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The transition of an economy from a primitive, largely agrarian state, to one with an important non-agricultural sector is invariably tied with the parallel growth of the public sector. This is because the growing complexity in a developing economy necessitates the increased provision of public goods, such as infrastructure, defense, education etc. Financing this growing role of the state must be done by some form of explicit or implicit taxation. Taxation of agriculture during an early stage of development is a necessity since during this stage most of income and employment are based on agriculture. While no one would argue that agricultural income should not bear its fair share of public revenues, it is a point of major controversy and debate in development economics whether agriculture should be taxed proportionally more or less than the rest of the economy.
Early debates, motivated by the Soviet industrialization phase of the mid-1920s (Preobrazhensky, 1965) suggested that agriculture should be taxed proportionally more via the suppression of the agricultural terms of trade, in order to extract surplus to be invested in non-agriculture. The debate gave rise to the so called "price scissors' problem".
In the last few decades several late developing countries, and especially those in Sub-Saharan Africa (SSA), in their effort to accelerate growth have followed, at least partly, the Soviet model and turned the terms of trade against agriculture, using a variety of direct and indirect policies. Such policies were strongly attacked in the early 1980s by many economists and multilateral lending institutions such as the World Bank and the International Monetary Fund (IMF), as having been responsible for the crises that hit many developing countries in that period. Stabilization and structural adjustment lending to deal with the crises was then made conditional on, among other things, "getting the prices right", implying in most cases that the unfavourable internal terms of trade against agriculture had to be corrected. This usually implied a decline in both direct and indirect taxation of agriculture.
Diminishing direct taxation of agriculture, however, presents governments of adjusting countries with some painful choices. Given that agricultural taxation forms a sizeable part of public revenues, a loss of this income entails either or both a cut in public expenditures (current and/or development), and an increase in nonagricultural tax revenues. While there are many political reasons why governments might opt for either or both of the above policies under adjustment programs, an interesting set of questions concerns the economic rationale for diminishing or not agricultural taxation, and the form in which the change in taxation can be accommodated.
The purpose of this paper is to review the arguments for and against agricultural taxation (in the terms of trade sense) and place them in the context of contemporary macroeconomic adjustment efforts in developing countries.
Theoretically, it turns out that the argument for turning the terms of trade against agriculture at early stages of development is quite strong. We exhibit a simple theoretical model with the help of which we illustrate for several stylized economies, that to increase a developing economy's surplus, defined as private and public savings available for public consumption and investment, the internal terms of trade of agriculture must be lowered compared to the international ones.
This argument, however, is separate from the question of who appropriates this surplus, and it is this latter question which entails the division of the surplus between the public and the private sector. A discussion is presented on the ways by which the public sector has appropriated a large share of the economy's surplus in many countries, and has precipitated crises. Structural adjustment programs can then be seen as ways to change the division of the surplus between the public and the private sector, albeit in the process they tend to diminish the overall size of the surplus.
The following discussion will examine agricultural taxation from the wider perspective of the terms of trade and the generated surplus in the economy. More traditional analyses deal with Pareto-efficient changes in taxes of specific agricultural products for the purpose only of generating public revenues. There are good surveys of these techniques (e.g. the papers in Newberry and Stern, 1987), which will not be reviewed here in order to concentrate on the more general problem.
Chapter one below presents a summary discussion of the issues relevant to the terms of trade of agriculture in the context of development. Chapter 2 reviews the various means of taxing the agricultural sector. In Chapters 3 and 4 a simple stylized two-sector model of a developing economy is presented, and schematically analyzed in order to illustrate the impacts of various policies on effective taxation and the terms of trade of agriculture. Chapters 5, 6, 7 and 8 exhibit the responses of the total surplus and other variables for a variety of stylized agrarian developing economies, under various policy regimes. Chapter 9 supplements these chapters with a discussion of the controllability of the tax base in a developing economy. In Chapter 10 some remaining issues of taxation in the context of adjustment are discussed, and in the final Chapter the conclusions are summarized.