Agricultural Productivity and Economic Growth: Role of Tax Revenues and Infrastructures

Abstract

1. IntroductionDevelopment economists such as Rostow (1960) and Ranis and Fei (1961) have stressed a positive linkage between agricultural productivity and industrialization. The positive link, however, has been argued to be nonexistent by Matsuyama (1992) in a two-sector endogenous growth model of small-open economies with a low elasticity of agricultural goods and the existence of learning-by-doing only in the domestic manufacturing sector.1 As a result of comparative advantage, higher agricultural productivity solicits labor inputs from the manufacturing sector in his model, leading to lower learning-by-doing and economic growth.Matsuyama's results, however, may not be consistent with what has actually happened in Japan and other East Asian economies. In Japan a land reform has been implemented, and allocation of resources to agricultural research has been increased since the Meiji Restoration. As a result of agricultural technical progress,2 agricultural productivity in Japan is much higher than before the Meiji Restoration. In particular, evidence has shown that the agricultural technical change after the Meiji Restoration tends to increase nonagricultural output by pushing resources out of the agricultural sector into the nonagricultural sector. For example, see Yamaguchi and Binswanger (1975, table 7) for the quantitative effects of the agricultural technical change in Japan on nonagricultural output (column 3) and on input reallocation (columns 5 and 7) in 1880-1965. Similarly, the agricultural technical change was higher in Korea's and Taiwan's early stages of economic development, as they have founded agricultural research institutes and farmers' associations during the Japanese colonial period3 and implemented land reforms after World War II. For evidence, see Mason et al. (1980, chapter 7) for the case of Korea and Thorbecke (1979) for the case of Taiwan. A World Bank (1982, p. 45) study reports that for the 23 developing countries whose agricultural growth rate in the 1970s exceeded 3% a year, 17 countries had a GDP growth rate above 5% a year in the same period. Finally, using cross-country data for 14 Asian developing countries in 1960-1986, Mellor (1995) finds a positive and significant relationship between growth rate of per capita agricultural and nonagricultural GDPs, in which both agricultural and nonagricultural sectors grow more rapidly than 31 sub-Saharan and 20 Latin American countries. These above observations lead to interesting questions as to what mechanism lies in the positive impact of accelerated agricultural growth on nonagricultural growth. What policies might increase the efficiency with which a productive agricultural sector moves a nonagricultural sector forward?The purpose of this study is to revisit the linkages between agricultural productivity and economic growth with a government policy. Our model is based on Matsuyama's (1992) framework, with a small twist, so that we can clearly identify the mechanism leading to a positive relationship. The departure in this article lies in introducing a government, which collects taxes and then conducts expenditures on infrastructures. An important role played by higher agricultural productivity in an early stage of economic development is the one by which it renders the government larger tax revenues, so that larger expenditure on infrastructures is facilitated.4 In a study investigating Taiwan's rice-for-fertilizer bartering system in the 1950s and 1960s, Koo (1996, table 2) finds that the resulting hidden taxes on rice alone account for 10-20% of total tax revenue in the period extending from 1950 to 1969. Along with other taxes, the agricultural sector is thus an important source of government revenue in a developing economy.5 Following Barro (1991), public expenditure on infrastructures is assumed to be productive, in that the learning-by-doing effect of the manufacturing sector becomes enhanced with public expenditure on infrastructures. …