Agricultural Productivity Growth, Rural Economic Diversity, and Economic Reforms: India, 1970–2000

Abstract

A salient theme in D. Gale Johnson’s work is the importance of agricultural development for general prosperity and for economic diversification (e.g., Johnson 2000). Johnson has also noted that most of the world’s poor are engaged in farming, so that a key focus of development policy is to raise the incomes of farmers. From a global perspective, increasing the productivity of agriculture, given the fixity of land, is necessary for both poverty reduction and the development of the nonagricultural sector. At the level of the world, agricultural productivity gains, poverty reduction, and the growth of the nonfarm sector are complements. However, the question remains whether these observations imply that every poor country should focus its public resources on agricultural development in order to raise the incomes of people now engaged in farming and whether such a policy is necessary for obtaining economic diversity. In this article, we use the experience of India over the past 30 years to address the issue of whether agricultural technical change actually leads to economic diversification and income growth within the rural sector in the context of an open-economy country in which there are cross-area trade and capital flows. We focus in particular on the rural sector because this is the sector in which linkages between agricultural and nonagricultural sectors are thought to be the strongest. We exploit the fact that India has maintained a policy of openness with respect to agricultural technology over this period, permitting and actively supporting agricultural development, and has moved to a reformed regime in which goods are traded and capital is more mobile in the 1990s. Evidence on the relationship between agricultural growth and nonfarm