In economics, if each person is already doing the best they can…

AGEC 340 – International Economic DevelopmentCourse 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:

Qty. of corn(bu/acre)

Qty. of labor (hours/acre)

Qty. of corn(bu/acre)

Qty. of beans(bushels/acre)

Qty. of machinery(hp/acre)

Qty. of labor (hours/acre)

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

(-Pb/Pc)

iso-cost (-Pl/Pm)

How can conditions ever improve?

Output can increase if prices change…

Qty. of corn(bu/acre)

Qty. of labor (hours/acre)

Qty. of corn(bu/acre)

Qty. of beans(bushels/acre)

Qty. of machinery(hp/acre)

Qty. of labor (hours/acre)

Price of an input falls, relative to the output

Price of an output rises, relative to other outputs

Price of labor rises, relative to cost of labor-saving technologies

Our textbook picture:Box 5.1: Sources of Growth and the Production Function

when price changes cause output growth, that growth encounters diminishing returns, so productivity must fall: the ratio of Qoutput to Qinput declines

output grows but productivity falls

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 innovationnew 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 farmerswill respond to a new technology?

Ag. output(tons/hectare)

Qty. of fertilizer (tons/hectare)

Qty. of labor(days/hectare)

Qty. of traction(hp/hectare)

Hybrid corn

Better herbicides

(same output with less labor & tractor time)

If the price ratio stays the same, does input use also stay the same?

Ag. output(tons/hectare)

old qty. of fertilizer

Qty. of labor(days/hectare)

IRC w/newIRC w/old Isoquant w/old

Isoquant w/new

old tractor set

Ag. output(tons/hectare)

old qty. of fertilizer

Qty. of labor(days/hectare)

IRC w/newIRC w/old Isoquant w/old

Isoquant w/new

old tractor set

If farmers adopt these new technologies at the old input levels…

So the new technology is good,without changing input levels

mor

e ou

tput

same qty. of fertilizer

Qty. of labor(days/hectare)

IRC w/newIRC w/old Isoquant w/old

Isoquant w/new

same tractor set

highe

rpr

ofit

lower

costsless labor

Ag. output(tons/hectare)

But adjusting input use to the new technologyis even better (highest profits, lowest costs)

even

mor

e ou

tput

more fertilizer

Qty. of labor(days/hectare)

Ag. output(tons/hectare)

highest-possible profit along the IRC w/ new hybrids mor

ela

bor

lesshorsepower

lowest-possible cost along the

isoquant w/ new herbicides

It’s the slope of the IRC and the isoquant, relative to the price line,

that determines change in input useAg. output(tons/hectare)

Qty. of fertilizer (tons/hectare)

Qty. of labor(days/hectare)

Qty. of traction(hp/hectare)

When the input response curve gets steeper,farmers are induced to use more fertilizer and increase output

When the isoquant gets flatter, farmers are induced to use more labor and less horsepower

New techniques using little

horsepower

Can this type of thinking help us predict what types of new technology are most desirable?

Ag. output(tons/hectare)

Qty. of fertilizer (tons/hectare)

Qty. of labor(days/hectare)

Qty. of traction(hp/hectare)

New techniques using few

workers

New techniques using much fertilizer

New techniquesusing little fertilizer

New techniques are most desirable if they help farmers use what is increasingly abundant

Ag. output(tons/hectare)

Qty. of fertilizer (tons/hectare)

Qty. of labor(days/hectare)

Qty. of traction(hp/hectare)

biochemical, labor-using innovations

mechanical, labor-savinginnovations

input-using, yield-increasing

innovations

input-saving(but yield-reducing)innovations

In the US…abundant cropland, expanding until 1935;so farm machinery spread early, andthere 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

Example: the U.S. and Japan, 1880-1980

U.S. changes 1880-1935 attract more inputs

Japan changes 1880-1940 use same inputs better

What happened to productivity?

Source: Y. Hayami and V. Ruttan (1985) Agricultural Development: An International Perspective. Baltimore, The Johns Hopkins University Press.

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

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.

Slide 22

(tons

/hec

tare

) Yield improvement begins after WWII

Yields rise only with “green revolution” in 1960s

The Green Revolution in wheat…

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

Why are the means higher than the medians?

Which targets

give the highest

payoffs? Why?

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.

The latest wave of ag research is biotechnology

0

10

20

30

40

50

60

70

80

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Herbicide ToleranceInsect ResistanceBoth together

Global Area of Biotech Crops, 1996 to 2007:By Trait (Million Hectares)

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)

0

10

20

30

40

50

60

70

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

SoybeanMaizeCottonCanola

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 Area Crops grown with biotech traitsUSA 62.5 Soybean, maize, cotton, canola, squash, papaya, alfalfa, sugar beetArgentina 21.0 Soybean, maize, cottonBrazil 15.8 Soybean, maize, cottonIndia 7.6 CottonCanada 7.6 Canola, maize, soybean, sugar beetChina 3.8 Cotton, tomato, poplar, petunia, papaya, sweet pepperParaguay 2.7 SoybeanSouth Africa 1.8 Maize, soybean, cottonUruguay 0.7 Soybean, maizeBolivia 0.6 SoybeanPhilippines 0.4 MaizeAustralia 0.2 Cotton, canola, carnationMexico 0.1 Cotton, soybeanSpain 0.1 MaizeChile <0.1 Maize, soybean, canolaColombia <0.1 Cotton, carnationBurkina Faso <0.1 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)