Economic Development, Agricultural Growth and Labour Productivity in Asia

Abstract

This article addresses two goals related to the role of agriculture in the economic development of Asian countries. First, it reviews the extant theories/concepts/ideas as well as empirical literature that sheds light on the role of agriculture in the process of economic development. Ending a few decades of neglect of agriculture by international agencies and donor countries in designing development strategies for poor countries, a body of nascent research has convincingly shown that the growth in agricultural productivity plays a critical role in promoting economic development. Second, the performances of agricultural sectors in 11 Asian countries are analysed with a focus on Southeast Asia. In particular, the analysis shows that agricultural labour productivity has considerably diverged between Korea and the Southeast Asian countries, while the latter is catching up with the former in terms of agricultural land productivity. As such, this article contrasts agricultural input use patterns and productivity changes in recent decades between Korea and the Southeast Asian countries and discusses the strategies that are required for improving agricultural labour productivity in the region.

Keywords:

• Economic development
• agricultural growth
• labour productivity
• Asian agriculture

Notes

1 The importance of human capital, knowledge or ideas in economic development was recognized as early as the 1960s (e.g. Schultz, 1961). However, we had to wait almost three more decades to witness research explicitly incorporating such intangibles into analytic growth models. The most direct reason responsible for the emergence of such analytical models in the 1980s was the predictions of the neoclassical growth models (shown in the previous section) that have failed to be supported by real-world experiences, i.e. most developing countries did not grow faster than developed countries in the 1970s and 1980s and there was no convergence of income across the world. These limitations of the neoclassical models gave rise to the modern growth theory called “endogenous growth theory” that highlights the role of knowledge, innovations, and ideas in economic growth while capitalizing on increasing returns to capital (Kosempel, 2004; Lucas, 1988; Romer, 1986, 1990).

2 The first generation of development economists were advocates of a strong governmental role in economic development. However, research showed that the consequences of government interventions (i.e. price distortions, high effective rates of protection, and rent-seeking) were exerting adverse effects on the economies of developing countries (Meier, 2001). Recognizing that governments in many developing countries have not been as effective as ideally envisioned, the second generation of economists tended to rely on markets to guide development policies. Yet such a market-oriented tendency was complemented by the “theory of information” (Stiglitz, 1989) that immediately caught the attention of development economists. The theory of information points to a new set of market failures such as the existence of imperfect (often asymmetric) and costly information, transaction costs, or imperfect (absence of) market for risk. These extensions of neoclassical microeconomics helped to explain the frequently underperforming agricultural and financial markets in developing countries (Meier, 2001).

 Having noted the importance of markets and correcting market failures in the course of economic development, the role of institution dictating the operation of markets and the process of dealing with market failures also received considerable attention from economists (Myint, 1985; North, 1990, 1994; Williamson, 1998, 2000). With this recognition, developing countries now need to “get institutions right” as well as to “get prices right” to move forward in their pursuit of economic development. Essentially, institutions are the incentive structure of a society. Possessing the right institutions greatly facilitates the efficient operation of markets and helps government handle market failures rationally.

3 While neoclassical economics was the predominant theoretical framework that underlies the generation of development policies, political economy had some impact on the discourse of development issues throughout the 1960s, 1970s, and 1980s. Rooted in the proposition of deteriorating terms of trade between underdeveloped and developed countries over time (Prebisch, 1950; Singer, 1950), the Neo-Marxian dependency theory advocates that countries should achieve development by import substitution of manufactured goods rather than agricultural (primary goods) export (Amin, 1976; Baran, 1952). With the terms of trade turning against low-income countries that export primary products and import manufactures, the dependency theory characterizes such countries as “the periphery”, while developed countries are referred to as “the centre”. The periphery goes through underdevelopment as a result of its integration into the world capitalist system. The world capitalist system embeds unequal exchange between the periphery and the centre. This theory generated two major real-world impacts: (i) it downplayed the role of agriculture and (ii) at the same time it popularized the inward-looking import substitution development strategy in many developing countries.

4 His theory consists of four evolving stages: (i) Mosher Environment where the primary concern is to get agriculture moving and to extract investable resources by taxing agriculture; (ii) Johnston–Mellor Environment where the agricultural sector makes a significant contribution to the growth of the overall economy through the five main functions of agriculture outlined in Johnston and Mellor (1961); (iii) Schultz–Ruttan Environment where the agricultural sector is integrated into the rest of the economy through the development of more efficient labour and credit markets which links rural and urban economies; and (iv) D. G. Johnson Environment where the agricultural sector receives massive subsidies from the government given the two characteristics (low share of labour force engaged in agriculture and low share of food expenditures from household budgets).

5 The distinction between the second and third groups, however, was not straightforward when it came to the poverty rates of Indonesia and the Philippines, which were not significantly lower than those of the third group of countries.

6 In relation to these measures, Gardner (2003) brought up two important points of note in interpreting data on those measures: (i) the growth rate of agricultural output may not be an appropriate measure of performance because the output could rise as a result of a larger labour force or more land for agricultural production, and (ii) the growth of agricultural productivity may not be an appropriate measure of rural living standards because the growing productivity can lower the prices of agricultural commodities and hurt farm incomes.