Agricultural Growth Leads to Economic Growth

Despite the high rates of return to investment in agriculture, many policymakers and economic experts have thought of agriculture as an isolated backwater. They believed that higher returns to public investment could be had by promoting urban-based industrialization. Others felt that agriculture’s contribution to growth could never amount to much because, they believed, it had few links to other sectors of the economy. In their view, agriculture was important mostly as a provider of low-cost food for urban workers, which helped to keep wages low, and as a source of government revenue.⁸ History, as well as recent research, shows that these views are mistaken.

In fact, agriculture is a major contributor to overall economic growth. In developing countries with the lowest per capita gross national product (GNP), agricultural production alone provides almost three-quarters of total employment, nearly half of gross domestic product (GDP), and more than half of all export earnings (Table 1). Among higher-income developing countries, similar figures apply for the food and agricultural system as a whole (that is, including the producers, processors, and distributors).

Although the relative contribution of agriculture to the economy declines as the economy develops, growth in agriculture and the overall economy actually go hand-in-hand. If agriculture is not productive, its lack of dynamism can drag down the entire economy, especially in least-developed countries where agriculture is a large sector.

Table 1 - The role of agriculture in developing countries, 1989-91

Source: Food and Agriculture Organization of the United Nations and World Bank data tapes.

Note: Data include only non-oil-exporting developing countries. Per capita GNP is in 1987 U.S. dollars.

Source: Computed by authors on the basis of World Bank and Food and Agriculture Organization of the United Nations data tapes.

Note: Data include only non-oil-exporting developing countries. Additional analyses performed for the periods 1971-80 and 1981-91 showed the same pattern.

As Figure 1 shows, when agricultural growth rates are high, overall growth rates are also high.

The effects of agricultural growth multiply throughout the economy. In Sub-Saharan Africa, for instance, each additional dollar of income from agriculture adds $2 to $3 to the overall economy.⁹

How does $1 of income end up adding more than twice that amount to the economy? The effect of that dollar ripples through the economy as it changes hands. Increased agricultural production leads to greater demands for supplies and services. As agricultural production expands, businesses that supply fertilizer, equipment, and repair services do too.¹⁰ Processing, distribution, and storage activities must expand and become more complex to handle the increase in production. Employment increases as well.

Many studies fail to consider the important effects of agricultural growth on consumption. As a result of the increase in production and employment, the incomes of farmers and agricultural workers rise. They buy more. The increased demand then leads to growth in sectors other than agriculture. Studies of Malaysia and Sub-Saharan Africa found that about 70 to 80 percent of the additional economic activity generated by agricultural growth is due to these consumption, rather than production, effects.¹¹

A study by Romeo Bautista found that in countries where agriculture constituted 20 percent or more of all economic activity, a 10 percent increase in the value of agricultural production led to a 13 percent increase in the value of nonagricultural production.¹² Other studies have also shown that the effects of agricultural growth on the economy, expressed as the value of additional economic growth generated by a $1 increase in agricultural output, consistently exceed $1. In India, for example, a $1 increase in the value of agricultural output produces from $1.64 to $1.83 of additional economic growth, according to various studies.¹³ A study of several African countries gave results that range from $1.96 for Niger to $2.75 for Burkina Faso.¹⁴ Other research shows similar results; the lowest figure for additional economic growth reported in the available studies is $1.26 for Latin America.¹⁵

IFPRI research using data for 42 developing countries from 1970 to 1992 reveals that, on average, a $1 increase in agricultural production generates $2.32 of growth in the overall economy (Table 2).¹⁶ This effect increases as growth rates or income levels rise.

Table 2 - Value of additional economic growth generated by a $1 increase in value of agricultural output

Source: Authors’ calculations, based on data from World Bank World Tables tapes.

Note: Data are for 42 developing countries. Countries were assigned to quartiles according to their average growth rate from 1970 to 1992 and average income level from 1989 to 1992.