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

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  • Bhattacharyya, Ranajoy
  • Das, Gouranga
  • Marjit, Sugata

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.

Suggested Citation

  • Bhattacharyya, Ranajoy & Das, Gouranga & Marjit, Sugata, 2021. "Effect of Contract Farming in a Small Open Less-Developed Economy: A General Equilibrium Analysis," Working Papers 312026, International Agricultural Trade Research Consortium.
  • Handle: RePEc:ags:iatrwp:312026
    DOI: 10.22004/ag.econ.312026
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    Keywords

    Demand and Price Analysis; International Relations/Trade;

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