Download AGEC 640 Agricultural Development and Policy Week 2

AGEC 640
Agricultural Development and Policy
Introduction to Agricultural Policy
August 30, 2016
Today:
– Farm and food problems, the development paradox and
structural transformation
Thursday:
– Population growth and demographic transition
Readings for this week
• Norton, Alwang & Masters, “Economic Transformation and
Growth”, ch. 6 in Economics of Agricultural Development.
• Tomich, Kilby and Johnston, "Poverty and the Rural
Economy" and "Structural Transformation," in Transforming
Agrarian Economies.
• Montgomery, “Notes on the Demographic Transition.”
Introduction to Agricultural Policy:
Farm problems and food problems
• First, some brainstorming:
– What kinds of problems arise in agriculture?
– What kinds of solutions are offered by
policymakers?
(read USDA Release No. 0181.16)
Where do we see what types of policy?
Source: World Bank data, reprinted from UNEP/GRID-Arendal Maps and Graphics Library
(http://maps.grida.no/go/graphic/world-bank-country-income-groups).
When do we see what types of policy?
Index of real international food prices,
1900 to 2005 (1977-79 =100)
Source: K. Anderson (2006), “Reducing Distortions to Agricultural Incentives: Progress, Pitfalls and Prospects.”
<www.worldbank.org/agdistortions>. Data shown are an index of export prices in US dollars for all major traded
agricultural products, deflated by the MUV index which is the unit value of manufactures exported from France,
Germany, Japan, UK and US, with weights based on those countries’ exports to developing countries.
This is the usual pattern: the “development paradox”
The “development paradox” in East Asia, 1955-2002
Average “Nominal Rate of Protection” for Agricultural
Production in East Asia, 1955-2002
Negative protection, i.e. taxation
Source: K. Anderson (2006), “Reducing Distortions to Agricultural Incentives:
Progress, Pitfalls and Prospects.” <www.worldbank.org/agdistortions>
The “development paradox” worldwide, 1960-2005
Effect of policy on farm product prices, by income level
All Primary Products
1.0
1.5
Tradables
0.0
-0.5
NRA
0.5
Support for
farmers
-1.0
≈
$5,000/yr
6
8
10
Taxation
of farmers
6
8
10
Income per capita (log)
Note: Data shown are regression lines and 95% confidence intervals through annual national-average Nominal Rate of Assistance
(NRA) for over 68 countries, covering more than 90%
world agriculture
1960 through 2005.
AllofPrimary
Products in each year from
Exportables
Importables
Source: W.A. Masters and A. Garcia, “Agricultural Price Distortion and Stabilization: Stylized Facts and Hypothesis Tests,” in K.
Anderson, ed., Political Economy of Distortions to Agricultural Incentives. Washington, DC: The World Bank, 2009.
Why is this pattern paradoxical?
The development paradox: employment and earnings
Source: Reprinted from World Bank, World Development Report 2008.
Washington, DC: The World Bank (www.worldbank.org/wdr2008)
From the Tomich, Kilby and Johnston reading…
Share of output from agriculture and mining in eight high-income countries, 1860-1960
What happens next?
Does the share fall to zero?
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995.
Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.
The structural transformation is
from agriculture to industry…
Share of output from industry in eight high-income countries, 1860-1960
…but what
happens
next to
industry’s
share?
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995.
Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.
…over the full span of development,
employment shifts to services…
Percent of workforce by sector in the United States, 1800-2005
today, about 80% of US
jobs are in services
in 1800,
employment
was 90%
farming
in 1930s-70s,
industry
reached
about
40%
agricultural
employment has stabilized
Source: U.S. Economic Report of the President 2007 (www.gpoaccess.gov/eop)
Another example of structural transformation over the
long run…
Percent of GDP by sector in Australia, 1901-2000
Source: Government of Australia (2001), Economic Roundup – Centenary Edition,
Department of the Treasury, Canberra.
As agriculture’s share of the economy declines, does
farm income also fall?
Agricultural Employment as a Share of Civilian Employment and
Real Farm Output as a Share of Real GDP
Until the 1930s,
employment and
output fell together
and then both
stopped falling
…then employment fell
much faster than output
SOURCE: U.S. Department of Commerce and the Federal Reserve Bank of St. Louis. Reprinted from K.L. Kliesen and W. Poole, 2000.
"Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): 1-12.
As agriculture’s share of the economy declines,
what happens to farm income?
Agricultural Employment as a Share of Civilian Employment
and Real Farm Output as a Share of Real GDP
Until the 1930s,
employment and
output fell together
and then both
stopped falling
…then employment fell
much faster than output
Reprinted from K.L. Kliesen and W. Poole, 2000. "Agriculture Outcomes and Monetary Policy Actions: Kissin‘
Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): 1-12.
The US
farm-nonfarm
earnings gap,
1910-2000
Source: BL Gardner, 2000.
“Economic Growth and Low
Incomes in Agriculture.”
AJAE 82(5): 1059-1074.
Structural transformation:
the story so far…
(1) Farming declines as a fraction of the economy, as industry
and services grow
(2) Farmers’ incomes decline relative to other workers, but then
catch up
–in the U.S.,
• farmers’ incomes began to catch up in 1933
• farmers’ incomes passed non-farmers in 1990s
(3) What happens within agriculture?
Does total world agricultural output decline?
Source: Reprinted from FAO, State of Food and Agriculture 2007. Rome: FAO (www.fao.org)
The structural transformation in world trade:
Agriculture’s share fell while its value rose
Source: Reprinted from FAO, State of Food and Agriculture 2007. Rome: FAO (www.fao.org)
Does U.S. agricultural output decline?
10,000
90
9,000
80
8,000
70
7,000
60
6,000
50
5,000
40
4,000
Farm value added
(left scale)
30
3,000
20
2,000
Source: U.S. Bureau of Economic Analysis, Table 1.3.6 <www.bea.doc.gov>.
2000
1,000
1995
1990
1985
1980
1975
1970
1965
1955
1950
1945
1940
1935
0
1960
Non-farm businesses value added
(right scale)
10
0
Non-farm business (2000 US$ b.)
100
1930
Farm value added (2000 US$ b.)
US GDP from Farm and Nonfarm Businesses, 1929-2004
(Billions of 2000 US dollars)
What happens to increases in U.S. output?
Farm output and agricultural exports in the United States, 1945-2006
280
160
260
140
240
120
220
100
200
80
180
60
160
40
≈25-30% exported
140
Farm market receipts (2000 US$ b.) [left scale]
Agric. exports (2000 US$ b.) [right scale]
≈12-25% exported
120
1945
1950
1955
1960
20
0
1965
1970
1975
1980
1985
1990
1995
Source: Farm receipts are from US Economic Report of the President 2007 (www.gpoaccess.gov/eop),
2000
2005
Source:
Farm receipts
Economic
ReportResearch
of the President
2007
(w w w .gpoaccess.gov/eop), Table B-97; exports are from USDA,
Table B-97;
exports are
are from
fromUS
USDA,
Economic
Service
(www.ers.usda.gov/Data/FATUS).
Foreign
Agricultural
Trade
of the United
States
(w GDP
w w .ers.usda.gov/Data/FATUS).
Both converted
to constant
dollars using GDP deflator.
Both are
converted
to constant
dollars
using
deflator from Bureau of Economic
Analysis
(www.bea.gov).
The bulk commodity business fluctuates,
while value-added exports grow
Fig. 1.3 U.S. Agricultural Exports by Category, 1970-2004
(billions of U.S. dollars)
35
Bulk
30
Intermediate
25
ConsumerOriented
20
15
10
5
20
03
20
00
19
97
19
94
19
91
19
88
19
85
19
82
19
79
19
76
19
73
19
70
0
Source: USDA, Economic Research Service, Foreign Agricultural Trade of the United States (www.ers.usda.gov/Data/FATUS).
Within agriculture, the structural transformation
brings specialization for inputs and marketing
Source: Reprinted from World Bank, World Development Report 2008.
Washington, DC: The World Bank (www.worldbank.org/wdr2008)
The stylized facts of structural transformation
(1) Farming declines as a fraction of the economy, as industry
and services grow
(2) Farmers’ incomes decline relative to other workers, but then
catch up
(3) Within agriculture, row-crop production fluctuates while
agroprocessing and agribusiness grows
… but what drives this change? what explains it?
Explaining Structural Transformation
Can consumers’ income growth explain the shift?
– Engel’s law
• As income grows, demand increases less for food and ag. products than for
other things
– The income-consumption curve for food is relatively flat
– Income elasticity of demand for food < 1
– Bennett’s law
• As income grows, demand increases least for basic staples and rises for
higher value foods
– The income-consumption curve for staples is very flat
– Income elasticity of demand for staples ≈ 0
– Evidence for “increasing demand for variety”
Engel’s Law
for (Global) Food
Source: “Food Shares in Consumption: New Evidence Using Engel Curves for the Developing World”
Rafael De Hoyos and Rebecca Lessem (2008) https://mywebspace.wisc.edu/rlessem/web/engel.pdf
Engel’s Law
for food in Vietnam
For the poorest group (Q1), meat is a luxury; For the richest (Q5) it is a normal good
For all income groups in Vietnam, rice appears to be a normal good.
Source: Le, Canh Quang (2008) “An Empirical Study of Food Demand in Vietnam” ASEAN Economic Bulletin
25(3): 283-292.
Explaining Structural Transformation
Can new technology explain the shift?
– New farm technology: “Cochrane’s Treadmill”
• New farm technologies that increase output might lower prices
and “push” farmers out
• The demand curve for food is relatively steep
– Food demand is price-inelastic:
– Price elasticity for food < 1 in absolute value
– Non-farm technology: bright lights, big city
• New nonfarm technologies that create opportunities might
“pull” farmers into nonfarm work
– A “Harris-Todaro” world?
• The demand curve for non-food is not as flat as for food
– Non-food demand is price-elastic
– Price elasticity for non-food >1 in abs. value
Engel’s Law
for manufactured goods in Malaysia
Source: Siddique, M. A. B. (1997) “Demand for machinery and manufactured goods in Malaysia” Mathematics
and Computers in Simulation 43(3-6): 481-486.
Explaining Structural Transformation
Limited land area may matter most of all:
– Because total land area is fixed,
• farmers’ savings and investment eventually runs out of
uses on the farm, and is applied to other uses
• farmers’ earnings are linked to the number of farmers,
acres per farmer and earnings per acre
– As # farmers grows…
– Acres per farmer declines…
– earnings per acre falls and earnings per farmer falls
» Until ???
Conclusions and the road ahead
• Ag policies vary widely but show some regularities over time &
across countries
• A key regularity is the “development paradox”:
– In poor countries, policies often try to reduce food prices
– In richer countries, usually switch to raise farm incomes
• This is closely linked to “structural transformation”,
– from farm to non-farm employment and earnings
– which in turn is closely linked to…
• Thursday’s topic: the “demographic transition”
– from high to low rates of deaths and births