Agriculture in Economic Development Theory

Economic development theory and planning in the 1950s and early 1960s focussed on industrialization, and to a considerable degree, neglected the role of agriculture in the development process. Like most developing countries, the Asia-Pacific developing economies followed the familiar pattern of adopting import-substitution strategies for industrialization. These strategies involved policies that biased incentives against agriculture and export activities of all types. The two basic premises of inward-looking import-substitution strategies were: first, that farm households in traditional agriculture were unresponsive to market incentives and modern technologies; and second, that prospects for exports, particularly of agricultural commodities, were bleak because of low elasticities of demand and supply and the alleged secular decline in developing countries' terms of trade. These premises turned out to be wrong. But the early export pessimism expounded by Prebisch and others combined with the fallacy of the “uneconomic peasant” provided an intellectual basis for industrial promotion and agricultural neglect (Bhagwati 1984).

Development theory assumed that abundant surplus labor was readily available in the rural economy. Economists developed models with a horizontal supply of labor to the “modern” or industrial sector, based on the idea of surplus labor with marginal product of zero in the traditional (agricultural) sector. The focus of these models was on rapid capital formation in the industrial sector. The propensity of industrial entrepreneurs (be they from the private or the government sector) to save and invest out of profits was assumed to be much higher than of rural farm households. Implicit in these models was a trade-off between growth and equity, and domestic obstacles to rapid industrial development were not well recognized. The protected private monopolists and government bureaucrats were treated as “platonic guardians” rather than as self-interested economic agents (Krueger 1986). Economists meanwhile engaged in sterile debate over whether or not the assumption of labor with zero marginal product in agriculture was warranted. (Actually, one needed only to assume that average product exceeded marginal product.)

Early development models also underestimated the difficulties involved in making a transition from a traditional rural-based economy to a modern industrial one (Bhagwati 1984). In particular, the problems of absorbing fastgrowing, low-skilled labor from rural areas into modern industry were not anticipated very well. The challenges of human resource development have been particularly great in Asian countries, with their large and rapidly growing populations and their limited land and other resources.