AGEC 340 – International Economic DevelopmentCourse slides for week 8 (March 2 &4)

Is Growth Sustainable?*

• Does economic growth use up natural resources?• Can economic growth be sustained over time?

* In the textbook, this material is in chapters 9 and 14.

Resource Use and Sustainability

• So far in AGEC 340 we’ve seen:– Part I: basic facts

economic growth from low to high production & consumption demographic transition from large to small families structural transformation from farm to nonfarm activity

– Part II: microeconomics if everyone already optimizes input use and production… productivity grows only through new technology

• But new technology is limited by natural resources: “natural” in that supply is fixed (land, water, air etc.)

cannot make more of them, even if their value rises “natural” in that supply is not under individual control

ownership is collective, so use is less likely to be optimized

Economic growth involves switching from natural to man-made resources

BOX 14-1: INPUT USE AND AGRICULTURAL OUTPUT IN INDIA

The textbook story, from chapter 14:

acreage expansion endsyield increase takes over

and made possible by new plant geneticsfueled by control of water and fertilizer

Trends in farm size and yields by region, 1961-1990Diagonals have same farm size (ha/worker):

Y axis shows yield (output per hectare):

X axis shows earnings (output/worker):

The race between people and land, so far…

Slide 5

so… why no green revolution in Africa?

Fertilizer use is not converging to world levels, as it did in Asia

Fertilizer Use (N+P+K), 1961-2002

1

10

100

1000

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

kg

pe

r h

a o

f a

rab

le l

an

d

.

SSAfrica

SouthAsia

E&SEAsia

RestWorld

Selected Soil Fertility Constraints in Agriculture

(as percent of agricultural area)

Note: Constraints characterized using the Fertility Capability Classification (Sanchez et al., Smith).

Source: Stanley Wood (2002), IFPRI file data.

Low Cation

Exchange Capacity

Low Moisture Holding Capacity

SSA 15.9 23.2 Southeast Asia 2.3 6.0 South Asia 0.7 7.9 East Asia 0.1 1.8 Global Total 4.2 11.3

One reason for Africa’s lag is that itssoils and moisture are unusually difficult

Africa gets relatively little rainfall

…and Africa’s rainfall may have worsened in the 1960-1985 period

Source: S. Barrios, L. Bertinelli, and E. Strobl (2006), “Climate Change and Economic Growth: Evidence from Africa.” University of Luxebourg: CREA.

Source: Calculated from data in Evenson and Gollin, 2003.

But crucially, most African farmers still use old seed types; new seeds are coming out now

Source: Calculated from IFPRI and FAOStat file data

And a key reason for that is simplythat Africa has had less local research

Public Research Expenditure per Unit of Land, 1971-91(1985 PPP dollars per hectare of agricultural land)

0

1

2

3

4

1971

19

72

1973

19

74

1975

19

76

1977

19

78

1979

19

80

1981

19

82

1983

19

84

1985

19

86

1987

19

88

1989

19

90

1991

Sub-Saharan Africa All Developing Countries All Developed Countries

Africa faces unusually severe population pressuresAnnual Percent Growth in Total Population 1950-2030,

Calculated from UN/FAO Estimates

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1950-60 1960-70 1970-80 1980-90 1990-2000 2000-2010 2010-2020 2020-2030

Total SSA South Asia E&SE Asia Rest of World World Total

Rural population growth is especially important

Figure 11. Rural Population Growth by Region, 1950s-2020s

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Rur

al p

op. g

row

th r

ate

(

perc

ent

per

year

)

SS AfricaSouth AsiaE & SE AsiaRest of World

Changing age structure imposes another burdenPast and Projected Child Dependency by Region, 1950-2015

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1950 1960 1970 1980 1990 2000 2010

No.

of c

hild

ren

(0-1

4) p

er a

dult

(15-

64)

.

AfricaAsiaRest of the World

Source: UN Population Division, World Population Prospects: The 2002 Revision . Available online at <http://esa.un.org/unpp>.

To respond to farmers’ needs, crop improvement involves multiple innovations

Genetic improvement

(by scientists, using controlled trials)

Agronomic improvement

(by farmers, using land & labor)

Slide 16

New techniques to manage soils and conserve moisture are spreading

traditional “flat” planting

labor-intensive“Zai” microcatchments

For these fields, the workers are:

Resource Use and Sustainability

• The information we’ve seen so far implies that farmers are already doing the best they can -- and yet observers may feel that some farmers “overuse” certain resources.

• For example, in Indiana as in many places around the world, some water supplies are affected by runoff of farmers’ fertilizers, herbicides or pesticides. Do farmers use “too much” of these inputs? To answer, we must ask how this information enters our picture...

How do inputs enter farmers’ optimal choices?

Qty. of corn(bu/acre)

Qty. of fert. (lbs/acre)

Qty. of corn(bu/acre)

Qty. of beans(bushels/acre)

Qty. of labor(hours/acre)

Qty. of herbicide (liters/acre)

iso-profit(slope=Pf/Pc) iso-revenue

(-Pb/Pc)

iso-cost (slope=-Ph/Pm)

To include runoff costs of input use, we would add water users’ costs to prices paid by farmers:

Qty. of corn(bu/acre)

Qty. of fertilizer (lbs/acre)

Qty. of labor(hrs/acre)

Qty. of herbicide(liters/acre)

runoff costs addedto farmer’s cost

slope= (Pf+runoff)/Pc

slope= Pf/Pc slope= -(Ph+runoff/Pl)

slope= -Ph/Pl

…so that from the whole society’s point of view, a lower level of input use would be optimal:

Qty. of corn(bu/acre)

Qty. of fert.(lbs/acre)

Qty. of labor(hrs/acre)

Qty. of herbicide(liters/acre)

new optimum from adding runoff costs to farmer’s cost:lower inputs, lower outputs, more work for farmers.

slope= (Pf+runoff)/Pc

slope= Pf/Pc slope= -(Ph+runoff/Pl)

slope= -Ph/Pl

How can the country movefrom point A to point B?

Qty. of corn(bu/acre)

Qty. of labor(hrs/acre)

optimum at social costsA

B optimum at farmer’s costsA

B

Reductions in input use to take accountof off-farm costs to drinking water

slope=social costsslope=farmer’s costs

To reach the social optimum, we’d need either a tax:

Qty. of corn(bu/acre)

Qty. of labor(hrs/acre)

A

B

A

B

tax on input use to induce change

To reach the social optimum, we’d need either a tax, or a regulation:

Qty. of corn(bu/acre)

Qty. of labor(hrs/acre)

A

B

A

B

rules specifying new input use levels

tax on input use to induce change

In conclusion, to set environmental policies… what would we need to know?

• To set optimal taxes, we’d need to know the cost per unit of the runoff to water users.

• To set optimal rules, we’d need to know the new optimal input-use level.

• Using taxes is likely to give closer-to-optimal input use, but…

• Imposing taxes may be politically harder than specifying rules, so

• Most governments use rules instead of taxes.