ECONOMICS CHAPTER 6 – AGRICULTURE (book summary)

Agriculture and Economic Growth

- Agriculture plays a big role in the process of economic development

- Most developing countries rely on their agricultural sector to produce the food necessary to
feed their people
- Agricultural sector is a rich source of factor inputs to feed the growing industrial and other
modern sectors of the economy
a. Labor – the agricultural sector is virtually the only source of increased labor power for the
urban sector
b. Capital – Agriculture can be a major source of capital for modern economical growth
c. Foreign Exchange – In the early stages of growth, agricultural products serve as the principal
source of foreign exchange. It enables the economy to import capital equipment and
intermediate goods necessary for its continued growth
- It provides a rich market for the output of modern urban sector. The extent to which the rural
sector depends on products from the industrial sector is directly linked to the type of income
distribution current in the economy (If income distribution is highly uneven, the large majority
of population will be poor)

Lewis-Ranis-Fei (LFR) Model of Structural Traditional sector

- Economic growth model that captures the transition of an economy from being mainly
agricultural to becoming mainly industrial based
- In this model, there are 2 main sectors of an economy
1. Modern sector – based in cities
2. Traditional sector – based in country side

5.3 AGRICULTURAL TRANSFORMATION IN ASIA

- In the post war era, all the economies in Asia were dependent on agriculture
- Taiwan (1955-1998): Agriculture absorbed majority of its labor force, but gradually diminished
as service and industry sectors had risen
- Southeast Asia and East Asia had high GDP and agricultural growth, meanwhile, South Asia had
the opposite. Many of the economies in Asia were at the early stages of industrialization, thus,
high GDP and agricultural growth were hard to achieve. The future “miracle economies” were in
the high growth group compiled by the World Bank (1982).
- Exceptions
a. Indonesia and Malaysia: did not have to rely exclusively on primary products due to their
large mineral imports
b. Korea: Had large local savings due to large amounts of foreign borrowings
c. Hong Kong and Singapore: Did not have any agricultural resources, thus, focused on labor-
intensive manufacturing
- The tendency of agriculture’s share of income to fall can be explained by 2 powerful effects
1. Engle’s Law

Low-income elasticity of demand for agricultural products

 • Since demand grows slowly, agricultural sector lags behind other sectors and the rest of
the economy
2. Green Revolution
• The combination of low-income elasticity of demand and sluggish price exerts strong
pressure on resources to move out of the sector
• Occurred in the industrialization movement in 1960s
• Further contributed to the decline in agriculture by increasing agricultural productivity
• Migration to urban areas where industrial establishments needed more workers was
facilitated

5.3.1 Productivity in Agriculture

Timmer (1991)

- Agricultural productivity growth is generally higher than industry at the beginning of the process
(when industry was still weak and needed protection from foreign competition)
- There was a wide productivity gap between agriculture and the rest of the economy
- The surplus in agriculture fueled the beginning of the industrialization process

Agricultural Transformation in China

- The agricultural sector in China is significant because it employs more than 60% of the local
population, and feeds 25% of the world
- The growth of agriculture was rapidly increased by implementation of various agricultural
reforms
- The relaxation of the government opened the doors for diversifying production and producing
other food crops such as sugarcane and vegetables
- The rise in productivity and income served as a catalyst to accelerate domestic demand, thereby
further stimulating production in the manufacturing and service sectors
- The rise of industrialization shrank the share of agriculture in GDP to 15%
- Measures taken by China in order to remain competitive in terms of agriculture despite focusing
on other produce such as livestock was the use of Genetically Modified (GM) crops
- Agricultural growth was also very high in richer countries such as Korea and Japan

5.3.2 Agricultural Development in Monsoon Asia

- Asia receives much more rain on average than other regions

- The monsoon nature of the weather cycle led to a reliance in Rice production
- Rice needs more manpower, thus, the higher population densities in many parts of Asia
- Plantation Culture was practiced in most parts of Indonesia, Thailand, Philippines, and more
heavily on Malaysia
- 2 Key factors of the shift from Agriculture to Industry in Asia
1. Irrigation – helped regulate the level of water in the fields and allowed farmers to plant two
or three crops with an increase in income with the same number or workers
2. Higher yielding rice varieties – designed for a more stable water level, having shorter stem
and more fruit per plant, designed for irrigated land
 - Agricultural surplus was important because farmers had more income, and it permitted workers
to migrate to the cities to work in industries, without diminishing agricultural output

5.3.3 The Efficiency of Traditional Agriculture

- Peasant farmers have adapted and refined their methods in terms of agriculture

Three techniques used to test the efficiency of allocation of resources by traditional farming

1. Cobb-Douglas production
• Compared marginal value of products using different factors
• If marginal value is close to equal → resources were allocated efficiently
• Based on Indian data, variable factors were allocated efficiently, but, fixed factors such
as the working animals (water buffalos and bullocks) were not
• In order to utilize the animals, they must either be shared among farmers or used in a
wider land area which can utilize their work
2. Econometric studies
• Suggested that traditional farming utilized and allocated efficiently their resources
3. Linear programming model
• State of Maharastra, India
• There were inefficiencies since potential output was higher than actual output
- Conclusion, traditional agriculture is reasonably efficient, but can use minor adjustments

5.3.4 Why do peasant farmers resist innovation and modernization?

- Apparent resistance to innovation and modernization can be considered “backwards thinking”

1. Adapting innovation and modernization may alter the way of life of most farmers
• Farming was the main economic activity of over 80% of the rural sector
• All family members interact and socialize in the process
• Patters, tasks and individual roles may change
2. Uncertainty
• There is a question of “what if it fails?”
• Threat of starvation and further poverty
• Highly risky and human lives are at stake

5.4 THE MICROECONOMICS OF AGRICULTURE IN ASIA

What worked?

A. Green Revolution
- The phenomena created by the development of higher-yielding varieties of rice
- International Rice Research Institute in Los Banos, Philippines
B. Application of Fertilizers, Pesticides and Herbicides
- Increased use of fertilizer has been the single most important indicator of technological change I
agriculture
C. Irrigation
- Contributed to the water management, furthermore, to the agricultural development in Asia
- Increase in overall productivity and reduced the risk of flooding
 - Allowed farmers to introduce multiple cropping

What did not help much?

A. Farm size
- There is an inverse relationship between farm size and overall farm productivity
- Other factors such as farming intensity, land quality, and use of irrigation suggest that this
inverse effect disappears when other factors are help constant
- The inverse relationship may also be broken down when modern technologies are introduced
B. Changes in Land Tenure
- Major forms of Land tenure
a. Owner-operated farms
• These vary dramatically in terms of size
• Large – typically grow plantation crops such as coconuts and rubber. Uses hired labor
• Small – mainly dependent on family labor
b. Tenancy arrangements (2 kinds)
1. Tenant gives a portion of output to the landlord
2. Land is rented to the tenant at a fixed fee