equilibrium models represents a step in the direction of better understanding of rural farm/non-farm linkages. In the light of the rapid growth of intermediate cities in rural areas of LDCs, an extension of this research to model linkages between villages or microregions and intermediate cities would constitute an appropriate next step.
