Role of Agriculture and Industry in Economic Growth of a Country

Let us make an in-depth study of the role of agriculture and industry in the economic growth of a country.

Role of Agriculture:

To begin with the concept of priority or preference of one sector and one technology over another is a slippery one.

For instance, A. W. Lewis once remarked that “Agriculture has been the weakest link in the development chain.” On the other hand, there is another argument that suggests that agricultural productivity and output contribute towards an economy’s development. Against this backdrop, the case for priority in agriculture rests on the following facts.

Since the days of David Ricardo, importance of agriculture in an economy’s development is being recognised. Taking the “natural limits”—the problem of diminishing returns—in agriculture into account, Ricardo concluded that such ‘limits’ in agricultural production would set the upper limit to the growth of the non-agricultural sector and to capital formation for economic development.

There are four ways through which agriculture contributes towards the process of economic development as described by Simon Kuznets.

These are:

(i) Product contribution,

(ii) Market contribution,

(iii) Factor contribution, and

(iv) Foreign exchange contribution.

(i) Product Contribution:

The product contri­bution of agriculture refers to its contribution of wage-goods, that is, foodstuffs over the subsistence level to feed the labour force of urban non-agricul­tural sector. A growing population must be suppor­ted with increased food supply. Raising food supply through different ways has thus great importance for economic growth of a country. The annual rate of increase in demand for food in an economy is determined by

D = p + η g

where p and g stand for the rates of growth of popu­lation and per capita income, and η stands for in­come elasticity of demand for agricultural goods. Poor LDCs experience high population growth rate and a high income elasticity of demand for food.

Under the circumstance, an increase in per capita income strongly increases the demand for food­stuffs/agricultural goods in these countries more than the advanced countries of the West. In Britain, agricultural revolution brought in the wake of Industrial Revolution (1760 onwards) raised agricultural productivity, provided surplus labour to the non-farm sectors, and wage-goods to support industrial expansion.

To this end, what is needed is the generation of ‘marketable surplus’—a surplus of agricultural output over the subsistence needs. Marketable surplus from agriculture also tends to widen the home market for the industrial products. Of course, the demand for industrial products largely depends on farm income. Increased agricultural produc­tivity, a growing marketable surplus, and a rising income of the agriculturists are necessary to trigger an expansion in the demands for industrial products by the agricultural sector.

(ii) Market Contribution:

The market contribution of agriculture to economic growth refers to the fact that the demand from agriculture acts as the source of autonomous demand for industrial goods. As a result of agricultural progress there occurs a market extension for industrial goods. Agriculture thus has linkages with the industrial sector—there is a complementarity between the two sectors.

A pre­condition for rapid industrial growth is a rapidly expanding agricultural sector. Dr Bright Singh asserts that increase in agricultural production and the rise in farm incomes together with industria­lisation and urbanisation lead to an increased demand for industrial products. Thus, a sluggish growth in agriculture acts as a drag on industrial development.

Thus, it is evident that if agriculture itself grows, there occurs a product contribution and when agriculture trades with other sectors, there occurs a market contribution.

(iii) Factor Contribution:

The factor contribution, comprising both labour contribution and capital contribution, occurs when there is a transfer of productive factors/resources to other sectors from the given sector. A overpopulated developing economy is characterised by the existence of sur­plus labour or disguised unemployment. Arthur Lewis, Ragnar Nurkse once suggested that in over- populated underdeveloped countries agricultural sector—by transferring its labour resources to the modern industrial sector where they create a surplus—can contribute to growth and develop­ment. Industrial development of many of the South East Asian countries had been bolstered by cheap labour supply available in the farm sector.

Agriculture contributes substantially to the sources for capital formation. However, savings may be voluntary or forced. Voluntary saving is made by rich landlords, peasant farmers while savings may be collected by coercion as was done in the erstwhile Soviet Union and China in the past. In addition, government, by taxing away agricul­tural sector, may collect resources for investment.

In addition, agricultural sector provides funds for capital formation through (i) transfer of labour and capital from farm sector to the non-farm sectors, (ii) export of surplus agricultural products, (iii) turning the terms of trade against agriculture by imposing price controls on agricultural goods by taxation or by using multiple exchange rates against agriculture, etc.

(iv) Foreign Exchange Contribution:

Agriculture may be a great source of foreign exchange of a country. Foreign exchange is an important source, just like savings. Primary products producing underdeveloped countries earn foreign exchange by exporting these products. As those exports contribute nearly 60 to 70 p.c. of their export earnings, the capacity to import capital goods and machinery required for industrial development largely depend on export earnings. However, as terms of trade deteriorate against primary products in the international market, the prospect of higher export earnings is rather limited.

Finally, agricultural growth tends to improve income distribution more in favour of small peasants-. Urban, industrial sector is characterised by ‘skewness’ in income distribution, the concen­tration of income in the hands of a few small business houses. Any effort for rural development would help in reducing the rural-urban gaps. Agricultural development thus helps in improving social welfare, particularly in the rural areas. In the process, the rural masses enjoy a better way of living.

While emphasising the importance of agri­culture, the World Bank in its 2007 World Development Report pleads for the development of agriculture in the 21st century as a fundamental instrument for both sustainable development and poverty reduction. Three-quarters of poor people of developing countries derive their livelihoods from agriculture.

In this connection, the Bank considers that there are three types of countries— agriculture-based countries, transforming coun­tries, and urbanised countries—where agricultural development along with the associated industries are ‘essential’ to both higher growth and the poverty reduction.

Its recommendations for agricultural develop­ment in these countries are as follows. A comprehensive approach to (i) shifting to high-value agriculture, (ii) extending non-farm activities in rural areas so as to encourage agricultural labour to reduce their dependence on agriculture for livelihoods in transforming countries of South and East Asia, the middle East and North Africa.

However, for the agriculture-based countries of most of sub-Saharan Africa, it recommends strong agricultural development along with related industries as an engine of higher economic growth and the reduction of mass poverty. Lastly, in urbanised countries of mostly Latin America and Central Asia, the reduction of poverty may be initiated by helping small landholders so that these people can participate in the modem food markets. As a result, jobs are created not only in agriculture but also in agro-industrial activities.

What thus emerges from the above is that agriculture must play a great role in the transfor­mation of a developing economy. Agriculture must be viewed as sources of (i) surpluses to support industrialisation, (ii) dynamic growth, employ­ment, and better income distribution.

Role of Industry:

Industrialisation offers substantial benefits that are crucial for structural transformation of LDCs. The concept of big push or balanced growth reflects deliberate industrialisation of these economies. Those who favour in giving a special priority to industry over agriculture put arguments like:

In the first place, agricultural productivity is hampered by poor technology and paucity of capital investment in poor LDCs. Under the circumstance, these countries must choose that sector which promises the greatest development. Indeed, modem growth and industrialisation is essential.

An appropriate industrial policy can overcome the obstacles to industrialisation. Indus­trial growth depends on agricultural growth—an assured supply of chemical fertilisers, pesticides, farm technologies may trigger industrial growth. Again, industrial growth creates the demand for agricultural output. In this way, it creates the basis of balanced growth.

Secondly, industrial investment will stimulate further investment compared to agriculture as the industry maximises linkages—the Hirschman’s concepts of backward and forward linkages. For instance, an iron and steel industry has very strong forward and backward linkages. The unbalanced growth doctrine implicitly but strongly recom­mends industrial investment.

Thirdly, it is strongly asserted that over time as agriculture is subject to diminution. its labour- absorptive capacity will decline. However, the employment potentiality of the industrial sector is indeed large. Although heavy industry being capital-intensive in nature cannot be a great employment provider; small and medium industries have the greater capacity to absorb labour force. Anyway, no economy can afford the luxury of remaining an agrarian one all the time; indeed no other alternative to this economy but to have industrialisation.

To be more specific, structural transformation demands industrialisation. As industrialisation develops, there occurs a shift in the composition of output from primary sector activities towards industrial activities along with a structural change in employment pattern in favour of industrial sector. This kind of structural transformation is a pointer to a higher level of development.

Fourthly, agricultural production is more cyclical and thus income receipts and tax receipts are not stable. Industrial growth more or less guarantees income stability and revenue stability to the government. Industry is also subject to cyclical ups and downs but not so like agriculture. Again, because of interdependence between agriculture and industry, the industrial output may exhibit cyclical variability. The current global recession (2008 onwards) largely faced by the USA and other European countries has somehow reduced India’s export earnings.

Fifthly, industrialisation provides a firm basis in raising the share of industry in total income rapidly. In other words, progress of industrialisation is accompanied by an increase in national and per capita incomes. After examining data for 45 countries grouped into three—large countries, small countries with heavy orientation of exports of manufactured products, and small countries with a greater orientation of exports of primary pro­ducts—Hollis B. Chenery and L. Taylor concluded that the share of industry rises from 16 p.c. to 37 p.c. for large countries as against a decline in the share of primary production from 45 p.c. to 12 p.c. The behaviour of small-industry oriented countries is, however, different. This study then clearly shows that large developing countries as well as small-industry oriented countries can gain a lot by developing industry.

Finally, from the sociological point of view, it can be said that industrialisation can bring about a change in the social outlook of people. With industrialisation the traditional village life gets transformed; people migrate to cities for jobs in non-farm activities. Casteism tends to vanish as educational attainment improves.

Education acts as a catalyst of social change; new progressive ideas towards life occur. A new class of entre­preneurs is born, capital formation increases, technical innovations take place. All these changes produce a favourable impact on social relationship which, in fact, acts as a precursor of a new, modem, cultured, and a vibrant society.