The Role of Agriculture in Economic Development

1. The Role of Agriculture in Economic Development Presentation to Mozambique Seminar on Broad-Based Development through Economic Transformation and Job Creation 9-11 February 2011, Maputo, Mozambique Alex F. McCalla Professor Emeritus of Agricultural Economics University of California-Davis

2. Better title: The Ever Changing and Critical Role of Agriculture in Economic Development Economic history shows that economic development is driven by two dynamic evolutions: • Economic Transformation from Agrarian Society->Industrial Economy->Mature Service Based Economy • Demographic Transition from High Birth and Death Rates to Low Death and ultimately Low Birth Rates The two evolutions are related e.g. higher incomes and capital substitution for labor influencing birth rates Today I will focus on the economic and especially the agricultural transformation

3. The Economic and Agricultural Transformation • The conversion from hunter/gathers to sedentary agriculture was a necessary prerequisite to development because it freed time for other tasks (Jared Diamond: Guns, Germs and Steel ). We must recognize it as a critical precursor to everything that follows. Development begins with agriculture. • As early farmers produce more food than they need, other activities emerge, first as non-farm rural activities and then towns form. • Invention and discovery generate production of tools and other industrial products. • As incomes rise, service economy emerges, eventually dominates. • With development, the agricultural sector declines from being the dominant sector in terms of share of labor force and GDP to a relatively small sector, in rich countries both less than 5%.

5. The Economic and Agricultural Transformation (2) • There is little disagreement about what happens: • Ag’s share of labor force and GDP declines throughout the process • But in early stages, rural labor force is still increasing in absolute terms and usually doesn’t contract until well into transformation • Agricultural GDP continues to increase but slower than total GDP • Agriculture is a positive contributor to GDP and is releasing labor • But lots of debate about how this happens? And is there a positive role for agriculture in the process? • Because agriculture declines, does this mean it is not important and can be ignored? Is it a backward sector to be squeezed? • Or does agriculture require investment and an active and strategic policy approach-can it be a leading sector?

6. My “Role of Agriculture” story has three parts I will focus on the transformation after agriculture is established: • Growth of agricultural output in last 10,000 years has supported incredible population growth from 5 million to 7 billion, the last 4 Billion since 1960“The development of agriculture and food production since that time (10 millennia ago) can only be described as phenomenal” D. Gale Johnson • A closer look at the debate about agriculture’s role • Agriculture’s role in the Industrial Revolution and the critical role of science and technology in supplying exploding population growth with an increasingly nutritious food supply

7. Agriculture, Population Growth and Food Supply (1) Lloyd Evans Feeding the Ten Billion (1998) tells how the world fed each billion. He tells the story of the phenomenal production performance of agriculture. Population grew slowly at first and then exploded. • 50 Years ago (1960) world population reached 3 billion, having increased from 2 to 3 billion in just 33 years • The second billion had taken 102 years (1825-1927) • And the first billion took from the origins of humans. • Virtually all of the increased food production needed to feed the first 2 billion came from expanded area under production and an expanding suite of domesticated plants and animals including valuable plants like maize and potatoes brought from the Americas.

9. Agriculture, Population Growth and Food Supply (2) Despite pockets of scientific agriculture in Western Europe and Japan in the 19th century, the third billion was primarily fed by (1) a 40% increase in area cultivated, and (2) the mechanical revolution which freed up 130 million hectares, previously producing fuel for horses, for food grain production. It is only after 1960 that increasing yields per hectare became the major source of increases in food supply. • Adding the fourth billion took just 15 years (1960-1975) • The fifth billion arrived in 11 years (1975-1986) • The sixth in 13 years (1986-1999) • The seventh arrives this year after just 12 years

10. Agriculture, Population Growth and Food Supply (3) The vast majority of the increase in food production needed to feed this more than doubling of world population in the last 50 years came from increased productivity. Modest increases in area since 1975 were more than offset by loses of productive land to other uses and soil degradation. Clearly the application of science to agriculture had research roots dating back at least to von Liebig in the mid 19th century. But it was increasing investments in applied research in developed countries in the first half of the 20th century that led to the genetic and chemical revolution that drove agriculture in the second half of the 20th century.

11. Peter Timmer - The Role of Agriculture (1) “For both macro-economic and micro-economic reasons, no country has ever sustained the process of rapid economic growth without first solving the problem of food security” • For Timmer, lessons of economic history are compelling- agricultural growth must as a minimum accompany or even precede general economic growth. • Because of Engel’s Law, the demand for food grows more slowly than growth in income, and because agricultural productivity historically increased faster than other sectors turning terms of trade against agriculture, the rate of growth of agricultural GDP was often less than for the general economy. • Result: agriculture is a perpetually declining sector. This is normal and not a sign of backwardness or unimportance. • And the more rapid overall economic growth, the more rapid the decline of agriculture as a share of the work force and GDP.

12. Peter Timmer - The Role of Agriculture (2) • During the 1950s and 1960s, agriculture’s declining share was seen as a reason to tax agriculture, not invest in agriculture, because it was going to decline anyway. • View strengthened by idea that agriculture had surplus labor whose loss would have no impact on food supply -the marginal product of ag labor was seen as zero. • Under this view, agriculture provides dynamic industrial sector with food, labor, and financial resources withdrawn with export taxes and/or over valued exchange rates • Labor surplus models like Lewis, and Fei & Ranis, gave theoretical support to this paradigm.

13. Peter Timmer - The Role of Agriculture (3) Despite a seminal American Economic Review article by Johnston and Mellor in 1961which argued that agriculture contributed to overall development in five important ways: • increased food supply • released labor • market for industrial output • supply of savings • and increased foreign exchange earning Agricultural growth driven by productivity improvement has remained a low priority issue, except during and after price spikes.

14. Peter Timmer - The Role of Agriculture (4) Agriculture has a critical but constantly changing role: • needs early investments to generate labor using production increases to soak up growing rural labor force and reduce poverty; • As population grows investments in biological and mechanical productivity increases needed to generate greater food surplus and release labor; • Encourage the development of non-farm rural enterprises growing out of expanded agricultural production: • Investments in rural infrastructure, especially to give access to both input and output markets; • Developing rural institutions for education, credit, governance, The sector should not be neglected!

15. D. Gale Johnson - The Last Word (1) A two quotes do him the most justice: • The Industrial Revolution was made possible by two significant agricultural improvements: rapid increases in labor productivity, which permitted labor to be released from agriculture to produce other useful things; and simultaneous increases in food production to provide for the growing population”. Johnson notes that the population / food supply race, made famous by Robert Thomas Malthus in 1798, has been a constant concern since the beginning of time. The perception that constraints on food supply would ultimately limit population growth was kept at bay most the time until the 18th century by expanding the area under production, and since the 18th century by phenomenal increases in productivity.

16. D. Gale Johnson- The Last Word (2) • I emphasize three major factors that I consider responsible for the remarkable period of economic growth that has occurred over the past two or three centuries that permitted breaking free from the limits imposed by food supply. The first factor is significant advances in agricultural productivity in the 18th and 19th centuries. The increase in agricultural productivity made possible the development of cities as the major focus of future economic development and growth. The second factor is the enormous increase in knowledge …made possible by increasing population and rising real per capita incomes…The increase in real income permitted the allocation of substantial resources to the creation of knowledge. The third factor… is that the response of families to the removal of restraints on their well-being imposed by limited food supplies was not significantly increased fertility…”

17. Implications for Mozambique Instructive to think about where in the process of Agricultural Transformation Mozambique may be:- • Population Distribution: 70% rural, 96% of which has a close relationship with agricultural production • Employment Distribution: >67% of those employed are in agriculture, unemployment rate > 20% • GDP share: Agriculture 25% (from 2003 to 2009) • GDP/capita: $440 in 2009 • Population growth rate: 3.0% (the demographic transition not finished) Where does that put us on our diagram?

19. Implications for Mozambique So Mozambique is in early stages of the agricultural transformation (left side of our diagram) • Population and labor force still dominantly in agriculture/rural sector • Agricultural share of GDP considerably less than labor share, suggesting low productivity in agriculture • Population growth rate is still high, meaning the agriculture labor force is still growing in absolute numbers • Poverty rates (rural 56.9 % and urban 49.6%) are high, more so poverty concentrated in rural sector

20. Policy Implications for Mozambique Rural/Ag sector will remain large and important for a long time with the rural labor force still increasing. So large numbers aren’t going to leave agriculture soon. Smallholder development models that generate employment needed: • Suggests focus on expanding labor intensive ag production – producing vegetables uses five times as much labor as cereals; ditto captive livestock production. • Support development of rural non-farm enterprises - which can eventually become an engine of growth. • Invest in agricultural research & extension - improved agricultural productivity critical for long run development because it releases labor. • Rural infrastructure - surplus producer in North importer in South; generally access to markets is critical.

21. Policy Implications for Mozambique Rural/Ag sector will remain large and important for a long time with the rural labor force still increasing. So large numbers aren’t going to leave agriculture soon. Smallholder development models that generate employment needed: • Suggests focus on expanding labor intensive ag production – producing vegetables uses five times as much labor as cereals; ditto captive livestock production. • Support development of rural non-farm enterprises - which can eventually become an engine of growth. • Invest in agricultural research & extension - improved agricultural productivity critical for long run development because it releases labor. • Rural infrastructure - surplus producer in North importer in South; generally access to markets is critical.

22. Recommended Reading • Hunter/Gathers to Sedentary Agriculture - Guns, Germs and Steel, Jared Diamond, Norton. 1999. • Evolution of Food Production - Feeding the Ten Billion. Lloyd Evans, Cambridge, 1998. • “Agriculture and Economic Development." Peter Timmer in Handbook of Agricultural Economics. Vol 2A Elsevier, 2002 • “Agriculture and the Wealth of Nations." D. Gale Johnson, American Economic Review (AER), May 1997. • "Population, Food and Knowledge." D. Gale Johnson, AERMarch 2000.