Agriculture and economic development revisited

Abstract

This paper reviews three stages of thought about the role of agriculture in economic development. The first, dating back to the 1950s and 1960s but having its origins in Soviet industrialization policies in the 1920s and 1930s, advocated extensive discrimination against agriculture as a way to mobilize labor and resources for investment in a modern industrial sector. Massive intervention by government into investment decisions and resource allocations was thought to be necessary to utilize effectively the resources extracted from agriculture. Even if all key economic decisions were not controlled by a central planning agency, as in socialist countries, most developing countries actively sought to displace market forces in favor of government decisions and activities. The second school of thought, dating to the 1970s and 1980s, sought a market-oriented balance between the agricultural and industrial sectors. This balance was needed to stimulate a more effective and dynamic role of agriculture in economic development, such as providing labor for an industrial workforce, food for an expanding population witth higher incomes, savings for industrial investments, a market for industrial output, export earnings to pay for imported capital goods, and raw materials for agro-processing industries. These contributions form the core of modern economic analysis of the relationship between agriculture and the modern sector. In this market-oriented approach to development, special measures to extract resources from agriculture to force the pace of industrialization are not warranted. Equally, however, when markets are working well and the economy is open to international trade, no special government policies are needed for these linkages to operate efficiently. Although this market-oriented development strategy has done much to redress the ‘urban bias’ that discriminated against agriculture in early development plans, this paper argues that it does not go far enough. Evidence is presented that a set of important links between agriculture and the rest of the economy is not well mediated by market forces. Sensitive interventions by government are required if agriculture is to play its optimal stimulative role in economic development. Several examples are discussed in the paper. First, there are non-market contributions of agriculture to economic growth, which operate through three poorly understood mechanisms: the impact of food price stability on investment decisions: the contribution of agricultural growth to growth in total factor productivity for the entire economy; and ‘learning by doing’ on the part of governments, which helps them understand their appropriate role in the development process, especially in mobilizing resources for investment in public goods, such as rural infrastructure. Second, the agricultural sector plays a special role in alleviating poverty. Third, agriculture serves to protect certain environmental amenities, such as green space and concentrations of greenhouse gases. Strategies for agricultural development that rely solely on market forces perform much better than strategies that systematically displace the market. But to ignore the important non-market contributions of agriculture is to undervalue significantly the sector's role in economic development.