Role of Agriculture in Economic Development

Agriculture plays a vital role in economic development of developing countries. The role of agriculture in economic development is crucial because a majority of the population of developing countries make their living from agriculture.

We explain below the role of agriculture in detail and point out in what ways agriculture can contribute to economic growth of a country.

Role of Agriculture in Economic Development

Agriculture’s contribution to economic development has been classified into six categories: 1. Product contribution 2. Factor contribution 3. Market contribution  4. Foreign exchange contribution 5. Agriculture and Poverty Alleviation 6. Contribution of Agriculture to Employment Generation.

1. Product Contribution:

Most of the developing countries depend on their own agriculture to provide food to be consumed by their population. However, there are few exceptions. Some countries such as Malaysia, South Saudi Arabia have large exports based on natural resources which enable them to earn enough foreign exchange to import their food requirements for their people. But most developing countries do not have necessary foreign exchange earnings to import food-grains to feed their people and therefore have to rely on their own agriculture to produce enough food to meet the consumption needs of their people.

Farmers in these developing countries have to produce food over and above their subsistence needs so as to provide necessary food to their urban population. If the industrial and services sectors have to grow, the food requirements of the workforce employed in them have to be met by the marketable surplus of the farmers. As the industrial and services sectors develop further, the agricultural productivity and production must also rise to sustain the industrial development by feeding the increasing industrial workforce.

If with industrial development, productivity of agriculture does not rise sufficiently and imports of food-grains are not possible due to non-availability of sufficient foreign exchange, the terms of trade will turn heavily against the industrial sector and as several models of growth point out the growth process will eventually stop because industrial production will become unprofitable.

As of result, the economy will reach a stationary state. Besides, according to Rostow’s model of economic growth, prior to take-off stage of economic development there must be agricultural revolution. As a matter of fact, why Britain was the first country to have industrial revolution is the fact that Britain had an agricultural revolution. Abolition of serfdom and enclosure movement led to the significant increase in agricultural productivity which enabled agriculture to provide enough food to feed its increasing industrial workforce.

It is here worth mentioning the concept of marketable surplus. The marketable surplus is the difference between the agricultural output and the subsistence needs of the farmers producing it. This marketable surplus must be extracted from the agricultural population to be used for the expansion of the industrial sector.

If agricultural productivity does not rise the marketable surplus for industrial growth has been obtained by some countries through coercion as was the case in Japan at the time of Meiji Restoration (1869) when through compulsory taxation marketable surplus was extracted from the farmers. More conspicuously, marketable surplus was forcefully collected from kulaks (small class of rich landowners) in 1920-21 during Stalin’s Collectivisation Scheme.

2. Factor Contribution:

Another contribution of agriculture to economic development is that it provides two important factors — labour and capital — for industrial growth. The size of agricultural sector in developing countries is quite large as around 60 per cent of their population is engaged in it and therefore it can release a significant amount of labour to be employed in the industrial and other non-farm sectors. However, agriculture can release labour for industrial development if its productivity rises.

In Lewis “Model of Development with Unlimited, Supplies of Labour,” mobilisation of surplus labour (i.e., disguisedly unemployed) in agriculture for expansion of modern industrial sector and capital accumulation has to be made for employment in expanding industries. The smaller the wages of labour, the lower will be the cost of industrial sector which will bring large profits to the industrialists which can be ploughed back for further industrial development and capital accumulation.

But as coercion is ruled out in democratic countries like India, the release of labour from agriculture for use in industrial sector can be achieved if there is rise in agricultural productively and therefore the increase in marketable surplus. Thus, it is through increase in agricultural productivity as a result of green revolution technology since the mid-sixties of the last century that has been used for generating agricultural marketable surplus for industrial growth by the developing countries of South-East Asia by using cheap labour from agriculture.

Source of Capital:

Agriculture can also be a major source of saving or capital for industrial growth of developing countries. Even, in poor developing countries, as income from agriculture is unequally distributed, rural people with high incomes can invest their savings for industrial development. In Britain at the time of industrial revolution rich landlords voluntarily invested some of their savings in growing industries. Besides, small farmers can deposit their small savings in banks operating in the rural areas and then these banks can provide loans to the industrialists for investment purposes.

The government can also extract savings from the farmers by taxing the agricultural sector. In Japan a tax on agriculture was levied to mobilise savings for capital accumulation. In India land revenue from agriculture has been a negligible source of State income. A committee headed by late Dr K.N. Raj recommended ‘Agricultural Holding Tax’ to mobilise savings from agriculture for economic development.

Since taxing agriculture is a State subject, no State has levied agricultural holding tax or agricultural income tax because no party can turn farmers who are voters against it. Therefore, in India agriculture remains under taxed. However, with the expansion of branches of nationalised banks farmers are voluntarily depositing their savings in these banks, which the banks can lend for industrial growth of the country.

3. Market Contribution:

The market contribution of agriculture means the demand for industrial products. In the earlier stages of development when urban sector is very small and markets for exports have not yet been found, agricultural sector of developing countries is a major source of demand or market for industrial products. The farmers often produce cash crops such as sugar, jute, cotton and from their sales they obtain money incomes which they can spend on industrial goods. Besides, the farmers who have marketable surplus of food-grains (cereals and pulses) sell them in the market from which they get money incomes which also become a source of demand for industrial goods.

Unless the market or demand for industrial products expands, rate of industrial growth cannot be high. In India it has been found that whenever there is sluggish or negative agricultural growth, there is stagnation in the industrial sector due to lack of demand for the industrial products. The increase in agricultural productivity and production causes increase in the home market for manufactured goods and services and thereby speeds up rate of economic development. According to World Development Report of the year 1979, “a stagnant rural economy with low purchasing power holds back industrial growth in many developing countries.”

In fact, there is interrelationship between agriculture and industries. Not only is agriculture a source of demand for various industrial products but it also supplies food and raw materials (such as sugarcane, jute, cotton, oilseeds etc.) to industries. Besides, various agro-based industries such as rice-husking, sugar manufacturing, oil-crushing, handloom weaving also depends on agriculture for the raw material supplies. Therefore, if agricultural growth is sluggish, these agro-based industries would not get their required supplies of raw materials.

The household studies of the currently developed economies indicate that in the earlier stages of development industrial revolution took place in the countries that had already experienced substantial increase in agricultural production. On the other hand, developing countries which have neglected agriculture (as India in the Second and Third Five Year Plans) and allocated bulk of their investment resources to the industrial sector soon found themselves with problems of food shortage, inflation and balance of payments difficulties. Thus Jean Waelbroeck and Irma Adelman write – “In the absence of increase in agricultural productivity, countries quickly find themselves in the balance of payments problems as they find themselves compelled to import food in order to avoid upsurge in real wages that would jeopardise their industrial programme.”

It follows from above that rapidly growing agricultural sector is a precondition for rapid industrial growth. This has however implication for pricing of agricultural products relative to the industrial goods, that is, terms of trade between agriculture and industry. Lower agricultural prices are good for industry as it would get cheaper food and raw material, which would lower its cost of production and raise its profitability. On the other hand, low agricultural prices are bad for the farmers because they reduce their incomes and therefore their buying power to purchase industrial goods.

Besides, lower agricultural prices would serve as disincentive to raise agricultural productivity. Therefore, there is need to strike a balance in terms of trade between agriculture and industry so that agricultural prices are not too high so that they should not make industrial production unprofitable. The agricultural prices should also not be too low so as to provide incentives to the farmers to increase agricultural production.

In the early fifties some economists were of the view that fanners do not respond positively to higher agricultural prices as they aim at earning fixed incomes. With higher agricultural prices the farmers, according to this view, produce and supply less agricultural output. That is, according to this viewpoint, there was backward bending supply curve of agricultural output. Thus, according to this viewpoint for raising agricultural production, agricultural prices should be kept at low levels.

This view did tremendous harm to the agriculture as it was based on wrong premises and the implementation of this view by some developing countries stood in the way of achieving a higher growth of agricultural output. The empirical evidence now clearly shows that farmers respond positively to higher agricultural prices. Even in case of India recently (2012-13, 2013-14) when minimum support prices (MSP) of wheat and rice were raised by the Government, farmers responded positively and not only they increased production of wheat and rice but also exported them on a large scale in the years 2012-13 and 2013-14.

With this India became the world’s largest exporter of rice which no one even dreamed of. That the farmers respond positively to incentive prices is also shown by the fact that the farmers in India and other developing countries adopted the green revolution technology (i.e., use of HYV of seeds along with fertilizers and pesticides) when higher prices of food-grains were offered to them as incentives.

4. Foreign Exchange Contribution:

The exports of agricultural products can also be a source of foreign exchange earnings. In the initial stages of development when industrial sector has not yet developed much, agriculture is a source of foreign exchange earnings from its exports of primary goods.

The developing countries in the early stages of economic development often experience shortage of foreign exchange or what has been called ‘foreign exchange gap’ to meet the requirements of imports for industrial development. By contributing to foreign exchange earnings, it enables the developing countries to have access to imported goods needed for industrial growth which cannot be produced at home or can be produced at a higher opportunity cost.

Thus agriculture can make significant contribution to economic development by earning foreign exchange required for importing industrial raw materials and capital goods required for expanding industries. The lack of foreign exchange acts as a great constraint on the growth process. Thus, in India as in the Second and Third Five Year Plans (period 1956-1966), agriculture was relatively neglected in allocation of investment resources, the growth process came to a halt as even food could be imported and also in the absence of availability of enough foreign exchange earnings, it experienced balance of payments problems and it became difficult to import even necessary inputs for industrial growth.

5. Agriculture and Poverty Alleviation:

A majority of poor people live in rural areas. Even after 60 years of independence around 40% of population in the rural areas of India lives below the poverty line and a majority of them consists of small and marginal farmers, landless agricultural labourers, Scheduled Casts and Tribes. It has been shown, among others, by Montek Singh Ahluwalia, the former Deputy Chairman of Indian Planning Commission that poverty declines with agricultural growth.

In any strategy of eradication of poverty agricultural growth plays an important role. Agricultural growth raises the productivities and incomes of small and marginal farmers, and raises and employment and wages of agricultural workers. With this, it helps to reduce poverty and disguised unemployment. Besides, increase in agricultural productivity leads to lower food prices and keeps inflation under control which also contribute to lowering of poverty.

6. Contribution of Agriculture to Employment Generation:

In major growth models for labour-surplus developing countries, prominent among them are ‘Lewis’ model of growth with unlimited supply of labour,’ Mahalanobis’ growth model of assigning higher priority to basic and heavy industries visualised withdrawal of surplus labour from agriculture to be employed in the expanding industrial sector. However, the empirical evidence shows that far from withdrawing surplus labour from agriculture, the modern industrial sector being highly capital-intensive generates very little employment opportunities which are not enough even to employ all the openly unemployed persons in the urban areas.

It has been found that agricultural growth has a good employment potential provided a proper strategy of agricultural growth is pursued. The new agricultural technology represented by the use of HYV seeds, fertilizers, pesticides along with use of optimum quantity of irrigation water leads to the expansion in agricultural employment. The use of these inputs of high-yielding technology enables the farmers to adopt multiple cropping which has a large employment potential.

What is needed is the increase in capital investment for expansion of irrigation facilities and other infrastructure for agriculture so that farmers throughout India can draw benefits from the new high-yielding technology. The widespread diffusion of new high-yielding technology in the rural economy of India will raise agricultural productivity as well as employment. However, to realise the full employment potential of agricultural growth, reckless mechanisation of agriculture should be avoided. Besides, to increase employment in agriculture, lands reforms such as tenancy reforms and distribution of land through imposition of ceilings on landholdings should be effectively implemented as small farmers employ more labour, have larger cropping intensity and higher productivity.

Irma Adelman and Jean Waelbroeck” have put forward a strategy called ‘Agricultural Development- Led Industrialisation Strategy’ simply called ADLI Strategy in which they have argued for allocating a greater share of investments to the agricultural sector to improve agricultural productivity and achieve a more rapid growth. To quote them, “With current initial conditions and in the present low-growth world environment, an “Agricultural Development-Led Industrialisation (ADLI) Strategy” leads to higher rates of economic growth, better income distribution, more rapid industrialisation and a stronger balance of payments than continuation of purely export-led growth strategy.

The main reasons for the favourable result of ADLI strategy are that:

(1) The strong domestic linkages of agriculture with manufacturing, through both the demand and the input sides, lead to high domestic demand multipliers for agricultural output;

(2) Investment in agriculture is less import- intensive and more labour-intensive than investment in industry and so is agricultural production;

(3) The rate of return to investment in agriculture is high, equal or be exceeding that of investment in industry.