Effect of Contract Farming in a Small Open Less-Developed Economy: A General Equilibrium Analysis

Abstract

In this paper, we analyse the entry of a cash crop producing foreign Contract Farming (CF) subsector within the agricultural sector of a country. Entry requires a cash crop price that is substantially above the price of the food crop already being produced within the country. Entry of CF could cause ‘vanishing’ of the food-crop sector. We employ a variant of 3×3 mixed Specific Factor-Heckscher Ohlin general equilibrium model of production and trade where introduction of a new policy may lead to the emergence of a new cash-crop sector resulting in finite changes where we show the possibilities of sectoral diversification with combinations of contract farming vis-à-vis traditional agriculture under some plausible conditions. Such ramifications could (a) increase GDP; (b) give rise to adverse distributional consequences for labour, and land-owner; (c) reduce domestic production of food and increase food import and hence, (d) aggravate food insecurity. Thus, CF might imply a tradeoff between food insecurity, inequality and growth. However, either zero CF and extremely high CF are suboptimal and hence, CF cannot be substitute of non-CF agricultural sector producing Food crops. In fact, fallacy of composition shows that aggregate has a price effect so that food-crop sector never disappears. Our results seem to be consistent when compared to some empirically robust conclusions found in the literature and some secondary data available in the FAO website.