Getting agriculture moving: do markets provide the right signals?

Abstract

Political discrimination has often pushed the domestic value of agriculture in developing countries below its value in markets at the border. This paper seeks to explain the reasons why border prices themselves undervalue the linkages that agriculture has to economic growth in the early stages of development. If agriculture is critically important to stimulating and sustaining rapid economic growth, those countries that fail to correct this discrimination exact a heavy toll in economic performance. Furthermore, the poorest countries will suffer the most. Agricultural development and development of the non-agricultural economy are closely linked. The traditional market-mediated linkages form the core of economic analysis of the role of agriculture in economic development: providing labour for an industrial work-force, food for an expanding population with higher incomes, savings for industrial investments, markets for industrial output, export earnings to pay for imported capital goods, and raw materials for agro-processing industries. A second category of linkages is not well mediated by market forces, even when markets are working well. The impact of agricultural growth on the rest of the economy through non-market linkages can be traced using a simple growth-accounting framework that examines contributions to the labour force, capital investment and the productivity with which these two physical factors are utilised. Several linkages stand out as likely to be important and potentially measurable because they draw on the efficiency of decision making in rural households, the low opportunity cost of their labour resources, the opportunity for farm investment without financial intermediaries, the potential to earn high rates of return on public investments that correct for urban bias, the contribution of food price stability to increased efficiency in investment decisions, and the impact of growth in food production on widespread improvement in nutrient intake and labour productivity. Each of these factors alone, as public investment and favourable policy stimulate growth in the agricultural sector, should cause an increase in the efficiency of resource allocation and thus higher total factor productivity. Several of these mechanisms will also serve to speed factor accumulation by increasing the savings rate or improving factor mobility.