Agriculture in economic development: primary engine of growth or chicken and egg?

In explaining the acceleration of economic growth, the causal factors that attract the most attention are matters of technology and large-scale investment: e.g., canals, exemplified by the opening of the Erie Canal in the 1830s; the later development of railroads culminating in the transcontinental railway completed in the 1870s; and a series of industrial innovations that, financed by venture capitalists and banks unrestrained by regulations, created great industries in steel, shipping, machinery and building materials. The building of this modern transport infrastructure was pivotal in expanding agricultural markets and raising prices. This view, emphasizing the critical importance of modern transport and communications infrastructure and access to expanding markets, for the development of both industry and agriculture, is similar to that of North (1966).

Mundlak (2005) mobilizes quantitative evidence on 19th century growth in agriculture. He estimates that the inputs of land, labor, and capital all grew at an annually rate of about 2% over the whole period 1800-1900, but relatively faster at almost 3% annually for all three input categories during 1800-1840 (see figure 1). However, total factor productivity (TFP) growth was much slower: 0.2 % annually in 1800-1840, 0.56% in 1840-1880, and 0.15% in 1880-1900. The increases in inputs helped in the growth of aggregate output, but productivity growth at the rates cited indicates only a modest contribution to output per capita since the increases in output did not do much more than pay for the additional inputs. These estimates provide the basis for a quantitative assessment of agriculture's place in the overall picture. As Mundlak's analysis indicates, agriculture's role is positive but modest. The contribution is far from sufficient to explain the nation's economic transformation.

When historians consider the fundamental causes of the changes in investment and technological change, agriculture's role is again marginal. Mechanical innovations such as the cotton gin, the steel mouldboard plow, the reaper, and barbed wire are recognized as innovations that made a real difference in agricultural productivity, but railroads, industrial and chemical innovations, and communications technology like the telegraph get more attention. And still more fundamental to innovations in all sectors are the ideas of Americans as risk-taking, money-loving, and entrepreneurial in spirit, and the laws of the United States and (lack of) state regulation as being conducive to innovation and investment. But these features are not particular to agriculture. Indeed, although agriculture grew in the 19th century and was home to some notable innovations as illustrated by example above, it can be argued that the successful transformation of American agriculture in terms of sustained productivity growth did not occur until the earlier part of the 20th century. Nevertheless, agriculture did contribute to America's overall economic transformation, e.g., through total factor productivity growth and in terms of export earnings and increased urban food supply.

Which of the polar views does the U.S. case support or undermine? Based on estimates of total factor productivity growth, agriculture's role as a causal factor during the early stages of America's industrial transformation in the 19th century is judged to be significant but not crucial. Thus, the U.S. case refutes the polar view that agriculture is necessary for sustained industrial growth. While not a confirming instance of the anti-agriculture view, the U.S. experience is consistent with it. The U.S. industrialization both benefited from and contributed to the successful transformation of its agriculture. It was a two-way synergistic interaction, not fundamentally causal in either direction.

Agriculture in the Republic of Korea's Economic Growth

Korea has been one of the fastest-growing economies in the developing world over the last fifty years. Per capita yearly income grew from under $100 in 1962 to around $10,000 in the late 1990s, and despite the downturn of the East Asian Financial Crisis, grew to around $16,000 in 2005. The Republic of Korea has been transformed in a little more than a generation. What was the role of agriculture?

After years of occupation and war, Korea was one of the world's poorest countries in the late 1940s. Agriculture accounted for 46% of GDP with the farm population constituting 61% of total. By 2005, agriculture's contribution to GDP had shrunk to 4%, and the urban population had risen to 85% of the total. Despite the substantial U.S. aid, Korea's economy stagnated until the 1960s. However, the situation changed dramatically under the export orientation strategy of General Park Chung Hee (1961-1979). The export-oriented industrialization strategy was continued into the 1990s. From 1962 to 1994, GDP growth of around 10% annually was fueled by an annual export growth that averaged 20%, while investment exceeded 30% of GDP. Korea's development strategy emphasized macroeconomic stability, high savings and investment rates, export orientation, heavy investment in human capital, and a private business-friendly environment. Korea borrowed heavily from abroad. Agriculture was not a major source of funds for investment.

After the Korean War (1950-1953), with plentiful American aid under U.S. PL480, and with an export-led industrialization strategy in place, agricultural development and investment were not prioritized in the first Five Year Plan (1962-1966). During this period, rice farmers received well-below world market prices. This policy of discrimination was reversed in 1971 and high protection has prevailed since. Agricultural land tax revenues were some 40% of total government revenues in the early 1960s, decreasing to 10% after 1970.

Scholars differ in their assessment of agriculture's role in Korea's economic transformation. Ban, Moon, and Perkins (1980) argued that although there was accelerated growth of agriculture in the 1930s (1-2%), "total productivity remained almost constant over the 1918-41 period." Kang and Ramachandran (1999) did not challenge the argument about low productivity, but argued "An agricultural revolution did take place in colonial Korea, and it was the direct result of the Japanese colonial policy to modernize Korean agriculture," which included substantial investments in agriculture: land intensification; investments in irrigation and rural infrastructure; and increased use of chemical fertilizers and high-yielding seed varieties.

Ban, Moon, and Perkins who focus on the later period when economic growth accelerated (1945-1975), pointed out that "There were no substantial net flows of savings or tax dollars from the rural to the urban sector ... For the most part however, it was agriculture that benefited from the industrial and export boom rather than reverse." Farmers benefited through expanding urban demand and access to lucrative rural non-farm and urban jobs. Agricultural output and productivity growth (1950s-1970s) was sustained at between 3-4% and 1-2%, respectively per year. Subsequent output growth rates were lower at around 2.6% (1970-1990) and 1.7% (1990s).

Although agricultural growth and productivity did accelerate during the post-war period, it was nowhere near the high growth rates of non-agriculture. Supporting the argument that the continued high economy-wide growth rate was not driven by agriculture's transformation are the following reasons: an increasing disparity between industry's and agriculture's growth rates (as of 1962), the substantial agricultural support given by PL480 (until early 1960s), the modest financial transfers in the 1950s, and the subsidization of agriculture from 1971 on. Instead, sustained overall Korean growth rates were export-driven, and agriculture benefited from such high overall growth.

Agriculture in the People's Republic of China Economic Growth, Pre- and Post- the 1979 Agricultural Reforms

For China scholars, the widespread adoption of the Household Responsibility System (HRS) was a watershed event in China's economic growth performance. Under the HRS, households became responsible for production and profits, not the collective. This reform was enormously successful. It promoted dynamic growth not only in agriculture but also in combination with other market-oriented reforms in the overall economy as well. China has been one of the fastest-growing economies since then. The agriculture/GDP ratio shrunk from 68 to 13% in 1949 and 2004, respectively.