1. Week 3 and 4 Presentation is from: Class notes of Prof. Gerald Shively
Purdue University
(AGEC 640: Agricultural Development and Policy)

2. Introduction to Agricultural Policy: Farm problems and food problems
First, some brainstorming:
What are the problems addressed by ag. policy?
What solutions are offered by policymakers?

3. Where do we see what types of policy?
Source: World Bank data, reprinted from UNEP/GRID-Arendal Maps and Graphics Library (

4. This is the usual pattern: the “development paradox”

5. The “development paradox” in East Asia, 1955-2002
Average Nominal Rate of Protection for Agricultural Production in East Asia,
Source: K. Anderson (2006), “Reducing Distortions to Agricultural Incentives: Progress, Pitfalls and Prospects.” <

6. The “development paradox” worldwide, 1960-2005
Effect of policy on farm product prices, by income level
Support for farmers
Taxation of farmers
≈ $5,000/yr
Note: Data shown are regression lines and 95% confidence intervals through annual national-average NRAs for over 68 countries, covering more than 90% of world agriculture in each year from 1960 through 2005.
Source: W.A. Masters and A. Garcia, “Agricultural Price Distortion and Stabilization: Stylized Facts and Hypothesis Tests,” in K. Anderson, ed., Political Economy of Distortions to Agricultural Incentives. Washington, DC: The World Bank, 2009.

7. Why is this pattern paradoxical?

8. The development paradox: employment and earnings
Source: Reprinted from World Bank, World Development Report Washington, DC: The World Bank (

9. Does the share fall to zero?
Share of output from agriculture and mining in eight high-income countries,
What happens next?
Does the share fall to zero?
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.
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10. The structural transformation is from agriculture to industry…
Share of output from industry in eight high-income countries,
…but what happens next to industry’s share?
Source: Reprinted from T.P. Tomich. P. Kilby and B.F. Johnston, Transforming Traditional Agriculture. Ithaca, NY: Cornell University Press.
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11. …over the full span of development, employment shifts to services…
Percent of workforce by sector in the United States,
today, about 80% of jobs are in services
in 1800, employment was 90% farming
in 1930s-70s, industry reached about %
agricultural
employment has stabilized
Source: U.S. Economic Report of the President 2007 (

12. 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.

13. As agriculture’s share of the economy declines, does farm income also fall?
Agricultural Employment as a Share of Civilian Employment and Real Farm Output as a Share of Real GDP
Until the 1930s, employment and output fell together
and then both stopped falling
…then employment fell much faster than output
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): 1-12.

14. The US farm-nonfarm earnings gap, 1910-2000
Thousands of 1992 dollars per farm
Percent of non-farm income
Farm income fell…
then caught up
Source: BL Gardner, “Economic Growth and Low Incomes in Agriculture.” AJAE 82(5):

15. Structural transformation: the story so far…
Farming declines as a fraction of the economy, as industry and services grow
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?

16. Does total world agricultural output decline?
Source: Reprinted from FAO, State of Food and Agriculture Rome: FAO (

17. 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 (

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

19. The stylized facts of structural transformation
Farming declines as a fraction of the economy, as industry and services grow
Farmers’ incomes decline relative to other workers, but then catch up
Within agriculture, row-crop production fluctuates while agroprocessing and agribusiness grows
… but what drives this change? what explains it?

20. 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
The income-consumption curve for food is relatively flat
Income elasticity of demand for food < 1
Bennett’s law
As income grows, demand increases least for basic staples and rises for higher value foods
The income-consumption curve for staples is very flat
Income elasticity of demand for staples ≈ 0
Evidence for “increasing demand for variety
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21. Engel’s Law for (Global) Food
Source: “Food Shares in Consumption: New Evidence Using Engel Curves for the Developing World”
Rafael De Hoyos and Rebecca Lessem (2008)
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22. Engel’s Law for food in Vietnam
Source: Le, Canh Quang (2008) “An Empirical Study of Food Demand in Vietnam” ASEAN Economic Bulletin 25(3):
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23. 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
The demand curve for food is relatively steep
Food demand is price-inelastic:
Price elasticity for food < 1 in absolute value
Non-farm technology: bright lights, big city
New nonfarm technologies that create opportunities might “pull” farmers into nonfarm work
Are we living in a “Harris-Todaro” world?
The demand curve for non-food is not as flat as for food
Non-food demand is price-elastic
Price elasticity for non-food >1 in abs. value
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24. Engel’s Law for manufactured goods in Malaysia
Source: Siddique, M. A. B. (1997) “Demand for machinery and manufactured goods in Malaysia” Mathematics and Computers in Simulation 43(3-6):
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25. Explaining Structural Transformation
Limited land area may matter most of all:
Because total land area is fixed,
farmers’ savings and investment eventually runs out of uses on the farm, and is applied to other uses
farmers’ earnings are linked to the number of farmers, acres per farmer and earnings per acre
As # farmers grows…
Acres per farmer declines…
earnings per acre falls and earnings per farmer falls
Until ???
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26. Conclusions and the road ahead
Ag policies vary widely but show some regularities over time & across countries
A key regularity is the “development paradox”:
In poor countries, policies often try to reduce food prices
In richer countries, usually switch to raise farm incomes
This is closely linked to “structural transformation”,
from farm to non-farm employment and earnings
which in turn is closely linked to…

27. Drivers of Change: Population growth and economic transformation
Last class:
broad diversity of policy problems and policy actions, but also
strong regularities (“stylized facts”):
the development paradox, from taxing to subsidizing farmers
the structural transformation, from farm to nonfarm activity
Today:
a key driver (from outside, exogenous to agriculture) is demography:
the demographic transition
from large to small families
high to low death rates and birth rates
high to low fraction of people who are children
…and other corresponding changes

28. Terminology: Demography and economics
The English language can be very confusing:
“demography”: study of population, also the population itself
“population growth”: increasing number of people
“demographics”: measured characteristics of the population
But…
the “economy”: the prod. & cons. activities of a population
“economic growth”: increases in prod. & cons. per person
“economics”: a way of studying the economy
And…
“demographic structure”: the composition of the population
usually age structure (% who are children, working-age, elderly)
“economic structure”: the composition of the economy
usually sectoral structure (% in ag., services, mining and manuf.)

29. Demographic transition
A pattern of steadily increasing population growth, followed by a period of slowing population growth (as experienced by industrialized countries). Generally indicated as an S-shaped curve for population through time.

30. Frank Notestein (b. 1945) Three stages of population growth
1. High growth potential
2. Transitional growth
3. Incipient decline 1 2 3

31. 1. High growth potential
Pre-industrial Birth rate high (25-40/1000) Death rate high Life expectancy short Population growth low but positive Widespread misery

32. 2. Transitional growth
Early industrial Birth rate remains high (or rises!) Death rate low and falling Life expectancy rises Population growth “explosive” Mortality declines before fertility due to better health, nutrition, and sanitation

33. 3. Incipient decline
Industrial Birth rate drops due to desires to limit family size Death rate low and stable Life expectancy high Population grows until birth rate = death rate Characterized by higher levels of wealth and reduced need for large families for labor or insurance.

34. A Stylized Model* of Demographic Transition
The gap between birth and death rates is the population’s “rate of natural increase”
(≈ population growth)
CDR = crude death rate CBR = crude birth rate
* In what sense is this a model?
Is it an economic model as per last week’s class?

35. An actual demographic transition
Sweden’s population growth rate peaked at about 1.5% per year, in the late 19th century

36. A different demographic transition
Mauritius’ peak pop. growth rate was over 3%/year, twice that of Sweden, because its death rate fell so fast…

37. A third kind of transition
Mexico’s peak population growth was even faster, because its birth rate fell slowly…

38. Message: Birth rates > death rates, country is still in stage 2 of the demographic transition

39. Birth and death rates depend in part on
age structure and “population momentum”

40. A very young age structure: the population pyramid for Nigeria 1980, 2000, 2020
Reprinted from
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41. A later stage of demographic transition: population pyramids for Indonesia 1980, 2000, 2020
Reprinted from
Indonesia has a much more “mature” population pyramid than Nigeria
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42. The final stage of demographic transition: population pyramids for the United States 1980, 2000, 2020
Reprinted from
The population “ages”, with
continued echoes of the post-WWII baby boom
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43. The lower-income regions have had a later (and much faster
The lower-income regions have had a later (and much faster!) demographic transition

44. Africa’s pop. growth has been of unprecedented speed and duration, but is now slowing

45. Africa’s child dependency has been similarly unprecedented, and is now improving10 20 30 40 50 60 70 80 90
100
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
No. of children (0-14)
per 100 adults (15-59)
E. Asia
S. Asia
Sub-Sah. Africa
Whole World
Source: UN Population Division, World Population Prospects: The 2000 Revision (

46. Explaining the demographic transition
What can account for the patterns we’ve seen, including especially the late and rapid demographic growth and child dependency in poor regions?
Will look first at mortality decline,
then fertility decline…

47. Explaining the mortality decline (UK data)

48. Explaining the mortality decline (US data)

49. The age structure of mortality decline

50. The HIV/AIDS tragedy

51. Explaining the fertility decline: social policies
Source: K. Sundstrom. “Can governments influence population growth?” OECD Observer, December 2001, p. 35.

52. Explaining the fertility decline: infant mortality

53. Conclusions on population growth and the demographic transition
Much popular understanding about population growth turns out to be wrong.
In fact, over time and across countries:
population growth starts with a fall in child mortality, which raises growth because fertility decline happens later
the temporary burst of population growth involves a rise and then fall in the fraction of people who are children
these changes are similar in all countries, but in today’s poor countries they occurred later and faster, with larger magnitude over shorter time period than occurred historically elsewhere
How does demographic transition affect agriculture?

54. What happens to the number of farmers?
Slide 54

55. What happens to the number of farmers?
Initially, farmers are much poorer than nonfarmers
less capital/worker, lower skills, less specialized
so agriculture is the residual employer…
annual change in the number of farmers depends on
growth in the total population
growth in nonfarm employment

56. In the world as a whole, the number of farmers has just peaked and will soon decline
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57. Regions differ sharply in their population growth rates
Source: Calculated from FAOStat data (

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

59. …but cities are still too small to absorb all population growth, especially in S. Asia and Africa
Source: 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):

60. Conclusions on economic growth and structural transformation
As incomes grow…
Farming declines as a fraction of the economy
in favor of industry and services
even within agriculture
Farmers’ incomes at first decline relative to others
but then farm incomes catch up
eventually farmer incomes pass nonfarmers’ incomes
The number of farmers first rises and then falls
speed depends on both population and income growth
eventually the number of farmers stabilizes

61. The rural effect is compounded by shift in age structure:
More conclusions…
Demographic transition and structural transformation interact, causing a rise & then fall in the number of farmers
Today’s developing countries have had very fast decline in death rates, leading to unprecedented speed of change;
With small shares of the population in nonfarm employment, this led to unprecedented rural population growth and declines in land available per farmer.
The rural effect is compounded by shift in age structure:
first, more children/adult (the “demographic burden”),
then, more child-bearing women (“population momentum”),
then more working-age adults (the “demographic gift”)
These are powerful drivers of change in agriculture and in agricultural policy, but occur slowly and are often ignored!