875-5.ppt 5 Analytical extensions and policy issues 1. Development strategy and agriculture 2. Stylized facts for resource-intensive developing economies 3. Model of development in a resourceintensive economy 1 875-5.ppt Dev’t strategy & agriculture • Ag. policy goals: food security, export revenues, gov’t revenues – Self-sufficiency as expression of food security policy • Infrastructural and Green Revolution investments • Input subsidies and price support/stabilization – Taxation of exportable crops (export taxes, marketing boards) • Belief in low supply responsiveness of farm sector 2 875-5.ppt Dev’t strategy & agriculture • Intersectoral consequences of other dev. policies (Kreuger et al) – Indirect taxation of all agriculture relative to industry (Lerner symmetry) • Land frontier as outlet for ‘surplus’ labor – Protection policies reduced labor absorption in industry – Land colonization as remedy for poverty and political dissent 3 875-5.ppt Resource use implications • Uplands: expansion and intensification – Land expansion at expense of forest – Intensification due to protection for cereals • Lowlands: intensification – Environmental costs of biological innovations • E.g. pesticides; see Rola and Pingali 1993 – But Gr. Rev. reduced pressures on upland ag., frontier 4 875-5.ppt Stylized facts of deforestation and soil depletion • Large economic magnitudes in SE Asia (Jha and Whalley 1999) • Disproportionately large involvement of the poorest households • Strong spatial elements: uplands, watersheds & forests • Institutional issues - market failures – ‘Open access’ to forests – Free disposal of soil runoff and other pollutants • Apparent economy-wide ‘drivers’ – Commodity prices and policies – Intersectoral and interregional labor markets 5 875-5.ppt Country variation • Stylized facts may be widely shared, but proportions/intensity vary with economic structure – Hence appeal of approach based on ‘representative economies’ as already seen 6 875-5.ppt A stylized upland-lowland model • Lowland economy: – Manufacturing and ‘lowland food’ production • Upland economy: – ‘upland food’ production and non-food crop – Land produced by forest clearing • Interregional linkages: – Labor market – Food market (food is non-traded) 7 875-5.ppt Forest & forestry Upland economy H-O upland economy Land Labor Upland food Food market Tree crops Lowland economy Land Capital Lowland food Ricardo-Viner lowland economy Labour market Manufacturing Labor 8 875-5.ppt Cerebral comparative statics 1. Effects of price changes, e.g.: • • Tree crops in uplands (H-O prediction?) Manufacturing price increase, e.g. tariff. (Cf. Deacon, JEEM 1995). 2. Effects of tech. progress and factor endowment growth • • ‘Green revolution’ in lowland food sector Capital investment in manufacturing 9 875-5.ppt A mathematical statement • Fundamental assumptions about technology, preferences General equilibrium Intersectoral and interregional marketclearing conditions • • • • • Spatial: labor market & migration Food market clearing when non-traded Open access to forest resource for land 10 875-5.ppt • Two regions, upland and lowland, with p rice-taking r evenue-maximi sing producers. • In uplands, two goods are produced: food (n) and non-food, or tree crops; vectors of upland prices and outputs are PU and YU respectiv ely. Defin e p as relativ e price of food to tree crops in uplands. • Upland goods produced with VU input s, containing labor (LU) and upland land (T). • Land must be cleared for production, using labor according to T = L. • Upland producer's problem is captured by revenue function: U U U R(T, LU – T, p) = max {P Y | V }. T ,Y • 'Default ' assumption upland food is labor-int ensive, or RnL > 0; RnT < 0 11 875-5.ppt • Lowland region produces food (n) and manufactures (m) in output vector YL. Price vector PL has elements p and q, where the latter is the price of manufactures. • Lowland food is different to that used in upl ands. • Each lo wland indust ry uses a sector-specifi c factor (irrig ated land and manufacturing capital), which we summarize as a vector K = (Kn, Km), and labor. • Lowland producer's problem L L L S(K, L – LU, p, q) = max {P Y | V }. Y 12 Consumption. Assumption s: 875-5.ppt • Utility deriv ed from consumption of goods and from exis tence of forest. • Forest-clearing decision takes no account of consumer preferences so quantity of land cleared is exogenous to the consumer. • Consumer’s problem is to maximi ze utility subject to income and the quantity of standing forest (utility is assumed separable between these). • Forest is quantity-rationed to consumer, so we have conditional expenditure function: E(P, F, u) = min {PC | u} where u =utility, F is quantity of forest land, and P and C contain prices and quantiti es of food, tree crops and the manufactured good. * T = 1 – F. ET,= virtu al price of land cleared, or –1* margin al amount the consumer is WTP to preserve standing forest. Therefore, we have ET Š 0. 13 875-5.ppt Equilibrium • Assume manufactures (upland non-food, food) to be import-competing (exportable, non-traded) with price q (1, p). q is exogenous, p endogenous. Aggregate budget constraint: E(p, q, T, u) = R(T, LU–T, p) + S(K, L–LU, p, q). 14 875-5.ppt FONC: Assume that food is not internationally traded, so at optimum: Rn + Sn = En. (4.2) Forest clearing for upland agricultu re, at optimum: RT RL = 0. (4.3) Note: assumption that forest clearing de cisions do no t cons ider social costs. Hence in equili brium t here is m ore tree-clearing than is socia lly optim al, which con fers a neg. externalit y on consu me rs. Labor mig rates between regions in response to changes in productivity , so:: RL SL = 0. (4.4) • The solution to (4.1)-(4.4) provid es values for endogenous variables T and LU, p, and u, giv en exog. variables L, K, q. 15 875-5.ppt Actual comparative statics • Esp. tariff change prediction 16 875-5.ppt (a) When food is a traded good and labor is regionally mobile Eq. (4.2) does not hold. Taking tot al diff of (4.3 ) and (4.4) and solving: ( RnT RLn )dp Rvv (RLT RLL ) dT u S dq ( R S )dp S dL S dK (R R ) (R S ) dL LT Lq Ln Ln LL LK LL LL LL The determin ant of the coefficient matrix , DL, is positive by the strict concavity of the revenue function. An in crease in q giv es: dLU dq RvvSLq / D L 0 dT dq (RLT (4.6a) dLU RLL )SLq / D 0 dq L (4.6b) RLT RLL 0 Rvv where High er labor productivity in lowlands causes down-slope migr ation; high er labor costs and diminish ed upland labor supply both cause the quantity of upland cleared for agriculture to dimini sh. 17 875-5.ppt Welfare change Denote the excess demand for manufactures by Zq = Eq(p, q, T, u) – Sq(K, L–LU, p, q), noting that Zq > 0 for a net import and Zq < 0 for a net export. Taking an in crease in q we obtain: Eu u T ET Zq < 0. q q (4.10) 18 875-5.ppt (b) labor is immobi le but food is non-traded Eq (4.4) does not hold. By total differentiation of (4.1)–(4.3): Eu du Zq dq RL dLU SK dK SLdL 0 ET U Znn (RnT RLn )dp Znq dq RnLdL SnK dK SnLdL Eu 0 dT ( R R ) R 0 vv nT Ln . The determin ant of the coefficient matrix , Dp < 0. For an in crease in q: dT dq Z mZ R dp dq Znq mZq Rvv / D p nq q > 0 if m = 0 (4.13a) p < 0 if m = 0 R / D nT Ln (4.13b) 19 875-5.ppt Comparative statics 1: tariff reform in manufacturing Equilibrium: E(p, q, T, u) = R(T, LU–T, p) + S(K, L–LU, p, q) + tZq, (4.30) When food market clears through trade, results are as for terms of trade shock (4.6). When labour is immobil e and food market clears through domestic price adjustment, 20 875-5.ppt When labour is immobil e and food market clears through domestic price adjustment, Znq mtZqq Rvv dp dt Dp, t > 0 if m = 0 (4.33a) RnT RLn dp dT dt Rvv dt < 0 if m = 0. (4.33b) Overall welfare when the tariff rate is altered depends on int eractions between the trade policy and the environmental externality . From (4.30), Eu (1 tcM ) du dT dp . ET tZ qq tZnq dt dt dt or, using (4.33b ) to elimin ate Žp/Žt, Znq RnT RLn dT du < 0. Eu (1 tcM ) tZqq ET t dt R dt vv 21 875-5.ppt Concluding remarks • U-L model combines two ‘small’ models to obtain richer specification and results • Predictions of comparative static effects depend on key parameter values – Can define different economic ‘types’ based on alternative parameter sets (see OEE Chapter 3) • Empirical and micro research should guide structural and parameter assumptions. 22 875-5.ppt Extensions: two non-ag sectors • Heckscher-Ohlin manufacturing sector, RV-J agriculture (as in Coxhead and Jayasuriya 2003) • All traded goods (for simplicity!) • Open access to forests for ag. land • Migration is free and immediate 23 875-5.ppt Two regions, four sectors A= agricultural ‘region’, producing upland (U) and food (F) crops. M = manufacturing ‘region’, producing labor-intensive (X) and capital-intensive (H) goods. wA cF cU rU rF wM LF 0A LA LM L LH cX c H 0M rM 24 875-5.ppt Price increase for upland ag. wA cU cF rU rF LF 0A wM LA LM L LH cX cH 0M rM 25 875-5.ppt Tariff reduction for importcompeting industry wA cU cF rN rT wM LF 0A LA LM L LH cX cH 0M rM 26 875-5.ppt Some conclusions • Extended model provides different prediction on NR effect of tariff change • More generally, issue of multiple env./NR problems – And added complexity of establishing welfare results in economy with multiple distortions, insufficient instruments 27 875-5.ppt Lerner symmetry •In a two-commodity economy, an export tax on one good and an import tariff on the other have identical effects on relative prices and resource allocation. •Let pi be domestic price, pi* be border price, and ti be tax or tariff rate. * * p p p •Then X X X pM p*M (1 t M ) p*M (1 t X ) • E.g. agriculture v. manufactures <--- 28 875-5.ppt Economic & policy heterogeneity Manufa cturing Econo my indus try Type orientation Upland Land Use by Market for Crop Type (%) staple cereals 0-----25-----50-----75----100 Jeepney Importsub stit uting (ISI) Nontraded Non-traded food crop s Becak Plantation crops Proton Non-traded Expor toriented (EOI) Tuk- Tuk <--- Traded Traded food & fibre Figur e 3.2: Schematic summary of econo mi c structure in representative econo mies 29