Week 3 and 4

1. Week 3 and 4 Presentation is from: Class notes of Prof. Gerald Shively Purdue University (AGEC 640: Agricultural Development and Policy)

2. Introduction to Agricultural Policy:Farm problems and food problems • First, some brainstorming: • What are the problems addressed by ag. policy? • What solutions are offered by policymakers?

3. 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).

4. This is the usual pattern: the “development paradox”

5. The “development paradox” in East Asia, 1955-2002 Average Nominal Rate of Protection for Agricultural Production in East Asia, 1955-2002 Source: K. Anderson (2006), “Reducing Distortions to Agricultural Incentives: Progress, Pitfalls and Prospects.” <www.worldbank.org/agdistortions>

6. The “development paradox” worldwide, 1960-2005 Effect of policy on farm product prices, by income level Support for farmers Taxation of farmers ≈ $5,000/yr Note: Data shown are regression lines and 95% confidence intervals through annual national-average NRAs for over 68 countries, covering more than 90% of world agriculture in each year from 1960 through 2005. 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.

7. Why is this pattern paradoxical?

8. The development paradox: employment and earnings Source: Reprinted from World Bank, World Development Report 2008. Washington, DC: The World Bank (www.worldbank.org/wdr2008)

9. 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.

10. 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.

11. Percent of workforce by sector in the United States, 1800-2005 …over the full span of development, employment shifts to services… today, about 80% of 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)

12. Percent of GDP by sector in Australia, 1901-2000 Another example of structural transformation over the long run… Source: Government of Australia (2001), Economic Roundup – Centenary Edition, Department of the Treasury, Canberra.

13. 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.

14. Percent of non-farm income Thousands of 1992 dollars per farm The US farm-nonfarm earnings gap, 1910-2000 then caught up Farm income fell… Source: BL Gardner, 2000. “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5): 1059-1074.

15. Structural transformation: the story so far… • Farming declines as a fraction of the economy, as industry and services grow • 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?

16. Does total world agricultural output decline? Source: Reprinted from FAO, State of Food and Agriculture 2007. Rome: FAO (www.fao.org)

17. 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)

18. Within agriculture, the structural transformationbrings specialization for inputs and marketing Source: Reprinted from World Bank, World Development Report 2008. Washington, DC: The World Bank (www.worldbank.org/wdr2008)

19. The stylized facts of structural transformation • Farming declines as a fraction of the economy, as industry and services grow • Farmers’ incomes decline relative to other workers, but then catch up • Within agriculture, row-crop production fluctuates while agroprocessing and agribusiness grows … but what drives this change? what explains it?

20. 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

21. 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

22. Engel’s Law for food in Vietnam Source: Le, Canh Quang (2008) “An Empirical Study of Food Demand in Vietnam” ASEAN Economic Bulletin 25(3): 283-292.

23. 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 Are we living in 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

24. 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.

25. 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 ???

26. 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…

27. Last class: • broad diversity of policy problems and policy actions, but also • strong regularities (“stylized facts”): • the development paradox, from taxing to subsidizing farmers • the structural transformation, from farm to nonfarm activity • Today: • a key driver (from outside, exogenous to agriculture) is demography: • the demographic transition • from large to small families • high to low death rates and birth rates • high to low fraction of people who are children • …and other corresponding changes Drivers of Change:Population growth and economic transformation

28. The English language can be very confusing: • “demography”: study of population, also the population itself • “population growth”: increasing number of people • “demographics”: measured characteristics of the population • But… • the “economy”: the prod. & cons. activities of a population • “economic growth”: increases in prod. & cons. per person • “economics”: a way of studying the economy • And… • “demographic structure”: the composition of the population • usually age structure (% who are children, working-age, elderly) • “economic structure”: the composition of the economy • usually sectoral structure (% in ag., services, mining and manuf.) Terminology: Demography and economics

29. Demographic transition A pattern of steadily increasing population growth, followed by aperiod of slowing population growth(as experienced by industrialized countries).Generally indicated as an S-shaped curve for population through time.

30. Frank Notestein (b. 1945) Three stages of population growth 1. High growth potential 2. Transitional growth 3. Incipient decline 3 2 1

31. 1. High growth potential Pre-industrialBirth rate high (25-40/1000)Death rate highLife expectancy shortPopulation growth low but positiveWidespread misery

32. 2. Transitional growth Early industrialBirth rate remains high (or rises!)Death rate low and fallingLife expectancy risesPopulation growth “explosive”Mortality declines before fertility dueto better health, nutrition, and sanitation

33. 3. Incipient decline IndustrialBirth rate drops due to desires to limit family sizeDeath rate low and stableLife expectancy highPopulation grows until birth rate = death rateCharacterized by higher levels of wealth and reduced need for large families for labor or insurance.

34. A Stylized Model* of Demographic Transition The gap between birth and death rates is the population’s “rate of natural increase” (≈ population growth) CDR = crude death rate CBR = crude birth rate * In what sense is this a model? Is it an economic model as per last week’s class?

35. An actual demographic transition Sweden’s population growth rate peaked at about 1.5% per year, in the late 19th century

36. A different demographic transition Mauritius’ peak pop. growth rate was over 3%/year, twice that of Sweden, because its death rate fell so fast…

37. A third kind of transition Mexico’s peak population growth was even faster, because its birth rate fell slowly…

38. Message: Birth rates > death rates, country is still in stage 2 of the demographic transition

39. Birth and death rates depend in part on age structure and “population momentum”

40. A very young age structure:the population pyramid for Nigeria1980, 2000, 2020 Reprinted from www.census.gov/ipc/www/idb.

41. A later stage of demographic transition:population pyramids for Indonesia1980, 2000, 2020 Reprinted from www.census.gov/ipc/www/idb. Indonesia has a much more “mature” population pyramid than Nigeria

42. The final stage of demographic transition:population pyramids for the United States1980, 2000, 2020 Reprinted from www.census.gov/ipc/www/idb. The population “ages”, with continued echoes of the post-WWII baby boom

43. The lower-income regions have had a later (and much faster!) demographic transition

44. Africa’s pop. growth has been of unprecedented speed and duration, but is now slowing

45. 100 90 80 70 60 No. of children (0-14) per 100 adults (15-59) 50 40 30 20 10 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 E. Asia S. Asia Sub-Sah. Africa Whole World Africa’s child dependency has been similarly unprecedented, and is now improving Source: UN Population Division, World Population Prospects: The 2000 Revision (http://esa.un.org/unpp)

46. Explaining the demographic transition What can account for the patterns we’ve seen, including especially the late and rapid demographic growth and child dependency in poor regions? Will look first at mortality decline, then fertility decline…

47. Explaining the mortality decline (UK data)

48. Explaining the mortality decline (US data)

49. The age structure of mortality decline

50. The HIV/AIDS tragedy