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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