The role of agriculture in economic development. Focusing on linkages beyond agriculture

Academic Paper, 2020

33 Pages

Dr. Veena Soni (Author)


Table of Contents

1. Introduction

2. Agriculture and economic growth

3. Drivers of change
Globalisation and liberalisation
Vertical coordination in international value chains
Increasing limits to natural resource use
Climate change

4. Economic development and pro-poor growth
Does economic growth lead to poverty reduction?
The role of agricultural trade56

5. Linkages between agricultural and non-agricultural sector
Backward and forward linkages
Factor markets: land, labour and capital

6. Inclusion and exclusion: the role of small farms

7. Discussion and conclusion



The role of agriculture in economic development

1. Introduction

Those of us who preach the gospel of agriculture with evangelical zeal find the text compelling and convincing. We are regularly possessed by the spirit only to look around and see out colleagues, in other sectors, in country management, or even our senior management doubting, yawning or subtly edging towards the door. We face the implicit query, “If agriculture can do such great things, why have they not yet happened?”1

The past decade has been one of agro-pessimism. The promises that agricultural development seem to hold did not materialise. This pessimism seemed to coincide with pessimism about Sub-Saharan Africa. Especially for Sub-Saharan Africa the hope was that economic development would be brought about by agricultural development. After the success of the green revolution in Asia, the hope was that a similar agricultural miracle would transform African economies. But this hope never materialised, agricultural productivity did not increase much in SSA (figure 1), and worse, the negative effects of the green revolution in Asia became more apparent, such as pesticide overuse and subsequent pollution. Also in Asia the yield increases tapered off.

The sceptics put forward several arguments why agriculture is no longer an engine of growth2. For instance, the liberalisation of the 1990s and greater openness to trade has lead to a reduction in the economic potential of the rural sector: cheap imported Chinese plastic buckets out compete the locally produced pottery. On the other hand, it does mean cheaper (imported) supplies. With rapid global technical change and increasingly integrated markets, prices fall faster than yields rise. So, rural incomes fall despite increased productivity if they are net producers3. The integration of rural with urban areas means that healthy young people move out of agriculture, head to town, leaving behind the old, the sick and the dependent. It is often also the men who move to urban areas, leaving women in charge of the farm. This has resulted in the increased sophistication of agricultural markets (and value chains) which excludes traditional smallholders, who are poorly equipped to meet the demanding product specifications and timeliness of delivery required by expanding supermarkets. The natural resource base on which agriculture depends is poor and deteriorating. Productivity growth is therefore increasingly more difficult to achieve. Finally, multiplier effects occur when a change in spending causes a disproportionate change in aggregate demand. Thus an increase in spending produces an increase in national income and consumption greater than the initial amount spent. But as GDP rises and the share of agriculture typically decreases, the question is how important these multiplier effects are, especially when significant levels of poverty remain in rural areas, which is the case in middle- income countries4.

The disappointment with agriculture led many donor organisations to turn away from agriculture, looking instead to areas that would increase the well-being of poor people, such as health and education. Those organisations that still focused on agriculture, such as the CGIAR, were put under pressure to focus more on reducing poverty, besides increasing agricultural productivity. However, since the beginning of the new century, there seems to be a renewed interest in agriculture. A review of major policy documents5, including the well-publicised Sachs report and the Kofi Annan report, show that agriculture is back on the agenda again. The most influential report, however, has been the World Development Report 2008 of the World Bank6. This report argues that growth in the agricultural sector contributes proportionally more to poverty reduction than growth in any other economic sector and that therefore alone, the focus should be on the agricultural sector when achieving to reach MDG 1.

A reassessment of the role of agriculture in development seems to be required. This policy paper addresses several timely though complex questions:

- First, how can or does agriculture contribute to economic development, and in particular how does it relate to poverty?
- Second, the agricultural sector has changed considerably in the past decades: what are the main drivers of this change?
- Third, what is the relationship between economic or agricultural growth and pro-poor development?
- Fourth, how does agriculture relate to other sectors in the economy?
- Fifth, who is included and who is excluded in agricultural development, specifically focusing on small farms?
- And finally, if agricultural development is indeed important to economic development, then why, despite all the efforts and investments, has this not led to more successes?

2. Agriculture and economic growth

This section presents a number of factual observations describing how the agricultural sector changed in terms of productivity, contribution to economic growth, and indicating the relevance of the agricultural sector for poverty alleviation in different regions.

Background: some facts

In the discussion of the role of agriculture in economic development, a leading question is how agriculture contributes to economic growth, and especially to pro-poor growth. There seems to be a paradox in the role of agriculture in economic development. The share of agriculture contributing to GDP is declining over the years (see figure 1). At the same time, the productivity of for instance cereal yields has been increasing (see figure 2). It seems that as agriculture becomes more successful, its importance declines in the overall economy. Of course, other sectors in the economy can be even more successful, such as the Asian Tigers.

Figure 1: Share of agriculture (value added) in GDP7

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A quick reading of figure 1 might suggest that focusing on other sectors of the economy at the expense of agriculture is a recipe for economic growth. Of course, with the benefit of hindsight, most observers today now agree that the agricultural sector contributes to economic growth, but that economic growth reduces the role of agriculture in terms of GDP8.

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Figure 2: Average yield of cereals (kg per ha)9

The share of the population living in rural areas is also declining (see figure 3), with increasing urbanisation areas becoming more populated, sometimes very rapidly. In South Asia and Sub-Saharan Africa, the share of rural population is still well above 50%. In the other regions of the world there are now more people living in urban areas than in rural ones.

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Figure 3: Share of population in rural areas from 1950-2003 (projected)10

The number of poor people living in cities has grown parallel to increasing urbanisation. Despite this, the share of poor in rural areas remains higher; i.e. there are relatively more poor people in rural areas than in urban areas with estimates varying from 60%11 to 75%12. The shares differ substantially per country (see table 1), but the main message here is that for poverty reduction, it is important to focus on rural areas where still the majority of the poor live in terms of share and number of poor.

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Table 1: rural and urban poverty in a few selected countries (in % of population below the poverty line)13

Agriculture constitutes the main source of employment of the majority of the world’s poor. In total, the share of agriculture in total employment in developing countries constitutes 53% of the total workforce in 2004. In Sub-Saharan Africa 60% of the economically active population works in the agricultural sector14.

Much effort has been put into trying to raise productivity in agriculture, and calls have been made for more investment in agricultural science and technology, especially for Africa15. The reasons for this seem evident when one considers the productivity growth in developing countries (see figure 4). In many regions (much) progress has been made in raising land and/or labour productivity measured in output quantity units16 (see also figure 2 for cereal productivity). When productivity is measured as value added per hectare arable land or labour, Sub-Saharan Africa has not made much progress. East Asia and the Pacific, as well as South Asia experienced productivity growth in terms of value added per unit of land, but not much in terms of value added per unit of labour. Thus although progress has been made in some regions in raising productivity, many other regions have lagged behind.

Figure 4: Labour and land productivity in agriculture 1961-200317

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When we measure agricultural growth, in terms of value added annual % growth, Sub-Saharan Africa has performed better than East-Asia and the Pacific in the past 10 years (see figure 5). It seems that the agricultural sector Sub-Saharan Africa has made some progress towards closing the gap with East Asia & the Pacific.

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Figure 5: Annual agricultural growth (value added, in %) in Sub-Saharan Africa and East Asia & Pacific18

Figure 6 shows big differences in agricultural value added (per worker) of the different regions in the world. Asia and Africa both have very low levels of value added, compared to Latin America, Europe or the Middle East. This illustrates the importance of low value, subsistence agriculture in Asia and Africa.

Figure 6: Value added per agricultural worker, in constant 2000 US$19

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In conclusion, we can say that in most developing regions, agricultural productivity has increased considerably, except in Sub-Saharan Africa and South Asia, where labour productivity gains have hardly materialized, and land productivity only somewhat in South Asia. The Green Revolution and other technology changes that increase productivity seem to have bypassed these regions and the gains of the Green Revolution are diminishing. Annual agricultural growth decelerated in East Asia, but has been quite constant level in Sub-Saharan Africa. These figures do not say much about underlying trends and driving forces, which are the subject of the next section.

3. Drivers of change

The above section highlighted with facts and figures how the agricultural sector has changed over the past decades. Some general underlying causes of change of these facts and figures will be addressed in this section, although a full discussion on the differences between regions is not given here.

Globalisation and liberalisation

Globalisation refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labour) and knowledge (technology) across international borders. Liberalisation in this context refers to the policy reforms accompanied by privatization and domestic price reforms that specific countries have implemented20. When a country liberalises its economy and trade policies, it can participate more easily in the international economy. Thus, globalisation and liberalisation go hand in hand, and we will discuss the implications of both.

In the past, the state played an important role in shaping agricultural production and marketing in most developing countries. Governments were often heavily involved in agricultural marketing and food processing through the creation of parastatals (marketing boards, government-controlled cooperatives and parastatal processing units). These parastatals constituted often monopolies, sole buyers of agricultural products, including basic food crops as well as important export crops (such as cotton, coffee and cocoa). Important objectives of the parastatals were to obtain tax incomes for the government and in some cases also to gain political control. In the 1980s and the 1990s most of these systems of state intervention and control came under pressure to liberalize, often under guidance of the World Bank. In many countries, the process of liberalisation and privatisation was by no means smooth. The withdrawal of the state often led to a vacuum – the private sector that was expected to fill up that vacuum and improve service delivery (inputs, output marketing, credit, etc.), did not arise, or only slowly. As production, processing, marketing, the provision of inputs and credit, and retailing were all directed and controlled by the government, vertical coordination (VC) in agro chains already existed in many developing countries. The dominant form of state-controlled VC was that of seasonal input and credit provisions to small farmers in return for supplies of primary produce. Often they were the only source of input and credit provision for small-scale farmers21. The dismantling of state-controlled VCs led to the decline of input and credit supply to farms.

The liberalization of the investment regimes did induce foreign investments in agribusiness, food industry, and further down the chain, with major implications for farmers22. Yet, the overall picture is quite patchy – some countries do well with FDI, others suffer from FDI (i.e. mining sector), others are not able to attract FDI at all. A well-known example of these investments is the rapid growth of modern retail chains (supermarkets) in some developing countries and which was triggered by the reform process in former state-controlled economies23. We will discuss these implications in the paragraphs on “increased vertical coordination” below. Trade liberalisation also led to an increasing share of developing countries in world agricultural trade.

In addition to an increasing volume of global agricultural trade, also the structure of this trade changed considerably during the past decades. There has been an increase in the share of high-value products

– mainly fish and fishery products, and fruits and vegetables in world agricultural trade. Especially developing countries experienced a sharp increase in such high-value exports while the importance of their traditional tropical export commodities – such as coffee, cocoa, and tea – has decreased. Analysis of agricultural trade for developing countries now needs to focus on the new commodities, such as seafood, fruits, vegetables, cut flowers and on other processed products, which together constitute almost 50 percent of the exports of developing countries24. However, it is important to keep in mind that the traditional crops still play a role of importance for many countries.

Associated with increasing international trade is the spread of (private and public) food standards. Consumers in the North are increasingly demanding specific quality attributes of processed and fresh food products and are increasingly aware of food safety issues. Food-standards are increasingly stringent, especially for fresh food products such as fruits, vegetables, meat, dairy products, fish and seafood products, which are prone to food safety risks. These food quality and safety demands are most pronounced in western markets (and increasingly in urban markets of low-income countries25 ) and affect traders and producers in developing countries through international trade.

Vertical coordination in international value chains

Recently, new forms of vertical coordination26 (VC) have emerged, through private vertical coordination systems. These are growing rapidly as a response to consumer demand for food quality and safety on the one hand and the problems that (small) farms face to supply such products reliably, consistently and timely on the other hand. Reasons for these problems of small farmers include financial constraints, as well as difficulties in input markets. Specifically for high-standard products, farmers might lack the expertise and have no access to crucial inputs such as improved seeds (see also chapter 4). Major institutional constraints occur: the importance of VC in developing countries is further explained by the lack of efficient institutions and infrastructure to assure consistent, reliable, quality and timely supply through spot market arrangements27. VC can therefore be seen as a private institutional response to the above described market constraints.

These new forms of vertical coordination are also an effect of the globalisation and liberalisation trends. They are made possible by the liberalisation of the economy, in which governmental vertical coordination is replaced by private efforts, the integration of the economy in the global market, which enables the production of high value export crops and increased foreign investment – the private vertical coordination system is owned by international companies. Despite their increasing importance, these international value chains still cover a small share of total agricultural sectors in the world.


The share of population living in urban areas has been increasing steadily over the past decades (see section 2.1). For the agricultural sector, there are various positive effects of urbanisation. Urbanisation increases the scope for economies of scale in food marketing and distribution, while reductions in transaction costs increase the size of the market for distributors and retailers. The result has been a remarkable increase in the volume of food marketing handled by supermarkets, but also substantial organisational and institutional changes throughout the food-marketing chain28. The effects are not only in agricultural processing and marketing but in production as well. The types of crops demanded by urban population differ, increasing the market for vegetables and horticultural crops.

Hazell29 underlines that “while much of the attention today is on high value market chains and the challenges of linking farmers to those chains, we should not overlook the importance of food staples markets and their own particular support needs. Given the global glut of food staples and historically low prices, it is tempting to conclude that developing countries can neglect their food staples sector and rely more on food imports while focusing their efforts on producing higher value products. This would also be consistent with the notion that few small farmers are going to get rich growing food staples at current prices. In reality, market opportunities are more nuanced than this, and food staples (cereals, roots and tubers and traditional livestock products) actually offer more important growth opportunities for small farmers in many low-income countries.”

Urbanisation means not only an increased market for agricultural (food) products, but also for labour. Off-farm labour activities have increased considerably over the past decades in all developing countries, even in remote areas.30 Not all off-farm employment can be found in urban areas, in rural areas they also play an important role, but in urban areas the wages are often higher. In general the boundaries between rural and urban areas are disappearing in many areas, as rural and urban areas are becoming increasingly integrated, not only geographically (with urban sprawl into rural areas) but also economically.


The impact of HIV/AIDS has an increasing impact on many rural areas in developing countries and affecting agricultural production in these areas. AIDS used to be more prevalent in urban areas but AIDS is increasingly becoming a rural issue in many developing countries. For instance, more than two- thirds of the population in the 25 most-affected African countries live in rural areas.31 But the problem is not only in Africa. For instance in India where 73% of the population is rural, the spread of HIV is nowadays faster than in urban areas32.

The impact of AIDS on communities is deep and tragic. It is often the young men and women who die, leaving grandparents and their grandchildren or orphans left to fend for themselves. AIDS is diminishing the agricultural labour force. AIDS has killed around 7 million agricultural workers since 1985 in the 25 most-affected countries in Africa33. Figure 8 gives an overview of the projected reduction in African agricultural labour force due to AIDS by 2020.

Figure 7: projected reduction in African Agricultural labour force due to HIV/AIDS in 202034

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AIDS reduces peoples’ productivity as people become ill and die, with others spending time and resources on caring for the sick, mourning and attending funerals. But more importantly, AIDS affects the social fabric of communities. AIDS has a greater chance affecting areas that are poor because the people living in these areas often do not have the resources or the knowledge to cope with AIDS. They may not know how it is transmitted, do not have the resources to go to hospitals; the medical infrastructure in those areas is usually inadequate as well. But AIDS also worsens the situation of the poor, killing the most productive members of the society and diverting scarce resources to medical care.

Increasing limits to natural resource use

In many countries, the combination of population growth, a lack of technical development and ineffective allocation mechanisms have led to a rapidly decreasing availability of natural resources for many poor farmers. Soil fertility is still declining in many areas, due to a lack of nutrients (mineral or organic) of which the availability is impeded by imperfect markets or lack of purchasing power. Water is becoming increasingly scarce around the world, as water resources such as rivers are being increasingly used for different purposes, such as agriculture, hydro-power, or drinking water.

According to the Millennium Ecosystem Assessment35, the degradation of ecosystem services poses a significant barrier to the achievement of the Millennium Development Goals and to the MDG targets for 2015. Many of the regions facing the greatest challenges in achieving the MDGs overlap with the regions facing the greatest problems related to the sustainable supply of ecosystem services. Among other regions, this includes sub-Saharan Africa, Central Asia, and parts of South and Southeast Asia as well as some regions in Latin America.

The Millennium Ecosystem Assessment reports the following main fields of concern:

- Biodiversity: Changes in biodiversity due to human activities were more rapid in the past 50 years than at any time in human history, and the drivers of change that cause biodiversity loss and lead to changes in ecosystem services are either steady, show no evidence of declining over time, or are increasing in intensity. Under the four plausible future scenarios developed by the Millennium Assessment, these rates of change in biodiversity are projected to continue, or to accelerate. Some 10–20% of drylands are already degraded (medium certainty).
- Land degradation: Based on these rough estimates, about 1–6% of the dryland people live in desertified areas, while a much larger number is under threat from further desertification. Scenarios of future development show that, if unchecked, desertification and degradation of ecosystem services in drylands will threaten future improvements in human well-being and possibly reverse gains in some regions. Therefore, desertification ranks among the greatest environmental challenges today and is a major impediment to meeting basic human needs in drylands.
- Water: The amount of water impounded behind dams quadrupled since 1960 and three to six times as much water is held in reservoirs as in natural rivers. Water withdrawals from rivers and lakes doubled since 1960; most water use (70% worldwide) is for agriculture.

It is especially the people who live in ecologically and economically marginal and poor areas who suffer most by a decreasing availability of natural resources, as their livelihoods directly depend on them. Climate change, characterised by more extreme and unpredictable weather, such as prolonged droughts affects these people disproportional.

Climate change

Most studies of climate change impacts have focused on changes in mean climate conditions although global climate change is likely to bring changes in climate variability and extreme events as well. The IPCC36 has outlined the various climate changes and effects for the various continents. For Africa, being a vast continent, and experiencing a wide variety of climate regimes it depends on the location, what the effect will be. Farmers have adapted to patterns of climate variability through land-use systems that minimize risk, with agricultural calendars that are closely tuned to typical conditions and choices of crops and animal husbandry that best reflect prevailing conditions. Rapid changes in this variability may severely disrupt production systems and livelihoods. Besides an increased variability, the IPCC detects a pattern of increased aridity throughout most of the continent. Mean rainfall decreased by 20-49% in the Sahel in most of the years between 1930 and 1997 and generally 5-10% across the rest of the continent Asia is another huge continent with very different climates – from the permafrost in the North to tropical climate in the south. Tropical Asia has a unique climatological distinction because of the pervasive influence of the monsoon. In tropical Asia, in spite of some differences, the climates of countries have one factor in common: The Asian monsoon modulates them all to a large extent. There is some evidence of increases in the intensity or frequency of some of extreme weather events, such as extra-tropical and tropical cyclones, prolonged dry spells, or intense rainfall, on regional scales throughout the 20th century, although data analyses are relatively poor and not comprehensive. As mountain glaciers in Asia continue to disappear, the volume of summer runoff eventually will be reduced as a result of loss of ice resources. Consequences for downstream agriculture, which relies on this water for irrigation, will be unfavourable in some places. For example, low- and mid-lying parts of central Asia are likely to change gradually into more arid, interior deserts.


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The role of agriculture in economic development. Focusing on linkages beyond agriculture
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