AGEC 640 Agricultural Development and Policy Introduction to Agricultural Policy August 27, 2013

1. AGEC 640Agricultural Development and PolicyIntroduction to Agricultural PolicyAugust 27, 2013 • Today: • Farm and food problems: • the development paradox and structural transformation • Thursday: • Population growth and demographic transition

2. 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.” 

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

4. 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).

5. 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.

6. …and within the U.S., for an even longer historical period Ratio of U.S. farm prices to prices of all goods and services in the U.S. Source: Unpublished file data from Prof. R.E. Evenson (2004).

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

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

9. 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 Nominal Rate of Assistance (NRA) 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.

10. Why is this pattern paradoxical?

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

12. 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.

13. 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.

14. 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 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)

15. 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.

16. 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.

17. 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.

18. 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?

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

20. 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)

21. Does U.S. agricultural output decline?

22. Source: Farm receipts are from US Economic Report of the President 2007 (www.gpoaccess.gov/eop), Table B-97; exports are from USDA, Economic Research Service (www.ers.usda.gov/Data/FATUS). Both are converted to constant dollars using GDP deflator from Bureau of Economic Analysis (www.bea.gov). What happens to increases in U.S. output? ≈25-30% exported ≈12-25% exported

23. Source: USDA, Economic Research Service, Foreign Agricultural Trade of the United States (www.ers.usda.gov/Data/FATUS). The bulk commodity business fluctuates, while value-added exports grow

24. 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)

25. 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?

26. 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”

27. 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

28. Engel’s Law for food in Vietnam For the poorest group (Q1), meat is a luxury; For the richest (Q5) it is a normal goodFor all income groups in Vietnam, rice appears to be a normal good. Source: Le, CanhQuang (2008) “An Empirical Study of Food Demand in Vietnam” ASEAN Economic Bulletin 25(3): 283-292.

29. 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

30. 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.

31. 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 ???

32. 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