Economist, October 4th 1997
Stranded on the farm?
Industrialisation is the standard measure of
economic development. But there is no reason why agriculture should hold back an economy
development is more a slogan than a term with a precise definition. But in the
thinking of politicians and economists around the world, it has long been synonymous with
industrialisation. Todays advanced economies grew rich by shifting
resources from agriculture into industry, so it is no wonder that emerging economies from
India to Brazil have sought to emulate that trick by fostering manufacturing.
This belief in the importance of industry has come into conflict with one of the fashions
of the 1990s, freer trade. In principle, reductions in trade barriers could open new
markets for manufactured exports from developing countries. But there is no assurance that
this will happen. Under free trade, after all, each country will tend to specialize in
those products in which it is relatively most efficient, compared with other countries.
This might mean that some countries will end up producing coffee and cattle rather than
computers and cars. If they get stuck in agriculture, are they condemned to
poverty and slow growth?
This is a question that some economists have taken seriously. Kiminori Matsuyama, a
professor at Northwestern University in America, showed several years ago* that under free
trade countries richly endowed with arable land and natural resources might grow more
slowly than others. Such natural wealth would encourage the growth of agriculture at the
expense of industry. This matters because in Mr Matsuyamas model manufacturing is
special. He assumes there are economies of scale in manufacturing: the more resources
employed in the sector, the faster productivity will grow. But is it not possible that
agriculture, too, can have large productivity improvements as more capital and other
resources are invested? If this were to happen, agriculture could have a special role in
stimulating growth, just as Mr Matsuyama assumes manufacturing does.
The fruits of freer trade
The empirical evidence on this point is mixed. As Mr Matsuyamas model assumes, the
relative importance of manufacturing in Latin America has been shrinking over the last
decade as trade liberalisation has taken hold (see chart). However, the consequences may
not be as bleak as he expected. This is because, so far, productivity growth in
agriculture has been as fast as in manufacturing.
Chile provides a good test case. Since the country opened up to trade in 1976, the
relative size of its manufacturing sector has declined. Manufacturing accounted for 27% of
Chiles GDP in 1973; in 1995 its share was only 16.8%.
Agriculture, on the other hand, has not declinedas traditional models of development
would have predictedbut instead has grown modestly as a share of GDP.
The decline of manufacturing has not meant slow growth, however. Chiles economy has
expanded at an average rate of 7.2% since 1987. Exports have been the engine of growth and
agricultural products have been star performers. Chile went from being a small player in
the global fruit market, exporting just apples in the 1960s, to become one of the
worlds largest fruit exporters in the 1990s.
Such exports may not be manufactured, but the businesses that make and export them have
been using increasingly sophisticated production technology and management methods.
Although table grapes are by far the main fruit export, Chile began exporting wines in a
significant way in the 1980s and achieving important world market shares in the 1990s.
Similarly, fish exports, once produced almost entirely by an ocean-going fleet, are now
seeing the growth of salmon farms. This sort of technological advance has meant marked
productivity increases in agriculture and higher incomes.
So does agriculture offer an alternative path of economic development? We used to
think that countries would develop by climbing ladders of production that would go from
textiles, to clothing, to toys and eventually electronics, says Ricardo Hausmann,
chief economist at the Inter-American Development Bank. Now we know that there are
different ladders and countries can grow by going from fruit to wine, furniture,
salmon . . .
Fair enough, say some advocates of industrial policy. But even if agriculture is highly
productive, emerging economies need to industrialise because there is a limit to the
demand for foodstuffs. This contention is based on the well-established finding known as
Engels law, which holds that people tend to spend a smaller share of
their budgets on food as their incomes rise. Engels law, however, does not mean that
agriculture will, sooner or later, become a slow-growth sector. Rather, it implies that
producers must constantly adapt to changing tastes: wealthier societies may consume less
manioc and potatoes, but spend more on beef, fruits and oven-ready frozen foods.
There is one final argument against the idea that countries will end up getting
stuck in agriculture. This worry assumes that a countrys comparative
advantage is static, so that a country that grows bananas today will inevitably grow
bananas in 20 years time. This need not be the case. If a country does what it does
best and sees its incomes grow as a result, it can afford better education and
infrastructure. These, in turn, will give it an advantage in other products in future.
Just as few could have predicted the dramatic growth spurt of East Asian economies 30
years ago, it is hard to forecast today how open, agriculturally-rich economies will
continue to develop. It may be that they will move towards a service economy without ever
having a large industrial sector. Or they may find new ways to prosper from their natural
resources. Although open trade may make it difficult for them to establish certain kinds
of industries, this does not necessarily doom them to slow growth. But it does not
guarantee fast growth either. Their own economic policies matter, but so do the trade
policies of wealthier nations. Many of these are more protectionist towards farm products
than towards manufactured goods. No wonder officials in many emerging economies worry
about being stranded on the farm.
* Agricultural Productivity,
Comparative Advantage, and Economic Growth. Journal of Economic Theory 58,
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