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Role of Agriculture in Economic Development We assume resource flows from agric into other sectors and vice versa. Agric contribution may be due to govt policy or impediments. In terms of agric contribution to development agric is similar in any agric system. Whether we are looking at a close economy (contribution differs) and open economy. Some contribution to development does not exist if there is closed system e.g. foreign exchange as earned by agric exports. International trade in agric alters some of the conclusions which could be made under closure. Agriculture’s contribution by providing demand for industry but with trade the conclusion may fall under open trade. Static contribution is common in literature it’s a logical extension of the characteristics of agriculture already mentioned e.g. primary products exports. From static sense, agriculture must play large part in developing other sectors. Agriculture has to provide some of the investible surplus. From a static point of view agric can be considered a reservoir of idle resources which have to be tapped. Limitation of agric contribution from static sense- these idle resources cannot be tapped without getting constraints in agriculture development itself. The view is agric has idle resources for industrial, non agric growth. Dynamic consideration alters situation- looks at agric contribution from dynamic point. Dynamic consideration- technical progress, agriculture reorganizing can potentially lead to development of non agricultural sectors. Within dynamic context it is not necessary to have agric as reservoir at initial stage nor have idle resources. Those 2 views have 2 different implications. Dynamic- investment within agriculture yields contribution. Static- contraction of agriculture sector (expansion of other sectors). Traditional arguments fail to see development of agriculture in agriculture itself. There is unidirectional flow of net resources to non agriculture. This view underestimates growth of agriculture as an industry in itself (pays wages etc.). One may argue the biggest contribution to development is if there was insuring high agric growth, reducing income inequalities if the surplus was transferred to rural farm schemes, etc. then poverty will be reduced (if income from agric is used according to the four mentioned above then urban influx, pressure for urban social services would be reduced. Alternative approaches to development of agriculture – agriculture can contribute to economic development by improving farm incomes etc, while agric labour might decline with time. In considering agric contribution to economic development we are looking at 2 sector models 1) agric and 2) non agriculture (industry and govt) One might want to include a non-farm rural sector. Non farm rural sector raises the possibility of getting surplus from agric to develop nonagric farm rural sector- rural development strategies ( see also Kuznets). Factor Contribution If argument about labour surplus holds it follows there is a possibility of drawing labour from there without production fall. As a source of capital this occurs when some of the agric sector grows- the surplus that can be channeled from voluntary savings banked and borrowed by industrialists. Capital transfer may be through government taxation (land or output or through P deterioration of TOT for agriculture. agric surplus is transferred. PI Output (Market) Contribution - food and raw materials for other industries. - Sources of demand for other industries (non agric) increase in agriculture incomes creates demand for output of other sectors. Higher export earnings provide foreign exchange. This occurs in 2 ways (a) direct export earnings- cash crops, coffee (b) Import substitution . Factors determining growth of food demand If food production is not forthcoming and falls short of demand, food prices , political instability , high wage demands . Pressure of food shortages is often overcome by importing food using scarce foreign exchange. There are 3 major determinants (a) General population increase rural/urban areas (Pop. Factor) – with population growth for most LDCs > 3% p.a. it means they have to produce food by this much to maintain. Very few LDCs have done this lower standards of living. (b) Occupational composition (changes in the occupational composition of population usually from rural urban employment shift- when a family moves to urban areas they consume as much as when in rural areas. There need not necessarily be increase in food demand. As a result of slow changes in marketing channels there is difficulty in food availability. Change in demand is when people who move to urban areas change consumption patterns. (c) Changes in income level and income distribution (income factor). When Agric’s income rises consumption of all goods increases. Increases of levels of income in urban population leads to income effect. Studies show that income elasticities of demand are higher in rural areas than in urban areas. It drops as income rises. The more sluggish the growth of agric output the more sluggish the income of the rural population. We have to bear in mind that if the agric is not growing fast enough and prices shoot up this may be an incentive for farmer to produce more output therefore rate of growth . Agriculture as Labour Source Normal pattern most countries have followed as nation expands there is contraction in agriculture in its share of GDP, fall in employment , therefore industry provides bulk of employment. However if industry has to have bulk of employment it has to draw from agric sector. Question is does agric have labour surplus? It may possess excess labour in: 1) Static sense- labour not fully employed (transferable without drop in output in agriculture. 2) Dynamic sense- only through increases in labour productivity in agricultural sector that comes through technical change that brings surplus labour which is released (more valid way of looking at it) Surplus labour (surplus people or labour hours) Views 1) assumes within family context – family members work fewer hours than they were willing to work (Ishikawa hence Ishikawa surplus). Implication is labour hours is assumed to be horizontal. Surplus labour exists in that you can withdraw some labour without reducing the utility. Labour works harder. If this is correct if 1 member is withdrawn and there is no decline in output (measurement is a problem). Seasonal variations in the number of hours worked by a single family unit. This again is measuring difficulty. No surplus labour exists in peak season. Disutility of effort and demand D1 D2 S No disutility of effort N1 N2 No. of labour hours Lewisian Surplus Labour Validity of the contention based on observation that industrial sector has no problem in attracting unskilled labour from agriculture. It is argued labour supply to industry is perfectly elastic at a constant real wage. Traditional sector (agric) is not profit motivated (it is agric sector excluding commercial sector). In terms of sources of labour there are three sources: 1) natural population increase. 2) urban and rural sector . 3) agric labour force. All three are taken as one for analysis. Lewis argues productivity (marginal and average0 is much high in the capitalist sector than C the agric sector. Wc Wa and W C MPPL Wagric . While MP principle is valid in the capitalist sector it is not valid in the agricultural sector (they are self TP APL in agriculture. For capitalist sector to attract labour from employed). Wa L agriculture it has to pay wage >APL in agriculture Lewis observed wage in agric sector was 30% less than the one in the capitalist sector. To attract labour, the capitalist sector has to pay APL c where c is the cost of changing occupation. Labour supply to industry is supposedly perfectly elastic. The Lewis model is one of structural transformation in the agricultural sector. It is contracting in share of national output and employment. It is doubtful whether there is no effect on production if labour is reduced continuously. This is the only case if MPL in agric is 0. For the working of Lewis model you need not say anything about productivity (he never mentioned this). What induces labour to capitalist sector is wage differential. Differences in wages may be 1) minimum wage legislation 2) collusive employers – employer/ employees forming strong unions. Lewisian surplus is purely due to differentials between the wage rates. At what point will TP wage in the capitalist sector cease to be horizontal. W . If L then W . Labour can be L reduced until there is equality between Wc and Wa . If there is a fall in TOT against industry there may be an increase in demand for agric products relative industrial sector. This bridges the gap. Redundant labour – confusion as to measuring of this. Essence is MPL is zero (MP does not contribute to output). There are two interpretations to MPL = 0: 1) referring to people while MP of worker might be zero that of manhours may not be zero if shorter working hours for labour. The additional manhour has positive MP but additional man has MP=0. 2) refers to both man and and manhours- you postulate you withdraw labour, remaining labour does not put more hours but output still constant. This interpretation is not satisfactory unless we assume fixed K/L ratio. Dynamic Surplus This refers to both manhours and workers. Through technical progress workers can be transferred from agric to industrial sector. Surplus labour comes from technological change. The argument is not helpful again because everybody is potentially surplus labour. From industry surplus labour can also be extracted. From the arguments however, agric contributes labour to industry. Labour transfer must ensure agric output must not decline. If there is a decline then we see problems of black markets, inflation , etc. Lewis Model- assumes two sectors, - traditional (overpopulated, rural subsistence sector, zero marginal labour productivity - high productivity modern urban industrial sector into which labour is being transferred from subsistence sector. Both labour transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. The level of wages in the urban industrial sector is assumed to be constant and determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector (Lewis assumed that urban wages would have to be at least 30% higher than average rural income to induce workers to migrate from their home areas. Lewis makes 2 assumptions about the traditional sector: 1. Surplus labour in the sense that MPLA = 0 2. All rural workers share equally in the output so that the rural real wage is TPA determined by the average and not the marginal product of labour, i.e. wA LA The marginal product of these LA workers is zero. All workers in excess of LA constitute surplus labour. TPM(KM3) TPM3 TPA TPM2 Total Product TPM1 (Manuf) TPA Total Product (food) (agric) O APLA Average (Marginal) TPM(KM2) TPM(KM1) O LA QLA QLM Real Wage Products MPLA WA Surplus labour MPLA APLA LA Traditional (agricultural) sector WM WA SL D2(KM2) D3 D1 (KM1) =MPLM L1 L2 L3 Manufacturing sector Lewis assumes that urban wage Wm above rural average income WA, modern sector employers can hire as many surplus rural workers as they want without fear of rising wages. Given a fixed supply of capital KM1 in the initial stage of modern sector growth, the demand curve for labour is determined by labour’s declining marginal product and is shown by the negatively sloped curve D! (KM1). Because Lewis assumes that all of these profits are reinvested, the total capital stock in the modern sector will rise from KM1 to KM2 causing the total product curve of the modern sector to shift to TPM (KM2) which in turn induces a rise in the marginal product demand curve for labour. This process of modern-sector self-sustaining growth and employment expansion is assumed to continue until all surplus rural labour is absorbed in the new industrial sector. Thereafter additional workers can be withdrawn from the agricultural sector only at a higher cost of lost food production because the declining labour to land ratio means that the marginal product of rural labour is no longer zero. Criticisms 1. Model implicitly assumes that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster the rate of new job creation. If however capitalist profits are reinvested in more sophisticated labour saving capital equipment rather than just duplicating the existing capital results would be different. It assumes capitalist profits are reinvested in local economy (and no capital flight). -antidevelopmental economic growth- all extra income and output growth are distributed to the few owners of capital, while income and employment levels of masses of workers remain largely unchanged. 2. Notion that surplus labour exists in rural areas while there is full employment in the urban areas. Most contemporary research indicates that there is little general surplus labour in rural locations (seasonal). 3. Notion of a competitive modern sector labour market that guarantees the continued existence of constant real urban wages up to the point where the supply of rural surplus labour is exhausted. - Tendency for urban wages to rise substantially over time, both in absolute terms and relative to average rural incomes (union bargaining power, civil service wage scales, MNC hiring practices- all negate competitive forces in LDC modern sector labour markets)