Agricultural Transformation and Development

According to Timmer (2008), “a powerful historical pathway of structural transformation is experienced by all successful developing countries. This structural transformation involves four main features: a falling share of agriculture in economic output and employment, a rising share of urban economic activity in industry and modern services, migration of rural workers to urban settings, and a demographic transition in birth and death rates that always leads to a spurt in population growth before a new equilibrium is reached”. Political pressures generated along the pathway, because of the distributional implications of the transition, have led to diverse policy approaches designed to keep the poor from falling off the pathway altogether.

Among developing countries in all continents the share of agriculture in gross domestic product (GDP) has declined considerably over the last 40 years, with the fastest declines being in East Asia and the Pacific, and South Asia. By contrast, the rates of decline have been much smaller in Middle East and North Africa, as well as in sub-Saharan Africa (CTA 2013).

According to the World Bank’s World Development Report 2008, which was devoted to Agriculture (World Bank 2008, Fig. 1.2, p. 28), the average shares of agriculture in GDP and labor in agriculture both decline as a function of GDP per capita, with the labor share being largely above that of the GDP share, and both asymptotically converging toward each other and toward zero at the higher income levels. In other words, it appears that in the long run the share of agriculture in GDP and the share of labor in GDP tend to reach the same level. Theoretically this is possible only when the level of GDP per agricultural worker or the level of average product per agricultural worker is the same as the level of nonagricultural GDP or average product per nonagricultural worker. This equality largely defines the end of the agricultural transformation, and implies that agriculture can be regarded in the same fashion from an income and distribu?tion perspective as any one of the many sectors of the economy. Several of the advanced economies have mostly reached this stage.

While the structural transformation just discussed seems an inevitable part of growth, the role of agriculture in development and growth is much more controversial. For many of the world’s poorest countries, especially in Africa, a future without or with low levels of agriculture has been urged as the efficient path to development (e.g. Rosenzweig 2004; Wood 2003). Many macroeconomists, convinced of the power of rapid economic growth to lift populations out of poverty, see resources devoted to slow-growing agriculture as wasted. A “pessimistic school” of agricultural development specialists thinks that for both technical and economic reasons, Africa cannot rely on agriculture as a source of growth or poverty reduction (Maxwell 2004). In fact, the question arises that in a world of ample food supplies in world markets (some of it free as food aid) and increasingly open borders for trade, what is the role of agriculture in pro-poor growth.

The new endogenous growth theory has highlighted the importance of several factors conducive to faster economic growth, such as human capital, infrastructure, sound monetary and fiscal policies, democracy and political stability, trade openness, corruption, and others, while considerable effort has been given to exploring relationships between growth and inequality as well as poverty. This essentially macroeconomic approach to growth has placed much less emphasis on sectoral aspects of growth and poverty reduction. Similarly the World Bank Development Report for 2000/2001 titled “Attacking Poverty”, which emphasized three themes—opportunity, empowerment, and security—is notable for the relatively limited discussion of sectoral priorities in reducing poverty and enhancing growth.

Development thinking and practice in the 1960s and 1970s tended to neglect agriculture as a leading sector, with its emphasis on import substitution industrialization and export promotion. It was only in the late 1970s and early 1980s that the role of agriculture as a leading sector was reemphasized in the development literature by authors such as Mellor (1976) and Adelman (1984). These authors emphasized the importance of agricultural growth in generating demand for locally produced non-tradable products, and thereby stimulating overall production and growth. Such a strategy was termed Agriculture Demand-Led Industrialization (ADLI) by Adelman (1984).

The real issue from a growth perspective is how to accelerate growth. More recently, in relation to the revival of discussion about growth rates, in the context of the “endogenous growth literature”, there have been a number of papers dealing with agricultural growth, the terms of trade, and overall economic growth (Skott and Larudee 1998; Sarris 2002; Gollin et al. 2002; Adamopoulos and Restuccia 2014). Almost all of these models and papers highlight the fact that a healthy agricultural sector should be the driving force behind industrial growth in the early stages of development, superseded by export growth in the later stages. They also point out that the degree of openness, especially in the presence of economies of scale, is a key factor in understanding the role of agricultural productivity growth in speeding up overall growth. They indicate that since demand factors are crucial in determining whether agricultural productivity growth is helpful for overall growth, the distribution of income and gains from growth is a key factor in this issue. They finally point out that the composition of demand among tradables and non-tradables is an important element of the agriculture-first theories. The models, however, do not consider the issue of how agricultural productivity growth is to be achieved and how it is to be financed.

The World Bank (WB) World Development Report (WDR) on agriculture (World Bank 2008) classified countries into three groups in terms of agriculture’s role in fostering growth and poverty reduction. First are the agriculture-based economies (most of them in sub-Saharan Africa), where agriculture contributes significantly to growth, and the poor are concentrated in rural areas. The key policy challenge in such economies is to help agriculture play its role as an engine of growth and poverty reduction. The second group consists of transforming economies (mostly in Asia and North Africa and the Middle East), where agriculture contributes less to growth, but poverty remains overwhelmingly rural. In such countries the rising urban-rural income gap accompanied by unfulfilled expectations creates political tensions. Growth in agriculture and the rural nonfarm economy is needed to reduce rural poverty and narrow the urban-rural divide. The third and final group consists of urbanized economies (mostly in Eastern Europe and Latin America), where agriculture contributes only a little to growth. In these economies, agriculture can reduce the remaining rural poverty by including the rural poor as direct producers and by creating good jobs for them.

According to the World Bank, poverty is concentrated in rural areas, where 75 percent of the world’s poor live. The decline in the $1-a-day poverty rate in developing countries—from 28 percent in 1993 to 22 percent in 2002—was mainly the result of falling rural poverty (from 37 percent to 29 percent) while the urban poverty rate remained nearly constant (at 13 percent). More than 80 percent of the decline in rural poverty was attributable to better conditions in rural areas rather than to out-migration of the poor. So, contrary to common perceptions, migration to cities has not been the main instrument for rural (and world) poverty reduction.

But the large decline in the number of rural poor (from 1036 million in 1993 to 883 million in 2003) has been confined to East Asia and the Pacific. In South Asia and sub-Saharan Africa the number of rural poor has continued to rise and will likely exceed the number of urban poor by 2040. In these regions, a high priority is to mobilize agriculture for poverty reduction.

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