The main theme will be developed within the agricultural sector of a developing economy, and then it will be pointed out how this can be extended to cover the industrial
sector as well. In Chapter 2, the major characteristics of such agriculture are described, stressing particularly the dualism that exists between the family and capitalist
farms, the distribution of income between them, and the implication of that distribution for the structure of rural credit market. Given these characteristics, a model is developed in Chapter 3, by deriving the decision rules that the family and capitalist farms will adopt about the use of inputs and allocation of wealth on the basis of some well-defined maximising objectives. In Chapter 4, this model is then used to analyse the special problem of capital accumulation in this agriculture. It is found that given an unequal initial distribution of income and the associated imperfection of credit market, such agriculture can show a tendency to approach a state of zero rate of capital accumulation under very plausible conditions, and this can be accompanied by a process of immiserisation of family
farms. The importance of the distribution of income and the structure of credit
market as factors responsible for this crisis is brought out more precisely in Chapter 5, where the results of this model are compared with those of a hypothetical situation involving a more equal distribution of income and a more perfect credit market. In Chapter 6, several ways of resolving this crisis are discussed, including particularly the solution that is offered by technical progress. Here, it is found that the issues connected with a special kind of technical progress, namely, the Green Revolution, as well as those connected with some other solutions based on institutional changes, can be given an interesting interpretation. In Chapter 7, the conclusions of this model are compared with other existing results in the literature. Finally, several ways of generalising the basic model are suggested (Chapter 8). It needs also to be pointed out at the outset that certain assumptions of our model, made particularly about the nature of market imperfections, are based primarily on the characteristics prevailing in the Indian agriculture. But in this respect, the Indian situation may not be very atypical of peasant agriculture of many other less developed countries.
References
Bhaduri, A. (1983). The Economic Structure of Backward Agriculture. Cambridge, MA: Academic Press.
Leibenstein, H. (1957). Economic Backwardness. New York: Wiley.
Consider an economy with an agricultural and an industrial sector. Although the primary concern of this presentation is with the agricultural sector, it is worthwhile in the beginning to comment very briefly on the structure of industrial sector as well, particularly its links with the agricultural sector, so that results derived within the agricultural sector can be viewed from the perspective of the entire economy.
The industrial sector is divided into a private sector producing a luxury consumption good, to be consumed partly in the industrial sector and partly in the agricultural sector, and a government sector producing a capital good to be used again in both sectors. The agricultural sector, in its turn, produces a necessary consumption goodâa part of it is consumed within agriculture and another part goes to industry. The other link between the two sectors is through the labour market. It may be further noted that the credit market linkage between the two sectors in rather weak. Even now, of the total credit disbursed by the scheduled commercial banks, 91.6 per cent is in urban areas and only 8.4 per cent in rural areas.1
Given this structure of the entire economy, we shall, as indicated before, concentrate on the agricultural sector. In order to be able to do that, we choose, for most of this presentation, not to go into the problems of interaction between agriculture and industry. It will be assumed that the agricultural output can be sold at a fixed (money) price within the sector and also to industry, and so also can be the luxury consumption good produced by industry. Capital goods are also available to the agricultural sector at a fixed price from the industrial sector and migration of labour from agriculture to industry is not significant. It will be mentioned later how all these assumptions can be relaxed and results generalised, but to start with they help us to focus our attention on the agricultural sector.
Within the agricultural sector, an important feature observed in many less developed countries is the coexistence of the family and capitalist farms. The distinction between the two is based on the significance of hired labour in the total labour force used in the respective farms. The family farm uses labour mostly of its family members, whereas the capitalist farm is dependent primarily on the wage labour coming from the family farms. For the sake of simplicity, we will assume in our analysis that the family farm uses only the family labour and the capitalist farm only the wage labour from the family farms.2 The distribution of land between these two types of farms is given at any point of time, and there does not exist any significant market for land. By this it is meant that there does not exist any market for voluntary exchange of land. One important reason for this is that in a society exposed to various kinds of risk, and with a few means of insurance effectively available, land is a highly attractive asset to hold. In particular, to a farmer on the margin of subsistence, who is most likely to be the potential seller of land, the risk of parting with land is often one of starvation and land prices rarely fully reflect this risk as evaluated by the farmer. However, although there does not exist any voluntary exchange of land, âdistress saleâ of land does take place. In fact, it will be shown later that it is through such a mechanism that the capitalist farm can take over the ownership of land from the family farms in some special situations, such as default of loan by the latter. But until a family farm is driven to such an extreme situation, the total amount of land owned by a family does not get voluntarily exchanged.
Now, the size of this land holding of a family farm is usually quite small compared to a capitalist farm. Consistent with the census findings, if the small and marginal farms (with a land holding size of five acres and less) are taken to be characterised as the family farm and the large farm as the capitalist farm, then according to the recent study conducted by the National Council of Applied Economic Research (NCAER 2010, Table 6.5), the average income of the family farm is much lower than that of the capitalist farm, both in relative sense (about one fourth) and also in absolute sense (less than Rs 9,000 per annum). This distribution of income between the family and capitalist farmsâthe significant disparity between their average incomes as well as the low absolute value of the family farmâs incomeâis to be taken as the description of the initial state in our analysis. And, as we shall presently see, this has an important implication for the structure of agricultural credit market. For that, one has to look into, among other things, the nature of the production process in agriculture.
The production process in agriculture can be best described by continuous input-point output technology. The entire process takes place over an interval of time which can be called an agricultural âyearâ and can be taken to be equal to a âperiodâ in our analysis. Within each such period, starting from the beginning point and spread over the entire interval, labour and capital are applied by both the family and capitalist farms to their given amounts of land, and then output is obtained at the end point of the period. The production function is assumed to be neoclassical showing constant returns to scale and diminishing returns to factors, and is the same for both the farms. However, the decisions they have to take on the use of labour and capital, though related, are not the same.
Consider, first, the family farm. It starts any period with a certain amount of family labour and a net income obtained from the previous period. Of this family labour, a part is to be used in its own production and the rest to be sent away to work on the capitalist farm for wage which, we assume, is paid post facto. By the net income of the previous period is meant the gross income of that period which, because of the nature of agricultural production and of wage payment, was obtained at the end point of the period, less the amount of loan that was taken in that period and had to be paid back. As already documented, the average gross income of the family farm is very low and hence its average net income is even lower. From the available empirical evidence, we find it reasonable to assume that from this level of average income it is not possible for the family farm to save anything. The family farm, therefore, does not own any stock of capital; it has to take production loan for using capital. Not only is the average net income of the family fa...
