CHAPTER ONE
INTRODUCTION
1.1 Definition and Scope of Agricultural Economics
The term Agriculture can be defined from two perspectives: economic activity and science.
Agriculture (also called farming) as an economic activity is the rearing of animals,
cultivation of land to grow plants, fungi, and other life forms for food, fibre, fuel and raw
materials which are used to sustain life. Agriculture as a science is a broad multidisciplinary
field that encompasses the parts of natural and social sciences that are used in the practice and
understanding of agriculture (production, processing, marketing). For example: agribusiness,
agricultural economics, plant sciences, animal sciences.
Agriculture is a way of life for rural people. It is an industry or business employing
knowledge of various sciences for the production of food, fiber, fuel and fodder. It is a
purposeful work through which the elements in the nature are harnessed to produce plants
and animals for mankind.
Agricultural Economics can be defined as the application of principles of economics to the
problems of agriculture. It is an applied field of economics in which the principles of choice
are applied in the use of scarce resources such as land, labour, capital and management in
farming and allied activities. It deals with the principles that help the farmer in the efficient
use of land, labour and capital. Its role is evident in offering practicable solutions in using
scarce resources of the farmers for maximization of income. It mainly focuses on principles
of microeconomics, which examines the actions of individuals, households and firms.
Examples of role of economics in agriculture: breeding or production of plants and animals
should be towards the varieties with desirable economic characteristics such as higher yield,
marketability, etc. agricultural production technologies (such as machineries, chemicals,
improved varieties, etc) should be affordable and least.
Historically, agricultural economics began in the 19th century as a way to apply economic
principles and research methods to crop production and livestock management. The roots of
the discipline, however, can be found in the writings of the classical economists of the 1700s
and early 1800s. The works of Adam Smith, Thomas Malthus and David Ricardo discussed
land as a factor of production and issues of human population versus its ability to produce
food.
Since the 1970s, the primary focus topics of agricultural economics includes: agricultural
environment and resources; risk and uncertainty; consumption and food supply chains; prices
and incomes; market structures; trade and development; and technical change and human
capital.
1.2 Historical Development of Agriculture
Human beings have been practicing agriculture since thousands years ago. The first period in
the history of agricultural development was hunting of wild animals and gathering of wild
plants. The second major stage in the development of agriculture began when human beings
start sedentary life which facilitated the domestication of plants and animals, intensification
of farming and emergence of private property. The third stage of agricultural development,
which is started in the middle of the 19 th century, was marked by the use of scientific
knowledge in agricultural production and the influence of industrialization on agriculture.
Prominently, this period is known for the application of science in the invention of new
efficient machineries, chemicals and improved varieties which is facilitated by the industrial
revolution. The fourth stage is characterized by the creation and maturity of institutions-
government policies, legal structures, marketing structures, etc. However, the development
of agriculture is not uniform in all parts of the world. The agriculture of contemporary
developing countries is mainly traditional while that of the developed counties attained the
highest stage in the historical ladder of agricultural development. The reason for the
backwardness of the developing countries agriculture is lack of improved agricultural
technology and necessary institutions.
1.3 Role of agriculture in economic development
“It is in the agricultural sector that the battle for long term economic development will be
won or lost.” Gunnar Myrdal, Nobel Laureate Economics
According to Kuznets (1961), agriculture makes four contributions for economic
development–product contribution, factor contribution, market contribution and foreign
exchange contribution. As far as its product contribution is concerned, agriculture produces
sufficient food for the growing rural and urban population and raw materials and expanding
industry. If agriculture fails to produce sufficient amount of these products, their demand
should be met through import. But this is impossible unless the export sector is matured
which is unlikely especially at the initial stages of development. Hence, governments,
instead, may borrow from foreign sources and sink in excessive indebtedness.
Food availability can become a constraint on economic growth. Latin American countries
experienced rapid industrialization between 1950s and 1970s. Agricultural growth barely
matched rising food demand caused by high population growth and urbanization. Industrial
growth rose to 8% per year during 1965-73, while per capita agricultural production
stagnated and even fell in five countries. As a result, food imports increased from an annual
growth rate of 3.1% during the 1950s to more than 12% in the early 1970s. With a rise in
world prices for grains, food imports led to substantial strains on the balance of trade and the
exchange rate and led to inflationary pressures.
The factor contribution of agriculture consists of two parts: labour contribution and capital
contribution. The incensed demand for labour for expanding industrial sector should come
from agriculture. Up on increased productivity, agriculture releases cheap labour for industry.
The rapidly growing economies of South-East Asian countries, for example china, are fuelled
by cheap labour drawn from agriculture. The famous Lewis surplus model also asserts that
industrialization can be achieved through withdrawal of surplus labour from agriculture to
industry.
Agriculture is also a source of saving and capital accumulation for industrialization. Unless
agriculture produces surplus, it is difficult to raise capital for industrial establishments in
agrarian economies. The agricultural surplus can be channelled in to investment in many
ways such as the voluntary investment by land lords and small farmers either in the form of
saving in banks or direct physical investment, or forced saving through taxation.
The market contribution of agriculture refers to the fact that the purchase of industrial
commodities by rural people represents demand for industrial commodities.
Lastly, the export of agricultural commodities is usually the major source of foreign exchange
earnings in the early stages of development. Foreign exchange provides access to goods that
either cannot be produced domestically or can only be produced at very high opportunity
cost.
1.4. Interdependence of Agriculture and Industry
Agricultural development led to industrial development in many countries of the world. This
industrial growth in turn led to economic growth. Industrial revolution after 1940s enhanced
economic development. Prior to this no industrialization, but many economists quoted that
agricultural growth is the pre-requisite for economic development (e.g A. Smith 1776).
Agricultural sector remained neglected due to the wrong thought saying “agricultural sector
can grow by itself.” However, other sectors help development of agricultural sector e.g by
supplying inputs (chemicals, fertilizers, machines, transport facilities,…). The other sectors
also create/expand the demand for agricultural outputs. Hence, the role of agriculture to
economic development of LDCs is vital and crucial.
Agriculture helps industries in the following ways:
It provides raw materials for industries.
It provides market for manufactured goods.
It provides labour.
It provides food for workers working industries.
It can be a source of funds for the industrial sector.
Industries help agriculture in the following ways:
They provide seeds of better quality.
They provide fertilizers.
They help in developing irrigation facilities.
They provide pesticides.
They supply modern equipment such as tractors.
They help in the development of marketing and storage facilities.
They supply manufactured goods to workers in the agriculture sector.
They are a potential source of funds for the agricultural sector.
Both agriculture and industry are complementary and support one another. Hence,
agricultural development is the precondition for a “self-sustained economic growth.”