World Development, Vol. 18, No. 8, pp. 1081-1095, 1990. 030~750x/90%3.00+0.00 Printed in Great Britain. 0 1990 Pergamon Press plc The Concept of the Agricultural Surplus CHRISTIAN MORRISSON OECD Development Centre, Paris and ERIK THORBECKE Cornell University, Ithaca, New York Summary. - The concept of the agricultural surplus has occupied a central place in the history of economic thought and has been used in a variety of different senses. The major objective of this paper is to offer a rigorous definition of the agricultural surplus based on the Social Accounting Matrix (SAM) framework. A SAM for Indonesia distinguishing between agriculture and non- agriculture is used to estimate quantitatively the magnitude of the agricultural surplus and its various components. Finally, the various meanings which have been assigned to this concept in the literature are reviewed and confronted with the definition which we derived. 1. INTRODUCTION The concept of the agricultural surplus has occu- pied a central place in the history of economic thought at least since the beginning of the 18th century. This can be explained by the predominant role played by the agricultural sector in the early phases of the development process and its potential as a source of resources for other sectors. In 18th century Europe and in many other settings the agricultural surplus was embodied in the land rent paid by tenants and farmers to landlords - many of whom lived in the cities. This resource transfer could be used by them in a number of different ways such as consumption of services and manu- factured goods and payments of taxes to the state. Both Cantillon’ and the Physiocrats* considered the size and disposition of this surplus to be key determinants of the level of economic activity and the state of public finance. In their eyes the surplus corresponded to the net scales from agriculture to the nonagricultural sector (sales minus purchases) and was transferred to the towns in the form of land rent and direct taxes. Subsequently during the 19th and 20th centuries, the agricultural surplus became viewed as the means to finance investment outside of agriculture. Thus, financing occurred directly through land- holders investing land rent in industry or through the state taxing a part of this rent and investing it. In any case, this process involved capturing a flow of resources from one sector to invest it in another regardless of the prevailing institutional and legal system. In the present treatment, we define the surplus somewhat more narrowly as a flow of resources from agriculture to nonagriculture which is nor compensuted. For example, if farmers pay direct taxes to the state and the latter does not provide any services benefiting agriculture, the surplus which is transferred is equal to the direct taxes. In contrast, if the state provides (subsidized) services to agriculture, the surplus would amount to the taxes levied on agriculture minus the value of these services (i.e., the public expenditures required to provide these services). Thus the agricultural sur- plus is defined here as a net rather than a gross transfer from agriculture to the rest of the economy. There was a resurgence of interest in the agri- cultural surplus notion after World War II with the emergence of development economics. In poor countries this surplus provides the only possible source of internal financing and capital formation for the incipient industrial and social overhead sectors, regardless of the prevailing economic sys- tem and adopted development strategy. Economists in the past have used this concept in widely different and often conflicting senses, as will be shown subsequently. Consequently, the major objective of this paper is to offer a rigorous and unambiguous definition of this concept based on the Social Accounting Matrix (SAM) framework. The SAM provides a general equilibrium frame- 1081