"Poor countries are poor primarily because

of their low productivity in agriculture",

Discussion.



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Introduction
Until the 19th century, living standards around the world were roughly
similar. Since the age of industrialization, countries began following different paths
in economic performance. As a result the difference in living standards started to
appear. Now, more than 200 hundred years later, with the countries' GDP/person
ranging from 400 to 102,800 (CIA World Factbook, 2012), economists pose an
important question: why do certain countries remain so much poorer?
To try to answer this question it is essential to understand the complexity of
poor countries' characteristics and the importance of agriculture in their
economies. In most developing economies the majority of people are employed in
agriculture
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. The concept was introduced by Schultz in 1953 when he defined the
"Food Problem". He maintained that due to low labour productivity poor countries
are forced to allocate the majority of employment into farming to subsidise their
needs and consequently are unable to follow the economic growth path
(Gary&Prescott, 2002). In this essay, I will try to investigate whether the above is
true 60 years later.
The following essay discusses whether poor countries are poor primarily
because of their low productivity in agriculture. Firstly, it investigates the empirical
pattern of productivity in agriculture and non-agriculture across countries with
different income levels. Secondly, it explores the distinction between low
agricultural productivity as a root of poverty and as a proximate manifestation of
other factors. Thirdly, it analyses the seemingly effect of other factors on agriculture
such as the role of technology, household preferences, institution and policies.
Finally, in the conclusion I will summarize all of the evidence and present my own
views.

The empirical pattern of productivity
In order to investigate the empirical pattern of productivity across countries for
different income levels for agricultural as well as non-agricultural sectors, we firstly
need to truly understand what productivity is (Caselli, 2005). Total Factor
Productivity (TFP) is a variable accounting for effects in total output not caused by
tangible inputs such as capital or labour. It is most known in the form of Cobb-
Douglas Y = A K

L

, where Y represents total output, A- total factor productivity, K

capital input and L - labour input, with and being two input's shares contribution
of K and L respectively. An increase in A, K, L leads to an increase in output. TFP is

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over 80% in the poorest countries ......... X, 2012 find the reference!!!

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regarded as the real driver of growth of the economy, accounting for up to 60% at
times, next to labour and investment (Comin, 2006). TFP poses, however, an
important challenge - available data is limited. In order to build TFPs we need to
derive development accounting framework at the sectoral level, while making three
assumptions: markets are competitive, production factors are mobile across the
sectors and production functions are Cobb-Douglas (II).
To investigate the empirical pattern of TFPs I interpret the work of Casseli (2005)
based on development accounting framework. In Figure 1. we can see a gathered
cross-sectional data exploring the relationship between GDP per worker and
employment share in agriculture. According to the graph, the aforementioned
Schultz's theory appears to still be in place. Clearly, countries with lowest GDP per
worker are also the one with the highest employment share in agriculture reaching
as far as 96% for Mozambique. By contrast the richest countries such as Great
Britain or USA employ only 2% of their workers in Agriculture. To conclude, it seems
fair to say that Agriculture is the biggest source of differences among countries and
as the country becomes richer it employs less workers in agriculture.

Figure 1. The employment share of agriculture across countries(source:Casseli, 2005)
Let us now investigate the relationship between the labour productivity in
agriculture and GDP across countries. Figure 2. suggests a positive relationship
between country's GDP and productivity in agriculture. As an example
Mozambique, which we discovered to have the greatest share of workforce in
agriculture (96%), is also the least productive in agriculture among other countries.
Conversely, the aforementioned rich countries with low share of employment in

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agriculture: USA and GB are according to Figure 2. the most productive ones in
agriculture in comparison to the rest of the world. Another fact stands out as well,
Mozambique seems to be twice as productive in non-agricultural sector than in
agricultural one, while the productivities in non-agricultural sector are only slightly
higher for rich countries (Figure 3.).

Figure 2. Productivity in agricultural sector across countries (Source: Casseli, 2005)
Trade theory states that developing countries, which are usually rich in land labour
and natural resources instead of capital and technology as developed countries
should have a comparative advantage in agriculture. Unfortunately, in the light of
the empirical studies carried out that claim seems to contrast the reality. Based on
the three figures previously analysed, it is seemingly easy to conclude that poor
countries remain poor and therefore cannot stand the trade competition for three
reasons. Firstly, developing countries are much less productive in agriculture,
possibly due to lack of modern technology such chemical fertilizers. Secondly, they
are a bit less productive outside agriculture and lastly, they employ most of their
labour force in the least productive sector - agriculture (Casseli, 2005).

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Figure 3. Productivity in non-agricultural sectors across countries (Source: Casseli,
2005)
Delayed structural transformation
As empirically shown in the last section, low productivity in agriculture is correlated
with being a poor country. However, could we go as far as saying that low
productivity in agriculture is the root cause of poverty? Or perhaps, low-
productivity in this sector is just a proximate manifestation of other factors?
According to Gollin, Parente and Rogerson (2006) low productivity in agriculture is a
root cause of poverty, as it delays structural transformation, which is understood as
a path of modern economic growth. Schultz's theory stated a country cannot start
the structural transformation until it is able to meet its subsidence needs. Only then
it can start reallocating resources (labour) from agriculture to manufacturing and
services. As a result of reallocation to higher-productivity sectors, while still meeting
the subsidence needs, aggregate productivity rises (Duarte&Restuccia, 2010).
Improvements in agriculture productivity could potentially fasten the start of
structural transformation and significantly rise country's relative output (Gollin et al,
2002).
The role of technology
In the previous paragraph I have touched upon a very important issue:
improvements to agriculture. However, traditional agriculture, known through the
land intensive Malthus model (Hansen&Prescott, 2002), is not able to generate a

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high enough labour productivity. Advancement in science-based technology, it
seems, is the only way of significantly increasing labour productivities. Examples of
such technological advances include: chemical fertilizers, wide variety of genetically
improved seeds and more efficient sources of power (Restuccia et al, 2008).
Unfortunately, they are not used quite as often as the economists would hope. On
various occasions farmers rationally refuse to use intermediate inputs such as
fertilizers, in the fear of uninsurable risk. Many of those products are bought in
advance of any idiosyncratic productivity shocks, which could generate losses
(Donovan, 2012). Since farmers do not use those frontier technologies they are
indirectly lowering productivity in the sector, and consequently making it impossible
for the entire economy to follow a modern economic path of growth.
The role of other factors
While it is generally true that agriculture is an important sector for country's
balanced growth in the early stages, we must not forget that there might be other
factors having an effect on agriculture and lowering sector's productivity.
Policies and institutions play a very important part in a country's economic growth.
The quality of policies could potentially explain differences in TFPs. Yet, only
barriers to international trade affect the tradable i.e. agricultural sector directly
(Peters, 2012). By raising trade barriers, policy makes it impossible for a poor
country to import foreign inputs that are cheaper and better quality than domestic
alternatives, further preventing adoption of frontier technologies. As it was
explained earlier the country cannot utilise its full potential and grow economically
and TFP in tradable sector decreases significantly (Trevor, 2012). Additionally it is
important to comprehend that bad quality policies may affect the agricultural
sector in numerous indirect ways. For example, they may indirectly reduce TFP by
reducing relative employment in agriculture. As land is a fixed factor in food
production, decreasing it would lead to a lower ratio of land to labour. Also,
through increasing the relative price of food, the policy would make it even more
expensive for the country to meet its subsistence needs (Herrendorf&Valentinyi,
2012).
Admittedly, sector productivity is also determined partially by self-selection of
heterogeneous workers, which was shown in 2009 by Lagkakos and Waugh. They
applied a two ingredient model called Roy Model (1951) to poor countries. As one
of the ingredients they set non-homothetic preferences - a subsistence food
requirement leading to an income elasticity of demand for agricultural goods to be
less than 1. As a second ingredient was the assumption that workers decide
independently where to supply their labour and their heterogeneity in
productivities. The general equilibrium states that those preferences allow for

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ineffective workers to stay in the agriculture industry, decreasing the aggregate
productivity of the sector (Lagakos&Waugh, 2012).
Household preferences according to (Gollin,Lagakos&Waugh, 2012) might also be of
use in explaining residual agricultural productivity gaps. While statistical surveys
are carried out similarly around the world, there are particular challenges while
measuring inputs and outputs in agricultural sector of developing countries.
Presumably, most of those are in fact biased through informality of large numbers
of households, operating outside formal market structures. Additionally, it is also
assumed that workers are indifferent between two sectors and decide to supply
labour only to one. In fact, households reveal their preferences through diversifying
income across different types of economic activity. As a result, household income
per worker may appear much lower for agricultural household.
Another potential explanation of lower productivity in agriculture are differences in
the cost of living for agricultural and non-agricultural workers. Admittedly, the costs
of living are lower in the rural areas, where agriculture takes place. The agricultural
workers possibly receive lower value added per worker due to costs of living than
non-agricultural workers while consuming the same amount of goods
(Gollin,Lagakos&Waugh, 2012). It is also plausible that institutions adapt barriers for
workers to move out of agriculture, which prevent movement of people and
withhold residual differences in agriculture (How?). In spite of those occurrences
being rare and are generally difficult to apply, they are still evident in a few
countries.

Conclusion
A significant issue was discussed in this essay: are poor countries poor primarily due
to low productivity in agriculture? To answer this question the empirical pattern of
sectors' productivities across different countries was investigated. Additionally, the
implications of low-productivity in agriculture was being analysed together with the
role of other factors on the productivity in the agricultural sector itself.
In summary, the empirical data shows that the Food Problem described by Schultz
in 50s is still a common problem facing most of the poor countries - countries with
the lowest GDP/capita are also the countries having the biggest share employment
in agriculture, which non incidentally collides with the fact that they are the least
productive in agriculture. This leaves us with the conclusion that poor countries, to
meet their subsistence needs, employ most of their workforce in the least
productive sector. However, the complexity of productivity in agricultural sector
and the limited informal data make it seemingly impossible for economists to make
a clear harsh judgement on low agricultural productivity's influence on economic

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growth in poor countries. On one hand, it seems that low-productivity in agriculture
is the main reason of preventing structural change, which would allow poor
countries a dynamic economic growth. On the other hand, there are numerous
economic data showing that low-agricultural productivity is not the root cause of
poverty but, in fact merely a cumulated manifestation of other factors from bad
quality of policies to difficulty in introducing technologies. In the future, it would be
recommended to compile and investigate the panel data relationship across
countries for different income levels controlling for the observed as well as
unobserved effect specific to the region in the pursue of significance of low
agriculture productivity on country's level of income.