Agricultural Development Agricultural Development TheoriesTheories

Dr. George NortonAgricultural and

Applied EconomicsVirginia Tech

Copyright 2009

AAEC 3204AAEC 3204

Objectives Objectives

Discuss agricultural development Discuss agricultural development theories:theories:• Expanding “extensive margin”Expanding “extensive margin”• Expanding “intensive margin”Expanding “intensive margin”• DiffusionDiffusion• High-payoff inputsHigh-payoff inputs• Induced innovationInduced innovation• Induced innovation modified by Induced innovation modified by

transactions costs, and collective action transactions costs, and collective action

Resource Exploitation: Resource Exploitation: Expanding the Extensive MarginExpanding the Extensive Margin Expand land and labor, moving back Expand land and labor, moving back

the frontierthe frontier

Resource Exploitation: Expanding Resource Exploitation: Expanding the Intensive Marginthe Intensive Margin

Resource Resource conservation, conservation, higher valued higher valued crops: more crops: more intensive use of intensive use of manure, green manure, green manure, crop manure, crop rotations, improve rotations, improve efficiency of water efficiency of water use, etc. use, etc.

DiffusionDiffusion

Domestic extension, farmer to Domestic extension, farmer to farmer, international technology farmer, international technology transfertransfer

High-payoff inputsHigh-payoff inputs

Seeds, chemicals, irrigationSeeds, chemicals, irrigation

Induced InnovationInduced Innovation

Changed relative prices will stimulate Changed relative prices will stimulate the search for new methods of the search for new methods of production which will use more of the production which will use more of the now cheaper factor and less of the now cheaper factor and less of the more expensive onemore expensive one

Induced Technical Induced Technical ChangeChange

Induced Institutional Induced Institutional ChangeChange

Theory of induced innovationTheory of induced innovation

Technical changeTechnical change in agriculture in agriculture represents a response to changes in represents a response to changes in relative resource endowments and to relative resource endowments and to growth in product demandgrowth in product demand

Institutional changeInstitutional change in agriculture is in agriculture is induced by changes in relative induced by changes in relative resource endowments and by resource endowments and by technical changetechnical change

Land and labor are the two primary Land and labor are the two primary factors of production, and capital factors of production, and capital goods substitute for land or goods substitute for land or substitute for laborsubstitute for labor

Land saving capitalLand saving capital: biological, : biological, chemical, & water control chemical, & water control investments (seeds, fertilizers, investments (seeds, fertilizers, insecticides, irrigation)insecticides, irrigation)

Labor saving capitalLabor saving capital: machinery & : machinery & equipment, particularly tractorsequipment, particularly tractors

Induced innovation (resource endowments Induced innovation (resource endowments change)change)

P

A

B

C

P

N

N

PPL L0

I*

I

1 I*0

0*I

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0

0

0 0

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Land

Labor

Over time, observed changes in factor Over time, observed changes in factor ratios will result from cumulative effects ratios will result from cumulative effects

of three changes:of three changes:

1.1. factor substitution along a current factor substitution along a current production isoquant (Iproduction isoquant (I00))

2.2. factor savings due to technical change factor savings due to technical change along an innovation possibility curve along an innovation possibility curve (such as I*(such as I*00))

3.3. factor savings due to higher research factor savings due to higher research budgets & scientific advances that shift budgets & scientific advances that shift I*I*00 to and I* to and I*11 (closer to the origin) (closer to the origin)

Empirical Evidence of Induced Empirical Evidence of Induced InnovationInnovation

History generally supports (look at History generally supports (look at Japan and the United States for Japan and the United States for example)example)

Enormous changes in factor Enormous changes in factor proportions could hardly have proportions could hardly have occurred as a result of substitution occurred as a result of substitution among factors in the absence of among factors in the absence of endogenous technical changeendogenous technical change

Induced innovation (output to input price changes)Induced innovation (output to input price changes)

C

P

P

P

A

BV V

u

0

1

1

1 0

Fertilizer input per unit of area

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In pure neoclassical form, theory of induced In pure neoclassical form, theory of induced innovation assumes perfect markets for innovation assumes perfect markets for products, factors, and risksproducts, factors, and risks

Thus, prices convey all relevant information Thus, prices convey all relevant information and all agents face the same prices.and all agents face the same prices.

Therefore, asset distribution does not affect Therefore, asset distribution does not affect efficient allocation of resources and there is efficient allocation of resources and there is no room for collective action.no room for collective action.

Why then, in some countries, do we observe Why then, in some countries, do we observe institutional changes that appear only to institutional changes that appear only to

benefit a small segment of the population?benefit a small segment of the population?

Answer: Transactions costs and collective Answer: Transactions costs and collective actionaction

What are they?What are they?

Transactions costsTransactions costs

Transactions costs:Transactions costs:• Costs of adjustmentCosts of adjustment• Costs of informationCosts of information• Costs of negotiation, monitoring, and Costs of negotiation, monitoring, and

enforcing contractsenforcing contracts T.C. arise because of fixed assets, T.C. arise because of fixed assets,

lack of perfect information and lack of perfect information and calculation ability, and opportunismcalculation ability, and opportunism

Transactions costs can lead to Transactions costs can lead to both economies of size and to both economies of size and to

unscrupulous behaviorunscrupulous behavior

When large farmers or self-When large farmers or self-interested people join interested people join together for together for collective collective actionaction, they can influence , they can influence the direction of technical the direction of technical and institutional changeand institutional change

Technical innovation occurs in a Technical innovation occurs in a direction influenced by:direction influenced by:

• successful collective actionsuccessful collective action• commodities that are important as commodities that are important as

wage goods or for foreign exchangewage goods or for foreign exchange(because State concerned about its own (because State concerned about its own

self-interest)self-interest)

Determinants of successful Determinants of successful collective actioncollective action

Need to control free riders which is Need to control free riders which is facilitated by:facilitated by:• Relatively small groupRelatively small group• Relatively homogenous groupRelatively homogenous group• Previous association helpsPrevious association helps• Close social and physical proximityClose social and physical proximity• Difficulty in exit from the groupDifficulty in exit from the group

Induced innovation with transactions Induced innovation with transactions costs and collective actioncosts and collective action

Land

Labor0 L L

N

N

0

1

0 1

I

I'

II'

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0 0

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Y

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An operational agricultural An operational agricultural development strategy must discover development strategy must discover ways to develop institutions that ways to develop institutions that protect the majority of its producers protect the majority of its producers so that the policy makers and so that the policy makers and research systems do not become research systems do not become captive to just a small segment of its captive to just a small segment of its producersproducers

Agricultural sector activitiesAgricultural sector activities

• Land reformLand reform• Transportation, marketing, and Transportation, marketing, and

communicationscommunications• New inputs and creditNew inputs and credit• Reasonable pricing policiesReasonable pricing policies• Research to provide new Research to provide new

technologiestechnologies• Education and extensionEducation and extension

Six suggestionsSix suggestions

• Asset redistribution with compensationAsset redistribution with compensation• Improve information flows.Improve information flows.• How?How?• Decentralized industrial growthDecentralized industrial growth• Government structure with enforceable lawsGovernment structure with enforceable laws• Improved international laws and institutionsImproved international laws and institutions• How?How?These activities should reduce transactions costs These activities should reduce transactions costs

and help constrain abuse of collective actionand help constrain abuse of collective action

ConclusionsConclusions

• Relative price changes will induce the Relative price changes will induce the development and spread of new development and spread of new technologies. technologies.

• Relative price changes and new Relative price changes and new technologies will induce institutional technologies will induce institutional changeschanges

• Because of transactions costs and Because of transactions costs and collective action, the resulting changes collective action, the resulting changes may not be optimal unless efforts are may not be optimal unless efforts are made to reduce transactions costs and made to reduce transactions costs and constrain abuse of collective action constrain abuse of collective action