Agricultural vs Industrial Economic Development

Published: 2019/12/11 Number of words: 2979

Different countries have different approaches to economic development; some focus on economic development through industrialisation while others focus on high-value agricultural production. Several factors determine which model a country should focus on in order to foster economic growth. However, to achieve growth in both urban and rural areas, it is necessary that growth-promoting strategies be emphasized in both models as development of the agricultural sector is a necessary precursor for industrialisation, and the development of the industrial sector may lead to agricultural development. Without cohesion between the two sectors, there will be barriers to wholesome development and most likely an increase in dependence on external factors of production and inputs. Focusing solely on industrial development and neglecting the agricultural sector may lead to increasing income inequalities, particularly in countries with large rural sectors that depend on basic agrarianism. As the overwhelming success of the Green Revolution in Asian countries has shown, an emphasis on rural agricultural development can prove to be an integral precondition for urban industrialisation while creating viable opportunities to increase the lives of the poor and promote overall economic development.

This paper aims to show the differences in an emphasis on agricultural development and industrialisation using examples from an Asian country. It also aims to demonstrate that an emphasis on both sectors is necessary to achieve sufficient growth. In addition, it shall be posited that public sector intervention, capital market development, and land inequality are relevant factors to consider in the development of both sectors.

Because most of the citizens in a developing economy live in the rural areas and participate in agriculture, it has been proved that the development of this sector enhances economic development. An emphasis on the agricultural sector leads to increases in income for the lowest percentile, while supplying food and other commodities for other domestic sectors and, if possible, the international economy. According to Ray (1998: 345), because the agricultural sector accounts for a large share of national output and populations in developing countries, it is necessary for this sector to flourish in order to supply labour to the non-agricultural sectors. Further, development of the non-agricultural sector can only thrive if agriculture produces more food than its producers need for their own consumption. Without this cycle, there may be an unwelcome reliance on imports from other countries and a susceptibility to price, supply, and other exogenous shocks.

As seen in the Green Revolution of several Asian economies, an emphasis on high value agriculture spurred economic development. With the backing of the government and numerous research institutions, the development of high yielding crop technology led to increased efficiency in the agricultural sector and consequently raised the economic well-being of not only the rural sector, but the entire economy. In the case of India, there was far-reaching government commitment to the rural areas and the technological advancement of the agricultural sector, while particular emphasis was placed on the research and development of genetically engineered, high yielding crops. This political commitment entailed subsidized electricity, guarantees of minimum prices, incentives for farmers to adopt modern methods, public investment in roads and farming infrastructure, which resulted in greater market integration, as well as the availability of advanced technological inputs such as seeds and fertilizers (Johnson 2003). This led to an overall dramatic increase in per capita agricultural production along with an overall reduction in agriculture expenditure due to efficiency gains (Johnson 2003).

These technological and efficiency increases resulted in an overhaul of the agricultural sector and led to productivity gains in high value agriculture such as dairy products, seafood, and meat, among others, that were mainly utilized to boost agricultural exports (Johnson 2003). In addition, the improvements in supply chain-driven agricultural development along with the introduction of large-supply industrial-scale contract farming (made available through foreign direct investment in agriculture) led to increased employment and incomes for the poorest in the rural sector. It also led to an overall increase in high value food exports and export income (Maertens 2009). Therefore, the development of the agricultural sector will lead to reductions in income inequality and overall economic growth because the rural poor will be fully involved in the development process.

However, another constraint faced by the rural agricultural sector that may result in under-development and reductions in efficiency is the general lack of access to credit, a concept which is propagated by initial income, asset, and land inequalities. The agricultural sector has largely been untargeted by private investors and lenders due to environmental risks, market risks such as logistic challenges, asymmetric information and lack of collateral, as well as underdeveloped credit markets in rural areas of developing countries (Beck 2013: 83). As a result, small farmers cannot buy land on mortgage and tenancy becomes the more suitable alternative. It has been hypothesised that very unequal land distribution retards agricultural development in countries facing labour surplus and land constraints, while further restricting their access to credit for capital development due to lack of collateral (Sabates-Wheeler 2005). It is therefore necessary for a government to intervene and attempt to correct this credit market failure in order to promote a productive agricultural sector. As seen in the case of India, it is imperative for the government to intervene in the financial market by enabling farmers access to input through the availability of credit and insurance through private sector involvement, particularly from the banking sector, in order to lower transaction costs, increase productivity and, inevitably, boost output ratios (Dorward 2004).

Another important sector of the economy, the industrial sector, takes into account the modernized manufacturing urban sector of an economy that creates large scale goods and services through an emphasis on technological prowess. As stated previously, it is necessary the development through the industrial sector is also emphasized as developing economies, in particular are largely sectoral. The rural-agricultural and the urban-industrial sectors are separated in terms of goals, relative incomes, and economic outcomes. The process of industrialization has become increasingly important within economies due to globalization and the high world-wide demand for modern products and services.

The development of industry globally has increased due to the liberalization of trade, available capital, efficient services, and technology flows. These have facilitated the integration of multi-national product systems, and have led to high economic growth and export competitiveness in developing countries (United Nations Development Organization 1996: ). Globalization and cooperation between countries has encouraged development through the transfer of technology, resources, and expertise from major industrialized economies to developing economies. According to Szirmai (2009), developing countries profit from being ‘latecomers’ to industrialization as they receive technological, rental, and knowledge spillovers from industrialized countries and they do not have to pay the full costs of research and development embodied in imported machinery. In addition, they receive equipment and inputs, as well as reserve knowledge and technical expertise through copying, imitating, and professional interaction (Szirmai 2009). Developing countries also benefit from intermediate capital inputs from developed countries, while the increase in global demand for manufactured goods enhanced export competitiveness, leading to the industrial growth of developing countries.

Most economists have posited that an economic focus on industrialization is the road toward economic development, given the past experiences of modernized economies during the Industrial Revolution, as well as the recent export-oriented growth of Asian economies. Productivity is higher in the industrial sector than the agricultural sector due to technological advances. The economies of scale in large, integrated supply chains have resulted in gains and concentrated manufacturing results in opportunities for capital accumulation. This has proved to be one of the main sources of aggregate growth a la the Harrod Domar Hypothesis (Szirmai 2009).

Another facet of industrialisation which will lead to economic development lies in the structural change hypothesis. This involves the ability of the modernized sector to absorb surplus labour from the agricultural sector and transform the structure of the economy from agrarian to manufacturing. This leads to increased employment for rural workers and raises the nation’s per capita income. According to Ray (1998: 360), Arthur Lewis stated that the dual economy presents advantages for an economy to grow because the excess labour in the agricultural sector can be transferred to the industrial sector without losses in agricultural output (Ray 1998: 360). Proponents of the Lewis model are convinced that this transfer of redundant labour to the industrialized sector will lead to increased incomes for the poor as well as create opportunities for more accumulation and efficient utilization of capital, leading to economy-wide development.

Another necessary condition which needs to be emphasized in order to exploit economic development through industry is the establishment of credit availability and financial investment opportunities within an economy. The underdevelopment of the financial sector may cause restrictions in the availability of financial and real capital in order to increase capacity and productivity. In addition, as stated before, if foreign investment is not a viable option with developing economies, there may be reductions in the possible gains due to technological, capital, and knowledge-based spillover effects from industrialized countries. The establishment of developed international capital markets can be an important catalyst for sustained economic growth in developing economies. This may lead to increased sources of financing and expansion through foreign direct and portfolio investment, while reducing costs and enhancing the aforementioned positive externalities from spillover effects (United Nations Development Organization 1996: 3). From a domestic credit standpoint, the development of the financial sector is also necessary in order to enhance manufacturing plants’ abilities to expand capacity through increases in fixed and working capital. In order to increase capital accumulation, which is an underlying factor of output growth, it is necessary for the manufacturing sector to have access to available credit to increase fixed inputs such as factories, machines, warehouses, and numerous input materials to extend capacity and increase output (Ray 1998: 531).

The agricultural and industrial sectors comprise the dual economy within a country, hence displaying several disparities as well as similarities in terms of policy emphasis. However, it is necessary that both sectors be targeted and promoted in cohesion for comprehensive development. This fact is emphasized due to the aforementioned notions from Arthur Lewis that the agricultural sector acts as a supplier of labor to the industrial sector, as well as the fact that the agricultural sector provides food and other commodities that facilitate the maintenance of the industrial sector. Foreign direct investment, government intervention, credit market development, and access to various forms of capital are all vital components in order to transform both sectors into economic development opportunities. In terms of government intervention, it is necessary that the public sector intervenes in both sectors in order to prevent market failures, and promote the advancement of the sectors by creating opportunities for the participants and mitigating risks of failure and underperformance. From an agricultural standpoint it is necessary that the government utilizes policy to assist in abridging the inefficiencies which afflict the rural sector such as the lack of availability of credit due to the unwillingness of the private sector to assist due to risk factors, as well as assist with infrastructure development and the provision of needed capital for development. Further improvements may be achieved by promoting research and development opportunities, reducing information asymmetries in order to increase access to credit and capital, improve health, as well as nutrition and agricultural education to bring about improvements in the human capital stock (Todaro 2011: 423). As seen in the aforementioned case of India, the intervention of the public sector brought about drastic increases in productivity when the private sector was incapable of providing these services. A similar case exists with the government’s role in the industrial sector, given the fact that market failures are also present in the industrial sector, where capital accumulation is seen as more of a growth stimulant than in the agricultural sector. It is therefore necessary for the government to create a market environment that is conducive to this concept, especially in light of globalization’s impact on industry. Governments have an important role in stimulating investment spurred by domestic savings, complimenting private investment with financial and physical infrastructure, enhancing macroeconomic stability to encourage foreign investment, while promoting industry cooperation and eliminating monopoly and rent seeking activities (United Nations Development Organization 1996: 8). Additionally, from both a high value agricultural and industrial perspective, as stated prior, it is beneficial that foreign direct investment is welcome within both sectors. This may to spillover effects, due to the fact that most developing countries are lagging behind developed countries in technological and human resource assets. Large scale industry contract farming introduced in agriculture was made possible largely due to increases in foreign involvement and resulted in income and productivity increases in some Asian and Sub-Sarahan African countries (Maertens 2009). The access to viable credit is also of utmost importance to both sectors, as it is necessary to expand capacity without facing exuberant upfront costs, particularly in the agricultural sector which typically has been excluded from credit markets due to information, collateral, and development constraints. Essentially, the high value agricultural sector as well as the industrial sector are heavily interlinked and are the major components of the dual economy, and it is necessary that the structure of an economy be geared toward the preservation and maintenance of both sectors, a fact that is particularly true for developing countries. However, given the mainstream economic thinking that industrialisation is the engine for growth, numerous developing economies create policies geared more toward the improvement of the urban industrial sector rather than the agricultural sector, and this may lead to income and sectoral growth distortions given the fact that the majority of the developing world occupy the rural agricultural sector.

In conclusion, the structural change hypothesis postulates that the process of development occurs in an economy when dependence on the agricultural sector moves to a more sophisticated and competitive industrial sector, serving as the catalyst for economic growth. Srzmai (2009) stated that ‘The more prosperous countries are the more industrialised ones’ and demonstrated that almost all the top per capita income earning countries rely heavily on industrialisation while the opposite applies to low income countries (Srzmai 2009). However, given the fact that most of the developing world still relies on income from the agricultural sector, it is necessary that the industrial sector be developed in order to raise incomes of the poor and provide food and commodities to the industrial sector. The failure to do this may result in stagnant growth due to rising inequalities, as well as the dependence on imports and their accompanying exogenous shocks.

This particular case can be seen when comparing sub-Saharan African agriculture with advancements in the high-value exports of India. Sub-Saharan Africa missed out on the initial advancements of the Green Revolution because governments and the private sector were incapable of developing agricultural systems, and the weak existing infrastructure, among other difficulties, has led to efficiency and income declines over the years (Evenson 2003). The development of the agricultural sector is therefore a necessary pre-condition for growth in the industrial sector, while industrialisation is also necessary for agricultural development. In both the industrial and high-value agricultural sectors, the government should correct market failures and maintain macroeconomic stability. Foreign investment needs to be welcomed and credit markets need to be developed for increasing capacity. Sectoral disparities should not be ignored if a country is targeting development. According to Deaton and Dreeze’s (2002), research into developing countries, the poorer states have little to no growth compared to industrialized states with high levels of growth, while rising sectoral disparities in income are also apparent: the income growth of agricultural labourers has increased more slowly than GDP growth.

Thorough economic development entails the development of all sectors of the economy rather than focusing on the industrial sector and viewing income increases on aggregate. Therefore, since sectors within an economy are intertwined, it is necessary that a country views economic development from a full perspective and focus on the development of both agriculture and industry.


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