Do the rich starve?
Probably, the issue that we dealt with last week ended with more questions than answers. The issue that we focussed on was that “there are too many people in rural agriculture sector in Sri Lanka, producing too little”, so that they continue to remain in poverty without an adequate income. Our discussion led to an important question: “What is the best strategy to get them out of rural poverty”.
The answer that we arrived at was that a significant number of people in the rural agriculture sector need to leave which would expand the average farm- holdings to an economical size.
What nonsense! Some of you might be thinking in that way too.
Falling agriculture share
“Is it possible for a country to become rich without agriculture output?” One day, I posed this question to a group of students.
They were all unanimous in saying “no”.
Then I directed them to find out “what the richest country in Asia is, and what would the contribution of agriculture in that country be.”
By going through the World Bank database, the answer they found, actually, shocked them: The richest country in Asia with US$ 64,000 per capita GDP is Singapore, and its agriculture contribution to GDP is zero. They thought it was a mistake.
It was not a mistake. As a percentage of GDP, agriculture value addition is reported to be (near) zero in Singapore, because of the overwhelming contribution by the non- agriculture sectors - industry and service sectors. Otherwise, out of about 3.5 million l abour force in Singapore, there are about 16,000 farmers too.
I asked them again: “So do you think that Singaporeans are starving without sufficient agriculture output for people’s consumption?”
Vulnerable to food crises
Some countries depend on agriculture more than others. We can identify these differences by looking at their sectoral output and employment composition. Their agriculture share in the economy is more and agriculture employment is more, compared to the others that are less dependent on agriculture.
From time to time, there have been food crises in the world. The most recent food crises was led by rising global food prices about 15 years ago. I gave them another issue to examine: “When there are food crises in the world, which countries suffer more – the countries which depend ‘more’ on agriculture or the countries which depend ‘less’ on agriculture?”
Technically, the countries which depend less on agriculture should suffer the food crisis more than the agriculture- dependent countries. Amazingly, it was the opposite! The countries, which were less dependent on agriculture did not suffer. It was the agriculture-dependent countries which suffered the food crisis most!
What was the secret? The countries, which were less dependent on agriculture were rich, while agriculture- dependent countries were poor. The rich can afford to pay high prices, but not the poor. Where is malnutrition in the world? In agriculture- dependent countries; why? They cannot afford to buy nutritious food. Isn’t ridiculous?
Senseless economics
It is amazing to know that when countries become rich, they also become less-dependent on agriculture. The smaller countries become even much less- dependent on agriculture than the bigger countries. This is because smaller countries logically and quickly find their limited land is more productive with non- agriculture than with agriculture.
Although this transformation challenges our conventional wisdom, it has been the fact. When countries transform themselves to become “high- income” countries, naturally the share of agriculture contribution to the economy and employment becomes smaller. Why?
There are two reasons for that: First, the expansionary capacity of the agriculture sector is naturally limited. Agriculture sector cannot grow at higher rates as 8 – 10 per cent a year. This means that whatever the productivity growth that we aspire in that sector, it cannot guarantee higher incomes and more jobs to growing populations.
Second, the non- agriculture sectors – industry and services, do not have such boundaries; they can grow at higher rates and, have the ability to sustain such higher rates over longer periods of time. This means that it is the non- agriculture sector that generates higher incomes and more jobs.
Most of the rich countries have agriculture sector contribution at around 2 per cent of GDP; the UK and the USA have even less than 1 per cent of GDP, produced by about 1 per cent of the labour force employed in the sector.
People leaving, output rising
Another amazing outcome of the economic transformation of a country is that, when people are leaving the agriculture sector, its output starts rising. For instance, 1 per cent of agriculture value addition to GDP in the US does not mean that the absolute value of agriculture output has dropped. It is actually the opposite.
The absolute value of agriculture value addition in the US is $ 178 billion, which is as big as twice the total GDP of Sri Lanka ($89 billion). When excess people leave the agriculture sector, the productivity improves so that the remaining fewer number of farmers have the capacity to produce more.
As the average farm size become bigger with a fewer number of farmers, they have the ability to benefit from the economies of scale, they are capable of introducing newer or more appropriate technology, and the agriculture sector also become more commercialised.
Sri Lanka and Malaysia
A good comparison for Sri Lanka is provided by Malaysia. Sri Lanka’s agriculture contribution of almost 8 per cent of GDP is similar to that of Malaysia. But it is produced by 26 percent of the labour force in Sri Lanka, and by 11 per cent of the labour force in Malaysia.
Does it mean that more than half of our 2 million farmers “trapped” in the agriculture sector can actually leave it without reducing the output? If we argue for an increase in agriculture productivity, the best way to do that is to reduce the over-employment in the agriculture sector.
In fact, that’s exactly what has been happening over the years even though it was at a slow pace. Along with education, young children have been leaving the sector whenever it was possible for them. The majority of those who continued to remain there are actually have done so, not necessarily because they liked it, but they didn’t have a choice.
Poor growth performance
Now in order to complete our story we have an important question to consider: Where should they go to? There should be “non- agriculture” sectors expanding in the economy in order to attract and absorb excess labour leaving the agriculture sector.
This is why the development policies should fundamentally be directed at promoting investment in industry and service sectors. It is impossible to figure out ways and means of improving production and productivity in agriculture, without creating a business-friendly policy environment to generate a modern economy with industry and service sector expansion.
The inverse of the point is also true: In an economy where industry and service sectors are not growing adequately, the agriculture sector remains stagnant. A country with an economy as such, obviously, displays poor growth performance. (The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).