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Donald F. Larson
Al Crego
TheWorldBank
DevelopmentResearchGroup
August1997
I
POLICYRESEARCHWORKINGPAPER1811
Summary findings
A comprehensive examination of data from many Measuring the effects of technology choice on
countries shows that in 1967-92, 81 percent of the productivity is crucial to understanding the determinants
world's population lived in countries where agricultural of agricultural growth. After selectively reviewing
growth exceeded population growth. Moreover, that applied production studies, Mundlak, Larson, and Crego
growth occurred as agricultural prices declined. conclude that the choice-of-technique method, which has
Productivity gains are a dominant characteristic of its roots in Tinter's early production function studies, is
agriculture for the period. Average productivity best suited for examining the determinants of agricultural
increased for land and labor. Moreover, agricultural growth.
productivity gains were greater than average productivity Investments in technology have yielded large gains for
gains for the economy in 80 percent of the countries agriculture, and the benefits have been passed on to
studied. consumers in the form of lower prices. Thus history
justifies public spending on agricultural research.
This paper -a product of the Development Research Group - is part of a larger effort in the group to examine the
determinants of agricultural growth. The study was funded by the Bank's Research Support Budget under the research
project "The Determinants of Agricultural Growth" (RPO 679-03). Copies of the paper are available free from the World
Bank, 1818 H StreetNW, Washington, DC 20433. Please contact Pauline Kokila, room N5-030, telephone 202-473-3716,
fax 202-522-3564, Internet address pkokila@worldbank.org. August 1997. (37 pages)
CONSEQUENCES
REFERENCES .............................................. 26
FIGURES .............................................. 27
i
AGRICULTURALDEVELOPMENT;ISSUES, EVIDENCE,AND
CONSEQUENCES
1. THE ISSUES
variousaspectsof growth.
1
mostly knownbut oftenignored- and providesa quantitativedimensionof the cross-
2. THE EVIDENCE
This interest is more intensethan in othersectors becauseof the uniquerole of food and
the natureof its demand. Much of the concernwith food supplycan be explainedby
the fear supplyshortagesand hunger at some pointin the near or remote future. In the
each country. At any pointon the graph, the readingon the vertical axis showsthe
2
proportionof countrieswhosegrowthrate did not exceed the correspondingvalue on the
relative size of countryis taken into account. This is done in the curve to the right,
risen, but this has not happened. This is seen in Figure2, which presentsthe distribution
distributionis -.45 percentper year and when we weighthe countriesby their importance
in world production,the median changesto -.61 percentper year. Note that the vertical
3
real pricesfell.
4
some of the observedspreadin growthrates. For instance,Singapore's agricultural
extent that 1992productionwas below that of 1967. Other countriesdo not fully utilize
countryperformanceto worldperformance.
5
growthrate, that is, the varianceof total growthrates is largerthan that ofper capita
demandderivedfrom productiongrowth.
under constantpricesthis ratio is roughly the income elasticityfor food. We say roughly,
demandis not the sameas that of food. However,in most countries,food dominates
agriculturalproduction.
Figure 4 presentsthe distributionof such a ratio for growth in real value for 91
countriesduring 1960-1992.5The medianvalues are .82 and .86 for the weightedand
6
models. Indeed,when it comesto agriculture,it is demandwhich has an enormous
2.1.3 Trade
tendencytoward self sufficiency. This is reflectedin the fact that trade accountsfor only
inadequateinfrastructure.
2.2.1 Land
7
quantityand as seen in Figure 5, was subjectto changes. In 65 percent of the countries
rate of .4 percent. For the world as a whole, the averageannualgrowthrate was .58
growthwas fasterin tree crops, 1.48,than in annual crops, .52, percentper year. Thus, in
spiteof the lowerprices for agriculture,it was still profitableto expandthe area of
agriculturalland.
unweightedand weighteddistributionsrespective!y.
2.2.2 Labor
8
substantialspread acrosscountries.
agriculture,but the timing and the degreeof such migrationdependson the off-farm
of the countriesthis ratio declined,and the rate of declinewas strongerthan the rate of
increasein the other half of countries. This uneveneffect is attributedto the dependence
migrationwas not sufficientfor the data to show a declinein the actual labor inputin
agriculture.
9
When outputper unit of land increaseswhilethe laborper unit of landis
The median ratesare 2.0 and 2.6 percentfor the unweightedand weighteddistributions,
from the discussionso far is capital. Data on this variableis limitedbut preliminary
can be quite high and hence it can have a strongdirect effect on productivity.In any
10
strikingis that laborproductivitygrew faster in agriculturethan in the rest of the
2.2.3 Summary
for sucha spread and more specifically,to what extentdoes the economicenvironment
set of all the variablesthat affect the productiondecisionsmade by firms. These include
that did change. The list of pertinentvariablesmay vary from countryto countryand the
obtainedin a cross-countryanalysis.
3. AGRICULTUREAND FARMERS
11
differentiatebetweenagricultureas an economicactivity(or a sector)and farmers. The
welfareof the sector is measuredby the returns to land,which is the factor specificto
land prices. The first is to deflateland pricesby the price of the agriculturalproduct,and
12
the value of land in terms of the purchasing power it has over an aggregate consumption
Figure 12 shows the pattern of real agricultural land prices for the United States,
Canada, South Africa and Japan countries for which extended time series are currently
available. In Figure 12, land prices are reported as indices with 1986 = 1. The upper
panel shows the output measure of land prices whereas the lower panel shows its
consumption measure. By both measures, land prices declined in the pre-war period.
They were gradually increasing in the immediate postwar period. This rise gained
impetus during the inflationary period of the 1970s and came to an end in the early
Comparing land prices at the beginning and end of each series, we see that by the
output measure prices are considerably higher, but according to the consumption measure
there is little change. In the US, the consumption-land-price index was .84 in 1992,
compared to .73 in 1910. For Canada the values for l990 and 1914 are .87 and .76,
respectively. The series for South Africa begins in 1940 at a level of .88, whereas the
1993 value is .65. Data for other countries show the same trend. On the whole, prices in
the 1990s are historically relatively low, and it is remarkable that land prices today are
not much different from those at the beginning of the century. Moreover, land prices
reflect subsidies to agriculture. If account were made for subsidies (which are relatively
new), then land prices would exhibit even less growth over their historic levels.
Another striking observation is the high correlation between the price movements
13
for the four countriesplotted in Figure 12,as well as for most countries. The correlation
the otherconsumptiongoods.
complex,story. The incomeof farmersis the returnto their laborand factorsin their
only sourcefor landlesslabor.7 Dataon returns to labor are deficient. Therefore,we will
examine changesin the structuralcompositionof the labor force and inferthe impactof
14
countriesis plotted in Figure 13,which showsthat such migrationtook place in
15
4. AGRICULTURE AND DEVELOPMENT
economy as a whole. First, it improved the overall food supply while prices declined and
thus improved consumer welfare. Second, it made it possible to produce more output
with relatively less labor and thus facilitated the development of nonagriculture. As a
result of the migration, the share of agriculture in the total labor force has declined. This
is seen in Figure 14 in which the share is plotted for 148 countries for the years 1950 and
economies and declines with the level of development. Even so, it has declined in all
countries. The median share was 70 percent in 1950, but only 33 percent in 1990. The
proportion of countries with a share below 10 percent increased from 1.3 percent in 1950
to 15 percent in 1990. Few indicators are better able to tell the story of the role of
for development. Therefore, understanding of the process of off-farm migration, and the
The net outcome of the processes reviewed above is a decline in the relative
importance of agriculture in total output. The change in the distribution of this share in
the 40 year period between 1950 and 1990, as seen from Figure 15, is indeed noteworthy;
the median for this group of 67 countries declined from 30 to 8 percent over this period.9
16
nonagriculture.At the sametime, in the longerrun, none of the benefitsare capturedin
productivityin the future? There is no reason to think that the futurewill be any different
burden of this researchshouldbe carriedby the public at large and not by agriculture,
which does not seemto captureand maintainthe benefit from it. Furthermore,because
the fruits of the researchare eventuallyspreadto all countries, a strong case can be made
technologyand benefit from it until the new technologyspreadsto other countries. Also,
well.
5. RESEARCHIMPLICATlONS
17
acrosscountries. The basic questionis how to account for this variability. There is no
answer. This is also true when it comesto the evaluationof the consequencesof policies.
and as such are dynamic in their nature. They are carriedout in responseto changesin
the studyof the impactof the economicenvironmenton such decisions. The task is to
18
considered by producers in making their production decisions can form the framework
impact that sectoral incentives have on factor demand and factor supply.
taken of the fact that the decisions have consequences in more than one
requirements, where on the whole, the more advanced techniques are more
implemented technology are made jointly with the decisions on input demand,
that demand also depends on the same constraints that affect the implemented
technology. The research and policy implications of this point can not be
overemphasized.
19
techniques, or changes in the available technology. Such a flow is correlated with
advancement in basic knowledge which, by its very nature, follows a random walk. The
voluminous literature that aims to explain this flow, for which agriculture is a good
example, provides plenty of anecdotal evidence but no structural model, and therefore
The empirical knowledge of the various blocks makes it possible to simulate the
economy and to evaluate the consequences of various policies. This is the approach
taken in Mundlak, Cavallo and Domenech for Argentina and Coeymans and Mundlak for
Chile. These studies construct simulation models along the lines indicated above which
are fitted to the historical data. Thereafter, the model is simulated to evaluate the
understand the dynamic, quantitative effect of various policies and to infer from them
Technical change is the key factor for growth and affects income distribution. Factor
shares determine the relationships between factor prices and product prices and the
20
Elasticities of substitution affects the functional distribution of income due to capital
accumulation. Not independent of all of the above is the question of supply response
and factor demand. Hence, the empirical analysis of technology, and its changes, is of
cardinal importance.
The literature on production functions and related topics deals with various
aspects of the subject but comes short of providing an integrated framework which is
into this literature we summarize some key findings on the central issues pertinent to the
There are two fairly distinct periods in the study of agricultural production functions,
before and after duality. The changing of the guards was in the early 1970s. Duality is a
powerful theory to analyze supply issues using primal or dual functions. However, its
empirical use is more limited. As a result, the appearance of duality changed not only the
method of estimation but also the questions asked to the extent that there is little
(1944). This work was influenced by the work of Paul Douglas and it thus took fifteen
years to adopt the work of Douglas in agricultural economics application. The primal
estimation of the Cobb-Douglas function was the centerpiece in the pre-duality work.
The approach does not impose competitive conditions on the estimation but instead
21
submitsthem to empiricaltesting. Such testingoften showsa differencebetween
most cases it varies in the rangeof 0.25to 0.45. This value is less than the elasticity of
susceptibleto increasesin the wage rate than nonagriculture.Also, the factor share of
saving.
From the perspectiveof farm incomeit is meaningfulto look at the sum of laborand land
22
factor shares and the true production elasticities. An example is the error involved in
finding increasing returns to scale and its subsequent incorporation in the computation of
growth over time or productivity differences across countries. Such a procedure was
motivated by the belief that all growth can be accounted for and therefore there should be
estimates and their dependence on the selected variables and sample coverage. This
result is consistent with the interpretation that the implemented technology is sensitive to
What distinguishes the dual approach from the primal is the appearance of prices
* What additional information is obtained from the dual equations and how can
they be interpreted?
The dual estimates are obtained by regressing factor shares on prices, a time
trend and sometimes output. When the change in use of inputs is decomposed to price,
23
technology(morecorrectly,time) and outputeffects,trend and outputaccountfor most
of the changeswhereasthe role of prices is the least important. Thus the apparentdirect
could be drawnfrom the raw data. This does not give a strongmarkto the analysisin
24
particularlyconcavityof the cost functionand convexityof the profit function.
One of the expectedvirtuesof duality has been its apparent solutionof the
estimators(Mundlak,1996).
25
REFERENCES
26
FIGURES
0. - ------ ----------
--- - - -- - - - I - - --- - -r----- --------
0.7
9 -- -
0.6 -- - - - - - - - -
l 0.5
* 6r
0.4
_ > Prod'nShares
0
-2.6 -1.3 0 1.3 2.6 3.9 5.2 6.5
Annual Growth Rate (percent)
. 1 J Equi it Weights
E 0.2; ; '; ;
-10 -5 0 5 10
Annual Growth Rate (percent)
27
Figure 3 Per Capita Agricultural Production
1967-1992 130Countries
07
3 0.5
0.6 ..... ...
,,,,,,;............................
0.1
028
Annual
Growth
Eqnual Rt(Pedent)
Weigh
Rat hre
d' Shamsn
I S @ 1 B I}MO19 JO 0fl3B
X~~~~~63
9L tl ZWaL 1 80 90 t0 Z0
C)
3
.... ... ... ... ... ... ................................ .................. . / -9
...................................
......................
...... ..................
..........I.......... - 8-
a
0.8
-15 -10 -s o 6 10
, ..
S
-15 -10-5 0 5 10
Annual Growth Rate(Pecn)
O~~~~~~~~
~ ~~~~~- - -
Ij 0.2 -I -, - - - - - - - - - - -
.,, , ...
I , prT~<.4 ZOo~
S14OIOmibt 4seJu,powd
|80
l~ ~~ ____ ___I___ 1
Z O Z- t-09-
...........
.........................
...X...I.................
............ .............
...............
..............................
.......
Z._90
..........................
.. ................ ................
...,............. ................................
.......
'-
1-II
o 02 08 2--.;
-4 -2 0 2 4 6 8
Growth Rat* (percent)
,O 0.2 - - - -- - - -. -- -------------------
-6 4 -2 0 2 4 6 8 10
Annual(r Growth Rate
32
Figure 11 Differential Growth of Labor Productivity
Non-Ag Minus Ag 1960 -1992 88 Countries
0 t l i i I
-15 -10 -5 0 5 10 15 20
Annual Growth Rat (V)
33
................... ............................ ,e .......
*wqmv q no ...........
. .:. . .. . . . ... .. .. ..
epeuoO .on
............ 0 *a
'..
*o1#1f
4in°S .... .... .. ..... .. a e
-a.J.s Pealun
N*W1V Wn0lS
P'.
u! puu-1JOOO!Jd
OJflhflO!JOV O41
ZlonBi:
Figure 13 Off-Farm Migration Rates
1950-1990 148 Countries
I
p06
4- 8 62
0
351990 1950
E
IL 0.8Lf/
* 0.4 .....
6 0.2-
35
Figure 16 Share of Agriculture in GDP
1950, 1990 67 Countries
O.8{ ~1990
U ~ ~~~ ~ ~ ~~~j ~~~~
1950
0.6 ,
IL 0.4-.
E 022 |
36
Notes
1.This researchhas been conductedat the WorldBank. The datawere assembledfrom the
known internationalsourcessuch as FAO,ILO, the WorldBank, IMF as well as from
countrypublications.The results are presentedin terms of empiricaldistributions. The
numberof countriesand the periodcoveredin the figuresvary accordingto data availability.
4. In making sucha statement,we note that the verticalaxis in the two figuresis the same
and that the units of the horizontalaxis are also the same
5. Based on nationalaccountsdata, convertedto dollars and deflatedby the US GDP deflator.
6. The varianceof the averageland productivityis lower than that of the averagelabor
productivity. This is due to biggervariancein the rates of changeof the labor forcethan of
land. The pattern of changesin land and labor productivityis discussedby Hayamiand
Ruttan (1985).
7. Part of the rent (residualincome)may also be sharedby tenants,dependingon the nature
of the contract.
8. The assumptionof equal fertilityrates is made here for purposeof illustration. The
migrationrates couldbe estimatedunder the assumptionof differentfertilityrates.
9. The medianin 1990for a larger set of 110 countriesis 9 percent. Figure 15 containsfewer
countrieson whichwe have data also for 1950.
37
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