Economic Well-Being in Rural Communities: The Role of Agriculture

Throughout the developed world, the share of agriculture in total income of the rural population is declining. This is due to push and pull factors. On one hand, terms of trade of agriculture are falling and farmers are forced to seek additional income sources. On the other hand, population expansion in rural areas, including an important component of urban-to-rural migration, creates attractive opportunities for alternative income-generating activities. The question is whether agriculture is good or bad for rural well-being. Are communities with more agriculture composed of stronger farms that enhance economic well-being, or perhaps more agriculture means lack of alternatives, in which case the outcome is the opposite? The answer has important implications for agricultural and rural policy. This paper attempts to answer this question in the context of Israeli Moshav semi-cooperative villages. These villages were established by farmers but have experienced a rising trend of exodus from farming in recent years and an inflow of non-farm population. We use village-level data derived from Censuses of Population and Censuses of Agriculture to study three complementary measures of well-being: income per-capita, housing spaciousness, and automobile ownership. We estimate a recursive system of simultaneous equations in which housing spaciousness and automobile ownership depend on income per-capita. The fraction of agriculture in total income in each village is the central explanatory variable. We also use explanatory variables representing demographic and economic characteristics of the villages, as well as geographic location and institutional affiliation. The results show that agriculture has a significantly negative effect on income per-capita. Income per-capita is also affected positively by the fraction of the population in the labor force, by the fraction of self-employed, and by the fraction of the population holding academic degrees. It is affected negatively by the distance from Tel-Aviv (the economic center of the country). Housing spaciousness and automobile ownership are affected positively by income per-capita. Holding income per-capita constant, housing spaciousness and automobile ownership are affected positively by the importance of agriculture. Housing spaciousness is also affected positively by median age in the village and the dependency ration, and negatively by household size. Automobile ownership is affected positively by household size and negatively by the dependency ratio. We conclude that rural communities that rely more heavily on agriculture are worse off in terms of income per-capita, but this adverse effect on well-being is partially offset by opposite results with respect to housing spaciousness and automobile ownership. The decline of agriculture is clearly not fully compensated by alternative sources of income. Provided that the global decline of agriculture will continue, the challenge of the authorities is to promote sufficiently attractive employment opportunities in rural areas that will smooth the occupational migration out of farming and prevent rural poverty.