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08 December 2017
What is the Impact of Agricultural Productivity Growth on Economic Growth and Poverty
Alleviation?
There exists a wide range of literature on economic development and roles different
strategies. Recently, the finance minister of India, Arun Jaitley, in pre-budget talks with
unions and farmer groups, showed his desire to achieve the goal of doubling farmers’ income
by 2022. “Farmers groups suggested that India has constantly pursued ‘Food Policy’ and
pressure on the land by creating off-farm jobs,” (cite) reported an article published in the
Economic Times. Current World Bank data suggests that India employs more than 48% of its
labour force in agriculture; however, agricultural sector accounts only a little over 17% of the
GDP. (cite) It is not unreasonable to assume that most of the poor in India or in other
developing countries with surplus labour is engaged in agriculture. Almost half of the
population in the developing world depend on agriculture for their basic needs, and it is
widely argued that the poor benefit much more from GDP growth caused by agriculture than
from an equal or greater amount of GDP growth generated by non-agricultural sectors. This
paper______
Historically, policy makers have seen agriculture as a sector with large amounts of
cheap resources, mainly labour and capital, which can be extracted and utilised in the non-
agricultural sectors. Therefore, pro-agricultural growth has mainly been neglected by them,
since they perceived agriculture as having low productivity, and little or no ability to promote
economic growth. However, W. Arthur Lewis famously argued that agriculture must play a
major role in the early phases of development. By this he means that surplus labour and
increased agricultural productivity will lead to the spillover of labour and capital to different
sector, i.e. structural transformation, which in turn leads to industrialisation and helps the
overall economy grow at a much faster rate. As economies grow, agriculture accounts for a
much smaller share in both, GDP and employment. This process can be enumerated by the
Engel law, which states that income elasticity is positive but less than 1. It implies that as
income grows faster than the demand for food, it results in the declining share of agriculture
in the GDP. This can be clearly seen in the case of land-abundant countries like Canada and
the USA, where labour employed in agriculture was around 40% in both the countries in
1900. Almost after a century, the numbers fell down below 2.5%. This was because of the
countries.” (cite)
These first world nations achieved this by not only promoting agricultural exports
through increased productivity and output that financed imports of machinery needed for
industrialisation but also by inducing spillovers to other sectors and an increased demand in
the industrialised goods. Further, kotwal and Eswaran also suggest that anything we correlate
with economic development would not have been possible if agricultural productivity had not
reached a tremendous level to absolve labour and capital for industrialisation. This can be
better understood with the help of the Labour-Surplus model, which was developed by the
eminent economist, David Ricardo, which assumed two things. First, he assumed that
agricultural production was subject to diminishing returns (since land is scarce) and second,
industrial sector could extract surplus labour from the agricultural sector without affecting
total agricultural production. The modern version of this model was first developed by Lewis
in 1954.
(c)
Figure 1
The model consists of three panels. First is the agricultural production function.
Figure 1–a represents that with a flipped horizontal axis flipped. Moving towards the right of
the horizontal axis shows a decrease in the number of agricultural workers. The figure shows
output as a function of labour per unit of land as oppose to the neo-classical production
function. The function illustrates diminishing returns to labour. Whats unique in this model is
that, it assumes that marginal productivity of labour (MPL) can be zero or negative too. In the
figure, this is beyond point g. So an additional labour either causes no increase in output or its
reduction. Interestingly, the wages does not fall beyond average product of labour since a
labour would not want to work outside her/his farm unless s/he earns more than what s/he
earns by sticking to farming her/his own land. This is called the “subsistence level.”
Second, figure 1-b shows the Marginal Product of Labour in Agriculture. Here too,
the horizontal axis is flipped. As the quantity of agricultural labour decreases, the marginal
product increases. The subsistence level of wage is represented by the dotted line hi. Wages
in agricultural sector remains at this level until point i is reached in the figure. Henceforth,
wages increase as labour is extracted by the non-agricultural sector. The curve shows the
agricultural wage and also the minimum wage the industrial sector should give the farmers to
hire them. Thus, this could be also seen as a supply curve of the labour for the industrial
sector.
Third, figure 1-c shows the industrial demand and supply curves. The demand curves
are denoted by the symbol s, m, and n. They display the downward-sloping demand curve
and exhibits levels of wages that the industry is willing to pay at different quantities of
labour. To draw agricultural workers towards industry, k, on the vertical axis is little above
developing economy with labour surplus starts by engaging completely in agriculture, it can
extract pg in figure 1-b (where the MPL starts rising) to employ them in the industrial sector
with no reduction in total agricultural output. The author argues that as long as the MPL is
greater than zero, if there is a way to transport the food consumed by pg from rural to urban
area, GDP will increase without reducing agricultural output. (cite) However, the excess
labour will be exhausted and will eventually lead to shrinkage of farm output (leading to rise
in prices of agricultural products). This will compel the industrial sector to pay higher wages
to compensate for higher prices. Therefore, there should be a clear set of terms of trades
between agriculture and industry. Thus, there should be attempts to insure agricultural growth
through technological changes to aim at higher level of output to fulfil the demands of both
the rural and industrial workers. In absence of this, the agricultural sector will languish and
prices will rise swiftly and lead to a reduction in the profits of the industrial sector (cite). This
two-sector model exhibits clearly the effects of productivity growth in agriculture which
states shifted the attention in development occurring from economic growth per se to poverty
alleviation. Kotwal and Eswaran argued that, “agricultural productivity growth is the key to
poverty alleviation.” Many economists have hence, calculated the impact of growth in
agricultural productivity on the reduction of poverty empirically and have estimated the
degree to which they are correlated. Theoretically Irz et al have argued that there is a direct
impact of agricultural productivity via generating higher incomes for the farmers (cite).
Since, in developing countries, majority of the population works in the agricultural sector, it
is a major determinant of poverty alleviation. They also argue that an increase in output
reduces the price of agricultural products, hence aiding consumers, especially who are net
consumers of food (since both the urban and rural poor spends majority of their income on
food) than the better off households (cite). Although this highly depends on the trade easiness
and the price elasticity of demand. The more inelastic the demand, the larger the fall in price
and consumers benefit mainly. The producers gain largely when the demand is elastic.
Johnston and Mellor have also theorized the pathway to poverty reduction through
agricultural sector. They believe that a “secular decline of the agricultural sector” aided with
an income elasticity of demand for food that is below unity and declining, and increasing
(cite) The authors further claim that the Lewis two-sector development model fails as he
assumes that there is unlimited supply of labour. Therefore, the extraction of the farm
workers by the industrial sector is driven by the demand for labour in that sector, which they
argue is “limited by the rate of capital accumulation.” They are required to be paid a wage
more than the subsistence level (average product of labour). Thus, they assert that “when
transfer of manpower to the capitalist sector is determined by the demand for labor in that sector, which in turn is limited by the rate of
capital accumulation. In the capitalist sector it will normally be necessary to pay a wage determined by the average product per man in the
traditional sector, plus some margin dictated by transfer frictions, social views of minimum subsist- ence, trade union pressure, and other
institutional forces
They break down labour productivity into two components: land productivity (or yield), and
the land labour ratio, which the author believes can be perceived as an estimator of a
They then use the following regression model on a sample of forty developing nations’ data:
The results (which are statistically significant) suggest that a percent increase in the land–
labour ratio reduces poverty by 0.82%, which the authors find surprising since a percent
increase in yield decreases poverty by 0.91% for the population living on less than a US
Dollar per day. The research suggests that agricultural productivity growth driven by
increasing land productivity can provide an efficient way of reducing poverty, especially for
the poorest of the poor. They also run the regression to check the impact on Human
Development Index (HDI) and find that a percent increase in yields increases the HDI by
0.12%. (cite)
Kotwal
developing countries, the land-to-labor ratio is thus a crucial determinant of the productivity
of the poor in agriculture. Indeed, one reason they are poor is precisely because the land-to-
unambiguously betters the lot of the poor (workers): It allows them to consume more Grain
Eswaran and Kotwal do not require surplus labor (and thus come closer to
the neoclassical model described in Figure 16–6) but add an assumption that consumer
preferences are such that people begin to consume textiles only once they
are able to afford at least a subsistence level of food. It is assumed that most of
the workers have not reached this subsistence level and thus will spend all incremental
take advantage of the technological progress and taste for variety in developed countries in
Many previously colonial countries in Africa, South Asia and Latin America regarded their
lack of industrial development as the main reason for their subjugation, and concentrated on
industrial development as soon as they became independent. Not only was far too small a
share of total public investment allocated to agriculture but policies were implemented that
artificially rendered the industrial sector relatively more profitable than the agricultural
Policy makers are inevitably more responsive to the demands of the urban class, which gets
The price of food, however, is a double-edged sword. The poor, as we have already seen,
spend a considerable part of their household income on food. A twenty-percent rise in food
prices would reduce their food intake by nearly twenty percent, unless their wages also rise'.
How a given policy affects the wellbeing of the poor will depend on how the wage rate
surge of investment, the productivity of workers would increase and so would the wage rate.
If the wage rate increases by a greater amount than the price, the poor will benefit
Support-
The second condition is the extent to which output growth raises incomes. Should
increased output drive down product prices, or costs of production rise as the demand
for inputs increases, the rise in gross margins may be small. In particular, if land is
scarce, increased returns to agriculture may be reflected in higher land rents. In cases
where the poor till land belonging to others, the capitalisation of benefits into higher
first wave of green revolution cereal varieties was largely confined to irrigated areas
with good soils, and even then required major inputs of pesticides and fertiliser
Increased agricultural production should have effects on other sectors in the rural
hence benefiting consumers and all net purchasers of food (N1). Since the poor, both
urban and rural, spend a greater proportion of their incomes on food than better-off
households (see, for example Musgrove (1985) on the case of the Dominican Republic),
the greater the fall in price and hence the share of the benefits accruing to consumers.
On the other hand, if demand were perfectly elastic, only producers would gain. The
elasticity of demand that producers face depends largely on the size of the market
supplied –and hence on tradability. Thus, recent liberalisation of trade probably means
that producers are capturing an increasing share of the benefits from agricultural
growth, while any consumer gains become increasingly global. That said, where
markets are poorly integrated and infrastructure underdeveloped, farm produce becomes
Agricultural growth can contribute to overall national growth and through this to
poverty reduction. The dual-economy models of Lewis (1954) and followers (Fei and
Ranis, 1961) stress the importance of capital formation2 and wage costs for
the same authors explain further the pro-poor character of agricultural growth by
that land yield is inversely related to a variety of poverty measures, with an elasticity
ranging from one to two. As expected, yield growth contributes to poverty alleviation
both directly and by inducing a rise in the wage rate as well as a decline in the price of
Equation (1) decomposes labour productivity into the product of two components:
land productivity, or yield, and the land labour ratio, which can be viewed as an
. A 1% increase in
the land–labour ratio reduces poverty by 0.82%, which is surprisingly low relative to the
effect of the land productivity term, which indicates that a 1% improvement in yields
decreases the percentage of the population living on less than US$1 per day by 0.91%.7
Again, the variables are highly significant and this is the preferred model
The two agricultural productivity variables alone explain 76% of the variance
in the HDI and both are highly significant. Thus, this regression confirms the apparently
solid link between agricultural productivity growth and poverty reduction. Raising
yields by 1% increases the HDI by 0.12%, which is the right direction, but an increase
in the value of a composite index is more difficult to interpret than a reduction in the