Agriculture is never enough…even services needs some help from manufacturing

As calls are rightly being made to diversify the Nigerian economy away from its dependence on oil, calls are being made to “return to our roots” in agriculture. While this is sensible enough on the surface, however some drilling down, particularly when you extend the analysis to the entire African continent reveals some facts that should at the very least make one feel uncomfortable. Agriculture is already the leading economic activity with about roughly 60-70% of the people being farmers, yet the continent is a net importer of food, has been so since the 1980s, with a food import bill that has been as much as $35 billion in recent years and is projected to go as high as $110 billion by 2025. To the uninitiated, this is made to look even more absurd when you consider that in America, only 1.3% of the people are farmers yet they produce enough to feed over 300 million people and still manage to export roughly 20% of their agricultural produce [1].

A decent economist would probably not be surprised this. Economists have long known that the ‘Law of Diminishing Returns’ applies much more strongly to agriculture than to other major areas of economic activity like manufacturing and services [2]. Alfred Marshall, one of the founders of neoclassical economics, defined the law of diminishing returns as applied to agriculture, as follows:

“With each additional input of labour and capital applied to a given piece of land, total product increases at a diminishing rate (i.e marginal product falls), provided there is no change in agriculture technology.”

In fact, you can get to a point beyond diminishing returns and start experiencing negative returns. The following table should give and idea of how this happens:

You get each marginal production in tonnes like this: Take row 2 for example. You get a marginal production of 70 by subtracting from its corresponding total production (120), the previous total production (50), 120 – 50 = 70. By the time you get to row 6 you can see that even though you are adding more resources (Labour & Capital), the total production in tonnes drops from what it was previously in row 5.

From all that has been said above, it should be obvious that Africa can’t solve its food production problem by throwing more people at it. “What is to be done?” The answer lies in the definition of the law of diminishing returns given above. The agriculture practiced in Africa is mostly subsistence agriculture. That needs to change to a more commercial model that is highly science and technology driven. That is the reason America’s farmers are so productive. This comes at a price however, and I am not just talking about the expensiveness of science and technology. If we aggressively adopt science and technology into our farming practices the same way America has done, the vast majority of farming labour will become redundant. You can’t have it both ways. You can’t have American agricultural productivity levels without American levels of farming employment. In the event that African agriculture becomes more technology intensive, where are all those people going to go? They will most likely join the already seriously problematic informal economy, whose problems I discussed in a previous post, Structural Corruption or worse go unemployed (the more hardened ones amongst them will swell the ranks of the criminal class), exacerbating an already difficult unemployment problem. The highly paid service jobs tend not to be enough for the university graduates in the labour market, let alone former subsistence farmers migrating from the rural areas to the cities.

The foregoing discussion highlights the importance manufacturing plays in the economic development of any nation. As countries industrialize, factories have been the traditional destination for the surplus labour no longer required on the farms. Again, America is a case in point. In 1790, about 90% of its population was engaged farming (population at the time was about 3,893,635), this reduced to 49% in 1890 (population: 62,979,766), this further reduced to 2.6% in 1990 (population: 248,709,873) and is now about 1.3% today with a population of about 328,926,114 [3]. This would not have been possible if the U.S was not at the same time transitioning from an agrarian nation to the world’s premier industrial powerhouse. You can learn more about industrialization from my book, Why Africa is not rich like America and Europe. A more general, important point to be made is that manufacturing is not only important to absorb agricultural surplus labour, it is also a critical input to the transition process from poor nation to rich nation. We would do well to move quickly to solve the very serious problems ailing our manufacturing industry. In 2013, Justin Yifu Lin, a former chief economist at the World Bank stated that “China is on the verge of graduating from low skilled manufacturing jobs that will free up nearly 100 million labor-intensive manufacturing jobs, enough to more than quadruple manufacturing employment in low-income countries.” [4]. The likes of Vietnam, Malaysia, Indonesia and Bangladesh are very serious about making in-roads into this bonanza. Getting a decent slice of this will go a long way in solving our serious informal economy issues. As people are taken out of the informal economy and move into formal employment, they can now appropriately bear their own share of the tax burden.

There has been the question as to whether manufacturing is still relevant in a service-dominated world. The answer is YES. It is well known that manufacturing has the largest job multiplier effects (what economists call backward and forward linkages to other sectors in the economy). Consider the economic activity in other sectors of the economy stimulated by the automotive industry: Steel, Rubber, Glass, Energy, Transportation & Logistics, Textile for upholstery, Chemicals for body paint, and many other sectors for automotive components, Entertainment (Car Racing) etc. [5]. Manufacturing activity generates a lot of demand for services particularly in trade and transportation [6]. To take a specific example, a study conducted on the UK fashion industry discovered that the value of manufacturing in the total bill to consumers of a fashion item was around 10% only. The remaining 90% is the share of all services that relayed the product to the consumer [7]. Now while the value of manufacturing in the fashion item is just 10%, that 10% is required to bring the remaining 90% of services into existence. Cambridge Don Han Joon Chang points out that no country has become rich solely on the basis of its service sector [8].

For those of you asking, “How about IT?” The progress in IT too, is dependent on manufacturing. The limits of what can be achieved by software are set by what is known as Moore’s law. Moore’s law is named after Gordon Moore, co-founder of Intel, the computer chip company. He came up with it in 1965. It states that the density of transistors that can be etched onto integrated circuits, which determines its speed, doubles roughly every 18 months. An integrated circuit (IC) is a chip that houses billions of transistors. The microprocessor in your computer is an example of an IC. A transistor is a device used to amplify or switch electronic signals and electrical power made from semi-conductor material. Semi-conductors are materials that are half-way between conductors and insulators. They allow electric current to pass through them much more easily in one direction than they do in another direction.  Progress in semi-conductor manufacturing techniques has played a key part in ensuring the reliability of Moore’s law. While there are some who believe Moore’s law is no longer valid or nearing its end, even in a post Moore’s law world, computer hardware will still place limits on what software can achieve and so manufacturing techniques that produce efficient hardware will remain critical.

I have written this article because the importance of manufacturing seems to be lost on a lot of people, particularly in our part of the world. I hope it will galvanize us into giving manufacturing the attention it sorely deserves.  

References

1. Banerjee, Abhijit Duflo, Esther 2019 Good Economics for Hard Times: Better Answers to Our Biggest Problems. UK Penguin Random House
2. Naeem Javid Muhammad. May 2018 ‘Define law of Diminishing Returns and its application to Agriculture and Forestry’ forestypedia.com: https://forestrypedia.com/define-law-of-diminishing-returns-and/
3. Ross, Sean. Updated Jun 2019 ‘What Impact does Industrialization have on wages?’ investopedia.com:   https://www.investopedia.com/ask/answers/032715/what-impact-does-industrialization-have-wages.asp
4. The Industrial Policy Revolution II: Africa in the Twenty-first Century, Springer, 2013
5. Yulek Murat 2018 How Nations Succeed: Manufacturing, Trade, Industrial Policy & Economic Development Singapore Palmgrave Macmillan
6. Roser, Christoph 2017 “Faster, Better, Cheaper” in the History of Manufacturing: From the Stone Age to Lean Manufacturing and Beyond. Boca Raton, Florida CRC Press
7. British Fashion Council. (2010). ‘The value of the UK fashion industry’. London: British Fashion Council. Retrieved from: http://www.britishfashioncouncil.com/uploads/media/62/16356.pdf (Accessed 12 June 2015).
8. Chang, Ha-Joon. 2008 Bad Samaritans: The Guilty Secrets of Rich Nations & The Threat to Global Prosperity. London: Random House