A. de Janvry

A Socioeconomic Model of Induced Innovations for Argentine Agricultural DevelopmentAuthor(s): Alain De JanvrySource: The Quarterly Journal of Economics, Vol. 87, No. 3 (Aug., 1973), pp. 410-435Published by: Oxford University PressStable URL: http://www.jstor.org/stable/1882013 .

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A SOCIOECONOMIC MODEL OF INDUCED INNOVATIONS FOR

ARGENTINE AGRICULTURAL DEVELOPMENT *

ALAIN DE JANVRY

I. The inducement of innovations, 412.- II. Decision processes in the inducement of innovations, 415.- III. The adoption of new technologies, 422. -IV. The adjustment path of actual to latent demand, 424.-V. Induced innovations and Argentine agricultural development, 428.

Except in the Marxist tradition, technological change has long been treated by economists as an exogenous factor and its biases attributed to a "natural drift." Only recently has the inducement of technological innovations been specified within rigorous economic models 1 and have empirical analyses been aimed at testing the im- plications of these new theories.2 Even though most-of this work has been done within the context of market-oriented production or research structures, Hayami and Ruttan have extended it to include the generation of technology through dialectic interactions between entrepreneurs and public research institutions.3 The new technological opportunities, in turn, induce institutional changes to permit society to internalize better the benefits of innovative activity. Based on this dual innovative process of technology and institutions, Hayami and Ruttan develop a provocative theory of agricultural development that they proceed to test convincingly on international data.

The present paper is in the same tradition but proceeds. to specify more rigorously the decision processes underlying the genera-

* Giannini Foundation Paper No. 351. This study was carried on while under a Ford Foundation appointment in Argentina. I am indebted to Pro- fessors L. Fletcher, V. Fuller, J. C. Martinez, Y. Hayami, A. Hirschman, V. Ruttan, and G. E. Schuh for helpful suggestions.

1. J. R. Hicks, The Theory of Wages (London: The Macmillan Co., 1964); W. Fellner, "Two Propositions on the Theory of Induced Innovation," Economic Journal, LXXI (June 1961), 305-08; S. Ahmad, "On the Theory of Induced Invention," Economic Journal, LXXVI (June 1966), 344-57; C. Kennedy, "Induced Bias in Innovation and the Theory of Distribution," Eco- nomic Journal, LXXIV (Sept. 1964), 541-47.

2. Y. Hayami and V. Ruttan, "Factor Prices and Technical Changes in Agricultural Development: the United States and Japan, 1880-1960," Journal of Political Economy, LXXVIII (Sept. 1970), 1115-41; W. Fellner, "Empiri- cal Support for the Theory of Induced Innovations," this Journal, LXXXV (Nov. 1971), 580-604.

3. Y. Hayami and V. Ruttan, Agricultural Development: An International Perspective (Baltimore: Johns Hopkins Press, 1971).



A MODEL OF INDUCED INNOVATIONS 411

tion of agricultural innovations by the public sector and the adoption of new technologies by individual entrepreneurs. In both of these decision processes an attempt is made to show the dynamic interplay of economic stress versus economic incentives. In doing so, social elements in the economic theory of inducement of innovations are introduced.

Of prime concern is the prevalence of agricultural underdevelopment that is conceptualized through a lag in the dynamic adjustment path toward potential technological and institutional innovations. For this purpose, the generation of innovations is specified in a demand and supply framework, and differences between a latent and an actual demand are distinguished. Latent demand for innovations is that which, when met by supply, leads agricultural development to an optimum consistent with prevailing economic and scientific conditions. If these conditions are socially optimum, so will the latent demand be. Actual demand, which guides the course of current public sector innovations, is conditioned by government and by socially and politically dominant farm interests, and generally will diverge from latent demand, thus creating lags in the generation of socially optimum innovations. Hence, of major im- portance for understanding agricultural underdevelopment is the specification of shifters in latent and actual demands for and supply of innovations.

The socioeconomic model of induced innovations presented in this paper is aimed at understanding the stagnation of the Argen- tine agricultural sector and, consequently, also of its national economy. That stagnation is due in great part to the unavailability to farmers of land-saving, yield-increasing technology is shown by two case studies. This unavailability is traced to a lag in the course of technological and institutional innovations, and this lag is in turn explained by the interplay of shifters in latent and actual demands and supply for innovations in that country.

Turning to the diffusion process of new technologies in Argen- tina, we analyze the very particular dynamic properties. of a land market-induced treadmill that acts as a coercive device for the adoption of new production techniques. It is shown that the long-run nature of this mechanism calls upon an activation of the land market through land taxation and more flexible land rental laws in order to accelerate the agricultural technification process. Finally, the extractive mechanisms of agricultural surplus are contrasted to those of Owen's "Mill-Marshallian" model to show that in this case no income transfer occurs naturally through market forces and that



412 QUARTERLY JOURNAL OF ECONOMICS

taxation schemes need to be implemented to redistribute among sectors the welfare gains from technological change.

I. THE INDUCEMENT OF INNOVATIONS

First, the theory of induced innovations is used to describe the determination of a new sectoral equilibrium with generation of technology in response to a change in product or factor prices. Fol- lowing Ahmad,5 use is made of the ex ante concept of a historical Innovation Possibility Curve (IPC) in which isoquants shift with changes in the stock of scientific knowledge and envelop all presently known or potentially discoverable technical blueprints at one stage of scientific knowledge. In the Schumpeterian tradition technological change can then result either from improvements in scientific knowledge or from discovery of new production techniques within the same IPCt.

Consider in Figure I the determination of a new sectoral equilibrium for agriculture with costless generation of technological innovations in response to a change in factor price ratios. Say that there are only two factors of production -land (T) and all other factors (X). In the initial period (t-1), the unit isoquant of the IPC is IPCt-1, the unit cost line 6 is AB, and the unit isoquant of the production function used is I1. The sector is in equilibrium at 1, where Schumpeterian profits are zero.

Assume that land prices increase while the price of all other inputs decreases (product prices may have changed also) and that the net effect is to shift the unit cost line to CD. Without innovations individual farmers may adjust to the new factor price ratio through factor substitution from 1 to 2 on I,, but at 2 profits are still negative. In order for profits to be nonnegative, a unit level of output must be produced on or below CD; and given IPCt, as in Figure I, there exists a latent demand for the innovation of isoquant I2, at which individual profits will be maximized. Since at 3 Schum- peterian profits are positive, further price and innovation adjust- ments are necessary to bring the sector to a new equilibrium. If demand is inelastic and factor supplies elastic, product prices will drop until a sectoral equilibrium is obtained at 3. If demand is elastic,

4. W. F. Owen, "The Double Developmental Squeeze on Agriculture," American Economic Review, LVI (March 1966), 43-70.

5. Ahmad, op. cit., p. 347. 6. The unit cost line is PT T+Px X=1 where PT and Px are the factor

prices relative to product price. It is, hence, the locus of points where profit per unit of output is zero.




xi:IPC WC t-

C

E D B T

FIGURE I

Sectoral Equilibrium with Costless Innovations

supply of land inelastic, and supply of other inputs elastic, land prices will rise until they internalize all nonzero profits, shifting the unit cost line to CE and establishing a new sectoral equilibrium at 4 with technology 13. Intermediate cases where there is some inelasticity of demand and some~ inelasticity of supply of other inputs will lead to sectoral equilibria between 3 and 4. In the adjustment process, factor ratios- have changed from I to II because of factor substitution and from II to III or IV because of technological innovations.

Research costs can be introduced into the solution by postulat- ing, for example, that the cost of innovating increases. when moving away from the factor ratios of the traditional, well-known technologies. Then, if research costs are internalized in product prices., CD pivots around F. and the optimum latent demand shifts toward traditional technologies.

Isoquant 11 corresponds to traditional, resource-based technologies where land is, used extensively, while I2. and 13 are modern technologies that are in latent demand. If market prices are socially




optimum, so will be this latent demand. With the problem of underdevelopment and technological backwardness in mind, interest is in specifying the shifters of the latent demand for innovations that may move the final sectoral equilibrium away from the socially optimum advanced technologies. Most important are the following:

1. The size of the "implicit" tariff, or divergence existing between internal prices of products and inputs, and the price levels that prevail in the world market valued at the equilibrium exchange rate. Most significant is industrial protectionism arising from import substitution policies, which raises the price of new capital inputs for agriculture and shifts the latent demand toward traditional technologies. The same shift results from lowering product prices through overvaluation of the exchange rate, export retentions, and other instruments of cheap food policies.

2. The risk attached to the price levels, of input X and of product that will shift the latent demand toward traditional technologies if there is aversion toward it. Risk aversion, in this case, implies basing innovation decisions upon an expected relative price of X sufficiently high that it has a high probability of not being ex- ceeded. Hence, it has the same effect as a rise in the price of X, and it shifts latent demand away from socially optimum modern technologies. The same is true for variability of product prices.

3. Higher research costs per unit of output that also shift the latent demand toward traditional technologies when internalized in product prices. Because of learning by doing and of economies of scale in research, costs will tend to be higher in less developed countries. If there is a fixed, predetermined research budget, the size of the budget will determine an interval of innovatable factor ratios around the traditional technology, and the optimum latent demand for technology may lie outside the interval. In this even- tuality, the budget allocated for research is incompatible with a socially optimum use of agricultural resources.

4. The stock of scientific knowledge determines the position of IPCt and also displaces latent demand, while the previous three shifters affect latent demand through displacement of the unit cost line. Developed countries and international agricultural research centers tend to have IPCt that lie closer to the origin in the factor space than do less developed countries. Even if the historical IPC is neutral, the latent demand for innovations in less developed countries will be for more traditional technologies than in developed countries.

In shifting latent demand away from its socially optimum posi-




tion, the prevailing economic and scientific conditions can determine a technological path remote from a socially optimum use of agricultural resources.

II. DECISION PROCESSES IN THE INDUCEMENT OF INNOVATIONS

Since technological changes may affect differentially producer and consumer welfare, the demands for innovations that arise from the agricultural sector and from the whole economy may be conflicting. And, depending upon the appropriability of the returns from research, these demands will be met by public research institutions or by private firms.

A. A Classification of Technology For the purpose of specifying the demand for innovations, tech-

nologies can be classified very broadly into four categories.: (1) mechanical - tractor, harvester, and windmill; (2) biological - hybrid seeds and cattle breeds; (3) chemical - fertilizers, insecticides, and pesticides; and (4) agronomic - cultural practices and management techniques (crop rotation, permanent pastures, forage reserves, fertility tests, etc.). These technologies can be characterized in terms of their own impact on the marginal rates of technical substitution among capital, labor, land, and management, and on yield level. Following Seckler 7 it is useful to distinguish between "on line" management, which consists of the actual direction of farm activities, and "staff" management, which deals with decision making as to choice of activities and of techniques (princi- pally investment decisions, financial and fiscal administration, and commercial activities).

Mechanical innovations raise the productivity of labor mainly through increases in land per worker. By reducing labor costs, they will substantially reduce on-line management requirements. Staff management requirements may increase somewhat as the firm becomes more capital-intensive. Hence, the new resource allocation will tend to differ from the premechanization solution by requiring less labor, more capital, less on-line management, and more staff management per unit of land. As pointed out by Sen 8 and other writers, while mechanization considerably raises the yield per unit

7. D. Seckler, "Reflections on Management, Scale, and Mechanization of Agriculture," Proceedings of the Western Agricultural Economics Associa- tion (Tucson, Arizona: July 1970).

8. A. K. Sen, Choice of Techniques: An Aspect of the Theory of Planned Economic Development (Oxford: Basil Blackwell, 1968), p. 82.




of labor, it generally does not lead to yield increases per unit of land without complementary investments in land-saving capital goods.

Biological innovations are fairly neutral on labor and management requirements. They are slightly capital using and moderately yield increasing when used outside of complete packages of techniques.

The returns from research on mechanical techniques can, in great part, be captured. To a lesser extent this is also true for biological innovations, particularly if the optimal package of techniques within which the seeds or breeds are to be used have already been developed. Because research costs for the development of modern biological-chemical-agronomic packages are considerable and because seed or chemical companies can appropriate only a small frac- tion of the returns from this research, private firms generally will not engage in these types of innovations. Hence, seed companies will tend to work on the development of new varieties that perform best for the prevailing production conditions - declining soil fertility if the fertilizer package is not used, as in Argentina, or high- yielding varieties if these have been introduced, as in the countries that have gone through the Green Revolution.

Chemical innovations aim at increasing yield. They are fundamentally land saving in permitting substitution of capital and labor for land; capital and labor deepening, however, require both more on-line and staff management per unit of land.

Finally, agronomic innovations are labor and on-line-management using and land saving. Like chemicals, they are strongly yield increasing.

The returns from innovations on the use of chemicals and on agronomic practices generally cannot be captured, and research on them needs to be performed by the public sector.9

Packages of biological, chemical, and agronomic technologies combine the factor biases of their components and tend to be labor and on-line-management using and very strongly yield increasing.

Following this categorization of technologies and, hence, also of capital as landsaving or laborsaving, an aggregate production function can be written for the agricultural sector in the following separable form where the degree of substitutability among inputs is high within but quite low between subfunctions:

Y=F[f (KT, T), g(KL, L)], where Y aggregate output, T and L=land and labor inputs, Kp =

9. Among chemicals, the returns from research on insecticides and pesticides tend to be more capturable than from research on fertilizers.




landesque capital (chemicals and the capital associated with biological inputs and agronomic practices), and KL= laboresque capital (mechanical).

One can conceptualize, as Owen does,' the dynamic contribution of agriculture to economic development as resulting from a "double developmental squeeze on agriculture," the first being a "production squeeze" whereby total output increases and the second an "expenditure squeeze," which fundamentally accounts for the release by agriculture of labor resources. Then, since the output- increasing capital investments are accounted for in the landesque subfunction f (KT, T), the production squeeze can be analyzed from that partition of the production function alone.2 Similarly, for fixed KT, labor use is dealt with through the laboresque subfunction g (KL, L), and the labor contribution of agriculture can be analyzed from it.3 The separation also permits the processes of generation of innovations to be contrasted, since the returns from research on g(KL, L) are appropriable and, hence, will be carried on largely by private firms, while the returns from research on f (KT, T) generally are not appropriable and will need public sector intervention. In the following model of agricultural development, confine- ment will be to the factor space (KT, T) for the analysis of the inducement of yield-increasing, technological innovations by the public sector and to the factor space (KL, L) for the laborsaving innovations.

B. The Actual Demand for Innovations Chemical, agronomic, and packages of innovations tend to be

generated by public institutions, and the channels by which research is oriented toward meeting demand for these techniques (both in quantity and in kind) in these government-supported "nonmarket" research centers are far from clear. Still, Hayami and Ruttan place the efficiency of the supply and demand mechanism for inventions at the center of their theory of agricultural development:

Farmers are induced, by shifts in relative prices, to search for technical alternatives which save the increasingly scarce factors of production. They press the public research institutions to develop the new technology and, also, demand that agricultural firms supply modern technical inputs which substitute for the more scarce factors. Perceptive scientists and science admin- istrators respond by making available new technical possibilities and new inputs that enable farmers to profitably substitute the increasingly abundant

1. Owen, op. cit., p. 44. 2. Assuming an elastic labor supply. 3. Assuming an inelastic supply of land.




factors for increasingly scarce factors, thereby guiding the demand of farmers for unit cost reduction in a socially optimum directions

In the Hayami-Ruttan model, the generation of innovations is studied at the reduced-form, supply-and-demand level and not at the structural form level of the decision functions of government, farmers, and researchers. Their approach is satisfactory because they work in a comparative statics framework comparing equilibrium points before and after innovation and are not overly concerned with specification of the dynamic adjustment path generated by the successive interplays of individual adoption decisions and of public innovations decisions. Specification of this path is important because the existence of major lags in the generation of innovations that would be consistent with prevailing factor and product prices may further maintain the use of resources in agriculture away from a social optimum.

The first step in the specification of a socioeconomic model of induced innovations consists of distinguishing between latent and actual demands for innovations. If expected profits are being maximized, a change in prices or a change in the IPC from t- 1 to t will create a latent demand for innovations corresponding to the neo- classical production function tangent at 3 or 4 to ICPt in Figure I. As shown earlier, higher (lower) and more variable prices of capital inputs (products), higher costs of innovations, and lower stocks of scientific knowledge will all shift the latent demand toward the more traditional technologies and away from a socially optimum use of agricultural resources.

The second step consists of specifying the decision processes that underlie the actual demand for innovations. This demand will materialize essentially in two forms: (1) the budget allocated for research, both in its absolute size and in its allocation restrictions, and (2) a flow of information to the Agricultural Experiment Sta- tions. The crucial question is then to determine whose demands do affect the size and allocation of money to research and constitute sources of information for the researchers as to the type of innovations currently needed. The answer is found by identifying the economic agents to which the welfare returns from technological changes accrue. In Argentina with a highly elastic long-run demand for exportable agricultural products 5 (mainly meat, corn, and

4. Hayami and Ruttan, Agricultural Development: An International Perspective, p. 57.

5. For simplicity, the analysis will be carried on as though it was in- finitely elastic.




sorghum), the direct welfare gains from technological change accrue wholly to the agricultural sector under the form of higher producer surpluses. Because the increase in gross income results from higher exportable surpluses, welfare gains also accrue indirectly to the whole economy through the particularly high import multiplier.6 Two demands for technological innovations correspond to these two destinations of welfare gains-the demand from the agricultural sector that is voiced through the dominant farm organizations and the demand from the public at large that is voiced through the government. Because there exists a variety of forms of technological changes and because they can affect differentially producer and exportable surpluses, the two demands may be conflicting.

Almost universally the demand for innovations that has dominated the course of agricultural research originates in the agricultural sector. This can seem paradoxical in situations of inelastic demand, since welfare gains of yield-increasing innovations'may be negative for agriculture, unless rationalized in the dynamic context of the "agricultural treadmill." 7 On the other hand, welfare gains of nonyield-increasing technologies, essentially mechanization, will increase producer surplus without major effect on prices and consumer surplus. In Argentina the actual demand for innovations originates only in the agricultural sector due to the flagrant non- existence of government policies toward technological change in agriculture.8 Since agricultural interests traditionally have been dominated by large landowners, the demand for innovations that determines the size and allocation of public research funds derives from these dominant farm interests. The same is true for information conveyed to the scientists since educated, large farmers are the ones who are in closest contact with the Experiment Stations.9

Hence, it is postulated that the actual demand for public innovations results from the maximization of the utility function of the dominant farm interests. Specification of this utility function is now in order. Unfortunately, little is known of its structure since economists and sociologists in analyzing technological change have concentrated mostly on adoption instead of innovations, on the oc-

6. E. Bee de Dagum, "Le Multiplicateur Dynamique d'Exportation: Un Modele pour l'Argentine," Economie Appliquee, XXII (1969), 89-112.

7. W. Cochrane, Farm Prices: Myth and Reality (Minneapolis: Uni- versity of Minnesota Press, 1958), see Section III.

8. D. Fienup, et al., The Agricultural Development of Argentina (New York: Frederick A. Praeger, 1969).

9. E. Obschatko and A. de Janvry, "Factores Limitantes del Cambio Tecnologico en el Sector Agropecuario Argentino," Desarrollo Economico, XI (March 1972). 263-85.




currence instead of the demand for innovations (ex post growth ac- countancy), on innovation by private firms instead of public institutions, and on the normative latent demand instead of the actual demand. Indubitably, two elements should enter the utility function for innovations - expected profits and risk aversion. Rosenberg's historical review of inducement of innovations takes us closer to a specification of other elements that condition this decision process - one is stress and the other congruence. Quoting Rosenberg's conclusions:

It is possible, furthermore, that threats of deterioration or actual deterioration from some previous state are more powerful attention-focusing devices than are vague possibilities for improvement. There may be psychologi- cal reasons why a worsening state of affairs, or its prospect, galvanizes those affected into a more positive and decisive response than do potential move- ments to improved states. The same sort of asymmetry which Duesenberry postulated for consumer units confronted with the need to adjust to a down- ward revision in their incomes may hold for decision makers who control the allocation of resources for exploring the technological horizon. Such asym- metrical behavior may possibly be treated more appropriately within a "sat- isficing" model of entrepreneurial behavior and response, where alternative technologies are explored only when a firm's profit position falls below some minimum acceptable level. In any case, it is clear that threats to an established position have often served as powerful inducements to technical change.1

Hence, if stress is defined as negative or falling profits, stress would tend to appear as a powerful inducer of innovations.

A corollary to this statement is that comparative advantages, which tend to act as shelters from stress, could sometimes act as retardants to technological innovations, an idea akin to Hirschman's unbalance mechanisms.2

Another important piece of evidence on the relative roles of stress and profit maximization in decision making concerning innovations is obtained from the relationship between comparative advantages and technological changes. Say, first, that technology is primarily a substitute for natural agricultural comparative advantages, which would imply that the internal rate of return to new techniques is higher when comparative advantages are smaller. Then the observation that lower rates of technification sometimes accom- pany comparative advantages would be explained in terms of differences in absolute profitability levels. If, on the other hand, as is

1. N. Rosenberg, "The Direction of Technological Change: Inducement Mechanisms and Focusing Devices," Economic Development and Cultural Change, XVIII (Oct. 1969), 1-24, quote on p. 23.

2. A. Hirschman, The Strategy of Economic Development (New Haven: Yale University Press, 1958).




most likely the case, technology is primarily a complement to resource-based agricultural comparative advantages, the internal rate of return to technification would increase with natural comparative advantages. Then, lower rates of technification in the presence of natural comparative advantages cannot be explained by the profitability argument alone, and this calls on lesser economic stress for a justification.

If stress acts as a focusing device and accelerates the rate of technological innovations, it must be because a goal exists, explicit or implicit, that dominates the profit maximization goal lexicographically and that, in turn, is dominated by the goal of stress removal. To determine this goal, intermediate between stress and profits, attention is given again to the literature on innovations.

Rosenberg mentions that

... if we would like to understand the kinds of problems to which technically competent personnel are likely to devote their attention, we must come to grips with their inevitable preoccupation with day-to-day problems posed by the existing technology. We might here invoke what March and Simon call Gresham's Law of planning which, succinctly stated, amounts to the proposition that daily routine drives out planning. If we pay more attention to the cues thrown out by this daily routine, we may gain a clearer understanding of the process of technical change.3

Similarly, Nelson 4 and Eckaus 5 both point out that "inventions are for the most part produced to order by step-by-step re- finement of the known 'state of the arts.' " The implication is that the actual demand for innovations is primarily geared to improv- ing existing designs and inducing innovations that are compatible with prevailing production structures (factor ratios), provided there is no economic stress. This shall be called the (implicit) congruence or structure-maintenance goal.

There are three elements that seem to enter into the decision mechanism of the inducement of innovations: congruence that dominates expected profit (II) maximization lexicographically and stress that dominates congruence, also lexicographically. If a risk-aversion goal in the form of a survival constraint like Pr(II>O) =a that also dominates congruence is introduced, the lexicographic utility function for innovations is

LU {Pr(lllrO) =a; E(II) O; Max congruence; Max E(l)}. (survival) (stress) (congruence) (profits)

3. Rosenberg, op. cit., p. 24. 4. R. Nelson, "The Economics of Invention: A Survey of the Litera-

ture," The Journal of Business, XXXII (April 1959), 101-27. 5. R. Eckaus, "Notes on Invention and Innovation in Less Developed

Countries," American Economic Review, LVI (May 1966), 98-109.




Before investigating the kind of actual demand for technological innovations that this decision mechanism implies, analysis of the process of adoption of new technologies is needed, since innovation and adoption mechanisms interact in generating an adjustment path of actual to latent demand.

III. THE ADOPTION OF NEW TECHNOLOGIES

Once profitable new agricultural techniques have been made available by private business firms, public research institutions, or by importation from other countries, their adoption by farm entrepreneurs is an individual matter that is essentially determined by profit objectives. The rate at which they are adopted is conditioned by a set of economic, institutional, and structural factors that have been extensively analyzed in both developed and underde- veloped countries and eventually show severely regressive biases.6

In the specification of the decision process that leads to innovations by the public sector, the interplay between coercion (stress) arising from negative or falling profits and search for higher profits is emphasized. The same is true for adoption. Economic coercion in adoption has been characterized as the "technological treadmill" by Cochrane.7

The dynamics of the technological treadmill have been specified in the context of an inelastic demand for farm products: Output- increasing, cost-reducing technological changes are adopted by alert profit-seeking farmers; aggregate supply shifts rightward, and prices drop as do profits of all other farmers who are in turn forced to adopt the new technology to lower their costs and maintain their income position; the quasi-rents of the early adopters are wiped out, and they must look again for new technological opportunities. They do so by pressing the agribusiness firms and the Agricultural Experi- ment Stations to innovate further. In this model a minority of ac- tive profit seekers can throw the whole sector on a permanent dis- equilibrium course of rapid technological changes.

Countries like Argentina are largely open on the world market of beef and cereals where they face highly elastic long-run demand schedules and where real prices have been increasing secularly. Still, while there is no demand-induced treadmill, the coercive mechanism

6. Obschatko and de Janvry, op. cit.; G. E. Schuh, "Patterns of Equity Under Agricultural Development in Latin America" (Rio de Janeiro: The Ford Foundation, 1971).

7. Cochrane, op. cit., p. 85.




of adoption of new technologies exists through a land market-induced treadmill. But this mechanism has dynamic properties that are very distinct from those of the product market-induced treadmill.

Assume that new techniques are available and adopted by some farmers. For these farmers the rate of return on resources increases. If the capital market was previously in equilibrium, this increase in rate of return has to be capitalized in land values in order for the capital market to return to an equilibrium situation. Adopters will bid up the price of land, which is in inelastic aggregate supply, until rates of return are again at par with opportunity costs. As land values increase, both the opportunity cost of holding land and the flow of capital gains increase. The net effect on profits depends upon the magnitudes of the rate of increase in land values A relative to the opportunity costs of capital r. If, as is usually the case, r> A, profits of owner-operators and of tenants who do not modify their allocation of resources collapse.8

Adoption of new technologies by some farmers raises the price of land and depresses the income position of nonadopters. The basic difference, though, between product market and land market tread- mills, is that, while a product treadmill affects the cash income position of nonadopters, a land treadmill only affects the noncash income position of owner-operators - land-cost increases are changes in opportunity costs and not in cash costs. And the perception of a deterioration in noncash income will indeed be much slower than the perception of changes in cash income. There are only two categories of farmers on which the impact is immediate: the new en- trants in the farm sector who have to buy their land at the inflated values; and the tenants who have to rent their lands at the increased user costs.

In summary, it has been argued that a technological treadmill effect exists even when product demand is elastic. This treadmill occurs through the land market rather than through product markets (provided land is in fixed aggregate supply), and it is of much longer run in its impact on the rate of adoption even though ulti- mately as inescapable as Cochrane's.

There are several other important differences in the impact on agricultural development of each of these two treadmill mechanisms:

1. The heterogeneity in the degree of technification among

8. The higher the anticipated rate of appreciation of land values, the lower the user cost (r- A) PT T of land, and the more land will be used relative to other factors of production. Hence, at one point in time, capital gains through increases in land values act as retardants to capital-deepening technological changes.




farms will be much greater under a land than a product treadmill. 2. While a product treadmill may induce the generation of

land-saving technologies (in Figure I, if the collapse in price is not sufficient to offset positive profits so that land values increase), a land market treadmill will have a much stronger bias effect in the inducement of land-saving technologies. The United States experi- ence of the last fifteen years supports this argument, since, due to government interventions to maintain product prices through land allotments to control production, a large part of the returns from technological change (and intervention) were capitalized in land values, inducing the generation of land-saving technologies. In fact, the land market treadmill possibly offers a better conceptualization of the recent technification process in United States agriculture than does the product market treadmill.

3. The appropriation of welfare gains from yield-increasing technological changes accrue wholly to producers instead of being transmitted to consumers through lower food prices and higher consumer surpluses as under a product treadmill mechanism. Hence, the extractivist squeeze in Owen's Mill-Marshallian model is no longer existent. In the open model, welfare gains from technological change for the whole economy exist only through the generation of foreign exchange and the import multiplier. If an appropriation of the agricultural surplus is desired, nonmarket mechanisms - such as taxation - need to be used.

Whatever the form of the treadmill, market forces impose a dynamic coercive mechanism of change upon the agricultural sector. Hence, new technology appears as a powerful agent of structural and behavioral changes. In the Argentine context, the generation of highly profitable technological packages may, in turn, generate diseconomies of large scale and force management dedication, thus acting in the direction of a land reform process that can be acceler- ated by land taxation schemes and revival of the land rental market.

IV. THE ADJUSTMENT PATH OF ACTUAL TO LATENT DEMAND

Coming back to the lexicographic utility function previously specified as the structural model from which the actual demand for innovations, is derived, it was shown that nonnegative Schumpeterian profits constitute a priority goal. Hence, in Figure II the area of the IPCt, which satisfies this dominant goal, is on or below the unit cost line CD. This segment of the IPCt may be further restricted to meet the goal of risk aversion. Once survival is insured and stress




K T

WCt P t-1 I

C

C

C

D" D' D T

FIGURE II

The Actual Demand for Land-Saving Technological Innovations

is eliminated, maximum congruence with prevailing factor ratio II becomes the implicit priority goal. Once this is done, expected profits are maximized.

If the unit cost line is CD, stress is eliminated, congruence with II is maintained, and expected profits are maximized by innovation of the isoquant I2 tangent at 3 to IPCt. Hence, the actual demand for innovations applies to isoquant I2. If, on the other hand, the unit cost line is at C'D', elimination of stress requires changing the factor ratio to II'. The actual demand for innovation concerns I3, which satisfies the postulated utility function. Hence, stress shifts the actual demand away from congruence with prevailing production structures and focuses innovations on more advanced technologies. Only if the unit cost line is at C"D" (which is the one of major stress among the three possibilities considered in Figure II), are the actual and latent demands coincident in aiming at technology 14.

A feature of the decision mechanism just specified is that, while it usually generates a lag between actual and latent demands and, therefore, implies a social cost, the interplay of innovation decisions




and adoption decisions generates a dynamic adjustment path in actual demand, such that actual demand converges toward latent demand. This path is described in Figure III.

KT

WC ~~~~~VI IP~t Factor ratio of

latent demand C

D" D" D' D T

FIGURE III Dynamic Adjustment Path Between Actual and Latent Demands

Say that the unit cost line is CD and that isoquant I3 has been generated as described in Figure II. Once technology 13 is available for adoption, individual profit maximizers will use it at 4 where profits are positive. If, as in Argentina, product demand and supply of factor KT are elastic while that of T is inelastic, land values will increase to CD' to internalize profits. But then technology I4 will be innovated, since it is congruent with prevailing factor ratios and maximizes expected profits. In time I4 will be used at 5, and land values will adjust to CD". Step by step, actual demand converges toward latent demand for technology I6, at which the sector reaches a stable equilibrium. Hence, introduction of stress and congruence in the decision-making process for innovations introduces a lag between actual and latent demands, but this lag tends to dis- appear through the interplay of individual profit maximization behavior in the adoption and use of available technologies, of social innovation decisions, and of market mechanisms.




All the shifters of latent demand away from a social optimum are also shifters of actual demand, but the latter will further diverge from the optimum latent demand as affected by the following:

1. The representativeness of the farm interests from whose utility function the actual demand for innovations is derived. The more representative they are, the weaker the congruence goal, since a wider spectrum of prevailing production structures is included. If, by contrast, farm interests are dominated by large landowners, congruence requirements with low KT/T ratios and, hence traditional technologies will prevail. The influence of nonfarm interests on the budgeting of agricultural research, voiced through government, will also shift actual demand, presumably toward latent demand, since it is closer to a social optimum.

2. The intensity of the dialectic interactions with research scientists. Most particularly, teaching farm interests about potential technical innovations will orient actual demand toward economically optimum latent demand as the real cost of myopic congruence requirements becomes better known. As pointed out by Hayami and Ruttan:

The dialectic interaction among farmers and research scientists and ad- ministrators is likely to be most effective when farmers are organized into politically effective local and regional farm "bureaus" or farmers associations. The response of the public sector research and extension programs to farmers' demand is likely to be greatest when the agricultural research system is highly decentralized, as in the United States.9

3. The ease of entry into the farm sector, either as owner- operator or tenant, thus lessening congruence requirements.

Large farmers tend to have lower labor-land and on-line management-land ratios than small farmers. Mechanical and biological innovations are more nearly congruent with their actual factor ratios than chemical and agronomic technologies. In addition, since the returns from research on machinery, seeds, and breeds can be internalized by private firms, new mechanical and biological techniques spread very rapidly in Argentine agriculture without requiring the research contribution of the public sector. Strongly cost-reducing, these technologies led to substantial increases in producer surpluses as attested to by the violent upsurge in real land values that have more than doubled in the last twenty years. Weakly yield-increasing, they did not permit the maintenance of exportable surpluses and, hence, had no counterpart effect on national economic welfare.

9. Hayami and Ruttan, Agricultural Development: An International Perspective, p. 57.




With no government demand and a weak farmer demand for chemical and agronomic technologies to the public research stations, the supply of these technologies was strongly limited by the size and allocation restrictions of research budgets. In turn, the inclinations of scientists toward social relevance and professional achievements affect the nature of supply for a given budget. In the case of INTA (the National Institute of Agronomic Research), a system of individual recognition, largely based on pure scientific achievements and foreign-training biases, tends to disembody research from local demands.' By contrast, perceptive scientists with strong inclinations toward social relevance and freedom in the allocation of research budgets could partly bypass actual demand and orientate their efforts directly to latent demand. This has been the case for the international agricultural research centers in contrast to the national research networks as in Argentina -or India.2

V. INDUCED INNOVATIONS AND ARGENTINE AGRICULTURAL DEVELOPMENT

A. Alternative Models of Economic Stagnation The fact that agricultural development plays a key role in the

growth of the Argentine economy has been widely recognized. Major contributions in the last twenty-five years have been in the form of foreign exchange generation, release of labor for industrialization, and transfer of a modest financial saving. Nevertheless, as the rate of development of the Argentine economy is dominated by its bal- ance of payments position,3 stagnating agricultural exportable surpluses, which still account for some 90 percent of total exports, have prevented a full employment utilization of national resources.

Deficient exportable surpluses result from the stagnation of Pampean agricultural output after 1940 when the extensive margin was reached, putting an end to horizontal expansion. Growth ac- countancy studies and an inspection of the evolution of yields over time indicate the lack of land-saving technological changes.4

Several schools of thought have developed to provide interpre-

1. Di Tella Institute, "Determinacion de Objectivos y Asignacion de Recursos en el INTA" (Buenos Aires: CIAP, 1971).

2. T. W. Schultz, "The Allocation of Resources to Research," in W. Fishel, ed., Resource Allocation in Agricultural Research (Minneapolis: Uni- versity of Minnesota Press, 1971).

3. 0. Braun and L. Joy, "A Model of Economic Stagnation -A Case Study of the Argentine Economy," Economic Journal, LXXVIII (Dec. 1968), 868-87.

4. A. de Janvry, "A Model Case of Economic Stagnation: The Role of Agriculture in Argentine Economic Development," Paper presented at the




tations of this model case of economic stagnation. The "monetarist" position is conceptualized in our model as a shift in latent demand away from its socially optimum position due to the level and variability of relative prices. It has been documented by Reca, who concludes that

... the lack of progress in the agriculture of the Pampas was largely the result of policy. In effect from 1924 to 1944 when agriculture in the Pam- pas blossomed, expected farm prices were sufficiently dependable to be taken seriously, whereas for most of the 1945-1965 period (when output stagnated for years) the opposite situation prevailed. Also in the twenties and thirties, when the export oriented agriculture of Argentina did well, expected farm prices were efficient as true "shadows" of world prices, whereas after they were inefficient on this score and undervalued by a large measure the agricultural resources of the Pampas.'

The traditional "structuralist" interpretation of stagnation at- tributes the inelasticity of aggregate supply response to the lack of entrepreneurial behavior in the agricultural sector. According to Ferrer:

Large landowners do not seem to have followed the pattern of behavior characteristic of the entrepreneur in the capitalist system. Frequently, land is held for prestige or social status and as a hedge against inflation, rather than as capital that should be turned to yielding a maximum profit through the use of manpower and investment. . . . The system of large landowners and tenant farmers for the most part explains the continued low yields per hectare of the main products of the Pampean region. It also explains the failure of price incentive policies followed after 1950 for the purpose of raising agricultural output in the Pampean region.6

A third interpretation of stagnation that calls upon both monetarist and structuralist arguments is that it results from the unavailability of yield-increasing new technologies for adoption by individual farmers. In our model this technological barrier is explained by the lag between actual and latent demand for innovations (structuralist factors) and by the shift of latent demand away from a social optimum (monetarist factors). This proposition coin- cides with Diaz Alejandro's diagnosis of the performance of Argen- tine agriculture:

Domestic price policies, land tenure, a technological lag and sluggish foreign markets all seem to have had some influence on the post-1930 rural stagnation. Quantification of the influence of each of these forces is a very difficult task. But if on the basis of available evidence one had to choose the

Ford Foundation Research Workshop on Problems of Agricultural Develop- ment in Latin America (Caracas: May 1971).

5. L. Reca, "The Price and Production Duality Within Argentine Agri- culture, 1923-1965," Ph.D. thesis, University of Chicago, 1967, p. 95.

6. A. Ferrer, The Argentine Economy (Berkeley: University of Cali- fornia Press, 1967), pp. 100-01.




major cause for the observed evolution of rural output, the best answer seems to be as follows. For 1930-1945, foreign and exogenous factors were the main cause for rural stagnation (especially for Pampean activities); for 1945-1965, the technological lag of Argentine agricultural and livestock activities are mainly responsible for poor output performance. And given the nature of the required research and the rural industry (i.e., large numbers of isolated entrepreneurs), the main responsibility for the technological lag falls on the public sector, whose price policies of 1945-55 could have perhaps been over- looked had it at least encouraged rural research and extension services to keep up with advances taking place in the rest of the world.7

The traditional structuralist position is easily refutable through the analysis of adoption patterns of available profitable technologies and through the high supply responsiveness of individual products obtained through reallocation of land among activities. By contrast, the lack of aggregate supply response indicates either the un- profitableness or risk of technification or the unavailability of yield- increasing technologies for adoption by individual farmers. To show the absolute and relative contributions of monetarist and structuralist factors to stagnation, attention is given to an analysis of the actual and potential technification processes of Argentine exportable agricultural products.

B. The Gap Between Actual and Latent Demands for Innovations In looking specifically at technification in the cereal (corn and

wheat) and beef-breeding sectors in an attempt to interpret their stagnation within the previous model of induced innovations, it is necessary to show that:

1. Current price ratios generate a latent demand for land- saving, yield-increasing technologies.

2. This latent demand is eventually in substantial divergence from its socially optimum position, mainly for monetarist reasons.

3. The new land-saving technologies are incongruent with the current factor ratios of dominant farm interests. Hence, because there is no stress, the actual demand for these innovations to the public sector is weak, with a consequent lack of funds for research on those technologies and an orientation of research away from them.

4. Lack of use of these technologies is due to their real unavailability for adoption by individual farmers because of lack of technical and economic research and information.

First, we turn to the cereal sector where Argentine yields are

7. C. Diaz Alejandro, Essay on the Economic History of the Argentina Republic (New Haven: Yale University Press, 1970).




about half the present United States levels, whereas they were of equal magnitude in both countries before the 1930's. Technological changes embodied in the genetic characteristics of the seeds spread remarkably, in fact about as rapidly as in the United States; the same is true for machinery. Going back to the classification of technology in section II, it will be seen that both genetic and mechanical improvements are congruent with the prevailing factor ratios of the dominant farm interests (low L/T and on-line management/T; high staff management/T). Since the returns from research on them can be appropriated, private firms supplied these innovations, sometimes through mere importation of technology as in the case of machinery. Once available, high profitability of these new techniques, enhanced in the case of machinery by capital sub- sidies through cut-rate credits and tax write-offs, brought about their quick adoption. Mechanization increased the labor contribution of agriculture to the other sectors of the economy and trans- formed Argentine agriculture, via labor-saving technological change, into a labor-surplus economy but had little effect on output level and exportable surpluses. The same lack of yield effect is true for seeds, since they were designed to work in the traditional production contexts and not within packages of new techniques.

While major yield increases are to come from the use of fertilizers, insecticides, and herbicides, and the development of new high- yielding varieties to go along with them, these chemicals are still practically unused on cereals. To assess the present potential for fertilizer use, production functions were fitted to experimental data on fertilizer response, allowing for an interaction between fertilizer and natural fertility of the soil. Since one is a substitute for the other, lower levels of fertilizer response are expected when land is more fertile. The estimated production functions are, hence, of the type8

Y-f(F, F * M, M, L, X), where Y=yield, F-fertilizer, M=soil fertility before fertilization, L=a stochastic composite weather index, and X=other variables such as varietal dummies, cultural practices, etc. Maximum expected profits are given by

E ,(o) PF 1,

VA

8. Empirical results are given in A. de Janvry, "Optimal Levels of Fertil- ization Under Risk: The Potential for Corn and Wheat Fertilization Under Alternative Price Policies in Argentina," American Journal of Agricultural Economics, LIV (Feb. 1972), 1-10.




where PF is the price of fertilizer and P is the price of the cereal considered. Since, for nitrogen, PF/P =8 at the farm level in Argentina when it would be equal to 3 if nitrogen prices were the same as in the United States, latent demand is shifted away from its socially optimum position, and interest is in measuring the social loss that results from the current fertilizer price policy. A "fertilization possibility frontier" can be defined as the locus of points

PF = h (M / X, E (HO) =0), ' <0, h <0, P where E (o)= 0. Hence, profits are positive within this frontier and negative outside of it. Since M is a good proxy for the ratio T/KT of the intensity of use of the land, the frontier also delineates the set of such factor ratios that are congruent with fertilizer use at each price level. This. frontier would shift to the right with more responsive varieties and, in general, -with all the cultural practices X, which are positively related to Y in the production function. More intensive use of the land would also decrease M and allow fertilizer use on a greater percentage of the total cereal acreage. Ulti- mately, as this is probably already the case in the United States and Europe, all of the land would lie within the fertilization possibility frontier and be receptive to fertilizer use. At present, by contrast, the results obtained indicate that about half of the corn and wheat acreages in the traditional production areas of these cereals lie within the fertilization possibility frontier at current prices. Since low T/KT ratios are observed in the smaller farms that make an intensive use of the land, half of the cereal acreage would mean more than 75 percent of the farms in those regions. Hence, there does exist a latent demand for the fertilizer technology even at present prices, and of course still more at potential prices. But large farms with high T/KT ratios have no potential for fertilizer use until their land is cropped more intensively and the fertilization frontier shifted to the right. For this reason, with no stress and congruence with prevailing factor ratios as a dominant goal, there is no actual demand for the fertilizer technology deriving from the dominant farm interests. As a result, systematic research on fertilizers was only initiated by INTA in 1962 and given low priority. Even after the initiation of the cooperative INTA-CIMMYT-Ford Founda- tion program, which started to produce results in 1969, the lack of interest in fertilizer trials remains clearly demonstrated. Even now, because there is a firm belief that trials have to be conducted under conditions that correspond to practices actually followed by farmers




(that is, without insecticides and herbicides), the results are poorly controlled, often unusable, and generally biased toward a subesti- mation of fertilizer response. This belief of farm interests and researchers gives further evidence of the subtle interference of congruence requirements in generating a gap between actual and latent demands for innovations.

An ex post inspection of the location of the fertilizer trials indicates that a high percentage of the trials, were on the wrong side of the fertilization frontier, mainly because it was easier for scientists to work with the educated, large farmers who have contacts with the research station and also have land to spare for experi- ments. Since land fertility was not taken into account in the analysis of the data, the conclusion was inevitably reached that fertilizer use is indeed of dubious economic worth in Argentina and, eventually, an "insult to the land." Hence, lack of adoption of the fertilizer technology is not due solely to unfavorable prices or to perverse individual attitudes toward profit maximization or change, but mainly to the real unavailability of the technique for adoption at the farm level because of lack of agronomic and economic research and of information.

Knowledge of the distribution of the cereal acreage by soil fertility levels permits calculation of the aggregate net return from fertilizer use at present and at potential price levels. If the social cost of the gap between actual and latent demands (mainly due to structural factors) is estimated by the potential net return of using fertilizers at present prices, and if the social cost of the discrepancy between latent demand and its socially optimum position (monetary factors) is estimated by the increase in net returns resulting from a drop in fertilizer relative prices from 8 to 3, the first social cost will be 3.3 times larger than the second one for corn and 4.4 times larger for wheat. Hence, structural factors, as conceptualized in the model, have had an important responsibility for the social cost of technological stagnation in the cereal sector.

In summary, there exists a latent demand for fertilizers, and it is substantially shifted from its socially optimum position; lack of adoption is due to unavailability of the technique to individual farmers; and the actual demand for research on fertilizers is weak or nonexistent.

Similar conclusions arise from an analysis of the technification process in the traditional area of beef breeding, which is dominated by large absentee landowners. Pounds of beef produced per acre have remained constant since 1935; and the use of yield-increasing,




management-intensive breeding techniques - such as permanent pastures, forage reserves, pregnancy tests, etc. - is low. By contrast, the region is technologically advanced with respect to genetic improvements of breeds. Winsberg describes the quick diffusion of new breeds in response to economic incentives.9 Just as in corn and wheat, genetic improvements, once available, have been quickly adopted and have been generated both through private and public research, presumably because they were congruent with the established scale and management production patterns.

Only in the last few years has public research been initiated on intensive breeding techniques. Economic analyses of the few experimental data presently available 1 all coincide in showing the high profitability of these techniques, especially when appropriately combined into packages. Hence, there exists a latent demand for such innovations.

An analysis of profit functions based on farm surveys made in 1968 and 1969 shows, on the other hand, the incongruence of these management-intensive techniques with large-scale farms and absenteeism. Including real capital gains from increases in land values that have been superior to 5 percent yearly in the last twenty years,2 in the definition of net income per acre, the function was estimated as

NI=f (A, D, S, A * D, A * S),

where A = technification index, D the number of days spent on the farm by the staff manager, and S the farm size measured in hectares. The predicted iso-net return functions show that, while technification and management dedication are profitable on small farms, this is not the case on large farms. They also show that high- est profits per acre are still obtained by large absentee and traditional landowners. As a result, there is not, nor has there been, a strong demand for research on these new technologies. As confirma- tion, most farmers interviewed prefer horizontal to vertical expansion with available capital, and 53 percent of the owners of farms larger than 2,000 hectares had more than one farm.

Lack of adoption of the new breeding techniques by small and medium farmers reflects in part the tremendous lack of technical

9. M. Winsberg, "Modern Cattle Breeds in Argentina: Origin, Diffusion, and Change," Occasional Publication No. 13 (Lawrence: Center for Latin American Studies, University of Kansas, 1968).

1. Empirical results of this analysis of the beef breeding sector are given in Obschatko and de Janvry, op. cit.

2. A. Sojit, "Factors Affecting Land Values in Argentina," Ph.D. thesis, University of California, Berkeley, forthcoming.




and economic information on their uses, particularly when combined in packages of techniques. It also reflects the existence of a strong regressive environmental bias against small farmers in the access to credit, information, and education, all of which are clearly determinants of adoption of new technologies. As a result, lack of adoption comes from lack of profitability for large farmers and from environmental biases for small farmers, reflecting in all cases the unavailability of these techniques for individual adoption and not perverse economic behavior. This is important since it refutes the traditional structuralist arguments according to which absenteeism and large scale cause lack of technification and stagnation. It is found, by contrast, that causality runs from the lack of profitable techniques available for adoption to absenteeism and large scale as the most rational economic behavior.

In summary, a latent demand is found to exist for research on modern breeding techniques while actual demand is weak. Lack of adoption is due to the real unavailability of the techniques for adoption by individual farmers.

UNIVERSITY OF CALIFORNIA, BERKELEY



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