The contribution of the agricultural sector not only provide incremental markets for new products manufactured in the industrial sector, it also has contribution on increasing the supply of food and new material to other sectors, tax revenue to the government to provide "investable surplus" to other expending sectors and to provide foreign exchange.
The first contribution of agricultural sector is to provide sufficient food for the labors in the industrial sector. From Lewis's balanced growth model, we know that if supply of good to the modern sector cannot catch up with the demand of food in the modern sector, the modern sector has to spend a large amount of money to import food to feed the labors and have reduce the accumulation of capital. As indicated by J. Mellow:
" It is in practice and in concept that it is possible for the agricultural sector to provide new productivity!"
The agricultural sector also provide "investable surplus" and tax revenue to other expending sectors. The excess supply of labors in the LDCs reduce the bargaining power of the labors. As a result, their wages are assumed to be constant. As labors shift to modern sectors from agri. sector, the productivity of the agri.
sector will increase(MPL increase). There will have some surplus and the landlord will use these surplus to reinvest to the agri. sector, drive up the MPL further. In this case, the TPPL will increase, with given number of labor, the productivity increase due to new equipment, the surplus further increase and the landlord will further expend their investment. Another contribution is tax revenue. The increasing productivity of agri.
sector provide resources to other sectors. If the resources are used productively, the effect can be accerlated! The new resources refer to supply of labor, new material and food. The increase production of food not only to feed the labor in modern sector and also to feed the high growth rate of population. The demand of food can be defined as below: D = P + nG D: the rate of demand of food
P: rate of population growth
G: rate of real income growth
n: income elasticity of demand for agri. product Refer to Mellow, the income elasticity of demand on agri. product is high (0.6 or higher) in LDCs when compare with HDCs(0.2-0.3). Therefore, as labor shift to modern sector and income increase which give rise to higher demand for the agri. products, and labors of the agri. sector increase , more land will be free out and tax revenue pay to the government. An example is in Japan, in last 2 decades, Japanese government received 80% of their revenue from land and from the direct production income tax, it is about 12-22% from agri. sector and only 2-3% in non-agri. sector.
The increase in government revenue can help the government to increase investment in SOC and improve educational level and impose other programs to help the economic growth
. Another contribution is to increase the incremental markets for new products manufactured in industrial sector. As the real income of labor in agri. sector increase, they can spend more on consumption good and provide a market for the industrial sector. The last contribution of agri. sector is the supply of foreign exchange. It is clear that increase export of primary products is the first stage of the LDCs.
As the productivity of agri. sector increase, excess products will be exported to earn more foreign exchange.
Since in the first stage, the output of industrial sector is small and the quality is not good due to lack of new tech. and equipment. Therefore, the nation has to rely solely on exporting agri. sector. The earning of foreign exchange can provide the government fund to invest in SOC and purchase new equipment for modern sector. To conclude, agri. sector is very important to the growth of economic.
In most of LDCs, the government only concentrate on expanding industrial sector and neglect the agri. sector.
And it generated many problems like lack of foreign exchange, lack of food supply. Therefore, The LDCs should put equal weight to both sectors.
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