How Does Agriculture Grow?
What is the process through which agriculture grows? Concerning agricultural growth and its components, early research (Binswanger et al. 1987) showed that the major determinants of agricultural supply are physical capital, infrastructure, human capital, research, extension, and rural population density. Prices were found to be weak determinants of agricultural supply. Similarly, Antle (1983) showed that the major determinants of total factor productivity (TFP) in agriculture in crosscountry regressions are education, research, and infrastructure. Later research (Mundlak et al. 1997) confirmed these results and specified that technological change in agriculture is incorporated into increased agricultural production through the increases in physical capital stock.
The changes in the total factor inputs appear to account for only about half of the total growth of agricultural output. The rest is accounted for by the “residual”, namely what is normally termed TFP, which is basically technical change. Mundlak (1999) suggests that the empirical evidence points to the fact that the major way technology is incorporated into agricultural production is through physical capital. The different rates of growth of physical capital among sectors in turn can lead to differential sectoral growth rates along standard Rybczynski theorem logic. Changes in technology, however, especially those involving new discoveries in production techniques, come irregularly, and hence cannot be planned.
Studies that explore the contribution of different factors to agricultural TFP growth have shown that publicly funded agricultural research and extension are the two most important factors accounting for TFP growth, with rural education, irrigation, rural roads, and rural electrification coming next. The internal rates of return to public agricultural research in particular are estimated to be higher than 50 percent (Evenson et al. 1999; Fan et al. 1999, 2000).
The latest work on agricultural growth and productivity is that of Fuglie et al. (2012). Their major finding is that despite earlier worries to the contrary, based on analyses of TFP growth in agriculture during 1970-1990, there does not appear to be a slowdown in sector-wide global agricultural productivity growth. If anything, the growth rate in global agricultural TFP has accelerated since 2001, in no small part because of rapid productivity gains achieved by developing countries, led by Brazil and China, and more recently because of a recovery of agricultural growth in the countries of the former Soviet Union.
It thus appears that publicly financed research and extension, and rural infrastructure in the form of rural roads, electricity, irrigation, and so on are the major contributors to agricultural TFP growth, with investments in human capital also considered a significant factor (Alston et al. 2000). Evenson and Westphal (1995) point out that there are significant differences between agriculture-related research and industrial research, with the former much more circumstantially sensitive, namely sensitive to local conditions. Thus, to have a high payoff of agricultural research, the large fixed cost of establishing and running technological facilities must be geared to producing results that can possibly be adopted by a large number of producers. This explains, for instance why returns to agricultural R&D have been so high in densely populated agrarian countries such as those in Asia, while they are lower in sparsely populated agrarian economies, such as those of Africa.