Agriculture: Its declining yet vital role in economic growth

By the Economist

It is most disconcerting to repeatedly hear a wrong understanding of the current status of agriculture in the country. And that too by none other than one of the several ministers in charge of a facet of our agricultural development. It was unbelievable to hear a minister say and then repeat that our agriculture accounts for 76 per cent of the economy and that 76 per cent of our people are dependent on agriculture. In fact the Sri Lankan economy was not that dependent on agriculture even at the time of independence, when undoubtedly ours was a predominantly agricultural one. For instance even in 1950 agriculture accounted for only as much as 46 per cent of GDP.

The position is different today with agriculture accounting for only 16 percent of GDP. Nevertheless about a third of our population is dependent on agriculture. This disproportionate percentage in agriculture is itself a noteworthy factor and of relevance to development policy. Despite this declining significance of agriculture in the economy, agriculture has a vital role to play. However, a blown up importance of agriculture could be misleading for an economic strategy and could be harmful to agricultural development itself. This is particularly so when growth in other sectors, especially in the services sector is devalued. Fundamental to the designing of a realistic and effective economic policy and the development of agriculture is an understanding of the process of economic development and the current status of agriculture in the economy. A realistic understanding of the problems facing farmers and the potential of agricultural development are essential. Shouting about a false importance of agriculture is hardly likely to help.

The Sri Lankan economy has undergone several structural changes, especially in the last 30 years since the liberalisation of the economy in 1977. The most significant of these changes is that agriculture, which was the predominant sector contributing 46 per cent of Gross Domestic Product (GDP) in 1950, is currently contributing only about 16 per cent. At the time of independence the Sri Lankan economy was predominantly agricultural. It remained so for almost the next three decades. Even in 1977, agriculture accounted for 31 per cent of GDP. In fact the importance of agriculture was understated during this period as the contribution of the manufacturing sector consisted mainly of processing the three tree crops, tea, rubber and coconut and services mainly of transport, finance and insurance for the plantation sector exports. In 1977, despite earlier efforts at industrialisation under an import substitution strategy manufactures other than tree crop processing of tea, rubber and coconut and cottage industry constituted only a small per cent of GDP. Only a few industrial ventures catering mainly for the local market existed.

The structural changes that have occurred in the Sri Lankan economy are in conformity with economic theory and development experience. The declining share of agriculture in national output and increases in industrial and services sectors’ output indicate the growth and diversification of the economy. With further growth the share of agricultural output should decline. Does this imply that agriculture has no significant role in the future? No. What it means is that one has to redefine the role of agriculture in the context of the economic diversification that the country has undergone, the aspirations of people, international commodity prices and overall global economic developments. An economy too dependent on agriculture is not likely to achieve rapid economic growth or solve the problems of unemployment and poverty.

The diversification of the economy should not be interpreted as a justification for the neglect of agriculture. It does not provide a basis for the view that agriculture has no significant role to play in the changed economic structure. Agriculture could still play an important role in increasing the country’s food supply. Increases in per capita incomes, diversification of the economy and annual increases in population of about 200,000, imply a significant increase in demand for food. If domestic food supplies do not increase, the import of the additional food requirement would strain the trade balance, which has been in deficit every year since 1977. Although one could argue that increased output in other sectors and increased exports of non-agricultural products could take care of such increases in demand, there is another dimension of the problem that cannot be adequately addressed through developments in other sectors.

At present there are about one-fourth of households that are estimated as not having adequate food. Poverty is estimated at about 18 per cent of the population, with the incidence of rural poverty at twice that of urban poverty. What these statistics imply is that increases in food production would improve the access of poor households, particularly rural poor households to food. Improvements in agriculture would enhance a significant number of rural households’ access to food. Rural poverty, unemployment and nutrition would benefit from improvements in agriculture. Therefore an emphasis on agriculture is a strategy for poverty alleviation as well as one that could still contribute to overall economic growth.The contribution that agriculture could make to economic growth is not confined to food crop agriculture. Tea continues to be an important contributor to the country’s foreign exchange earnings.

Though the balance of payments discloses a much lower foreign exchange contribution from tea, than industrial exports, the comparison is misleading of their relative contributions. Tea, as well as rubber production, has a much lower import input than most industrial exports. Net export earnings, defined as the total foreign exchange earnings minus the value of imported inputs, give a different relative significance. One of the recent developments has been the export of new agricultural produce and processed foods. In fact in 2006 and in the first half of this year there has been a significant increase in such agricultural exports. The expansion of such exports could make an important contribution.

The contribution that agriculture makes towards future economic growth will be very much dependent on changes that this sector undergoes to ensure viable cultivation of crops. The agriculture of the future would not be the present agrarian economy writ large. The selection of crops, the farming practices, the size of holdings, the technology used and the marketing and processing of crops would have to be necessarily different. A more commercialised agriculture, viable part-time and mixed cropping systems, use of much higher productive technologies, are among the changes that should take place.

The challenge facing the country is to revive and restore agriculture, increase production and reduce the gap between current yields and the realistic potential, transform agrarian systems and cropping patterns and develop an institutional framework to support a more productive and commercialised agriculture. If these were achieved agriculture would continue to be an important contributor to economic growth, improvement of rural incomes, increased employment possibilities, reduction of rural poverty in particular, improvement of the country’s and household food security and easing social tensions. That agriculture has a significant role to play in Sri Lanka’s future growth is unquestionable. Whether we would tap the agricultural potential or not, depends largely on a government policy framework, institutional support and response of the farming community. If that response is weak, then agriculture’s contribution would not only be insignificant but could drag the growth of the economy as a whole.

The country has undergone an economic transformation and structural changes and agriculture itself has undergone significant changes. Agriculture still has a significant role to play in assisting the country’s economic growth, alleviating poverty, enhancing employment opportunities and improving food security at national and household levels. Neglecting agriculture could drag economic growth, increase the country’s vulnerability to international fluctuations in prices and endanger the entitlements of the poor. A realistic and effective economic policy and the development of agriculture must be based on an understanding of the process of economic development, a proper understanding of the current position of agriculture in the economy and the problems facing agriculture.