North D.C. (1959) Agriculture and economic growth

North, Douglass C. (1959) “Agriculture and Regional Economic Growth”, Journal of Farm Economics, 41/5, 943-951.

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Introduction
“There seems to be agreement amongst economist that agriculture contributes little to economic growth”. Worse it may even delay development as agricultural comparative advantage may attract production factors away from the most moderns sectors of the economy. At best, progress in agriculture is seen as a consequence rather than a cause of urban and industrial development (p.943). But the author argues that “the successful production of agricultural (or indeed most extractive) commodities for sale [outside of] the region can be and under certain conditions has been the prime influence inducing economic growth […] and eventually industrial development”.

Theory

The recent and explosive success of numerous industrial countries has artificially given the impression that industrialization was the alpha and the omega of economic development. But in numerous cases (Denmark, Canada, Pacific Northwest) it is actually “the expansion from one or more agricultural commodities which has been the prime mover in initiating expansion” (p.944). In other words: “the expansion of an export industry is a necessary condition for regional growth it is not a sufficient one.” On the other hand, not all regions enjoying a strong export-oriented agriculture have developed successful industries. So how does the selection happen?

The author pinpoints important preconditions for the agriculture to initiate long-term growth: (1) a comparative advantage in more than one commodity so as to quickly diversify after the initial foray (p.945); (2) a relatively equal distribution of income so as to foster local industries (instead of having a majority in survival mode and a small minority importing luxuries), moreover, in an unequal society acquiring skills is unlikely to yield significant rewards, so there is a clear disincentive against investment in education; (3) a necessary high level of investment in transportation to export the initial commodities will induce the construction of facilities (warehouses, ports, etc.) that will create economies of scale for the other products to be exported, furthermore it will also stimulate local industry (brick and mortar; p.946); (4) an explosive growth will induce imports without giving local industries the time to develop, hence the regional income will directly flow back out without having acted as a significant multiplier (p.947).

Case-study

To illustrate his point, the author uses the opposite examples of the American South and the Midwest. The former showing how an economy can get stuck at the agricultural stage of development, while the latter shows how it can go forward. The value of cotton exports from the South expanded hugely from 1815 ($17.5 million) to 1860 ($191.8 million). Meanwhile the Midwest enjoyed a sustained expansion of its wheat and corn and their derivates (bacon, whisky, flour), exporting first to the South and then to the Northeast and to Europe.

The South was characterized by a comparative advantage so great in the production of cotton that it soon became its only commodity export. On the other hand, the Midwest exported a wide range of commodities including lead, iron and copper, as well as cereals.
Production of cotton was well suited to a large plantation system resulting in an extremely unequal patter of income distribution (epitomized by slavery). The region also lacked any meaningful urban development (except New Orleans). “Is states were at the bottom of the list of retail store per thousand population in the 1840 census [implying that] a large percentage of the South’s population remained outside the market economy.” The South also had the highest rate of illiteracy (even among the white). The opposite was true in the Midwest as an increasing portion of the population shifted out of self-sufficiency to integrate the market economy, a thriving urban network arose, the production structure was centred on family farms (p.948) and the population invested heavily in education.
Cotton is relatively easy to transport and was exported without undergoing any major processing phase in the South. On the other hand, the landlocked West had to invest heavily in transportation (railroad) and there were important incentive to process the products within the region itself (thus fostering manufacturing and urbanization).
The “one-way cargoes from the cotton ports resulted in back hauls of manufactured good being imported into the cotton region at very low rates.” As a result cheap European and Yankee imports flooded the local market. On the contrary, high transportation costs to the Midwest played as a natural protection for local consumer oriented industries which had time to develop before being faced with international competition (p.949).

Conclusion“I would simply argue that a successful agricultural export trade can and has induced urbanization, improvements in the factor markets and a more effective allocation of investment funds” (p.951).

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