The tendency for agriculture’s share of income to fall can also
be explained by 2 additional powerful effects:
1. Engel’s Law
 Low-income elasticity of demand for agricultural
products
 As Income increases, a smaller proportion of this is
increase in income is spent on agricultural products.
 Since demand grows slowly, the sector lags behind
the rest of the economy
 This decreasing domestic demand is unlikely to be
made up by foreign trade growth because of the Engel
effect also apply internationally
 Agriculture’s share in world trade has also diminished
over time.
2. Given that demand is sluggish because of the Engle
effect, if productivity increases in agriculture is relatively
strong, then it is likely that the term of trade for
agriculture in international markets will begin to decline.
This tendency has been reflected by a downward trend in
primary product prices for many years.
 In Asia, Green Revolution, which occurred at the
beginning of the industrialization movement in 1960s,
further contributed to the decline in Agriculture by
increasing agricultural productivity quite substantially.
 This facilitated and accelerated the migration to urban
areas where rapidly growing industrial establishments
required more workers.
Productivity in Agriculture
 Timmer (1991) : Agricultural productivity growth is
generally higher than that of industry at the beginning
of the process when industry is still weak and in need
of protection from foreign competition.
 The early phases of industrial development are thus
characterized by a wide productivity gap between
agriculture and the rest of the economy.
Timmer attributes the sectoral differences in the

average productivity of labor to differences in the
production function and technological change. More
importantly, however, he points out that such
differences may also arise from the low mobility of
resources, condition that underlies the persistenceof a
disequilibrium state, such as surplus labor in
agriculture and other low productivity activities,
including handicrafts and services.
 It is the surplus from this increase in profitability of
agriculture that serves to fuel the beginning of the
industrialization process.
 Often, in countries where there are wealthy landlords,
such as the Philippines, this agricultural surplus is also
the source of a burgeoning industrial empire, as
entrepreneurs make the switch from agricultural
processing to manufacturing.
 However, because of the rapid growth and dynamism
of the industrial sectors, this was not necessarily true
in Asia in the 1960s and 1970s.
 Agricultural productivity growth was also very high in
richer countries of the region such as Korea and
Japan.
o This is one reason that the industrialization
experience that began in Japan and
continued after the war in east Asia, in Korea
and Taiwan, served as a model for the
development in other regions.
 In any case, there was a mutual reinforcing interaction
between agriculture and manufacturing in Asia.
 This was the result of combination of the technology
associated with green revolution raising output and
the rapid rate of rural to urban migration that reduced
population pressure in country side but also raised
demand for agricultural products as living standards
improved in cities.
 This pattern of productivity growth in agriculture is
significantly different from that observed in Latin
America and Africa.
Agricultural Development in Monsoon Asia
 Monsoon weather cycle in Asia led to reliance in rice
production
 Traditional was practiced post-war required more
intensive
manpower specially during planting and harvesting.
 In between planting and harvesting farmers had to
seek
employment elsewhere.
 Opportunity cost of labor is high during planting and
harvesting,
 industries cannot hire full-time employees due to the
intermittent demand for labor.
 LFR Model suggest that the opportunity cost of labor
shifting from agriculture to industry was zero.
(However, did not necessarily hold true for Asia)
 Rice yields per hectare are much higher than for other
grains, and it requires more intensive manpower
which later on became a major reason that population
densities are much higher in many parts of Asia.
 As a result of intermittent nature of workforce
availability, the industries that developed in the rural
areas were also small and labor-intensive.
 Asian villages were densely populated and surrounded
by small family farms complemented by small and
flexible labor-intensive workshops and factories, often
employing women and men.
 This was typical situation in peasant agriculture at the
beginning of the postwar era. There was literally no
scope for increasing agricultural productivity within
the limitations of traditional farming technology.
 The opportunity cost of this labor was high,
particularly during the planning and harvesting
season. The opportunity cost was not zero as
suggested by LFR model.
How did the shift from agriculture to industry take
place in Asia?
 Two keys: Irrigation and higher-yielding varieties.
The agricultural surplus was important because:
1. It give farmers more income to buy consumer goods
2. Permitted some workers to migrate to cities to work
in newly established industries without diminishing
overall agricultural output
 Added income is used to adopt more labor-saving
harvesting and cultivation techniques.
The Efficiency of Traditional Agriculture
 Dates back hundred years or more ago
o Antiquated methods of cultivation
o Trial and error
 Many improvements in economic efficiency made
recently in traditional agriculture could not have
occurred without some change in technology or
improvement in irrigation.
Studies in determining if traditional agriculture was efficient
(an Indian experience)
1. Cobb-Douglas production Function
o Variable factors of production are efficiently
allocated.
o Biological assets were not efficiently
allocated.
o This is due to lack of economies of scale
 o Greater efficiency could be attained of
bullocks were shared among farmers, or if
the farm size was large enough to effectively
utilize these work animals.
2. Econometric Model
o All resources were allocated efficiently
3. Linear Programming
o The potential output of agriculture was
higher than the actual output.
o There are inefficiencies but these could be
removed by improving copping patterns.
o Tentative conclusion: Traditional Agriculture-
Efficient but minor improvements could be
made.
Why do Peasant Farmers Resist Innovation and
Modernization?
 Studies have shown that various innovative
approaches to farming and great improvements in
technology are the key elements to these increases in
productivity.
 Leaving our comfort zone is never easy because of
Possible uncertainties we may Encounter as we move
to our zone!
 Explanations:
1. we note that subsistence farming is the m a in
economic activity for about 80 percent of the rural
sector in developing countries. Traditional farming
systems in many societies define the role of
individuals in the family. All family members interact
and socialize in the process. In such a scenario, the
adoption of new technology or new varieties of seeds
would not just increase yield. It could also be seen as
a mechanism for altering the way of life for many
rural families.
2. fact that change may be accompanied by
uncertainty. Even if farmers have been assured of a
strong prob ability of achieving higher yields, they
will continue to ask: "What if it fails?" This question
assumes greater importance to subsistence farmers
(compared with those that are relatively better off)
because failure of the new technique or new seed
variety can have disastrous consequences.
o Subsistence agriculture is thus a highly risky
and uncertain venture because human lives
and people's futures are a t stake. In such
circumstances where threats of starvation
are real, the main objective of the farmer is
not to maximize income, but to maximize his
family's chances of survival.
o Accordingly, when risk and uncertainty are
high, a small farmer may be very reluctant to
shift from traditional technology and crop
pattern that has served him well over the
years, that he has come to know and
understand to a new one that promises
higher yields but may entail greater risks of
crop failure.
3. Farmers revealed that disincentives to increasing
productivity by adopting new varieties such reasons
as:
o Landlords secured all the gain
o The money lender captured all the profits
o The government guaranteed price was never
paid
o Complementary inputs (fertilizers, pesticides,
etcs. ) was never made available)
The Microeconomics of Agriculture in Asia
 The aim is to translate the inputs of land, labor,
fertilizer, pesticides, irrigation, and mechanization into
higher level of output.
 This process will depend upon the size of the holding
and the fertility of the soil, weather conditions,
susceptibility to flooding and/or drought, potential for
natural disasters, land tenure arrangements,
availability of storage and marketing, transfer of
technology through an agricultural extension system,
and so on.
Green Revolution
 was the phenomena created by the development of
new higher-yielding varieties of rice at the
International Rice Research Institute, located in Los
Banos, near Manila, in the Philippines.
 The advances made in wheat cultivation were adapted
to lesser extent, because wheat is heavily grown only
in the
more temperate areas of Asia. The results of the
Green Revolution on rice production are evident from
the research conducted by Mellor and Mudahar
 This study broke down rice production growth into
several components, including area effects from
greater irrigation, and yield effects from fertilizer and
new technology.
What really worked?
 Application of Fertilizers, pesticides and herbicides
 Irrigation
 Green Revolution
What factors have not helped much?
 Farm size
o There is an inverse relationship between
farm size and overall farm productivity in
traditional agriculture.
o Inverse relationship disappears with the use
of farming intensity, land quality, use of
irrigation and technology.
 Changes in land tenure
o Tenancy arrangement- operated farms
√ Farmers give the landlord a share of
their harvests.
√ Landlord rents out his land to farmers at
a fixed rate.
o In countries where land distribution is an
issue programs on land redistribution is
advocated on equity grounds.
Macroeconomic Aspects of Agricultural Development
Agriculture in Asia is an intensive sector
- Adopt a labor and capital-intensive technology.
- Keep undervalued exchange to maintain
appropriate trading terms and promote appropriate
labor-intensive production technology.
 In Asia, import-substitution policies were abandoned
quite early and stress was put on export promotion
and developing competitiveness in exports. This led to
the adoption of exchange rate regimes that were at
the same time beneficial to exports and to the
continued viability of the rural sector through the
terms of trade effect.
 Another sometimes forgotten aspect of
macroeconomic policy is that interventions designed
 to protect an industry or a sector or a factor of
production usually have unintended and often adverse
impacts. Thus, a more general equilibrium approach is
often needed to assess the overall impact of
macroeconomic or sectoral policies
Modernizing Agriculture and Rural Welfare: Lessons and Policy
Issues
Mechanization and the Demand for Labor
 In the agricultural sector, the main concern is when
and where mechanization should be introduced
 Since agriculture is highly labor-intensive
 Several studies have shown that a shift to modern
varieties has increased the amount of labor input per
hectare but probably decreased the amount of labor
per ton of production because of yield increases.
 Local conditions play major role in the decision
whether to mechanize or not
Technological Transfer, Growth, and Equity
 The introduction of new technology, be it higher-
yielding varieties or new methods of crop rotation and
cropping systems, of improved irrigation and
fertilization, has been the major factor contributing to
increased productivity in agriculture in Asia during the
past fifty years.
 Although modern technology has certainly increased
the average per-capita income, it may have had an
adverse impact on income distribution because there
are several forces at work.
 larger farmers consistently used higher levels of
fertilizer and obtained higher yields. To the extent
that farm size and income are highly correlated, these
results suggest a negative impact of the Green
Revolution on income distribution
 most of the higher farm income derived h a s gone to
factors of production other than labor.
 It has also been argued that after the Green
Revolution, rice producers and workers involved in
 rice harvesting were worse off because of
"immiserating growth," that is, the Green Revolution
has increased production beyond demand, thus
depressing prices and reducing incomes.
 It is unlikely that the growth in agriculture induced by
the Green Revolution will continue in the future
without changes being made to the production system
and further advances in technology. Growing water
shortages throughout Asia will constrain further
extension of irrigation networks, as well as present
challenges for maintaining or increasing agricultural
productivity.
Genetic Engineering
 In recent years, rice productivity growth has declined.
It is now necessary to implement ongoing
technological developments that have taken place in
rice and in other food crops, horticulture, and
livestock.
 There are also more recent developments in genetic
engineering that can be considered-even as there are
many associated issues with its implementation.
Genetically modified organisms (GMOs) are produced
by transferring a gene or set of genes conveying
specific desirable traits within or across species.
These GMOs are controversial and have been banned
in some European countries. However, this method
has been widely used in Asia.
Zero Tillage
 Zero tillage minimizes or eliminate stilling of the land
and retains crop residues as ground cover.
 Zero tillage saves on labor and energy required to
overturn the soil, conserves soil fertility, increases
tolerance to drought, and educes greenhouse gas
emissions. However, it requires more weeding and the
occasional use of pesticides.
 It is applied in this region in a rice-and-wheat
combination. Wheat is planted immediately after rice,
without tillage, and the wheat seedlings germinate
without irrigation, using the residual moisture from
the previous rice
 crop. The system saves water, and reduces production
costs and the incidence of weeds and pests. Rates of
return are reported to be very high-as much as 50
percent or more
Research and Development
 It has been widely documented that agricultural
research and development(R&D) yields high returns in
the developing countries
Food Prices and the Linkages to Energy
International Trade and Resource Transfer
 The role of agricultural exports in earning foreign
exchange was very important at the beginning of the
growth phase for these countries in the 1950s and
1960s.
 All the Asian countries were primary product
exporters, including Korea and Taiwan, both of which
exported rice. As development progressed,
agricultural exports diminished in importance as Asia
became more specialized in industrial exports.
Nevertheless, Asia still accounts for a significant share
of world trade in agricultural commodities. While the
economies of East Asia are net food importers,
Southeast and South Asia are still net food exporters.
 The structure of tariffs and the level of protection of
agriculture from international competition tend to
vary inversely with the level of income
 These high tariffs also harm the developing countries
in that they would be able to produce and export
more products if the tariffs were lower.
Shifts out of Primary Grain Production
 There has been a gradual shift in the mix of
agricultural goods produced in Asia from primary food
grains, such as rice, wheat, and sorghum to secondary
food crops, such as livestock, tree crops, horticulture,
and fishing.
 These shifts have occurred in line with changes un
comparative advantage, relative prices, and
profitability, which have encouraged the
diversification of agriculture.