The Role of Agriculture in Economic Development

Agriculture plays a crucial role in the economy of developing countries, and provides the main source of food, income and employment to their rural populations. According to FAO 2000, it has been established that the share of the agricultural population in the total populace is 67 percent, that agriculture accounts for 39.4 percent of the gross domestic product (GDP) and that 43 percent of all exports consist of agricultural goods. It has become increasingly evident in the last few years that the conception of both economist and policy-makers regarding the role of agriculture in economic development has undergone an important evolution. Roughly one quarter of the Earth’s terrestrial surface is now under cultivation with more land converted to crop production in the 30 years after 1950 than in the previous 150 years . In many regions - including Europe, North America, Australia and recently Brazil, China and India – humanity has also become skillful at raising yields through using inputs like fertilizers and pesticides. Yet in many poorer countries with low productivity rates and growing populations, agriculture continues to expand into marginal and fragile lands. In much of sub-Saharan Africa and large parts of Asia – according to estimates compiled by the Millennium Ecosystem Assessment (MA) – almost no highly productive land is left. However, improvements in agriculture and land use are fundamental to achieving food security, poverty alleviation and overall sustainable development.

The first part of this paper looks at the evolution of agriculture with relevant theories. The role of agriculture in economic development is discussed in the second part. It further argues that whereas in the past, agriculture was often viewed as the passive partner in the development process, it is now typically regarded as an active and co-equal partner with the industrial sector.

During the 1940’s and 1950’s there was a renaissance of interest in analyzing the determinants of economic growth. The economics profession turned its attention to the study of economic development to better understand the anatomy and physiology of the growth process and to formulate prescriptions for appropriate development policies and strategies (Weber, 1968). It was widely believed during this period that industrialization was the unique key to development and that the industrial sector, as the advanced sector, would pull with it the backward agriculture sector. More specifically, industry as the leading sector would be a source of alternative employment opportunities to the rural population, would provide a growing demand for foodstuffs and agricultural raw materials which it would process for domestic consumption or export and would begin to supply industrial inputs (e.g. fertilizer) to agriculture. It became fashionable to use as an analytical and planning framework one-sector models of Harrod-Domar types which because of their completely aggregative and simple production functions with only investment as an element, emphasized at least implicitly investment in infrastructure and industry. The one-sector, one-input nature of these models obviously precluded any measurement of the sectoral production effects of alternative investment allocations and of different combinations of factors (since it was implicitly assumed that factors could only be combined in fixed proportions with investment). In the absence of either theoretical constructs or empirical information on the determinants of agricultural output, the tendency was to equate the modern sector with high productivity of investment (and vice versa for the backward agricultural sector) and thus directs the bulk of investment to industry and industrial infrastructure.

With the advent of two-sector models economists (Lewis, Fei-Ranis, Jorgenson; 1950-60) continued to assign to subsistence agriculture an essentially passive role as a potential source of “unlimited labor” and “agricultural surplus” for the rest of the economy. Not only was it assumed that the farmers could be released from subsistence agriculture in large numbers without a consequent reduction in agricultural output, but also that they could do so while carrying their own bundles of food (i.e. capital) on their backs. One of the popular policy prescriptions which encourages the above transfer of labor, and of the agricultural ‘surplus’, was to turn the terms of trade against agriculture. The trouble with this approach was that the backward agricultural “goose” would be starved before it could lay the golden egg.

As the dual-economy models became more sophisticated and realistic it was increasingly recognized that the functions which the agricultural and industrial sectors must perform in order for growth to occur are totally interdependent (Mellor; 1970-90). On the one hand, the agricultural sector had to release resources for the industrial sector, which in turn had to be capable of absorbing them. On the other hand, the release of resources, by and of itself, and the absorption of resources, by and of itself, were not sufficient for economic development to take place. It was felt that growth could result only if these conditions occurred simultaneously and that this release-cum-absorption of labor and capital resources was, in fact, the key to development. Recognition of this active interdependent was a large step forward from the naïve industrialization-first prescription, because the above conceptual framework no longer indentified either sector as leading or lagging.
Even though two-sector models did provide important insights into the interaction between the agricultural (backward) and industrial (advanced) sectors, there were at least two fundamental points that they did not address explicitly: foreign trade and the determinants of agricultural output. The foreign trade sector was eliminated – a closed economy being selected as the frame of reference rather than the open economy. A better understanding of the determinants of agricultural output – both in microeconomic and macroeconomic terms – is essential if agriculture is to play an active role as a supplier of resources.

The relationship between agriculture and foreign trade can be scrutinized at the national level or at the global level. The majority of the developing countries are largely dependent on primary exports as their major source of foreign exchange. The import capacity of the typical developing country is based, to a large extent, on the flow of agricultural and mineral exports that it can sell to the rest of the world. Since the balance of payments is generally the binding constraint to further growth, the role of the agricultural sector as a provider of foreign exchange through exports or as a saver of foreign exchange through import substitution (particularly through increased domestic production of foodstuffs) is a crucial one. In many less developed countries, the agricultural subsector producing for exports tends to be highly commercialized in contrast to the subsector producing foodstuffs for domestic consumption. In such cases, the backward linkages of agricultural exports may be quite small. In other countries, particularly in Africa, the distinction between the commercialized (export) and the subsistence sectors is much more difficult to draw.

At the global level the dependence of the developing world on agricultural exports creates many problems. World demand for these products tends to be both income and price inelastic. As a result, for many crops, of which the supply is also inelastic in the short-run, the growth rate of export earnings is held to a relatively low level and prices fluctuate. Efforts at diversification and commodity stabilization can be successful only if undertaken under viable international agreements. Empirical evidence on the terms of trade of the developing vis-à-vis the developed countries leave at least a presumption that they are not improving. In the most developing countries the level of receipts from traditional exports – determined as it is by exogenous forces – is largely outside of the control of the country; large output and efficiency gains are often negated by perverse price effects. Under these circumstances, the planning of agriculture and overall development cannot be done through the simple aggregation of independently prepared national plans and projections that are likely to be mutually inconsistent. What is required is that the prospects for agricultural exports and their contribution to development be evaluated through the projection of supply and demand by regions and by commodities within a general and spatial equilibrium setting (World Bank Development Report, 2002). National projections need to be aggregated and differences in planned global and regional output and demand reconciled, before a rational (efficient) production and trade pattern can be established.

The question as to the form of the production function and the choice of technique within agriculture is fundamental. Because of the limited capacity of the industrial sector to absorb labor productively and because of the low efficiency and residual nature of employment opportunities in services, a labor-using technique to alleviate the unemployment problem appears called for in a majority of the developing countries. With respect to land, the question is less clear-cut. In Africa, land is still abundant and output can continue to increase through land expansion. In parts of Latin America and Asia, the bringing under cultivation of new land areas entails very large capital resources in infrastructure (e.g. irrigation) and thus yield-increasing techniques may be more efficient. In any case, the macroeconomic implications in terms of employment creation and income distribution of different techniques and combinations of inputs need to be analyzed carefully to determine the possibility of conflicts that might arise in the pursuit of static economic efficiency, on one hand, and long-run economic and social development, on the other. This comparison is further complicated by the discrepancies that exist between the shadow and market prices in the factor market.

In spite of agriculture’s strong position in the developing countries, this sector of the economy is still not capable of fulfilling its over-all economic tasks. The main reason for this appears to be that agriculture has been neglected for years in favor of a stronger development of the industrial sector of the economy. However, the introduction of the “Green Revolution” in the economies of developing countries has brought an entirely different perspective of agricultural sector as a sector that is able to promote sustainable economic growth (FAO, 2000). This concept which was introduced as a result of increasing food production to meet the food need of the growing population has yielded fruit in many developing countries. In 1943, Mexico imported half its wheat, but by 1956, the Green Revolution had made Mexico self-sufficient; by 1964, Mexico exported half a million tons of wheat. The associated transformation has continued as the result of programs of agricultural research, extension, and infrastructural development. These programs were instigated and largely funded by the Rockefeller Foundation, along with the Ford Foundation and among other major agencies.
The Green Revolution allowed food production to enable, or keep pace with worldwide population growth. The Green Revolution has had major social and ecological impacts, making it a popular topic of study among sociologists (Weber, 1976). In the 1960s, rice yields in India were about two tons per hectare; by the mid-1990s, they had risen to six tons per hectare. In the 1970s, rice cost about $550 a ton; in 2001, it cost under $200 a ton. India became one of the world's most successful rice producers, and is now a major rice exporter, shipping nearly 4.5 million tons in 2006. In 1966, annual rice production in the Philippines increased from 3.7 to 7.7 million tonnes in two decades. The switch to IR8 rice made the Philippines a rice exporter for the first time in the 20th century. But the heavy pesticide use reduced the number of fish and frog species found in rice paddies.
There have been numerous attempts to introduce these successful concepts from the Mexican and Indian projects into Africa. These programs have generally been less successful, for a number of reasons. Reasons cited include widespread corruption, insecurity, a lack of infrastructure, and a general lack of will on the part of the governments. Yet environmental factors, such as the availability of water for irrigation, the high diversity in slope and soil types in one given area are also reasons why the Green Revolution has not been successful in Africa. A recent program in western Africa is attempting to introduce a new high-yield variety of rice known as “New Rice for Africa” (NERICA). NERICAs yield about 30% more rice under normal conditions, and can double yields with small amounts of fertilizer and very basic irrigation. However the program has been beset by problems getting the rice into the hands of farmers, and to date the only success has been in Guinea where it currently accounts for 16% of rice cultivation.
Under the joint funded programme by United Nations (UN) and International Fund for Agricultural Development (IFAD), the Farmer Field School movement has shown that it is possible to generate very high returns on investment in agricultural research and rural development in Africa. This helps fulfill the agreement of global leaders at the 2005 United Nations World Summit that greater investment in agricultural and rural development is crucial for achieving the Millennium Development Goals. The leaders committed to increasing support for agricultural development and trade capacity-building in the agricultural sector in developing countries. Agricultural development makes a critical contribution to overall economic growth in many developing countries. As farmers’ incomes rise, so does their demand both for farm inputs and services, and for non-farm goods. Increased agricultural production also leads to increased demand for processing facilities. Figures from the International Food Policy Research Institute show the multiplier effect of agricultural growth in Africa. Estimates range from an additional $0.60 in non-agricultural income in Niger for every $1 increase in farm income, to a near doubling effect in Burkina Faso of $1.88 in additional income outside the sector for every $1 increase in agricultural income. Agriculture in sub-Saharan Africa, indeed, generates at least 30 per cent of GDP, 40 per cent of exports and over 70 per cent of employment.

Agricultural growth and development require investment and technology. With them huge productivity gains are possible. Over the past 20 years, increases in government spending on agriculture in East and South Asia have been clearly linked to rapid growth in agriculture and to progress towards achieving the Millennium Development Goals. In sub-Saharan Africa, however, public investment in agriculture is still far below what is needed, despite commitments by African governments to allocate 10 per cent of their public spending to it, increased spending on agricultural research is vital, but it is equally important to ensure that the research carried out benefits the smallest farmers. In developing countries, it has all too often bypassed the most needy farmers, offering solutions that are beyond their reach or simply inappropriate to their livelihoods. The challenge is to develop technology in a way that is relevant to small farmers and to create the conditions they need to transform their small plots into viable small businesses that make a vital contribution to local and national economies. The Farmer Field Schools in East Africa show that when this is done, the results can be very impressive indeed.

Assisting poorer countries to intensify their agriculture may seem the most obvious and sensible solution but intensification—at least under current models— carries significant stings in its tail. Unsustainable management of fertilizers, for example, contributes to a steady rise of oxygen depleted ‘dead zones’ in the world’s seas and oceans and deleterious changes to inland waterways. Pesticide and herbicide use can contaminate freshwaters and if inappropriately handled and stored present serious risks to human health and the environment. And many monoculture crop systems have lost the ability naturally to combat diseases and pests making them ever more dependent on chemicals. Some forms of intensification have aggravated disease. Recent outbreaks of foot and mouth in Europe and the arrival of ‘mad cow’ disease have had huge costs. Demand for food, and other agricultural products, will increase over the next decades as the world’s population rises to an expected nine billion and people become wealthier. Yet climate change is likely to make meeting it more difficult. And some experts fear that, one of the measures taken to combat global warming, increasing the use of biofuels, made from grain, sugars and other crops, if carried out inappropriately, may increase food shortages among the world’s two billion poorest people and put further pressure on forests and grasslands in some areas. Increasing pressure on nature is not in the interests of farmers or the global community as a whole. For agriculture’s very sustainability depends on such factors as water supply, soil fertility and stability and genetic resources from nature for improving crop strains which are in turn provided by freshwaters, forests, biodiversity both above and below ground, and other healthy and productive ecosystems.

Agriculture will continue to play an important role in the economic development and poverty alleviation in developing countries in the era of economic liberalization and globalization. The persistence of hunger in the developing world means that ensuring adequate and nutritious food for the population will remain the principal challenge facing policy makers in many developing countries in the years to come. As a result of this agriculture in the developing world must be made intellectually and economically rewarding by means of partnership with private players and entrepreneurs.

Content owner: 

Antwi, Stephen Bodybobton