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Economics of Food and Agriculture in International Development Week 14 April 27, 2004 WrapUp and Con

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Title: Economics of Food and Agriculture in International Development Week 14 April 27, 2004 WrapUp and Con


1
Economics of Food and Agriculturein
International Development Week 14 April 27,
2004 Wrap-Up and Conclusions
2
The story line
  • 1. Introduction
  • Demographic transition structural
    transformation
  • Nutrition and food demand
  • 2. Households
  • Production, technology adoption and resource
    use
  • 3. Markets
  • Prices, policies, and political economy
  • 4. Countries
  • Agriculture in growth and trade
  • RD and the future of agriculture

3
From week 1
  • Economics
  • explain observations in a particular way
  • as an equilibrium
  • (a mutually acceptable transaction)
  • among rational people
  • (who optimize something,
  • subject to constraints)

4
Some strengths limitations of economics
  • I show life as it is, but stylized
  • (Marcel Marceau in an NPR interview, 25 March
    1998)
  • In order to know anything, it is necessary to
    know everything, but to talk about anything, it
    is necessary to neglect a great deal.
  • (Joan Robinson, Economica 1941)
  • Mathematicians are like Frenchmen whatever you
    say to them, they translate into their own
    language, and all at once it is something
    completely different.
  • (Goethe, Maxims and Reflexions, 1829)

5
What do we mean by international development?
  • development change over time
  • gain new things accumulation, innovation,
    growth
  • lose old things natural resources, social
    relationships
  • Im all for progress its change I cant
    stand. (Mark Twain)
  • If a palace rises beside a house, the house
    shrinks. (Karl Marx)
  • international differences across countries
  • one path, or many? what can we learn from
    success/failure?
  • All happy families are alike. (Leo
    Tolstoy)
  • international development interactions
    between us
  • trade, investment, migration, technology
    transfer
  • Does our wealth come from their poverty?
  • Can our wealth help alleviate their poverty?

6
The structural transformation agriculture
declines
Agricultural Employment as a Share of Civilian
Employment and Real Farm Output as a Share of
Real GDP
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.
7
but agricultural output does not fall
Source Drawn from U.S. Bureau of Economic
Analysis data ltwww.bea.doc.govgt.
8
and neither do farmers incomes
Real income per farm and productivity in the U.S.
Percent / index value
Thousands of 1992 dollars per farm
Source BL Gardner, 2000. Economic Growth and
Low Incomes in Agriculture. AJAE 82(5)
1059-1074.
9
The number of farmers rises and then falls
10

The speed of structural transformation is closely
linked to the speed of demographic transition
  • Given the size and growth of the nonfarm sector,
    the key determinant of the number of farmers
    (and hence area/farmer) is population growth
    births, deaths and migration

11
Because Africas birth rates remained high after
death rates fell rapidly, it faces an unusually
rapid and long period of population growth
12
and because Africas cities are small, although
they grow fast Africas rural population will
keep rising, while Asias rural population begins
to shrink
13
From week 2
  • Food consumption and nutrition

14
Source Computed from World Bank (2001), World
Development Indicators.
15
Source Computed from FAO (2000), The State of
Food and Agriculture 2000.
16
Source Computed from FAO (2000), The State of
Food and Agriculture 2000.
17
For Africans with limited non-farm income,
nutrition is closely linked to food production
18
From week 3
  • Food demand

19
Economists think of individuals behavior as
constrained optimization
the price of b has no effect on this point
Quantity of a, all other goods
Indifference level at the initial point
The new expenditure line is steeper slope
-Pb/Pa
The new indifference level is lower
Slope of expenditure line -Pb/Pa
Quantity of b goods
higher prices induce substitution and reduce
real income
20
and represent the aggregate of many consumers by
a demand curve
When income rises, consumers demand curve shifts
(usually to the right,
Price
as consumers buy larger quantities at each price)
Quantity Consumed
21
Economists describe demand in terms of its
elasticity with respect to price
Price (/lb)
Inelastic demand demand curve is
relatively steep when price rises,
expenditure (PQ) rises e lt 1
Elastic demand demand curve is relatively
flat when price rises, expenditure (PQ)
falls e gt 1
Quantity Consumed (lbs/yr)
Unit-elastic demand demand curve is such
that when price rises, expenditure (PQ)
stays constant e 1
22
Qty. Consumed (kg/year)
Elasticity is also used with respect to income
30
inelastic or normal
negative or inferior
necessary
20
Income elasticity (e?Q/ ?Y) is closely linked
to income level income-elastic (luxury)
goods e gt 1 income-inelastic (normal)
goods 0 lt e lt 1 negative-elasticity
(inferior) goods e lt 0
elastic or luxury
10
0
500
1000
1500
2000
2500
3000
3500
Income (/year)
no effect
23
Average income and price elasticities of demand
in Indonesia (estimated in the 1970s)
inelastic
inelastic
elastic
elastic
(Note elasticity is ?Q/?Y (income) or ?Q/?P
(price).)
24
Income elasticities by income group, rural
Brazil, 1974-75
(inferior for everyone)
(luxuries for the poor)
Effect of income growth among the poorest 30 in
Brazil, 1974-75
25
Calorie intake by nutrient group and income level
income level in 1962 (log scale)
The poorest eat mainly carbohydrates income
growth permits an increase in fats and proteins
calories from each nutrient group (percent of
total)
26
At high (U.S.-level) incomes, weve been
switching back to more carbohydrates.
27
Food is a private, not a public good, but there
may be food-market failures and hence an
opportunity for public intervention to improve
social welfare
Weight-for-height (WHZ) and height-for-age (HAZ)
of children in Mali, relative to international
norms
The most severe nutritional deficits occur in a
relatively brief period
28
From week 4
  • Rural households

29
Optimality implies that
Quantity of a, all other goods
the observed point is on the highest possible
indifference curve
Qa
impossible
inefficient
Qb
Quantity of b goods
30
A key optimality condition is that
the observed point is where the slopes of the
two curves are equal
Quantity of a, all other goods
the slope of the indifference curve is the
marginal rate of substitution in consumption
(MRS)
Qa
the slope of the PPF is the marginal rate of
transformation in production (MRT)
at the optimum, slopes are equal
MRT MRS ?Qa/?Qb ?Qa/?Qb
Qb
Quantity of b goods
31
Without trade, its a Robinson Crusoe economy
the diagram is used to interpret observed
quantities as an optimum for a self-sufficient
individual. It is also used to describe
general equilibrium in a closed economy
Quantity of a, all other goods
Qa
All these points are technically efficient (on
the PPF), but give a lower income and a lower
indifference level
Income line
Qb
Quantity of b goods
32
What if trade with others becomes possible?
Quantity of a, all other goods
If others place a higher value on b, and offer to
trade at a higher Pb/Pa ratio, wed have a
steeper income line
Qa
Old income line QaExp./Qa(Pb/Pa)Qb
New income line slope (Pb/Pa)
Qb
Quantity of b goods
33
Trade allows us to separate production from
consumption
by accepting the prices offered in trade, we can
get to a higher income and indifference level.
Quantity of a, all other goods
Qa
Qa
we have to specialize in production of b
and then sell b to buy other goods
Qa
Qb
Qb
Qb
Quantity of b goods
34
Separability in production and consumption
allows us to overcome diminishing returns in home
production and consumption
Quantity of a, all other goods
at optimum consumption, MRS -Pb/Pa
Qa
Qa
at optimum production, MRT -Pb/Pa
Qa
Qb
Qb
Qb
Quantity of b goods
35
Implications of separability between production
and consumption
Quantity of a, all other goods
consumption depends only on indifference curves
and relative prices
Qa
Qa
production depends only on PPFs and relative
prices
Trade depends on all three
Qa
Qb
Qb
Qb
Quantity of b goods
36
The gains from trade do not depend on the
direction of trade
Quantity of a, all other goods
if others price of b were low, we could produce
less and consume more of it
Qa
Qa
Qa
Qb
Qb
Qb
Quantity of b goods
37
A partial equilibrium view of the same problem
Price of b
Supply curve
Separability means that
Ptrade
production depends only on the supply curve and
prices
Pautarky
consumption depends only on the demand curve and
prices
Demand curve
Qty. of b
Qproduced
Qconsumed
Qtraded
When price in trade is high, we gain from
exporting
38
Again, the gains from trade do not depend on the
direction of trade
Price of b
Supply
Supply
Ptrade
Pautarky
Pautarky
Ptrade
Demand
Demand
Qty. of b
If price in trade were low, wed gain from
importing
When price in trade is high, we gain from
exporting
And separability holds in either case.
39
From week 5
  • Technology adoption

40
A new technology helps by allowing more output
with given resources, shifting the PPF out
Quantity of a, all other goods
allowing consumption at a higher indifference
level.
new technology allows more production from given
resources
Quantity of b goods
41
The same logic can be applied to input use,
along an Input Response Curve
Qty of output (e.g. corn)
Optimal input use is at the highest possible
level of profit
Profit PoQo - PiQi
Qo Profit/Po (Pi/Po)Qi
This negatively-sloped part of the curve cannot
be optimal, so would not be observed
The slope of the input response curve is the
inputs marginal product. At optimum
production, ?Qo/?QiPi/Po
This convex segment of the curve cannot be
optimal, so would not be observed
Qty of input (e.g. labor)
42
A change in prices leads to movement along the
curve
Qty of output (e.g. corn)
if inputs were free, production would be here
if the Pi/Po ratio were steeper than this,
profits are zero and production shuts down.
A more favorable profit line is flatter (its
slope is Pi/Po)
With a lower relative price of the input, the
farmer can afford to apply more of it,
increasing use until the (declining) marginal
physical product just equals the price ratio.
Qty of input (e.g. labor)
43
A new technology shifts the input response curve
upwards
Qty of output (e.g. corn)
profitable innovations often increase the use of
an input
these are input using innovations
Qty of input (e.g. labor)
44
Innovations vary widely in their effects on
production
Qty of output (e.g. corn)
profitable innovations may lead to lower use of
inputs
these are input saving innovations
Qty of input (e.g. labor)
45
Similar ideas apply to farmers choice among
inputs, along an isoquant
Qty of input 1 (e.g. machines)
Optimal mix of inputs is at the lowest possible
level of cost
Cost P1Q1 P2Q2
Q1 Cost/P1 - (P2/P1)Q2
Slope of cost line -P2/P1
The slope of the isoquant is the marginal rate of
substitution among inputs. At optimum
production, ?Q1/?Q2-P2/P1
Qty of input 2 (e.g. labor)
46
When prices change, farmers move along the
isoquant
Qty of input 1 (e.g. machines)
For example, when labor becomes more expensive
relative to machinery, the initially-observed
point is no longer optimal
now the lowest-possible cost line uses less
labor and more machinery.
Qty of input 2 (e.g. labor)
47
A new technology shifts the isoquant inwards
Qty of input 1 (e.g. machines)
A Hicks-neutral innovation keeps the inputs in
the same proportion, (along a ray from the
origin), at the given relative prices.
Qty of input 2 (e.g. labor)
48
Innovations vary widely in their effects on input
use
Qty of input 1 (e.g. machines)
This shift reduces the need for labor
This shift reduces the need for machines
Both happen to give the same cost reduction,
with very different changes in input use
Qty of input 2 (e.g. labor)
49
Innovation often responds to price differences
and changes
Draft power per worker and the power-labor price
ratio in the US and Japan, 1880-1990
(changes in an isoquant diagram)
Source Hayami and Ruttan (1985)
50
Real-life changes both move along and shift the
curves
(kg/ha)
Fertilizer per hectare and the fertilizer-land
price ratio in the US and Japan, 1880-1990
(changes in an input-response curve diagram)
Source Hayami and Ruttan (1985)
51
Countries differ in both the direction and speed
of innovation
52
African agricultural productivity started low
and stayed there
53
Adoption of individual technologies typically
follows S-shaped curves, whose start date, speed
and ceiling varies widely by region
54
Productivity growth is the cumulative result of
many sequential innovations
55
Smaller farms are faster adopters of land-saving,
divisible innovations larger farms are faster
adopters for labor-saving, lumpy innovations.
56
Most African farmers still use old seed types
new seeds are coming out now
Source Calculated from data in Evenson and
Gollin, 2003.
57
Another reason for Africas lag is simply that it
has had less local research
Source Calculated from IFPRI and FAOStat file
data
58
In general, but particularly in Africa, crop
improvement involves multiple innovations
Genetic improvement
Agronomic improvement
(by scientists, using controlled trials)
(by farmers, using land labor)
59
Measuring welfare gains from innovation with
trade (when price is fixed)
Qty. of a goods
Price of b goods
Qty of b
Qty of b
60
Measuring welfare gains from innovation without
trade (when supply affects price)
Qty. of a goods
Price of b goods
Increased productivity of b lowers its price,
relative to other things. This helps consumers of
b, but on balance are producers better off?
a lower price of b is a lower Pb/Pa price
ratio, hence a flatter price line
Qb
Qb
Qb
Qb
61
Measuring welfare gains from innovation without
trade (when supply affects price)
Price of b goods
Consumer Surplus Gain AB
Producer Surplus Change C-A
Net Econ. Surplus Gain BC
A
B
If demand is very inelastic, and supply is very
elastic, then innovation causes producer surplus
to fall. This is Cochrans Treadmill, pushing
ag. producers to become ag. consumers.
C
Qty of b
62
From week 6
  • Natural-resource use

63
Resource stocks in agriculture
  • Typical trajectory of resource use over time
  • is a continuum from abundance to scarcity
  • depletion (when resource is most abundant)
  • conservation management (when it becomes scarce)
  • replenishment (when it can be regenerated)
  • substitution (when alternatives are found)
  • Examples from agriculture
  • soils and soil nutrients
  • water and soil moisture
  • crop genetics
  • interactions with other species
  • (biodiversity and ecosystem services)

64
Common property in agriculture
  • Typical pattern of property rights among people
  • is a continuum from private to public
  • private property (freehold ownership)
  • limited user rights (restricted ownership)
  • common property (user group is well-defined)
  • public goods (all potential users have open
    access)
  • Examples from agriculture
  • land cropped area is typically private,
  • grazing land is typically common property
  • water enclosed surface water is typically
    private,
  • groundwater is usually common property
  • climate one of the few truly public goods

65
Are farmers choices optimal?
  • If farmers are already doing the best they can,
    subject to the constraints they face, what could
    be improved?
  • For example
  • In poor countries, farmers typically engage in
    soil mining, depleting soil nutrient levels
  • In wealthier countries, farmers apply
    fertilizers, herbicides or pesticides, causing
    runoff damage.
  • How can we take this into account, to design
    appropriate interventions?

66
How do inputs enter farmers optimal choices?
Whats missing from this picture? The curves
include effects of soil degradation on the farm,
but not the effects of runoff on other people.
Qty. of corn (bu/acre)
Qty. of corn (bu/acre)
Qty. of labor (hours/acre)
iso-profit (slopePf/Pc)
iso-revenue (-Pb/Pc)
iso-cost (slope-Ph/Pm)
Qty. of fert. (lbs/acre)
Qty. of beans (bushels/acre)
Qty. of herbicide (liters/acre)
67
To include runoff costs of input use, we would
add water users costs to prices paid by farmers
Qty. of corn (bu/acre)
Qty. of labor (hrs/acre)
slope (Pfrunoff)/Pc
slope Pf/Pc
slope -(Phrunoff/Pl)
runoff costs added to farmers cost
slope -Ph/Pl
Qty. of fertilizer (lbs/acre)
Qty. of herbicide (liters/acre)
68
so that from the whole societys point of view,
a lower level of input use would be optimal
Qty. of corn (bu/acre)
Qty. of labor (hrs/acre)
slope (Pfrunoff)/Pc
slope Pf/Pc
slope -(Phrunoff/Pl)
slope -Ph/Pl
new optimum from adding runoff costs to farmers
cost lower inputs, lower outputs, more work for
farmers.
Qty. of fert. (lbs/acre)
Qty. of herbicide (liters/acre)
69
How can the country movefrom point A to point B?
Qty. of corn (bu/acre)
Qty. of labor (hrs/acre)
slopesocial costs slopefarmers costs
A
optimum at social costs
B
B
optimum at farmers costs
A
Reductions in input use to take account of
off-farm costs to drinking water
70
To reach the social optimum, wed need either a
tax, or a regulation
Qty. of corn (bu/acre)
Qty. of labor (hrs/acre)
tax on input use to induce change
A
B
B
A
rules specifying new input use levels
71
  • We can see the same thing in partial equilibrium

Total social costs
Marginal external cost to water users
Farmers marginal costs (market supply curve)
P
Pfree
Buyers willingness to pay (market demand curve)
Q
Qfree
Qty of output
For simplicity, external costs are drawn
constant per unit of output in reality, there
may be variation.
72
  • This allows us to compute economic surplus
    effects of moving to the socially optimal Q

Total social costs
Marginal external cost to water users
Farmers marginal costs
P
Net economic surplus gain from moving to Q
Pfree
Total economic surplus cost of runoff to water
users
Q
Qfree
Qty of sheep grazed on common pasture
73
We can see all kinds of externalities
MC
MC
WTP
WTP
Qe
Qe
MC
MC
WTP
WTP
Qe
Qe
74
External costs in production (e.g. livestock
odors)
External benefits in production (e.g.
agro-tourism)
MCtotal
MC
MC
MCtotal
EXTERNAL COST
EXTERN. BENEFIT
WTP
WTP
Livestock
Qe
Qe
Q
Q
Agri-beauty
External costs in consumption(e.g. antibiotics)
External ben. in consumption(e.g. education)
MC
MC
EXTERN. BENEFIT
EXTERNAL COST
WTPtotal
WTP
WTP
WTPtotal
Qe
Qe
Q
Q
Pesticides
Education
75
The economic-surplus effects of moving to Q
MCtotal
MCprod.
MCprod.
MCtotal
Qe
Qe
Q
Q
WTPtotal
WTPcons.
WTPcons.
WTPtotal
Qe
Qe
Q
Q
gains/losses to victims/beneficiaries
net econ. surplus gain from moving to Q
76
  • The Tragedy of the Commons Linking
    externalities to resource degradation over time

Garrett Hardin (1968) argued that markets lead to
degradation of common resources, as each user can
ignore his/her effects on others e.g. grazing
areas
all shepherds marginal cost
Econ. surplus loss due to overuse of common
property
MEC cost to others of ones grazing
one shepherds marginal cost
Shepherds marginal revenue
Q
Qfree
Qty of sheep grazed on common pasture
Here, external costs are drawn increasing in
output, but they could also be non-linear, with
thresholds, etc.
77
From Week 8Rural Markets
78
Food and agriculture involve rural markets
  • In rural markets, people are far apart
  • so transaction costs are relatively large.
  • Transaction costs may be the most important
    difference between rural and urban life
  • wide variation in prices over space and time,
  • and large welfare effects of transport or
    storage
  • it is relatively easy for government
    interventions to have counter-intertuitive
    impacts

79
OverviewTransaction costs function like a tax,
inhibiting input use
worsening of the input-output price ratio
caused by transaction costs
slopePit/Po
Qo (qty. of output)
slopePi/Po
A
Qi (qty. of input)
80
  • and driving people towards self-sufficiency

Quantity of a, all other goods
transaction costs reduce the farmer to a lower
indifference level.
slope-Pb-t/Pa
slope-Pb/Pa
Quantity of b goods
81
  • and we can measure welfare effects using economic
    surplus, in partial equilibrium

Total marginal cost
Transaction costs
Farmers marginal costs (market supply curve)
Pd
P
Buyers willingness to pay (market demand curve)
Ps
Q
Q
Qty of output (b goods)
For simplicity, external costs are drawn
constant per unit of output in reality, there
may be variation.
82
  • and we can measure welfare effects using economic
    surplus, in partial equilibrium

supply transaction costs
If transaction costs were eliminated,
consumers gain A producers gain B This is a
much bigger gain than just the Harberger
triangle, because the costs themselves are saved
Pd
supply
A
B
demand
Ps
Q
Q
but transaction costs are real, and cant be
wished away. We need to think carefully about
how they affect markets.
83
we can specify supply and demand curves for two
(or more) regions
Northern Zimbabwe
Southern Zimbabwe
P(/lb)
P(/lb)
SMC
SMC
Pes
Pen
DWTP
DWTP
Q(tons)
Q(tons)
In the Northern region, the equilibrium price is
low
er than in the South.
84

and draw excess supply and demand functions
for transport between the regions
Transport between north south
Northern Zimbabwe
Southern Zimbabwe
P(/lb)
Pes
ESnorth
Pen
EDsouth
Q(tons)
Q(tons)
Q(tons)
85
to find a national equilibrium price and
quantity transported north-south
Northern Zimbabwe
Southern Zimbabwe
P(/lb)
ESnorth
Pen
EDsouth
Q(tons)
Q(tons)
Q(tons)
Qt
Qt
Qt
all equal!
86
But it costs something to do north-south
transport!
Northern Zimbabwe
Southern Zimbabwe
P(/lb)
ESnorth
ctransport
EDsouth
Q(tons)
Q(tons)
Q(tons)
Qt
Qt
Qt
87
As transport costs rise, each region moves toward
autarky prices ( )
Northern Zimbabwe
Southern Zimbabwe
P(/lb)
larger ctransport
ESnorth
EDsouth
Q(tons)
Q(tons)
Q(tons)
Qt
Qt
Qt
88
In equilibrium, price differences equal
transport costs
Northern Zimbabwe
Southern Zimbabwe
Psouth
ctransport
Pnorth
Q(tons)
Q(tons)
Qt
Qt
and we can generalize this to have many regions,
including import export locations.
89
and the whole country may beexporting or
importing...
on a national S-D diagram
when exporting, the national price level is at
Pt, above Pe...
Pt
Pe
Ptsouth
less deficit here
more surplus here
Pesouth
Ptnorth
Penorth
Q(tons)
Q(tons)
Qt
Qt
and both regions prices are higher than they
would be without trade.
90
From week 9
  • Policy and political economy

91
The development paradoxCountries tend to tax
agriculture when they are poor, and increasingly
subsidize it as they get richer.
Source Real GDP per capita is from the Penn
World Tables (http//pwt.econ.upenn.edu), and
percentage PSE estimates are from the USDA
Economics and Statistics System
(http//usda.mannlib.cornell.edu). Countries are
Argentina, Australia, Bangladesh, Brazil, Canada,
Chile, China, Colombia, Slovak Rep, France,
Egypt, Hungary, India, Jamaica, Japan, Kenya,
Mexico, Nigeria, New Zealand, S. Africa, Senegal,
Turkey, USA, Venezuela, Zambia, Zimbabwe.
92
How might we understand, explain and perhaps
reform agricultural policy?
  • In poorer countries,
  • agriculture generally
  • employs a large fraction of workers,
  • consumes a large fraction of expenditure, and
  • supplies a large fraction of exports (but often
    net food imports)
  • while governments generally
  • have few tax instruments, so rely on trade
    tariffs for revenue-- taxing trade taxes
    agriculture as an unintentional by-product
  • have few democratic institutions, so respond to
    lobbying--farmers are poor and dispersed so
    cannot counter-lobby
  • have falling land per farmer, often a rising real
    cost of food--governments seeking stability may
    try to keep food prices at past levels.

93
Meanwhile,
  • In richer countries
  • agriculture generally
  • accounts for a small fraction of expenditure and
    trade and
  • employs a small number of workers on a fixed land
    base
  • field crops are dominated by self-employed
    family farmers, whose farm profits are
    capitalized into the value of farmland, which
    active farmers rent or buy from ex-farmers
    their heirs
  • and farm lobbying groups generally
  • can field a large number of geographically
    dispersed, similarly motivated activists, who can
    appeal to a common history of relative
    deprivation but whose land makes them now
    wealthy
  • also, each farmer can gain large benefits by
    investing in politics, at little cost to each
    non-farmer (who therefore doesnt counter-lobby),
    with assurance that free-riding entrants will not
    dissipate policy rents.

94
Are we already in the best of all possible
worlds?
  • If everyone is optimizing, observed policies
    might maximize aggregate welfare. Three kinds of
    models in which this occurs are
  • Benevolent dictator models
  • (in which omnipotent leaders maximize their
    dynastic wealth)
  • Median-voter models
  • (in which entrepreneurial leaders seek policies
    that appeal to 501 voters)
  • Tiebout-sorting models (from Tiebout 1956)
  • (in which entrepreneurial leaders provide a set
    of options, and people move to jurisdictions
    where policies match their preferences)
  • ...but these approaches dont work very well
    real governments dont do anything close their
    predictions.

95
Modern political economyExplanations with
(political) market failure
  • More successful models use a principal-agent
    approach, in which principals (the people) must
    use agents (leaders) to acquire public goods.
  • With full information, costless transactions,
    etc., the losers from inefficient policy could
    always buy out the winners, leading to Pareto
    optimality.
  • So modern models rely on transaction costs
  • Rational ignorance (from Anthony Downs in a 1954
    book)
  • Free-ridership (mainly from Mancur Olson in a
    1971 book)
  • Rent-seeking (term coined by Anne Krueger in a
    1974 article)
  • Time consistency (e.g. paper by McMillan and
    Masters 2003)

96
What about the prospects for reform in
industrialized countries?
In the U.S. and other rich countries, agriculture
is still dominated by family farms, but they are
either part-time or very large
Source Economic Research Service, U.S.
Department of Agriculture
97
Prospects for reform in industrialized countries
Its really all about land values if subsidies
were withdrawn, land values would fall, and
landowners would scream.
Source Economic Research Service, U.S.
Department of Agriculture
98
A few conclusions
  • There are very strong political-economy reasons
    why poorer countries tax agriculture, and richer
    countries subsidize it
  • Moral outrage and exposure might not be enough to
    change the balance of power efforts to induce
    reform will probably have to change the
    institutional mechanisms available to
    governments
  • in rich countries, to support land values and
    rural employment
  • in poor countries, to reduce stabilize food
    prices for urban areas.
  • Rich-country farm subsidies may be egregiously
    inefficient and inequitable, but they have little
    direct effect on poor-country farmers for them
    whats much more important is what happens within
    their countries.

99
From week 11
  • Agriculture in economic growth and in
    international trade

100
Gollin, Parente and Rogerson
  • Some key insights from this approach are
  • when an activity is required for survival
  • if productivity in that sector stays below some
    threshold, it can impose a permanent poverty
    trap
  • if/when productivity in that sector rises above
    subsistence, it can allow growth out of poverty,
    but only as fast as labor can move.
  • productivity growth in the subsistence sector,
    when it can be achieved, is a particularly
    pro-poor kind of intervention.

101
Agriculture in the World Economy
  • Both pro- and anti-globalization activists have
    seen high rising rich-country farm subsidies as
    a cause of low falling poor-country farm
    income.
  • To what extent is this true?

102
Reprise of earlier table on impacts of
rich-country reform on poor countries
103
A few conclusions
  • A small but perhaps-growing group of economists
    see the possibility that the poorest regions may
    be stuck in an agriculture-health poverty trap,
    where
  • people have no choice but to farm transaction
    costs are too high to attract enough foreign
    investment and trade
  • farming is increasingly difficult demographic
    transition initiated by mortality decline caused
    a burst of population growth and decline in land
    area available per farmer
  • agricultural productivity growth in food crops
    is needed to free labor and capital for other
    things, including perhaps some agricultural
    exports
  • technological innovations are not automatic, they
    come from collective decisions requiring
    political leadership.

104
From week 12
  • RD and the future of agriculture

105
RD for AgricultureFrom the Green Revolution to
Biotechnology
  • Induced innovation in agriculture
  • You can't always get what you want, but if you
    try sometimes you might find you get what you
    need.
  • Mick Jagger and Keith Richards

106
Induced InnovationNew techniques are most
desirable if they help farmers use what is
increasingly abundant
Ag. output (tons/hectare)
Qty. of labor (days/hectare)
biochemical, labor-using innovations
input-using, yield-increasing innovations
mechanical, labor-saving innovations
input-saving (but yield-reducing) innovations
Qty. of traction (hp/hectare)
Qty. of fertilizer (tons/hectare)
107
Productivity growth can change its pace and
direction over time, as in the U.S.
Farm Input Use in the U.S., 1910-1994 (index
numbers, 1948100)
Crop chemicals
Machinery
Land
Labor
Source W.E. Huffman and R.E. Evenson, 2001.
"Structural and productivity change in US
agriculture, 1950-82." Agricultural Economics 24
127-147. Data for 1910-1948 from loomis and
Barton 1961, and for 1948-1994 from U.S.
Presdient 1997, updated to 2000.
108
The modern green revolutionKey characteristics
of the technology
  • Genetic improvement
  • First generation, general-purpose breakthroughs
  • short stature, to concentrate nutrients in grain,
    not stalk, and support more grain without falling
    over (lodging)
  • photoperiod insensitivity, to give flexibility in
    planting/harvest dates and accelerate maturation,
    with more time for grain filling, and early
    maturity for short rains or multicropping
  • Second generation improvements and local
    adaptations
  • pest and disease resistance
  • abiotic stress tolerance (moisture, heat,
    salinity, pH, toxins)
  • product traits (grain quality, stover)
  • Agronomic improvement
  • moisture management
  • irrigation but also water harvesting, control of
    water runoff
  • soil fertility
  • inorganic nutrients but also organic matter, soil
    quality, erosion

109
Most African farmers still use old seed types
new seeds are coming out now
Source Calculated from data in Evenson and
Gollin, 2003.
110
RD funding for Africa has been low and stagnant
Source Calculated from IFPRI and FAOStat file
data
111
Public research intensities are low in developing
countries
112
Private research intensities in developing
countries are even lower
113
And in conclusion, just one new slide
114
The economics of food and agriculture offers many
puzzles, and much room for improvement!
Foreign aid and agriculture in the US and all
OECD (billions of US dollars, 2000)
Source Calculated from OECD, Geographical
Distribution of Financial Flows to Aid Recipients
2002, and Producer and Consumer Support Estimates
2002 (www.SourceOECD.org).
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