AGEC 340 -- International Economic Development
Course slides for Week 5 (Feb. 9 & 11)
Reminder:
Project topic & sources must be uploaded by 5 pm Thurs.
– Topic is a title plus one-paragraph description
– Sources is at least 10 biliographic citations
– Assignment will be graded on:
 the match between topic and sources
 the quality of presentation


 remove your name and any identifying information from the page provide a meaningful title and a clear, complete paragraph describing your topic find important sources, and format the bibliography carefully!
 total is out of 50 points (=two quizzes or exercises)

Structural transformation & economic growth*
As incomes rise, what happens to economic “structure”?
will look at three aspects of the structural transformation:
(1) Agriculture, industry and services as a share of income, employment and spending
(2) The earnings gap between farmers and nonfarm workers
(3) The number of farmers and “industrialization” within agriculture
There are big surprises ahead in each of these!
.
* If you’re following the textbook, this is in chapter 5, pp. 81-86

Our textbook picture of structural transformation
Agriculture’s share of national income

Another textbook picture of the transformation:
Agriculture’s share of employment

A third textbook picture:
Food’s share of total expenditure

Over time, in the history of rich countries:
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.

Among developing countries today, the same pattern but each country’s path varies:
Source: Reprinted from World Bank, World Development Report 2008.
Washington, DC: The World Bank (www.worldbank.org/wdr2008)

Getting richer involves industrialization
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.

Some conclusions on structural transformation as a share of the economy
• As incomes rise, the farm sector declines as a share of employment, income & expenditure
–The share of industry rises and then falls
–The share of services rises
–The share of agriculture eventually stabilizes
• What happens to the earnings gap between farmers and nonfarmers?

Farm employment and earnings in the United States, 1889-2000
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.

The US farm-nonfarm earnings gap, 1910-2000
Source: BL Gardner, 2000. “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5): 1059-1074.

Structural transformation and the earnings gap across countries
The farm-nonfarm earnings gap in 86 countries, 1965-2000
4
The gap may worsen as incomes rise, then farmers catch up
6 8
LNGDPpc (Constant US$-2000)
10 12
Agri. GDP Share (LCU) Agri. Employment Share
Agri. GDP Share (LCU)minusAgri. Employment Share
Source: Peter Timmer, “Agricultural Trade Policy during Structural Transformation.” Mimeo, Stanford Univ., Dec. 2007.

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)

100
90
80
70
60
50
40
30
20
10
0
Does U.S. agricultural output decline?
US GDP from Farm and Nonfarm Businesses, 1929-2004
(Billions of 2000 US dollars)
Farm value added
(left scale)
Non-farm businesses value added
(right scale)
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Source: U.S. Bureau of Economic Analysis, Table 1.3.6 <www.bea.doc.gov>.

280
What happens to increases in U.S. output?
Farm output and agricultural exports in the United States, 1945-2006
160
260 140
240
220
120
100
200
180
80
60
160 40
≈25-30% exported
140 20
Farm market receipts (2000 US$ b.) [left scale]
Agric. exports (2000 US$ b.) [right scale]
≈12-25% exported
120 0
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: Farm receipts are from US Economic Report of the President 2007 (www.gpoaccess.gov/eop),
Source: Farm receipts are from US Economic Report of the President 2007 (w w w .gpoaccess.gov/eop), Table B-97; exports are from USDA, 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).

The bulk commodity business fluctuates, while value-added exports grow
35
30
25
20
15
10
5
Fig. 1.3 U.S. Agricultural Exports by Category, 1970-2004
(billions of U.S. dollars)
Bulk
Intermediate
Consumer-
Oriented
0
70 73
19
76 79 82 85 88 91 94 97 00
19 19 19 19 19 19 19 19 19 20 20
Source: USDA, Economic Research Service, Foreign Agricultural Trade of the United States (www.ers.usda.gov/Data/FATUS).
03

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

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
 The demand curve for non-food is relatively flat


Non-food demand is price-elastic
Price elasticity for nonfood >1 in abs. value

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 on-farm uses, and is applied to other uses
 farmers’ earnings are linked to the number of farmers, acres per farmer and earnings per acre

Farmland area and the number of farmers
Use of land and labor on U.S. farms, 1910-2000
Source: W.E. Huffman and R.E. Evenson, 2001. "Structural and productivity change in US agriculture, 1950-82."
Agric. Economics 24: 127-147, extended with more recent data from the US Economic Report of the President.

During structural transformation, the number of farmers rises, then falls, and finally stabilizes
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995.
Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.

The number of farmers rises then falls… until farmers’ incomes catch up to nonfarm earnings
Our textbook picture of structural transformation within agriculture: farm numbers stabilized by off-farm income and rising profits per acre; latest census shows slight rise in no. of farms
Figure 5-3. Number and average size of farms in the United States, 1900-2002.

In the world as a whole, the number of farmers has just peaked and will soon decline

Regions differ sharply in their population growth rates
Source: Calculated from FAOStat data (www.fao.org).

Cities are growing much faster than total population
Source: Calculated from FAOStat data (www.fao.org).

…but cities are still too small to absorb all population growth, especially in S. Asia and Africa
Source: Calculated from FAOStat; chart 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.

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