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. 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.
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