Agriculture and Industry: enhancing mutual gains

There are strong links between agriculture and industry. But does low or high improvement in agricultural productivity give the fastest overall development? In a structuralist two-sector model, the answer is that it depends on the food budget share. An efficient real wage results in a target for the agricultural terms of trade. If relative agricultural price lies above the target inflation occurs. Optimal policies, at high food budget shares, are keeping food prices stable, raising agricultural productivity and industrial demand. A nominal agricultural price rise may lead to a worsening relative terms of trade and lower farm incomes. East Asian economies got the transition right, but in India political economy factors forced an early rise in food prices. Liberalisation offers an opportunity to shift to the optimum policy set. The shift will be more feasible if corporates invest in agriculture. This will increase agricultural productivity, and help revive industrial growth.