Role of Agriculture in Economic Growth

Previously I have commented about India’s agriculture GDP and the workforce engaged in agriculture.  So I decided to dig deeper into the structural transformation of developing economies to understand where all this is heading.

In the process I came across a thin book titled “A World without Agriculture” by C. Peter Timmer. It is an academic work, not necessarily meant for popular reading, but it is worth getting through.

The book is based on data from 86 countries over 35 years, so it provides a very long-term fact based look at where things may be headed for countries like India going through economic development.

Below, I am paraphrasing/quoting some of the interesting points from the book.

 

The Structural Transformation: What, When and How

As expected, as economies develop, the share of agriculture in national GDP drops over time. However the agriculture GDP continues to grow in absolute terms (unless of course nature or politics go horribly wrong).  For example, India’s agri GDP is currently 18.5% of national GDP, down from 42% in 1970.

The share of agri employment in total labour force also declines over decades. At some point, the agri employment starts decreasing in absolute numbers, not just in percentage terms. For example, agri employment is currently 52% in India — that is, 52% of the workforce is involved in agriculture.  This number was 70% in 1970. In India, the number of people employed in agriculture is still growing — we added 20 million people (net of urban migration) working in agriculture over the last decade.

The gap between the share of agri in employment (52%) and share  of agri in GDP (18.5%) first widens and then starts narrowing at some level of threshold per capita GDP in the economy.  While this number varies from country to country and based on decade, some definitive things can be said about this turning point.

The turning point appears to be around $9-10K GDP per capita across the globe. Also, this number has been growing: i.e., the threshold at which the gap starts narrowing is becoming higher and higher.  “Such resuls are strongly suggestive of a failure of modern economic growth processes to integrate the agricutlural sectors of poor countries into the rest of their economies, despite relatively successful aggregate growth records.”

“A widening sectoral income gap — as differences in labor productivity between urban and rural areas become larger – spells political trouble. Rural households that feel left out of the growth process can vote governments out of office… It is no wonder that policymakers feel compelled to address the problem, and the most visible way is to provide more income to agricultural producers.  The long-run way to do this is to raise their labor productivity and encourage agricultural labor to migrate to urban jobs, bu teh short-run approach — inevitable in most political environments — is to use trade policy to affect domestic agricultural prices. In low-income economies, agricultural protection is a child of growing income inequality between the sectors during the structural transformation.”

Looking back at the structural transformation of developed countries: “Virtually the entire growth experience of modern developed countries has been spent on the convergent path of sectoral labor productivity.  This is in sharp contrast to currently developing countries, which are mostly at income levels per capita where sectoral labor productivity is [still] diverging.”

 (East) Asia versus other countries

There appears to be something distinctively unique about the path Asian countries have taken so far (mostly East Asia, eg. Indonesia).

“Asian economies tend to employ disproportionately more farm workers in the early stages of development.” Also, “Asian countries provided more price incentives to their agricultural sectors … as a way to prevent the movement of labor out of agriculture from being “too fast.” The net effect is that the turning point for the gap (between agri employment and agri GDP) is around $1600  of GDP per capita for Asian countries compared to $11,000 for non-Asian countries. “This difference underscores two distinctive features of Asian economies: their more rapid growth and the greater role of agri productivity in that growth.”

A side note: India’ GDP per capita is currently around $1500 at current exchange rates.

Paradoxical Role of Agriculture in the Structural Transformation

“The past decade has brought a quiet revolution in the understanding of determinants of poverty and the mechanisms fro reducing it in a sustainable fashion.  Partly, it is a simple recognition that economic growth is the main vehicle for reducing poverty – provided the distribution of income does not widen too sharply.”

“In current strategies used by countries and donor agencies to cope with poverty, the role of agriculture has been limited, largely because of a failure to recognize the importance of direct links among agri development, food availability, caloric intake by the poor, and poverty reduction.”…

“The case [for linking agri to poverty reduction] builds on three empirical relationships: between agri growth and poverty alleviation; between increases in domestic food production and improvements in nutrient intake; and between agri productivity and productivity growth in the rest of the economy.”

“An agriculture-driven growth strategy, if it does not sacrifice aggregate growth, directs a greater share of income to the poor – that is, it is more pro-poor. Such a strategy is the first step in breaking the cyle of poverty.”

So the paradox is that in trying to make agri a vanishingly small sector of a growing economy, the economy must invest in increasing agricultural productivity.

Rural Employment

“Throughout Asia, most rural households earn half or more of their income from non-farm sources, and often this sector is the “ladder” from under-employment at farm tasks to regular wage employment in the local economy, and from there to jobs in the formal sector.” So investing in creation of this ladder is equally important.

Conclusions

  1. “Structural transformation has been the main pathway out of poverty for all societies, and it is depends on raising productivity in both the agri and noagri sectors (and the two are connected).”
  2. “The process of structural transformation puts enormous pressure on rural societies to adjust and modernize, and these pressures are translated into visible and significant policy responses that alter agi prices.”
  3. “Despite the decline in relative importance of agricultural sector leading to the “world without agriculture” in rich societies, the process of economic growth and structural transformation requires major investments in the agi sector itself.  This seeming paradox has complicated (and obfuscated) planning in developing countries, as well as for donor agencies seeking to speed economic growth and connect the poor to it.”
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One Response to Role of Agriculture in Economic Growth

  1. Pingback: Indian farmer population drops by 9 million in a decade | Stirring the Pyramid

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