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Agricultural Productivity and Economic Growth: Role of Tax Revenues and Infrastructures

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  • Jing Jun Chang

    ()
    (Department of Public Finance and Taxation, National Taichung Institute Technology)

  • Been-Lon Chen

    ()
    (Institute of Economics, Academia Sinica)

  • Mei Hsu

    ()
    (Department of Economics, National Taipei University)

Abstract

To encourage economic growth in a developing economy, higher agricultural productivity has been believed to enhance the manufacturing sector's development, which provides the transition into industrialization. Although this positive linkage between agricultural productivity and economic growth has been judged to be incorrect, based upon the comparative advantage argument in a model of small-open economies by Matsuyama (1992), this article revisits the linkage by extending Matsuyama's model by introducing the revenue-generating effect, which is missing in his model. As agriculture is an important source of taxation in an early stage of economic development, higher agricultural productivity generates more tax revenues and facilitates spending on infrastructure. By introducing government taxation and infrastructure expenditure, we show that under proper conditions, higher agricultural productivity creates a positive growth effect via the revenue generation that dominates the negative growth effect through the comparative advantage. Moreover, introducing infrastructure expenditure may shift the manufacturing sector's original comparative disadvantage into comparative advantage, thereby enabling a trapped economy to take off and eventually industrialize. From the early stages of economic development in Japan, Taiwan, and Korea, we can quantitatively assess an obvious net positive effect of agricultural productivity upon labor allocation and economic growth.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 72 (2006)
Issue (Month): 4 (April)
Pages: 891–914

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Handle: RePEc:sej:ancoec:v:72:4:y:2006:p:891-914

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Cited by:
  1. Kamei, Keita, 2013. "Does Agricultural Productivity Growth Promote a Dynamic Comparative Advantage in the Manufacturing Sector?," MPRA Paper 48603, University Library of Munich, Germany.
  2. Grabowski, Richard, 2009. "An alternative Indian model?," Journal of Asian Economics, Elsevier, vol. 20(1), pages 50-61, January.
  3. Takeuchi, Nobuyuki, 2010. "Industrialization and the role of government," MPRA Paper 26822, University Library of Munich, Germany.
  4. Kamei, Keita & Sasaki, Hiroaki, 2014. "Is Agricultural Productivity Growth Good for Industrialization? Infrastructures and the Welfare Maximizing Tax Rate," MPRA Paper 53606, University Library of Munich, Germany.

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