February 27, 2024

Can agriculture foster economic development?

Agricultural infrastructure can be promoted to help create the value-additions from the agriculture produce and to transport the produce to both domestic and international markets.
Keywords: Reforms | Development | Agriculture | Economy | Northeast India | Farmer | Market | Manufacturing | Service | Labour | Productivity | Infrastructure     
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This article explores whether an agriculture-led development model is suited for the north-eastern states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura. It begins with a brief background of agriculture-led development models and then proceeds to examine the north-east region as a case study. 

Agriculture-led development models

Unlike Keynesian development models that advocate savings and investment, an agriculture-led development model argues for the development of the agricultural sector to fuel the rest of the economy. This implies that resource allocation will be in favour of agriculture. It is particularly useful for states that are predominantly agrarian like in the north-eastern region where 70 percent of the region’s workforce is engaged in agriculture. In this model agriculture is first developed until a structural change of the labour force occurs – where labour moves out of agriculture into more productive sectors like industry or services. Subsequent theorists like Johnston and Mellor (1961) viewed agriculture as central to the development process, providing surplus labour, supplying food and contributing to foreign-exchange, lacking which development cannot take place. 

Empirical evidence shows that agriculture is over twice as effective in reducing poverty than either the manufacturing or service sectors (World Bank 2007). It increases labour productivity and wages, and produces savings that are invested in other sectors. Drawing from this argument, agriculture plays a key role in escaping a “poverty trap” as it is labour intensive, employing a large section of the population. 

Harris and Todaro (1970) and Mellor and Johnston (1984) argue that encouragement of agriculture in the initial stages of the development cycle, increases agriculture-dependent household income, increases their spending power and eventually reduces overall poverty. In essence a four-stage transmission mechanism for poverty-reducing growth occurs. First, food becomes cheaper and farm incomes increase, thereby creating more jobs, and finally incomes multiply which stimulates economic diversification. What is clear is that structural transformation from agriculture to manufacturing and services is inevitable as a country develops. However, this growth should be corresponded by an equal share of the labour force moving out of agriculture into more productive sectors. 

How successful such a model is will depend on the absorptive capacity of the manufacturing sector – how effectively they can make use of the excess agricultural inputs. Essentially, how will the manufacturing sector make use of the structural change that is assumed to occur? It is shown that the more competitive the manufacturing sector (or other productive sectors), the more the benefit from agricultural-led development models. A policy implication therefore is to ensure that the structural transformation of labour occurs. Particularly for countries like India that have a growing population it is important to fast-track this labour-shift. Paradoxically, the process of development eventually limits the role of agriculture and favours industrialisation (Kuznets 1973). 

Johnston and Mellor (1961) outlined five ways by which agriculture can promote economic development. The first is meeting increased food demands as a country develops, second, as “a means for increasing income and foreign exchange earnings”, third and fourth, in contributing capital and labour to advanced sectors, and fifth, by stimulating the economy through increases in farm wages (Johnston and Mellor 1961, 572). The authors note that income elasticity of demand for food is higher in developing countries, implying a greater demand for agricultural produce as a country develops. Their argument views agriculture as stimulating a chain reaction for development. Others call for greater government intervention when pursuing an agriculture-led development strategy, especially to help maintain the growth of agriculture and to raise productivity and incomes (Timmer 1992). Overall, a strongly positive link is found between agriculture and long-term economic development in both Asia and Africa, and is stronger with increased trade openness (Awokuse 2009). 

Is the model suitable for Northeast India?

70 percent of the region’s workforce is engaged in agriculture, majority of which is rural (Jana and Basu 2018). 22 percent of the land is cultivated (Jana and Basu 2018). 78 percent of cultivated land is owned by small or marginal farmers (Jana and Basu 2018). The prevailing climatic conditions are suitable for growing many crops as the land is fertile and the region is blessed with abundant water resources and reliable rainfall. As of 2006, the population was growing at 5 percent every year (Barah 2006). 98 percent of the region’s borders are international with countries which all offer markets for agricultural produce. The region provides a conducive environment for an agricultural-led development model. 

Already, around 30 percent of the region’s cumulative gross domestic product comes from agriculture. Coupled with a growing population and high literacy rates, the stage is already set for the region to experience structural transformation which can stimulate a chain reaction for development. Given that the region is rich in other natural resources, it is a textbook example of the transitioning process from agriculture to manufacturing and services. 

Dominant crops of the region include cereals, maize, tea, ginger, potato, cardamom, peas and horticultural produce. Manipur grows an indigenous variety of olive, Meghalaya has turmeric, Tripura grows pineapples, and Nagaland grows the bhut jolokia, all of which have an existing market. Interestingly, the majority of the crops are grown using organic methods, which attract higher prices and are in growing demand in international markets. These crops can easily be exported for two reasons. First, a demand in the bordering countries already exists and second, the location of the region already gives it a vantage point in terms of export. For example, Tripura shares a border with Bangladesh, a populous country with which to trade. The region also benefits from trade openness which is shown to have a positive impact on agriculture and development. It receives Foreign Direct Investment (FDI), although negligible compared to the rest of the country. However, efforts are underway to increase FDI in the region. Its biggest advantages however are its close proximity to international borders, the existing international trade, labour, fertile soil and abundant water. 

However, challenges do exist. Firstly, logistics which will become easier as road, rail and air connectivity improves. Moreover, given its large geographical area spread across varying terrains transportation is expensive. In agriculture, it is imperative to keep costs low particularly for distribution of agricultural produce. Secondly, productivity needs to be improved Alternatively, value-additions may be required to demand better pricing. For example, jams can be made from fruits, peas frozen or tomatoes sundried. Finally, agricultural infrastructure can be promoted to help create the value-additions from the produce and transport it to both domestic and foreign markets. For example, cold storage units, bottling factories, food-testing labs, and packaging units can be set up. Tripura, Arunachal Pradesh and Assam for instance could be potential locations for food-processing centres. Challenges aside, given that agriculture is weather and labour dependent, and benefits from open trade, the north-eastern region can easily leverage its natural comparative advantage to fast-track its development using an agriculture-led development model. 

References:

Awokuse, T.O (2009) ‘Does Agriculture Really Matter For Economic Growth In Developing Countries?’, paper presented at American Agricultural Economics Association Annual Meeting, Milwaukee, 28 July, doi:10.22004/ag.econ.49762 (accessed 10 January 2020)

Barah, B.C (2006) ‘Agricultural development in North-east India: Challenges and Opportunities’, ICAR Policy Brief 26,

http://www.ncap.res.in/upload_files/policy_brief/pb25.pdf (accessed 17 January 2020) 

Diao, X; Hazell, P, and Thurlow, J (2010) ‘The Role of Agriculture in African Development’, World Development 38: 1375-1383, doi: https://doi.org/10.1016/j.worlddev.2009.06.011 (accessed 10 January 2020)

Jana, H., and Basu, D (2018) ‘Agricultural backwardness analysis of North-east India: A cause of concern for national development’, International Journal of Current Research 10 (12): 76825-76831. 

Janvry, A, and Sadoulet, E (2010) ‘Agricultural Growth And Poverty Reduction: Additional Evidence’, The World Bank Research Observer 25: 1-20, https://www.jstor.org/stable/40649308 (accessed 10 January 2020)

Johnston, B.F., and Mellor, J.W (1961) ‘The Role of Agriculture in Economic Development’, The American Economic Review 51: 566-593, https://www.jstor.org/stable/1812786 (accessed 10 January 2020)

Kuznets, S (1973) ‘Modern Economic Growth: Findings and Reflections’, The American Economic Review 63: 247-258, http://www.jstor.org/stable/1914358 (accessed 12 January 2020)

World Bank (2007) World Development Report 2008: Agriculture for Development, Washington DC: World Bank, https://openknowledge.worldbank.org/handle/10986/5990 (accessed 10 January 2020)

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Shreya Challagalla

Shreya has completed her masters in development from the Institute of Development Studies, UK. She has previously been associated with ORF and is currently a Senior Research Fellow at IF.

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