Thanks for sharing this, I found it very interesting.
I was curious about the sectoral transformation. Presumably we will always need some people working in agriculture. A lot of this specialisation has occurred between rural and urban areas, but might it not also make sense for some entire countries to focus on agriculture? They could focus their education systems, regulations and so on the industry, which might improve efficiency, rather than having smaller numbers of people in more countries doing agriculture. If this is the case then we could see some countries getting rich entirely off agriculture—just like there are wealthy farmers in the US, Australia, etc. If so pushing for sectoral transformation could be a mistake if some countries really have a comparative advantage in agriculture.
This also connects to your points about agricultural productivity. My impression was that many third world countries have chronic under-utilisation of labour; you literally just have a lot of working age men hanging around doing nothing all day. This is labour slack is implicit in the model for why GiveDirectly might boost economic activity that they described on the 80k podcast. If so, productivity growth that incentivized people to stay in agriculture could be good, especially if it replaced unemployment, even though it would retard the sectoral transformation.
Finally, I was interested in the negative effects of the services transition. Could this be because poor regulatory setup means many of the ‘service’ jobs are essentially rent-seeking rather than providing socially valuable services? e.g. an increase in lawyers or bureaucrats primarily creating more work for other people.
I guess the fact that no country in history has gotten rich while being agrarian gives me a very strong prior against it. And there are clear reasons why; agricultural goods are commodities that are extremely cheap, so even having an advantage in them, you can only have a slim advantage. Plus different countries will always have different comparative advantages in different crops. Compare that to manufacturing where you can make increasingly specialized and high-quality goods that generate much more profits.
My impression is that underutilization of labor is even more severe of a problem in agriculture than in non-agriculture. This is why in most developing countries, output per worker is higher in manufacturing than in agriculture. You would likely not observe that if surplus labor was unique to manufacturing, and indeed the surplus labor hypothesis was first proposed to explain why agriculture is so unproductive. (Edit: I think I misunderstood this point from you. Yes, productivity growth that increases the demand for labor could put some of that surplus labor to good use, and that can be good. However, if the surplus workers would have counterfactually moved into non-agriculture where they would have been more productive, then it’s still a negative outcome.)
No, that’s not why services have a negative effect. Theres no assumption that services are not valuable, just that productivity growth (as measured by revenue per worker growth) is much slower. This is mostly because services are nontradable, so you can’t have specialization/competition between producers in different regions. But I have a footnote pointing out why we should be careful in claiming that shifting to services has a negative effect. After all, every rich country today is primarily a service economy, and most of what we consume is services.
I guess the fact that no country in history has gotten rich while being agrarian gives me a very strong prior against it. And there are clear reasons why; agricultural goods are commodities that are extremely cheap, so even having an advantage in them, you can only have a slim advantage.
My impression is that Argentina became a very rich country, by the standards of today, largely as an agricultural exporter? And just because a product is cheap doesn’t mean you can’t have a big advantage in them if it is a very scaled business; according to OWID, US agricultural productivity is over 100x higher than in Liberia in dollar term; I don’t have the bushels/farmer figures to hand but I suspect there are also orders of magnitude difference.
Theres no assumption that services are not valuable, just that productivity growth (as measured by revenue per worker growth) is much slower.
I’m not assuming it, I’m offering it as an explanation. The ‘nontradable’ explanation doesn’t really make sense to me, because it doesn’t explain why people would choose to work in a less productive sector (agriculture or services), where wages are presumably lower, instead of manufacturing. Unless you think that manufacturing has to be combined with labour suppression, where wages will be held lower than productivity, in order to facilitate more investment? I do get the impression that is part of the story behind east asian growth, and it does make sense it would be easier in manufacturing than services.
You could argue that Argentina, and even my home country of new Zealand have kind of “made it” through agriculture.
My issue is, even assuming you are right Larks and African countries somehow manage become far more productive at farming and become more competitive on the global stage, thats unlikely to solve the jobs problem. Increased productivity means industrialized farming, means less farming jobs not more. Especially in countries like Uganda with high population and low land area, it’s hard to see how this could solve the jobs problem, although obviously it would probably be net positive and help the economy.
New Zealand and Argentina also have huge land area to population ratios, which enables large scale farming to have a bigger impact.
As a side note the absolute nail in the coffin for any opportunity for African countries to become serious food exporters are the insane farming subsidies and tariffs both in the EU and the US, which wipe out one of the only sectors African countries have a chance to be competitive in. Noone talks about it much, but it’s not impossible these subsidies and tariffs might cause more net suffering than all the aid these countries reduce IDK.
I wasn’t aware of Argentina as an example and spent some time looking into it. My takeaway is that it’s interesting and I don’t have a great story about it, other than that at the time, agriculture was most of all trade, and most of all consumption globally, whereas today with a much richer and industrialized world, demand for food is not large enough to make it competitive with manufacturing as a path. But that’s tentative.
just because a product is cheap doesn’t mean you can’t have a big advantage in them if it is a very scaled business; according to OWID, US agricultural productivity is over 100x higher than in Liberia in dollar terms
This is largely because the US uses so much more capital and so much less labor than developing countries, so I don’t interpret this in support of the idea that developing countries can get rich without most labor leaving agriculture.
it doesn’t explain why people would choose to work in a less productive sector (agriculture or services), where wages are presumably lower, instead of manufacturing.
That’s the puzzle I was talking about in point #3. The likely explanation is that people select into the less productive sector because they don’t have the skills to work in manufacturing, for reasons elaborated more in that section.
One way to think about services vs manufacturing: suppose you’re very poor and you suddenly earn more money. How do you spend this limited new resource? Certainly you spend some of it on stuff: furniture, a better phone, electricity. If a country lacks manufacturing or exports, the money you spend on stuff leaves the country with no balancing inflow. And when you buy services, the person from whom you bought the services also buys stuff. So if people get richer at scale, the country as a whole tends to bleed that money back out. You can export services somewhat (customer service, or software development if your country has enough education) but you’ll be competing with the likes of India and GPT4/AIs.
If you can manufacture stuff locally, more money stays in-country, and if the manufacturing sector grows large enough, it can become efficient, which allows exports. And my intuition says that limited, targeted protectionism (tariffs) would be beneficial, or even required, to nurture whatever local industries are developing.
There must always be a balancing flow. Your country has to be doing something to get the foreign currency required for that import. This could be exporting more of something else, or it could be attracting more foreign investment (or more aid), but there must be a balance. Your mercantilist intuition is a common one but it is mistaken.
Ugh, yes of course if you got richer you got the money from somewhere. If you thought I thought otherwise, you were mistaken. (Of course it could’ve just been printed by the government, but that will cause inflation if not balanced by some kind of in-country value creation or spending reduction.) (Edit: also, Google tells me “Mercantilism was based on the principle that the world’s wealth was static” and I do not have any such “mercantilist intuition”.)
Thanks for sharing this, I found it very interesting.
I was curious about the sectoral transformation. Presumably we will always need some people working in agriculture. A lot of this specialisation has occurred between rural and urban areas, but might it not also make sense for some entire countries to focus on agriculture? They could focus their education systems, regulations and so on the industry, which might improve efficiency, rather than having smaller numbers of people in more countries doing agriculture. If this is the case then we could see some countries getting rich entirely off agriculture—just like there are wealthy farmers in the US, Australia, etc. If so pushing for sectoral transformation could be a mistake if some countries really have a comparative advantage in agriculture.
This also connects to your points about agricultural productivity. My impression was that many third world countries have chronic under-utilisation of labour; you literally just have a lot of working age men hanging around doing nothing all day. This is labour slack is implicit in the model for why GiveDirectly might boost economic activity that they described on the 80k podcast. If so, productivity growth that incentivized people to stay in agriculture could be good, especially if it replaced unemployment, even though it would retard the sectoral transformation.
Finally, I was interested in the negative effects of the services transition. Could this be because poor regulatory setup means many of the ‘service’ jobs are essentially rent-seeking rather than providing socially valuable services? e.g. an increase in lawyers or bureaucrats primarily creating more work for other people.
I guess the fact that no country in history has gotten rich while being agrarian gives me a very strong prior against it. And there are clear reasons why; agricultural goods are commodities that are extremely cheap, so even having an advantage in them, you can only have a slim advantage. Plus different countries will always have different comparative advantages in different crops. Compare that to manufacturing where you can make increasingly specialized and high-quality goods that generate much more profits.
My impression is that underutilization of labor is even more severe of a problem in agriculture than in non-agriculture. This is why in most developing countries, output per worker is higher in manufacturing than in agriculture. You would likely not observe that if surplus labor was unique to manufacturing, and indeed the surplus labor hypothesis was first proposed to explain why agriculture is so unproductive. (Edit: I think I misunderstood this point from you. Yes, productivity growth that increases the demand for labor could put some of that surplus labor to good use, and that can be good. However, if the surplus workers would have counterfactually moved into non-agriculture where they would have been more productive, then it’s still a negative outcome.)
No, that’s not why services have a negative effect. Theres no assumption that services are not valuable, just that productivity growth (as measured by revenue per worker growth) is much slower. This is mostly because services are nontradable, so you can’t have specialization/competition between producers in different regions. But I have a footnote pointing out why we should be careful in claiming that shifting to services has a negative effect. After all, every rich country today is primarily a service economy, and most of what we consume is services.
Thanks for the response!
My impression is that Argentina became a very rich country, by the standards of today, largely as an agricultural exporter? And just because a product is cheap doesn’t mean you can’t have a big advantage in them if it is a very scaled business; according to OWID, US agricultural productivity is over 100x higher than in Liberia in dollar term; I don’t have the bushels/farmer figures to hand but I suspect there are also orders of magnitude difference.
I’m not assuming it, I’m offering it as an explanation. The ‘nontradable’ explanation doesn’t really make sense to me, because it doesn’t explain why people would choose to work in a less productive sector (agriculture or services), where wages are presumably lower, instead of manufacturing. Unless you think that manufacturing has to be combined with labour suppression, where wages will be held lower than productivity, in order to facilitate more investment? I do get the impression that is part of the story behind east asian growth, and it does make sense it would be easier in manufacturing than services.
Great discussion
You could argue that Argentina, and even my home country of new Zealand have kind of “made it” through agriculture.
My issue is, even assuming you are right Larks and African countries somehow manage become far more productive at farming and become more competitive on the global stage, thats unlikely to solve the jobs problem. Increased productivity means industrialized farming, means less farming jobs not more. Especially in countries like Uganda with high population and low land area, it’s hard to see how this could solve the jobs problem, although obviously it would probably be net positive and help the economy.
New Zealand and Argentina also have huge land area to population ratios, which enables large scale farming to have a bigger impact.
As a side note the absolute nail in the coffin for any opportunity for African countries to become serious food exporters are the insane farming subsidies and tariffs both in the EU and the US, which wipe out one of the only sectors African countries have a chance to be competitive in. Noone talks about it much, but it’s not impossible these subsidies and tariffs might cause more net suffering than all the aid these countries reduce IDK.
I wasn’t aware of Argentina as an example and spent some time looking into it. My takeaway is that it’s interesting and I don’t have a great story about it, other than that at the time, agriculture was most of all trade, and most of all consumption globally, whereas today with a much richer and industrialized world, demand for food is not large enough to make it competitive with manufacturing as a path. But that’s tentative.
This is largely because the US uses so much more capital and so much less labor than developing countries, so I don’t interpret this in support of the idea that developing countries can get rich without most labor leaving agriculture.
That’s the puzzle I was talking about in point #3. The likely explanation is that people select into the less productive sector because they don’t have the skills to work in manufacturing, for reasons elaborated more in that section.
One way to think about services vs manufacturing: suppose you’re very poor and you suddenly earn more money. How do you spend this limited new resource? Certainly you spend some of it on stuff: furniture, a better phone, electricity. If a country lacks manufacturing or exports, the money you spend on stuff leaves the country with no balancing inflow. And when you buy services, the person from whom you bought the services also buys stuff. So if people get richer at scale, the country as a whole tends to bleed that money back out. You can export services somewhat (customer service, or software development if your country has enough education) but you’ll be competing with the likes of India and GPT4/AIs.
If you can manufacture stuff locally, more money stays in-country, and if the manufacturing sector grows large enough, it can become efficient, which allows exports. And my intuition says that limited, targeted protectionism (tariffs) would be beneficial, or even required, to nurture whatever local industries are developing.
There must always be a balancing flow. Your country has to be doing something to get the foreign currency required for that import. This could be exporting more of something else, or it could be attracting more foreign investment (or more aid), but there must be a balance. Your mercantilist intuition is a common one but it is mistaken.
Ugh, yes of course if you got richer you got the money from somewhere. If you thought I thought otherwise, you were mistaken. (Of course it could’ve just been printed by the government, but that will cause inflation if not balanced by some kind of in-country value creation or spending reduction.) (Edit: also, Google tells me “Mercantilism was based on the principle that the world’s wealth was static” and I do not have any such “mercantilist intuition”.)