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?

Source: World Bank data, reprinted from UNEP/GRID-Arendal Maps and Graphics Library (http://maps.grida.no/go/graphic/world-bank-country-income-groups).

Where do we see what types of policy?

This is the usual pattern: the “development paradox”

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” in East Asia, 1955-2002

The “development paradox” worldwide, 1960-2005

-1.0

-0.5

0.0

0.5

1.0

1.5

6 8 10 6 8 10

All Primary Products Tradables

All Primary Products Exportables Importables

NR

A

Income per capita (log)

Effect of policy on farm product prices, by income level

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.

Taxation of farmers

Support for farmers

≈ $5,000/yr

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)

Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995. Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.

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.

Share of output from industry in eight high-income countries, 1860-1960

The structural transformation is from agriculture to industry…

…but what happens

next to industry’s

share?

…over the full span of development, employment shifts to services…

Source: U.S. Economic Report of the President 2007 (www.gpoaccess.gov/eop)

Percent of workforce by sector in the United States, 1800-2005

in 1800, employment was 90% farming

today, about 80% of jobs are in services

in 1930s-70s, industry

reached about

40%

agricultural employment has stabilized

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.

Agricultural Employment as a Share of Civilian Employment and Real Farm Output as a Share of Real GDP

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.

As agriculture’s share of the economy declines, does farm income also fall?

Until the 1930s, employment and output fell together

…then employment fell much faster than output

and then both stopped falling

The US farm-nonfarm earnings gap, 1910-2000

Source: BL Gardner, 2000. “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5): 1059-1074.

Th

ou

san

ds o

f 1

99

2 d

ollars

per

farm

Perc

en

t of

non

-farm

in

com

e

Farm income fell…

then caught up

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 transformationbrings 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.

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 ???

Explaining Structural Transformation

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…

Slide 27

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 28

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

–usually sectoral structure (% in ag., services, mining and manuf.)

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.

Demographic transition

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 dueto 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

Slide 34

A Stylized Model* of Demographic Transition

* In what sense is this a model? Is it an economic model as per last week’s class?

The gap between birth and death rates is the population’s “rate of natural increase” (≈ population growth)

Slide 35

An actual demographic transition

Sweden’s population growth rate peaked at about 1.5% per year, in the late 19th century

Slide 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…

Slide 37

A third kind of transition

Mexico’s peak population growth was even faster, because its birth rate fell slowly…

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

Slide 38

Slide 39

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

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

The final stage of demographic 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

Slide 43

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

Slide 44

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

Slide 45Source: UN Population Division, World Population Prospects: The 2000 Revision (http://esa.un.org/unpp)

0

10

20

30

40

50

60

70

80

90

100

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

No.

of c

hild

ren

(0-1

4)pe

r 10

0 ad

ults

(15

-59)

E. Asia S. Asia Sub-Sah. Africa Whole World

Africa’s child dependency has been similarly unprecedented, and is now improving

Slide 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…

Slide 47

Explaining the mortality decline (UK data)

Slide 48

Explaining the mortality decline (US data)

Slide 49

The age structure of mortality decline

Slide 50

The HIV/AIDS tragedy

Slide 51

Explaining the fertility decline: social policies

Source: K. Sundstrom. “Can governments influence population growth?” OECD Observer, December 2001, p. 35.

Slide 52

Explaining the fertility decline: infant mortality

Slide 53

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

• How does demographic transition affect agriculture?

Slide 54

What happens to the number of farmers?

Slide 54

Slide 55

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 populationgrowth in nonfarm employment

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

Slide 61

• 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!

More conclusions…