AGEC 340 – International Economic Development Course 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 Q output to Q input 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 innovation new 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 farmers will 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/new IRC 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/new IRC 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 more output same qty. of fertilizer Qty. of labor (days/hectare) IRC w/new IRC w/old Isoquant w/old Isoquant w/new same tractor set higher profit lower costs less labor Ag. output (tons/hectare)

But adjusting input use to the new technology is even better (highest profits, lowest costs) even more output more fertilizer Qty. of labor (days/hectare) Ag. output (tons/hectare) highest- possible profit along the IRC w/ new hybrids more labor less horsepower 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 use Ag. 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 techniques using 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-saving innovations input-using, yield-increasing innovations input-saving (but yield-reducing) innovations

In the US… abundant cropland, expanding until 1935 In Japan… scarce cropland, limited since 19 th century Example: the U.S. and Japan,

U.S. changes attract more inputs Japan changes 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.

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:

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/hectare) 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

Herbicide Tolerance Insect Resistance Both 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) 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) CountryAreaCrops grown with biotech traits USA62.5Soybean, maize, cotton, canola, squash, papaya, alfalfa, sugar beet Argentina21.0Soybean, maize, cotton Brazil15.8Soybean, maize, cotton India7.6Cotton Canada7.6Canola, maize, soybean, sugar beet China3.8Cotton, tomato, poplar, petunia, papaya, sweet pepper Paraguay2.7Soybean South Africa1.8Maize, soybean, cotton Uruguay0.7Soybean, maize Bolivia0.6Soybean Philippines0.4Maize Australia0.2Cotton, canola, carnation Mexico0.1Cotton, soybean Spain0.1Maize Chile<0.1Maize, soybean, canola Colombia<0.1Cotton, carnation Burkina Faso<0.1Cotton 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 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)