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Gryskewich 1 Kevin Gryskewich Dr. Mutter Intermediate Microeconomics April 27, 2012 Agricultural Exports I will be researching to see if agricultural exports increase with the stage of development in a developing country. This is an interesting question to study because once a country can produce enough food for their population they can start to export their agricultural goods. Many developing countries still lack efficient ways to produce agriculture and their countries people are starving. Once a country has a significant amount of food for their people they can then start exporting their goods to gain profit. In the past, it was essential for a country to adapt and develop new ways to produce agricultural output. The counties that seem to adapt the fastest continued to grow while others simply tried to feed themselves. Once a country can start feeding itself it can then worry about other forms of production. Agricultural exports are a significant part of growth in developing countries contrast to developed countries where they grow from non agricultural exports. There has been many changes in the macroeconomy in the past and they can help explain why agricultural exports are so important in a developing country. There were surprisingly a good amount of economic sites to help explain this theory. A very important site I found was the Food and Agriculture Organization of the United Nations. There is very useful data here including the Agricultural Export Value Index along with Agricultural area and Agricultural population. For the stages of development I will be looking at the GDP per capita from the Penn World Tables. The economic theory that applies to the issue emerged in the 1970 by neoclassical economist thinkers and came up with the theory of export led growth. This theory has also influence how the World Bank creates policies for developing countries. I have already came across a few articles that address my topic and the best one I have indicated so far was published by Ana I. Sanjuán-López, P. J. Dawson and the paper is titled, Agricultural Exports and Economic Growth in Developing Countries: A Panel Cointegration Approach. They took 42 countries and using a panel cointegration approach they look at the relationship between agricultural and non-agricultural exports against GDP. Results show that a long-run relationship exists, the agricultural export elasticity of GDP is 0.07 whereas that of non-agricultural exports is 0.13, and total exports Granger-cause GDP, which supports the export led growth hypothesis. (Lopez and Dawson 2010) Gryskewich 2 This paper explains that it is more profitable to invest in agriculture production if the country is poor. If the country is more developed then they it will be more profitable to invest in industrial sectors. Another very interesting paper was written by Maurice Schiff and Alberto Valdes and was titled, The Plundering of Agriculture in Developing Countries. They decided to take 18 developing countries and review their data from 1960 to 1980. Schiff and Valdes explain that during this time there was a huge tax on agricultural production and the government was protecting industrial production. The main idea behind taxing agriculture even when a country has scarce resources is to hopefully direct them to industrial production. Indirect interventions depress the prices of agricultural tradables relative to nontradables (through their impact on the real exchange rate) and relative to other tradables (due to industrial protection).(Schiff and Valdes 1992) These policies affect production incentives by making agriculture less attractive than other sectors of the economy. (Schiff and Valdes 1992) From 1960 to 1980 agricultural producers were taxed on average about 30 percent and the indirect effects were even stronger at 22 percent. There was some major macroeconomic consequences of having such an intense tax on agriculture. These policies caused the appreciation of the real exchange rate, raised the relative cost of nontradable inputs, and reduced the real purchasing power of income received from the sales of export- and import-competing commodities.(Schiff and Valdes 1992) Farmers became discouraged from producing output because they were not making enough profit off of their crops. Some countries started importing their agricultural products because the farmers started decreasing production. Such intervention usually reduced agriculture's share of gross national product and was often related to slower growth in agricultural production and agricultural exports and to slower economic growth overall. (Schiff and Valdes 1992) This is a perfect example of how important agriculture is to a developing country and although policy makers were trying to promote industrialization they ended up hurting their country. A country needs to be able to feed itself, then export some of the excess crops, and then they can start to move into other sectors of the economy. Once a country is able to feed itself, then they can start worrying about exporting the agriculture. Once this stage of development is complete the country will turn to more non-agricultural profit seeking exports. Macroeconomics by J.Bradford Delong and Martha L. Olney has a entire chapter on the changes in the macroeconomy and the changes in macroeconomic policy. This chapter illustrates some of the same viewpoints I personally agreed with. Delong and Olney explain that a thousand years ago almost everyone was a farmer. They explain how economic growth is also a process of structural change and throughout history countries have shifted their labor force from agricultural driven growth to other forms of production. Gryskewich 3 Between the year 1100 and the start of the Civil War in 1860 the share of the labor force engaged in agriculture fell from perhaps 80 percent to perhaps 50 percent. (Delong and Olney 2006) But between the Civil War of the 1860's and the end of the twentieth century the share of the U.S. labor force engaged in agriculture fell from 50 percent to 2 percent. (Delong and Olney 2006) The gap between the 1860's and the twentieth century is only about 150 years and agricultural industries dropped 48 percent. Even in 1900, nearly one-third of the labor force was composed of farmers. (Delong and Olney 2006) As America became more and more developed they shifted into more profitable industries like manufacturing, government, and other services. Other countries were not capable of maintaining with technology or adapt as fast and they have never been able to make the shift to other industries. If a developing country is starving and has little food, they are not going to be able to shift to other forms of production. America is a prime example of how important agricultural exports are to a society. A main reason the United States fought for their independence in the revolutionary war was because Britain had restrictions on agricultural trade from the new world. They also had other limitations that were hindering America’s growth. in 1776 we claimed our independence from Britain. This was America’s first step to becoming the great economic power that we are today. After the war, the farmers who were near the coast began growing crops for exports. While the farmers more inland were producing crops to feed the country. In 1790 the total population was 3,929,214 and farmers accounted for 90% of the labor force. (Growing A Nation 2012) We were able to also farm animals such as pigs and horses, as well as making a productive use of the ox who were pulling our plows. We were working more efficiently not harder. It was essential for us to use these animals to our advantages. To this day, other countries in the world who are not as efficient as America still do all agricultural planting and gathering by hand. Furthermore, we were able to stay ahead of the curve by coming up with new farming inventions. Eli Whitney invented the cotton gin, in 1793 which lead to the mass production of cotton in the southern half of the country. Along with his cotton gin he also invented a milling machine that allowed people to cut metal in an identical fashion. This was the first time interchangeable parts were introduced to the marketplace. This also led to the being of mass production as we know it today. In addition to the invention of the cotton gin, Cyrus Mccormick, who invented the Horse drawn Reaper accelerated the process of harvesting grain and agricultural output overall. He was a very intelligent individual and he wanted to help the farmers of America. He invented the Horse drawn Reaper in 1831 and started mass producing and selling his produce in 1840. With this invention a single farmer was able to harvest 5 times the amount they normally did with a scythe. (USHistory.org) This single invention shaped the way Gryskewich 4 americans were able to farm and dramatically increased our agricultural output which led to rapid growth in the economy. In 1837 a man by the name of John Deere revolutionized the way people harvested crops. He invented a riding plow that was very useful and even accessible to women and children. During the Civil War, 25 years later, women and young children of the South would use these devices allowing the men to be away at war.(USHistory.org) This dramatically lessened the amount of physical labor demanded to plow the fields. John Deere has been producing agricultural equipment for over 175 years. John Deere currently is the biggest producer of agricultural machinery in the entire world. Today, with business entities in over 27 countries John Deere can continue to turn profits and expand their business. Agriculture has revolutionized other parts of the world and another prime example is the world’s second largest economy, China. China has the largest population in the world, and throughout their history became one of the world's largest producer of farm outputs. The first trace of agriculture in China can be dated all the way back to 9000 BC. The first rice grown appeared about 1000 years later in 8000 BC. Jumping to 3000 BC agriculture can be seen getting closer to major cities and civilizations. Around this time they adopted other cultures farming techniques and began to grow wheat and barley. From 400 to 300 BC the chinese formulated a horse harness that was efficient, and now they could start using horses to do the labor intensive work. Some other developing countries were not able to adapt as quickly as the Chinese were to these new harnesses and they suffered for it. China was able to work harder, more efficient, and produce more output, because of these new harnesses. Another interesting time period for agriculture in China was from 1850 to 1855. In the beginning of this time period Chinese food is introduced to America. Now they have even a larger market for their agricultural products which will allow them to grow and prosper. In 2002 China joined the world trade organization. The economic super powers of world, which included the United States, let China into the organization once they felt they had met the standards. This was a huge step in growth for their country. Now the Chinese were able to export to markets they could not do before. It was also a sign that China was on the right track and was now an acceptable trade partner with developed nations. With new reforms and the acceptance into the WTO China started rapidly developing. “Today, China produces 18% of the world’s cereal grains, 29% of the world’s meat, and 50% of the world’s vegetables.” (Shurtleff) In the future we can expect the Chinese economy to grow significantly. Being able to feed your enough to produce agricultural output is a good sign for a developing country. With open trade routes China can continue to grow and expand its position in the world market place. Gryskewich 5 Some developing countries still lack efficient ways to produce agriculture. It is unfortunate that with all of today’s modern technology there are still some people who are farm with their hands. It is very interesting to see how agriculture output influenced the superpowers of the world today. Through history many inventions have been created to help ease the pain of harsh physical labor. In developing countries, investing in the agriculture sector is a very easy way to grow the economy as a whole. Likewise, investing in more industrial sectors will promote growth if the country is already well developed. In the past, we have seen progress in the growth of agriculture across the world. In the future it will be exciting to see what other inventions are created to help agricultural output. Gryskewich 6 Work Cited Growing A Nation. "Historical Timeline 17th-18th Centuries." Agriculture in the Classroom.Web. 10 Apr. 2012. <http://www.agclassroom.org/gan/timeline/17_18.htm>. Olney, Martha L. "Changes in the Macroeconomy and Changes in Macroeconomic Policy." Macroeconomics. By J. Bradford Delong. Second ed. New York: Gary Burke, 2006. 468-69. Print. Sanjuán-López, A. I. and Dawson, P. J. (2010), Agricultural Exports and Economic Growth in Developing Countries: A Panel Cointegration Approach. Journal of Agricultural Economics, Web. 10Apr. 2012 61: 565–583. doi: 10.1111/j.1477-9552.2010.00257.x Schiff, Maurice, and Alberto Valdes. "The Plundering of Agriculture in Developing Countries." The International Bank for Reconstruction and Development, 1992. Web. 4 Apr. 2012. <http://siteresources.worldbank.org/ INTTRADERESEARCH/Resources/5448241146153362267/The_Plundering_of_Agric_Prices_in_Dev_Countries.pdf>. Shurtleff, William, and Akiko Aoyagi. "SoyInfo Center." Soyinfocenter.com. Soyinfo Center, Lafayette, Califorinia. Web. 03 Mar. 2012. <http://www.soyinfocenter.com/HSS/china1.php>. "25c. Inventors and Inventions." Inventors and Inventions [ushistory.org]. Independence Hall Association in Philadelphia, 2012. Web. 14 Mar. 2012. <http://www.ushistory.org/us/25c.asp>.