Many of us may have heard of Banana Republics. These refer to some countries in Central America and the Caribbean that depend, almost exclusively, on the production and export of bananas.
They also produce some other items, but they devote most of their manpower and land resources to the banana crop. It is such an extreme dependence on bananas that has earned them the moniker of Banana Republics.[break]
In normal use, the term banana republic is meant to be derogatory—in the sense of some countries having little choice in broadening their economic base and being vulnerable to swings in weather and market conditions over which they have little control. In other words, banana republic countries always live on the edge of poverty and prosperity, depending on outside conditions beyond their control.
The implied reference to poverty and misery befalling on countries depending exclusively on bananas, however, is illusive and, for most part, wrong. For example, according to World Bank data, banana-based countries of Costa Rica and Equator had a per capita income of $10,880 and $9,270, respectively, in 2010—above Thailand’s $8,240 and approaching that of Malaysia’s at $14,380 and, considerably above India ($3,560) and Nepal ($1,200). [Income data are adjusted for inter-country price differences]. Lesson: specialization in a single commodity or crop doesn’t make a country poor; rather, it is much more likely that these countries are often rich and prosperous.
Experiences of banana republic countries are consistent with the vent-for-surplus model of economic development, originally proposed by the Burmese economist Hla Myint. According to this theory, primary producing—and often poor—countries can specialize in just a certain line of economic activities—product specialization—if an adequate amount of “effective demand” for those items are created, often through marketing opportunities overseas.
It is assumed that poor countries have a high level of dependence on subsistence production, meaning that they tend to produce just enough to meet their own needs but are capable of much more than their subsistence level of production if trading opportunities—often through export promotion—are created where their production can be sold at substantially higher prices than what they would fetch in the domestic market.
According to this model, then, surplus production capacity exists in a subsistence economy above domestic consumption demand but this lies unexploited before their exposure to international trading opportunities. Access to international markets and customers then serves as demand inducement to put to use often underutilized production capacity.
Development experiences of many of the key primary commodities producing countries—Thailand, Malaysia, Brazil—have, indeed, been consistent with the vent-for-surplus theory of economic development.
In the case of Thailand, for example, it was largely a subsistence economy until the early 1950s. With the opening of trade opportunities for sales overseas, agricultural production was specialized in only a few key crops with substantial amounts of underutilized resources of land and labor. Research by University of Minnesota economist Keith Fugli to explain the phenomenal growth of agricultural production in Thailand starting in the 1950s through 1980s speaks of the success of the vent-for-surplus-based approach to the development of hitherto a largely subsistence economy.
Over the 35 years period from the early 1960s to mid-1980s, rice production in Thailand increased four-fold; sugarcane production five-fold; kenaf production 23-fold; maize production 66-fold; and cassava production a whopping 450-fold! Although the expansion in acreage cultivated was the main factor promoting growth there was also substantial gains in land productivity—output per unit of area cultivated.
This kind of revolution in agricultural sector didn’t just help enrich the rural population but also created a basis for growth elsewhere in the economy—of manufacturing and service sector industries—as surplus income from this sector got invested in non-agricultural enterprises. Nearly the same story is true of the now-highly industrialized economics of Malaysia and Brazil, whose growth was fueled by surplus generated in the agricultural sector.
Experiences of these successful economies hold valuable lessons for countries like Nepal that seem stuck at the subsistence level of production in agriculture, which drags down the growth in other sectors of the economy. Most importantly, production of the key food crops has lagged population growth to a substantial degree, requiring a steady increase in food imports and associated rise of trade deficit.
Over the past two decades, the Nepali economy did diversify into service sectors (tourism, banking, trade, tourism and construction) and consumer incomes have been supplemented from earnings by migrant workforce but the lack of agricultural growth has been a powerful drag on the rest of the economy and the manufacturing sector in particular. Because agriculture continues to employ two-thirds of the country’s working-age population, overall living standards have remained unchanged and whatever growth has occurred elsewhere in the economy has gone to a very small segment of the population, mostly to urban centers.
The country’s planners since the late 1950s have been very conscious of the importance of agricultural sector to improving welfare of the population and thus have given priority to agricultural development. Unfortunately, agricultural development strategy has been largely unfocused, without consideration of broader linkages of this sector to the rest of the economy. For the most part, the idea of export-focused agricultural development has scarcely been mentioned in plan documents that gives strong indication of the ignorance of theoretical underpinnings of the agriculture-led growth.
It is expected that future planning in agricultural sector is centered on vent-for-surplus theory of development which would require selecting some key crops with high growth potential, both in terms of expanding planted acreage and increasing yield. Although we do not have the land advantage of Thailand, for example, which during the initial years of agricultural revolution depended heavily on the expansion of new acreage for increasing production, but incentive for double- and triple-cropping would be the other alternative to achieve the larger size planted area.
Overall, a larger proportion of growth in crop production must come from increase in yield, which is possible through the introduction of new technology, supply of irrigation water, and selected use of fertilizers and new seed varieties. The expectation would be that, with the right combination of technology and inputs, average yield could be increased by 3 percent annually which combined with at least a 2 percent increase in cultivated area would help provide 5 percent growth in annual output.
Now the key question concerns the follow-up step: what fuels the vent-for-surplus growth? It isn’t the expansion of domestic demand but increment of foreign demand that not only provides an almost unlimited market for surplus production but also very lucrative prices, in most cases double or triple their sales value at home. Again, Thailand exports almost a quarter of rice production while export share for cassava and kenaf is almost 100 percent.
Development challenges facing Nepal are then three-fold: selection of only a few crops with high potential for growth; policies for increasing their acreage and yield; and finding overseas markets where they can be sold at remunerative prices. There are no other ways of achieving high growth that benefits the largest segment in the society and, most specifically, alleviate poverty at the grassroots.
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