As I wrote in a recent post, Stalin believed that the political and economic future of the Soviet Union lay in industrialisation. He set high prices for industrially produced goods and low prices for agriculturally produced goods in order to encourage a shift from agriculture to industry. He reasoned that surplus workers in the countryside would be better employed in industry, and that a policy of cheap food would drive economic growth.
This view has not disappeared. Within the developed world, most governments keep food prices low (to placate urbanites) while quietly transferring money back to rural areas through tax-funded subsidies. And in the developing world, many classical economists still believe that industry, and not agriculture, drives economic growth.
The data, at first sight, appears to support that view. The chart below shows how workers moved from farms to factories as the industrial revolution gathered speed in 19th century Europe.
While this chart, again from ourworldindata.org, shows that the richer the country becomes the smaller the percentage of the workforce employed in agriculture.
This third chart shows how agricultural productivity increases as countries get richer. This could be because a shortage of labour in rural areas leaves farmers no choice but to improve productivity. It could also be because farmers get better access to information, finance and technology as their country develops.
The conclusion is therefore clear. Stalin was right: a country develops when farmers migrate from field to factory. This migration leads not only to GDP growth in the cities but also to greater productivity on the farms. Everyone gains.
As a result, development economists and politicians give this process a nudge through low food prices, forcing productivity gains in the countryside while subsidising workers’ wages in the cities. (This is known as ‘urban bias’.)
However, there may be some confusion here between causation and correlation. Forcing displaced rural workers into the cities does not guarantee that industrial activity will pick up. The industrial revolution in the UK ‘pulled’ workers into the cities; displaced rural workers did not ‘push’ industrialisation. People are ‘pulled’ from farms to factories once factories offer them better wages and a better future for their families. Pushing workers from their fields may lead to an increase in poor urban dwellers – and hence a fall in urban wages – but it does not directly ensure economic growth.
In a closing address to last years FT Global Foods System Conference, Pavan Sukhdev, President of WWF International, argued that the number of people employed in agriculture in developing countries is simply too large to be absorbed by industrialisation within any reasonable timeframe. He argues for a different approach, one driven by economic growth in the countryside fuelled by sustainable agriculture. He cites the Indian state of Andhra Pradesh in India as an example, where six million farmers practise what is called ‘zero-budget’ farming.
So why then do governments continue a policy of keeping food prices low? It seems redundant in developed countries where the shift in population from farms to factories has already occurred. Meanwhile in developing countries it can drive people from their farms without helping the country’s economic growth.
The answer can possibly be found in the way that governments quietly transfer money back to farmers through subsidies. City dwellers pay partly for their food through taxes. Governments do this because urban voters are better organised than rural ones, and there are more of them. Cheap food buys votes in democracies.
Cheap food also helps keep leaders in power in less democratic countries. Consumers protest – and riot – when food prices are increased. The Arab Spring may have started in Tunisia, but it was food price protests in Algeria that gave it momentum.
So everyone wins with cheap food. The farmers are happy; they get paid partly through the sale of their produce and partly through tax transfers. Consumers are happy: they get cheap food in the shops, blissfully unaware that they are actually paying for it through their taxes. Governments are happy, because they stay in power.
The problem is that not everyone wins. But more on that in future posts.
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