This document summarizes the agricultural-led growth theory and its critics. The agricultural-led growth theory proposes that investment in agriculture is necessary for national economic growth, as agriculture provides surplus labor, food, markets, savings, and foreign exchange to support industrialization. However, critics argue that in open economies, high agricultural productivity can squeeze out manufacturing and that trade openness, not agriculture, drives growth by allowing countries to import food and export manufactured goods. Both agriculture and trade are important for economic growth, but agriculture's role decreases as industry increases, and open trade is also a key factor.
3. Background on Agriculture
To date, agriculture remains of key importance in various economies.
In Least Developed Countries (LDCs) agriculture;
Accounts for a large share of GDP (ranging from 30 to 60 % in about two thirds of
them)
Employs a large proportion of the labour force (from 40 % to as much as 90 %
Is a major source of foreign exchange (from 25 % to as much as 95 % in three
quarters of the countries),
Supplies food and provides subsistence to more than half of the LDCs' population.
4. Background on Agriculture
However, the role of Agriculture in Economic development of a country has been
heavily contested between Development Economist and Economic Historians
Key question:
Is agriculture a prerequisite for economic development?
Review the Agricultural-led growth theory and its critics
5. Theory of Agricultural-led Growth (ALG)
Proposed by Development Economist who contend that investment in agriculture is a
prerequisite for national economic growth
First proponents were Johnston and Mellor (1961) in "The role of Agriculture in
economic Development”
Other proponents are Schultz, 1964; Timmer, 1995, 2002, Lewis, 1954, Hirschman,
1958; Fei and Ranis, 1961;
6. ALG Theory continued
They offer the following explanations for developed and developing countries:
Developed countries:
Economies that did not have a developed agricultural sector (e.g. .Russia) quickly
ran into trouble with their industrialization programmes and were unable to
maintain high rate s of industrial development
Developing countries:
Attempts by various developing nations to industrialize their economy without prior
agricultural development resulted in dismal economic growth rates and very
skewed income distribution
7. ALG Theory continued
Why most agricultural based countries are poor (case of LDCs)
Developing countries have generally neglected their agricultural
sectors and invested the overwhelming bulk of their resources in
other industries, thus starting their industrialization programmes in
economies characterized by low productivity agricultural sectors.
8. ALG Theory continued
Summary of contribution of Agriculture to Economic Development
Johnston and Mellor presented 5 inter-sectoral linkages.
(i) supply of surplus labor to firms in the industrial sector;
(ii) supply of food for domestic consumption;
(iii) provision of market for industrial output;
(iv) supply of domestic savings for industrial investment; and
(v) supply of foreign exchange from agricultural export earnings to finance import of
intermediate and capital goods
9. Critics of ALG theory
Economic historians oppose the ALG Theory (Mokyr, 1976, 1978 and Wright, 1979,
Matsuyama, 1991)
They assert that there is indeed positive link between agricultural productivity an
economic growth in a closed economy while there is a negative link in an open
economy
10. Critics of ALG theory continued
Begun with the work of Morkyr (1976); The Industrial Revolution in the Low Countries in the
First Half of the 19th Century: A Comparative Case Study”
Publication was a comparative study of Belgium and Netherlands
It sought to understand why Belgium experienced rapid industrialization while Netherlands
did not in the mid-19th century
These two countries are of comparable size, located in the same corner of Europe,
surrounded by giants, with considerable overlapping in linguistic and cultural backgrounds.
11. Critics of ALG theory continued
Belgium Netherlands
Industrialization
Rapid industrialization (the
most industrialized economy
at 1840)
Little/slow industrialization
Geography Rich deposits of coal and iron
Fertile agricultural land (not
much iron and virtually no coal)
Industry Imported wool & cotton, Farming, Paper, oil and sawmill
• Assert that Economies that lack arable land and have initial comparative
advantage in manufacturing successfully industrialize by relying on foreign
trade through importing agricultural raw materials and exporting
manufactured products.
12. Critics of ALG continued
They further argue that high productivity in the agricultural sector squeezes out the
manufacturing sector by employing more labour and attracting more investment
They also argue that in open economies the agricultural sector does not have strong
linkages to other industries for fostering higher productivity and export growth
Therefore, In this theoretical analysis, Morkyr used the comparative advantage
argument to refute the claim that agricultural productivity is an engine of economic
growth.
Identified trade openness as a ley factor of economic growth
13. Conclusion
According to the ALG theory, there is strong evidence that agriculture contributes to
economic development.
According to critics of the ALG theory, trade openness is also a key driver of economic
growth
Therefore, both agriculture and trade openness are key drivers of economic growth
However, it is agreed that in order to achieve higher rates of economic growth,
agriculture should decrease in contribution in contribution GDP while industry should
increase and that economies should be open for international trade
