The government’s Growth & Transformation Plan (GTP) is targeted at the development of the agricultural sector, with the guidance of the 1993 strategy of Agricultural Development Led Industrialization (ADLI).
The ADLI aim is “to bring about a structural transformation in the productivity of peasant agriculture and to streamline and reconstruct the manufacturing sector, so that it makes extensive use of the country’s natural resource and manpower”. On the basis of this, the GTP envisions “building an economy which has a modern and productive agricultural sector with enhanced technology and an industrial sector that plays a leading role in the economy; to sustain economic development and secure social justice; and, increase the per capita income of citizens so that it reaches the level of those in middle-income countries.”
The GTP can be seen as a transformative development strategy, based largely on the agricultural sector, which, then, is assumed to offer labour, inputs and demand for the non-agricultural sector. Based on smallholder agriculture and private sector involvement in large scale commercial farms, growth in the agricultural sector is expected to be driven by yield (output per hectare) increases, stemming from technologies, such as irrigation, infrastructure and modern inputs.
But the question is how growth in agriculture could be brought about and how this growth in agriculture relates to growth is non-agricultural sectors.
The most important task is to understand the mechanisms by which the Ethiopian agricultural sector can grow. Such factors as price and demand in the other sectors, as exogenously given, contribute to forming an understand of the relationship between the general economic context and the progress of the agricultural sector.
Agricultural productivity, under a smallholder agriculture context, could be increased in several ways. A defining factor is the land to labour ratio among smallholders.
Increases in cultivated land per worker is a way to increase labour productivity in the smallholder agriculture sector. By definition, this can come about either because of expansion in cultivated land or a reduction in the agricultural labour force.
Evidence from various academic studies suggests that a considerable share of recent cereal production growth of the country has come from area expansion. Of course, this remains contentious.
Furthermore, the area expansion has not led to larger farms. This is because the rural population continued to grow considerably. Even if output growth was largely driven by area expansions, resource constraints imply that the continued expansion of cultivated areas is not the way to create sustained growth in agricultural labour productivity.
Therefore, in the absence of area expansion, the rising land to labour ratio may be the result of the transfer of labour to other sectors, which may occur through rural non-farm activities and migration.
Such a reduction in the agricultural labour force can also be associated with increased agricultural income per capita. This happened in the development history of England and in Italy, when the “Black Death” epidemic occurred in the middle of the 14th century, which has been associated with the rise in labour productivity in agriculture.
Either of these mechanisms to increasing the land-labour ratio will raise the average productivity of labour. In the case of land expansion, total output will increase, whereas in the case of reallocation of land, resulting from migration, the effect on total output is ambiguous.
In general, the marginal productivity of labour will rise in both cases. In the case of increasing the land-labour ratio through labour transfer, an important question is the implication for total agricultural output.
Extensive debates in the 1960s and 1970s regarding the existence of pure surplus labour, the extreme case in which the marginal product of labour is zero over some time, have largely been regarded as a red herring.
If economies of scale are sufficiently powerful, it is even possible that the consolidation of small farms can generate a positive net effect on total agricultural output when labour migrates. But what is important and broadly accepted as a characterisation of labour markets in many developing countries is that the marginal product of labour in smallholder agriculture lies below its opportunity cost in other sectors.
Factors, including the availability of risk coping mechanisms, create incentives for household members to remain in that sector, even when a transfer of labour would increase aggregate output in the economy.
In an economy that is not completely open, a decline in total agricultural output will tend to turn the terms of trade against other sectors. This results in rising nominal wages. For example, in the industrial sector, even if the economy is closed, this decreases (accounting) profit and hurts its competitiveness in the international market. Thus, both approaches have the potential to retard the growth of non-agricultural sectors.
For this reason it is important to understand whether, and to what extent, the withdrawal of labour will reduce total agricultural output. If there are economies of scale in smallholder farms, it may, in fact, be the case that these will offset the reduction in labour supply so that total output can increase as a consequence of labour withdrawal.
The classical and neoclassical models of a dual economy highlight the importance of the question of surplus labour in determining agriculture’s contribution to growth. If labour markets are competitive, then, increases in rural incomes can translate into real wage growth in urban areas. Otherwise, this will not occur until a combination of labour transfer to other sectors and agricultural technical change increase the marginal product of labour above current income levels.
If there is a surplus of rural labour, growth in other sectors may be accelerated by increasing the marketed surplus of agricultural output. If this marketed surplus increases less proportionally than with the growing urban labour force, relative food prices will rise and urban growth with slow.
Two key reasons explain the failure of the marketed agricultural surplus to rise in this way. If the marginal product of labour in agriculture is not zero, then, total output of that sector will decline with the migration of the rural workforce. And if rural smallholders choose to consume rather than to sell the increment in the surplus of food per capita that accrues when family or neighbors migrate, then this absorption by the rural sector will decrease the supply of food per capita to urban areas.
I argue that, while it is possible to increase the allocation of labour to rural non-farm activities without diminishing agricultural output, the movement of labour to urban economic activities does come at a significant cost to agricultural output (or at least to marketed agricultural output per urban worker). There is limited evidence on the relationship between agricultural and non-agricultural incomes in Ethiopia, largely since labour markets are not competitive.
In theory, it is possible that the withdrawal of labour from the agriculture sector would not diminish its output. The agricultural sector would not diminish its output. Two mechanisms may support this.
On the one hand, an increase in the labor inputs of those who remain behind may compensate for lost labour. Alternatively, consolidation of rural landholdings may result in economies of scale that have a net positive impact on production.
Evidence suggests that marginal productivity of labour is not zero in Ethiopia. Rural urban migration, in the absence of technological progress in agriculture, will result in a decrease in total agricultural output. Similarly, the absence of technological progress in agriculture will result in a decrease in total agricultural output.
Studies show that in regions where there has been significant transfer of labour from rural to urban areas, food prices have risen more sharply than national trends. This is consistent with the view that the withdrawal of labour has had a non-negligible impact on the marketed surplus from agriculture; and urban consumers are unwilling to substitute the consumption of service or industrial goods for agricultural output. If indeed the transfer of labour from rural to urban areas causes rising food price in Ethiopia, it threatens to constrain industrial growth.
Deterioration in domestic terms of trade for industrial output means that rising costs of labour will eat into the returns to capital, with consequent reductions in savings by capitalists and investments in the sector. Thus, increases in agricultural productivity are required in order to maintain a balanced growth process in which terms of trade are relatively constant between sectors.
I argue that in order to support industrial growth, technological agriculture does not need to increase the marginal productivity of agricultural labour. This threatens to constrain industrial growth. Therefore, a marginal increment in labour productivity will suffice to meet food needs in other sectors and maintain a balanced growth path.
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