The link between agriculture and development
Summary :
- Les gains de productivité dans l’agriculture participent à l’initiation du processus de développement, mais d’autres éléments entrent en jeu, comme l’accumulation de capital dans le reste de l’économie :
- Il existe une relation négative entre le niveau de richesse par habitant et le poids de l’agriculture dans l’économie ;
- À la fin du processus de transition, l’agriculture a encore des fonctions primordiales : elle ne participe plus beaucoup à l’essor de l’économie, mais elle en est la garante.
Agriculture is the cradle of human activity. Appearing in the Neolithic period, between 10,000 and 9,000 BC, this activity has remained at the center of development ever since [1]. Even today, although less than 5% of the working population in developed countries works in agriculture, it remains the main activity for people in poor and developing countries.
The key questions for economists are, on the one hand, why are rich countries rich and poor countries poor? And, on the other hand, how can poor countries be enabled to grow and catch up with rich countries? These questions are, of course, complex, and the aim here is not to claim to answer them. We will simply attempt to shed some light on the role of agriculture in the development process.
Pre-industrial economies
Pre-industrial economies were characterized by a large proportion of the population working in agriculture and by the importance of agriculture in terms of income. Thus, years of drought or heavy rainfall generally led to famine because people no longer had access to basic commodities.
But more than that, these economies were in a constant Malthusian trap. In other words, population growth was extremely dependent on agricultural yields: as the population increased, more had to be produced to feed it. However, agriculture is a sector with diminishing returns, which means that cultivating additional land does not produce as much as the previous land, for two reasons. First, there is a disconnect between the food needs of the population and human production capacity: newborns and young children need to eat without being able to work, as do the elderly. In addition, people cultivate the most fertile land first and then the least fertile land, which has a lower yield. This means that agricultural production does not increase as much as needs do, leading to famines. In this context, it is clear that economic development depends mainly on agricultural development.
Industrial revolution and dumping
The Industrial Revolution, which began in England in the early 19th century, was made possible by the search for new profits. This led to innovations in agriculture, as in other sectors, particularly textiles. These innovations increased productivity and thus freed up workers. At the time, agriculture was the largest sector of activity. It was therefore from this sector that most of the workforce left to take up other jobs in new sectors created by the revolution.
This process is known as sectoral spillover: innovation in one sector reduces the need for labor in that sector. Increased profits and wages in this sector will increase demand across the economy as a whole, thereby creating new jobs in other sectors and providing employment for workers who have recently left the innovative sector. In addition, innovation, which leads to productivity gains, not only increases profits and therefore wages, but also reduces the price of goods produced. The increase in agricultural productivity has thus had the effect of increasing the incomes of farmers who remain in employment, but above all, it has led to a reduction and stabilization of food prices, which has freed up a significant portion of household income. By paying less for their food, they were able to shift their consumption to other sectors. The increase in demand for these sectors led to their growth and thus to new jobs.
Agriculture was the first human activity, and it was the technical progress made in this sector that enabled the innovations of the industrial revolution to develop thanks to the influx of workers. Initially, therefore, an increase in agricultural productivity was necessary for the economic transition to industrialization to take place [3].
Importance of agriculture in GDP
This phenomenon has resulted in a reduction in the importance of agriculture in the economy. The graph in Figure 1 shows that agriculture’s share of GDP in some countries is declining significantly, but that it is still much more important in poor and developing countries than in developed countries. In fact, only Brazil and, at the end of the period, China have agriculture accounting for around 10% of economic activity, while it still accounts for 20% in other poor and developing countries.
Figure 1: Share of agriculture in GDP
Sources: WDI-BSi Economics-Macrobond-Author
The graphs in Figure 2 provide a partial understanding of the level of agricultural productivity compared to GDP. It can be seen that developed countries, where agriculture accounts for a smaller share of GDP, also employ far fewer people in agriculture (yet agriculture in these countries is highly productive). Data for poor and developing countries is lacking, but we can still see a significant change between 1990 and 2010, particularly in China and, to a lesser extent, Brazil. India, however, and especially Pakistan, do not seem to have changed much. This shows that economic transition is very unevenly distributed.
Figure 2: Link between the level of employment in agriculture and GDP per capita
Sources: WDI-BSi Economics-Macrobond-Author
Note: the red line is the regression line for the scatter plot. It shows how much employment in agriculture falls when GDP increases by 1. The stars indicate that the coefficients are statistically significant. Finally, R2 provides an indication of the overall viability of the model tested: the closer it is to 1, the better the model explains the variations observed.*
Finally, the graphs in Figure 3 allow us to situate countries in the process of economic transition. Developed countries have agriculture that accounts for little of their GDP, as shown in the graph in Figure 1, while poor and developing countries are much more dependent on this sector. Once again, we can clearly see that China and Brazil have entered this transition, as they are moving downwards and to the right. These graphs show that India also appears to have finally entered this process. The other countries are showing very little change.
Figure 3: Link between the level of employment in agriculture and GDP per capita
Sources: WDI-BSi Economics-Macrobond-Author
These graphs show that countries’ development is closely linked to changes in agricultural production: the more productive it is, the less labor it requires and the more work is available for other sectors of the economy. However, it seems that the pace of conversion in poor and developing countries is slower than it was in developed countries during the industrial revolution. It is therefore interesting to ask why we are seeing this result. Why has the increase in agricultural productivity enabled Western economies to develop but not, or to a lesser extent, developing countries?
Firstly, agricultural productivity in many poor and developing countries remains low. The process of worker displacement is therefore not at its maximum, as evidenced by the importance of agricultural jobs (more than 50% of the working populations of Africa and Asia). Of course, the average rate of agricultural employment fell from 81% to 48.2% between 1950 and 2010 in developing countries, which shows that, overall, developing countries have entered the transition process, but it remains far behind that of developed countries, which had only 4.2% of jobs in agriculture in 2010.[4] As long as individuals are forced to be farmers in order to survive, the development of other sectors is severely constrained due to a lack of available labor.[5]
But in reality, while technical progress in agriculture is absolutely necessary to generate overall development, it is not sufficient. Its value lies in enabling a significant proportion of individuals to be available to work in other sectors. The rest of the economy must then be able to absorb them. For this to be possible, other sectors of the economy must accumulate capital. By doing so, these sectors will be able to employ individuals who are productive in relation to the level of capital (theory of diminishing returns to factors of production).[6]
Furthermore, following the transition from an agricultural to an industrial economy, it is necessary to invest heavily in quality education in order to increase the productive capacity of the economy as a whole, whether agricultural or not (this is the teaching of endogenous growth models).[7]
At the end of the industrialization of the economy, should countries abandon their agriculture?
It would seem that agriculture is important for the initialization of economic development. However, when economies are developed and agriculture is reduced to a small part of GDP and employment, the question arises as to whether special attention should be paid to this sector. Based on our journey so far, it seems that agriculture is a means of achieving an industrial economy, just as industry seems to be a means of achieving a service economy. The value of having and supporting a large agricultural sector could therefore be called into question.
Abandoning a sector of activity is never without consequences, even if it is a marginal economic sector. Nevertheless, we can put forward several arguments in favor of maintaining a strong agricultural sector: food security, international trade, and land use planning.
Firstly, in the event of a global crisis, whether economic, political or, as is likely today, climatic, abandoning agriculture is problematic because it affects food security. Relying on global markets for food supplies prevents us from protecting ourselves against such a risk, which countries, particularly in Africa, are currently experiencing to a large extent (in the rice market, for example). However, the cost of maintaining a sector of activity in the event of a crisis must be properly understood, as must the level of risk of a crisis occurring.
In the current context of significant inequalities in development, particularly in terms of food, the highly productive agriculture of developed countries ensures the supply of agricultural products to global markets and thus contributes significantly to global food security. As long as these differences in productivity and agricultural policies remain so significant, there will be strong demand on international markets. This is all the more true given that agricultural products can be sold raw, but also processed, which further increases international market opportunities. In fact, agriculture can be, as in France, a very important sector for the balance of trade.
Finally, agriculture has another key advantage that is not related to sovereignty. In all countries, agriculture plays a role in land use planning and maintenance. The landscapes of developed countries have been shaped by centuries of agriculture, as have most poor and developing countries, where agriculture is still the largest employer today.
Conclusion
Agriculture was the first human activity and it was agriculture that made the industrial revolution possible. However, it is a necessary but not sufficient element for initiating economic transition. The rest of the economy must be able to absorb the influx of workers: the economy must be overcapitalized. For the least developed, poor, and developing countries to achieve significant and sustainable levels of growth, governments must push for increased agricultural productivity while encouraging capital accumulation in the rest of the economy.
At the end of the transition process, agriculture is not destined to be abandoned for several reasons: it guarantees food security, it can be a major export sector, and it is an important channel for land use planning.
Bibliography:
[1] Mazoyer, M., & Roudart, L. (1997). History of world agriculture (No. 2013/44782). ULB–Free University of Brussels.
Repec: https://ideas.repec.org/p/ulb/ulbeco/2013-44882.html
[2] The fact that the industrial revolution began in England and not elsewhere can of course be explained by many other factors: the lack of labor (Allen 2009b « the British industrial revolution in global perspective« ), the quality of institutions (Acemoglu, Johnson & Robinson 2005 Repec: http://www.aeaweb.org/articles.php?doi=10.1257/0002828054201305), and population fluctuations due to wars and diseases (Voigtländer & Voth 2013 Repec: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/719.pdf).
[3] Gollin, D., Parente, S., & Rogerson, R. (2002). The role of agriculture in development. American Economic Review, 160-164.
Repec:http://web.williams.edu/Economics/wp/Gollin_The_Role_of_Agriculture_in_Development.pdf
[5] Yang, D. T., & Zhu, X. (2013). Modernization of agriculture and long-term growth. Journal of Monetary Economics, 60(3), 367-382.
Repec: https://www.economics.utoronto.ca/public/workingPapers/tecipa-472.pdf
[6] Berthelier, P., & Lipchitz, A. (2005). What role does agriculture play in growth and development? Revue Tiers Monde, 183(3), 603-624.
Repec: http://www.persee.fr/doc/tiers_1293-8882_2005_num_46_183_5595
[7] It should be noted that these proposals are not intended to be initiated directly by public authorities. Indeed, following the work of W. Easterly, it seems that individuals respond strongly to incentives and that the best approach is therefore to design incentive-based policies rather than directive ones (Easterly, W. R. (2006). Are poor countries doomed to remain poor? Eyrolles-Ed. d’Organisation.)
Notes:
* The proposed regressions are based on very small samples, but by repeating the analysis on as many countries as possible using data from the World Bank’s WDI database, we obtain the following equation for 2012: Employment = -14.1*** GDP + 153***, and an R2 of 0.6 (106 observations). This shows that our analysis is consistent.
