Courtesy Reuters

Economic Development and Agricultural Surpluses

AMONG many pressing contemporary problems are two which receive much attention but without adequate recognition of the possibility that they may be related. These problems are, one, the insufficient economic growth of the underdeveloped countries of the free world, and, two, the agricultural surpluses of the free world, primarily those in the United States. Approached separately, they have remained insoluble; but a new coördinated approach might help to solve both. Aid to underdeveloped countries in the form of agricultural surpluses might enable them to progress economically at an even faster rate than would be possible under the forced-draft methods of the Russians and Chinese; and at the same time the crisis of agricultural surpluses in America and other countries of the free world would be alleviated.

II

In the early stages of economic development large expenditures are necessary to provide basic public facilities and services such as roads, bridges, docks, power, water supply, irrigation, housing, health and education without which there can be no satisfactory agricultural and industrial development. The creation of this essential substructure, accounting for more than half the cost of initial economic development, requires largely domestic manpower and materials and relatively small amounts of capital goods and technical assistance from abroad. The basic deficiency in our present aid program, which emphasizes capital goods and technical assistance, is that it does not sufficiently concern itself with the financing of this substructure of public facilities and services without which the assistance offered cannot be effectively absorbed.

In most underdeveloped countries at least 70 percent of the people derive their livelihood from agriculture. Perhaps 25 percent or more constitute a manpower surplus, unemployed or underemployed a good part of the year. The recent All-India Agricultural Labour Enquiry revealed that the country's 35 million landless laborers were employed only six months each year. This lack of full employment of the country's manpower prevents maximum production of goods and services and keeps the people poor, depriving many of even the minimum requirements for a healthy and satisfactory existence.

Agricultural development, though vital to economic growth, cannot alone solve the problem. Greater employment outside agriculture is essential. That is one reason why the people of underdeveloped countries are so intent on industrialization. Yet the development of basic industries like iron and steel, minerals, chemicals, electrical goods and heavy machinery, while requiring large amounts of capital, provides comparatively little employment. Moreover, such investment produces no consumer goods in the first instance although it is essential to sound economic growth. The development of basic industries must therefore be balanced with projects requiring a large labor force, thereby utilizing the idle manpower of the country. Here the economic plans of underdeveloped countries usually falter for lack of domestic finance, inducing them to undertake programs much too modest for a satisfactory rate of economic growth.

Perhaps no more than 20 percent of the cost of development plans is for capital goods and technical assistance from outside the country. In spite of the heavy emphasis on industrialization in India's Second Five-Year Plan, it is estimated that only $2.8 billions out of a total outlay of $15 billions will be required for machinery and equipment from outside the country.

The limits to the type of foreign aid we are now providing are indicated by the fact that Asian countries have expended only about 50 percent of the economic and technical assistance made available to them since 1950. India is carrying about $200,000,000 of unexpended foreign aid, mostly American, from the First to the Second Five-Year Plan. There are several reasons for this, but certainly one is an inability to absorb the proffered aid in its present form. The large amounts of obligated but unexpended foreign aid funds are an annual source of acridity between the foreign aid administrators and Congress.

Since building and construction require primarily unskilled or semi-skilled labor and indigenous building materials it seems paradoxical that underdeveloped countries are unable to utilize their surplus manpower and domestic materials to do the job. Yet it is the inability to utilize these abundantly available resources which constitutes the main barrier to economic development. The problem exists because neither of the available methods of achieving full employment is feasible from both the political and economic standpoints.

The underdeveloped country could resort to deficit financing of the construction required for economic development. In most countries this would result in uncontrolled inflation. The newly employed worker would spend most of his wages on food and cloth and, since these commodities are not generally available in sufficient quantities in underdeveloped countries, prices would soar. This can be illustrated by the situation in India.

There are at least 25 million man-years of surplus manpower in India today. It would require about $1.5 billions in wages to employ fully this manpower for the economic development of the country.[i] The recent All-India Agricultural Labour Enquiry found that agricultural labor families spend 85 percent of their incomes on food. According to the National Sample Surveys, over 60 percent of all consumption expenditures in India are on food. It is therefore reasonable to conclude that two-thirds of the newly created wage incomes would be spent on food and cloth--about 50 percent or more on food and about 15 percent on cloth. India could not safely attempt full employment through deficit financing unless she was assured of at least 13.5 million tons of additional food annually.[ii] As for cloth, India is already importing raw cotton for her present needs.

Her own agricultural production cannot be counted on for an increase of such magnitude. India's food production rose by 11 million tons during the First Five-Year Plan, but half or more is attributable to a series of unusually good monsoons. The Second Five-Year Plan calls for an increase of 10 million tons, most of which is required merely to keep pace with the population growth. Moreover, the level of consumption of a large segment of the agricultural population is presently so low that much of any increase in production will be absorbed within the agricultural economy and will not be available to meet the demand of the new wage earners. Thus it is apparent that in India, for example, deficit financing of economic development designed to bring about rapid full employment is not economically feasible unless a sufficient supply of food and cloth is assured from outside.

The alternative method is heavy taxation of the agricultural economy. Russia and Japan have demonstrated, in differing contexts, that this method will permit rapid economic development. China is emulating this pattern. Unfortunately, neither Japan, Russia nor China has employed this method within a democratic framework. That it is economically feasible is perhaps not in doubt. Through effective taxation it is possible to deny the farmer freedom of consumption of his own agricultural production in order to provide the food and fibre supply to meet the demand of the new wage earners. What is in doubt is whether this is politically practicable in a democracy, especially where the electorate consists primarily of farmers.

The limitations thus imposed on the underdeveloped democracies are disturbing. India produces only 65 million tons of food grains for a population of 375 million people.[iii] China is allegedly producing 175 million tons of food grains for about 580 million people. During her first few Five-Year Plans Russia was producing 70 to 100 million tons of food grains and had a population less than half that of India. Yet both Russia and China have found it necessary to use harsh measures to hold back consumption in agriculture and appropriate the surpluses for purposes of economic development. Thus India not only finds herself at an initial economic disadvantage but is trying to achieve economic development within a democratic framework in which it is not politically acceptable to resort to similar measures. Whether due to economic or political factors the result is that India today is taxing only about 1 percent of her agricultural output for economic development whereas China is appropriating over 25 percent of her agricultural output for this purpose.

The less advanced countries seeking economic development within a democratic framework are thus faced with a dilemma: on the one hand, heavy taxation of agriculture for purposes of economic development is not politically feasible; on the other, deficit financing is economically unsound because of insufficient resources of food and cloth.

III

If, as I believe, the principal barrier to economic development of most underdeveloped countries is insufficient supplies of food and cloth, the economic prosperity of many other countries of the free world is imperiled by quite a different hazard--the problem of agricultural surpluses. The situation in the United States is perhaps the most serious and intractable. Many people fear that our depressed agricultural economy could well pull us into another depression, with dire consequences for the political fortunes of the free world. Attempts to move these surpluses into world markets have merely tended to exacerbate foreign relations between countries possessing surpluses in the same commodity.

If the analysis to this point is sound it reveals a bitter irony. Pursuing independent solutions, one area of the free world has been unable to solve the peril to economic prosperity presented by agricultural surpluses and another part of the free world has been unable to solve the problem of inadequate economic development because of insufficient agricultural production. Yet if the two problems are placed side by side they reveal an opportunity for mutual solution and economic coöperation. The advanced countries of the world are already committed to a policy of long-range economic support to underdeveloped areas. The situation therefore appears to call for a new type of foreign aid which would first of all assure underdeveloped countries a sufficient supply of food and cloth essential to domestic finance of their economic development, and then concern itself with the capital goods and technical assistance also needed from abroad. The two types of assistance--the basic consumer goods required for full employment of the country's manpower and the capital goods and technical assistance to facilitate industrialization of the country--should, however, proceed pari passu for a balanced development effort. Both are essential but the former appears to be the more critical in most underdeveloped countries.

Efforts by the United States to utilize farm surpluses in the underdeveloped countries have not so far been of this nature. Existing legislation[iv] does not aim primarily to lift levels of economic development in the recipient countries, but is designed chiefly to enable the United States to sell surpluses against payment in foreign currencies. In cases where the proceeds are devoted to economic development, ill-advised and enervating restrictions are imposed, such as deposit of the proceeds to the account of the United States Treasury for controlled release. Moreover, these practices have frequently operated to displace sales by other countries with agricultural surpluses, thereby creating political problems both for us and the recipient country. Agricultural surpluses have also been used, of course, to alleviate food shortages due to famine, floods and other adversities, but these emergency measures add little to the positive economic development of the country.

The objective of foreign aid with agricultural surpluses should be to supply the underdeveloped country with the food and cloth needed to achieve full employment of its idle manpower as fast as this can be organized administratively. Such an aid program would be possible only under a long-range commitment after the pattern of the Marshall Plan. It would be unfair and probably impossible to ask the underdeveloped countries to launch a program of deficit financing which would be ruinous without an assured supply of food and cloth for a period of years. A minimum commitment of five years, the usual planning period, would be desirable, with a policy statement in the legislation that the program would be continued thereafter if the underdeveloped countries had demonstrated the success of the program.

Ideally, a plan of foreign aid based on agricultural surpluses would embrace all the countries of the free world. The advanced countries would be expected to transfer their agricultural surpluses to the underdeveloped countries on a grant basis, while the underdeveloped countries with agricultural surpluses would have to be offered a quid pro quo. Burma and Egypt, for example, could not be expected to join such a program unless they were assured that the use of their present rice and cotton surpluses would redound to their benefit. The countries of the free world might establish a Commodity Exchange Union which would operate to absorb and reallocate the agricultural surpluses of the underdeveloped countries for their mutual economic development. American wheat could be exchanged for Egyptian cotton and the cotton delivered to India for her enhanced economic development effort. In this manner Egypt would receive a greater supply of wheat, which she must normally import, and India a greater supply of cotton.

An industrialized country such as Japan could also be included in the operation of the Commodity Exchange Union. Many countries in Asia do not yet possess a sufficiently developed textile industry to meet their cloth requirements. Burma is such a country; she imports finished cloth. In this case raw cotton could be supplied to Japan for manufacture into cloth for Burma. Japan could take Burma's rice in payment for her manufacturing services. The raw cotton would be furnished free of cost to Burma under the foreign aid program. Triangular arrangements of this nature could form the basis of the Commodity Exchange Union. In fact, such triangular arrangements are already beginning to evolve spontaneously in Asia to meet the problem. The recent barter agreement among the Philippines, Burma and Japan involving sugar, rice and manufactured goods is an example.

It is not possible to determine the precise magnitude of the proposed aid without a comprehensive country-by-country study of the food and cloth requirements for full employment and the agricultural productive capacities of the countries with surpluses. The free world could well absorb its existing agricultural surpluses and find production insufficient to give full support to all the underdeveloped countries wanting to participate in the program. Rice might create such a problem because of the consumption habits of many people in Asia and other underdeveloped areas. It is also possible that the supply of cotton might become tight. Consumption habits may change quickly to better food grains and more cloth as the underemployed earn larger incomes. Even on the basis of existing consumption patterns, India would theoretically require a billion dollars worth of food and cloth from abroad annually to permit full employment of her surplus manpower through sound deficit financing.

Assuring an adequate supply of food and cloth would not eliminate the need for capital goods and technical assistance. In fact, the need for these forms of aid might be expected to increase as the tempo of economic development increased. It might not, however, be necessary to meet this increased need for capital goods and technical assistance through foreign aid. Once the underdeveloped country demonstrated the vigorous economic growth that is possible with an assured supply of food and cloth it would be in a stronger economic position to borrow from the World Bank and other international financial institutions.[v] In fact, these institutions might for the first time be able to operate on the scale they were intended to function. It is not unreasonable to expect that the capital goods and technical assistance required could be obtained without recourse to grants.

Private investment and technical assistance would also be expected to flow more freely into the underdeveloped countries. At present there are three important deterrents to this form of aid: (a) inadequate development of public services, (b) lack of a broad market for manufactured goods, and (c) the uncertainty of the survival of democratic political institutions. All three deterrents would be substantially diminished by rapid internal economic growth made possible by foreign aid with agricultural surpluses. Although we should not assume that no additional aid would be needed to provide capital goods and technical assistance, these can be provided primarily in the form of easily serviceable loans rather than grants.

A salutary effect of such foreign aid would be its tendency to broaden the market for manufactured goods within the underdeveloped country. As we have seen, approximately one-third of the new wages would be spent on commodities other than food and cloth. With their increased earnings from full employment, workers would soon diversify their consumption toward bicycles, sewing machines, plastic products and other machine-made goods. In the beginning there might be great unfulfilled demand for these goods and prices would rise, but this kind of inflation should be welcome because it would be a powerful stimulant to domestic and foreign private investment. As long as inflation can be controlled with respect to basic consumer goods like food and cloth the underdeveloped country need not be unduly concerned about inflation involving manufactured goods.

The countries which export capital goods, such as Japan, Germany and England, whose prosperity and political stability depend upon foreign markets for their manufactures, would also benefit as demand increased and foreign exchange became more available. The anticipated economic growth of the underdeveloped countries under a foreign aid program based on agricultural surpluses would provide the best assurance of export markets for the capital goods of the industrialized countries. It cannot be overemphasized that the aim of the suggested aid program is to increase sharply the tempo of economic growth in underdeveloped areas; and this in turn will increase the demand for both agricultural and manufactured commodities from abroad.

How long may an aid program based on agricultural surpluses be expected to last? The objective of such foreign aid may be considered fulfilled when the underdeveloped country has created full and permanent employment outside agriculture for the majority of its labor force and has developed agricultural production adequate to supply the food and fibre requirements of that labor force. In some countries this objective may never be fulfilled. In others the achievement of this goal may be made more difficult by tremendous population growth. Nevertheless it would seem reasonable to expect these conditions to be achieved within a generation or so, say 25 years, in most underdeveloped countries. During the latter part of the period it could be expected that the need of food and fibre supplies from abroad would decrease steadily as development of land and water resources and agricultural techniques give rise to greater agricultural production.

IV

Many objections will be found to a program of foreign aid with agricultural surpluses. Among them may be these:

(1) Underdeveloped countries would hesitate to accept such foreign aid even under a five-year commitment for fear of becoming economically subservient to foreign countries. They would fear that once they became dependent on large supplies of agricultural commodities from abroad they would be vulnerable to pressures for political and military alliances.

These are serious problems from the standpoint of the recipient country. A partial solution might be to accumulate at the outset a stockpile of agricultural commodities within the underdeveloped country. This would give the recipient country a measure of security in the event of delays in delivery or termination of the agreement by either party. The availability of adequate storage facilities might present a problem. Although projects are under way in many countries for construction of storage facilities, they will require time for completion and may not be sufficient for this purpose. As an interim measure the United States Government could lease to the underdeveloped countries the Liberty and Victory Ships in which some of our agricultural surpluses are stored to serve as temporary granaries in their ports. Further, many of the fears of the underdeveloped countries might be allayed if the program were genuinely international.

(2) The organizational and administrative capacity of underdeveloped countries is not adequate to step up the tempo of economic development by utilizing large quantities of agricultural surpluses.

It is difficult to estimate how quickly the underdeveloped countries could organize for such foreign aid. Different results would doubtless obtain in different countries. In the case of India, it would not appear unreasonable to expect 10 million of her idle manpower to be brought into full employment by the end of the Second Five-Year Plan in March 1961. Perhaps she could surpass this goal. Such increased employment would achieve a very satisfactory rate of economic growth. In contrast, India's present Five-Year Plan, for which finance is not yet assured, is expected to create only about eight million jobs outside agriculture, which will barely absorb the additions to the labor force due to population growth during the period. To deny that underdeveloped countries are capable of increasing the tempo of economic development is unacceptable without admitting defeat from the start. If China can organize for such increased economic activity, so can India once the financial obstacles are mitigated or removed, and providing technical assistance is available.

(3) The problem of agricultural surpluses would merely be postponed and, perhaps, even aggravated.

It would probably be inadvisable to permit American agriculture to exceed its present level of production merely for the sake of the aid program. But it could be reasonably expected that domestic requirements for food and cloth will increase over the next 25 years as our population increases, thereby absorbing today's excess production or reducing it to manageable proportions. Moreover, the increased economic activity in the underdeveloped areas stimulated by the aid program should create permanent markets for some of the present surplus agricultural production. In the world as a whole, agricultural production must obviously be increased substantially in the years ahead.

(4) The existing markets for agricultural commodities would be disturbed and undermined by such an aid program.

This objection assumes that national surpluses represent overproduction in the world at large. This cannot, however, be the case when so many people of the world are undernourished. The Russians have been quick to exploit the irony of our policy of retrenchment in agricultural production while much of Asia lives on the verge of starvation.

The people of the underdeveloped areas are undernourished because they are not employed productively enough to be able to purchase adequate quantities of food. The surpluses are, therefore, the result of a low level of economic activity in large parts of the world. A foreign aid program designed to increase consumption of food and cloth would augment rather than undermine the markets for agricultural commodities. This stepped-up level of consumption could create new, permanent markets for the free world's agricultural production.

(5) Underdeveloped countries would be encouraged to place undue emphasis on industrial rather than agricultural development and thus become dangerously dependent on food and fibres from abroad.

The objective of foreign aid with agricultural surpluses is to fill a temporary need due to inability of an underdeveloped country to increase its agricultural production rapidly enough. There is no reason to assume that agricultural development would be ignored. It must be remembered that agricultural development is vitally dependent upon such facilities as roads, irrigation, health and education which the suggested aid program is designed to make possible. Ultimately, therefore, it would assist the underdeveloped country toward greater self-sufficiency in food and fibres.

Although the political, administrative and international obstacles may be formidable, a substantial program of foreign aid with agricultural surpluses appears to be sound and eminently desirable. But the validity of the argument should not be impugned merely because the scale of the program may seem too large. It is possible that the agricultural surpluses available may prove to be less than expected or that the problems involved in a large-scale program are more substantial than they appear. But the approach that has been outlined has the advantage that it can, if necessary, be undertaken on a more modest scale and can be terminated, given due notice, if it proves unworkable. The important point to be recognized is that agricultural surpluses can be used to stimulate a sounder and more rapid economic development than is now taking place in the less advanced countries of the free world.

[i] Based on a wage of a rupee (or 21 cents) per day, the average pay of unskilled labor in India, and a 300-day work year.

[ii] Computation based on wheat at $2.00 per bushel and reckoned in long tons. Since wheat sells for less than $2.00 per bushel in India, the 13.5 million tons estimate is probably low.

[iii] The comparative figures for India and China include coarse grains, gram, pulses, tubers, and other human food crops. The figures for Russia include only cereals.

[iv] Agricultural Trade Development and Assistance Act of 1954 and Section 402 of the Mutual Security Act of 1954.

[v] In the international discussions involving the financing of the Aswan Dam, the World Bank was disturbed about the inflationary propensities of Egypt's development plans which might make it difficult to service the loan. Concern on this point would have been greatly relieved under a foreign aid program which could alleviate the dangers of inflation and assure Egypt a market for her vital cotton crop.

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