The agricultural roots of industrial development: ‘forward linkages’ in reform era China

A classic literature argues that improvements in agricultural productivity result in higher non-agricultural output, particularly at low levels of development. The proposed mechanisms for these ‘forward linkages’ centre on increases in the supply of factors—usually labour or capital—or demand externalities in product markets. Regardless of the mechanism, empirical evidence for substantial linkages from agriculture is limited. In this paper, I show that improvements in agricultural productivity were an important factor in the growth of the non-agricultural sector in early reform-era China. I obtain plausibly exogenous variation in agricultural productivity growth by exploiting the fact that reforms between 1978 and 1984 were more beneficial to farmers endowed with land suited to cash crops. Then, using a newly digitised panel of economic data for 561 counties, I trace the growth of agricultural and non-agricultural output over forty years. Over the 15 or 25 year periods following the reforms, I estimate elasticities of county level non-agricultural output with respect to agricultural output of 1.2 or 0.8. Several pieces of additional evidence indicate that the linkages identified were primarily due to higher agricultural surpluses increasing the supply of capital to local non-state firms.