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CHAPTER 3
Investment in agriculture for increased production and productivity

Agricultural development depends on the simultaneous growth of farm-level production and productivity and the value chains to which it is linked. These value chains include a wide range of small- and large-scale activities that involve supplying farm inputs, processing, storing, distributing, wholesaling, retailing and exporting farm products. These activities can be referred to collectively as ‘agro-industry’. There is a need to look at both farm-level investment, as well as investment in agro-industries.

3.1 INVESTMENT FOR ON-FARM AGRICULTURAL CAPITAL STOCK

For any investment to have positive impact on production and productivity, it must contribute to capital formation at the farm level. Persistent poverty and food insecurity is partially explained by insufficient food production, due primarily to the low productivity of agriculture. Low productivity of agriculture signifies low per unit output of factors of production. The primary factors of production in agriculture are land and labour. Low labour productivity, or low land productivity, or the combined effects of both are accountable for low productivity of agriculture.

Agricultural products are outcomes of tamed natural processes that take place on land. This is accomplished with human labour. Land has to be worked to generate agricultural outputs. Land and labour are indispensable primary factors. Without them, agriculture does not exist. Land, as non-produced asset, is fixed in supply. Labour is inherently variable. The labour force or the amount of time worked can change depending on the population or on workers’ preferences. Agriculture on the aggregate level is an industry characterized by a combination of fixed land with variable capital. This combination is typical of low-productivity agriculture in which land size has natural limits and the agricultural labour force is expanding. For the economy as a whole, there is little scope to increase the expanse of agricultural land, particularly when concerns for the environment are mainstreamed into economic activities. Increasing numbers of people taking refuge in agriculture for their livelihoods is a fact of life in developing economies. As such, the model of agriculture relevant to this analysis is characterized by fixed land and variable labour, which are determined by environmental, socio-economic, political and demographic factors that lie outside agriculture.

According to economic theory, a fixed tract of land combined with increased labour produces increased output at a decreasing rate, as it is bound to face inescapable diminishing returns to labour. Productivity increases from the land decline as the land is worked with more labour. Moreover, land loses its fertility as soil nutrients get extracted through repeated cropping. A model of fixed land with increasing labour and declining fertility loss through time approximates the reality of underdeveloped agriculture. This reality will not change unless a compensating mechanism is put in place in the form of land improvement and fertilizing. Indeed, underdeveloped agriculture is characterized by the low level of compensating mechanisms to offset fertility loss. The set of compensating mechanisms is part of a broader concept called land-augmenting technology (Todaro and Smith, 2003), which is the application of a certain form of capital that enhances the productivity of land. That form of capital consists of newer methods and newer technologies for doing things.

Raw agricultural labour is the human expenditure of energy to do useful work. There are natural limits on the amount of energy an individual worker can exert. The natural limit of raw human labour can be extended with tools and mechanical implements. However, agricultural labour is not simply an application of physical force. In working the land and in dealing with natural forces, knowledge and skill guide the physical labour that is augmented by the use of tools and implements. Tools, implements, skill and knowledge are all factors of production that constitute a form of capital that enhances the productivity of labour. It can be referred to as labour-augmenting capital. Literature makes a clear distinction between capital and technology. However, empirically it is difficult to separate technology and capital. In addition, the ultimate rationale for the use of technology in combination with capital is to augment labour. For these reasons, it is unnecessary to expend effort in distinguishing between capital and technology. The use of capital fused with technology may be conceptualized as labour-augmenting capital in the same way that there is land-augmenting capital.

In developing country agriculture, modern skills, knowledge, tools and implements are rudimentary, which leads to low productivity. An expanding agricultural work force with rudimentary skills, knowledge, tools and implements creates a situation where output per worker (agricultural labour productivity) declines. This is the result of a combination of two factors: a growing number of farm workers and inadequate working capital.

The possible combinations of raw labour, land, capital-augmented labour and capital-augmented land provide a range of possibilities for productivity. The lowest level of productivity (traditional agriculture) arises from the combination of raw labour and land. The highest productivity (modern, developed agriculture) results from the combination of capital-augmented labour and capital-augmented land (see Fig. 1).

FIGURE 1. Productivity and combinations of land and labour with and without capital

In underdeveloped agriculture, where declining soil fertility is not compensated by investments in land improvement, fertilizers and chemicals, and where the expanding labour force is not equipped with modern skills, knowledge, tools and implements, the productivity of both labour and land is bound to decline. Productivity of labour declines as more households with low labour-augmenting capital become dependent on agriculture. Combining increased amounts of labour inputs with fixed tracts of land would inevitably lead to diminishing returns to labour. Diminishing returns alone do not lead to declining productivity. Losses in soil moisture and fertility caused by environmental degradation and the depletion of nutrients from repeated cropping also cause productivity to decline. Without the application of land-augmenting capital, farm land depreciates and the productivity of the land declines, which leads to more exploitation of land and the environment. Traditional agriculture uses raw human labour combined with traditional wisdom and rudimentary forms of capital. Draught animals and unsophisticated farm implements and tools are predominant. Traditional agriculture in areas with an expanding population is an example of a situation in which there is an increasing variable factor (labour) combined with weak labour-augmentation capital and declining (rather than fixed) production factors (soil, land and other natural assets). Productivity loss is accentuated by both increasing raw labour and declining soil fertility and environmental quality.