RIFT VALLEY UNIVERSITY BURAYU CAMPUS

Faculty of Business and economics

Department of Economics

program me degree

Course Economics of agriculture

Division regular for 4th year students

CHAPTER ONE:
INTRODUCTION
1.1 Definition and scope of economics of agriculture
1.1.1 Basic concepts
The "agriculture” comes from two Greek words, “agros” = field and “cultura” = cultivation.
According to that, agriculture is a sort of economic activity connected with land, with soil
cultivation. Agriculture in the form of animal husbandry and plant cultivation goes through the
human history almost from its very beginning. One of the very first stories in the Bible is the
story of the brothers Cain and Abel, land cultivating farmer and shepherd.

All the definitions that follow the word “agriculture” should not be considered as a mere
production of crops or farming. In addition to this, now a day, agricultural activity includes
animal husbandry and forestry. Specifically, the agriculture sector has the following main areas:
Crops production, Fruits production (Pomiculture), Forestry (Silviculture), Livestock, Poultry
farming, Beekeeping (Apiculture) and Fisheries (Aquaculture). Again it goes beyond business on
farms & includes such business activities as marketing, processing & distribution of agricultural
products and other off farm activities like supply of inputs (seeds, fertilizers, credits, etc).
1.1.2. Definition
Different agricultural Economists have defined Economics of agriculture in different manner, but
with the same content.
1. DR TAYLOR: “Agricultural Economics deals with principles which underlie the farmer’s
problems of what to produce, how to produce and what to sell and how to sell it in order to
secure the largest net profit which is consistent with the best interest of the society as a whole.”
2. BLACK: “Economic principles imply economizing. Hence, the object of the science of
Economics in agriculture as anywhere else is to provide the basis for economizing resources.”
3. GOODWIN: “Agricultural Economics is a social science connected with human behavior
during the process of production, distribution and consumption of products on the farm and
ranches.”

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4. JOUZIER: “Agricultural Economics is that branch of Agricultural science which treats the
manner of regulating the relation of the different elements comprising the resources of the farmer
whether it is to be the relations to each other or with other human beings in order to secure the
greatest degree of prosperity to the enterprise.”
5. ASHBY: “Agricultural Economics is an applied science; i.e., it is a methodological pursuit of
knowledge of economic process and organization in agriculture and their results. For the purpose
of stabilizing, adopting or modifying them, and if and when necessary changing of their results.”
6. HIBBARD: “Agricultural Economics is a study of relationships arising from the wealth
getting and wealth using activities of man in agriculture.”

1.1.3. Scope of Agricultural Economics

We may dare to say that Agricultural Economics is as wide as the discipline of Economics
because we can apply all economic principles in agriculture. We may again use different
concepts of general Economics in Agricultural Economics like production, consumption,
distribution, marketing, financing, planning, etc. It can also be studied at micro or macro level.

Role at Microeconomic Level

Agricultural economists at the micro level are concerned with issues related to resource use in
the production, processing, distribution and consumption of products in the food and fiber
system. Production economists examine resource demand by businesses and their supply
response. Market economists focus on the flow of food and fiber through market channels
to its final destination and the determination of prices at each stage. Financial economists are
concerned with issues related to the financing of businesses and the supply of capital to these
firms. Resource economists focus on the use and preservation of the nation’s natural resources.
Other economists are interested in the formation of government programmes for specific
commodities that will support the incomes of farmers and provide food and fiber products to low
income consumers.
Role at Macroeconomic Level
Agricultural economists involved at the macro level are interested in how agriculture and agri-
business affect domestic and world economies and how the events taking place in other sectors
affect these firms & vice versa. For example, agricultural economists employed by the Ministry
of Ethiopian Agriculture will evaluate how changes in monetary policy affect the price of food.
Macroeconomists with a research interest may use computer-based models to analyze the direct
and indirect effects that specific monetary or fiscal policy proposals would have on the farm
business sector. Macroeconomists employed by multinational food companies examine foreign
trade relationships for food and fiber products. Others address issues in the area of international
development.
1.1.4. Nature of Agricultural Economics

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 1) Agricultural Economics makes use of the principles of general economics with some
modification. Economic principles are applied to solve certain problems in agriculture.
2) Agricultural economics is a specialized form of pure science instead of being an applied
science because it does not directly apply all the principles of Economics.
3) Agricultural Economics is a normative science as well as an art like General Economics.
As a science, it explains cause and effect relationships between various economic
variables operating in agriculture. As an art, uses those relationships to solve various
problems in agriculture.

1.2. Historical development of agricultural Economics

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:
one from 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 study 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 Specific features of agricultural production

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)

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  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 of the fact that 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 behavior
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
that consumers may buy.

1.3 Main attributes of traditional agriculture

The subsistence-oriented agriculture is characterized by:
 Low Productivity and Minimal Capital investment
 Use of simple traditional methods and tools
 Labor and land as the principal factors of production (Seasonal employment of Labor)
 Presence of disguised unemployment
 Production for household’s own consumption
 Dominance of staple foods in production

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Subsistence agriculture is highly risky and the main motivating factor/force in this type of
agriculture is to maximize their family’s chance of survival, not profit. That means agriculture in
this case is a mode of life, not a mode of making money.
On the other hand, diversification in agriculture refers to the stage where part of the produce is
grown for own consumption and part for sale to the commercial sector. And in this form of
agriculture, the production is no more dominated by staple food crops, but includes animal
husbandry and cash crops that take up the idle labor.
1.4 Agricultural systems:
1.4.1 Low external input agriculture (shifting cultivation, pastoralism, and peasant agriculture)

1. Shifting cultivation is an agricultural system in which plots of land are cultivated temporarily,
then abandoned while post-disturbance fallow vegetation is allowed to freely grow while the
cultivator moves on to another plot. The period of cultivation is usually terminated when the soil
shows signs of exhaustion or, more commonly, when the field is overrun by weeds. The period
of time during which the field is cultivated is usually shorter than the period over which the land
is allowed to regenerate by lying fallow.
This technique is often used in LEDCs (Less Economically Developed Countries) or LICs (Low
Income Countries). In some areas, cultivators use a practice of slash-and-burn as one element of
their farming cycle. Others employ land clearing without any burning, and some cultivators are
purely migratory and do not use any cyclical method on a given plot. Sometimes no slashing at
all is needed where regrowth is purely of grasses, an outcome not uncommon when soils are near
exhaustion and need to lie fallow.
In shifting agriculture, after two or three years of producing vegetable and grain crops on cleared
land, the migrants abandon it for another plot. Land is often cleared by slash-and-burn methods
trees, bushes and forests are cleared by slashing, and the remaining vegetation is burnt. The ashes
add potash to the soil. Then the seeds are sown after the rains.
2. Pastoral Nomadism
Pastoral nomadism involves people who travel, more or less continuously, with herds of
livestock. Pastoral nomads have no established farms, but often follow well-established
traditional routes. Although there probably only about 15 million pastoral nomads in the whole
world, they occupy an area larger than the entire cultivated area in the world. They are especially
prevalent in the arid and semi-arid tropics. Some examples include the Masai of Kenya and
Tanzania, the Hima of Uganda, the Fulani of West Africa, the Bedouin of the Eastern
Mediterranean, and the nomads of Mongolia.

Pastoral nomadism can be total or partial. In the latter case, the nomads have homes and some
cultivation for part of the year. Typically five or six families will travel together with 25 to 60

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goats and sheep or 10 to 25 camels. Sometimes they own cattle as well. The livestock eat natural
pasture and their productivity is quite low.

Pastoral nomadism can lead to a variety of problems. Because the grazing takes place on
common land, there is a tendency for overgrazing because every individual farmer wishes to
maximize his or her number of animals. As the number of animals increase, the grazing areas
deteriorate and incomes shrink. There is little scope for technical improvement, and serious
problems arise in years of drought. As the human population grows, additional pressures are
placed on the resource base supporting the nomadic system.

3. Peasant Characteristics
Peasants are farm households who derive their livelihoods mainly from agriculture, utilize
mainly family labor in the farm production and are characterized by partial engagement
(integration) in input and output markets, which are often imperfect or incomplete.

Distinguishing features of peasants

1. Land: a peasant without land is no more a peasant. Land is, therefore, the distinguishing
feature of peasants from landless laborers, urban workers, plantation workers and nomads.
Since peasants obtain their livelihood from the land by crop cultivation and livestock
rising, they have access to the resources of land as a base for their livelihood.
2. Family labor: it is widely agreed that reliance on family labor is a defining economic
characteristics of peasants. In case of capitalists, production is run by employment of
worker. Thus, family labor utilization is another distinguishing feature of peasants from
other social groups like capitalists and commercial farmers. But peasants may hire labor in
peak period of harvesting and may engage in off-farm activities in the off season.
3. Capital: command over capital and its accumulation is a central attribute of capitalist
production. Peasants do not have access to capital and the main objective of their farm
business is to get appropriate returns that satisfy/maximize the household utility.
4. Consumption: the majority of the production of peasants is for self-consumption. Perhaps
the most popular defining feature of peasants is their subsistence way of life. Subsistence
refers to the proportion of peasants' output which goes for self-consumption rather than for
profit making activities.
For peasant Farm Family;
1. Capital markets are fragmented or non-existent so that credit is obtained mainly from
merchants or local money lenders at high rate of interest.

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2. Variable production inputs like fertilizer, seed and chemicals are erratically available or
unavailable. Their quality may vary or access to them may involve formal and informal
way of rationing.
3. Up-to-date technology is not available or costly if available.
4. Free supply of land is not easily available for sale, but may be on rent.
5. Market information is poor, erratic, fragmented and incomplete. Depending on place and
infrastructure factors, there are varying degrees of association between social
communities, regions and the more developed segment of the national economy.
In the Ethiopian context, the inherent weakness of peasant agriculture flows from the
interplay of the following factors.
 S m a l l h o l d e r agriculture is oriented towards self-consumption, and this, more than
the market, largely determines land use and cropping patterns.
 The standard of technology is poor or of limited potential. Improved technology is, for
most peasants, either too costly to acquire, too complicated to operate, or too
dependent on external economies.
 Most peasants are plagued by inadequate holdings; their plots are too often
fragmented, and soil and water erosion are frequent hazards. Compared with family
based peasant production, producer cooperatives are fragile institutions. Their rate of
success in developing countries–measured by the ability to be self-supporting–has been very
disappointing.
1.4.2 High external input agriculture (the case of Industrial & green revolution
agriculture)

Historical Significance of the Industrial Revolution

The First Industrial Revolution

1760-1820/1840
The Industrial Revolution changed human life drastically
More was created in the last 250+ years than in the previous 2500+ years of known
human history
The Industrial Revolution refers to the greatly increased output of machine made goods
that began in England in the 1700s
Machines were invented which replaced human labor.
New energy sources were developed to power the new machinery – water, steam,
electricity, oil (gas, kerosene)
Scientific Revolution
Intellectual Revolution
Encouraged learning and the search for better and newer ways of doing things
Agricultural Revolution
Landowners experimented in their enclosures

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 Seed drill
Crop rotation
Livestock breeding
Termed coined by U.S. Agency for International Development director William Gaud
(March 1968)
Movement to increase yields by using:
Hybrid seeds
Irrigation
Fertilizers
Pesticides
mechanization
 A planned international effort funded by:
 Rockefeller Foundation
 Ford Foundation
 Many developing country governments
 An attempt by agricultural scientists to eliminate hunger by improving crop performance
 Began in 1943 with funding from the Rockefeller Foundation to support a group of U.S.
agricultural scientists
 Norman Borlaug considered father of the Green Revolution

Impact of the Green Revolution

Praise
 Agric. Production now outpaces pop growth
 Use of fertilizers has increased food productivity in many countries
 New irrigation processes have greatly increased crop yields
 Higher productivity is primarily responsible for reducing dependency on imports in Asia,
including China and India
 Green revolution technology and training have focused on men

Criticisms
 Poor countries cannot always afford the machinery, seeds,
and fertilizers
 Farmers in poor countries cannot afford fertilizers leading to
inequalities b/n rich and poor; fertilizers lead to ground
water pollution
 Irrigation has led to serious ground water depletion,

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 CHAPTER TWO:
ECONOMICS OF AGRICULTURAL DEVELOPMENT
2.1. Changing views/perspectives of the role of agriculture since 1950
2.1.1. Role of Agriculture in Undeveloped Economy
An economy can be broadly divided into three sectors namely:
1. The primary sector which consist of agriculture, mining, fishing, etc.
2. The secondary sector includes all types of industries.
3. The tertiary sector which represents the service sector includes banking, insurance,
transport, trade and other services.
Position of agriculture in the developing Economies:
 It represents the main economic activity
 It employs the prevailing share of economically active population
 It forms the main source of export
The transformation of agriculture from its traditional subsistence roots, induced by technical
change, to a modernizing and eventually industrialized agriculture sector is a phenomenon
observed across the developing world. In the 1950s, although agriculture was ignored by
scholars as a non-contributor sector to the development of the economy, it was observed that the
success story of East Asia began their drive towards industrialization by first developing their
agricultural sector. This brought a clear consensus that the strategy of industrialization in the

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1960s and 1970s could only be successful because of agricultural productivity, and farm income
was significantly increased in the initial phase of industrialization.
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

1. Product Contribution
Expansion of non-agricultural sector is strongly reliant on agricultural sector, not only for a
sustained increase in the supply of food, but also for raw materials used in manufacturing
products and export earnings that pay for imported capital equipment and intermediate inputs.
The domestic farm sector is the principal source of food for consumption by growing number of
non-food producers employed in industry.

a) Food for the non-agricultural workforce

For both macro and microeconomic reasons, a given country cannot achieve sustainable rapid
economic growth without first solving the problem of food security. At the micro level,
inadequate and irregular access to food limits labor productivity and then income per capita and
further reduces investment in human capital.

Instability in the food sector can have three macro-level effects. First, it can affect the quantity of
investment through an increase in precautionary savings or a decrease caused by greater
uncertainty. Consumers save to protect themselves against the effect of possible increase in food
prices and farmers save to insure themselves against a sudden drop in crop prices. Here we have
to note that these are precautionary savings and are kept in liquid form, not for investment and
may not contribute to economic growth. Secondly, instability in the food sector can reduce the
quality or efficiency of investment (rate of return), because unstable food price give little
information of the kind that is relevant for long-run investment, as they cause instability in all
other prices in the economy. Finally, price instability can induce a bias towards speculative
rather than productive investment activities and thereby slowdown economic growth. Moreover,
in poor countries, food price instability causes price instability in other sectors of the economy,
since the food sector dominates the economy. An important reason for investing in a country’s
agricultural sector, therefore, is above all to realize the potential to stabilize the domestic food
supply and enhance food security.
If the food sector is ignored and the industrial sector is focused upon, the consequence is that
employment in the industrial sector increases with increased income, the largest portion of which
is spent on food. This will cause the price of food rise, squeezing the real income of laborers
downwards, close to the previous level, and reducing the incentive to work. This in turn places
upward pressure on wages, and ends up reducing employment and/or industrial profit. Therefore,

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the capacity of the industrial sector to produce a growing volume of manufacturers could be
restricted unless agricultural production is growing simultaneously. This is also the reason why
the industrial and agrarian revolutions always should go together, and why an economy in which
agriculture is stagnant do not show industrial development (Lewis, 1978). Above all, increased
food security of the poor can contribute substantially to long run economic growth. It also has a
short-run economic dimension in that attaining stabilized food prices seasonally and yearly.
Securing food encourages farmers to invest more in innovation and technologies that increase
farm productivity.

b) Raw materials for domestic agro-processing industries

Once food supply is secured, the agricultural market surplus is available as input for domestic
agro-processing industries, which is used for consumption or production of intermediate
goods. A domestic supply of raw materials stabilizes fluctuations in the availability and prices of
imported inputs. Moreover, it saves foreign exchange. Thus, it promotes self-sustained
development of the industrial sector, particularly in the early stages.

c) Foreign exchange earnings through exports of agricultural products

Agricultural products are needed to earn foreign exchange through exports. Sufficient growth in
agricultural products helps in composition in a world’s product market to earn foreign currency
that developing countries need to run their economy. As long as a country is not industrialized,
export earnings largely come from primary products generated by agricultural sector. This
income, combined with domestic farm sales income, is the important part of the net capital
outflow from agriculture that can be transferred or used to finance imports of industrial
equipment and other investment outside agriculture, such as investment in infrastructure
development.

2. Market Contribution
a) Expand market for the products of the other sector
The second important role that agriculture can play is providing effective demand for products of
the industrial sector. This includes rural agriculture-based households’ demand for consumption
goods and farm inputs produced by the industrial sector. The expenditure pattern from the net
additions to income arising from accelerated growth of agriculture creates demand for a
wide range of goods and services with a high employment content, much of the production of
which must be broadly diffused in rural areas. In fact this can occur only through accelerated
growth in employment (more precisely, increased demand for labor), which is facilitated by the
indirect effects of agricultural growth itself. Thus, agriculture offers a potential for rapid growth
in domestic demand for labor-intensive goods and services.

It is believed that a productive agriculture implies higher level of income to the large rural
population, which then generates a large demand for manufactured goods that enables
manufacturers to produce at scale that allows them to exploit efficiency gains from scale
economies. This includes rural agriculture-based households’ demand for consumption goods
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and farm inputs produced by the industrial sector. Hence, the farm sector is the major market for
domestic industrial products. Farmer’s expenditures on industrial products -both consumer goods
and producer goods- represent one aspect of agricultural sector’s market contribution to general
economic development through sectoral diversification.

b) Flow of agricultural products to other sectors of the economy

As agriculture develops and its production becomes more market oriented, many other
institutions, generally non-agricultural in character, come into existence. These institutions
include those providing marketing, processing, packing, and distribution services.

c) Development of international trade

Surplus products from the agricultural sector, as a result of its development, can move to the
international market. This, in turn, can result in the flow of necessary capital as well as consumer
goods from outside.

3. Factor Contribution
Development of agriculture releases some resources for being transferred to the other sectors. As
these resources are productive in nature, we call transfer of these resources to the non-
agricultural sectors as ‘factor contribution’ of agriculture. Factor contribution can be in the
following forms.

a) Provision of capital
The non-agricultural sectors require funds for acquiring material capital. In the initial stages of
their development, these funds will be generated in the agricultural sector and then transferred to
other sectors. In a closed economy in the initial stages, it is the agricultural sector, which
commands most of the income, capital and also labor. Even when an underdeveloped economy is
an open economy, the outside source of capital like foreign aid and foreign commercial
investment can make only a limited contribution to the economic development. Further, foreign
political influence is likely to accompany such capital and this may not be acceptable to the
present day underdeveloped economies.

The transfer of capital to non-agricultural sectors can be voluntary or compulsory. It is

voluntary when the agriculturalists themselves invest their savings in the industrial projects. The
agriculturalists of England and the land owners of Japan present an important example of this
type of voluntary flow of capital to the non-agricultural sectors. The compulsory form of flow of
funds is generally brought about by the government of the day through taxation on the
agricultural sector-its net proceeds being spent for the development of the non-agricultural
sectors. Forced extraction of surplus from agriculture by taxation, confiscation, imposition of
levies or arbitrarily kept low prices of agricultural products, can be the other measures taken by
the government to transfer funds from the agricultural sector to the non-agricultural
sectors. However, this form of compulsion is not always necessary for the transfer of funds.

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Agricultural development itself may bring down the prices of agricultural produce, reduce the
cost of production in manufacturing and other sectors, increase their profits and thus
indirectly help in the generation of capital in these sectors.

b) Provision of labor.

Another factor contribution of agriculture towards economic development is through the release
of labor to the non-agricultural sectors. If there is high productivity in agricultural sector, fewer
farm laborers are needed to produce sufficient agricultural products in the economy and as a
result, there will be surplus labor force in the agricultural sector. Now this surplus labor force is
ready to be easily drawn into the industrial sector without any fall in agricultural output.
2.1.2. The Role of Agriculture in a Developed Economy
Position of agriculture in the developed economies:
 The main economic activity is becoming first industry, then the tertiary sector and at
present non-material services and information technology and communications
 Agriculture employs still decreasing share of economically active population
 It represents a still decreasing share in the total export
 In many cases the country is a net food importer
In the initial stages of development, it is the development of agriculture which initiates the
process of overall development. That is why Lewis said "it is not profitable to produce a
growing volume manufactures unless agricultural production is growing simultaneously and this
is why economies in which agriculture is stagnant do not show industrial development." But the
role of agriculture in economic development undergoes changes as economic developments
proceed; i.e., once an economy has moved sufficiently on the growth path, agriculture will lose
its importance as a sole source of development push. When the non- agricultural sectors begin to
depend up on themselves they will start helping the agricultural sector in its growth. Thus, we
can conclude that the agricultural sector which in the initial stages was responsible for the
development of other sectors gradually ceases its importance as the pivot in the development
process proceeds. But this does not imply that in a well-developed economy, it will lose all its
importance in the process of further development. The only change will be that of instead of
being an engine for growth, it becomes one of the contributors for the process.

2.2, The classic 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

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 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
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 Vocation
Employment development

2.3. Contribution of Industry to the Development of Agriculture

1. Provision of modern Inputs of Production
This is the most important contribution of industry to agriculture. It has been found that
agriculture in the developed economies is highly capital intensive, using sophisticated
machineries, heavy doses of fertilizers and insecticides. The use of those inputs has brought
about a spectacular increase in the agricultural output and it is the industrial sector that
provides all those improved inputs of production which leads to increase in productivity of
farmers. This in turn increases in their standard of living.

2. Industry Provides Market for the Products of Agricultural Sector

A growing industrial sector will provide an expanding market for the products of agricultural
sector and thus, create incentives for further growth of the agricultural sector. The expansion
of the industrial sector will strengthen the commercial motives of the farmers and they are
likely to shift from the food crops to the cash crops. They will produce for the market and this
will lead to the development of some allied processing industries.
3. Reductions in the Pressure of Population on Land

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Excessive population in the agricultural sector has been responsible for the fragmentation of
land holdings, deforestation, low saving and low productivity in agriculture. Hence, those
problems are solved to some extent when the developing industrial sector helps in the out
movement of population from the agricultural sector.
4. Supply of Consumption Goods
The developing industrial sector supplies not only modern inputs but also consumption goods
to the agricultural sector i.e. their consumption pattern will be diversified. Some comfort and
luxuries also find their way into their consumption schedule. The urge maintains the new
standard of living which in turn induces the agriculturalists to work hard.
5. Provision of Infrastructure
Modernization of agriculture depends on the use of modern agricultural inputs. But for their
use, many supportive services like good means of transport for carrying the inputs to the
farms and the products to the market, means of consumption for disseminating modern
information about technology of the famers, electric power to run the machines to be used in
agriculture, agricultural research institutions and hospitals are required for the development of
agriculture. And these are all the gifts of the industrial sector.
6. Intellectual Environment
It is obvious that a modern industrial sector when in contact with the agricultural sector will
transmit its less tradition bound intellectual environment to the agricultural sector. Such an
environment which is favorable for the creation of new skills, capital formation, decreasing
birth rate and technical innovations will obviously help the agricultural sector in its
development.
1.4. Interdependence between Industry and Agriculture
At the initial stages, the agricultural sector makes input, output and market contribution for
the growth of the industrial sector. It is shown that after the industrial sector has developed to
some extent, it starts helping the agricultural sector for further growth. The industrial sector
contributes for the growth of the agricultural sector by providing improved inputs of
production, infrastructure, by creating market for the agricultural products, etc.

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All these show us that the two sectors are interdependent to each other. That is agriculture
depends upon industry for provision of some input and at the same time industry depends
upon agriculture for the provision of raw materials. This interdependence between agriculture
and industry helps the development of both sectors. Because the most important aspect of this
interdependence is that the products of one sector serve as important inputs for the other.
Growth of one sector is therefore mean ample supply of inputs for the other which insures
mutual development.

It should, however, be understood that the interdependence between the two sectors is not
complete; i.e., the agricultural sector is not completely dependent up on the industrial sector
and vice versa. For instance, the industrial sector does not depend up on the agricultural sector
for the supply of minerals and salts as ingredients of production and much of its capital is now
supplied from its own sources. It supplies machinery to itself. Similarly, the agricultural sector
will continue to depend up on nature for certain inputs like water supply even after the
industrial sector has provided it with canals and modern irrigation facilities. As use of
machinery is limited in agriculture, human and animal power will continue to be important
inputs. For this, the agriculture sector will again depend up on itself. All these show us that a
greater flow of products from one sector to the other simultaneously insures a greater return
flow of inputs to itself with some time lag but not in a perfect sense.

2.4. Agricultural transformation & development

The concept of Structural Transformation

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Structural Transformation includes virtually all economic functions, but primarily involves the
transformation of production. In other words, it entails a decline in the relative importance of
agriculture and an increase in that of the industrial and the service sectors of an economy
accompanied by a shift in resources, particularly that of labor in the same direction. Secondly,
it involves the change in the composition of consumer demand. Demand for food declines
relative to the demand for non-food consumption. At the aggregate level, the relative
importance of investment, government expenditure and international trade (export of
manufactured goods and services) increase. Furthermore, changes occur with regard to
socioeconomic factors such as urbanization and the demographic structure.
The production component of structural transformation is the driving force behind other
changes. To put it more specifically, the economy becomes relatively less agriculturally
oriented, although agriculture and, more broadly, the food system continue to grow in
absolute terms and generate important growth linkage to the rest of the economy. Structural
transformation thus involves a net resource transfer from agriculture to other sectors of the
economy, over the long term. Therefore, the focus is on the mechanism by which
underdeveloped economies transfer their domestic economic structure from predominantly
rural and traditional subsistence agriculture into a more modern, more urbanized and more
industrially diverse manufacturing and service economy. This structural transformation has
involved expansion of non-farm employment, increased integration of agriculture with the
rest of the economy, and expansion of off-farm elements of the food system.
In Lewis’s model, the underdeveloped economy consists of two sectors: a traditional,
overpopulated rural subsistence agricultural sector, characterized by zero marginal labor
productivity that can be withdrawn and transferred to the modern sector without any loss of
output in the agricultural sector; and a high productivity of modern industrial sector into
which labor from the subsistence sector is gradually transferred. The structural transformation
of the economy takes place with the balance of economic activity shifting from traditional
rural agriculture to the modern urban industry.
From both historical and contemporary cross section perspectives, agricultural
transformation seems to endure at least four phases that are roughly definable according to
C.P. Timmer. The process starts when agricultural productivity per worker rises. The
increased productivity creates surplus, which in the second phase can be tapped directly,
through taxation and factor flows, or indirectly, through government intervention into the
rural-urban terms of trade. The surplus can be utilized to develop the non-agricultural
sector, and this phase has been the focus of most dual economy models of
development. The progressive integration of the agricultural sector into the macro
economy, via improved infrastructure and market equilibrium linkages, represents a third
phase in agricultural development. When this phase is successfully completed the fourth
phase is barely noticeable; the role of agriculture in industrialized economies is little
different from the role of steel, housing and insurance sectors.

2.4. Agricultural Transformation in Historical Perspectives

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 Agricultural development, which is also referred to be agricultural transformation or
agricultural modernization, is the gradual and sustainable transition of individual farms
from subsistence oriented to diversify and then more specialized market oriented
production.
The subsistence-oriented agriculture is characterized by:
 Low Productivity and Minimal Capital investment
 Use of simple traditional methods and tools
 Labor and land as the principal factors of production (Seasonal employment of Labor)
 Presence of disguised unemployment
 Production for household’s own consumption
 Dominance of staple foods in production
Subsistence agriculture is highly risky and the main motivating factor/force in this type of
agriculture is to maximize their family’s chance of survival, not profit. That means agriculture
in this case is a mode of life, not a mode of making money.

On the other hand, diversification in agriculture refers to the stage where part of the produce
is grown for own consumption and part for sale to the commercial sector. And in this form of
agriculture, the production is no more dominated by staple food crops, but includes animal
husbandry and cash crops that take up the idle labor.

2.5. The need for agricultural transformation (ASSIGNMENT 5%)

Economic development is a process of structural transformation, and agriculture is the essential engine
to jumpstart the process. Ending hunger and under nutrition are also important goals of agricultural
modernization and for economic transformation.

2.6. Phases of Agricultural Transformation

Based on the historical perspectives, economists identified four evolutionary stages of
agricultural transformation that calls for different policy approaches.
Stage One: The Economic Growth and Modernization Era of the 1950s and 1960s
This stage is about “getting agriculture moving” and this is the period where development was
defined largely in terms of growth in average per capita output (growth was defined only as
quantitative increase). Although, the growth of agricultural surplus was acknowledged at the
first stage of agricultural transformation, in 1950s most development economists did not
view agriculture as an important contributor sector to economic growth, by raising the
following arguments:

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  The income elasticity of demand for unprocessed food is less than unity; hence,
the demand for agricultural products grows more slowly than consumption of non-
agricultural products. Because agriculture’s share in the economy was assumed to be
declining. Economists of that time neglect the need to invest in agricultural sector.
 Others also argue that the scope of growth through agriculture and other primary
exports were very limited since the terms of trade to turn against countries that export
primary products and import manufactured goods. These economists advocate that
priority be given to import substitution of manufactured goods rather than to
production of agricultural export products.
However, in 1960s, other scholars argued the need to invest in agricultural sector since
agriculture has a potential positive force in development and agriculture and industry are
interdependent for economic growth and development. The analysis given by those economists
showed that:
 Food shortage could chock-off the growth in the non-farm sector, by making its labor
supply less than infinitely elastic. In the early stages of development a country need to
make some investment in agriculture to accelerate the growth of agricultural surplus.
 Agriculture could provide labor, capital and foreign exchange to the developing
economy and specifically to the industrial sector.
 It could also supply market for domestically produced industrial goods.
The “Green Revolution Model” was instrumental in convincing policy makers and
international donors to devote more resources to the development of new inputs for Third
World Farmers, such as high yielding and fertilizers responsive grain varieties. Intensification
of agricultural production based on high yielding cereal varieties offered the opportunities to
provide productive employment and outputs for the rapidly growing rural labor force. During
this phase, agriculture becomes a key contributor to growth. Thus, the policy interventions
focused on establishing market links with industry, technology and incentives to create a
healthy agricultural sector, and improving factor markets to mobilize rural resources.
Stage Two: The Growth-With-Equity Era of the 1970s
This stage is concerned with the interaction between income distribution and rate of economic
growth. The attention was given to income growth, income distribution and health and
education services. It was also concerned with employment generation and possible existence
of employment. It had become apparent that urban industry in most developing countries

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 could not expand quickly enough in the short run to provide employment for the expanding
rural labor force. Hence, the concern of development economics and planners shifted to
finding ways to hold labor force in the countryside.
The surplus generated in agriculture can be utilized to develop the non-agricultural sector
through a combination of factor inputs. For this matter, rural factor and product markets must
become better integrated with those in the rest of the economy. This is because improved
functioning of labor markets speeds up the process of extracting labor and capital from
agriculture, where returns are low and shifting to industry or service with higher productivity.
Therefore, in the early 1970s, rather than simply waiting for increase in average per capita
income to solve the problem of poverty and malnutrition, the greater attention has been paid
to employment, income distribution and basic needs such as nutrition and housing.
Stage Three: The Economic Growth and Policy Reform Era of the 1980s
In the third stage, agriculture is progressively integrated with the macro-economy through
improved infrastructure. At this stage, the relative importance of agriculture in the economy
substantially declines and economic dualism disappears. More attention was given to
macroeconomic policies related to income generation, agricultural sustainability and market
linearization. The policy synthesized how to trace effects of macroeconomic adjustments as
well as sectoral level policies on food production, income generation and the consumption
patterns of the poor.
Stage Four: The Policy Role in Agriculture and Rural Development Period since 1990
The fourth stage of agricultural transformation was the immediate result of the third stage in
which serious attention was given to macroeconomic and agricultural policies. For
macroeconomic and agricultural policies to succeed it requires:
 Sufficient domestic and international effective demand
 Public investment in research and rural development/Infrastructural facilities
 Stable political, environment, etc, which was the focus areas of this stage.
Generally, it was aimed at building a more dynamic and integrated rural economy, through
attaining more rapid, broad based agricultural growth and sustainable rural development. The
following few points are the focus areas of the coming decades which are required to attain
sustainable agricultural and rural development:

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 1) Agriculture and rural development require strong rural institutions and well
trained individuals, to relate smallholder agricultural farmers with research, training
and extension.
2) Public and private investment policies should be in such a way that promote
and accelerate agriculture and rural growth.
3) Agricultural development must satisfy the food requirement of rapidly growing
population to achieve food self-sufficiency.
4) Government should invest in expansion of public services to the rural economy such
as road construction, irrigation, water supply, etc.
5) Improved management and governance can also use economic resources
economically, effectively and efficiently.
2.7. Conditions for agricultural development
Conditions for Agricultural Development
 Academic Foundations
 Communications
 Problem Solving and Critical Thinking
 Information Technology Systems
 Knowledge of Safety, Health and Environment
 Leadership and Teamwork Skills
 Ethics and Legal Responsibilities
 Employability and Career Development
 Technical Skills
 Innovation
 Education
Innovation is one of the several strategies through which a farmer could change its situation
in the market in pursuit of its objectives. It is an instrument, which the farmer uses to enhance
its competitive power in the market. It provides a basis for greater degree of diversification &
hence growth of the farmer. The major elements of innovation or technological change are:
New agricultural products,
New methods of production,
New markets and
New forms of agricultural organization, etc.
An invention is the creation of the new technology. By 'technology' we mean any tool or
technique, any product or process, any physical equipment or method of doing or making, by
which human capability is extended. It is an intellectual act which involves a perception of a
new image, of a new connection between old conditions, or of a new area for action. All
inventions, big or little, are made for some practical uses. The process of adopting an
invention in a practical use is called innovation. It is the implementation of a new or
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significantly improved idea, good, service, process or practice that is intended to be useful. If
the existing product line is changed by a firm, i.e. it introduces a new product with or without
displacement of the old ones, and then it is defined as product-innovation. If a new method is
initiated to produce existing products then it is process innovation. Both of these are the
elements of 'technological innovation'. When a firm makes changes in its marketing strategy
we define that as 'market-innovation'.
In case of agricultural development the contribution of education are the following:
1. It will directly improve the productivity of agriculture
2. It will improve the probability of getting off-farm employment
3. It will lead to improved family planning
4. It can improve the health and nutrition of the people and its impact is felt over generation
5. By widening the horizons of knowledge; it can enable them to overcome ignorance
and superstitions
6. It can improve the risk taking and managerial capacity of the farmer

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