by Nimal A. Fernando

Labour Economics Series
About two decades ago it was strongly believed that agricultural development would over time considerably ease the problem of unemployment and underemployment in developing countries with large agricultural sectors. Development economists prescribed a “labour-intensive, capital-saving” strategy of agricultural development for them to achieve higher growth rates with equity. While the prescription remains valid for many developing countries even today, a multitude of important constraints have emerged in the way of implementing this strategy. For a variety of reasons many developing countries have adopted agricultural development policies which depressed or decelerated employment growth. As a result, the performance of the agricultural sector in employment generation has been disappointing in a large number of developing countries.

A number of researchers have recently pointed out that the current trend towards low labour absorption in agriculture in the countries falling into the category of “late comers” is likely to be strengthened by the labour-saving agricultural innovations likely to come into the market on a growing scale and at a lower unit cost (Jayasuriya and Shand, 1986). It is increasingly realised, by both researchers and policy-makers, that employment opportunities will have to be found on a greater scale outside the agricultural sector to reduce unemployment and poverty and improve the distribution of income, which is one of the key development objectives in many developing countries today (Anderson and Leiserson, 1980: Meyer, 1983; Ho, 1986).

A parallel development over the last decade has been the better understanding of the role of non-farm economic activities in the process of economic development in these countries. The literature on various facets of non-farm activity has burgeoned and it points out that, if properly promoted, non-farm activity can contribute considerably to growth and development. Thus, much greater emphasis is placed today on non-farm activities as a source of employment and of growth and as a strategy which combines poverty alleviation and better distribution of incomes with growth.

Despite the important role that non-farm activities can play in development, very few studies have been undertaken on these activities in Sri Lanka. Furthermore, the available literature has failed to deal with an important aspect of their development, namely, capital transfers for, and investment in, such activities. In this paper an attempt is made to discuss the issues relating to this so far neglected area.
This paper consists of seven sections. Section 2 provides definitions of the key terms used in the paper. Section 3 discusses the methods and mechanics of capital transfers and the determinants of capital surpluses in general. In Section 4, this general discussion is applied to the specific case of Sri Lanka. Section 5 is devoted to a general discussion of several aspects relating to investments in non-farm activities while Section 6 examines non-farm investments in Sri Lanka together with factors affecting such investments. The concluding section presents a brief outline of a possible strategy for promoting non-farm investment in Sri Lanka.