AGEC 340 -- International Economic Development

Course slides for Week 5 (Feb. 9 & 11)

Reminder: Project topic & sources must be uploaded by 5 pm Thurs.

– Topic is a title plus one-paragraph description – Sources is at least 10 biliographic citations– Assignment will be graded on:

the match between topic and sources the quality of presentation

remove your name and any identifying information from the page provide a meaningful title and a clear, complete paragraph describing

your topic find important sources, and format the bibliography carefully!

total is out of 50 points (=two quizzes or exercises)

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 .

Agriculture’s share of national income

Our textbook picture of structural transformation

Agriculture’s share of employment

Another textbook picture of the transformation:

Food’s share of total expenditure

A third textbook picture:

Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995. Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.

Share of output from agriculture and mining in eight high-income countries, 1860-1960

Over time, in the history of rich countries:

What happens next?Does the share fall to zero?

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)

Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995. Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.

Share of output from industry in eight high-income countries, 1860-1960

Getting richer involves industrialization

…but what happens

next to industry’s

share?

Over the full span of development, employment shifts to services

Source: U.S. Economic Report of the President 2007 (www.gpoaccess.gov/eop)

Percent of workforce by sector in the United States, 1800-2005

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 transformationas 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?

Agricultural Employment as a Share of Civilian Employment and Real Farm Output as a Share of Real GDP

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.

Farm employment and earnings in the United States, 1889-2000

Until the 1930s, employment and output fell together

…then employment fell much faster than output

and then both stopped falling

The US farm-nonfarm earnings gap, 1910-2000

Source: BL Gardner, 2000. “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5): 1059-1074.

Th

ou

san

ds o

f 1

99

2 d

ollars

per

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Perc

en

t of

non

-farm

in

com

e

Farm income fell…

then caught up

Structural transformation and the earnings gap across countries

-1

-.5

0.5

1

4 6 8 10 12LNGDPpc (Constant US$-2000)

Agri. GDP Share (LCU) Agri. Employment ShareAgri. GDP Share (LCU)minusAgri. Employment Share

Source: Peter Timmer, “Agricultural Trade Policy during Structural Transformation.” Mimeo, Stanford Univ., Dec. 2007.

The gap may worsen as incomes rise, then farmers catch up

The farm-nonfarm earnings gap in 86 countries, 1965-2000

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)

US GDP from Farm and Nonfarm Businesses, 1929-2004(Billions of 2000 US dollars)

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10

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100

1930

1935

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1945

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1995

2000

0

1,000

2,000

3,000

4,000

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10,000

Farm value added (left scale)

Non-farm businesses value added (right scale)

Source: U.S. Bureau of Economic Analysis, Table 1.3.6 <www.bea.doc.gov>.

Far

m v

alue

add

ed (20

00 U

S$

b.)

Non

-far

m b

usin

ess

(200

0 U

S$

b.)

Does U.S. agricultural output decline?

Farm output and agricultural exports in the United States, 1945-2006

120

140

160

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240

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280

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

0

20

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Farm market receipts (2000 US$ b.) [left scale]

Agric. exports (2000 US$ b.) [right scale]

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, Foreign Agricultural Trade of the United States (w w w .ers.usda.gov/Data/FATUS). Both converted to constant dollars using GDP deflator.

Source: Farm receipts are from US Economic Report of the President 2007 (www.gpoaccess.gov/eop), Table B-97; exports are from USDA, Economic Research Service (www.ers.usda.gov/Data/FATUS). Both are converted to constant dollars using GDP deflator from Bureau of Economic Analysis (www.bea.gov).

What happens to increases in U.S. output?

≈12-25% exported

≈25-30% exported

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)

0

5

10

15

20

25

30

35 Bulk

Intermediate

Consumer-Oriented

Source: USDA, Economic Research Service, Foreign Agricultural Trade of the United States (www.ers.usda.gov/Data/FATUS).

Within agriculture, the structural transformationbrings 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

–Bennett’s law As income grows, demand increases least for basic staples and

rises for higher value foods

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

–Non-farm technology: bright lights, big city New nonfarm technologies that create opportunities might

“pull” farmers into nonfarm work

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

Explaining Structural Transformation

Farmland area and the number of farmers

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.

Use of land and labor on U.S. farms, 1910-2000

Inde

x va

lue,

194

8=10

0

Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, 1995. Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.

During structural transformation, the numberof farmers rises, then falls, and finally stabilizes

The number of farmers rises then falls… until farmers’ incomes catch up to nonfarm earnings

Figure 5-3. Number and average size of farms in the United States, 1900-2002.

Our textbook picture of structural transformation within agriculture:

farm numbers stabilized byoff-farm income and rising profits per acre;latest census shows slight rise in no. of farms

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

(2) Farmers’ incomes at first decline relative to others

(3) The number of farmers first rises and then falls