Agricultural Economics Lecture 1

What is Agricultural Economics? “…an applied social science that deals with how producers, consumers and societies use scarce resources in the production, processing, marketing and consumption of food and fiber products”.

What is Agricultural Development? Here development means what happens over time change, evolution, growth it may be an improvement… or not. We focus on what happens to the whole country to the entire agricultural sector, given overall economic development: higher income, production and consumption improved health and life expectancy and many other changes…

A key change over time is that people get richer, so when we talk of “more” or “less” developed, what we usually mean is “richer” or “poorer”. We will usually be descriptive, asking: what happens over time, as countries get richer? what differs across countries between rich & poor? And sometimes we will be prescriptive, asking what should be done, to help people get what they want?

Development involves accumulation, that economists call “capital”: physical capital (houses, roads, machines) human capital (education, health) institutional capital (“rules of the game”) The accumulation of capital makes it more abundant and cheaper. But accumulation doesn’t happen automatically. To build up capital, people must save and invest from one year to the next.

new physical things (seeds, chemicals, etc.) Development also involves innovation, which economists call “technical change”: new physical things (seeds, chemicals, etc.) new ideas (crop rotations, etc.) new institutions (futures markets, etc.) Innovation makes it possible to produce more of what people want, from the resources they have. But innovation doesn’t happen automatically. To innovate, people must be able to change what they do.

Agriculture as a share of GDP vs. GNP per capita, 1989 Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

Agriculture as a share of employment vs. GNP per capita, 1985 Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

Percent of income spent on food vs. GNP per capita, 1980s Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

YEARS SHARE OF AGRICULTURE (%) SHARE OF INDUSTRY (%) SHARE OF SERVICES (%) 1980 24,2 20,5 55,4 1981 22,6 21,5 55,9 1982 22,7 21,9 1983 21,6 22,4 56 1984 20,3 23,1 56,6 1985 19,4 23,6 57 1986 18,8 25 56,2 1987 17,2 24,9 57,9 1988 18,3 25,1 56,7 1989 16,6 25,9 57,5 1990 16,3 1991 16,1 26,5 57,4 1992 15,8 57,8 1993 14,5 59 1994 15,3 26,6 58,1 1995 14,4 27,7 1996 14 58,3 1997 12,7 28,1 59,2 1998 13,4 27,6 1999 27,9 58,7 2000 13,1 27,8 2001 13,7 28,5 2002 29,3 56,9 2003 12,6 29,9

The Functions of Agriculture Function 1: Provide food for humankind Malthus’ theory of the capacity of world to feed humankind: Geometric increase in human population vs. arithmetic increase in food poduction.

Function 2: Provide raw material for the industry Function 3: Provide opportunity for rural lanscape Function 4: Source for capital accumulation for development Function 5: Source of labor for the industry

Why Does Agriculture’s Share Declines in Economic Development? Inelastic income elasticity of demand for staple foods: as per capita income rises, declining proportion of household expenditure is devoted to food. By Engel's law, as per-capita income rises, the proportion of income spent on food declines relative to other products.

As household demand for food declines in relation to other products, relative prices of foods decline, other things equal. This in turn reduces returns to factors used in agricultural production, causing a net migration of labor and capital to other sectors.  Share of agriculturen declines over the economic development process..

Almost always, agriculture declines In employment share In share of GDP or GNP (national income) In share of consumer expenditure Do farmers get poorer? Are there fewer farmers?

Agricultural Policy Policy is guiding principle leading to a course of action that is pursued by the government. Policies and programs Major forces for policy change: Instability Globalization Technology Food safety Environmeny Industrialization of agriculture Politics Unforseen events

What is Agricultural Policy? A subset of public policy directed primarily but not exclusively at the farm and agribusiness sectors of society.

Agricultural policy applies to two markets: 1. AGRICULTURAL INPUT MARKETS USE OF LAND AND OTHER NATURAL RESOURCES AGRICULTURAL CREDIT AND FINANCE LABOR INDUSTRIAL PRODUCTS 2. AGRICULTURAL OUTPUT MARKETS PRODUCTION CONSUMPTION MARKETING INTERNATIONAL TRADE

Next week Read: Economic Importance of Agriculture for Poverty Reduction Answer the following questions: What is the role of agriculture in poverty reduction? What is the major research question in the paper? What is the conclusion of the paper?