Lecture note: Development Economics II 2022

Chapter Four: Agriculture and Economic Development

4.1. Agricultural Progress and Rural Development
Agriculture employs a majority of the labor force in most developing countries. The agriculture sector has been integral
to any thinking about development.

The early classical theory viewed the agriculture sector as characterized by:

Low productivity, traditional technology, and decreasing returns.

Agriculture has been assumed to play a passive and supportive role.
Its primary purpose was to provide food and employment.
The importance of agriculture was expected to decline as development advanced.

Hence, development requires systematic reallocation of factors of production from the agriculture sector to a modern
industrial sector with higher productivity and increasing returns.

The active role of agriculture in growth and development

The view that agriculture plays only a passive role in development was swept aside by the green revolution in Asia
during the late 1960s and early 1970s.

Green revolution: the increase in grain production associated with the scientific discovery of new hybrid seed
varieties of wheat, rice, and corn that have resulted in high farm yields in many developing countries.
The transformation of traditional agriculture into a modern sector revealed the potential of Agricultural
development is now seen as an important part of any development strategy.
Simon Kuznets indicated that agriculture has four contributions to economic development:

1. Product contribution = supply of inputs for industries , such as textile and food processing
2. Foreign-exchange contribution = using agricultural export revenues to import capital goods agriculture as a
growth sector.
3. Market contribution = an increase in rural incomes create more demand for consumer products
4. Factor market contribution
 Labour contribution = workers not needed on farms after an increase in agricultural productivity work in
industry
 Capital contribution = some farm profits could be invested in industry. Today, most development
economists share the consensus that besides playing a passive role, the agricultural sector and the rural
economy play an indispensable role in any overall strategy of economic progress, especially for the low-
income developing countries.

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An agriculture and employment based strategy of economic development requires three basic complementary
elements.
1. Accelerated agricultural output growth through technological, institutional, and price incentive changes designed
to raise the productivity of small farmers
2. Increased domestic demand for agricultural output derived from an employment-oriented urban development
strategy
3. Diversified, non-agricultural, labor-intensive rural development activities that directly and indirectly support and
are supported by the agriculture. Expanding Integrated rural development strategies

As countries develop, the shares of GDP and labor in agriculture tend to decline, but with many idiosyncrasies. Why do
the shares of GDP and labor in agriculture decline with economic development process ?

 Inelastic income elasticity of demand for food. As per-capita income rises, the proportion of household income
spent on food declines relative to other products.
 As household demand for food declines in relation to other products, relative prices of foods decline, other things
equal. This in turn reduces returns to factors used in agricultural production, causing a net migration of labor and
capital to other sectors.
 Due to the contribution of the other sectors increase and start to share the agricultural sector.
4.2. The Structure of Agrarian systems in the Developing World
Three types of developing countries based on agriculture:
a. Agriculture-Based Countries: agriculture is a major source of economic growth (32% of GDP growth on average) and
it makes up a large share of GDP.
- More than two-thirds of the poor of these countries live in rural areas.
2. Transforming Countries: the share of the poor who are rural is very high (almost 80% on average) but agriculture
contributes only a small share to GDP growth (7% on average).
3. Urbanized Countries: nearly half or more of the poor are found in urban areas, and agriculture tends to contribute even
less to output growth.
Many countries that were in the agriculture-based category moved to the transforming category in recent decades, like
India and China.
4.2.1. Peasant Agriculture in Latin America, Asia, and Africa
Agrarian system is the pattern of land distribution, ownership, and management and also the social and institutional
structure of the agrarian economy.
In Latin America, Asia and Africa, agrarian structures are not only part of the production system but also a basic feature
of the entire economic, social, and political organization of rural life.
There are 3 agrarian systems in developing world:
a. The Latifundio-Minifundio dualistic pattern in Latin America

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 Latifundio : is very large landholding capable of providing employment for more than 12 people, owned by a
small number of landlords, and involving a unequal share of total agricultural land.
 Minifundios: are the smallest farms. They are too small to provide employment for a single family (2 workers).
 The degree of land ownership inequality (thus, income inequality) is very high in Latin America.
 The major agrarian problem of Latin America is too much land is under the control of too few people.

b. The fragmented and heavily congested dwarf land holdings in Asia

 The basic problem in Asia is too many people crowded on too little land.
 The land is distributed more equally in Asia than in Latin America but still with substantial levels of inequality.
c. Extensive cultivation patterns in Africa
Subsistence agriculture is an agriculture in which crops are produced mainly for personal consumption. African
agriculture systems are dominated by three major characteristics:
1. The importance of subsistence agriculture in the village community
2. The existence of some land in excess of immediate requirements, which permits a practice of shifting cultivation.
As population size increases, the feasibility of shifting cultivation will be broken down.
3. The rights of each family in a village to use a common property such as land and water, excluding families that
do not belong to the community from using such property.
The low-productivity of subsistence African agriculture results from a combination of three historical forces:
1. Traditional farming practices
2. Intensive and shifting cultivation
 Small areas tend to be intensively cultivated. As a result, they are subject to rapidly diminishing returns to
increased labor inputs.
3. Scarce labour supply during growing season, planting and weeding times.
4.3. The Economics of Agricultural Development
4.3.1. The contribution of agriculture to development
Agriculture makes its contribution to economic development in several ways:
1. Contribution to National Income:
The lessons drawn from the economic history of many advanced countries tell us that agricultural prosperity contributed
considerably in fostering economic advancement.
2. Source of Food Supply:
Agriculture is the basic source By earning valuable foreign exchange through the export of agricultural products By
earning valuable foreign exchange through the export of agricultural products By earning valuable foreign exchange
through the export of agricultural products e of food supply of all the countries of the world whether underdeveloped,
developing or even developed.

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3. Pre-Requisite for Raw Material:

Agricultural advancement is necessary for improving the supply of raw materials for the agro-based industries especially
in developing countries. The shortage of agricultural goods has its impact upon on industrial production and a consequent
increase in the general price level.
4. Shift of Manpower:
Initially, agriculture absorbs a large quantity of labour force. In India still about 62% labour is absorbed in this sector.
Agricultural progress permits the shift of manpower from agricultural to non-agricultural sector. In the initial stages, the
diversion of labour from agricultural to non-agricultural sector is more important from the point of view of economic
development as it eases the burden of surplus labour force over the limited land. Thus, the release of surplus manpower
from the agricultural sector is necessary for the progress of agricultural sector and for expanding the non-agricultural
sector.
6. Creation of Infrastructure:

The development of agriculture requires roads, market yards, storage, transportation railways, postal services and many
others for an infrastructure creating demand for industrial products and the development of commercial sector.

7. Relief from Shortage of Capital:

The development of agricultural sector has minimized the burden of several developed countries that were facing the
shortage of foreign capital. If foreign capital is available with the ‘strings’ attached to it, it will create another significant
problem. Agriculture sector requires less capital for its development thus it minimizes growth problem of foreign capital.

8. Helpful to Reduce Inequality:

In a country which is predominantly agricultural and overpopulated, there is greater inequality of income between the
rural and urban areas of the country. To reduce this inequality of income, it is necessary to accord higher priority to
agriculture. 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.

10. Create Effective Demand:

The development of agricultural sector would tend to increase the purchasing power of agriculturists which will help the
growth of the non-agricultural sector of the country. It will provide a market for increased production. Therefore, it will
be helpful in stimulating the growth of the non- agricultural sector. Similarly improvement in the productivity of cash
crops may pave the way for the promotion of exchange economy which may help the growth of non-agricultural sector.
Purchase of industrial products such as pesticides, farm machinery etc. also provide boost to industrial dead out.
11. Helpful in Phasing out Economic Depression:

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During depression, industrial production can be stopped or reduced but agricultural production continues as it produces
basic necessities of life. Thus it continues to create effective demand even during adverse conditions of the economy.

12. Source of Foreign Exchange for the Country:

Most of the developing countries of the world are exporters of primary products. These products contribute 60 to 70 per
cent of their total export earnings. Thus, the capacity to import capital goods and machinery for industrial development
depends crucially on the export earning of the agriculture sector. If exports of agricultural goods fail to increase at a
sufficiently high rate, these countries are forced to incur heavy deficit in the balance of payments resulting in a serious
foreign exchange problem.

13. Contribution to Capital Formation:

Underdeveloped and developing countries need huge amount of capital for its economic development. In the initial
stages of economic development, it is agriculture that constitutes a significant source of capital formation. Agriculture
sector provides funds for capital formation in many ways as:
(i) Agricultural taxation,
(ii) Export of agricultural products,
(iii) Collection of agricultural products at low prices by the government and selling it at higher prices. This method is
adopted by Russia and China,
(iv) labour in disguised unemployment, largely confined to agriculture, is viewed as a source of investible surplus,
(v) Transfer of labour and capital from farm to non-farm activities etc.
14. Employment Opportunities for Rural People:
Agriculture provides employment opportunities for rural people on a large scale in underdeveloped and developing
countries. It is an important source of livelihood.
15. Improving Rural Welfare:
It is time that rural economy depends on agriculture and allied occupations in an underdeveloped country. The rising
agricultural surplus caused by increasing agricultural production and productivity tends to improve social welfare,
particularly in rural areas. The living standard of rural masses rises and they start consuming nutritious diet including
eggs, milk, ghee and fruits. They lead a comfortable life having all modern amenities a better house, motor-cycle, radio,
television and use of better clothes.

4.4.2. Constraints of agricultural productivity

 Inappropriate policy and legal framework that are not fully supportive of private sector-led agricultural
development in a liberalized economic environment
 Insufficient and poorly maintained transport and market infrastructure for handling food products in urban and
rural areas resulting in high levels of waste and spoilage

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 Low agricultural output and productivity resulting from low adoption of appropriate technologies such as high-
yielding crop varieties, inadequate application of fertilizer and manure, inefficient tillage and cultivation
methods, and high cost of inputs and productive resources such as credit and irrigation infrastructure
 Poor performance of research and extension systems due to low Government investment, restrictions on staff
recruitment, and weak research–extension linkages
 Inappropriate land-use practices and environmental policies that have encouraged land fragmentation, extension
of urban development into agricultural land, retention of idle land, cultivation of river banks, deforestation and
encroachment into catchment areas and wetlands
 Weak institutional framework, which leads to poor coordination of the various actors following liberalization of
service delivery
 Poor access to agricultural information and technologies leading to low output, limited access to markets and
narrow market destinations for various commodities the country is capable of producing
 Poor access to credit by producers in spite of a well-developed financial sector

 Weak institutional capacity attributed to deficiencies in determining training needs and in monitoring and
evaluating training undertaken, as well as high turnover of senior personnel, which lead to loss of institutional
memory and change of priorities.

4.4.3. Agricultural strategies and the role of the government in the agricultural sector

 Formulating and implementing appropriate policy and legal frameworks

 Improving agribusiness and market access
 Strengthening research, extension and training
 Improving land use and crop development
 Enhancing farmer access to affordable inputs and credit
 Enhancing institutional efficiency and effectiveness in implementation and service delivery
 Implementing the national climate change response strategy
 Enhancing conservation and management of resources
 Finalizing and implementing the national irrigation policy and legal framework
 Promoting good governance and management
 Promoting internal and external trade
 Strengthening institutional and pricing policies: providing the necessary economic sport
 Establish integrated development objectives such as restoring a proper balance between urban and rural economic
opportunities