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Home Agriculture and Economic Development Agriculture Surplus as a Source of Capital Formation and Economic Development


Agriculture Surplus as a Source of Capital Formation and Economic Development:


In this connection we study (1) Classical Model, (2) Growth Stage Theories, and (3) Kuznets Views.


(1) Agriculture in Classical Growth Model:


In the late 18th and early 19th century, the classical economists like Smith, Mill, Malthus and Ricardo developed a theory of growth which is based upon three factors, namely population growth, natural resources and capital accumulation. The classicals say that there are two types of people in an economy like workers whose asset is their labor, and capitalists who own land and capital. The workers are given just the subsistence wages. If due to some new inventions or the favorable weather conditions etc., production increases it will create surplus which is accumulated by the capitalists. However, such accumulation increases the demand for labor. As the population is fixed in short run, the increase in demand for labor will result in rise in wages. The excess of wages over subsistence level will lead to grow the population demand for food. The rise in demand for food is met by cultivating inferior lands as the superior land is fixed. The price of food rises to cover the higher cost of production on lower quality land. The effects of increased population and higher-priced food drive the real wages to the subsistence level. Thus, in classical growth model, application of diminishing returns and higher costs of production on lower quality land, represents a constraint to growth so that the living standard remains at subsistence level. If the technological progress occurs, the change occurs temporarily. All this shows that agri. surplus has no greater role to play to promote economic growth.


(2) Agriculture in Growth Stages Theories:


According to growth stages theories, economic development involves a structural transformation of a country.

In 19th century, Frederick List developed a set of stages based on shifts in occupation distribution. His five stages were Savage, Pastoralism, Agricultur, Agriculture and Manufacturing and Agriculture - Manufacturing - Commerce. The German philosopher, List believed that progress in agriculture was dependent on strong export demand or domestic industrial development. He felt that the industrial development has the potential to develop agriculture and the total economic growth.


Another 19th century German Economist Karl Marx visualized five stages of development based on changes in technology, property rights and ideology. His stages are as:


Primitive communism, Ancient slavery, Medieval feudalism, Industrial capitalism, Socialism and Communism.


He is of the view that the class struggles drive countries through these stages. One class possesses the land, capital and authority over labor while the other possesses labor only. Class struggles occur because economic institutions allow the exploitation of labor. Prior to reaching the final stage, labor is never paid its full value. For example if wages rise in the fourth stage (Industrial capitalism), labor is replaced by machines. As a result, there will be unemployment which would depress the wages. According to Marx, exploitation by the owners finally results in revolution where all the means of production are collectively controlled. Same is the case with agri. sector where cooperative farming was suggested. Marx also viewed economies of scale in both agriculture and industry as a major source of growth. He identified that in the process of growth the small peasant farms would be eliminated and that they would be employed in industry.


Alan Fisher and Collin Clark also presented growth theory having three stages. In Clark's formulation, agriculture is dominant in the first stage. In the second stage manufacturing grows more relative to agriculture and in the third stage the tertiary or the service industries grow the fastest. According to Clark, economic growth is achieved by increases in output per worker in any sector and by transfer of labor from sectors with low output per worker to those with higher output per worker. While Fisher linked the transition from stage to stage to advances in science and technology.


The major growth theory was developed by W. W. Rostow during 1950s. He identified five stages through which all countries must pass. These stages are as:


Traditional society, The Pre-conditions for take-off, The Take-off, The Drive to technological maturity and the Age of High Mass Consumption.


He stressed upon capital accumulation and suggested that technology plays an important role in the emergence of Leading Sectors. In his stage theory, Rostow gave much more importance to the stages like Pre-conditions to Take-off and Takeoff. He says that the Take-off is determined by the leading sectors where agri. and its exports play an important role, He is of the view that in case of so many developed countries which were once under-developed, agri. exports like grain from Canada, Timber from Sweden and silk from Japan played very powerful role.


(3) Kuznets' View of Agri. Surplus of Capital Formation and Economic Development:


Prof. Simon Kuznets is of the view that if agri. production increases it will lead to create agri. surplus. Such surplus contributes to economic development through three stages, as:


(i) After meeting its own requirements the agri. sector can transfer its surplus wheat and cotton etc. to the other sectors of the economy.


(ii) When the agri. sector sells its surplus to other sectors of the economy the incomes of the farmers will increase which they will spend on the other sectors of the economy. As, if the farmers earn by selling their surplus agri. goods they will spend them on non-agri. goods like, T.V. radios, fridges and motor-cycles etc. When the demand for such goods increases the process of industrialization will increase. This will promote .economic development.


(iii) The agri. sector could export the surplus agri. goods. In this way, the foreign exchange could be earned. Such foreign exchange could be used to finance a country's imports By importing machinery from foreign countries the process of industrialization can be initiated. In other words, the export-led growth can be started with agri. growth which may finally take a country to adopt import-led growth strategy Thus the economic growth may be attained by following export-promotion and import-substitution strategies. Again, if in a country, agri. production increases a country may attain self-sufficiency. The dependency on agri. imports will decrease leading to save the foreign exchange which could be employed for industrialization.




Prof. John Mellor and Prof. Johnston has presented following limitations whereby the agri. surplus cannot play an encouraging role in economic development.


(i) When the process of development in a country starts the structural changes in the economy will take place loading to reduce the share of agri. sector and increase the share of industry in GNP. To such situation, if the agri. sector does not grow the industrial development will be affected. As we saw in the Lewis model that the growth of modern sector depends upon the growth of traditional sector.


(ii) In case of UDCs population increases rapidly which leads to greater rise in demand for food. As a result, there are reduced possibilities of having agri. surplus in developing countries rather they have to import food.


(iii) The income elasticity of demand for food is very high in case of developing countries. As a result, the people spend a major share of their incomes on agri. goods. Hence, the chances of agri. exports are not very bright.


(iv) In case of UDCs, mostly those industries are set-up which require the domestic inputs. This will also decrease the chances of agri. surplus for exports. The reduced foreign exchange earning will not be able to finance growth.


(v) In case of Japan and UK the savings of landlords shifted from agri. sector to non-agri. sector But in the countries like Pakistan and India such did not happen. Here when the incomes of the farmers increased they purchased lands, paid old debts or used them to celebrate ceremonies.


Relevant Articles:


Role of Agriculture Sector in Economic Development of a Developing Country
Structure of Third World Agrarian System
Economics of Agricultural Development/Stages of Agricultural Development
Strategy for Agricultural and Rural Development
Economics of Small Scale Agriculture
Economics of Agriculture Specialization
Role of Agriculture in Economic Growth
Agriculture Surplus as a Source of Capital Formation and Economic Development
Surplus Labor as a Source of Capital Formation and Economic Development
Agriculture Sector and Capital Formation in Developing Countries
Land Reforms or Agrarian Reforms
Land Reforms Measures
Effects of Agrarian Reforms
Agrarian Reforms and Economic Development
Green Revolution (GR)
Nature of Green Revolution (GR)
Causes or Importance of Green Revolution (GR)
Effects of Green Revolution (GR) on Income
Problems/Demerits of Green Revolution (GR)
Relationship Between Farm Size and Farm Output with Respect to Productivity
Productivity of Lands
Relationship Between Green Revolution and Size Productivity

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
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Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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