PRINCIPLES OF MACROECONOMICS

BDEC32101
UNIT 1

AGRICULTURE AND ECONOMIC DEVELOPMENT:

BASIC CONSIDERATIONS

OWEN MAKAKA
BDEC 32101: Principles of Macroeconomics 1
 Objectives

• By the end of this Unit, you should be able to:

– Explain the linkages between agricultural sector and
economic growth
– Explain agricultural growth role in poverty reduction
– Macroeconomic linkages to agriculture

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AGRICULTURAL SECTOR AND
ECONOMIC GROWTH

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 Contribution of Agriculture Sector
to Malawi GDP
• Malawi is an agro-based economy with the agriculture
sector accounting for:
– about 22 per cent of GDP,
– employing about 84.5 percent of labor force and
– accounting for 82.5 percent of foreign exchange earnings.
• Agriculture is characterized by a dual structure
consisting of:
– Commercial estates that grow cash crops and a large
smallholder sub-sector that is mainly engaged in mixed
subsistence farming.
• The main agricultural export crop is tobacco, followed by
tea, sugar and coffee.
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 Sectoral Contribution to GDP: 2023
(%)
Plus: Taxes less Subsidies on products and production 5.4
R+S+T Arts, entert. & rec; Other serv; Act. HHs; 1.9
Q Human health and social work 5.8
P Education 4.2
O Public administration and defence 3.4
Economic Activity (Sector)

M+N Prof., sci & tech; Admin & support service 1.3
L Real estate activities 6.7
K Financial and insurance activities 6.7
J Information and communication 6.2
I Accommodation and food service activities 1.2
H Transportation and storage 4.5
G Wholesale and retail trade; motor vehicles 11.6
F Construction 3.5
D+E Electricity, gas, Water supply; sewerage 2.9
C Manufacturing 11.7
B Mining and quarrying 0.7
A Agriculture, forestry and fishing 22.3
0.0 5.0 10.0 15.0 20.0 25.0

Percentage Contribution

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 The Role of Agricultural to Economic
Growth

• The fundamental role of agriculture is to supply

the basic food and fibre needs of a country's
growing population and economy.
• However, agriculture's total contributions to
economic growth go much beyond this
fundamental role.
• In changing from a traditional society to an
advanced economy, the role of agriculture in the
total economy usually declines.
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 The Role of Agricultural to
Economic Growth
• Kuznets summarized the contributions of Agriculture
sector into more general and perhaps more measurable
aspects.
• According to Kuznets, agriculture makes a direct
contribution to growth of national product by

i. Increasing the total product

ii. Making a market contribution by trading with other sectors
of the economy.
iii. Making a factor contribution i.e. transfers capital and labor
resources
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 The Role of Agricultural to
Economic Growth
• Johnston and Mellor listed five contributions that
agriculture makes to economic growth as a result
of increased production. These are:
i. Increased food supplies,
ii. Increased agricultural exports,
iii. Increased transfer of labor resources,
iv. Increased capital formation, and
v. Increased purchasing power as a result of increased
levels of income.
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 Agricultural Sector and
Economic Growth
• Johnston and Mellor’s contributions are essentially the
same as the Kuznets classification:
Table 1: Kuznets Contributions Versus Johnston and Mellor’s
Contributions
Kuznets’ Contributions Johnston and Mellor’s Contributions
i. Product Contribution i. Increased food supplies
ii. Increased agriculture exports
ii. Market Contribution
v. Increased purchasing power
iii. Increased transfer of labor resources
iii. Factor Contribution
iv. Increased capital formation

• The Kuznets classification is preferred because it is more inclusive

and perhaps more measurable in aggregate terms
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 The Role of Agricultural to
Economic Growth
Dorward et al. (2008) identify two potential roles that
agriculture can play in wider economic growth in low
income countries:
• First, growth in production of tradables (imported or
exported commodities)
– raise incomes of domestic producers who can produce either
below import parity price for domestically consumed products
or below export parity price for exports.
• Secondly, agriculture can also drive growth through
increased production of non-tradable or semi-
tradable staple foods which are important in people’s
expenditure, having high average shares in household
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REASONS FOR PRIORITISING
AGRICULTURE IN
LOW-INCOME COUNTRIES

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 Reasons for Prioritising Agriculture in
Low-Income Countries
• Many low-income countries have their
comparative advantage in agriculture
• Makes agriculture the priority sector for growth
in an open economy (World Bank, 2007).
• There are three reasons why this is the case for
most Sub-Saharan Africa countries and these are;
– Factor endowments
– Weak business climate
– Existence of economies of scale in manufacturing
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 Factor Endowments

• Many developing countries are rich in natural

resources
• Growth in agriculture sector is still to be
captured
• Yields are generally low and these pose a
challenge on how to improve productivity while
exposing an opportunity to supply food to other
countries.
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 Weak business climate

– There is poor infrastructure

– There are also ineffective and inefficient institutions

• These circumstances limit competitiveness in

more complex manufacturing and high-value
services,

• However, they are less constraining on

agriculture and agro-industry.
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 Economies of Scale in
Manufacturing
• The large economies of scale in manufacturing
makes it difficult for newcomers to enter the
international market and these are less binding in
agriculture.
• Agriculture and its associated agro-industries
thus offer comparative advantages in the short
run, and a path toward industrialization via agro-
industry in the longer run.
• For these countries, investing in agriculture can
be the most cost-effective growth strategy toward
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AGRICULTURAL GROWTH AND POVERTY
REDUCTION

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 Poverty
• No society can surely be flourishing and happy, of which by far the
greater part of the numbers are poor and miserable. (Adam Smith,
1776).
• Absolute poverty A situation of being unable to meet the minimum
levels of income, food, clothing, healthcare, shelter, and other
essentials.
• The World Bank estimates that the shares of the population living on
less than $1.25 per day are:
– 9.1% in East Asia and the Pacific,
– 8.6% in Latin America and the Caribbean,
– 1.5% in the Middle East and North Africa,
– 31.7% in South Asia, and
– 41.1% in sub-Saharan Africa (Todaro & Smith,2012).
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 Agricultural Growth and Poverty
Reduction

• There is strong empirical evidence that growth in

agriculture is particularly effective for poverty
reduction.
• This is for the simple reason that most of the
world’s poor are in rural areas, where they are
engaged in, or dependent upon, agriculture for
their livelihoods
• It is estimated that 78% of the world’s extreme
poor are in rural areas and 63% of them work in
agriculture.
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 Agricultural Growth and Poverty
Reduction
• Its effectiveness in reducing poverty is an advantage
that agriculture has over growth in other sectors such
as the service and industry.
• One key advantage that agriculture has for poverty
reduction in most sub-Saharan African countries is its
share of the Gross Domestic Product (GDP).
• In most countries, agriculture contributes a significant
percentage to the total GDP which means that growth
in agriculture has a higher weight in aggregate
poverty reduction.
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 Effectiveness of Agricultural
Growth Depends on Some
Factors
• The effect of agricultural on poverty reduction
depend on access to assets (mainly land)
• A rise in food prices would benefit farmers who
produce those food crops but hurt food
consumers
• The effectiveness of agriculture in reducing
poverty is much stronger in settings where:
– Land ownership is more evenly distributed, and
– Production techniques are more labor-intensive, and
thus generate more
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of Macroeconomics 23
 Poverty Reduction from
Agriculture and Non-Agriculture
• A number of studies have attempted to quantify the
effects of growth originating in agriculture versus non-
agriculture.
• The general consensus among these studies, based on
cross-country evidence, is that growth originating in
agricultural growth is three times more effective at
reducing poverty than growth originating in non-
agriculture.
• They also found that among the poorest people (those in
the bottom decile of the income distribution), the effect
of agricultural growth was approximately six times
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greater than that of non agriculture
 Avenues of Getting Out of
Poverty
• For households living in poverty, what specific
opportunities does agricultural growth provide for
pathways out of poverty?
• There are three broad avenues:
i. Poor, subsistence-oriented farmers to increase their
on-farm output for sale;
ii. Engage in rural labor markets, especially for off-farm
rural work
iii. Migrate to the urban economy
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 THANK YOU

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