Agricultural-Economic

Transformation
Chapter 5
The Problem
• If production is continued on old and established methods, not much
can be produced even if lands were rich and people worked hard.
• Application of science and technology, on the other hand, enables
greater production even when the soils are poor and men devote less
labour.
• Farming that is carried on with the factors of production used for
generations may be called traditional agriculture. Those countries
which are dependent upon traditional agriculture are poor and spend
much of their income on food.
Con..
• Delayed attention, to the economic potentials of agriculture has been
due to economists' neglect of the agricultural sector in less
development economies.
• Earlier development studies mostly took the form of macro-
development models which were not relevant in theorizing about the
growth potential of the agricultural sector or examining the behavior
of agriculture as a source of growth.
Old Doctrines
• Old doctrines did recognize the importance of agriculture in the
process of economic development. Physiocrats believed that
agriculture alone is productive.
• The classical economists put forth a dynamic model of growth based
on accumulation of capital, Malthusian population law and law of
diminishing returns in agriculture.
• Schultz refutes all these doctrines. He believes that these doctrines do
not stand empirical tests. Schultz also refutes the doctrine of disguised
unemployment" and factor indivisibilities.
Unsettled Questions
• In determining the opportunities in agriculture for economic growth,
according to Schultz, it will be necessary to resolve three unsettled
questions:
1) Can low income communities increase agricultural production
substantially by an efficient allocation of the agricultural factors of
production presently at their disposal?
2) Which agricultural factors of production are primarily responsible
for the large differences among countries in the success of the
agricultural sector in contributing to economic growth?
3) Under what conditions does it pay to invest in agriculture?
Attributes of Traditional Agriculture
1) Farming is a way of life based on long-established traditions.
Traditional agriculture is, therefore, cultural characterization of the
way people live.
2) Another attributes of traditional agriculture is the institutional setup
dealing with the ownership of land, legality of tenure-ship and the
share of home consumption in agricultural production.
3) Another aspect is of technical property.
Con..
• Not much importance has been attached to these aspects by Schultz. In
his view, traditional agriculture is a particular type of economic
equilibrium, it is an equilibrium at which agriculture gradually arrives
over a long period, provided particular conditions prevail.

• Reallocating or readjusting the allocation of resources, according to

Schultz, is not going to make any substantial improvement in farm
income.
Con..
• Even if the imperfections of capital market are corrected, it is not
going to open any sound opportunities of economic growth. Even
when it is known that there is a superior technology available, the
farmers may not be forthcoming to adopt it.
Allocative Efficiency
• There are comparatively few significant inefficiencies in the allocation
of the factors of production in traditional agriculture.
• The factors refer to traditional factors of production in possession of a
community. All poor agricultural communities may not be traditional
and may have to be excluded because these have witnessed change.
• The implications of the proposed hypothesis are:
Con..
1) That no appreciable increase in agricultural production is to be had
by reallocating the factors at the disposal of the farmers who are
bound by traditional agriculture".
2) Significant individualities will not hamper agricultural production.
Con..
3) No farm management expert shall be in a position to discover any
major inefficiency in the allocation of factors.
4) No production factor remains unemployed.
Zero Marginal Productivity
• There have been several significant contributions in development
economics on the theme of zero marginal productivity.
• These contributions have developed the theme, at length, that in
traditional agriculture, there is a sizeable proportion of labour force
who remain disguisedly unemployed and make no contribution to the
total product.
Con..
• The implication of this hypothesis is that if a portion of labour force is
siphoned off from the farm sector and used elsewhere, the total output
of agricultural sector will not fall.
• This large scale surplus labour has been put forward as a characteristic
feature of traditional agriculture contributing to its poverty.
High Returns to Low Capital
• Another deep-rooted notion of traditional agriculture is that there is
relatively low capital stock and accordingly high rate of return on
capital. European countries diverted their investments to poor
countries during the colonial period.
• It also happened that rich peasants of these poor countries invested in
western developed countries.
Con…
• Schultz does not accept this notion. Quoting from his two illustrations
he shows that there is relatively a large capital in traditional
agriculture and hence a low rate of return.
• He finds that imported capital in the poor countries was not used in
building up the traditional factors of production but in transport, etc.
Schultz concludes that, "rent from land is a small part of total factor
costs in some poor agricultural communities.
Development of Traditional Agriculture
• Traditional agriculture, according to Schultz, can be transformed into a
relatively cheap source of economic growth.
• transformation of agriculture predominantly depends upon the
availability and price of non-traditional (modern) agricultural inputs.
• Producing and distributing these factors cheaply makes investment in
agriculture profitable and farmers accept these modern inputs and
learn how best to use them.
• This also stimulates the savings and builds up institutions to finance
investment in agriculture.
Con..
• The principal sources of the high productivity of modem agriculture
are reproducible sources. These sources are of two parts: (1) modem
material inputs and (2) farm people with modern skills.

• In order to produce these inputs, scientific and technological

knowledge has to be built up. It is also essential to socialize basic and
developmental research.
Farmers as Demanders of New Factors
• The rate of acceptance of new inputs depends upon the cultural
variables, on the one hand and observed difference in the profitability,
on the other.
• Schultz asserts that investment in human capital has radical social and
economic implications. In this direction, the role of schooling is
emphasized.
• People learn while young, skills are formed at a relatively young age
and new ideas weighed against traditional outlook through better
education.
Con..
• Schultz firmly believes that it is only through the right forms of
investment that traditional agriculture can be transformed into a
modern business proposition.