4 In the early stages of structural transformation there typically exists a substantial gap between the share of the labor force employed in agriculture and the share of GDP generated by that workforce. In SSA, agriculture’s share of GDP has declined to 17 percent in 2013, according to World Bank data. Meanwhile, agriculture still occupied more than half (52%) of the region’s economically active workforce in 2013, according to FAO data.<sup>5</sup> This suggests substantial differences in annual average labor productivity among sectors within SSA. Further analysis (see below) indicates that this is mainly because of larger underemployment within agriculture and rural areas, rather than intrinsically low average or marginal productivity of agriculture. It also signals the existence of barriers to more efficient allocation of factors of production.

Once agricultural productivity growth yields agricultural surpluses and rural incomes rise, intersectoral linkages typically enhance agriculture’s contribution to economic growth through factor markets. Rising agricultural labor productivity and the relative decline in food spending as incomes rise (i.e. relative to nonfood spending, even though food expenditures increase in absolute terms)<sup>6</sup> holds down growth in food prices and agricultural incomes, while the demand for non-farm goods and thus off-farm labor increases. Given intersectoral competition for factors of production, this releases labor and capital from the rural farm sector. With average output per person (not necessarily per hour worked) typically lower in the rural farm sector than in the rural non-farm and urban sectors, the intersectoral reallocation of labor further adds to growth and poverty reduction, largely because labor approaches full employment. Identifying and addressing factor market imperfections to facilitate such movement is therefore equally central to the task of stimulating agricultural and structural transformation for the low-income rural economies of SSA. If financial and labor markets worked perfectly, there would be few productivity gains from intersectoral factor migration.

After robust agricultural growth has been established and sustained for some period and the nonagricultural sector has become significant, economies move into an integration phase in which growing agricultural surpluses accelerate growth in the nonagricultural sectors by further mobilizing labor, savings, and tax revenues. The shift in agricultural output from staples towards protein rich foods (meat, dairy), fruits and vegetables<sup>7</sup> and the expansion of agribusiness (storage, transport, processing, wholesale and retail of food), the latter recorded as nonagriculture in the national accounts, are part and parcel of this process (Tschirley et al 2015, Anriquez, 2016). The Asian experience further suggests that poverty reduction is fastest when the agricultural transformation - from staples to non-staples - complements the structural transformation - from agriculture to industry (Huang, 2016). Continued agricultural development depends on increasing integration into the rest of the economy through improved infrastructure and the development of competitive markets.

Obviously, the role of agriculture in an economy’s structural transformation described above heavily depends on the extent of economic integration within the domestic economy and with global markets. With full integration, food imports can in principle enable an economy to skip some of the above stages by redirecting labor directly from agriculture into industry, relying on manufactured export earnings to finance food imports (Dercon 2009, Dercon and Gollin 2014). But that trade-based approach has only worked for a very limited number of small developing countries – such as Hong Kong SAR, China, or Singapore – with reliable ocean port access and thus very low-cost connectivity to global markets. Most SSA countries have large populations distant from ocean ports and therefore must rely on domestic production for the overwhelming majority of their food supply for the foreseeable future. Indeed, during 1980-2009, the percentage of SSA agricultural output consumed within the country in which it was produced never fell below 80 percent, and was typically above 90 percent and increasing, on average, over the period, especially among land-locked countries (Barrett and Upton 2013). Also, given the low

> 5 This and all subsequent ‘FAO data’ come from FAOStat (http://faostat.fao.org/), unless otherwise indicated.

> 6 This phenomenon is also known as Engel’s Law.

> 7 The corresponding increase in consumers’ dietary diversity as incomes grow is commonly known as Bennett’s Law.