AGRICULTURAL SECTOR

Unique characteristics of Agricultural sector

1. GDP share
2. labor force share
3. special characteristics of the agricultural production function
4. agro output consumed by producers
5. agri role as resource reservoir

 most nonfarm activities depend on vibrant agricultural sector

 consumption side role of agri
o 50-70% of household expenditure is food expenditure
 Agri sector
o Sheer number of participants (thousands)
o decentralized

Agri production function

1. Seasonality
a. Distinct seasons
b. Cost minimization
c. Strict timing requirements may lead to labor shortages at critical times
2. geographic dispersion
a. unique use of surface area
b. efficient marketing of both in outs and output is important for agri development
3. the sources of risk
a. prices
i. varies across and within seasons
ii. farmers must commit resources and potentially take on debt
1. they don’t know the price that they’ll receive for the outputs
b. weather
i. unique to agri sector
4. the sources of technical change
a. drives growth in agricultural productivity
b. challenges for policy makers
c. agri tech is highly context specific

STRUCTURAL TRANSFORMATION

 defining characteristics of economic development is the structural transformation

o early stages of economic development, agriculture dominates both GDP and employment
shares in the economy
o shift of sector proportions away from agriculture toward industry and services
o migration of rural to urban
o structural transformation PHASES
1. increase in output per worker (average labor productivity)
 creates surplus in rural economy
2. transfer of surplus from agri to non-agri
 direct taxation
 indirect other govt intervention
3. progressive integration of agri and non-agri
4. agri fully integrated in the macroecon
 decline in the relative size of the agriculture share in income = demand for food grows more
slowly than income
o Engel’s law- proportion of income spent on food declines as income rises
  The concentration of poverty in rural areas that it is implied by the gap between rural employment
shares and agriculture’s share in GDP also implies that average labor productivity tends to be
higher in nonagricultural sectors.
 Growth in agricultural productivity plays a critical role in facilitating the release of labor and capital
from agriculture for employment in industry and services.

TWO SECTOR MODELS

 Dual-sector growth models provide a stylized depiction of the interactions between the
agricultural and nonagricultural sectors of the economy, specifying the conditions under which
labor and capital migrate from agriculture to nonagriculture. The dominant dual-sector model,
developed by Lewis and elaborated by Fei and Ranis, assumes that the defining characteristic
differentiating agriculture from nonagriculture is the existence of surplus labor with low or zero
marginal product.


 At point g: MPL =0
 The Lewis and Fei-Ranis models were widely misinterpreted by policy makers in developing
countries as a justification for ignoring agriculture’s potential contributions to growth and
concentrating investment on industrial development.
 Subsequent research demonstrated a more nuanced role for agriculture in economic growth by
considering intersectoral linkages. Building on the Lewis linkages, through which agriculture
supplies labor and capital to nonagriculture
o Johnston and Mellor compiled a broader list of linkages,
1. agriculture’s role in supplying food for non-agricultural laborers
2. agriculture’s importance in earning the foreign exchange necessary to finance
industrialization
3. agriculture’s role as a source of demand for the output of the nonagriculture
sector
 Intersectoral linkages also include the benefits to investment from agricultural price
stabilization and agriculture’s contribution to growth by supporting improved nutrition (and
health) of the labor force. Agriculture provides a potent vehicle for addressing poverty, much of
which is concentrated in the rural population. These contributions are direct and indirect and
include both those employed in agriculture and net food consumers for whom agricultural growth
reduces the price of food, often the major share of the household expenditures.
 On average, a 1 percent increase in aggregate GDP originating in agriculture has about three
times the effect in reducing national poverty as a 1 percent increase in aggregate GDP
originating in nonagriculture.
• Three mutually reinforcing avenues, through which agriculture can
provide a pathway out of poverty, are
increased on-farm output
increased engagement in rural labor markets and nonfarm rural employment
 and
migration to cities.
• Although many middle-income countries have grown out of their
dependence on agriculture, it is clear that agriculture still has a central role
to play in the development of some of today’s most challenging regions,
large parts of sub-Saharan Africa in particular.