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


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


In this connection we shall study (1) Nurksey Model, (2) Dual Economy Models like Sociological Dualism, Technical Dualism, Lewis Model and Fei-Ranis Model.


(1) Nurksey's Model:


According to Nurksey the developing countries are entrapped into vicious circle of poverty which is reflected into low incomes, low savings, low purchasing power, low investment, low capital accumulation, low productivity and again, low incomes etc. As a result of such vicious circle of poverty (VCP) the developing countries remain backward. Therefore, need is to break such VCP so that poverty and misery could be put to an end. In this connection, Prof. Nurksey writes that in UDCs, there exists disguised unemployment on the supply side which is 20% to 30% of the total agri. manpower. This unemployment can be used for capital formation. He says that the parents who used to feed such unemployed would go on feeding them. When such unemployed are

put into different projects the process of capital formation and development will start. Thus, the disguised unemployed of agri. sector can be used for capital formation and economic development.


Limitations of the Model:


(i) According to Nurksey the process of development can be initiated by utilizing the disguised unemployed. But the critics are of the view that these unemployed could meet the process of development partially, as development requires other factors also.


(ii) Nurksey did not mention about the machinery and raw material to utilize the unemployed. Again, if once the unemployed get the jobs why their parents would go on supporting them.


(iii) According to Nurksey the peasants of Pakistan and India have plenty of time. But it is not so rather they go on indulging in construction of their houses, canal banks, local roads and cutting of trees etc. Therefore, it is difficult to withdraw them from lands.


(2) Dual Economy Models:


In this connection we study (i) Sociological dualism, (ii) Enclave dualism and (iii) Labor-surplus dual economy models.


(i) Sociological Dualism:


This model was presented by J.H. Boeke to explain why the Dutch colonial period failed to induce economic development in Indonesia. He says that the economic activity in the West and their counterparts in the East is motivated by economic needs, but the economic activity in the East is motivated by social needs. Thus he means to say that it is useless to introduce new ideas, new institutions and new technologies into Eastern societies. Hence, sociological dualism provided a rationalization for emphasizing industrial development and ignoring agriculture.


(ii) Enclave or Technical Dualism:


This theory was developed by Benjamin Higgins and Hla Myint. They tried to explain why in developing countries, small enclaves of modern society remain surrounded by a sea of traditional society. These developed enclaves are oriented toward extraction of primary commodities in mining and on plantation and exportation of these commodities to developed countries. The modern sector imports labor-saving technology from abroad. There is little development of traditional sector, only exploitation of its resources. The implication of this theory _is that unless the developing countries explicitly focus their development efforts on traditional sector, broad-based development will not occur. Alt this necessitates the development of agri. and traditional sector.


(iii) Labor-Surplus Dual Economy Models:


It consist of (a) Lewis Model, (b) Fei-Ranis Model.


(3) Agriculture Tax as a Source of Capital Formation and Economic Development:


In Japan, since the last three decades of 19th century, this has been the practice to tax agri. sector. As according to Prof. Ohkawa, the land tax in Japan gives rise to 74% to 86% of govt. revenues. It means that in UDCs there arc lands and plenty of natural resources which can yield revenues, if they are taxed. Such taxes may consist of agri. income tax, land tax and agri. export tax. Regarding agri. taxes it is said that it must also pay the tax as the other sectors pay. Moreover, alongwith increase in demand for food etc. their prices are increasing leading to increase the incomes of the farmers, landlords and feudals. Again, govts. are also spending a lot to develop agri. sector. Hence, the farmers must pay something in return.

Limitations of the Model:


(i) Practically it has been observed that agri. sector in UDCs is furnished with uncertainty. Because of subsistence farming, augmentation and sub-division of holdings and existence of natural calamities, the govts. of developing countries avoid to tax agri. sector. As Lewis says:


"The direct taxes whether imposed on lands or produce are .reluctantly paid by the farmers. The direct taxes imposed on the farmers have been furnished with exploitation. The farmers think that the taxes imposed on them means the feeding of soldiers and the administrators by the farmers, while they will not get anything in its return".


(ii) It is said that taxing the agri. sector would result in losing the attraction in agri. sector. As a result, the resources will shift to the other sectors of the economy. In this way, there will be food shortage in these countries.


(iii) If tax is imposed on agri. exports, there exists the chances of cultivation of non-export goods instead of export goods. As a result, a country may lose foreign exchange which is generally short in the UDCs. Consequently, neither tax nor foreign exchange could be earned.


(iv) The pre-requisite of any govt. to be in office in UDCs is its support by the fanners, landlords and fculdals. Therefore, in the weak democratic societies, the govts. try to avoid agri. taxes. This is the reason that agri. taxation has been successful only in DCs.


(v) Agri. taxes are against the canon of economy. It is also least practical for administrative point of view because heavy expenditures will have to be made to raise such tax. Again, there exist a lot of difficulties to make estimation regarding production of crops, value of lands and agri. incomes.


(4) Adverse Terms of Trade For Agriculture as a Source of Capital Formation and Economic Development:


This method was applied in Russia where the terms of trade were kept against the agri. sector. Under this system the farmers were given the specific quotas of agri. goods to produce. The official men from Moscow used to up-load such grains at gun-point. Hence, limited amount of food-stuff remained available for the local farmers. Again, for the adverse terms of trade, govts. purchase agri. goods on lower prices. This may also happen that the govts., particularly of the socialist countries, fix the prices of manufactured goods at a higher level. This would also result in lowering the prices of agri. goods. In market economies, the terms of trade against agri. sector are kept adverse with the following devices:


(i) The goods purchased by the villagers are taxed.


(ii) Govts. engaged in trading of agri. goods (as in Pakistan CEC and REG purchased cotton and rice cheaper from fanners and sold them at higher prices in the world markets).


(iii) Such a system of taxes and economic incentives to be imposed that farmers be given less facilities or producers be given more facilities. This happened during second five year plan when not only the manufacturers were given concessions but the prices of wheat, sugar-care, rice and potatoes were kept low. As a result of this policy, not only the investors were to be encouraged, but the urban population was also to be protected at the cost of rural growers.


It is told that the concept of adverse terms of trade against agri. sector is also available in Lewis model when he says that rural population whoso marginal product is zero in farms be transferred to the modern urban sector and their parents could go on providing food to these migrants. The govts. can opt for multiple exchange rate system to keep the terms of trade against agriculture. This also happened in Pakistan when during the period of 1959 to 1972 the foreign exchange was provided at a lower rate to the industrial importer, while the agri. exporters got lower rupees against dollars by the SBP. The purpose behind was to transfer resources to non-agri. sector. The same like situation was also observed in Japan where the tenants had to pay 60 to 70% as a rent to this landlords and these landlords invested this rental income in the industry.


Thus by depressing the procurement prices of agri. goods, by exempting the industrial sector, by raising the prices of manufactured goods, by imposing taxes on agri. sector, by increasing the rate of rent on agri. lands or by making the availability of foreign exchange at higher prices, the terms of trade can be kept against agri. sector.




(i) The economic experience of Pakistan is before us where the policy to keep the terms of trade against agri. sector resulted in its backwardness. The socio-economic position of the farmers could not be improved. Not only the farmers were given reduced prices for their produce, but they were also deprived of civic amenities, education, health, transportation, water-supply and water-sanitation. This resulted in lower wages, unemployment, reduced literacy and mass diseases in the rural areas. While the people engaged in non-agri. trade service and manufacturing sector of Lahore, Karachi and Faisalabad earned higher salaries and profits. The policy of adverse terms of trade for the agri. sector also promoted inequality in income distribution. This has also encouraged conspicuous consumption in the country. Such all led to flourish corruption, looting, dishonesty, robberies, kidnapping, ransom cases, terrorism, hatred, jealousies, inflation, sectarianism, polarization of the people on the basis of creed and caste systems, ethnic riots, provincialism and divergences between have and have-nots.


(ii) The Russian policy of keeping terms of trade against agri. sector is also before us. This led to create shortages. The people of big cities like Moscow got the wheat while the people of small cities remained deprived of them. As a result, we find disintegration of Russia.


(iii) The policy of adverse terms of trade of agri. requires effective implementation of fixing the procurement quota or fixing the lower support price. Thus, if govt. fails to acquire specific amount of wheat, rice and other grains, the terms of trade could not be kept against agri. sector. Here the farmers will be able to sell in open market at higher prices instead of lower govt. prices. This is very much observable in countries like Pakistan where due to population growth and smuggling, the target of official purchase is hardly met. In certain cases, the market price is higher than the procurement price.


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
Price and Output Determination Under Monopolistic/Imperfect Competition
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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