Agricultural productivity gap in developing countries

Abstract

Labor is substantially less productive in agriculture than that in non-agricultural sectors in poor countries. The gap has tended to increase over time. Conclusions from the existing literature, which mainly trace the factors related to labor market frictions and statistical discrepancies, are inconclusive in explaining the magnitude and pattern of the gap. The phenomenon has remained puzzling. In this work, we intend to show that the unexplained portion of the gap and its trend over time can fully be attributed to differences in capital intensities and relative technical change. In formal framework with two sectors, two factors, and exogenous prices, we show that in equilibrium with constant labor supply agricultural productivity gap is related to relative cross-sector technical change through skill-premium and division of, heterogeneous in skills, labor. Under plausible empirical assumptions and stylized facts, resulting propositions imply that technology imports from abroad stimulate the productivity gap between agriculture and non-agriculture in developing countries. The theory developed is substantiated with two sets of empirical estimations on crosscountry longitudinal data. Results imply that technology imports have positive, statistically significant, and robust impact on the sectoral productivity gaps in developing countries. Key findings reinstate the debate regarding appropriateness of technologies transferred into poor economies and corroborate longstanding views that without technological change traditional agricultural productions deliver decreasing returns at increasing rate. High and increasing productivity disparities in developing countries suggest that proper development policies should be implemented to induce more balance and sustainable development. Particularly, in the short run, policies ought to emphasize on the elimination of barriers to free labor mobility between agriculture and non-agriculture, or equally, rural and urban areas. In the long-run, governments should pay greater attention to technical change in the agricultural productions, whether through domestic development or adoption of appropriate technologies from more advanced countries. Accumulation of human capital in the economy, overall, would make more skilled labor available for both traditional and modern sectors to embrace technical changes more smoothly and consistently.