Tuesday, January 20, 2009

Strategies For Development 2: Should Developing Countries Continue To Focus On Agriculture Sector?

The greed to industrialise while is to utmost important, need to be treated with caution. I personally do not think that all developing countries are adaptable to such stance. Countries with fairly educated workforce & where food supply is not a major concern can strive for such strategy such as the Asian Tigers

But what about countries especially those from Sub Saharan African regions where majority of its people have never even received primary education? Can they take complicated management instructions & operate machineries? Furthermore, clean water supply is even restricted in many town areas, so how to base factories there? Besides, famine is everywhere & how can we ask them to ignore basic necessity such as farming?

Arguments to focus on primary sector to thrive development:

(1) Food supply. Robert Malthus’ argument is strongly applicable here. According to him, population is growing at geometric progression while food is arithmetic progression. Very soon, there will not be enough food for everyone. This claim is strongly criticise by Western economists due to the fact that high technology & modern farming can actually aggravate the production rate of food. However, this is not the case in primary-thrived African economies, where the capital goods are obsolete & peasants often show resistance to technology

(2) Exploits comparative advantage. Comparative advantage advocates that if a country can actually produce a good at a lower opportunity cost than other countries, then they should specialise in the production of it. In other word, large proportion of exports should consist of primary products. Poor developing countries have abundance of lands & cheap labour. As such they could produce wheat, crops etc at competitive price

(3) Engine for ‘growth’. In theory, exporting agriculture produce can enable developing countries to earn some income which can be source of economic growth. The industrial expansion which takes place in Northern Hemisphere will create additional demand for primaries from the South. That is because, as industrialisation swept over, there will be lesser lands available for farming. In many cases, agriculture is insignificant of total output. Like UK, farming is only 1% of its economy (manufacturing 26% & services sector 73%)

It is difficult to promote development via farming

(1) Low price elasticity of demand (PED lesser than 1). Recall what I have taught in Unit 1. If the demand curve is very inelastic, any increase in supply will result in a huge fall in price, eventually pushing the total revenue to a very low level (TR = P x Q). Here the price effect is greater than quantity effect. Primary products have low PED as they are often necessities & have few or no close substitutes

Source of diagram: http://www.bized.co.uk/
(2) Low income elasticity of demand (YED lesser than 1). As world incomes grow, smaller proportion of income will be spent on primaries. Since food is necessity, consumers especially in rich countries already consume virtually all they require. A rise in incomes therefore tends to be spent on luxury goods & services and only a meagre increase on basic foodstuffs. Poor countries especially from African regions which specialise in primaries will face deteriorating terms of trade. It means for e.g. more cocoa need to be exported in order to import the same amount of other consumer goods

(3) Agricultural protection in advanced economies. EU government is to be largely blamed for this. In order to be self-sufficient & to protect some local farmers, they erect various policies that prevent the poor farmers from exporting their way out. For instance, they imposed quotas on food import, creating minimum guaranteed price (MGP) to ensure high local price for farmers & dump all those surpluses into world market thus destroying market price for the poor farming countries

(4) Biasness in modernisation programs. Government in developing countries should be held responsible too. Thrive to develop industrial base has often meant that most funding will be spent onto developing urban areas. They ‘forgot’ that it is the majority of the poor who live in rural areas. Those places remain undeveloped. Villagers are left without electricity & clean water supply. Transportation such as roads to connect these people to town is left untouched. As such the standard of living of those peasants will remain low

(5) Low marginal revenue product of labour (low MRPL). According to the theory of labour markets, MRP is the demand curve for peasants by landlords. MRP itself is determined by the productivity of peasants & the price of agriculture produce. In reality, productivity is often low as workers on farms tend to be not educated, strong resistance to modern farming & operate with obsolete & worn off machineries. Prices of output tend to be low on the other hand. When these 2 are multiplied (MPL x Poutput), we can see mathematically that very few farmers will actually be hired & wages paid are very low. Based on this argument unemployment remains at large in rural. Ask yourself, from logical point of view how many person can work on a small farm? (which is fragmented)

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