AGEC 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

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, Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press. Share of output from agriculture and mining in eight high-income countries, 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 Washington, DC: The World Bank (

Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press. Share of output from industry in eight high-income countries, 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 ( Percent of workforce by sector in the United States,

Another example of structural transformation over the long run… Percent of GDP by sector in Australia, Source: Government of Australia (2001), Economic Roundup – Centenary Edition, Department of the Treasury, Canberra.

Some conclusions on structural transformation as 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, "Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): Farm employment and earnings in the United States, 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, Source: BL Gardner, “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5): Thousands of 1992 dollars per farm Percent of non-farm income Farm income fell… then caught up

Structural transformation and the earnings gap across countries Source: Peter Timmer, “ Agricultural Trade Policy during Structural Transformation.” Mimeo, Stanford Univ., Dec The gap may worsen as incomes rise, then farmers catch up The farm-nonfarm earnings gap in 86 countries,

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 Rome: FAO (

The structural transformation in world trade: Agriculture’s share fell while its value rose Source: Reprinted from FAO, State of Food and Agriculture Rome: FAO (

Does U.S. agricultural output decline?

Source: Farm receipts are from US Economic Report of the President 2007 ( Table B-97; exports are from USDA, Economic Research Service ( Both are converted to constant dollars using GDP deflator from Bureau of Economic Analysis ( What happens to increases in U.S. output? ≈12-25% exported ≈25-30% exported

The bulk commodity business fluctuates, while value-added exports grow Source: USDA, Economic Research Service, Foreign Agricultural Trade of the United States (

Within agriculture, the structural transformation brings specialization for inputs and marketing Source: Reprinted from World Bank, World Development Report Washington, DC: The World Bank (

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, "Structural and productivity change in US agriculture, " Agric. Economics 24: , extended with more recent data from the US Economic Report of the President. Use of land and labor on U.S. farms, Index value, 1948=100

Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press. During structural transformation, the number of 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, Our textbook picture of structural transformation within agriculture: farm numbers stabilized by off-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 (

Cities are growing much faster than total population Source: Calculated from FAOStat data (

…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, “Paying for Prosperity: How and Why to Invest in Agricultural R&D in Africa.” Journal of International Affairs 58(2):

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