Interlinkage between food prices and agricultural wages and implications for farm mechanization in Bangladesh

Abstract

In recent decades, Bangladesh’s economy has undergone a remarkable structural transformation. Agricultural wages are becoming high while staple food prices are becoming volatile. In the meantime, agriculture has experienced an expansion of machine rental services provided by specialized agents, which has contributed to the mechanization of agricultural production. The emergence of machine rental markets and the recent wage growth may have significant effects on the efficiency of farmers of different scales in rural Bangladesh through land reallocation and technology adoption. Proper understanding of the relationship between food prices and rural wages is essential for planning policies in support of the rural poor in Bangladesh. This dissertation analyzes the interlinkage of food price and agricultural wages and its implication in farm mechanization. <br /> In exploring the link between food prices and rising agricultural wages, the first analytical chapter analyzes the dynamic relations between those two by using monthly data from 1994 to 2014. A standard vector error correction model (VECM) was implemented to determine the short‐run and long‐run relationships between wages and food prices in eight divisions in Bangladesh. Besides, autoregressive distributed lag (ARDL) models were fitted to estimate the pass‐through coefficients and to compare the short‐run effects of rice price and urban wage shocks on agricultural wages. We found statistical evidence of a structural break between January 2007 and January 2009. After the structural break, in six out of eight divisions, any shock in rice prices did not transmit to the farm wages in the short run. Moreover, in the long run, food prices became less influential in explaining the changes in rural wages while the influence of urban wages became stronger in some divisions. To better understand the rural wages pattern this study also examines the implications of agricultural mechanization for agricultural wages using a unique data set of monthly wages and rice prices over the period from 1995 to 2015. Employing a dynamic panel model, estimated by generalized methods of moments, this study found that increasing agricultural mechanization was associated with an increase in real agricultural wages, both in the short, medium, and the long run. This has important implications for policymakers aiming to reduce rural poverty and for interventions put in place to reduce extensive rural-urban migration and create more employment opportunities in the agricultural sector. <br /> The third empirical chapter examines the dynamics of land transactions and the demand for machine services using two-rounds of household panel data from 62 villages of the country. The empirical results show that despite an increase in farm wages, small farmers increased their total cultivable land and their net rented-in land. An increase in the wages of hired agricultural labor led to the substitution of labor with machines. The average investment in hiring farm machines was higher for larger farms. However, there was no significant evidence to suggest larger farmers experienced greater changes in machine hiring expenses. <br /> Finally, this study analyzes the rental market for farm machinery services in Bangladesh. Using primary information collected from 371 machine owners and 239 client farmers, this study demonstrates that different rental service systems have emerged in Bangladesh over time. Ownership of machines (e.g., power tillers, tractors, and threshers) is largely determined by the owners’ access to rural credit, land size, and the number of fragmented lands. The monopolistic-type of market prevails for tractors and a competitive market structure exists for power tiller. However, a monopoly exists in the rental market for transplanters and combine harvesters. Social capital seems to be an important factor that ensures the profit of owners as well as the timely availability of services for users. Farmers are willing to mechanize planting and harvesting operations regardless of whether they are owners or non-owners. This strongly indicates that machinery rental services have a bright future in the country.