For Poor Nations, Productivity Begins on the Farm

Freeing up farmers and food prices is the key first step.

Dreaming big.

Photographer: Satish Bate/Hindustan Times/Getty Images

When discussing countries that have undergone astonishing economic transformations -- as, most notably, China has over the past few decades -- observers usually credit success to industrialization. After all, that’s the visible consequence of rapid growth: Where sleepy fishing villages once lay, ports and factories and high-speed rail networks spring up. The people who lived in those villages are in turn far more productive, working in those factories and shipping goods to the rest of the world through those ports. Moving up the productivity scale from farm to factory -- that’s the key to growth, right?

As it happens, the crucial breakthrough may not take place in cities at all, but on farms. If emerging nations like India want to replicate China’s success, they first have to improve their agricultural productivity.

In theory, we’ve known this for awhile -- at least since the birth of the world’s first industrial nation. Centuries of rising agricultural productivity preceded and fueled the explosion of smokestacks and steamships in 19th century Britain. Economists still aren’t certain what caused this “agricultural revolution.” Was it the consolidation of landholdings? Or the development of crop rotation? Or, perhaps, turnips?

Whatever the case, most historians agree that the steady growth in British agricultural productivity till 1850 -- it tripled over a few centuries -- permitted workers to leave their fields and caused the build-up of surpluses that allowed for investment. Excess labor and capital came together to power the first industrial nation.

As with the first, so with the latest. The scale of China’s transformation from agrarian to industrial nation is starkly evident in the statistics. In 1978, agriculture occupied 70.5 percent of China’s labor force and produced 28.2 percent of its GDP. By 2007, barely 40 percent of the workforce was in agriculture, which accounted for only 11.3 percent of China’s GDP.

A closer look at the numbers shows how critical productivity gains were to this process. One recent study estimates that total factor productivity in agriculture grew in China by 6.5 percent annually between 1991 and 2013. The study’s authors calculate that this growth was at least as important to China’s transformation as the rise in industrial productivity.

This helps explain why China’s competitors haven’t been able to industrialize quite so dramatically. Even less-granular estimates of Chinese productivity growth in agriculture highlight how much better the country has done compared to many of its peers. U.S. Department of Agriculture figures say that China’s agricultural productivity grew by 2.2 percent annually between 1971 and 1990. Over that same period, India’s agricultural productivity grew at half that rate. South Africa’s grew at 1.2 percent; Indonesia’s at 0.93 percent.

QuickTake Productivity

China’s stunning gains weren’t achieved in a vacuum. Most critically, the Chinese government ensured that farmers held onto the surplus that they produced, which meant that their savings financed industrialization along the coasts. The “terms of trade” for agriculture as compared to industry -- how much farm products are worth in terms of industrial goods -- kept getting better after Deng’s reforms in 1978. Economist Robert Ash estimated that, in 1988, Chinese farmers could buy 80 percent more industrial goods than they could just ten years earlier.

By contrast, governments elsewhere have often tried to suppress food prices. In South Africa, for example, a strict marketing law passed in 1937 allowed the government to meddle in agricultural prices, keeping the terms of trade between agriculture and industry largely constant. The law wasn’t repealed for more than 60 years.

In democracies like India, things can get even trickier. The question of the terms of trade between agriculture and industry has long been central to political battles, as the political scientist Ashutosh Varshney pointed out in 1995. How well a government controls food prices determines if it wins India’s cities -- and, since 2004 at least, national elections.

This pattern repeats itself across the emerging world: Governments seek to squeeze agricultural prices to please urban voters. If China is any guide, they should instead seek to improve agricultural productivity, allow farmers to keep the surplus and then squeeze their savings to fund industrialization. That would address the need for capital.

To address the need for labor, workers also need to move, constantly, from the less-productive agricultural sector to more-productive industries. Here, too, countries like India have much room for improvement. Although productivity in India’s organized sector is 18 times higher than in agriculture, restrictive labor laws and poor urbanization policy often keep surplus agricultural labor on the farm. As a consequence, farm holdings have fragmented -- 80 percent of landholdings in India are less than two hectares in size -- further eroding agricultural productivity.

Liberalizing those labor laws, encouraging large-scale manufacturing and improving city services are all key to promoting greater mobility; workers move twice as much within developed Europe, for instance, as they do within India. So, yes, countries need to promote agricultural modernization first if they’re to have any hope of industrializing. But then they’ve got to give all those farmers somewhere to go.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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