AN APPLICATION OF THE

O – RING THEORY TO

AGRICULTURE DEVELOPMENT IN

MALAWI

Outline

• Coordination Failure• Multiple Equilibria• Models about Multiple Equilibria• The Big Push Model• The O Ring Theory of Economic Development• Agriculture in Malawi• How the O – Ring Theory Fits into the picture• Conclusions

Underdevelopment as coordination Failure

• Coordination failures occur when agents’ inability to coordinate their actions leads to an outcome that makes all agents worse off

• Who are these agents?– Government Institutions (Statutory, Research, Planning…)– The Private Sector– The Citizenry

• Coordination Failure mostly occur when actions are complementary. For Example: actions taken by one agent reinforces incentives for others to take similar actions

Multiple Equilibria

• Refers to a system in which there is more than one equilibrium, most commonly a market in which a backward bending supply curve crosses a demand curve more than once, at prices each of which is a market clearing price.

• In Developing countries there is presence of multiple Equilibria

Models about Multiple Equilibrium

• The Big Push Model• The O – Ring Theory of Economic

Development

The Big Push Theory

• Conditions for Big Push• Sometimes market failures lead to a need for public policy

intervention• Multiple Equilibria• Inter - temporal effects• Urbanization effects• Infrastructure effects• Training effects• Linkages• These needs cannot be addressed by a super entrepreneur

Explosion of the Space Shuttle Challenger, 1986

What is the O – Ring Theory

• Takes the name after what happened to the Space Shuttle Challenger in 1986. The rocket exploded because a part – the O – Ring – failed to expand

• Output depends on completion of a series of tasks/processes

• Failure at any one of these tasks reduce the value of the output, sometimes output can be zero (The Weakest Link)

• Quantity cannot substitute quality

Weakest Link TV Show on BBC follows O – Ring Theory

Examples of O – Ring Production

• Micro chips that become soiled• Symphony Orchestra – when one member is out of

tune• The Space Shuttle Challenger, 1986 – which exploded• In the United States of America, E-coli (bacteria)

contaminated spinach sickened consumers in 25 states in 2006. Spinach was destroyed, loss of business

• These cases show the cost mistakes have on output

The O – Ring Production Function

O – Ring Production Function

When Kα and β are exogenous, I assume they are 1. Model becomes:

Y = n (q1 x q2 x q3x … qi x …x qn)

When n = 10 and qi = 1, Y = 10

[qi is the quality of skill. qi = probability of making a mistake = 0; qi = 0.9, probability of making a mistake = 0.1 or 10%]

Effect on Output, E(y), as q decreases

Observations from the model

• Output is affected as the level of skill drifts away from the perfect skill level (q

i = 1)

• The probability to make a mistake of 0.1 results in a considerable reduction of the expected output

• We conclude that to realize total potential output, there should be no mistake in any one sequential production process

How the O – Ring fits Agriculture Production

• Cigarette production• Cornflakes production• Coffee production• Attracting Vertical Foreign Direct Investment in

Agriculture• Maize production

How the O – Ring fits in Agriculture

• Maize Production tasks– Land Preparation (distance between ridges)– Ridging– Planting (seed type due to weather, planting method, distance)– Fertilizer application – the timing– Banding– Harvesting– Storage– Price information– Export licenses– Protection from thieves– Research and Development– Infrastructure– Extension Services

Cereal Yield in World RegionsThe developed countries, Latin America and the Caribbean and Asian Developed countries – have registered commendable progress with growth rates in excess of 3%. SSA registered a measly growth rate of as little as 0.2%.

Consumption of Fertilizer by World RegionAfrica as evidenced from the graph is far out classed by the other World Regions

Source: [http://www.ourworldindata.org/data/food-agriculture/fertilizer-and-pesticides/]

Fertilizer use, by developing regions and type (Nitrogen, Phosphates, Potassium) kg/ha (1961 to 1999) – FAO

http://www.ourworldindata.org/data/food-agriculture/fertilizer-and-pesticides/

Agriculture in Malawi

• Malawi is a landlocked SSA country with a population of 16 million people.

• One third of the land is cultivatable; • Agriculture is the major source of income, jobs,

foreign exchange and also the largest contributor to Gross Domestic Product.

• The sector employed 85% of the population and contributed 31% to GDP in 2013.

• Incidence of poverty is very high as depicted

Poverty Headcount in Malawi

1998 2005 20110%

10%

20%

30%

40%

50%

60%

70%

80%1998 – 68%2005 – 52%2011 – 51%

Selected Indicators from Malawi

Trends in Agriculture Spending in Malawi

Proportion of Subsidy in Agriculture Budget

Why Agriculture underperforms in Malawi

• 54% of the smallholder farmers use hybrid seed, which is problematic.

• 60% of farming households reported the use of fertilizer, which again is a problem

• 18% of smallholder farmers are reached by extension workers; • The average landholding size of 0.44 ha; • Access to loans being only 3% and the little allocation in the

government budget to Research and Development and Extension Services

• 80% of the farm land is customary land; just 6% is private land; the rest is public land

Recall the O – Ring Production Function

Y = n (q1 x q2 x q3x … qi x …x qn)

q1 = extension services (q1 = 1. if less output will be affected)

q2 = Research and Development (q1 = 1. if less Output will be affected)

q3 = Fertilizer Application.

.

.

qi = Weeding

.

.

.

qn = Property rights

Quality Matching

Consider a situation where there are 2 high quality skilled workers and 2 low skilled workers in an industry

Which combination will produce the maximum Output? Should the skills be matched or mixed for maximum output?

• Assume high quality (skilled) workers = (qh = 1) and Low

(skilled) Quality Workers = (qL = 0.9)

When Skills are matched:

E(y) = 2qh

2+ 2qh

2 = 2(1)2 + 2(0.9)2 = 3.62

Quality Matching…/2

When skills are mixed (not matched)E(y) = 2q

hq

L + 2q

hq

L

E(y) = 2(1) (0.9) + 2(1)(0.9) = 1.8 + 1.8 = 3.6

E(Y) is higher where skills are matched than where they are mixed

Conclusions

• To achieve increased agriculture production, a multiplicity of factors is at play

• When one or so such factors are not executed at 100%, Output is affected

• Agriculture output in Malawi experiences colossal underperformance due to coordination failures

• To give a boost to agriculture, there has to be investment or priority given to these factors

Conclusions…/2

• The failure of agriculture to deliver has an effect also on the vertical FDI in agriculture a country attracts; Malawi attracts the lowest FDI in agriculture

• Adoption of capital intensive use in agriculture is very minimal

• And poverty continues being a problem