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

Two polar views regarding the centrality of agriculture's role in the process of economic growth are prominent in the literature of economic development. At one pole, a substantial literature argues that agricultural development is necessary for overall economic transformation of a country. The contribution of agriculture in food, raw materials, and financial surplus (including foreign exchange) to invest is essential for the process of industrialization in its early stages, during which by definition, the industrial sector is small (Johnston 1970). At the other pole is the view that economies can always bypass this process of agricultural development and instead invest to build an industrial base. This latter view, popular in the 1950s, also has recent adherents. The question of which view is correct remains open. In this paper, we address the reasons for the lack of resolution of the debate and explore an alternative method for moving forward.

The Findings of Econometric Approaches Have Not Established Causality

It is straightforward to tell a story of why agricultural growth is a necessary condition for a country's economic development in the poorest areas of the world. There the share of the population in agriculture, as well as the share of food in consumption are so high that income generation, or new income streams in the terminology of Schultz (1964), have to come from agriculture if they are to make any substantial national impact. Yet, it appears some countries have managed to grow without a flourishing agricultural sector.

A natural way to try to assess agriculture as a cause of growth is through econometric investigation of cross-sectional data for a panel of countries, or possibly regions within a country. However, this approach is fraught with difficulties that have so far precluded definitive findings. Most notably, the criteria of statistical significance have not provided answers as durable as the confidence intervals on estimated coefficients would lead one to expect. A prime example is a critical review of World Bank economic research on the effectiveness of development assistance (Banerjee et al. 2006). Using country cross-sectional regressions, Burnside and Dollar (1997) found that aid stimulated economic growth, but only conditional on an indicator of good government. This statistically significant finding had been widely touted by Bank management as support for their efforts to make their assistance conditional on satisfaction of good governance criteria in client countries. But with later attempts to replicate the Burnside and Dollar findings with two years of additional data and some alternative specifications, it became clear that the original finding was far from robust, and indeed, it disappeared.

With respect to agriculture in relation to overall Gross Domestic Product (GDP) growth, in a cross-sectional panel of 52 developing countries, Gardner (2005) found no significant evidence of agriculture leading overall economic growth. But in a more sophisticated analysis using Granger-causality tests on very similar data, Tiffin and Irz (2006) found "overwhelming evidence that supports the conclusion that agricultural value-added is the causal variable" (2006). Based on econometric work by Sumarto and Suryadi (2003) on the topic of agricultural growth as related to poverty for Indonesia, Timmer (2005) concludes, "Roughly two-thirds of the reduction in poverty observed during the period of fastest growth in manufactured exports was due to growth in agricultural output at the provincial level." Yet Fane and Warr (2003), in a general equilibrium model of the same economy, conclude, "Contrary to the assumptions of many commentators, the poor do much better if a given amount of GDP growth is produced by technical progress in services or in manufacturing than if it is owing to technical progress in agriculture." As is apparent from broader assessments of this issue, such as those conducted by Valdes and Foster (2005) and Timmer (2005), the results of econometric analyses are inconclusive and even contradictory with one another. Timmer asks, "What are we to make of all this confusion?"

Our view is that economists will simply have to face the fact that econometric studies of country data will not be able to establish causality.

Popperian Approach: Focus on Refutations of Bold Conjectures

The argument that statistical association does not prove causation is a special case of the more general principle of the weakness of confirmations. No amount of confirmation can establish a universal truth, as argued over two centuries ago by David Hume. An alternative approach is Karl Popper's (1965): that the only valid empirical test of a hypothesis is a refutation of it. Popper's approach makes use of the logical strength of refuting instances--one exception can disprove a theory as a universal hypothesis, whereas countless confirmations cannot establish its universality.

To apply this idea one formulates the hypothesis in such a way that it is refutable, and then looks for refuting instances. So, to test the hypothesis that agricultural growth is necessary for general economic growth, it is sufficient to find instances where general growth is achieved without agricultural growth. This leads to a case study approach. It can be viewed as informal non-parametric econometrics. We do not look at the significance of estimated parameters in cross-country regressions. Rather, we look in detail at each country and inquire whether the behavior of variables over time is consistent with the hypothesis under consideration. In the remainder of this paper, we consider in this light both polar claims with respect to agriculture's role in economic development. To do so, we outline four country cases: England (1650-1850), the United States (1800-2000), South Korea since World War II, and People's Republic of China, pre- and post the 1979 agricultural reforms.

Agriculture in English Economic Growth

England was the first country to industrialize, and agriculture had a well-documented role in the process. While economic historians debate the scope of "an agricultural revolution" and its precise dates--starting as early as 1650 for some, there is consensus that the revolution unfolded over the span of a century or more, and its core was "an increase in cereal yields per acre that is the amount of grain that could be produced from a given area of land sown with a particular crop" (Overton 1998). Agriculture's contribution to GDP, estimated at around 43% in 1700, declined to 10% by the 1880s. Roughly 75% of the English population was dependent on agriculture in 1700. But by the late 19th century, the urban population predominated. The industrial revolution, characterized by the increasing application of power-driven machinery (instead of human labor) to manufacturing, started in the mid-18th century and continued into the 19th century.

From around 1770s to 1840s, while money wages went up, real agricultural wages declined with sharp and sustained rises in wheat prices. The main factors pushing prices up were the unprecedented rise in population, especially the increasing non-agricultural population (64% of total by 1801), the Napoleonic Wars (1793-1815), and the continued protection afforded by the Corn Laws (1815-1846). By the 1850s, small farms were a minority. There was increased agricultural investment, which gradually included the purchase of industrially manufactured farm implements. The expansion of export and re-export trades generated wealth that was re-invested in land by the successful merchant class. Thus, by the early 19th century, a virtuous circle of agricultural and industrial integration and expansion had set in.

[FIGURE 1 OMITTED]

The quantity of food exported from agriculture to the urban sector increased by 265% from 1701 to 1820. "The industrial revolution proceeded without a large increase in the import of food and raw materials" (O'Brien 1977). Thanks to the agricultural revolution, neither the Malthusian fears over excess population nor the Ricardian concerns over diminishing returns materialized to choke off the industrial revolution. The polar view that industrial expansion can bypass agricultural development gets no support from England's industrializing experience and in the view of economic historians could not have succeeded without agriculture's contribution.

Agriculture in the U.S. Economic Growth

Until 1830, over 90% of the U.S. population resided on farms, and neither the data available nor historical narratives indicate substantial productivity growth in agriculture. A common view among historians describes "eighteenth and early nineteenth century farmers in New England as trapped by poor husbandry in chronically low-yield, subsistence agriculture" (Rothenberg 1995). Agriculture is implausible as an engine of economic transformation until later in the 19th century.

Figure 1 shows the rise in real GDP per person in the United States over a span of two centuries. Dividing 1800-2000 into four fifty-year periods, the rate of growth of real GDP per person was 0.7% annually during 1800-1850, and 1.7, 2.0, and 2.2% during the succeeding three periods. The growth rate almost tripled during 1850-2000 as compared to 1800-1850. Both the transformation of agriculture and the acceleration of overall economic growth came after 1850. The period after the Civil War (1861-1865) was when we see both accelerated GDP growth and a sharp increase in the non-farm share of the United States population. What was the contribution of agriculture?

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.

Agricultural and overall economic performance pre-1979 stands in marked contrast to post-1979 performance. During pre-1979, China wanted to leap forward to become an industrial power. Instead, it hobbled at an average annual growth of 3.0% (1950-1978). Agriculture's annual growth averaged 2.99% (1952-1978). The annual growth rate of total factor productivity in China during 1952-1981 was only 0.5%, well below the levels of 19 other developing countries. Under this strategy, China built a substantial industrial base but at a high cost, in terms of increasing inefficiency and substantial foregone consumption (Dernberger 1999). It was a largely closed economy as the autarchy of its import-substituting industrialization-first strategy was reinforced by geo-political tensions. To generate the surplus to invest in industry, China had virtually no other option but to tax agriculture, which it did using a variety of socialist tools. Moreover, prices were slanted in favor of industry and of urban dwellers subsidizing their food, housing, and other needs. In contrast, very little was re-invested back in agriculture in return. The main capital investments in rural areas were primarily in the form of labor-intensive mobilization drives for constructing irrigation works. Strong urban bias in supporting both investment and consumption persisted into the late 1980s (Johnson 1992).

In contrast, TFP in agriculture increased sharply during the later period (1977 to 1987). China's sustained growth performance of 8-10% per year post-1979 has been driven by market and export orientation, including high levels of foreign direct investment (FDI).

What was the role of agriculture in China's transformation? The overall economic performance of the earlier period (pre-1979) undermines the polar view that agricultural development can always be bypassed; that of the later period (post-1979) supports the claim that it can make a substantial contribution to overall economic transformation, without acting as the primary engine of overall growth.

Summary and Conclusion

We have been addressing both substantive and methodological issues in the assessment of agriculture's role in economic growth. Having become convinced that cross-sectional econometric studies, popular as they may be, are proving of quite limited use in sorting out fundamental issues in economic growth, we are attempting an alternative approach using Popperian ideas of refuting falsifiable conjectures in country case studies. These case studies, being carried on in depth in our ongoing work, so far do not provide the clean refutations that we would like to obtain of the polar views about agriculture in economic growth. These and other case studies, however, undermine both polar views.

Our conclusion is that neither polar view applies, as evidenced by the four country cases with very different histories and institutional structures. There are other underlying factors. Methodologically, we believe our approach has advantages over cross-sectional econometrics. It provides less-constrained ways of data-based assessment of hypotheses. At the least, it provides helpful analytical information that economists can use to better formulate their econometric work. Economists can then proceed more fruitfully in evaluating and taking the next steps in developing refutable hypotheses about causal relationships underlying economic growth.

Principal Paper Sessions

Causes of and Constraints to Agricultural and Economic Development (Wyatt Thompson, University of Missouri and Laurian J. Unnevehr University of Illinois at Urbana-Champaign, Organizers)

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Isabelle Tsakok is Visiting Research Associate and Bruce Gardner is Professor in the Agricultural and Resource Economic Department, University of Maryland, College Park.

This article was presented in a principal paper session at the AAEA annual meeting (Portland, OR, July 2007). The articles in these sessions are not subjected to the journal's standard refereeing process.