ABSTRACT
This chapter (1) describes the economic transformation that occurs with economic development, involving a decline in the size of agriculture relative to the non-agricultural activities and (2) identifies potential sources of economic growth. Economic growth involves a transition from low-income agricultural-dependent economies to higher-income non-farm employment. The process is driven by capital accumulation, technological innovation, and specialization in either sector. An economic transformation occurs because (1) demand for food is relatively fixed, so when incomes grow, demand for other things grows faster, (2) productivity increases in agriculture free up resources for nonagricultural production, and (3) as people specialize and trade with each other, many tasks that were previously done on the farm are now classified as non-agricultural. Agriculture declines as a share of the economy, but the sector does not shrink. Typically, total farm output continues to rise with economic growth. When population is growing, the number of farmers also rises until the absolute size of the non-farm sector is large enough to absorb all those entering the workforce each year. Diminishing returns has important implications when population or capital increases with a fixed land base. To overcome it and sustain economic growth, technological change, increased specialization and trade, and improvements in efficiency from improved human capital and institutions are needed.
