CHAPTER ONE

Definition, Scope, and Role of Agriculture in Economic Development

1.1 Introduction:
Definition and Scope of Agricultural Economics
To make it simple, before we attempt to define the term agricultural economics, let us
begin with splitting the two words ‘Agriculture’ and ‘Economics’ and then attach specific
definition for each.

We hope that every one of you is well familiar with the word agriculture. Agriculture is
the purposeful tending of crop(s) and livestock. It includes group of interrelated activities
that encompasses the planting, raising, subsequent care and final disposition of a wide
range of crops and livestock. Alternatively, we can define agriculture as the production,
processing, marketing, and distribution of crop and livestock.

What is economics? The modern definition of Economics, like other science, is brought
evolutionary from the earlier definition of Adam Smith “economics as the study of
wealth” to the modern Keynesian definition “as the study of administration of scarce
resources and of the

determinants of income and employment.” In your microeconomics course you had been
acquainted to different ways of defining economics. This means there is no single
definition for the word economics. But for our purpose let us define economics as a
science of
analyzing the use of limited resources to achieve the desired wants/satisfy human wants.
Now bringing both definitions, we can define Agricultural Economics as a discipline that
adopts the principle of economics to the problems of agricultural production and people
engaged in agriculture and allied activities. Thus, Agricultural Economics is an applied
science dealing with how humans choose to use scarce productive resources and technical
knowledge to produce agricultural output and to distribute these for consumption to
various members of society over time.

Agricultural production has several general characteristics that distinguish it from other
forms of production. These are:
 The existence of many small production units (despite differences among
countries, agriculture employs by far the largest share of the world population)

 The plurality of products from one producing unit (individual producing unit or
farm typically engage in production of several different types of commodities)

 The biological nature of the production process (production processes are geared
to the life cycle of the particular plant or animal that is involved requiring
considerable quantities of heat, moisture, and soil nutrients)
 The nature of location decision (decision is how best to use the land)
 The existence of considerable degree of production for self-sufficiency (majority
of farmers in the world plan their activities in terms of production for home
consumption rather than for the market. In other words it does not enter
commercial channels)
 Its sensitivity to natural forces such as rainfall intensity, climate, drought,
temperature and the like.
Because agriculture is special (almost unique) in a number of ways, a specialized branch
of economics called Agricultural Economics has developed to address the problems
associated with it. And agricultural economists make extensive use of microeconomics or
price theory in which propositions on the functioning of markets in terms of production,
consumption, and exchange are developed from hypothesis about the behaviors of
individual producers and consumers. In contrast, macroeconomics utilizes highly
aggregated concepts such as total consumption, national output, investment etc, which are
closely linked with agriculture. Recently some studies (e.g. Trimmer et al, 1985) have
noted that macroeconomic policies and adjustments can have a major impact on the
agricultural sector.

The central theme in studying agricultural economics is that resources - land, labor,
capital, time, etc are limited or too few to satisfy all human wants and that as a
consequence of this scarcity choice must be made.

The problems with which we will study are ones of "constrained choice" (socio-economic
influences-land tenure, farm size, market system, infrastructure, government actions,
cultural influence); that is how limited quantities of inputs are allocated between
alternative production uses of agricultural as well as non-agricultural activities, and of
how limited income are allocated between the many products consumers may buy.

Evolution of the Subject Matter

The application of economic theory to agricultural problems has gone through a process
of slow acceptance. The origin of the field, now known as Agricultural Economics reach
back in many directions and over a long period of time. The filed came from two separate
sources: - from the physical sciences, and later, from economic theorists.
Since agriculture and its production systems are influenced by physical (topography,
climate), social (tradition, culture) and economic (market, infrastructure) factors, a
comprehensive body of science, which includes physical science, social science, and
economic theory, is fundamental.
The severity and length of the agricultural depression beginning in the 1880s caused
increasing attention to be devoted to its causes and possible solutions. Primarily
agronomists and horticulturalists made the most notable early efforts. They recognized
 that the ability to grow plants and animals was not sufficient to make farmers succeed.
Agricultural Economics is an important subject area because it is concerned with
society's basic needs. Getting food and other agricultural products to all people in the
world in the right form at the right time is an extremely complex process.

1.2 Role of Agriculture in Economic Development

The contribution of agriculture to economic development is crucial. The contributions lie
in:
1. Providing food to the rapidly expanding population
2. Increasing the demand for industrial products and thus necessitating the
expansion of the secondary and tertiary sectors, i.e. Market Contribution.
3. Providing additional foreign exchange earnings for the import of capital goods
for development through increased agriculture exports, i.e. Product
Contribution
4. Increasing rural incomes to be mobilized by the state
5. Providing productive employment, i.e. Factor Contribution
6. Improving the welfare of the rural people
According to Kuznet (1960), the contribution of the agricultural sector to economic
development constitutes three elements:
A) Product contribution
B) Market contribution
C) Factor contribution
A. The product contribution: developing countries mostly specialize in the production of
a few agricultural goods for exports. As output and productivity of exportable goods
expand, their exports increased and result in large export earnings.

Thus agricultural surplus leads to capital formation when capital goods are imported with
foreign exchange. Foreign exchange earnings can be used to build the efficiency of other
industries and help the establishment of new industries by importing scarce raw
materials, machines, capital equipment and technical know-how. This is what is called
the product contribution of agriculture, which first augments the growth of net output of
the economy, and then the growth of per capita output.
B. The market contribution: a rise in rural purchasing power, as a result of the
increased agricultural surplus there is a great stimulus to increased development. The
market for manufactured goods is very small in developing countries where peasants,
farm laborers and their families are too poor to buy factory goods. Increased rural
purchasing power caused by expansion of agricultural output and productivity will tend
to raise the demand for manufactured goods and extend the size of the market. This will
lead to the expansion of the industrial sector. Moreover, the demand for such inputs as
fertilizers, better tools, implements, tractors, irrigated facilities in the agricultural sectors
will lead to the expansion of the industrial sector. Besides, transport and communications
will expand. The long-run effect of these expansions will be higher profits, which tend to
increase the rate of capital formation through their investment.

C. The factor contribution: a developing country needs large amount of capital to

finance the creation and expansion of the infrastructure and for the development of basic
and heavy industries. In

the early stages of development, increasing the marketable surplus from the rural sector
without reducing the consumption levels of farm population can provide capital. Labor as
the principal input can be a source of capital formation when it is reduced on the farm
and employed in other productive works. One major possibility of increasing farm
receipts and thus capital formation is by mobilizing increased farm incomes through
agricultural taxation, land taxes, agricultural income tax, land registration charges, school
fees, fee for providing agricultural technical services and other types that cover the cost
of services provided to the farm population.
 In general, the agriculture sector occupies a central place in the national economy. The
manner in which it contributes to the economic development can be depicted in the chart
below:

Agriculture

National Trade Foreign

Food income A way of
exchange
Rural life
Industry development Vocation
Employment

1.3. Theories Role of Agriculture in Economic Development

Dear class, we are now ready to briefly summarize the changing views of role of
agriculture in economic development since 1950s and their impact in economic policy,
and we systematically place the theories in historical perspective.
To begin with, the history of agricultural development ideas can be divided roughly in to
three periods:

i) The Economic Growth and Modernization Era (1950-1960s)

ii) The Growth-with-Equity Period (1970s)
iii) The Economic Growth and Policy Reform Period (1980s)

I. The Economic Growth and Modernization Era

Economists traditionally have analyzed agricultural development in terms of its
relationship to the growth of the overall economy. The first notable Physiocrats viewed
agriculture as the engine of economic growth, arguing that agriculture was the only
activity capable of generating a surplus large enough to stimulate growth in other sectors
of the economy. Classical economists, on the other hand, believed that diminishing
marginal returns to agricultural land would eventually lead to overall economic
stagnation.

Most Western Development Economists of the 1950s did not view agriculture as an
important contributor to economic growth, and assigned passive role of agriculture to
economic development. Those economists of course knew little about tropical agriculture
or rural life, and thus equated development with the structural transformation of the
economy, i.e., with the decline of agriculture’s relative share of the national product and
of the labor force and the dominance of the industrial modern sector.

Many development economists of 1950s and 1960s concluded that since economic
growth facilitated the structural transformation of the economy in the long run, the rapid
transfer of resources (especially surplus labor) from agriculture to industry was an
appropriate short-run economic development strategy.

In an article entitled "The role of agriculture in economic development" (1981) Johnston

and Mellor drew on insights from the Lewis model to stress the importance of agriculture
as a motive force in economic growth. They argued that far from playing a passive role in
development, agriculture could make five important contributions to the structural
transformation of third word economies: Thus, agriculture
 Provide labor, capital, foreign exchange, food to growing industrial sector, and
 Supplies a market for domestically produced industrial goods.
Johnston and Mellor's article and William H. Nicholl's influential article "The place of
agriculture in economic development" (1964) were instrumental in encouraging
economists to view agriculture as a potential positive force in development, and they
helped to stimulate debate on the interdependence of agriculture and industrial growth.
In addition, Western development economics was challenged (1960-70s) by the
emergence and rapid growth of Radical Political Economy and Dependency Models of
Development and Underdevelopment.

The radical political economy models have their roots in the writings of Lenin (on
imperialism), Kautsky (on agriculture), Paul Baran and other Marxist economists.

The dependency interpretation of underdevelopment was first proposed in 1950s by

economic commission for Latin America under the leadership of Raul Prebisch. The
basic hypothesis of this perspective is that underdevelopment is not a stage of
development but the result of the expansion of the world capitalist system. It is a
condition of impoverishment brought about by the integration of the Third World
economies in to the world capitalist system. Dependency theorists implicitly argued that
low-income countries were pauperized through both a process of unequal exchange with
the industrialized world and repatriation of profits from foreign owned businesses.
Capitalist growth in Third World countries was stunted by policies favoring import
substitution of luxury goods and export of agro-industrial products often produced on
large estate farms. These policies limited the internal market for consumer goods
(including food and other agricultural products) and led to impoverishment of the mass of
small farmers.

To sum up, radical political economists made several important contributions to the
understanding of agricultural and rural development. First, they stressed on the
importance of understanding each country’s economic development in the context of that
country’s historical experience. Second, in arguing that rural poverty in the third world
resulted from the functioning of the global capitalist economy, they focused attention on
the relationships between villagers and the wider economic system. Third, they attacked
the ‘mutual benefit claim’ of international trade by development economists - the
assertion that economic relations between high and low-income countries could be
shaped in a way to yield benefits for all.

Both the western dual-sector model economics and the radical analysis of the 1960s
suffered from the following shortcomings:-
 Inadequate attention to the need for technical change in agriculture.
 Lack of attention to the biological and location-specific nature of agricultural
production process.
 Lack of a solid micro foundation based on empirical research at the farm and
village level.

II. The Growth-with-Equity Period (since 1970s)

Dear class, recognition of some of the shortcomings of the above model were important
elements leading to a reevaluation of the goals and approaches of development
economics and of the role of agriculture in reaching those goals in the period following
1970. Then around 1970 mainstream Western Economics began to give greater attention
to employment and the distribution of real income. This shift in emphasis spills over from
three reasons:-
a) The goal of economic growth for Third Word countries was seriously questioned
and the need to redefine the goal of development more broadly was required.
b) From the 1960s onwards it became apparent that rapid economic growth in some
countries (Pakistan, Nigeria and lran) had harmful and in some cases disastrous
results. The development disasters ranged from civil war to the establishment of
murderous authoritarian regimes.
c) Though in countries were rapid economic growth had not contributed to social
turmoil, the benefits of economic growth were not trickling down to the poor and
the income gap between rich and poor was widening.
Thus growth-with-equity concerns stimulated a number of important theoretical and
policy debates.
 The first concerned the interactions between income distribution and rates of
economic growth. The analysis focused on changes not only in the size of
distribution of income during the course of development but in the functional
distribution as well (for example impact of economic growth on small farmers, on
women…).

 The second centered on employment generation and the possible existence of

employment-output trade-offs in industry and agriculture (for example population
growth, rural-urban migration and its impact on agricultural production and output;
urban industry and its capacity to employ new entrants to the labour force…).

Taking these and other issues, new concern was raised about creating rural jobs in
agriculture and industry, and in the relative output and employment generation capacities
of large and small enterprises. In agriculture debate centered on how much emphasis
should be given to improving small farms as opposed to creating large and more capital-
intensive farms and plantations. In industry, the small-versus-large debate led to
empirical studies of rural small-scale enterprises.

IMPLICATIONS FOR AGRICULTURE

The change in orientation of development economics implied much greater role for
agriculture in development programs because:
i) The majority of the poor in most developing countries live in rural areas and
because food prices are a major determinant of the real income of both for rural
and urban poor, the low productivity of agriculture was seen as a major cause of
poverty.
ii) Urban industry had generally provided few jobs for the rapidly growing labor
force; development planners increasingly concentrated on ways to create
 productive employment in rural areas, if only as a holding action until the rate of
population growth declined and urban industry could create more jobs.

It becomes apparent that if agriculture were to play a more important role in development
programs, policy makers would need a more detailed understanding of economics. That is
why there was a rapid expansion of micro-level research on agricultural production and
marketing, farmer decision-making, the performance of rural factor markets, and rural
non-farm employment in 1960s and 1970s.

III. The Economic Growth and Policy Reform Period of 1980s

Students, we have so far discussed two views concerning the role of agriculture in
economic development: The Economic Growth with Modernization Era, and the Growth-
with-Equity Period. We are now remaining with the third view. Let us dwell on it and
have a clear picture.
This period witnessed a major shift in development economics towards economic growth,
policy reform and market liberalization. The shift from microeconomic analysis of
agricultural projects to macro policies was considered as a cutting edge of development
in food policy analysis, and it was the dominant development theme of the 1980s. In
Africa, policy reform was strongly advocated in the Word Bank's report, and structural
adjustment programs were launched or in underway in the mid of 1980s. In Asia,
agricultural development proceeded more rapidly than expected and can be considered as
major success story of the 1980s. For example, India achieved food self-sufficiency in
grain production in the mid-1980s.

In the policy reform era, a major analytical advance in the way economists viewed policy
was the development of the Food Policy Analysis Approach. The approach synthesized
work in a number of areas, outlining how to trace the effects of macroeconomic
adjustments as well as sectorial level policies on food production, income generation, and
consumption patterns of the poor. The food policy analysis approach has set two
distinguishing characteristics apart from the production incentive school, and the basic
needs school

The production incentive school emphasizes the need to get prices high, i.e. raising
agricultural price in order to increase farmers’ incentive to produce. The basic needs
school stressed the need to keep price low in order to ensure that the poor could afford an
adequate diet.

The Food Policy Analysis Approach recognized that the production concerns of the
production incentive school and the consumption concerns of the basic needs school were
both legitimate, and it showed how they will be linked through food prices. Food policy
analysis hence forms a bridge between the two approaches. In addition it recognized in a
more explicit manner that policy formation takes place in an open economy where the
financial and commodity markets are increasingly integrated; thus calls for the
integration of food and agricultural policy with macro policies such as the exchange rate
and interest rates, in a world economy framework.

In the mid-1980, policy makers in many countries become interestingly concerned about
Food Security. Despite the achievement of national food self-sufficiency in major Asian
countries, it was apparent that a large percentage of people neither had the access to
resources (land, credit) nor the purchasing power to secure their food needs. Thus many
works stressed that food security should involve assuring both an adequate supply of food
(through own production and trade) and access by the population to that supply.

Tips!!! Food Security can be defined as access by all people at all times to enough food
for an active and healthy life. Similarly, it could be defined as the absence of hunger and
malnutrition.
The basic concepts are:
 Sufficiency of food (calorie requirement)
  Access to food (produce, purchase, gift)
 Security (vulnerability, risk)
 Time (chronic, transitory)

Acid rain, pollution, environmental degradation, and sustainable agriculture also emerged
as central issues in the 1980s, especially following the release of the influential Bruntland
Report, ‘Our Common Future’. Concerns about sustainability were raised at several
levels: local, institutional, national, and global. Increasing population pressure on fragile
environments led to worries that existing farming systems in many parts of the world
were no longer sustainable.

Summary and Lessons

To begin with, in the 1950s and 1960s, economists had developed simple two-sector
models to analyze the role of agriculture in relation to industry. During the 1970s analysts
developed an increasingly detailed micro theoretical and empirical understanding of the
rural economy with the wider economic system. During the 1980s, however, many
economists realized the importance of broader macroeconomic analysis for the quest of
better understanding. So by the end of 1980s development thinking had come nearly full
circle. From all these views, we now can draw some important lessons for 2000s.
Lessons for the future can be summarized as:
a) Population pressure will reemerge as critical issue, and rapid population will
press hard on natural resource base of Africa and Asia. In addition, political
instability will continue to undermine African economic progress.
Comprehensive and integrated policies of population, agriculture, and natural
resource use are important
b) The success of macroeconomics policies to stimuli agricultural growth depends
on:
  Sufficient domestic and international effective demand,
 Public investment in research and rural infrastructure, and
 Political environment conductive to mobilize resources
So, countries should give due attention for the interdependence and impact of
national and international economic and political policies for domestic economies.
c) Third world economists and agricultural economists are concentrating on
purely economic and technocratic issues, but they have to broaden their
analysis to take into account other factors on food and agricultural policies
like political forces, institutional change, transaction costs and market failures.

According to research findings and development experiences of developed and

developing economies for attaining rapid, broad-based agricultural growth and
rural development, the following components should be emphasized:

 Strengthening the institutional bases of smallholder agriculture through

research, training and extension.
 Policy analysis, and analysis of agricultural development issues in broader
macro-economic frame work
 Studying impact of International trade on peasants
 Food aid and food security in disastrous seasons
 Agricultural mechanization and specialization
 CHAPTER TWO
1.4. Agriculture in Economic Development (Theories)
Dear classs, we have seen that there has been a shift away from an earlier "industrial
fundamentalism" to an emphasis on the significance of growth in agricultural production
and productivity for the overall development process of a given country. As economists
has been involved in the analysis of development problems in nations characterized by
static agricultural technology and rapid growth in demand for agricultural products,
attention has shifted increasingly to a concern with the conditions under which an
agricultural surplus can occur and be sustained.

Now we are in a position to investigate different descriptive approaches that have been
developed by political economists to trace back why agricultural and economic
stagnation has occurred in developing countries and the possible remedial measures
thereof.

Three approaches have been used frequently in attempts to stake out the boundaries of a
new development economics:
I. The Growth-Stage/Leading Sector approach (Walt Rostow)
II. The Dual-Economy approach (Arthur Lewis)
III. The Structuralism and Dependency perspectives (Raul Prebisch and Paul Baran)

1.4.1. Growth stage theories

The earlier growth stage literature was primarily a product of the 19th century German
Economic Historians (because Germany was then a latecomer to industrialization,
relative to Britain) and the promotion of industrialization and economic growth were
regarded as major goals of German nationalism. With the rebirth of interest in economic
growth, economists have joined together in an effort to satisfy the demand for a general
development theory by dividing economic history into discrete linear segments.
The general growth-stage development theories through historical perspective are:
The German tradition
The Structural transformation, and
The Leading sector

A. The German Tradition

There were two major traditional schools in the 19th century German literature of growth
stage theories:-
 Fredric List and the German historical school
 Karl Marx and the Marxists school

Both List and Marx emphasized five stages in the development process, but their stages
were based on entirely different principles.
List’s stages are Marxist stages are
- Savage - Primitive communism
- Pastoral - Ancient slavery
- Agricultural - Medieval feudalism
- Agricultural manufacturing - Industrial capitalism
- Agricultural-manufacturing - commercial - socialism

In List's view, progress in agriculture could occur only under the stimulus of export
demand or the impact of domestic industrial development. Of these, domestic industrial
development was considered as the more important generator of agricultural progress
because of the double impact of the increased demand for farm products from non-farm
sector and the development of more efficient production methods. This will be made by
encouraging industrialization through the protection of "infant industries" to promote
both import substitutes and industrial exports.
Marx based his classification on changes in production technology and associated
changes in the system of property rights and ideology. In Marxist system, economies
evolve through these stages, driven by the forces generated by struggles between two
classes, one controlling the means of production to combine with labor and the other
possessing no means of production but labor. The class struggle reflects the continuing
contradiction between the evolution of economic institutions and progress in production
technology.

B. Structural transformation
List’s last three stages can be termed as primary, secondary and tertiary production
stages. According to structural transformation theorists (mainly Fischer and Clark), the
steady shift of employment and investment from the essential primary activities to
secondary activities and still to greater extent into tertiary production accompanies
economic growth. The economic growth, which accompanies this transformation, is
achieved by:
 Increases in output per worker in any sector, and
 Transfer of labor and capital from sectors with low output per worker to sectors
with higher output per worker.

Fischer, as did List, held that such a transition was closely associated with the advance of
science and technology.

Criticism
i) Official statistics conceal that there is high proportion of time spent by the rural
population in secondary and tertiary activities and this disproves the greater
share to be given for secondary and tertiary activities to foster economic growth.
 ii) Dovring demonstrated that the size of the agricultural sector relative to the rest
of the economy limits the rate at which workers can be shifted to nonagricultural
employment. In an economy that is primarily agricultural, the share of labor in
agriculture will decline slowly even when the growth of employment in the
industrial and service sectors is very rapid.
iii) According to Johnston and Kelby, the domestic demand for the commodities
produced by the agricultural sector is limited by the small size of the urban-
industrial sector and the low income of workers in the industrial and service
sectors.
iv) The above demand side constraint in turn limits the farm sector demand for
manufactured consumer goods and purchased input (fertilizer, farm equipment,
etc).

C. Leading Sectors
The decline of professional interest in the Fischer-Clark stages during the 1960s was due,
at least in part, to the emergence of Rostow’s ‘leading sector’ growth stage approach.
Like the traditional German historians, Rostow identified five growth stages in the
transition from primitive to a modern economy. These are:
Stage 1: The traditional society, characterized by stagnant, subsistence agriculture and a
stratified society;
Stage 2: The precondition for take-off, characterized by change through external forces,
infrastructure development, increasing exports, and a new social and political
elite;
Stage 3: The take-off, characterized by investment of greater than 10 per cent of GDP,
high growth manufacturing sectors, and institutional change favoring high
growth;
Stage 4: The drive-to-maturity, characterized by self-sustaining growth, the impact of
growth spreading to all areas, and decreasing social inequality;
Stage 5: The high mass consumption, characterized by a shift in sectoral dominance to
durable consumer industries and growth of the service sector and welfare
capitalism.

It was argued that developing countries were at stages one and two while developed
countries had passed stage three. The stages except the first and last, are transition stages
rather than equilibrium positions. Rostow was primarily concerned with the process by
which a society moves from one stage to another, and with the objective of providing
policy guidance to the leaders of the developing countries. Rostow's approach starts from
the premise that "deceleration is the normal optimum path of a sector, due to a variety of
factors operating on it, from the side of both demand and supply." The problem of
transition and hence of growth become how to offset the tendency for slow progress in
individual sectors to achieve growth in the total economy.

On the supply side, Rostow introduces the concept of sequence of leading sectors, which
succeed each other as the basic generators of growth. On the demand side, declining price
and income elasticities of demand are introduced as technical factors dampening the
growth rate of leading sectors and transforming them to sustaining or declining sectors.
Technology plays an important role in both the emergence of new leading sectors and the
elimination of old sectors.

The above three growth stage theories (List, Marx and Rostow) so far reviewed treat the
transition from an agricultural to an industrial society as the major problem of
development policy. In an open economy, however, agriculture and primary sector
industries may act as leading sectors and carry the burden of accelerating growth. In
addition, agriculture must provide food for a rapidly increasing population, provide mass
market, generate capital investment and labor force for new leading sectors outside of
agriculture.
1.4.2. Dual Economy Models
The dual economy models identify agriculture as the traditional sector and industry as the
modern sector and attempt to trace the relationship (or lack of relationship) between the
two sectors in the process of development. Broadly, the dual economy model can be
categorized into two major parts: static and dynamic dualism.

A. Static dualism
There are two distinct variations within this model:
i) Sociological dualism, which stresses cultural differences leading to distinct
Western and non-Western concepts of economic organization and rationality.
ii) An enclave dualism, which emphasizes the improper (perverse) behavior of
labor, capital and product market through which the traditional and modern
sectors interact.

Sociological dualism: Boeke (1910) argued that Western economic thoughts were not
applicable to tropical colonial conditions and urged the need for a separate theoretical
approach to the problems of such economies. Where there is a sharp, deep, and broad
cleavage dividing the society into two segments, many social and economic issues take
on a quite different appearance and western economic theories lose their relation to
reality and hence their value.

The major policy implication of Boeke analysis is the futility of attempting to introduce
Western technology and institutions to the Asian economic systems. Despite some
criticisms (alleging him in unfamiliarity with Western thought) he has got acceptance in
the intellectual elite and the bureaucracy in the economic policy and planning agencies. It
provided an intellectual rationalization for an industrialization policy that avoids
investment in agricultural inputs (fertilizer, chemicals, equipment) in favor of other heavy
industry and import substitutes.
Boek’s “backward bending supply curve” provides a rationalization for failure to achieve
productivity gains in agriculture, in spite of: -
a) Failure to invest in agricultural research, education and manufactured input.
b) The adoption of price policies that provide only minimal incentives to use
available technology.
Enclave dualism: Enclave dualism encompasses (encloses) a high productivity sector
producing for export coexisting with a low productivity sector producing for the domestic
market. Higgins, explicitly rejecting the sociological dualism, traces the origin of dualism
to differences in technology between the modern and subsistence sectors. In his view, the
modern sector concentrates heavily on the production of primary commodities in mining
and plantations. It imports its technology from abroad, which is basically laborsaving.
This is in contrast to the technology employed in the traditional sector, which is
characterized by wide substitution possibilities between capital and labor and the use of
labor-intensive production methods. Expansion of the modern sector is primarily in
response to demand in foreign markets, and its growth has relatively little impact on local
economy.

B. Dynamic Dualism
This model is the work of Jorgenson, Fei and Ranis accepting the static typology of
‘sociological’ and ‘enclave’ dualism as essentially valid for a broad class of
underdeveloped economies (Asia, Africa and Latin America) with large indigenous
populations.
According to them, these economies are characterized by the coexistence of two sectors: -
 A relatively large, stagnant and subsistence agricultural sector
 A relatively small but growing commercialized sector.
The main thrust of dynamic dual-economy models has been to explore the formal
relationship that would permit an escape from the Malthusian trap-the inevitable
consequence of attempting to introduce new technology into native agriculture, and from
the lack of effective labour and capital market relationships between the modern enclave
and the traditional economy. Indeed productivity increase in agriculture become, in the
dynamic models, the mechanism that permits continues reallocation of labour from the
agricultural to the industrial sector.
In the model, the subsistence sector is characterized by:
a) Disguised unemployment and underemployment
b) Institutionally determined wage rate for agriculture
c) A marginal productivity of labor lower than the wage rate.
d) Fixed land input.
Under these conditions it is possible to transfer labor form the subsistence sector to the
commercial industrial sector without reducing agricultural output and without increasing
the supply price of labor to industrial sector during the early stages of development.
Indeed, the transfer of one worker from the subsistence to the non-subsistence sector
results in an agricultural surplus, which then becomes available as an investment fund for
the development of the industrial sector. The model also envisages additional agricultural
surpluses as a result of productivity increase from labour-intensive capital improvements.
Agriculture in this system, contributes both workers and surplus production in the form of
a wage fund for the expansion of the industrial sector.

MPLi
Wage
Rate

Wi MPLi

01 L1 L2 02 qty of lab
agriculture sector
industrial sector

Given that: L1 is the labor shortage point

 L2 is the labor commercialization point
Wi is the supply curve of labor

If agricultural labor force supply exceeds O2 L1, Marginal Productivity of Labor (MPL)
of agriculture will be is zero. If agricultural labor force supply exceeds O2 L2, MPL
exceeds wage rate. If the demand for labor in industrial sector exceeds O1L1, then
transfer of labor form agriculture to industry leads to decrease food output which then
leads to increase food price and consequently to increase wage rate in industrial sector.
Similarly, if the demand for labor in industrial sector tends to exceed the O1L2, wage rate
in agriculture and industry rise together.

Two points are important to discuss in relation to the above results:

1. The Point when the Marginal Value Product (MVP) of agricultural labor begins to
rise above zero, shortage point, the transfer of one worker from subsistence to
non-subsistence (commercial-industry) sector doesn't releases a sufficiently large
wage rate to support his consumption. The result is a worsening of the terms-of-
trade (TOT) against the industrial sector.

2. The point when the MVP of labor exceeds the wage rate in agricultural sector,
commercialization point, a rise in the industrial wage is required if the non-
subsistence sector is to compete effectively with the subsistence sector.

According to the Fei and Ranis model, the major functions of the public policy are:
 To design institutions that transfer the ownership of such surpluses from the
agricultural sector to the government or to the entrepreneurs in the commercial-
industrial sector, and
  To avoid dissipation of potential surpluses through higher consumption in the rural
sector.

1.4.3. Dependency Perspectives

The growth- stage approach looks largely within national economy for the timing of the
transition to more advanced stages. It also looks within the national economy for the
transformation of industrial structures. However, the dependency perspective insists that
the key to differential development between developed countries of the center and the
underdeveloped countries of the periphery is to be found in the growth of the
international economic system in the word system.

The distinguishing feature of the dependency perspective is the dominance of the

economic forces operating in the international system over those operating within
national system.
The different models are:
1. The structuralism model
2. The under development perspective
3. The agrarian development in the periphery.

The structuralism model The central argument of the structuralist school is that the countries
of the periphery have experienced long-run deterioration in the terms-of-trade (TOT) with the
center due to:
 Low price and income elasticity of demand in the center for the products of the
periphery
 High demand elasticity for imports from the center by the periphery

Illustration: Productivity growth, measured in output per worker, is slower in primary

production (source of export by the periphery) than in
the industrial sector (source of export by the center). Similarly, the periphery sells its
products in competitive market (homogeneous and undifferentiated) while the center in
monopolistic market (differentiated goods like consumer durables and industrial
equipment)

In the structuralisms view, the great industrial centers not only keep for themselves the
benefits of the use of new techniques in their own economy, but also are in a favorable
position to obtain a share of that deriving from the technical progress of the periphery. As
a consequence of differential demand elasticity’s and differential rates of productivity
growth, the countries of the periphery are forced into the unattractive alternative of
growth strategy by restraining imports, by tariff protection or subsidies to import
substituting industries.

The Underdevelopment perspective

The Orthodox Marxian theory assume that the force of technological change (the forces
of production) interacting with changes in institutions (the relations of production) and
with culture and ideology (the superstructure) cause economic growth in the advanced
and backward countries to converge along the common path. This is what is termed as the
convergent growth hypothesis, which states that developed countries show to the less
developed countries the image of thier own future. The perspectives insist that the
underdevelopment of Africa, Asia and Latin America has been a product of the same
forces that have led to development in Europe and North America. The integration of
backward areas into the world capital system is viewed as a major source of
underdevelopment. So it appealed to nationalist sentiment because it focuses reform
effort on inequalities in the international system rather than on domestic policy.

Agrarian Development in the Periphery

Alain de Janvry has elaborated the implications of the dependency perspective for
agrarian development. In the de Janvry's view the implications of the dependency
perspective for agrarian development has been seen that rural poverty particularly in the
Latin American context is explained by a three lever chain of exploitive relations:
a) At the international level between the dominant countries of the center and the
dependent countries of the periphery, there had existed unequal exchange between
raw materials and industrial capital goods.
b) At the sector level between capital intensive industry and the labor intensive
sector, the former produces commodities for the upper class in the periphery and
for the word market, while the latter produces mass consumption with cheap labor;
the type of cheap food for the laborers in commercial sector of agriculture, and
which in turn produces cheap food for the urban- industrial sector.
c) At the social level between landlords and agricultural laborers driven by the need
for cheap food and cheap labor in the urban sector.

The marginalization of peasants in the periphery is a consequence of the peculiar pattern

of dependent industrial development, i.e. wages and incomes remain low in rural areas
because capital-intensive industrial development creates little demand for labor, and
labor-intensive industrial development can expand only as long as wage rates remain low.

In the center, the distribution of income between capital and labor determines growth.
The center is the primary consumer of its own output, and wages are an important source
of demand as well as a cost of production. In the periphery low wages are an important
determinant of the ability to export labor-intensive primary and industrial products and to
import capital equipment and luxury consumer products.

The implication of dependency theory of agricultural development stands in sharp

contrast to the growth stage and dual economy theories in:
 The growth stage theories attempt to explain the process of transformation from a
primary agrarian to an industrial economy.
  In the dynamic dual economy models incorporation of peasants in to the market
results in the disappearance of dualism.
 The dependency perspective, however, attempts to explain why the periphery
remained trapped in a backward agrarian state. They view incorporation of rural
areas in to the market is the source of marginalization and it perpetuates rather than
erodes dualism.

1.5. Theories (Models) of Agricultural Development

Dear classs, in line with the strong analysis economists have made to investigate the very
causes for agricultural stagnation and underdevelopment in developing countries that we
have discussed so far; they have also developed different models (theories) of agricultural
development to influence decision makers. Let us now go through (review) some of these
models and look their implication to East African economy, and critically evaluate the
internal strengths and weakness of each model.

It should have to be recalled that, the problem of agricultural development is not that of
transforming a static agricultural sector into a modern dynamic sector, but of accelerating
the rate of growth of agricultural output and productivity, consistent with the growth of
other sector of a modernizing economy.
Similarly, a theory of agricultural development should provide insight into the dynamics
of agricultural growth [changing sources of growth] in economies whose output growth
from an annual rate of 1.0 percent or less to 4.0 percent or more.

Agricultural policy makers are applying one or more models from theories for policy
formulations and realizing the development objectives of the agricultural sector.
Reviewed literature on the topic under consideration came up with nine major
classifications. The models of agricultural development are:
 Conservation model
  Frontier model
 Industrial fundamentalism model

 Urban industrial impact model (location model)

 Diffusion model
 High payoff input model
 Induced innovation model
 Cultural change first model and community development movement
 Neo-Marxist and dependency model

The theories of agricultural development, based on Ruttan and Hayami, can be seen
under five major models and their practical implications to East Africa could be reviewed
as follows (nevertheless the models consist of in total nine): -
1. The resource exploitation model
2. The conservation model
3. The location model
4. The diffusion model
5. The high payoff input model
These are not regarded as models of stages in the agricultural growth but as changing
sources of growth during the process of agricultural development.

I. The Resource Exploitation Model

According to this model, expansion in the areas of cultivated/grazed has been the main
means of increasing agricultural production, exemplifying in Western history the opening
of new continents such as North and South America, Australia to European settlement
during 18th and 19th centuries. Similar events were also seen, though in slow pace, in Asia
and Africa, and to some extent in the case of East Africa in Socialist settlement issues.
Population pressure resulting in the intensification of land use in the existing villages was
followed by pioneer settlement programs, the establishment of new villages, and the
opening up of forest or Jungle land to cultivation with a series of changes from Neolithic
forests to shifting cultivation on bush and grassland to short fallow annual cropping.

The implications of agricultural development in newly settled regions are viewed through
the staple model and the vent-for-surplus model

The staple model developed by Harold A. Innis explains the rapid growth of commodity
production and exports in the newly settled areas of North America. The vent-for-surplus
model developed by Myint explains the rapid growth of production and trade in a number
of tropical countries during the 19th century. He further explained that peasant export
production usually expanded as rapidly as that of plantation sector while remaining self
sufficient in production of food crops.

The explanation is that surplus land and labor capacity enabled peasant producers to
expand production rapidly under the stimulus of new markets opened by the reduction of
transport cost. This is exemplified in the production of rice in Asian countries. In Latin
America and Africa the opening up of new lands awaited the development of
technologies for control pests and diseases in the tsetse fly infested plains and
productivity problems of soil and incapability of maintaining fertility was a problem.

The primary concern of the scholars (staple and vent for surplus theories) were to explore
the conditions by which underutilized natural resources could be exploited to generate
growth in agricultural output and to identify the processes by which agricultural surplus
could be mobilized to generate growth in the whole economy.

The major problems (criticisms) observed were:

 Little insight in to the problem of how to generate growth in productivity.
  Diminishing marginal productivity from additional increment of resources was
given less attention.
 Lack of due emphasis to the issue of sustainability
In order to sustain agricultural growth it is necessary to make a transition from resource
exploitation to:
a) Development of resource conserving or enhancing technologies such as crop
rotation and manuring
b) Substitution of modern industrial inputs such as fertilizers for natural soil
fertility
c) Development of modern fertilizer responsive crop varieties.

II. The Conservation Model

The conservation model of agricultural development evolved from the advances in crop
and livestock husbandry and the concepts of soil exhaustion suggested by soil scientists.
This theory was reinforced by the concept of diminishing returns to labor and capital
applied to land and the traditions of ethical, aesthetic and philosophical naturalism.

The new husbandry permitted the intensification of integrated crop-livestock production

through the recycling of plant nutrient and animal manures to maintain soil fertility.
Advances in technology were accompanied by the consolidation and enclosure of farms
and by investments in land management; thus the inputs used in this conservation system
of farming were largely supplied by the agricultural sector itself.

The nature and principle of soil and plant nutrition led to a doctrine of soil exhaustion
which states that the danger of soil exhaustion (depletion) was so great that any
permanent system of agriculture must provide for the complete restoration to the soil of
all the elements removed by the crop. And it was also extended to include the
maintenance of the mineral content of the soil.
Summarized in economic terms, the doctrine asserts that natural resources are scarce, that
the scarcity increases with economic growth and that resources scarcity threatens to
impair levels of living and economic growth.

Criticism
 The perspective of agriculture was seen as a relatively self-contained system.
Therefore, industrial inputs were not viewed as playing a significant role at either
the extensive or intensive margin.

 An attempt to explore the economic importance of conservation principle,

particularly in the field of fertility maintenance, as a guide to agricultural
development practiced lately.

By the early 1950s as new body of literature embracing both technical (soils, plant
nutrition, agronomic, engineering) and economic consideration was leading to a more
rational view of both the farm management and public policy aspects of soil fertility and
the role of land in agricultural development. With the new perspectives in the theory, it
has been possible to analyze and test the resource scarcity more rigorously using the
study of scarcity and growth by Barnett and Morse taking strong and weak versions of
the scarcity hypothesis.

The strong scarcity test is based on change in the unit cost of extractive output. The
definition is based directly on the classical notion that as the quantity of land that is
brought into production declines, larger and larger dose of labor and capital are required
to produce a unit of extractive output.

The weak scarcity test is based on change in the relative price of the extractive products.
A rise (decline) in the price of the extractive produce relative to the general price level is
taking to indicate an increase (decrease) in scarcity. The weak scarcity test is generally
regarded as a more relevant measure because the price of extractive products reflect the
effect of expectations regarding the future costs of exploration, discovery, and extraction
of productivity growth in the extractive industries.

In spite of the some criticisms, agricultural development efforts carried out within the
framework of the conservation model can continue to make an important contribution to
productivity growth.

To evaluate the relevance of the model in East Africa, it is helpful to assess the ground
that justifies the application of the model. According to the ‘East African Highlands
Reclamation Study’, the ecological and economic loses are proved to be tremendous. In
1983, degradation was estimated to cost East Africa for about 600 million birr per annum,
which was found to be equal to 14 per cent of the contribution of agriculture to GDP of
the time.
In the current socio-economic development policy of East Africa, the development
strategy of agricultural sector emphasizes that the development effort should be in line
with a guiding principle of conservation based agricultural development strategy. As a
result, conservation model has explicit legal and policy bases of application in the
country. In general after considering ADLI as priority task in the macro development
strategy in current East Africa, there are few new inclusions in relation to agricultural
development efforts in the policy frameworks ensuring the application of conservation
model. The inclusions are:

 The establishment of Environmental Protection Authority, with relevant regional

and zonal offices, that formulates and implements rules and regulations regarding
the use of land, water and natural resources of the country.
  The recent regulation enacted to control the use of agricultural chemicals impacts
on the control of various diseases, insects, weeds and vegetable pests that will in
turn contribute a lot to the sustainability of agriculture.
 Pertaining East Africa being signatory of International Convention on
Environmental Protection, which strengthens efforts to control the existing and
potential environmental degradation.
 The attention given to pastoral farming system, which is practically at a
premature, is also another implication to be looked on environmental conservation
issues.

III. The Location model

Dear class, in the previous models locational divergences in agricultural development and
impact of development of nonagricultural sectors were not brought into agricultural
development process. The location model was initially formulated to explain geographic
variations in the location and intensity of agricultural production in an industrializing
economy. This model primarily explains the changing distribution of commodity
production in response to changes in transport cost and variations in the national
environment. Schultz formulated the implications of the location model for modern
agricultural development in 1953 as:
 Economic development occurs in a specific locational matrix
 These existing matrices are primarily industrial-urban in composition.
 The existing economic organization works best at or near the center of a particular
matrix of economic development and it also works best in those parts of
agriculture which are situated favorably in relation to such a center.
Schultz presented a rationale for the urban-industrial impact hypothesis in term of more
efficient functioning of factor and product market in areas of rapid urban-industrial
development than in areas where the urban economy had not made a transition to the
industrial stage.
Development polices based on the urban-industrial impact of agricultural development
appear to have limited scope in the poorest of the less developed countries, where: -
a) The major problem is to initiate and accelerate economic growth at a sufficient
rate to absorb the growing labor force rather than the geographical distribution of
economic activity.
b) The technology necessary for rapid agricultural growth is not available.
c) The pathological growth of urban centers resulting form population inflow from
rural areas is running ahead of growth in the demand for non-farm workers.

This model can be said partially practiced in East Africa when the first effort was made to
develop the economy in 1945 when the ten-year program of industrial development was
prepared. At this initial stage of the policy practice, industrial development was believed
to change and develop the whole economy, while the remaining sectors were considered
to change and develop as a result of the industrialization. By implication, the model has
also been partially exercised in the subsequent few urban as well as industrial
development policy, planning practices and budgetary allocations of the country.
Although, all policies, plans and strategies on paper insist on the importance of
agriculture sector to East Africa, the practice was far from the promise. As a result, the
agriculture sector of East Africa did not get the right share in budgetary allocation as
much as its contribution and expected role to play in the development of the whole
economy.

IV. The diffusion model

The diffusion of better husbandry practices of crop and livestock varieties has been a
major source of productivity growth in agriculture. Such diffusion must have been an
important element in the evolution of pre-industrialize labor and land intensive
conservation systems. The diffusion model of agricultural development has provided the
major foundation for much of the research and extension effort in farm management and
production economics. Besides, it became the source of institutionalization of the process
of plant exploration and discovery in many parts of the world.

 In Britain for example, the effort was organized through a system of botanic
gardens (to facilitate the transfer, test, and introduction of plant materials)
 The Empirical observation of differences in land and labor productivity among
farmers in any agricultural region from the most advanced to the most backward.

The development of farm management research and extension occurred when research
experiment station were making only a modest contribution to agricultural growth. This
led to a heavy emphasis on the analysis of farmer innovations through survey method,
accounting techniques and statistical methods to determine the sources of productivity
and income differentials among farmers. A further contribution to the effective diffusion
of known technology was provided by the research of rural sociologists on the diffusion
process emphasizing the relationship between diffusion rates and the personality
characteristics and educational accomplishments of farm operators.

The limitation of the diffusion model as a foundation for the design of agricultural
development policies become increasingly apparent as technical assistance and
community development programs failed to generate either rapid modernization of
traditional farms or rapid growth in agricultural output.

The practical application of the model to East Africa is quite relevant. Although the
initial efforts of extension activities on disseminating and demonstrating fertilizer
application, partially improved seeds cultivation and new farming practices have shown
good results, it could not be

sustained. The effort to acquaint farmers with new farming practices has not registered
significant result even at the beginning. The reason for all is that, on one hand, the per
head income of farmers is not so much enabling to go beyond the common expenses. On
the other hand, the prices of inputs are continually increasing so that limited further
diffusion. However, the diffusion model has relatively better importance, wider bases for
practices as well as strong sides for applications as compared to others.

V. The High Pay-Off Input Model

The answer the above boxed question is here: The absence of a body of agricultural
techniques that could be readily diffused from the high productivity to the low
productivity countries and the existence of significant disequilibrium in the allocation of
resources among progressive and lagging farmers led to the emergence of a new
perspective that agricultural technique is highly location specific and that techniques
developed in advanced countries are not directly transferable to less developed countries
with different climate and resource endowment.

In Schultz's opinion, the key to transforming a tradition agricultural sector into a

productive source of growth is investment to make modern

high pay-off input available to farmers in poor countries. Peasants in traditional

agriculture are rational, efficient resource allocators and they remain poor because of
limited technical and economic opportunities. This implies mainly three types of
relatively high productivity investment for agricultural development: -
 In the capacity of agricultural experiment stations to produce new technical
knowledge,
 In the capacity of industrial sector to develop, produce and market new
technical inputs, and
 In the capacity of farmers to use modern agricultural factors effectively.
The high-payoff input model has been accepted and translated widely into an economic doctrine
due to the successful results of the efforts to develop high-yielding modern grain varieties
suitable for tropics. The varieties were highly responsive to industrial inputs, such as fertilizers
and other chemicals, and to more effective soil and water management. The significance of the
high pay-off model is that policies based on the model appear capable of generating a
sufficiently high rate of agricultural growth to provide a basis for overall economic development
consistent with modern population and income growth requirements and thus the model was
heralded as a ‘green revolution’.

As interpreted generally, the model is sufficient to embrace the central concepts of the
conservation, location, and diffusion models of agricultural development.

Criticism
 The model does not incorporate the mechanisms by which resource are allocated among
non- marketable public goods such as how knowledge is transferred, how research is
conducted, and other public and private roles in the course of dissemination of high
payoff inputs.
 The model does not explain how economic conditions induce the development and
adaptation of an efficient set of technologies for a particular society.
 At last, the model does not explain how economic conditions induce the development of
new institutions such as publicly supported agricultural experiment stations to enable
both individuals and society to take fuller advantage of new technical opportunities.

Although the model was criticized for the major problems of inapplicability at the micro level, it is implicitly
applied in East Africa by establishing the Rural Technology Center in order to produce and introduce new inputs
and equipment designed for improved agricultural production and productivity but practically unable to be fully
effective. The Rural Technology Centers (started since long during the Socialist regime and functional still) have
dimensions of diffusion model as well. In fact, the dissemination of materials produced/installed at demonstration
level also failed mostly because of the activities being carried out without the participation of peasants from the very
beginning.