Transcript AGEC 340 – International Economic Development Course slides for week 7 (Feb.

AGEC 340 – International Economic Development
Course slides for week 7 (Feb. 23 & 24)
What drives growth?
Market prices and innovation*
In economics, if each person is already doing the
best they can…
How can there be improvement over time?
* If you are following the textbook, this is chapter 12.
The story so far...
if each person already does the best they can, given
what’s physically possible and what things are worth:
How can conditions ever improve?
Qty. of corn
Qty. of corn
Qty. of machinery
(bu/acre)
(bu/acre)
(hp/acre)
iso-profit
iso-revenue
(slope=Pl/Pc)
(-Pb/Pc)
iso-cost
(-Pl/Pm)
Qty. of labor
(hours/acre)
Qty. of beans
(bushels/acre)
Qty. of labor
(hours/acre)
Output can increase
if prices change…
Qty. of corn
(bu/acre)
Qty. of corn
(bu/acre)
Price of an
input falls,
relative to
the output
Qty. of labor
(hours/acre)
Qty. of machinery
(hp/acre)
Price of
an output
rises,
relative
to other
outputs
Qty. of beans
(bushels/acre)
Price of labor
rises, relative
to cost of
labor-saving
technologies
Qty. of labor
(hours/acre)
Our textbook picture:
Box 5.1: Sources of Growth
and the Production Function
output grows but
productivity falls
when price changes cause
output growth, that growth
encounters diminishing
returns, so productivity
must fall: the ratio of
Qoutput to Qinput declines
Our textbook picture:
Box 5.1: Sources of Growth
and the Production Function
productivity growth is possible only with new technology
output grows but
productivity falls
output grows
with higher
productivity
…but what kind of new technology?
Box 5.2: New technologies, input use
and the demand for innovation
new technologies that are profitable all raise productivity
….but they have varying effects on output levels and input use
Where does new technology come from?
• Chapter 12: Research, extension and education
– R&D changes what is technically possible
– extension and education helps people adapt
faster to change
• This is surprisingly important for world economic
development!
look at examples of:
 higher-yielding hybrid corn seed
 more effective herbicides
How does economics predict farmers
will respond to a new technology?
Ag. output
(tons/hectare)
Qty. of labor
(days/hectare)
Hybrid corn
Better
herbicides
(same output
with less labor
& tractor time)
Qty. of fertilizer
(tons/hectare)
Qty. of traction
(hp/hectare)
If the price ratio stays the same,
does input use also stay the same?
Ag. output
(tons/hectare)
Qty. of labor
(days/hectare)
IRC w/new
IRC w/old
old qty. of fertilizer
Isoquant w/new
Isoquant w/old
old tractor set
If farmers adopt these new technologies
at the old input levels…
Ag. output
(tons/hectare)
Qty. of labor
(days/hectare)
IRC w/new
IRC w/old
old qty. of fertilizer
Isoquant w/new
Isoquant w/old
old tractor set
So the new technology is good,
without changing input levels
Qty. of labor
(days/hectare)
IRC w/new
IRC w/old
Isoquant w/new
Isoquant w/old
less labor
more output
Ag. output
(tons/hectare)
same qty. of fertilizer
same tractor set
But adjusting input use to the new technology
is even better (highest profits, lowest costs)
Qty. of labor
(days/hectare)
highestpossible profit
along the IRC
w/ new hybrids
more fertilizer
more
labor
even more output
Ag. output
(tons/hectare)
lowest-possible
cost along the
isoquant w/
new herbicides
less
horsepower
It’s the slope of the IRC and the isoquant,
relative to the price line,
that determines change in input use
Ag. output
(tons/hectare)
Qty. of labor
(days/hectare)
When the input response
curve gets steeper,
farmers are induced to
use more fertilizer and
increase output
Qty. of fertilizer
(tons/hectare)
When the
isoquant gets
flatter, farmers
are induced to use
more labor and
less horsepower
Qty. of traction
(hp/hectare)
Can this type of thinking help us predict what
types of new technology are most desirable?
Ag. output
(tons/hectare)
New techniques using
much fertilizer
New techniques
using little fertilizer
Qty. of fertilizer
(tons/hectare)
Qty. of labor
(days/hectare)
New techniques
using little
horsepower
New techniques
using few
workers
Qty. of traction
(hp/hectare)
New techniques are most desirable if they help
farmers use what is increasingly abundant
Ag. output
(tons/hectare)
Qty. of labor
(days/hectare)
input-using,
yield-increasing
innovations
input-saving
(but yield-reducing)
innovations
Qty. of fertilizer
(tons/hectare)
biochemical,
labor-using
innovations
mechanical,
labor-saving
innovations
Qty. of traction
(hp/hectare)
Example: the U.S. and Japan, 1880-1980
In the US…
abundant cropland, expanding until 1935;
so farm machinery spread early, and
there was no big yield growth until 1930s
In Japan…
scarce cropland, limited since 19th century,
so fertilizer and new seed varieties spread early,
and machinery was not adopted until 1960s
What happened to productivity?
U.S. changes
1880-1935
attract more
inputs
Japan changes
1880-1940 use
same inputs
better
Source: Y. Hayami and V. Ruttan (1985) Agricultural Development: An International
Perspective. Baltimore, The Johns Hopkins University Press.
New plant varieties have driven productivity growth
Source: Y. Hayami and V. Ruttan (1985) Agricultural Development: An International
Perspective. Baltimore, The Johns Hopkins University Press.
Adoption of individual technologies typically
follows S-shaped curves, whose start date,
speed and ceiling varies widely by region
Source: Z. Griliches (1957), “Hybrid corn: an exploration in the economics of technological
change.” Econometrica 25: 501-522.
The spread of economic growth in Asia is
closely linked to the “Green Revolution”
In 1920s and 1930s, Japanese agronomists developed
high-yielding, labor- and fertilizer-using varieties of
rice suitable for Japan’s colonies in East Asia (Taiwan
& Korea).
After WWII, new international ag. research institutions,
financed mainly by the U.S., developed rice varieties
with similar characteristics for South & Southeast Asia,
and wheat varieties for South Asia & Latin America.
Key characteristics of
Green Revolution technology
• short stature, to
– concentrate nutrients in grain, not stalk, and
– support more grain without falling over (lodging);
• photoperiod insensitivity, to
– give flexibility in planting/harvest dates,
– control maturation speed, with
 more time for grain filling, and
 early maturity for short rains or multicropping
• new plant architecture, to
– concentrate energy and protect the grain.
(tons/hectare)
The Green Revolution in wheat…
Yield improvement
begins after WWII
Yields rise only with
“green revolution”
in 1960s
Slide 22
Your textbook table:
Payoffs from agricultural research are very high
Many studies;
payoffs are
measurable and
interesting
Payoffs are compared as percent/year earnings on investment
Which
targets
give the
highest
payoffs?
Why?
Why are the means
higher than the medians?
The latest wave of ag research is biotechnology
Note: The top line counts crop traits rather than crop varieties, as an increasing number of
varieties are bred with two or more “stacked” biotech traits.
Source: Reprinted from Clive James (2009), “Global Status of Commercialized
Biotech/GM Crops: 2008.” ISAAA Briefs No. 39.
Global Area of Biotech Crops, 1996 to 2007:
By Trait (Million Hectares)
80
70
60
50
Herbicide Tolerance
Insect Resistance
Both together
40
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Reprinted from Clive James (2008), “Global Status of
Commercialized Biotech/GM Crops: 2007.” ISAAA Briefs No. 37.
Global Area of Biotech Crops, 1996 to 2007:
By Crop (Million Hectares)
70
60
50
40
Soybean
Maize
Cotton
Canola
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Reprinted from Clive James (2008), “Global Status of
Commercialized Biotech/GM Crops: 2007.” ISAAA Briefs No. 37.
Global Area of Biotech Crops in 2008, by Country (Million Hectares)
Country
USA
Argentina
Brazil
India
Canada
China
Paraguay
South Africa
Uruguay
Bolivia
Philippines
Australia
Mexico
Spain
Chile
Colombia
Burkina Faso
Area
62.5
21.0
15.8
7.6
7.6
3.8
2.7
1.8
0.7
0.6
0.4
0.2
0.1
0.1
<0.1
<0.1
<0.1
Crops grown with biotech traits
Soybean, maize, cotton, canola, squash, papaya, alfalfa, sugar beet
Soybean, maize, cotton
Soybean, maize, cotton
Cotton
Canola, maize, soybean, sugar beet
Cotton, tomato, poplar, petunia, papaya, sweet pepper
Soybean
Maize, soybean, cotton
Soybean, maize
Soybean
Maize
Cotton, canola, carnation
Cotton, soybean
Maize
Maize, soybean, canola
Cotton, carnation
Cotton
Note: In addition the following countries grow <0.1 m. ha of GM maize, in descending order of area:
Honduras, Burkina Faso, Czech Rep. Romania, Portugal, Germany, Poland, Slovakia, and Egypt.
Source: Clive James, (2009), Global Status of Commercialized Biotech/GM Crops 2008. ISAAA Briefs No. 39.
How does technology adoption
vary across farms?
• Do smaller farms have “less technology”?
Do smaller farms have lower crop yields?
Do smaller farms adopt new technologies slower?
Conclusions… and next steps
• New technologies drive productivity growth…
– but can that be sustained over time?
we need to modify our economic analysis to
account for natural resources and the environment
(week 8, chapters 9 & 14)
• Then, after the midterm exam
– where do prices come from?
we need to expand our analysis in a different way
(weeks 11-15, chapters 15-19)