Transcript AGEC 340 Lecture Slides - Purdue Agricultural Economics

AGEC 340 -- International Economic Development
Course slides for Week 5 (Feb. 9 & 11)
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Structural transformation & economic growth*
As incomes rise, what happens to economic “structure”?
will look at three aspects of the structural transformation:
(1) Agriculture, industry and services as a share of income,
employment and spending
(2) The earnings gap between farmers and nonfarm workers
(3) The number of farmers and “industrialization” within
agriculture
There are big surprises ahead in each of these!
* If you’re following the textbook, this is in chapter 5, pp. 81-86
Our textbook picture of structural transformation
Agriculture’s share of national income
Another textbook picture of the transformation:
Agriculture’s share of employment
A third textbook picture:
Food’s share of total expenditure
Over time, in the history of rich countries:
Share of output from agriculture and mining in eight high-income countries, 1860-1960
What happens next?
Does the share fall to zero?
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995.
Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.
Among developing countries today,
the same pattern but each country’s path varies:
Source: Reprinted from World Bank, World Development Report 2008.
Washington, DC: The World Bank (www.worldbank.org/wdr2008)
Getting richer involves industrialization
Share of output from industry in eight high-income countries, 1860-1960
…but what
happens
next to
industry’s
share?
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995.
Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.
Over the full span of development,
employment shifts to services
Percent of workforce by sector in the United States, 1800-2005
today, about 80% of
jobs are in services
in 1800,
employment
was 90%
farming
in 1930s-70s,
industry
reached
about
40%
agricultural
employment has stabilized
Source: U.S. Economic Report of the President 2007 (www.gpoaccess.gov/eop)
Another example of structural
transformation over the long run…
Percent of GDP by sector in Australia, 1901-2000
Source: Government of Australia (2001), Economic Roundup – Centenary Edition,
Department of the Treasury, Canberra.
Some conclusions on structural transformation
as a share of the economy
• As incomes rise, the farm sector declines as a
share of employment, income & expenditure
–The share of industry rises and then falls
–The share of services rises
–The share of agriculture eventually stabilizes
• What happens to the earnings gap between
farmers and nonfarmers?
Farm employment and earnings
in the United States, 1889-2000
Agricultural Employment as a Share of Civilian Employment and
Real Farm Output as a Share of Real GDP
Until the 1930s,
employment and
output fell together
and then both
stopped falling
…then employment fell
much faster than output
SOURCE: U.S. Department of Commerce and the Federal Reserve Bank of St. Louis. Reprinted from K.L. Kliesen and W. Poole, 2000.
"Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): 1-12.
Source: BL Gardner, 2000. “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5): 1059-1074.
Thousands of 1992 dollars per farm
Percent of non-farm income
The US farm-nonfarm earnings gap, 1910-2000
Structural transformation and the earnings gap
across countries
-.5
0
.5
1
The farm-nonfarm earnings gap in 86 countries, 1965-2000
-1
The gap may worsen as incomes rise, then farmers catch up
4
6
8
10
LNGDPpc (Constant US$-2000)
12
Agri. GDP Share (LCU)
Agri. Employment Share
Agri. GDP Share (LCU)minusAgri. Employment Share
Source: Peter Timmer, “Agricultural Trade Policy during Structural Transformation.” Mimeo, Stanford Univ., Dec. 2007.
Structural transformation:
the story so far…
(1) Farming declines as a fraction of the economy, as
industry and services grow
(2) Farmers’ incomes decline relative to other
workers, but then catch up
–in the U.S.,
farmers’ incomes began to catch up in 1933
 farmers’ incomes passed non-farmers in 1990s

(3) What happens within agriculture?
Does total world agricultural output decline?
Source: Reprinted from FAO, State of Food and Agriculture 2007. Rome: FAO (www.fao.org)
The structural transformation in world trade:
Agriculture’s share fell while its value rose
Source: Reprinted from FAO, State of Food and Agriculture 2007. Rome: FAO (www.fao.org)
Does U.S. agricultural output decline?
10,000
90
9,000
80
8,000
70
7,000
60
6,000
50
5,000
40
4,000
Farm value added
(left scale)
30
3,000
20
2,000
Source: U.S. Bureau of Economic Analysis, Table 1.3.6 <www.bea.doc.gov>.
2000
1,000
1995
1990
1985
1980
1975
1970
1965
1955
1950
1945
1940
1935
0
1960
Non-farm businesses value added
(right scale)
10
0
Non-farm business (2000 US$ b.)
100
1930
Farm value added (2000 US$ b.)
US GDP from Farm and Nonfarm Businesses, 1929-2004
(Billions of 2000 US dollars)
What happens to increases in U.S. output?
Farm output and agricultural exports in the United States, 1945-2006
280
160
260
140
240
120
220
100
200
80
180
60
160
40
≈25-30% exported
140
Farm market receipts (2000 US$ b.) [left scale]
Agric. exports (2000 US$ b.) [right scale]
≈12-25% exported
120
1945
1950
1955
1960
20
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: Farm receipts are from US Economic Report of the President 2007 (www.gpoaccess.gov/eop),
Source: Farm receipts are from US Economic Report of the President 2007 (w w w .gpoaccess.gov/eop), Table B-97; exports are from USDA,
Table B-97; exports are from USDA, Economic Research Service (www.ers.usda.gov/Data/FATUS).
Foreign Agricultural Trade of the United States (w w w .ers.usda.gov/Data/FATUS). Both converted to constant dollars using GDP deflator.
Both are converted to constant dollars using GDP deflator from Bureau of Economic Analysis (www.bea.gov).
The bulk commodity business fluctuates,
while value-added exports grow
Fig. 1.3 U.S. Agricultural Exports by Category, 1970-2004
(billions of U.S. dollars)
35
Bulk
30
Intermediate
25
ConsumerOriented
20
15
10
5
20
03
20
00
19
97
19
94
19
91
19
88
19
85
19
82
19
79
19
76
19
73
19
70
0
Source: USDA, Economic Research Service, Foreign Agricultural Trade of the United States (www.ers.usda.gov/Data/FATUS).
Within agriculture, the structural transformation
brings specialization for inputs and marketing
Source: Reprinted from World Bank, World Development Report 2008.
Washington, DC: The World Bank (www.worldbank.org/wdr2008)
The stylized facts of structural transformation
(1) Farming declines as a fraction of the economy, as
industry and services grow
(2) Farmers’ incomes decline relative to other
workers, but then catch up
(3) Within agriculture, row-crop production fluctuates
while agroprocessing and agribusiness grows
… but what drives this change? what explains it?
Explaining Structural Transformation
Can consumers’ income growth explain the shift?
– Engel’s law
 As
income grows, demand increases less for food and ag.
products than for other things
 The income-consumption curve for food is relatively flat
 Income elasticity of demand for food < 1
– Bennett’s law
 As
income grows, demand increases least for basic staples and
rises for higher value foods
 The income-consumption curve for staples is very flat
 Income elasticity of demand for staples ≈ 0
Explaining Structural Transformation
Can new technology explain the shift?
– New farm technology: “Cochrane’s Treadmill”
 New farm technologies that increase output might lower
prices and “push” farmers out
 The demand curve for food is relatively steep
 Food demand is price-inelastic:

Price elasticity for food < 1 in absolute value
– Non-farm technology: bright lights, big city
 New nonfarm technologies that create opportunities might
“pull” farmers into nonfarm work
 The demand curve for non-food is relatively flat


Non-food demand is price-elastic
Price elasticity for nonfood >1 in abs. value
Explaining Structural Transformation
Limited land area may matter most of all:
– Because total land area is fixed,
farmers’ savings and investment eventually runs
out of on-farm uses, and is applied to other uses
 farmers’ earnings are linked to the number of
farmers, acres per farmer and earnings per acre

Farmland area and the number of farmers
Index value, 1948=100
Use of land and labor on U.S. farms, 1910-2000
Source: W.E. Huffman and R.E. Evenson, 2001. "Structural and productivity change in US agriculture, 1950-82."
Agric. Economics 24: 127-147, extended with more recent data from the US Economic Report of the President.
During structural transformation, the number
of farmers rises, then falls, and finally stabilizes
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995.
Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.
The number of farmers rises then falls… until
farmers’ incomes catch up to nonfarm earnings
Our textbook picture of structural transformation within agriculture:
farm numbers stabilized by
off-farm income and rising profits per acre;
latest census shows slight rise in no. of farms
Figure 5-3. Number and average size of farms in the United States, 1900-2002.
In the world as a whole, the number of farmers
has just peaked and will soon decline
Regions differ sharply in their population growth rates
Source: Calculated from FAOStat data (www.fao.org).
Cities are growing much faster than total population
Source: Calculated from FAOStat data (www.fao.org).
…but cities are still too small to absorb all
population growth, especially in S. Asia and Africa
Source: Calculated from FAOStat; chart reprinted from W.A. Masters, 2005. “Paying for Prosperity:
How and Why to Invest in Agricultural R&D in Africa.” Journal of International Affairs 58(2): 35-64.
Conclusions on economic growth and
structural transformation
As incomes grow…
(1) Farming declines as a fraction of the economy
• in favor of industry and services
• even within agriculture
(2) Farmers’ incomes at first decline relative to others
• but then farm incomes catch up
• eventually farmer incomes pass nonfarmers’ incomes
(3) The number of farmers first rises and then falls
• speed depends on both population and income growth
• eventually the number of farmers stabilizes