Land misallocation and industrial development

Abstract

In many poor and densely populated countries, a large fraction of land is devoted to agriculture. This makes industrialization and urbanization, both of which require land, a serious challenge. We argue that land can be re-allocated from agricultural to non-agricultural uses without any adverse effect on agricultural output when the existing land use in agriculture is sub-optimal. Using actual and potential crop yield data from Indian districts, we show that a planner who allocates agricultural land to its best possible use can release up to 40 percent of land without affecting aggregate agricultural output. The effect is analogous to landaugmenting productivity increase in the agricultural sector. Using a calibrated two-sector model, we find that re-allocation of the freed up land from agriculture to the manufacturing sector raises manufacturing output by 29 percent and real income by 9.4 percent.