Role of Agriculture in Economic Development

We assume resource flows from agric into other sectors and vice versa. Agric contribution
may be due to govt policy or impediments. In terms of agric contribution to development
agric is similar in any agric system. Whether we are looking at a close economy (contribution
differs) and open economy. Some contribution to development does not exist if there is
closed system e.g. foreign exchange as earned by agric exports. International trade in agric
alters some of the conclusions which could be made under closure. Agriculture’s contribution
by providing demand for industry but with trade the conclusion may fall under open trade.
Static contribution is common in literature it’s a logical extension of the characteristics of
agriculture already mentioned e.g. primary products exports. From static sense, agriculture
must play large part in developing other sectors. Agriculture has to provide some of the
investible surplus. From a static point of view agric can be considered a reservoir of idle
resources which have to be tapped. Limitation of agric contribution from static sense- these
idle resources cannot be tapped without getting constraints in agriculture development itself.
The view is agric has idle resources for industrial, non agric growth.

Dynamic consideration alters situation- looks at agric contribution from dynamic point.
Dynamic consideration- technical progress, agriculture reorganizing can potentially lead to
development of non agricultural sectors. Within dynamic context it is not necessary to have
agric as reservoir at initial stage nor have idle resources. Those 2 views have 2 different
implications. Dynamic- investment within agriculture yields contribution. Static- contraction
of agriculture sector (expansion of other sectors). Traditional arguments fail to see
development of agriculture in agriculture itself. There is unidirectional flow of net resources
to non agriculture. This view underestimates growth of agriculture as an industry in itself
(pays wages etc.).
One may argue the biggest contribution to development is if there was insuring high agric
growth, reducing income inequalities if the surplus was transferred to rural farm schemes, etc.
then poverty will be reduced (if income from agric is used according to the four mentioned
above then urban influx, pressure for urban social services would be reduced. Alternative
approaches to development of agriculture – agriculture can contribute to economic
development by improving farm incomes etc, while agric labour might decline with time.

In considering agric contribution to economic development we are looking at 2 sector models

1) agric and 2) non agriculture (industry and govt) One might want to include a non-farm
rural sector. Non farm rural sector raises the possibility of getting surplus from agric to
develop nonagric farm rural sector- rural development strategies ( see also Kuznets).

Factor Contribution
If argument about labour surplus holds it follows there is a possibility of drawing labour from
there without production fall. As a source of capital this occurs when some of the agric sector
grows- the surplus that can be channeled from voluntary savings banked and borrowed by
industrialists. Capital transfer may be through government taxation (land or output or through
Pagric

deterioration of TOT for agriculture. PI surplus is transferred.

Output (Market) Contribution

- food and raw materials for other industries.
 - Sources of demand for other industries (non agric) increase in agriculture incomes
creates demand for output of other sectors.
- Higher export earnings provide foreign exchange. This occurs in 2 ways (a) direct
export earnings- cash crops, coffee (b) Import substitution .

Factors determining growth of food demand

If food production is not forthcoming and falls short of demand, food prices  , political
instability  , high wage demands  . Pressure of food shortages is often overcome by
importing food using scarce foreign exchange.

There are 3 major determinants

(a) General population increase rural/urban areas (Pop. Factor) – with population growth
for most LDCs > 3% p.a. it means they have to produce food by this much to
maintain. Very few LDCs have done this  lower standards of living.
(b) Occupational composition (changes in the occupational composition of population
usually from rural urban employment shift- when a family moves to urban areas they
consume as much as when in rural areas. There need not necessarily be increase in
food demand. As a result of slow changes in marketing channels there is difficulty in
food availability. Change in demand is when people who move to urban areas change
consumption patterns.
(c) Changes in income level and income distribution (income factor). When Agric’s
income rises consumption of all goods increases. Increases of levels of income in
urban population leads to income effect. Studies show that income elasticities of
demand are higher in rural areas than in urban areas. It drops as income rises. The
more sluggish the growth of agric output the more sluggish the income of the rural
population. We have to bear in mind that if the agric is not growing fast enough and
prices shoot up this may be an incentive for farmer to produce more output therefore
rate of growth  .

Agriculture as Labour Source

Normal pattern most countries have followed as nation expands there is contraction in
agriculture in its share of GDP, fall in employment , therefore industry provides bulk of
employment. However if industry has to have bulk of employment it has to draw from agric
sector. Question is does agric have labour surplus? It may possess excess labour in:
1) Static sense- labour not fully employed (transferable without drop in output in
agriculture.
2) Dynamic sense- only through increases in labour productivity in agricultural sector
that comes through technical change that brings surplus labour which is released
(more valid way of looking at it)

Surplus labour (surplus people or labour hours) Views 1) assumes within family context –
family members work fewer hours than they were willing to work (Ishikawa hence Ishikawa
surplus). Implication is labour hours is assumed to be horizontal.
Surplus labour exists in that you can withdraw some labour without reducing the utility.
Labour works harder. If this is correct if 1 member is withdrawn and there is no decline in
output (measurement is a problem). Seasonal variations in the number of hours worked by a
single family unit. This again is measuring difficulty. No surplus labour exists in peak season.
 Disutility D1 D2
of effort
and demand S
No disutility of effort

N1 N2 No. of labour hours

Lewisian Surplus Labour

Validity of the contention based on observation that industrial sector has no problem in
attracting unskilled labour from agriculture. It is argued labour supply to industry is perfectly
elastic at a constant real wage. Traditional sector (agric) is not profit motivated (it is agric
sector excluding commercial sector). In terms of sources of labour there are three sources: 1)
natural population increase. 2) urban and rural sector . 3) agric labour force. All three are
taken as one for analysis.

Lewis argues productivity (marginal and average0 is much high in the capitalist sector than
W  Wa C
and W  MPPL  Wagric . While MP principle is valid in the
C
the agric sector. c
capitalist sector it is not valid in the agricultural sector (they are self employed).
TP
Wa   APL
L in agriculture. For capitalist sector to attract labour from agriculture it has to
pay wage >APL in agriculture
Lewis observed wage in agric sector was 30% less than the one in the capitalist sector. To
attract labour, the capitalist sector has to pay APL  c where c is the cost of changing
occupation. Labour supply to industry is supposedly perfectly elastic. The Lewis model is
one of structural transformation in the agricultural sector. It is contracting in share of national
output and employment. It is doubtful whether there is no effect on production if labour is
reduced continuously. This is the only case if MPL in agric is 0. For the working of Lewis
model you need not say anything about productivity (he never mentioned this). What induces
labour to capitalist sector is wage differential.

Differences in wages may be 1) minimum wage legislation 2) collusive employers –

employer/ employees forming strong unions.

Lewisian surplus is purely due to differentials between the wage rates. At what point will
TP  
W 
wage in the capitalist sector cease to be horizontal. L . If L then W . Labour can be
reduced until there is equality between Wc and Wa . If there is a fall in TOT against industry
there may be an increase in demand for agric products relative industrial sector. This bridges
the gap.
Redundant labour – confusion as to measuring of this. Essence is MPL is zero (MP does not
contribute to output). There are two interpretations to MPL = 0:
1) referring to people while MP of worker might be zero that of manhours may not be zero if
shorter working hours for labour. The additional manhour has positive MP but additional man
has MP=0.
2) refers to both man and and manhours- you postulate you withdraw labour, remaining
labour does not put more hours but output still constant. This interpretation is not satisfactory
unless we assume fixed K/L ratio.

Dynamic Surplus
This refers to both manhours and workers. Through technical progress workers can be
transferred from agric to industrial sector. Surplus labour comes from technological change.
The argument is not helpful again because everybody is potentially surplus labour. From
industry surplus labour can also be extracted.

From the arguments however, agric contributes labour to industry. Labour transfer must
ensure agric output must not decline. If there is a decline then we see problems of black
markets, inflation , etc.

Lewis Model- assumes two sectors,

- traditional (overpopulated, rural subsistence sector, zero marginal labour productivity
- high productivity modern urban industrial sector into which labour is being transferred from
subsistence sector.
Both labour transfer and modern sector employment growth are brought about by output
expansion in that sector. The speed with which this expansion occurs is determined by the
rate of industrial investment and capital accumulation in the modern sector. The level of
wages in the urban industrial sector is assumed to be constant and determined as a given
premium over a fixed average subsistence level of wages in the traditional agricultural sector
(Lewis assumed that urban wages would have to be at least 30% higher than average rural
income to induce workers to migrate from their home areas. Lewis makes 2 assumptions
about the traditional sector:
1. Surplus labour in the sense that MPLA = 0
2. All rural workers share equally in the output so that the rural real wage is
TPA
 wA
determined by the average and not the marginal product of labour, i.e. A L
The marginal product of these LA workers is zero. All workers in excess of LA constitute
surplus labour.

TPM(KM3)
TPM3
TPA TPA
TPM2 TPM(KM2)
Total Product Total
(food) Product
TPM1 TPM(KM1)
(agric) (Manuf)

O O
APLA LA QLA QLM
Average Real
(Marginal) Wage
Products
MPLA WM SL
WA Surplus labour WA D2(KM2) D3
MPLA APLA D1 (KM1) =MPLM
LA L1 L2 L3
Traditional (agricultural) sector Manufacturing sector

Lewis assumes that urban wage Wm above rural average income WA, modern sector
employers can hire as many surplus rural workers as they want without fear of rising wages.
Given a fixed supply of capital KM1 in the initial stage of modern sector growth, the demand
curve for labour is determined by labour’s declining marginal product and is shown by the
negatively sloped curve D! (KM1). Because Lewis assumes that all of these profits are
reinvested, the total capital stock in the modern sector will rise from KM1 to KM2 causing
the total product curve of the modern sector to shift to TPM (KM2) which in turn induces a
rise in the marginal product demand curve for labour.
This process of modern-sector self-sustaining growth and employment expansion is assumed
to continue until all surplus rural labour is absorbed in the new industrial sector. Thereafter
additional workers can be withdrawn from the agricultural sector only at a higher cost of lost
food production because the declining labour to land ratio means that the marginal product of
rural labour is no longer zero.

Criticisms
1. Model implicitly assumes that the rate of labour transfer and employment creation in the
modern sector is proportional to the rate of modern sector capital accumulation. The faster
the rate of capital accumulation, the higher the growth rate of the modern sector and the faster
the rate of new job creation. If however capitalist profits are reinvested in more sophisticated
labour saving capital equipment rather than just duplicating the existing capital results would
be different. It assumes capitalist profits are reinvested in local economy (and no capital
flight).
-antidevelopmental economic growth- all extra income and output growth are distributed to
the few owners of capital, while income and employment levels of masses of workers remain
largely unchanged.
2. Notion that surplus labour exists in rural areas while there is full employment in the urban
areas. Most contemporary research indicates that there is little general surplus labour in rural
locations (seasonal).
3. Notion of a competitive modern sector labour market that guarantees the continued
existence of constant real urban wages up to the point where the supply of rural surplus
labour is exhausted.
- Tendency for urban wages to rise substantially over time, both in absolute terms and relative
to average rural incomes (union bargaining power, civil service wage scales, MNC hiring
practices- all negate competitive forces in LDC modern sector labour markets)