AGRICULTURE AND GROWTH: THE ROLE OF SAVING AND FINANCIAL DEVELOPMENT

Can agricultural productivity positively affect economic growth? To answer this question this research paper will use a hybrid neoclassical and Schumpeterian growth model with financial intermediaries. The theory is expected to show that agricultural productivity enhances economic growth for countries with high saving rates and well-developed financial systems. This theoretical prediction will be tested using empirical cross-country and panel estimations over the period 1980-2011. These findings have important policy implications. First, the paper will explain the observed low productivity in the agricultural sector of developing countries. Second, our model will show that when countries have high savings and well-developed financial systems, agriculture matters for economic growth. Third, this is crucial for sub-Saharan countries and some parts of Asia, where as much as 60 percent of the economically active population works primarily in agriculture, and approximately the same fraction resides in rural areas (Gollin (2010)), also given the evidence that agriculture counts for one-third of GDP and three-quarters of employment (The World Bank). To boost economic growth in developing countries throughout the agricultural sector policy-makers must reform financial systems and encourage savings among the population.