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Employment Creation in Non-Agricultural Sectors

Isabelle Tsakok | October 18, 2018

As agriculture becomes more productive, it must shed labor, which unless absorbed in non-farm jobs that pay at least as well as agriculture, would simply constitute exporting farm poverty to other sectors. Adequate employment creation is a concern of every government. However, for agriculture-dependent countries whose agricultures are being transformed, the need to generate non-farm employment is particularly urgent as higher productivity agriculture will shed labor that must find productive employment in the non-farm economy.

How have governments in developing countries, burdened with extensive underemployment, particularly of youth, effectively addressed this stiff challenge? This policy brief is about how the governments of Rwanda, Vietnam, and Mauritius have effectively addressed this problem. Though the specific measures taken were different, their experiences were similar in three key respects: 

1.    They focused on raising agricultural productivity growth and on diversifying agriculture; 
2.    They went beyond agriculture to create a supportive macro and trade framework; and 
3.    The employment challenge, even if successfully addressed for a period, never really diminishes. They have to continue to address new threats and opportunities as these emerge. 

The central message is to solve the problem of adequately creating non-farm employment, in economies where agriculture is still important (AG/GDP is 10 percent or more), sustained agricultural productivity growth is necessary but not sufficient. Too many developing countries striving to reduce extensive poverty and underemployment have found out that, first, they cannot bypass sustained growth in agricultural productivity;  and second, that sustained agricultural productivity growth is, however, not sufficient. The entire economy must be transformed as well. 

Introduction:

The existence of employment-creating non-agricultural sectors is one of the five conditions common to cases of successful agricultural transformation (Tsakok, 2011: summary, xxi-xxiii).  During the later stages of a successful agricultural transformation, two stylized facts are: (1) the decline of agriculture’s contribution to total employment in both relative and absolute terms; while (2) its contribution to GDP is in relative but not absolute decline.  

This policy brief focuses on what three remarkable countries have done to transform their agriculture sector, including addressing the need for non-farm employment creation. Although Rwanda, Vietnam, and Mauritius are at different stages of their agricultural transformation, their approaches have much in common. The cases illustrate how.  

Employment creation through agricultural transformation and economy-wide diversification: Rwanda, Vietnam and Mauritius 

The Case of Rwanda 

From a country ravaged by the Genocide against people of Tutsi ethnicity in 1994, Rwanda has been at peace and growing; with annual GDP growth averaging 8.1 percent (2000-12); substantial reduction in poverty incidence—from 72 (2002) to 45 percent (2012); and in inequality—Gini coefficient from 0.52 to 0.49 (World Bank Group, JN 2014: iii). Rwanda is a small landlocked country with 85 percent of its land mass being hilly terrain, and with the highest population density in Africa of 416 per sq. km (2011) (World Bank, June 2014: 2-3). Under the leadership of President Paul Kagame, a central government goal as set out in Vision 2020 is for Rwanda to become a middle-income country by 2020, an ambitious goal since GNI/cap was USD 185 (2002) and USD 720 (2017). A major goal in the National Agricultural Policy (NAP, 2004), is to transform Rwanda’s low productivity, subsistence-oriented agriculture into an innovative, specialized and profitable agriculture within a knowledge-based overall economy.

Non-farm employment creation during initial stages of agricultural transformation:

Nearly two decades into Kagame’s leadership, the inter-sectoral shift of labor from agriculture to non-agriculture has been particularly fast in Rwanda and has been a major driver of poverty reduction and economic growth. The share of non-farm employment for both wages and self-employment was 26.6 percent of total employment in 2011, falling short of the target of 30 percent. This achievement was based on an increase of 100,000 jobs over the last five years (2006-2011) (World Bank, June 2014: 7).  High growth in AG GDP—at 5.6 percent per year (2008-12) contributed to this shift. GOR’s land policy was a key contributor to these positive results. Farmers—male and female, including those not legally married—benefited from improved land access and land tenure security as Rwanda completed its Land Tenure Regularization (LTR) program (2012-13) (Ayalew Ali et al, JN 2016: 6-7).  Farmers had also benefited from scaled-up public investments in the Crop-Intensification Program (CIP), Land Use Consolidation Program, and input subsidies on fertilizers and seeds, among other things. Rwanda also succeeded in maintaining macroeconomic, price, and political stability; emphasizing good governance (e.g., zero tolerance policy to corruption),  institutional strengthening (e.g., building the capacity of the judiciary system), and building a business-friendly environment. It also promoted its exports—they expanded by 40 percent since 2012—and diversified them beyond the traditional coffee, tea and minerals—tourism became the largest export item in Rwanda (World Bank, JN 2014: 5).

The Case of Vietnam

Vietnam’s transformation from a low income—GNI/cap USD 150—in the late 1970s to a lower middle-income country—GNI/cap USD 2,170 in 2017, is a remarkable development story. In July 1976, Vietnam was finally unified as one country, the Socialist Democratic Republic of Vietnam.  For decades, agricultural production had barely grown at one percent per year while population had grown by around 3 percent per year (from 1942-76).  Cultivated land per capita hovered around 0.22 ha/cap in 1942 to decline to 0.10 ha/cap by 1976, one of the lowest in the world (World Bank, March 1980: ii, Tab 1.1). For a decade (1976-86), the Communist Party collectivized agriculture, built state-owned enterprises (SOEs), managed markets, and mandated prices. Despite substantial Soviet aid, extensive poverty persisted. Per capita income stagnated while hyperinflation and chronic balance of payments problems characterized the economy (World Bank, Sept 1993: ii-vii). Agricultural growth turned negative in 1987, hyperinflation raged, near famine conditions prevailed, and the Soviet Union announced an end to all aid (World Bank Group, April 2016: Box 6).  

Transformation following radical re-orientation by the VI Communist Party Congress:

In this difficult environment, the government abandoned central planning (December 1986). Two decades after the launching of Doi-Moi  (in 1986 and enlarged overtime)—from a centrally planned and closed, to a market — and outward-oriented economy with socialist priorities, Vietnam was already a high growth, transforming economy. Growth was not only high but it was inclusive, equitable,  and with effective delivery of basic services of education, health, and social protection in addition to widespread provision of water, sanitation and electricity access. In the 1990s, extensive poverty (at USD 3.10/day poverty line) afflicted roughly three quarters of the population while by 2012, poverty incidence had fallen to roughly 10 percent (World Bank Group, 2016: 24, 16).  The AG/GDP ratio declined from (in percent) around 40 (1980s) to 20 (2010s) (World Bank Group, April 2016: Fig 4). In fact, agriculture grew at an annual rate of 3.5-4.0 percent (1985-2005).  Rice is still dominant, but agriculture has been diversifying. Vietnam is among the top five global exporters of such diverse products as coffee, cashews, pepper, rice and shrimps. By the early 1990s, an important feature of the growth was the ability of the private, non-farm sector—small scale manufacturing in food processing, non-alcoholic beverages, garments, etc.; in trade and commerce—to absorb new entrants from the dominant agriculture and from contracting state-owned enterprises (SOEs)—thus, contributing 72 percent of total employment in those years (World Bank, 1993: 66-67). By early 2000s, there was already a continued massive shift of employment from agriculture to private sector and wage employment. The proportion of working age population who are farmers declined from (percent) roughly 50 of total employment (1998) to less than 40 in 2004.  Over the same period, wage employment rose from (percent) 11 to 18 (World Bank Group, 2007: 15).  Over the three decades since Doi-Moi, over 20 million new, largely private sector jobs were created mainly in the labor-intensive and export-oriented manufacturing, and services sectors (World Bank Group, 2016: 23). Today (2018), less than half the jobs are agricultural. 

How Doi-Moi re-oriented Vietnam’s socialist socio-economic system:  

The reforms were structural and wide-ranging, encompassing macro and trade, agriculture, individual ownership rights and the role of private sector (World Bank, Oct 1997: Box 1). From an agricultural point of view, the key ones included: 

1.    The re-instatement of private property rights in that agricultural and residential urban land could be sold, leased, inherited, and mortgaged. This was made possible through the issuance of Land Use Certificates (LUC) according to the Land Law (1993). This reform reversed a process of nationalization and collectivization that had started in 1954 and which culminated in the 1980 constitution that all land belonged to the state;  
2.    The dismantling of collective agriculture (as early as 1981) in favor of family farming based on short and long-term leases;  
3.    The removal of virtually all price controls including liberalizing domestic rice trade as well as sharply devaluing the exchange rate;
4.    Progressive trade liberalization; e.g. eliminating import quotas, and replacing quantitative restrictions by tariffs.
5.    Incentives for FDI, through the 1987 law, adjusted until 1989 to respond to investor concerns, provided constitutional protection against nationalization for foreign investments and companies; and for Vietnamese enterprises that entered into joint ventures and partnerships with other Vietnamese and foreign investors. 

Vietnam’s development experience clearly shows that generating non-farm employment for agriculture-dependent economies requires measures that set in motion not only the transformation of agriculture but also of the entire economy. By launching Doi-Moi, Vietnam has taken the first key steps on the long road of economic transformation. 

The Case of Mauritius

Key features of the transformation of the island economy:

Mauritius  is well known for its successful diversification from a mono-crop (sugar cane-dependent economy in the 1970s) to a diversified economy based on sugar, textiles and services (tourism, finance and ICT) by the 2010s.  The structure of the economy changed radically during these three decades. Thus, the ratio of the primary: secondary: tertiary sector, which was 23:15:62 (1976), became 6:27:67 (2012). In particular, the contribution (in percent of GDP) of sugar cane which was 17.8 (1976) shrank to 1.1 (2012); while the contribution of textiles and clothing rose from 2.6 to 4.9 respectively; and hotels and restaurants (a key component of tourism) from 1.8 to 6.8 respectively. For three decades, Mauritius grew at an average of 5 percent per year. The unemployment rate fell from (percent) 22 in 1980 to 8 in 2012. Agricultural employment, which averaged around a third of total in the mid-1980s, declined to around 14 percent in the mid-1990s, as employment increased in the emerging export-oriented sectors including services (World Bank, 1985: 34-35).  By 2010, agricultural employment had shrunk to 7 percent of total (World Bank Group, June 2015: 36). Extreme poverty (USD 2/day) was eliminated  From around GDP/cap of USD 260 at independence, it rose to USD 8,350 in 2012 (Sobhee and Rajpati, June 2013: Sect 2.3.1, Tab 1-3, Tab 8)  and to USD 10,140 in 2017.

What did the Government of Mauritius do? How did they re-orient and restructure the entire economy ?

By taking a holistic and inclusive approach, Mauritius diversified not only the dominant sugar sector, but re-oriented its inward-looking economy towards export orientation. Indeed, Mauritius had no other option since its domestic market is small. Mauritius is now one of the most open economies –exports plus imports reaching 98 percent of GDP.  The Government of Mauritius succeeded in stabilizing the economy and in creating an environment in which sustained, labor-intensive, export-led growth could materialize. Specifically, the key measures included a substantial devaluation of the Mauritian Rupee in 1979 and 1981; removal of quantitative restrictions on imports and reform of the tariff structure; promotion of private incentives in the export processing zone (EPZ)—investment in textiles and in services—investment in hotels, air access and development of a marketing strategy to attract tourists from select markets (World Bank, July 1989: 1- 12).  Mauritius liberalized its banking and financial system, and established regulations –the Banking Act of 1988—to make Mauritius an off-shore banking center, a major step signaling its ambition to become a regional financial center. 

Profits from high sugar prices re-invested for diversification:

In the dominant sugar sector, Mauritius profited from a boom in sugar prices in 1973-74 and from the preferential trade agreements with the EEC under the Sugar Protocol. The profits obtained from these preferential deals were re-invested, partly by the GOM through the export tax to promote its industrial policy and partly by the private sector in new hotels. Over time, the bagasse from the sugar cane has increased in importance as a source of electricity, with the Government of Mauritius sharing in and guaranteeing the financial risk of the substantial investments needed.  For an island without any fossil fuels, this contribution to renewable energy is timely and of strategic importance.   

Substantial FDI a major boost to diversification:

Sugar and textiles benefited not only from the preferential trade agreements but also from substantial foreign direct investment (FDI). Preferential  access to the EU for sugar and textiles resulted in rents of 7 and 4.5 of GDP per year in the 1980s and the 1990s respectively (World Bank Group, June 2015:14).  Total FDI increased from USD 64 m in 1999 to USD 361 m in 2012. Investments in finance, real estate and insurance also raise hope that they will strengthen Mauritius as a regional  offshore financial center (World Bank Group, June 2015: 24).  

Employment growth and social protection critical to the success of diversification:

The restructuring process was painful. From 1979-82, per capita consumption fell steadily and unemployment rose to nearly 20 percent by 1983.  However, by 1990, unemployment was only 3 percent and per capita incomes had risen substantially (World Bank, July 1989: 23). The inclusion of all racial and income groups in the growth process was of pivotal importance to their success given the diversity of Mauritian society. At the time of independence (1968), with an uncertain future, limited economic prospects, and wealth concentration, racial tensions ran high in this multi-racial, multi-ethnic and multi-cultural society.  James Meade, a Nobel Prize laureate in economics, who led the economic survey mission to Mauritius in 1960, famously predicted, “In the author’s opinion, Mauritius faces ultimate catastrophe” (Meade, 1961).  Thus, the situation was dire and coexisting in harmony is essential for political stability and development. In addition to employment growth, the GOM also used its extensive system of social protection which included, among other measures, cash transfers, universal free education, health services as well as assistance such as school feeding programs, school supplies and textbooks. In 2013, the GOM allocated some 5.5 of GDP to social protection, accounting for more than 20 percent of government expenditure, benefitting nearly half of the total population (World Bank Group, Sept 2015: 63, Appendix A).  Redistribution through social programs has been a major contributor to reducing poverty and vulnerability, to connecting the poor to the growth process, as well as to social cohesion and stability.    

Conclusion    

However, at different stages of development, Rwanda, Vietnam and Mauritius have all made substantial inroads in transforming their agricultures and economies, thus generating substantial non-farm employment. Nevertheless, success is not forever. Their reform agendas are still unfinished. Rwanda is still low income, characterized by extensive underemployment and low household earnings. Vietnam must continue to reposition its economy to exploit market opportunities generated by mega trends such as increasing urbanization, and a rising middle-class in Asia; increasing importance of the knowledge economy, continued automation, and requirements for highly skilled workers (World Bank, Aug 2018).  Mauritius still has the problem of reducing inequality through more equitable labor markets.  Despite these continuing challenges, these countries have taken the first key steps to transform their agricultures and economies. Taking the first step is the critical thing for “the journey of a thousand miles starts with the first step” (Laozi, 6th century BCE).