Chapter 2
Roles of Agricultural in Economic Development
The Roles of Agriculture
Agriculture is the oldest industry in the world and the largest even today. It is identified as
one of the most significant economic activities across all parts of the world because it
produces those goods which are essential for the survival of human being.
Its contribution to economic development of a country is significant. An increase in the
net output of agriculture itself represents a rise in country’s GNP.
Historical experiences of most of the developed country like England, USA, Canada, Japan
etc. reveal the importance of agriculture in the process of the countries economic
development at the outset of Industrial revolution.
Cont...
And in most of the developing countries, agriculture is the major existing industry.
Most of these countries have to depend much upon the development of agricultural sector
for their economic development in order
to meet the demand for food
to earn foreign exchange for over-head investment
expansion of secondary industries to meet the growing demand for employment
to raise more income of rural people.
Cont…
The agricultural sector is at the heart of the economies of the least developed countries (LDCs).
It accounts for
a large share of gross domestic product (GDP) (ranging from 30 to 60 percent in about two
thirds of them)
employs a large proportion of the labour force (from 40 percent to as much as 90 percent in
most cases)
represents a major source of foreign exchange (from 25 percent to as much as 95 percent in
three quarters of the countries)
supplies the bulk of basic food and provides subsistence and other income to more than half of
the LDCs' population.
Cont…
The strong forward and backward linkages within the rural sector and with other sectors of
the economy provide added stimulus for growth and income generation.
Another dimension of the role of agriculture is the support its renders
to the industrial sector by supplying raw materials
food for the workforce engaged in this sector creating demand for industrial products etc.
Significant progress in promoting economic growth, reducing poverty and enhancing food
security cannot be achieved in most of these countries without developing more fully the
potential human and productive capacity of the agricultural sector and enhancing its
contribution to overall economic and social development.
Cont…
A strong and vibrant food and agricultural system thus forms a primary pillar in the
strategy of overall economic growth and development.
Agriculture in LDCs cannot continue to be treated as a residual sector for policy attention
and investments.
Since agriculture constitutes a large share of national output and often employs a majority
of the labor force in most developing countries, the sector is integral to any thinking about
development.
Cont…
Early classical theory viewed economic development as a growth process requiring the
systematic reallocation of factors of production from a primary sector characterized by low
productivity, traditional technology, and decreasing returns to a modern industrial sector
with higher productivity and increasing returns.
Agriculture was seen as a low-productivity, traditional sector that only passively
contributed to development by providing food and employment.
Furthermore, agriculture’s importance was expected to decline as development advanced.
Nevertheless, agricultural growth was still considered necessary for development and for a
country’s transformation from a traditional to a modern economy.
Cont…
Two key characteristics of agriculture during the early stages of development justified
its place in early development thinking.
First, agriculture produces goods that directly satisfy basic human needs. Second,
agricultural production combines human effort with natural resources, such as land and
agroecological assets.
Since natural resources were assumed to be freely available, early development theorists
believed that agriculture could grow independently of other economic activities.
However, in reality, agriculture’s dependence on a fixed supply of land meant that its
expansion was constrained.
Cont…
However, in reality, agriculture’s dependence on a fixed supply of land meant that its
expansion was constrained.
This implied that agricultural output cannot proportionally increase with increased labor
supply under a given technology (that is, agriculture suffers from diminishing returns).
On the demand side, the need to satisfy basic needs implied that, at the very least,
agricultural growth must match population growth in order to avoid the Malthusian trap
and stagnant development
Cont…
Classical theorists observed that most developing countries are comprised of ‘dual’
economies. In this view, labor productivity is typically lower in agriculture than in industry,
and hence development requires the movement of agricultural labor into non agriculture.
While non agricultural innovation and technological change can occur independently of the
agricultural sector, both labor and savings must be released from agriculture in order to
satisfy labor demand and finance capital investment in industry.
This explains why industrial and agrarian revolutions always go together and why
economies in which agriculture is stagnant do not show industrial development.
For agricultural goods does not keep pace with per capita income growth (Engel’s Law)
implies that agricultural surpluses can be generated as long as agricultural productivity
growth exceeds the population growth rate.
Cont…
Beyond agriculture providing a ‘reserve army’ of labor, classical economists also
highlighted the importance of food supplies in stimulating economic growth.
If traditional agriculture remains stagnant, then increased employment in the
nonagricultural sector may result in food shortages.
Food price increases would raise the cost of living, especially for low income households
with high food consumption shares.
The pressure to raise wages would hamper industrial growth, especially during the early
stages of development when technologies are typically labor-intensive.
Cont…
It was suggested that agricultural productivity growth stimulates rural economies through
production and consumption linkages at the regional level.
Labor demand between agriculture and rural nonfarm activities can create further rural-linkage
effects, and reciprocal reverse flows from rural nonfarm activities can help finance the
purchase of agricultural inputs, which further improves productivity.
Agricultural growth also benefits rural and urban consumers alike by driving down food prices.
The poor typically spend a high share of their income on food, and therefore benefit from
increases in food production that reduce prices.
The strength of this effect depends, however, on the degree to which farm production is
tradable and the associated price-elasticity of demand.
Cont…
Alston et al. (1998) show that, following an increase in supply, the price decrease
determining the distribution of benefits between producers and consumers depends on the
elasticity of demand, which in turn depends primarily on the size of the market supplied.
While the importance of food-supply in the growth process has already been discussed
above, its link to poverty reduction should be understood within the broader context of
development.
By benefiting the poor, agricultural growth can facilitate development by smoothing
structural transformation and reducing potentially painful adjustment costs as
inequality becomes more binding on growth later in the development process.
Cont…
Agriculture is the mainstay of the LDC economies, underpinning their food security, export
earnings and rural development.
Slow production growth and sharp annual fluctuations in output have continued to be chronic
problems for the LDCs, constituting the main causes of their persistent poverty and rising
food insecurity.
The proportion of undernourished in the total LDC population increased from 38 percent to
40 percent between 1969-71 and 1996-98, while the absolute number rose from 116 million to
235 million.
As regards trade, the LDCs have continued to be marginalised from world agricultural
markets, accounting for only 5 percent of global agricultural exports in the early 1970s but
barely 1 percent in the late 1990s
Cont…
The poor performance of agriculture in the LDCs is related to the many internal and external
difficulties that these countries face as they seek to develop this sector and achieve their
objectives of improving food security and increasing export earnings.
Their internal difficulties include low productivity, rigid production and trade structures, a
limited skills base, short life expectancy and low educational qualifications, poor
infrastructure, and inadequate institutional and policy frameworks.
At the same time, with the growing integration of markets from globalisation and trade
liberalisation, their economies have to operate in an increasingly competitive external
environment.
They continue to export a narrow range of primary commodities that are highly vulnerable to
instability of demand and deteriorating terms of trade.
Agriculture for Development
Agriculture is a critical productive sector, and engine of growth for most countries in the
region, accounting for between 30 and 55% of GDP, provides employment for over 70%
of the rural people, and for 40% of export earnings.
Agricultural sector contributes to:
(i) food supply for the growing population and food security;
(ii) livelihoods for the rural population;
(iii) the markets for manufactured goods and particularly inputs (backward linkages);
(iv) raw materials for agroprocessing (forward linkages);
(v) foreign exchange through exports and finally
(vi) surplus to be reinvested in the rest of the economy
Cont…
In the early days, up to end of 1990s, the commonly used concept was agriculture and
development.
Here, the explicit goal of the agricultural sector is its contribution to economic growth and
is implicitly assumed that economic growth will automatically lead to wider
developmental goals.
Currently there is growing awareness that economic growth is a necessary condition but
not sufficient to achieve the national, regional and global developmental goals.
There are countries which have achieved double digits economic growth, but still with
high incidence of poverty.
Cont…
Thus, many development practitioners prefer the concept “agriculture for development”
where the explicit goals are the broader developmental goals and agriculture is considered
as the key instrument to achieve these goals.
This concept also recognizes the trade offs between economic growth, poverty alleviation,
food and nutrition security and environmental sustainability.
As an economic activity, agriculture can be a source of growth for national economy, a
provider of investment opportunities for private sector; and a prime driver of agriculture-
related industries and the rural non-farm economy, it generates significant multiplier effect
through value addition and forward and backward linkages with input and output markets.
Cont…
As a livelihood
Agriculture is a source of livelihood for the majority of the rural poor. Globally, agriculture provides jobs
for 1.3 billion smallholders and land less workers
As a provider of environmental services.
As a major user of the natural resources (land and water), agriculture can create good and bad
environmental outcomes.
Agriculture contributes to around 30% of green house gas emission thus to global warming). Improper land
and water use also could contribute to irreversible damage to the natural resources and the environment.
On the other hand, through sequestering carbon, managing watersheds and preserving bio-diversity,
agriculture also makes positive contribution to the environment.
With rising resource scarcity and mounting externalities, agricultural development and environmental
protection have become closely intertwined.
Cont…
Peace and stability
Good governance, peace, security and political stability are necessary pre-conditions for
sustainable growth and development.
By providing food for the growing population at an affordable price, agriculture can
contribute tomaintenance of food security and political stability.
Given the inter sectoral linkages, managing the connections among agriculture, natural
resources conservation and the environment must be an integral part of using agriculture
for development
Cont…
The role or contribution of the agricultural sector in the economic transformation and overall
development is mainly determined by three factors
1. the relationship between the agricultural sector and other sectors of the economy (the
transformation phase in which the agricultural sector finds itself);
2. the way in which agriculture is treated in the political process
3. the chosen model to stimulate growth and development (Van Rooyen, 1997).
The specific role and scope of agriculture in economic development depends to a large extent
on the phase of economic transformation in a country (Johnson and Meller, 1961, Mosher,
1971, Mellor, 1986; Hayamy and Ruttan, 1971; Timmer, 1988).
Cont…
A high rate of agricultural growth has far-reaching positive implications for economic
development of low-income countries in terms of increasing employment and accelerating poverty
reduction.
High agricultural growth also helps avoid the creation of mega-cities with large slum
populations.
In order to achieve this rapid agricultural growth with positive economywide linkages, however, it
is necessary to engage “middle farmers”, large enough to adopt new technologies and produce
significant marketed surpluses, but small and numerous enough to have spending patterns that
drive a vibrant rural non-farm sector.
Finally, public and private investments in road, electricity and telecommunications are also needed
to reduce marketing costs and enable growth in rural market towns and secondary cities
Cont…
Role of agriculture for the development of an economy may be stated as:12
Contribution to GDP.
Contribution to Employment.
Contribution to export.
Source of Food supply
Pre Requisite for raw materials
Creation of infrastructure.
Relief from shortage of capital
Helpful to reduce Inequality
Improving rural welfare
Create effective demand
Contribution to capital formation.
Extension of market size.
Cont...
Contribution to GDP.:
Agriculture has been observed to contribute a very large share of GDP of most of the
economies before industrial development take place in them.
As the process of industrial development accelerates , the share of non agricultural
sector in GDP tends to increase steadily.
Simultaneously ,the relative share of agriculture shrinks and yields place to that of
manufacturing and service sectors.
It only implies that the growth in production of industrial and service sectors is faster
than the growth in agriculture sector.
In some typical African economy ,agriculture produces about 50 per cent of their GDP.
Cont…
Contribution to employment:40% to 90%
Agriculture provides employment opportunity for rural people on a large scale in
underdeveloped and developing [Link] is an important source of livelihood.
Contribution to Export:25% to 90%
The progress in agricultural sector provides surplus for increasing the exports of
agricultural products.
According to Simon Kuznets “Agriculture was a major source of exports and that the
resulting command over the resources of the more developed countries played a strategic
role in facilitating modern economic growth.
Cont…
Source of food supply:
The most important contribution of agriculture is to provide food supply to increasing
population of the countries of the world.
Raising supply of foods by agriculture sector has ,therefore, great importance for
economic growth of a country.
Pre-requisite for raw material:
Agriculture provides industrial raw material to a large number of industries (textile ,silk ,
oil ,sugar, rice, flour mills etc.)
As a supplier of raw material ,agricultural sector is of primary significance for the growth
of industrial sector in the economy.
Cont...
Creation of infrastructure:
The development of agriculture requiresm roads,market,storage,transportation,postal
services and many others services for an infrastructure creating demand for industrial
products and the development of commercial sector.
Relief from shortage of capital:
Agriculture sector requires less capital for its development thus it minimizes growth
problem of foreign capital.
Cont…
Helpful to reduce inequality:
The prosperity of agriculture would raise the income of the majority of the rural population
and thus the disparity in income may be reduced to a certain extent where there is a greater
inequality of income between the rural and urban areas of the country..
Improving rural welfare:
The rising agriculture surplus caused by increasing agricultural production and productivity
tends to improve social welfare ,particularly in rural areas .
Cont…
Create effective demand:
A rapid growth of agriculture output with fair amount of stability is very important ,as it
enables food supply to be available at relatively lower prices.
In that case the non-agricultural sector, requires less of its income to purchase food, and
this helps to increase effective demand for the output of nonagricultural sector.
Agricultural development also increases purchasing power of farmers which will help the
growth of the non-agricultural sector of the country.
Cont...
Contribution to Capital formation:
Agricultural growth largely contributes to capital formation in the under-developed
countries.
There are three ways in which the farm sector contributes to capital formation.
First, increased agricultural productivity benefits the non- agricultural sector through
lower food prices. It will facilitate increased saving and capital accumulation in urban
sector.
Second, increased farm output may generate higher levels of farm income ,part of which
may be [Link] savings may be utilised in financing the growth of the
nonagricultural sectors.
Thirdly,capital can be derived through a well devised tax [Link] China,Russia and
Japan , farm tax revenue helped significantly in their economic growth.
Cont...
Extension of market size:
Agricultural efficiency raises rural income levels and creates an effective market for
more and new industrial goods.
It enlarges the size of market .If there is surplus production ,then it can be exported to
the other countries of the world.
So, agriculture sector expands the market at national and international level.
Agricultural Transformation and Prime Movers
As countries achieve higher economic growth and development they move from one
category to the other.
For example in the recent past, China and India moved from agriculture-based to
transforming group while Indonesia moved from transforming countries to urbanized
countries group.
Based on past experience, there are stages of agricultural transformations so as to
achieve sustainable development.
Stages of Agricultural Transformation
Stage One: The Economic Growth and Modernization Era of the 1950s and 1960s
This is the period where development was defined largely in terms of growth in average per
capita output.
Although, the growth of agricultural surplus was acknowledged at the first stage of agricultural
transformation, in 1950s most development economists
Did not view agriculture as an important contributor sector to economic growth, by raising
the following arguments:
The income elasticity of demand for unprocessed food is less than unity.
The scope of growth through agriculture and other primary exports were very limited.
Stages of Agricultural Transformation
However, in1960s, other scholars argued the need to invest in agricultural sector since
agriculture has a potential positive force in development and agriculture and industry are
interdependent for economic growth and development.
The analysis given by those economists showed that:
Food shortage could check-off the growth in the non-farm sector, by making its labor supply
less than infinitely elastic
Agriculture could provide labor, capital and foreign exchange to the developing economy
and specifically to the industrial sector
It could also supply market for domestically produced industrial goods.
Stages of Agricultural Transformation
The “Green Revolution Model” was instrumental in convincing policy makers and
international donors to devote more resources to the development of new inputs for Third
World Farmers, such as high yielding and fertilizers responsive grain varieties.
Intensification of agricultural production based on high yielding cereal varieties offered the
opportunities to provide productive employment and outputs for the rapidly growing rural
labor force.
During this phase, agriculture becomes a key contributor to growth.
Thus, the policy interventions focused on establishing market links with industry,
technology and incentives to create a healthy agricultural sector, and improving factor
markets to mobilize rural resources.
Stages of Agricultural Transformation
Stage Two: The Growth-With-Equity Era of the 1970s
This stage is concerned with the interaction between income distribution and rate of
economic growth.
The attention was given to income growth, income distribution and health and education
services.
It was also concerned with employment generation and possible existence of employment.
In the early 1970s, rather than simply waiting for increase in average per capita income to
solve the problem of poverty and malnutrition, the greater attention has been paid to
employment, income distribution and basic needs such as nutrition and housing.
The surplus generated in agriculture can be utilized to develop the non-agricultural sector
through a combination of factor inputs
Stages of Agricultural Transformation
Stage Three:The Economic Growth and Policy Reform Era of the 1980s
In the third stage, agriculture is progressively integrated with the macro-economy through
improved infrastructure.
At this stage, the relative importance of agriculture in the economy substantially declines.
More attention was given to macroeconomic policies related to income generation,
agricultural sustainability and market linearization
The policy synthesized how to trace effects of macroeconomic adjustments as well as
sectoral level policies on food production, income generation and the consumption patterns
of the poor.
Cont...
The following few points are the focus areas to attain sustainable agricultural and rural
development
1. Agriculture and rural development require strong rural institutions and well trained
individuals, to relate smallholder agricultural farmers with research, training and extension
2. Public and private investment policies should be in such a way that promote and
accelerate agriculture and rural growth
3. Agricultural development must satisfy the food requirement of rapidly growing population
to achieve food self-sufficiency
4. Government should invest in expansion of public services to the rural economy such as
road construction, irrigation, water supply, etc
5. Improved management and governance can also use economic resources economically,
effectively and efficiently
Agriculture strategy
Agriculture is the weakest sector in the development chain of developing countries, because of lower
productivity.
Characteristics of agriculture sector
There are millions of people involving in decision making where as they are few in other sectors
Seasonality & geographical dispersion of agriculture production creates a need to have an
extensive system of storage & transportation system.
Weather adds extra elements of uncertainty to agriculture production and volatility of prices. Due
to output & price risk, stabilization of income is difficult.
All these characteristics of agriculture complicate the task of policy makers. It is also difficult for
the government to design agricultural strategy
Reasons for Government Intervention in the Agricultural Sector
Incomplete market in insurance & credit market: i.e. credit & insurance market are
incomplete (or totally missing) in agricultural sector.
Public good & increasing return to scale: Government would intervene to provide
public goods. E.g. providing water dam.
Imperfect information: e.g. - Price information, new technology, quality products
Externality (positive externality): successful adoption of a new technology by one
farmer conveys valuable information to his neighbors & hence gives them a significant
externality.
Income distribution: - the distribution of income generated by a free market is one of the
reasons for government intervention.
The most important issue in the design of agriculture strategy is the choice between Bi-
Criteria for Designing Agriculture strategy
modal & Uni-modal agriculture strategy.
In Bi-modal strategy, resources are concentrated with a small fraction of the population.
Frontier firm with high capital labor ratio would account the bulk of commercial
production & would have the cash income to buy these technologies
Their production can increase substantially but agriculture products have very low income
elasticity.
This implies small farmers cannot increase their production because of lower demand.
Because the commercial farmers use huge capital, they will consume most of the foreign
exchange.
These commercial farms use more capital than labor.
Under bimodal strategy import of capital is subsidized.
These commercial farms hire labor & pay based on the min wage legislation.
All these increase the price of labor relative to capital, which is contrary to the social
opportunity cost of labor.
The bimodal strategies do not reduce inequality & poverty.
Criteria for Designing Agriculture strategy
A uni -modal strategy is a strategy that encourages a more progressive & wider diffusion
of technological innovation, adapted to the factor proportion of the sector as a whole (more
labor using technology).
It emphasizes the sequence of innovations that are highly divisible & scale neutral , and
this innovations can be used by a small – scale farmers
The import requirement is very low. Small firms use appropriate mix of labor & capital
which reflects the social opportunity cost of labor.
This will help to increase employment, reduce poverty & inequality.
The Main Objectives of Agricultural Strategy
Agriculture strategy in LDCs has to have the following objectives:
Contribution to the overall economic growth & structural transformation
Uni-modal strategy-increase the demand for local manufacturing industries-structural
transformation will come (high interdependence)
Increasing farm productivity & output:
Bimodal - farm mechanization - more unemployment.
Uni-modal use scale neutral biological & chemical
Achieving broad based improvement in the welfare of rural population
Uni-modal strategy helps to increase the welfare of rural population.
The Economics of Agricultural Development:
Transition from Peasant Subsistence to Specialized Commercial Farming
For expository convenience, we can identify three broad stages in the evolution of
agricultural production:
1. The first and most primitive is the pure, low-productivity, mostly subsistence level,
peasant farm.
2. The second stage is what might be called diversified or mixed\family agriculture, where
part of the produce is grown for consumption and part for sale to the commercial sector.
3. The third stage represents the modern farm, exclusively engaged in high productivity
specialized agriculture geared to the commercial market.
Subsistence Farming: Risk Aversion, Uncertainty, and Survival
On the classic peasant subsistence farm:
Most output is produced for family consumption (although some may be sold or traded in local
markets), and a few staple food crops are the chief sources of food intake.
Output and productivity are low, and only the simplest traditional methods and tools are used.
Capital investment is minimal; land and labor are the principal factors of production.
The law of diminishing returns is in operation as more labor is applied to shrinking (or shifting)
parcels of land.
The failure of the rains, the appropriation of his land, and the appearance of the moneylender to
collect outstanding debts are the banes of the peasant's existence and cause him to fear for his
survival.
The Transition to Mixed and Diversified Farming
It is neither realistic nor necessarily desirable to think of instantly transforming a traditional
agrarian system that has prevailed for many generations into a highly specialized commercial
farming system.
Diversified or mixed farming therefore represents a logical intermediate step in the transition
from subsistence to specialized production.
In this stage, the staple crop no longer dominates farm output, and new cash crops such as fruits,
vegetables, coffee, and tea are established, together with simple animal husbandry.
These new activities can take up the normal slack in farm workloads during times of the year
when disguised unemployment is prevalent
Toward a strategy of agricultural and rural development: some main requirements
It is important to identify the principal sources of agricultural progress and the basic
conditions essential to its achievement the progressive improvement in rural levels of
living achieved primarily through increases in small-farm incomes, output, and
productivity
Sources of small-scale agricultural progress
Technological change and innovation
Appropriate government economic policies
Supportive social institutions
Improving small-scale agriculture
Technology and innovation
Institutional and Pricing Policies
Providing the Necessary Economic Incentives
Supportive Policies
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