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This report is not to be published nor may it be quoted as representing the Bank's views.

No. E 218

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

THE BALANCE BETWEEN AGRICULTURE AND INDUSTRY

IN ECONOMIC DEVELOPMENT

Economic Department

Prepared by: E. deVriea

J'une 4, 195Z

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wb350881Typewritten Text67147

A. The i!'lportance of egr~ cul tural develonment 3. The need for trfnsfer of ],)opulat:ton C. Its affect on f'gr"!.cultural products to Of: nerketed D. The need for a ba:!.anced develomr.ent E. Develo9ment of the non-agricultural sector F. Investments needed for total develooment

:2 • 11. 14 18 2.0· ::3

The "?re9aratory Comi-:1is!11on on :'lorld Food ?roposalsU)J havine stressed the need for expans50n of agr~culture, declares th

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A. 'i'FB ni?ORTj~YC'El OF AGIUCtJLT1JRf.L D::V:?LOPliSHT

There is general ugreement on the need to expand agriculture in the world as a "lhola, and especielly food productIon in underd~veloged countries, in order to matntain and improve standards of nutrition. Sometir.1es it is ar-~ed t~r expansion is not expensive because techniques can be easily 1m-proved • .::.J TM 13 may be true in isola ted cases if ne", crops are introduced (rubber in ~falaya.; Sumatra .s.nd Borneo after 1910) or new varieti.es (high-yielding, disease-reSi.Stant sugar canes after 1925, or hybrid corn after 1935). but tMs thesis does not hold in general. IJ:here ar~ no longer gree, t fertile plains "rHh natural grasses wE,H1ng for the plo't' as "Jcre avnilable a century ago 5.n the four corners of the earth (North AneriC

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i'!hen national figures e.re made cO!:lparable by express1ng them in percent-ages of wtional 5r.come t let p.! be the .Dercentage of lnCOr.'!9 derived from agricul ture Ecnd sl the percente.ge avan~ble for ne\·! ~.nvestments. If:£.1 is the rate of agricultural investment in total investment, the follmv5.ng equations ce,n be establi.shed.

a = d x r c x p

If we call the amount of investment in agriculture, in percentages of wtion-al income. ±'or simpHci ty. BIt \·re find:

n=dxr=axnxc 100

The absolute amount. to be called rJ in th1.s stud:l. can eaRi.ly be der1ved by mult:l.ply5ng!.!/ by the total national income of the country or area. This calCUlation is still further s'f.mpltfied. if.s.l is uniformly sot f;."t 4. In that case,

n := 0.04 a x p

The UN expert CO!ml1i ttee goes even further by using a uniform !if of 2.5% and p.! of 4056 in all areas, thereby reductng the formula to

n - 0.1 P .. 4% of ~~tional income.

At th~s pOint. hO'll/ever, we have to depart fron the reasoni.ng of the commi t-tee. In rea.lity, the percentage of nati.onal income derived fron agricult1:lre differs \ddely even among underdeveloped countr1es. Let us first look at presont conditions before embarking upon calculating capital reqUirements.

The a.mount of domestic savings or of total (tvai.lable investment -funds obViously is not the same 4n all underdeveloned countries. The variation - / -ranges fron :3 to 8,), Etccorcl~ ns to the un Report.' Too t part of s~"v~.ngs "Ih:' ch is devoted to £.gr';culture also vt'.rjes, although tMs ratio h ... ",8 seldom been stud'i.ed thoroughly. Therefore. it ~~ unclerstandable that the annual increase of acricul turr,l producHon is \

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Invest-Income !tEnt Rate of derived devoted- agr~c-

lTet from to. ::.g).tr~ ultural }Tation- do;nes- Domes- agrlc",:, . culture devel-

Popula- al In- tic tic ulture- est. 0pment Region ti.on come savin s savings d est. E... r a

(mill.) (bUlion dollars .' (percen tages)

I,a tj,n America. 160 25 2.00 8~0 40 35 1.75 Africa (e):cl.

Egypt) 180 13 0.72 5.5 55 45 1.12 Hiddle East 95 10 0.55 5.5 40 30 1.03 South Central

ASia 440 25 1.20 4.8 50 40 0.96 :Elar Et"st (excl.

Japan) 660 --11 0.80 -1& --2S -5Q 0·20

Total 1,535 100 5.27 5·3 48.6 38 1.04

'.T:lth the exce~)tion of the FEr East, l'lhere i1ar, revolution and civil strife impede developnent, there ~.s a remarkable tendency i.n underdeveloped. countri.es to increase thei. r fooo product .. on by around 1% annually. Ex; a t1.ng trends ~ n the underdeveloped countries are on the ,·!hole very s~ mnar to tMs figure. The data assembled by the League of }Tations bet,,,een the t,·;o 1:18.ra, as Hell as those by FAO in the post\'1ar peri.od, po~nt to an increase of that magnitude. In Java c:,nd Hadura (Indonesia.) food production and popula t10n data are reas-onabl~/ \1ell kno\m ~l.fter 1880, Between that year and 1940, both popule. tion and food production increased by 140%.

Al though H is understandable that espec:J.ally in underdeveloped countries food supp11es tend to l.ncrease at the same rate as populr.tion. the phenomenon is important enough to be com~ented upon. The basic reason obviously 58 the lot·! degree of elastfcit;:l of demand for bas:i.c foodstuffs. If food supplies did not keep up ",ith popu.lat:i.on increase in a r.larket economy, hieh ,rices for food would follow. In a self-sufficient, closed economy, the same economic rule works. Production shorte.ges here are even !:lore sbarply felt br;eause imports fro~ abroad are very d.ifficult to obta:i.n and, at the same tine, :'t is virtually irnpossible to export foodstuffs. Under these c: rcums tunces, the desire to produce food, efforts to brj ng land :into cuI tiva tton, and labor cievoted to land and crops increase sharply '~hen food shortages occur and. v1ce versa. It "Iould nqt "payll to -produce more than the stanc:.arcl cons1.lmotion of the local com-un! ty.l! These cOli.d~tions ':lill change ",Ihen better trans~)ort and marketing

17 In certain closed co;:mruni.t:tes 1 t "les the custom to accumul"te 2 or 3 years' food supply or large hords of cattle. Anthropologists have generully explain-ed this custom as displuy of social i'llporte.nce or economic '\-laste t but it can also be explained as a social defense aga:'nst rapidly declining private efforts in case of abunde.nt food product{on. It is the pr:lr1itive prototype of the "ever normal granaryfl.

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:"c:~li~,LE' (;~,

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A1thou;h based u:JOl1 rou~;'h estir.:2tes, this table c1evr1y shm.[s the reasons why in highly ceveloped cOUIltries 8tricultural development is more rapid than in underdeveloped countries. l!.ven "111ere the percentage of national income devoted to agriculture is high (Thailand), the rate of increase is 1m,}. The proportion of agricultural investment in total investment increases creatly as the proportion of national income derived from agriculture rises, but this is not sufficient to al10\,1 a large increase in aericultura1 production. There is also a general tenc:ency in underdeveloped countries for a smaller per capita income in agriculture than in other parts of the economy. This is illustrated by data, published by the Statistical Office of the United Nations. The ratio in favor of non-agriculture is derived from the formula:

column 1 x column 2 column 3 xcolmnn 4-

Agrarian Non-a gra rie n Eon- Income per capita population income as a ,srarian in non-agrarian as percentage percentage of popula- Agrarian activity (agrar. of totalJj total tion income per capita

Countn _ !l)_ {2} t~) ...uL_y income = lool N., Rhodesia 8:3.1 57.7 ?J 16.9 42.3 2 670 Union of South Africa 49.1 27.1 50.9 12.9 648 Canada 25.7 8.3.6 74 .• 3 16.4- 175 Puerto Rico 39.2 75.8 60.8 24.2 202 U.S.a. 14.3 92.0 85.7 8.0 205 Argentina 25.9 76.0 74.1 24.0 109 Ghi1e 33.4 82.7 66.6 1'7.3 238 Colombia 61.0 39.6 39.0 4':).4 153 Peru 62.5 67.4 3'1.5 32.6 343 India 68.2 52.5 31.8 47.5 :?26 .Japan 54.3 71.6 45.7 28.4 257 Denmark 29.1 7B.9 7C.9 21.1 150 J!rance 36.5 79.G 63.5 20.2 226 Gerfl1any 2/-4-.3 88.3 75.7 11.7 242 Greece 60.9 59.2 39.1 40.8 224 Italy 4:j.O 64.1 52.0 35.9 170 :~Iether lands 19.3 ~~.O 81.7 12.0 170 NorHay ,32.8 85.4 67.2 14.6 284 Poland 68.2 62.3 ,31.8 37.7 343 U.K. 5 .l~ 9L.6 94.6 5.4 100

11 In fact, the percentage of persons r,ctively in the D.N. Document E/2041, bas been used. from agricultural income is somet/hat hieher lower in the Eastern Hemisphere. This does

engaged in 8griculture, as '-riven The percentage of people living

in Latin America, and somewhat not msterially affect the com-

parison. ~ Adjusted by ~ 5 million for subsistence a~riculture.

Source: D.N. Document £/2041, Tables 5 and 7.

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For the five regions under conf3ideration, this ratio works out 9.6 follows:

Agricul tum 1 Agricultural Ratio of . Region I20pula t!,9n _._ income income La tin America 60 40 2.25 Africa 75 55 2.75 Near $st 60 40 2.25 South East Asia 70 50 2.34 P'ar East 70 li. 1.92

Total 69 48.6 2.34 U.H. Report 11 70 40 3.50 l! The U.U. report makes this estimate implicitly.

Consequently, the agricultural sector will generally have a propensity to eave even less than the already low averege in underdeveloped areas, and will not be able to ~ccumu1~te enough capital for the desired degree of development. l!

Unless special goverr~~ental funds become available for the agricultural sector, population increase rr,ay easily reach a point lJhere net investments in agriculture ere inadequate to raise food production at the same rate. rhere agriculture produces a large part of national income, even a large proportion of available domestic investment funes may not. be enough to allm! any improve-ment in the amount of food consumption 11er head.

The s.mount of investment reQuireC: to reach an increase in p!'oduction of 0.75% above population increase can no,,; be caltrulated.

17 1t!here land is avc.ilable, the rural community ho""ever is able to expand :Jro(lucticn by investint':: off-season labor. The prerequisite is a rapidly expandinr; market e.nd in '- enerel this is Of1~y found in the case of export crops. Investments can most readily be l"'lF,de in tree cro'1s, ",hich is the reason for nushroom::'nc proc~uctiorJ. of coconuts, rubber, cocoa anel similar r:rocucts, d:8never the prices are favorable. The ver-J rapid. development of food rroGuction b~r the Arab communi ties in Israel in recent years is another exaI"lple of the effect of marl:et conditions on agricultural pro-dUction.

Percentace. populc:.tion

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Tarcet in-crease of agricultu....-al 'l"'rocuction

Percentaf,e of national income deri-ved from agriculture

Percentage of national incon:e to be in-vested

A.mount in billions of dollars

~@ions inc rea se __ _ (a) (p) ---40

_illL._-_ _..lliL._ La tin America Africa

2.25 1.25

.3.00 2.CO 2.25 2.25 1.50 2.12

55 4.30 /;..40 J.6C !;.4C

1.20 0.57 0.36 1.10 0.89 4.12

Iv~icJdle Zest 1.50 40 s. Central Asia Far East

1;'50 0.75

50 .22 ~

4.12 Total 1.24 L~8.6

Formula used: n = o. 04 a x p n = target investments in billion dolle.rs

The percentages of nD.tional income derive6 from agriculture in Latin America and the Biddle :E:ast are eqUB.l to the assumptions in the U.N. Report; elsewhere they are hi~her and, therefore, on the v/hole a net investnent of 4% of national in~ome ind.uces only a 2~" increase in agricultural production.

An overall target of a 2.5~ increase in agricultural production for the underdeveloped countries as' a group ,·;ould absorb 5% of national incofle. If in each region a.n increase of 2.5~ 'Here to be achieved, canital requirements ,·mule be 4% of national income in latin America and the Nidole East, and as high as 6.5% in Africa. The regional differences in projected popUlation increase add to the differences in capital requirements for a.gricultural de-velopment. An equal percentage increase over and above grOlJth of ponulation of 0.75;; means an overall increase of agricultural production of 2.1% rather than an overall increase of 2.5%.

The compensating effects of these differences in assumptior..s, corr.pared with those of the U.N. Report, are such -L'ihat both calculations arrive at a need for ~4 billion net investment in agriculture but with a significant difference in the distribution of this amount OYer the regions. Part of this capital is locally accu.rnulated at present. 'l'he exact amounts are un-knowD but I consider the estimate in the follov:ing table reasonable:

(All figures in billion dollars annually)

Estimated Target present situation Target set in

!!egion investment .. - amount Deficit U.N. Report latin America 0.70 1.20 0.50 0.96 Africa 0 • .30 0.57 C.27 C.5.3 lviiddle East 0.16 0.36 0.20 0.36 s. Central Asia 0.43 1.10 0.62 0.96 Far East 9.:i& 0.89 Q.4.2 1.06

Total 2.04 z:u 2.08 3.86

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Present net investment in E!Briculture in uncerdeveloped countries \'ill ha.ve to be doubled to reach the moderate aim of a 2.1% annual increase in agricul tural :.)roduction. In absolute amounts, this means tha t for a period of time ~2 billion foreign financing ~ill be required ar~ually.

:For development prograr.:nning, it does not Inatter Duch Fhicb part of present investment :funds ere e.llocated to agriculture. A shift in this fi~,llre meE.ns a 1areer or srne.ller calcula.ted deficit in non-agricultural enterprises, but the total need for forei~~n financing is not affected by it.. HovevGr, it is worth,'hile to note than on the basis of our estimetes, Latin America needs ro%:hly 6. 7Cf/o increase, South Central Asia an increase of 130;", and the othe-::-regions \-lill require couble the amount of present investment.

~:!:,€ D.H. Re,port doeR not allocete ,enourh to Iat.in A!:'l9ricn and too rmch to t,{~G :Far East. This 'is the- consequence of differences in popUlat:Lon increase.

}[ot all of this additional caYlital needs to come from fo:reign sources. Measures to increase domestic investments ,,·rill need to be encouraged, although unde:r present conditions not much can be eY.:pected from the ma.jority of small peasants in unoerdeveloped countries. Increased capital formation vithin the countries ce.n eventually be achieved through cOIrL.'"1lorcialization of 8("riculture and throu::;-h industrialization, but tOlllporaril;T at least, invest..'1lents of foreign capital, toe:ether Fith measures to increase kno1'ledCe s.nd skill of -;?easants, \Jill be necessary.

It is obvious that simply to make capital available is not in itself sufficient to ensure the desired rate of increased "')roduction. The farmers themselves must be capable; they uill have to be tau[ht better r:-l"oduction methods and they t..rill need coed seeds and lives tick , fertilizers, tools and equipment. Furtherr'lore, adeqm.te incentives are necessary to induce farmers to 'Jork at hichest efficiency. In a number of countries production ba s been helc1 dmm b lznd tenure conditions, procurement policies and lack of farm credit and of ~Jrice incentives. Misdirected private and public investments can also seriously Rffect production. Finally, producers and consumers must be served by a \-lell-organized network of marketing anCl transportation facilities.

The maximum effect of a development program \

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investment if supplemented by fnrm re~uisites which often implies organizing farm credit and marketinz facilities. Hovever, there can De no nope for an easy road to\Jard rapidly increasing yields over a large area.

Expansion of farmland through drainage and malaria control is one of the pronll.s~n fields for development, since it is usually cheaper than irri-eation. Expansion of the area under crops or ~rassland in marginal areas (drought, frost, flood) may increase total yields, but it adds tremendously to the risk of crop failures in unfavorable years. On the other hand, higher capital and labor intensities in agriculture generally decrease the risk of \Jeather conditions, pests and diseases. Therefore, more considerations than just average yields against alternative investments are needed to define the most favorable line of development in agriculture.

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The foregoinG calculations BSstWe that industry and social overhead services are eXJ;6nded along 'Hith agricultural development. Without adequate investments in transportation, cOIllmUL'lications, povler, education, health and sbrl.lar 006ie services an agricultural progrcm of any magnitude could not be carried out. In the algebraic language of the precedinG p'3.ragranhs, that 110uld J!le811 that the return from one unit of capital decreases. In other 'ltJords, agriculture cannot be developed quickly, un1ess the non-agricultural part of the economy is expanded likewise. This is a problem vith many aspects" but "Ie \lill deal mainly with tWft of them, viz. the c1emo[;raphic ane the mar-keting aspects.

With the oevelopment of an economy, there is 13,1: increase in movement from the countryside to the to"ms and from agricultural pursuits to non-agricul-tural. People are attracted by at least seemingly better living conditions, anc1 as they floc!';: to urban areas more abricultural products can be sold in the cities.

The impact of popul~tion transfer 011 the market for food is especially important ir coun'!:,ries vhere the agrarian proportion of the population at present is very high.

The assumption in the U.N. Report is that 1% of t.he population is to be transferred annually to non-agricultural activities, and that consequently total agricultural population would not increase. HOl-leVer, except for a very few countries (and at that only in a late state of development such as the U.S.A. since 1:.orld liar I) total agricultural population increases with de-velopment, al thoueh much more slmdy than the industrial popule,tion. There-fore, the target put up by the U.N. Report scems unrealistically high. But

even if the degree of transfer is less, the effects on the economy are con-siderable.

_ In order to estiIl1.ate whet might happen 'Ahen foce production increases more rapidly than population, it is assumed that the standard of nutrition is equally improved for all sectors of the economy, and tre.nsfer of popu-lation is sufficient to allow the agricultural population to obtain such an improvement in total per capita income that their food intake equals the target-improvement in aiet.

For the !laverage!! of the "underdeveloped part of the 'tolorldll this cal-culation, runs as follovlS:

Agricultural product,ion incre8se Populaticn increase ?9r capita increase of con-

su.'tJlption of agricultural product

- 2.12% - 1.24jQ

- 0.88%

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It thus is assumed that this improvement occurs in the a:riculturel as 'IA'ell as non-a&;ricultuI"&l part of the ~,opulation.

At present aGricultural procucts form 48.6; of national incC>I'!le. If this percentaGe is also vl3.1id for the nell economic activity (actually it has the tendency to fall off gradually) a per capita increase in total income is neeead of 0.88 x 100 = 1.81%. It is our assumption that this has to

48.6 be reached for the non-agricultural as vell as the ot;ricultural population.

~ith a 1.81% per capita increase in incone and 2.1~~ increase in total income (= production), agricultural population can increase b~r only 0.31?;. As a simplification, percentages have been added end deducted; to be accu-rate, they should have been multi;Jlieo and divided, in which case the exact resul t 'Would be O.35)~. As the basic figures are mostly tarEets or statisti-cally rou£h estimates, the simple calculation is sufficient. For the five main areas this same calcula tion ,~ives the follo\du'·· result (all fifrures in percentages per annum): ...

South latin Near Central Americ~ ~£! East Asia Far £as.!:

Abricultural production increase 3.00 2.00 2.25 2.25 1.5(' Population increase 2.25 1.25 1.50 1.50 C.75

Per cs pi ta inc rea se food 0.75 0.75 0.75 0.'75 C.75 Agr. ~roduct percent. of national increase 40 55 4C 50 55

Fer capita increase total income 1.875 1.38 1.875 1.50 1.36

Admissible increase in agri-cultural population 1.125 0.62 0.3?5 0.75 0.14

It is interesting to see what becomes the relation between numbers of agricultural and non-agricultural population, if the necessary shift in population materializes.

STARTING POINI:

Uon-Agrarian agrarian popula- popula-

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il.FT$ ONE YEAR Agr. population, I Non-agricultural populatlo~

Percent after

Percent 11 1/ Percent one Region tion lion increase Number ' Number !E£r.~~ ;zear

Ia tin America 60 40 1.125 60.67 41.58 3.94 40.66 Af:::-ica 75 25 0.62 75.46 25.79 3.16 25.45 Near East 60 40 0.375 60.23 41.27 3.16 4C.66 S.G. Asia 70 30 0.75 70.52 30.98 3.33 30.52 Far East 70 ]0 O.lA 70.10 3( .65 2.17 ]0.52

Total 69 31 0.33 69.23 32.01 3.25 31.62

11 The sum of these twa columns is total ~opulation after one year.

The same increase in per capita food availability (0.75%) has verj" different results on movements of population, on the assumption of equal increase in standard of livinr and food intake in both major parts of the economy.

On the assumDtions set out above, on the average 80% of the increase of population has to find vJOrk outside agriculture; the percentage rate of increase is about ten times more rapid in the non-agricultural popu-lation, and the percentage agricultural populotion decreases by 0.627;.

In the course of development, the differences between per capita in-come of agricultural and non-agricultural groups of population tend to diminish, but no hard and fast rule can be laid down by comparing U.S.A. and Puerto Rico or India and Japan, France and Greece (as shown in the table on page 6. It therefore is not necessarJ to introduce a secular movement over and above maintaininG the present rs.te of income level in both sectors of the economy.

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c. ITS EFF'ECT on AGRICULTURAL ~·rtODUCTS TO BE NARKETED

The importance of t.his aspect of agricultural production can be shO' .. m by a comparison of the situation in countries which have different numbers of economically active population engaged in agriculture. The follm1ing conditions are assumed: The country produces on a net. basis exactly the agricultural goods it needs, or in other words it maintains a balance between exports and imports of these products. Farmers and non-farmers consume on the average equal amounts of food, and sales by faI'T.lers to other farmers (local specialties a~~ seasonal exchanzea) have been neglected. The following relations would then appear:

Percentage of active population in a gricul ture 11

70 60 50 40 )0 20 15

Food available for other grouDs . _ y

30 40 50 60 70 80 85

Quantity of food one farmer (family) produces in percen-:t;.age of O1m needs 'J.I

11.3 167 2CO 250 33.3 500 667

Y Also represents the !Jroportion of food necessary for the farming population, if this is the same figure as active population_

y Also the proportion of farm income available for industrial goods, services, servicing of investments, savings and taxes.

JI First approximation of labor ~roductivity in agriculture; as food consumption rises with economic development, the actual differences in pro0uctivity ~er man-year are still larger.

, hen agricultural production exnands under conditions in 1Jhich the in-crease in population can be transferred to non-agrarian activities, standerds of livin:; rise in both sectors of the economy. If food intake increases at an equal pace in both sectors, a much larger part of the new agricultural pro-duct has to be marketed. Let us consider the effect of the degree of popula-tion t!~nsfer into incustFJ_ In all cases population increases by 1.25%, agricultural production by 2.0C;&, and no cf,ange in eX}Jort-import status is en-visaged.

1) The entire population increment is transferred to non-agricultural activities. The effect on mar!mting of 'lgricultural product is as follows:

S':'ARTING POIIIT Percentage agriculturally active people 11

70 6e 50 40 30 20

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ConsQmption by a ,'ricu1tura1 peo~le y

70.525 60.45 50.375 4G.30 30.225 20.15

1I.FTza ONE YEAR

ProC'uct avail-able for r..on-aGricultural population '2/

31.475 41.55 51.625 61.70 71.775 81.85

Percentage of new Droduct entering market

74 78 81 85 88 92

1:./ At the same time percentage consumed by agricultural people; the re-mainder to be put on the market.

g/ At 0.75% increase per caoita.

JI Column 2 t 3 = 102 (increase in agricultural ~?roduction).

As this table ShovIS, '''!hen the Hhc1e population increase is channelled a'Way from agriculture, at least 75J~ of the new product enters the market even in underdeveloped countries, and in its marketing aspect agriculture assumes the characteristics of a more developed country, including more sales, hibher consUID:>tion of industrial goOc1S and more or?ortunity for savings in the &cricultural sector.

2) Population increase in llcn-agricu1ture is four times that in agriculture.

FOFUUTIOH AFTZR FeOD C0NS1J1·L2TION ~ARTIHG I-OIlIT .~B_~R AF'rER cm~ Yr;hR __ iigricul- l~on-abri- Ap'ricu1-0 Non-a Gri- Percentage tiural cultural Non- tural cultural nel." product popula- popula- Agri- agri- popula- popula- to be tion tion cultural cultural tion tion marl\:eted ---

70 30 70.50 30.75 71.04 30.96 4S 60 40 60.35 40.90 60.80 41.20 60 50 50 50.25 51.00 50.63 51.37 68 40 60 40.16 61.09 4('.43 61.57 78 30 7(: 30.12 71.13 30.34 71.66 83 20 8(: '"'r r t,. ~ ... lk_ 21.17 2C.23 81.71 8.9

The difference \lith the first case is felt mainly ,'here the agricul-tural popu1c,tion is relatively larve.

of

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) Population increase in non-agriculture is two times that in agri-culture.

~l'.~RTING POINT AFTER OEE YEAR Percentage Agr. Non-agr. P012ulation Food Consum12tion nm, product Eeo,e1e peoEle .. Agr. Non-a gr. ..Agr. Non-a gr. on market

70 )0 70.69 )0.56 71.23 30.77 38 60 40 60.5) 40.72 60.98 41.02 51 50 50 50.42 se.8] 50.73 51.27 63 40 60 40.)1 60.91 4(.55 61.45 72 30 70 30.22 71.03 3(.44 71.56 78 20 80 20.1t~ 81.13- 20.29 81.71 85

The effect of this srnall de~~ree of population transfer is small, and the market econom:;' nenetra tes only 610",ly into agriculture.

Comnarison "'i th the ori::;iml llnarket surplus ll reveals that the im-porwnce of population transfer to !rlDrl:eting increases l~reat1y with the l"'lroportion of Bcricultural population, ane, that 8. strong movement siNay from agriculture is L!9cessary to bri:n:~ about, the desired result.

4) Population transfer is adequate to maintain llbalance ll between agri-culture and non-agriculture.

Applying the same type of calculation to the rate of transfer needed to maintain the re,tio of income bet\-!een agricultural and non-agricultural groups in the n~in underdeveloped regions results are obtained:

in the t!orld, the follo'\-,'ing

}}egion La tin America Africa Near East S.C. Asia Far East

Total

Increase of population div~d ill....R~E .. g .... ~ __

i>.gri-~tural

.30 37 15 .35

_;1..2 19

Non-agri-cultural --.......--

70 63 85 65 87 81

Present ratio of agricultural product consumed outside agricultural sectot_

40 25 40 3C

..lQ .31

Percentage of new product to be marketed

70 63 85 65 87

81

Given an equal increase in food consQ~ption per capita of 0.75% for each cf both 1:12 jor groups of the populE,tion, GO;~ of the new product there-f01'9 v;ill have to reach the market c3S against 30~ under present conditions. The effect is not only more sales of produce by farmers, but at the same time a creater consumption of indusLrial :~oors as a result of the rise in per capita income outstrippine th8t of per capita food consuInption. It also elves neH opportunities for capital &ccumulation in the rural areas through savin~:s or taxation 1:hich can then be used to finanoe future development.

-17-Hov-ever, the whole proeram \...rill be frustra.ted, unless transportation and marketing facilities for rural products are ':::'rel:l.tly improved.

It should be stressed that nrof'rams for irrif:>ation, clearin~; new land, mecheniza tion and eC;r;?,rian reforn "Jill have little effect, unless the in-c':ividual famers have the ~ntiv2 to ero,,, more. This incentive 1as lacking in the closed economy because local surpluses could not be mar~:etec:.. Ne"i agricultural techniques will not alter this situation unless the markets can readily be reached; otheT\olise the major deterrent to expansion in the traditional subsirtence economy will continue to operate. Likewise, under agrarian reforms the tenants mi["ht eat more, but ther woulCl have no in-centive to use better seed, implements and fertilizers if the sur?lus finds no ready market. The need for markets has been the main motive for build-ing railroads and developing ocean ports in Itnewll countries during the last centUlJr, and it is boune to be one of the cornerstones of future development.

At the same time, a sufficient per capita rise in income of farmers will be impofsible if not enougb excess population is channeled off into other activities. Any increase in food production woul. be consumed on the spot by more underemployed peo~le on the land, and individual farmers would feel no incentive to increase prodUction above the rate of gro,,,th of the population.

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D. T HE NEED FOR A BALANCED DEVELOPMEJt1l'

Thus, economic development is basically an indivisible process of agri-cultural expansion, of movement of people to non-agricultural enterprises and expansion of industry, a~d of improved marketing facilities and internal tr~sportation. )j

Agriculture cannot prosper unless investment in other activities takes care of:

a) Increase of productivity of existing non-agricultural people and the excess of birth over death of this group;

b) Equipment, housing and public services for the population transferred from the agricultural sector.

The non-agricultural sector could be developed independently, but only at the expense of large food imports, therefore this road is not open to the world at large.

It may seem disappointing that only a 0.9% increase ~~ually in food in-take seems feasible, especially since part of the increase is caused by differ-entials in population growth.

This question calls for qualifying one of our basic assumptions, viz. the self-sufficiency in agricultural products of the underdeveloped countries as a group. This is so near to existing conditions that no statistical correction was needed in our calculations.

But there is a possibility for development of a net export of food and agricultural raw materials to the more highly industrialized countries. If this should materialize, the development..-defeating characteri.stic of the low elasticity in demand for food is circumvented. Such exports could provide the means to buy more developmental and consumer goods and add to the self-financing of economic development. This was the development pattern of many countries between 1880 and 1930, but since the disastrous depression of the thirties there has been great relUctance to follow that course. The violent changes in demand and in price of food and agricultural raw materials are a serious handicap_ Nevertheless, it is in the interest of the whole world that safe~uards should be found against a future IIbig depression." This is the reason for the con-tinued interest in schemes for economic stabilization as well as development (\Jorld Food Board Plan, International Commodity Clearing House, Commodity Agree-ments, the Angell report, etc.).

It would take a long period of continuous high prices before farmers and governments would start an all-out effort to produce more agricul~lral goods for export. Producers are keenly aware that the inelasticity of demand for

1/ The need for these services, as well as for research and extension ser-vices in agriculture, was the reason for adopting the rather high capital: output ratio of 4:1 in agriculture.

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foodstuffs would reverse the trend at a later stage, and nobody is attracted by prospects of long-term cycles with excessively high or low prices. The conclu-sion, therefore, is that no rapid increase is likely to occur unless stability of economic conditions is better safeguarded.

When per capita agricultural production rises, it is necessary quickly to move ppople away from agriculture into other activities. On the basis o£ a "balanced development", i.e. the same per capita increase in real income in both major sectors of the economy, this needed population shift can be shown in figures for the aggregate of the underdeveloped areas (population increase 1.25~ All figures are in percentages per annum.

The Effect of Increased Mticultural Productiop on Need For Non-Agricultural Production

Need for Need for Increase Per capita Per capita Admissible increase of increase of in agricul- increase of increase of increase in non-agri- non-agri-tural pro- agricultural total agricultural cultural cultural duction production production population population production

1.50 0.25 0.51 0.99 1.90 2.41 1.75 0.50 1.02 0.73 2 • .42 3.44 2.00 0.75 1.52 0.48 2.97 4.49 2.25 1.00 2.03 0.23 3.52 5.55 2.50 1.25 2.54 -0.04 4.13 6.67 2.75 1.50 3.06 -0.31 4.71 7.77 3.00 2.00 4.07 -1.07 6.35 10 .. .42

The last two colQ~s in this table show that there is slight hope of at-taining the high targets for non-agricultural activities, which are equivalent to an increase of agricultural production of more than 2.00-2.25% per annum. If the necessary movement of people, with the consequent high demand for food from the cities should not occur, inevitably income per laborer in the agri-cultural sector will fall as a result of underemployment and of low prices for food. Under these circumstances, no further rapid increase in food production would be justified, and a high per capita increase of agricultural production would not be attained.

Could there, on the other hahd f be a possibility of a rapid expansion of industry without a complementary expansion of agriculture? Evidently this is possible only when the country can import the necessary food a.~d raw materials and at the same time sell a surplus of industrial products abroad. History shows that this was the case in ~ngland and Japan. However, the two require-ments must be co-existent because the country would have no funds to buy unless it exported, and the latter is necessary because the domestic rural population develops no purchasing power. Whenever only one of the two requirements is met, such a country encounters very serious internal and external problems. For the underdeveloped countries as a whole this road seems blocked because for the most part they ~ould have to buy and sell among themselves. There would be no supply of food and no market for industrial products if it was tried on a larger scale for a period of time.

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E. DEVELCPMENl' OF THE NON-AGRICULTURAL SECTOR

In order to calculate the amounts of capital needed to develop the non-agricultural sectors of the economy, it is necessary to estimate the capital coefficient in these sectors. On the basis of a publication of the U.N. Sta-tistical Office,', I divided these activities into three groups: (Table I)

A) Mining and construction, transportation, comm\L~ications and dwellings; these belong to the group which need a large amount of capital for one unit of increased production.

B) Manufacturing, which includes activity with both a high and a low coefficient.

C) Commerce and other activities, which belong largely in the group with a very low ratio.

The rather astonishing conclusion can be drawn that there is no apparent relation between the degree of economic development and the proportion of the three groups. Roughly speaking, they contain 20% of A, 30% of B, and 50% of C (compare India with the U.S.A.). If the capital coefficient in these three groups is assumed at 6, 4 and 2 respectively, this average works out at 3.4. However, very few studies have been made to determine the effect of investments in different sectors of the economy. Also, the statistics used for this purpose are not strictly comparable, as the breakdown between aotivities is not handled in the same way in all countries. A tentative comparison has been made between the countries in the last two columns of the table.

As could be expected, there is a tendency for the capital coefficient to be high in countries where:

a) A large part of the population is active in primary production, especially mining.

b) Transportation is very difficult or expensive; this applies especially to some countries in Africa.

The figure is low in Egypt, Puerto Rioo and the Dominican Republic, where a large proportion of income is derived from U other acti vi ties" and therefore presumably underestimated.

Although the statistics are not suffioiently accurate and comparable, the figures seem suffioient to oonclude that no clear trend can be established be-tween the rate of development and the capital input:output ratio. Unless there are special cases, a ratio of ~ therefore can be assumed, regardless of the degree of eoonomic development. Rough as this approximation is, it works out to an average of 3.75 for the total economy in the underdeveloped countries as a group, which is higher than the ratio for most highly developed countries.

There appears to be no reason for using different capital coefficients for different regions, except for the fact that probably in Africa, where a large

-~1 ..

T \4.L:r....! I ~-

?ercentage Distribution of non-~.gricultural Income by Major

2/. Br"i:.cLes of Industri£ Cauital Coefficient ~ al 0 ~ ~ Q) ~ .... 0 ~ ~

0 +'> .... • .-1 ~ 0-.... .. (C .. ~ M al ..t:: ~I .. al .. al :;:l Q) :;: o t:!) M 0 .. Q) ....... ]~ ~ ~ 0 .... 0 0 $:I~+> tw .... ~ ~ al M O:;:l"" $:I .. ~ Ul g Q) M $:I 0 l> +> 0 .... Ul~ s:: ~ Q) • .-1 • .-1 s:: s:: S::Q)~ o b.(j 0 o 0

C' ·tirrlr;-- : ==: o E-t~O ;:;:: 0 0 /iqai~ f:o:; Q) --

i~f:;'Ypt 10.5 20 18.5 51 2.B2 3.34 Kenya 2.5 27 16 31 23.5 4.70 ~ .• 22 N. Rhodesia 60 7.5 3.5 12.5 16.5 4.77 4.51 u. of S. Africa 13 17 27.5 20 22.5 3.85 3.B7 Canada 4 IB 36 24- 18 .3.60 3.66 nom. Republic 3.5 7.5 27 35 27 3.00 3.42 l1exico 11 14 28 .30 17 3.56 .3.65 Puerto Rico 16 15 28.5 40.5 2.94 3.21 U.S. America 2.5 13 33.5 30.5 20.5 3.29 3.35 ~~rt·entina ,.., ;; 17 28 31.5 21 3.34 3.50 ..J~~ • Chile 11.5 9 29 21 29.5 3.4C 3.51 Colombia 3.5 15.5 32 27.5 21.5 3.70 3.84 Paraguay 15 46 20 19 3.52 3.68 :?eru :9 8 27.5 33 22.5 3.23 3.48 Venezuela 33 x x x x China 1 20 19 36.5 23.5 3.22 3.72 India 1.5 15 31.5 32 2C .3.29 3.62 ,Japan .3 17 38 22.5 19.5 3.65 3.72 :t:'hilippines 2.5 13 9 )'-: e; 37 2.80 3.56 t.,.,. , 'fhailand 1.5 x 33 x x Tu,key 6 36 35.5 22.5 2.86 J.43 Bulgaria 3 10.5 39 23.5 24. 3.42 3.71 Denmark 1 22 38.5 19.5 19 3.69 3.75 :li'inland 20 46 18.5 15.5 3.72 3.30 .France 6.5 27 22 16.5 28 .3 r:':. 3.80 • ILl 't:7. Germany r:./ 12 59.5 11.5 17 Cfreece 1 13.5 .37.5 26.5 21.5 3.33 3.61 Hun::;-",ry 4 7.5 58 14 18.5 Ice18,nd 25.5 20 36.5 18 3.42 3.64 Ireland ): 34.5 3G.5 :x Italy 1 12 47.5 2C 19.5 3.47 3.67 Netherle.nds 2 "':1 """; 31 19 20 3.52 3.57 iJo!'Way gJ ';;4 49.5 16 10.5 Poland y 11.5 57 31 C.5 U. Kingdom 3.5 18.5 41 14 23 3.70 3.72

11 l,ith a capital coefficient of 4 for &zriculture. y The figures in th:5.s tEl. ble are c:eri ved from UN document E/2041 ij i':Iining included in manufacturing. !I No specification

-22-

percentage of output is concentrated in mining and a great need exists for better transportation and new general services, the coefficient will be higher. No allowance has been made for this fact, as there is no sufficient statistical evidence to do so and, therefore, the investment needed for Africa may be understated.

The next factor to be estimated is the annual rate of increase of non-agricultural produotion. The following table is based upon agricultural targets as defined in Section A of this paper, and a balancing non-agricultural develop-ment as set out in Section D. When the capital coefficient is estimated at 3.5, it becomes possible to calculate the amounts of investments needed to reach the goal.

Begion

Latin A.merica Africa Middle East S. Central Asia Far East

Total

Region

Latin America Africa lYiiddle East S. Ce'1tra.l Asia Far East

Total

c = 3.5

Peroentage increase in non-agric. t?opulation

3.94 3.16 3.18 3.33 2.17

3.25

Percentage increase per capita 12roduction

1.875 1.38 1.875 1.50 1.36

1.51

Target of increase of production

(a)

5.9 4.6 4.1 4.9 3.5

4.8

Capital needed in % of national income (n)

Capi tal needed in billion dollars eN)

12.4 7.2 8.6 8.6 5.~

8.6 1/

3.10 0.94 0.86 2.15 l·kl

n = a x n x c = 0.035 a p 100

Percentage non-agric.

income (p)

60 45 60 50 45

51.4

Available domestic capital

1.30 0.42 0.39 0.72 0.40

3.23

11 Difference due to ronnding to previous calculations.

a. x p

3.54 2.07 2.46 2.45 1.57

Deficit (billion dollars)

1.80 0.52 0.47 1.43 1.01

5.23

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F. Il\1\:"'ESTNENrS NEEDED FOR TorAL DEVELOPMENT

In order to obtain a 2.1% annual increase in food production and a 4.8% increase in non-agricultural activities, the need for capital investment as compared with the present situation can be calculated as follows: (in billion dollars)

Available Needed Deficit Non- Non- Non-

Agri- agri- Agri- agri- Agri- agri-cultu- cultu- cultu- cultu- cultu- cultu-

Region ral ral ~ ral ral Total W-. ral Total - - - - --Latin America 0.70 1.30 2.00 1.20 3.10 4.30 0.50 1.80 2.30 Africa 0.32 0.42 0.72 0.57 0.94 1.51 0.27 0.52 0.79 Middle East 0.16 0.39 0.55 0.36 0.86 1.22 0.20 0.47 0.67 S.c. Asia 0.48 0.72 1.20 1.10 2.15 3.25 0.62 1.43 2.05 Far East 0.40 0.40 0.80 0.89 1·41 2.30 0.49 1.01 1.50

Total 2.04 3.23 5.27 4.12 8.46 12.58 2.08 5.23 7.31

The conclusion can be drawn that an average rate of increase in national income of 3.5% or of 2.2% per capita per annum"CO.8% in food, 1.4% in non-food) is possible with a $12.5 billion investment, out of which $4 billion is to be used in agriculture and ~~8.5 billion in non-agricultural investments.

Of this ~l2.5 billion, a little over 40% is available from domestic savings. Some $7 billion of outside financing will be necessary, to be divided roughly into ;~ billion for agriculture and ~~5 billion for non-agriculture.

It should be stressed that this $7 billion includes all private, govern-ment and international investments and gra..l1ts. It seems to be a target which is within the economic potentialities of the free world. However, it is clear that it would be very difficult to reach higher targets.

The rate of overall economic developmeht based on these assumptions can be described as follows:

Per capita Non increase in

Agricultural agricultural Tot.al Population produc-Region sector sector Economy Increa§e tion 1/

Latin America 3.00 " 5.9 4.74 2.25 2.49 Africa 2.00 4.6 3.17 1.25 1.92 Middle East 2 .. 25 4.2 3.42 1.50 1.92 S. Central Asia 2.25 4.9 3.57 1.50 2.07 Far East 1.:50 3.5 2.40 0.75 1,65

Total 2.12 4.8 3.50 1.24 2.26

U.S.A. 1895/1940 1.40 4.3 3.50 1.48 2.00

11 The discrepancy which seems to arpear in this cola~ is the result of higher increase in population in regions with higher per capita income.

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A comparison 'With development in the U.S.A. in 1895/1940 11 shows that conditions at that time were similar to those envisaged in this paper as tar-gets for the underdeveloped areas. This again confirms that it would be un-realistic to expect a more rapid development than the one described here.

In this paper, in a number of cases comparisons have been made with the assumptions in the U.N. experts' report. It seems worthwhile also to compare the outcome of both studies.

Estimates of Capital Needed (billion dollars annually)

U.N. Re120rt Present 3tYGY Indus- Non-triali- Agri- agri- Agri-

Region 2lation culture ~ culture culture Total

Latin America 1.58 0.96 2.54 3.10 1.20 4.30 Africa 1.78 0.53 2.30 0.94 0.57 1.51 lv1idd1e East 0.94 0.36 1..30 0.86 0 • .36 1.22 South Central Asia 4.36 0.96 5.32 2.15 1.10 .3.25 Far East 6.61 1,06 7.77 1.4+ 0.89 2.30

Total 15.27 .3.86 19.13 8.46 4.12 12.58

Present savings x x 5.24 .3.23 2.04 5.27 Deficit x x 13.89 5.2.3 2.08 7 • .31

In agriculture, the total amount needed is about equal to the estimate of the U.N. experts. However, it should be pointed out that the U.N. experts believe it possible to increase agricultural production by 2.5% annually with an investment of about $4 billion. Also, they assumed a flat 2.5% increase in all areas, and did not take into account the expected difference in popUlation growth.

In industry, the discrepancies are much larger; it seems that the U.N. experts underestimated the need in Latin America but grossly overstated the feasibilities of a program in Asia and Africa mainly because they assumed a fixed amount was necessary to put one laborer to work outside agriculture. They also assumed a larger rate of population transfer. Further, it is im-plicit in the calculations of the U.N. report that in industry the oapital 00-efficient is very high. Investments of;;i19 billion would be adequate to ~.

JJ Prof. Th. Schultz (Agriculture in an Unstable Economy, New York 1945) puts the inorease of agricultural production in the U.S.A. at 1.4% annually between 1895 and 1940 and of industrial produotion at 4 • .3%, with the population in those years increasing 1.48% annually. In "the golden agen of agriculture in the U.S.A., agriculttlral production increased 2.5% annually. However, this \oIas under special circumstances of easy and rapid opening up of new lands and a large 'immigration of skilled laborers.

The ta~get for the U.S.A. is put (p.126) ae follolis: It seems likely that agriculture C9.n be fairly prosperous if during the

first t .. !O decades after the war the annual rate of increase in non-agricultu-ral output reaches 4 to 6%. This would probably make room for an expansion in agriculture of up\-!ard of 2% per year.

y increase national income by cnl~? ,,:,2.5 billion. I believe thet l"core can be expected, even with an investment of only ;~12 billion.

A crosscheck on the validity of the use of a capital coefficient of 4 and 3.5 for agricultural and non-agricultural development respectively can be made by applying them to present conditions.

lie then arrive at the following figures:

Annual Average Aggregate Aggre- in-population Aggregate Present non- Present gate crease increase agrarian annual agraria."'l annual total total

Region 1940/50 income increase income increase income income

Latin America 1.89 10.0 1.75 15.0 2.48 25 2.16 Africa 1.20 7.2 1.12 5.8 2.07 13 1.44 Hiddle East 1.25 4.0 1.03 6.0 1.86 10 1.49 S. Central Asia 1.02 12.5 0.96 12.5 1.70 25 1.35 Far T;ast 0.48 14.8 0.70 12.2 0·94 27 0.76

Total 0.91 48.6 1.04 51.4 1.82 100 1.40

It should be remembered that ive started with a rough approximation of the division of total domestic savings between both sectors of the economy, There-fore, it cannot be expected that there is an absolute correlation between the annual increase of agricultural production and population increase,

However, in most areas population increased even more rapidly in 1940/50 than the calculated increase in food production.

The onl7 area where the figures would indicate that per capita food pro-duction increased is the Far East. However, here the effects of the war have seriously disturbed the pattern of production. In a large part of the last decade, there might have been no net domestic savings at all or even negative ones owing to war destruction. In addition to this, the annual population in-crease might have been higher than 0.48% per annu'll. The 1949 figures of avail-able funds therefore might better be compared with expected average population increase in the years to come. He then find in each of the regions that actual domestic savings are insufficient to support existing nutritional levels in view of the expected rate of increase of the population.

Non-agricultural income increased in each of the regions more rapidly than agricultural income, with the result that non.agricultural income has main-tained a small margin over population increase. This fact is in accordance with general observations and supports the validity of our assumptions.

Total national income increased in each region at a rate which is barely equal to expected population increase, with the exception of Africa where de-velopment was slightly more rapid.

Assuming domestic savings at a rate of 5.27% of national income, this ratio would allow an overall rate of economic development of 1.4% annually in

;

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all under-developed countries together. This is very little above the in-crease in population expected for the next decade and thereby indicates in principle a stagnant economy.

The ratio between domestic investments and population increase therefore is a quantitive expression for the degree of "underdevelopment" of a country. Underdevelopment is a state of affairs, in which a country cannot develop its potential resources and raise income levels without outside financing, rather than the actual existence of low levels of income and standards of living. Nor is it an expression to describe an existing gap which is rapidly being closed; on the contrary, there is evidence that the gap is widening because the rate of development is more rapid in highly developed co~~tries, where population increase is below that of many underdeveloped areas and the amount of savings is higher.

One of the paradoxical results of better health conditions, in itself a consequence of eoonomic develo~ent, is that it pushes countries back into the Itunderdeveloped ll category unless at the same time domestic savings increase about four times more rapidly than the increase in population. On the other hand, it is only through such development of internal resources, backed up by assistance from abroad, that a solution can be found.