Economic growth can alleviate poverty by increasing both employment opportunities and labor productivity. An Overseas Development Institute (ODI) study of 24 countries that experienced growth found that in 18 cases, poverty was alleviated.
However, employment is no guarantee of escaping poverty. The International Labor Organization (ILO) estimates that as many as 40% of workers do not earn enough to keep their families above the $2-a-day poverty line. For instance, in India most of the chronically poor are wage earners in formal employment, thanks to insecure jobs, low pay, and the lack of opportunity to accumulate wealth (and thereby mitigate risk).
This situation appears to be the result of a negative relationship between employment creation and increased productivity. Reducing poverty requires a simultaneous positive increase in both. According to the United Nations Research Institute for Social Development (UNRISD), increasing labor productivity negatively impacts job creation: in the 1960s, a 1% increase in output per worker was associated with a reduction in employment growth of 0.07%. By the first decade of this century, the same productivity increase implied a reduced employment growth of 0.54%.
This dynamic has led some experts to promote the creation of quality over quantity in labor market policies. However, as many examples in East Asia has shown, this approach does not always succeed; in Vietnam, for example, employment growth has slowed while productivity growth has continued. Furthermore, productivity increases do not always lead to increased wages, as can be seen in the United States, where the gap between productivity and wages has been rising since the 1980s.
While acknowledging the central role that economic growth can potentially play in alleviating poverty, the development community is beginning to agree that special efforts must be made to ensure that poorer sections of society are able to participate in economic growth. For instance, a country with low inequality, a growth rate of 2% per head, and a 40% poverty rate can halve poverty in ten years. If this same country had high inequality, however, this same feat would take nearly 60 years. ODI researchers found that in Uganda, despite a 2.5% period of annual growth between 2000 and 2003, the percentage of people living in poverty actually increased by 3.8%.
The ODI study also showed that a diversity of economic sectors is important in reducing unemployment, as each sector has a unique employment profile. For example, the services sector is most effective at translating productivity growth into employment growth, while agriculture provides a safety net for jobs and an economic buffer when other sectors are struggling.
Agriculture is the backbone of East Africa’s economy. In Kenya it accounts for 17% of the GDP, employs more than 70% of the workforce, and generates about 60% of national export revenue. It is even more important in Tanzania, where farming accounts for about 43% of the GDP, employs 70-80% of the workforce, and produces 56% of export earnings.
Tanzania’s economy experienced increased growth between 1995 and 2004. However, the national poverty rate did not see significant improvement during this period, mainly due to the lower growth rate in agriculture than in other sectors since 1995. In countries such as Tanzania, significant poverty reduction requires higher growth in the rural economy, and particularly in agriculture.
Because so many people in East Africa live in rural areas, the pace of economic development and the efficacy of poverty eradication depend largely on growth in the agricultural sector. Farming currently contributes far less to the national economy than is ideal given its percentage of the workforce. While this situation is problematic in the short term, it means that there is immense potential to positively impact the region by improving the agricultural sector.
The possibilities are extremely promising. The process of industrialization and urbanization currently under way in Kenya and Tanzania requires a supply of relatively cheap food for the growing urban labor force; agriculture can fulfill this need. It can supply raw materials to a growing domestic industrial sector, and earn valuable foreign exchange that can be used to finance imports of capital and intermediate goods for the local market. It can be a significant source of domestic savings for investment and capital formation. Finally, it can provide employment and income to a large percentage of the population, both directly and indirectly; prosperous farmers would provide a large market for domestic industries and services.
In short, small improvements in farm productivity and in rural earnings, multiplied by millions of smallholder farmers, can generate huge benefits for the country as a whole. Considerable historical evidence shows that solid agricultural growth must precede, or at least accompany, general economic growth. This is as true today as it was in previous centuries. Africa will not be an exception.
A broadly accepted conceptual framework for agricultural and economic transformation identifies four stages:
- Agriculture is nurtured and starts growing, creating new wealth at a rate that allows direct and indirect taxation. This enables investment in other major public assets, including infrastructure.
- Agricultural growth becomes a direct contributor to overall economic growth through greater links with industry, improving efficiency of product and factor markets, and continued mobilization of rural resources (labor, raw materials and capital).
- Agriculture is fully integrated into the market economy. Prices of food and the share of food in urban budgets continue to decline.
- Agriculture is part of an industrial economy.
As agriculture passes through these stages, its share of gross national product diminishes and the population becomes more urbanized. Unfortunately, some policymakers have misinterpreted this trend. They interpret a decline in agriculture’s relative importance as an indication that it is economically less important than other sectors. In reality, agriculture is critical. Even in industrial economies where farmers and the rural population represent only about 4% of the total population, it still commands the attention of governments and of financial and industrial interests. Where farming’s relative importance in the economy has declined, growth in agriculture stimulates growth in other sectors, producing a significant positive impact on national income. Moreover, increased public and private investment into the rural economy has a strong multiplier effect: it produces jobs, cuts poverty and boosts economic growth, as demonstrated in many fast-growing East and Southeast Asian countries.
Africa, it would appear, is still entering the first of the four stages of agricultural transformation. The continent must focus squarely on productivity and competitiveness to jumpstart its agricultural sector. Over the last three decades, production increases have occurred largely through expansion of the cultivated area rather than improvements in yield. But because farms are now very small in many high-potential areas, the only way to boost output is to raise productivity.