Week 3 and 4
Presentation is from:
Class notes of Prof. Gerald Shively
Purdue University
(AGEC 640: Agricultural Development and Policy)
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?
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).
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
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
Taxation
of farmers
6
8
10
6
8
10
Income per capita (log)
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.
All Primary
Products
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)
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
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.
Source: BL Gardner, 2000. “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5): 1059-1074.
Thousands of 1992 dollars per farm
Percent of non-farm income
The US farm-nonfarm earnings gap, 1910-2000
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)
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
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
– 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
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…
Drivers of Change:
Population growth and economic
transformation
• 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
Slide 27
Terminology:
Demography and economics
• 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
Slidemanuf.)
28
–usually sectoral structure (% in ag., services, mining and
Demographic transition
A pattern of steadily increasing
population growth, followed by a
period of slowing population growth
(as experienced by industrialized
countries).
Generally indicated as an S-shaped
curve for population through time.
Slide 29
Frank Notestein (b. 1945)
Three stages of population growth
1.
High growth potential
2.
Transitional growth
3.
Incipient decline
1
2
3
Slide 30
1. High growth potential
Pre-industrial
Birth rate high (25-40/1000)
Death rate high
Life expectancy short
Population growth low but positive
Widespread misery
Slide 31
2. Transitional growth
Early industrial
Birth rate remains high (or rises!)
Death rate low and falling
Life expectancy rises
Population growth “explosive”
Mortality declines before fertility due
to better health, nutrition, and sanitation
Slide 32
3. Incipient decline
Industrial
Birth rate drops due to desires to limit family size
Death rate low and stable
Life expectancy high
Population grows until birth rate = death rate
Characterized by higher levels of wealth and reduced need for
large families for labor or insurance.
Slide 33
A Stylized Model* of Demographic Transition
The gap between birth
and death rates is the
population’s “rate of
natural increase”
(≈ population growth)
* In what sense is this a model?
Is it an economic model as per last week’s class?
Slide 34
An actual demographic transition
Sweden’s population growth
rate peaked at about 1.5% per
year, in the late 19th century
Slide 35
A different demographic
transition
Mauritius’ peak pop. growth rate was over
3%/year, twice that of Sweden, because its
death rate fell so fast…
Slide 36
A third kind of transition
Mexico’s peak population growth was even
faster, because its birth rate fell slowly…
Slide 37
Message: Birth rates > death rates, country is
still in stage 2 of the demographic transition
Slide 38
Birth and death rates depend in part on
age structure and “population momentum”
Slide 39
A very young age structure:
the population pyramid for Nigeria
1980, 2000, 2020
Reprinted from www.census.gov/ipc/www/idb.
Slide 40
A later stage of demographic transition:
population pyramids for Indonesia
1980, 2000, 2020
Reprinted from www.census.gov/ipc/www/idb.
Indonesia has a much more “mature”
population pyramid than Nigeria
Slide 41
transition:
population pyramids for the United
States
1980, 2000, 2020
Reprinted from www.census.gov/ipc/www/idb.
The population “ages”, with
continued echoes of the post-WWII baby boom
Slide 42
The lower-income regions have had a later
(and much faster!) demographic transition
Slide 43
Africa’s pop. growth has been of unprecedented speed and duration, but
is now slowing
Slide 44
Africa’s child dependency has been similarly unprecedented, and is now
improving
No. of children (0-14)
per 100 adults (15-59)
100
90
80
70
60
50
40
30
20
10
0
E. Asia
S. Asia
Sub-Sah. Africa
Whole World
Slide 45
Source: UN Population Division, World Population Prospects:
The 2000 Revision (http://esa.un.org/unpp)
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…
Slide 46
Explaining the mortality decline (UK
data)
Slide 47
Explaining the mortality decline (US
data)
Slide 48
The age structure of mortality decline
Slide 49
The HIV/AIDS tragedy
Slide 50
Explaining the fertility decline: social policies
Slide 51
Source: K. Sundstrom. “Can governments influence population growth?”
Explaining the fertility decline: infant mortality
Slide 52
Conclusions on population growth and
the demographic transition
• Much popular understanding about population
growth turns out to be wrong.
• In fact, over time and across countries:
– population growth starts with a fall in child mortality,
which raises growth because fertility decline happens
later
– the temporary burst of population growth involves a rise
and then fall in the fraction of people who are children
– these changes are similar in all countries, but in today’s
poor countries they occurred later and faster, with larger
magnitude over shorter time period than occurred
historically elsewhere
Slide 53
What happens to the number of farmers?
Slide 54
Slide 54
What happens to the number of
farmers?
• Initially, farmers are much poorer than
nonfarmers
– less capital/worker, lower skills, less specialized
so agriculture is the residual employer…
annual change in the number of farmers
depends on
growth in the total population
growth in nonfarm employment
Slide 55
In the world as a whole, the number of farmers
has just peaked and will soon decline
Slide 56
Regions differ sharply in their population growth rates
Source: Calculated from FAOStat data (www.fao.org).
Slide 57
Cities are growing much faster than total population
Source: Calculated from FAOStat data (www.fao.org).
Slide 58
…but cities are still too small to absorb all
population growth, especially in S. Asia and Africa
Source: Reprinted from W.A. Masters, 2005. “Paying for Prosperity: How and Why to Invest in
Agricultural R&D in Africa.” Journal of International Affairs 58(2): 35-64.
Slide 59
Conclusions on economic growth
and structural transformation
As incomes grow…
(1) Farming declines as a fraction of the economy
• in favor of industry and services
• even within agriculture
(2) Farmers’ incomes at first decline relative to others
• but then farm incomes catch up
• eventually farmer incomes pass nonfarmers’ incomes
(3) The number of farmers first rises and then falls
• speed depends on both population and income growth
• eventually the number of farmers stabilizes
Slide 60
More conclusions…
• Demographic transition and structural transformation
interact, causing a rise & then fall in the number of farmers
• Today’s developing countries have had very fast decline in
death rates, leading to unprecedented speed of change;
• With small shares of the population in nonfarm
employment, this led to unprecedented rural population
growth and declines in land available per farmer.
• The rural effect is compounded by shift in age structure:
• first, more children/adult (the “demographic burden”),
• then, more child-bearing women (“population momentum”),
• then more working-age adults (the “demographic gift”)
• These are powerful drivers of change in agriculture and in
agricultural policy, but occur slowly and are often ignored!
Slide 61