lecture notes - agricultural and food policy analysis (eng)

Agricultural Economics I:

Agricultural and Food Policy Analysis

Adam Smith (1776): It is not from the benevolence of

the butcher, the brewer, or the baker, that we expect our

dinner, but from their regard to their own interest.

Ricardos (1817) theory of

comparative advantage

used wine and cloth as

the example.

Anderson, Kym (2007). Distortions to Agricultural Incentives: A Global Perspective, 1955-2007. The World Bank and Palgrave Macmillan.

http://www.econlib.org/library/Ricardo/ricP.html

The Agricultural Roots of The Economist:

Created in opposition to the protectionist Corn Laws in the UK

Theodore Shultz on Agricultural Economics

Most of the people in the world are poor, so if we knew the economics of being poor we would know

much of the economics that really matters. Most of

the worlds poor people earn their living from

agriculture, so if we knew the economics of

agriculture we would know much of the economics

of being poor.

T.W. Schultz (1979)

Nobel Prize Lecture

This Course

An introduction to the field of agricultural and food policy analysis

Primarily developed for use in the MA Program in Economics at the International School of Economics at Tbilisi State University (ISET)

14 class sessions, 1 hour each

We will assess a variety of topics related to the economics (and political economy) of agricultural and rural development

Courses at ISET

Agricultural Economics:

Agricultural Economics I: Agricultural and Food Policy

Analysis

Agricultural Economics II: Agricultural Product and Factor

Market Analysis

Agricultural Economics III (planned): International Agricultural Trade

Additional courses:

Cost-Benefit Analysis

Development Economics

Program Evaluation

Trade Policy

Transition Economics

Agricultural and Food Policy Analysis

Agricultural and food policy analysis Subfield of agricultural economics Focus on market specifics, agriculture in transition, agricultural and rural

development

Incorporation of insights from the literatures on development economics, political economy, new institutional economics, field experimental research methods Emphasis on the importance of the institutional environment for an

economy, for the agricultural and food sector, and for understanding policy formulation

A rich methodology Neoclassical economic analysis is enriched by insights and tools from the

above fields

Acemoglu on Development Economics

Development economics investigates the causes of

poverty and low incomes

around the world and seeks to

make progress in designing

policies that could help

individuals, regions, and

countries to achieve greater

economic prosperity.

Acemoglu, Daron (2010). Theory, General Equilibrium, and

Political Economy in Development Economics. The Journal of

Economic Perspectives, 24(3), 1732.

The Institutional Environment

In Institutions, Institutional Change, and Economic Performance, Douglass North wrote that (p. 3):

Institutions are the rules of the game in a society or, more

formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change.

The rules of the game and their enforcement Organizations as the players of the game

North, Douglass (1990). Institutions, Institutional Change, and Economic Performance. Cambridge University Press, Cambridge UK.

Source: Williamson, Oliver (2000). The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic

Literature, XXXVIII: 595-613.

Williamsons

Four Levels of

Social

Analysis

Solid arrows

signify

that the

higher level

imposes

constraints

on the level

immediately

below.

Reverse

arrows

signal

feedback

A Public Choice Analysis of Agricultural

and Food Policies

Involves examining why agricultural and food policies are the way they are

Calls for a positive economic analysis of policy formulation, decision making, and resource allocation

James Buchanan: public choice is politics without romance.

Contrasts with a normative approach to these issues What policies should be developed

Though some normative criteria will be discussed (and debated!)

Washington is awash in rumors this week that the White House is planning major changes in the way the U.S. donates food to fight hunger in some of the worlds poorest countries.

It has set off an emotional debate. Both sides say they are trying to save lives.

Americas policies on food aid are singularly generousand also unusually selfish. On the generous side, the U.S. spends roughly $1.5 billion every year to send food abroad, far more than any other country.

On the other hand, the rules for this program, known as Food for Peace, ensure that much of the money stays in American hands. Most of the food, which commonly includes wheat, corn, and soy meal, and vegetable oil, has to be bought from U.S. farmers, processed here and delivered to its destination by U.S. shippers.

Listen: http://www.npr.org/blogs/thesalt/2013/04/04/176154775/a-political-war-brews-over-food-for-peace-aid-program

Why U.S. Taxpayers Pay Brazilian Cotton Farmers

Contrary to WTO rules, the U.S. subsidizes domestic cotton farmers (by $1.5 to $4 billion per year)

Brazil complained. The WTO ruled against the U.S., but it went nowhere because of a series of appeals.

So Brazil retaliated and threatened to tax imports of specific goods from the U.S. (in line with WTO rules). They grouped up with powerful U.S. industries (who would face the Brazilian import tax) to lobby the government.

What eventually happened? The U.S. now pays Brazilian cotton farmers $147 million a year. And the U.S. still subsidizes cotton farmers.

Source: http://www.npr.org/blogs/money/2011/01/26/131192182/cotton

A Public Choice Approach to

Agricultural Economics

What role do economists have in influencing the policy process if stakeholders have vested interests and influence in legislation?

Explains why policies may not be changed even if economists and the vast majority of citizens would like them to be changed

Fundamentally deals with issues related to good governance and the development of good political institutions

Course Goals

Broad goals: Improve skills in applied economics Improve critical thinking, writing and co-authoring, and

presentation skills

Specific goals: Become acquainted with the effects of agricultural and food

policies and programs

Assess the role of government in a market economy Understand the importance of institutions and organizations in a

market economy

Identify potential policy problems related to rural and agricultural development

Course Goals

Specific goals, continued: Study the transition of the agricultural sector and

models of rural and agricultural development

Become familiar with the basic concepts and frameworks used in agricultural and food policy analysis

Assess how policies are designed, implemented, and evaluated in practice, with a clear understanding of the political economy of agricultural and food policy analysis

Become equipped with skills for analyzing agricultural and food policies and monitoring and evaluation of their impacts ex ante and ex post

This Course

For examples and empirical evidence, much focus on the countries of the South Caucasus

(Armenia, Azerbaijan, and Georgia) and other

former Soviet republics

Well also examine the reform experiences of other countries in Central and Eastern Europe

Course Structure and Evaluation

Lectures and class discussions

Assigned readings

A short co-authored paper

Presentations and discussions in a short conference

Final exam

Lectures, Discussions, and Readings

The content of the lecture notes is not identical to the content of the reading materials It is important to read the assigned texts carefully in

order to fully understand and appreciate the context and contributions of each article

The reading material is meant to widen the scope of analysis beyond the content of the lecture

We will discuss the readings in class, in addition to having regular lecture sessions

Lectures, Discussions, and Readings

At the beginning of each lecture, please feel free to raise questions to clarify the content of the

preceding lecture or to clarify the content of the

assigned readings

Dont hesitate to ask questions and critique the materials!

Tentative Lecture Schedule

Lecture Topic

Lecture 1 Introduction to Agricultural and Food Policy Analysis

Lecture 2 The Puzzle of Agricultural Productivity in Georgia

Agriculture in Transition

Lecture 3 Agriculture in Transition (Continued)

Lecture 4 Agricultural Market Specifics

Lecture 5 Insights from New Institutional Economics

Lecture 6 Case Study: Embedded Institutions and the Persistence of Large Farms in Russia

Case Study: Property Rights in Mestia

Lecture 7 Agricultural and Food Policy Objectives

Lecture 8 Agricultural and Food Policy Objectives, Continued

Lecture 9 Agricultural and Food Policy Evaluation

Lecture 10 Impact Evaluation and Field Experimental Methods

Lecture 11 Impact Evaluation and Field Experimental Methods: Specific Studies

Lecture 12 The Political Economy of Agricultural Policy

Lecture 13 The Political Economy of Agricultural Policy, Continued

Lecture 14 Conference: Presentations and Discussant Comments

The Puzzle of Agricultural Productivity

Agriculture in Transition

Section Readings

Ellman, Michael. (1988). Soviet Agricultural Policy. Economic & Political Weekly, 23(24): 1208-1210.

The Arena and the Common Heritage, Chapter 2. Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Rozelle, Scott and Johan F. M. Swinnen. (2004). Success and Failure of Reform: Insights from the Transition of Agriculture. Journal of Economic Literature, XLII: 404-456.

The ISET Economist, October 11, 2012. The Puzzle of Agricultural Productivity in Georgia (and Armenia). http://www.iset.ge/blog/?p=836


According to official statistics, Georgia is the only former Soviet republic in which labor

productivity in agriculture hasnt returned to or

exceeded its level in 1992

Agricultural labor productivity: value added in agriculture per agricultural worker, constant 2000 US

dollars from the World Banks World Development

Indicators dataset

0200

04

00

06

00

0

Ag

ricu

lture

va

lue a

dde

d p

er

work

er

1990 1995 2000 2005 2010Year

Data source: World Bank

Agricultural Productivity

0

200

04

00

06

00

0A

g

1990 1995 2000 2005 2010Year

Armenia Azerbaijan

Belarus Estonia

Georgia Kazakhstan

Kyrgyz Republic Latvia

Lithuania Moldova

Russian Federation Tajikistan

Turkmenistan Ukraine

Uzbekistan



0100

200

300

400

Ag

ricu

lture

va

lue a

dde

d p

er

work

er

rela

tive to

199

2

1990 1995 2000 2005 2010Year


Agricultural Productivity Relative to its 1992 Level

0

100

200

300

400

Ag

1990 1995 2000 2005 2010Year

Armenia Azerbaijan

Belarus Georgia

Kazakhstan Kyrgyz Republic

Latvia Moldova



Uzbekistan

Ag


Inputs

Rozelle, Scott and Johan F. M. Swinnen. (2004). Success and Failure of Reform: Insights from the Transition of Agriculture. Journal of Economic

Literature, XLII: 404-456.

Irrigation

Lerman, Zvi, and David Sedik. (2010). Rural Transition in Azerbaijan. Lexington Books, UK.

Land Reform



Land Reform

Lerman, Zvi. (2007). Land Reform, Farm Structure, and Agricultural Performance in CIS Countries. Hebrew University, Discussion Paper No. 7.07


What is agricultural and rural development?

Is agricultural productivity necessarily the key variable of interest? If not, what metrics of

agricultural development should we consider?

These are just a few of the questions well be thinking about

Considerations

How is value added calculated? How were agricultural product price data collected and calculated? How valuable are existing inputs to the agricultural production

process?

How is employment calculated?

How large is the informal agricultural sector? Schneider, Buehn, and Montenegro (2010) estimate that the total

size of the overall shadow economy in Georgia was about 62 percent of officially recorded GDP in 2007, which suggests that there is indeed much economic activity occurring in the informal economy

Schneider, Friedrich, Andreas Buehn, and Claudio E. Montenegro. (2010). New Estimates for the Shadow Economies all over

the World. International Economic Journal, 24(4): 443-461.

Measurement Error?

0

200

04

00

06

00

0

Ag

ricu

lture

va

lue a

dde

d p

er

work

er

1990 1995 2000 2005 2010Year



0

200

04

00

06

00

0A

g

1990 1995 2000 2005 2010Year

Armenia Azerbaijan

Georgia



Definitely Measurement Error Here!

Source: http://databank.worldbank.org/data/home.aspx. April 2, 2013.

Reform and Agricultural Labor

Productivity



How

Productive

Was Georgia

During the

Soviet Era?

What issues might there be

with a data source like the

Statistical Yearbook of the

USSR?

Lerman, Zvi, Yoav Kislev, David Biton, and Alon Kriss. (2003). Agricultural Output and Productivity in the Former Soviet Republics. Economic

Development and Cultural Change, 51(4): 999-1018.

Different Calculations

Lerman, Zvi, Yoav Kislev, David Biton, and Alon Kriss. (2003). Agricultural Output and Productivity in the Former Soviet Republics. Economic

Development and Cultural Change, 51(4): 999-1018.

Additional Considerations

How efficient are agricultural producers?

Supporting environment Estonia, Latvia, and Lithuania are members of the EU

and agricultural producers benefit from EU support measures

A rights-based approach to agricultural development Forced labor in the cotton fields in Uzbekistan to

increase cotton exports; should we discount these data because of rights violations?

Its Not

Agricultural

Productivity

Per Se That

Matters

A Rights-Based Approach to

Agricultural Development

Human Rights Watch:

For the 2012 harvest, the Uzbek government forced over a million of its own citizens, children and adults including its

teachers, doctors, and nurses to harvest cotton in abusive

conditions on threat of punishment, Human Rights Watch

found. The authorities harassed local activists and journalists

who tried to report on the issue. In 2011, Uzbekistan was the

worlds fifth largest exporter of cotton.

Additional

Considerations

The agricultural sector is much more complex than is suggested by macro-level statistics on productivity or output

A caveat about growth

Source: Paul Samuelsons textbook; Marginal Revolution

An Enabling Environment

Rozelle and Swinnen (2004): our analysis suggests that, above all, success requires two key

elements: good rights and an institutional

environment within which agents can exchange

goods and services and access inputs.



What is Development, After All?

In Development as Freedom, Amartya Sen argued that development can be seen as:

as a process of expanding the real freedoms that people enjoy. Focusing on human freedoms contrasts with narrower views of development, such as identifying development with the growth of gross national product, or with the rise in personal incomes, or with industrialization, or with technological advance, or with social modernization. Growth of GNP or of individual incomes can, of course, be very important as means to expanding the freedoms enjoyed by members of the society. But freedoms also depend on other determinants, such as social and economic arrangements (for example, facilities for education and health care) as well as political and civil rights (for example, the liberty to participate in public discussion and scrutiny).

Sen, Amartya. (1999). Development as Freedom. Anchor Books, New York.

Development as Freedom

Sen (1999) argued that real development requires the removal of major sources of

unfreedom: poverty as well as tyranny, poor

economic opportunities as well as systematic

social deprivation, neglect of public facilities as

well as intolerance or overactivity of repressive

states.

Sen, Amartya. (1999). Development as Freedom. Anchor Books, New York.

The Capability Approach

Amartya Sen View that income and wealth are not ends, but means

Instruments for other purposes

Sen argues that the capability to function is what really matters

Functionings: what a person does (or can do) with the commodities of given characteristics that they come to possess or control.

Freedom of choice (control over ones own life)

Todaro, Michael and Stephen Smith (2012). Economic Development, Addison-Wesley.

Sources of Disparity Between

Income and Development Personal heterogeneities

E.g. disabilities, illnesses, age, gender

Environmental diversities Variations in social climate

Crime, violence, and social capital

Distribution within the family Family resources may be distributed unevenly (e.g. on

the basis of gender)

Relational perspectives Demand for some commodities to function in different

societies

Todaro, Michael and Stephen Smith (2012). Economic Development, Addison-Wesley.


Rising agricultural productivity is often viewed as a key policy goal Rozelle and Swinnen (2004): Rising productivity through

policies that provide better incentives and reduce resource wastewill a.) lead to rising food and non-food agricultural production; b.) contribute to higher income; and c.) make the sector more modern.

because its seen as important for poverty reduction.

Well look at the sources of growth in agricultural output per worker (per person) later in the course



01

02

03

04

05

06

0

% o

f T

ota

l E

mplo

ym

ent

1990 1995 2000 2005 2010Year


Employment in Agriculture (% of Total Employment)

30

35

40

45

50

55

Ag

1990 1995 2000 2005 2010Year

Armenia Azerbaijan

Georgia

XX

02

04

06

08

0

% o

f G

DP

1990 1995 2000 2005 2010Year


Agriculture value added (% of GDP)

02

04

06

08

0A

g

1990 1995 2000 2005 2010Year

Armenia Azerbaijan

Belarus Estonia

Georgia Kazakhstan


Lithuania Russian Federation

Tajikistan Turkmenistan

Ukraine Uzbekistan

XX

Note: Moldova is not included because of measurement error.

0200

04

00

06

00

0

Ag

ricu

lture

va

lue a

dde

d p

er

work

er

1990 1995 2000 2005 2010Year



0

200

04

00

06

00

0A

g

1990 1995 2000 2005 2010Year

Armenia Azerbaijan

Belarus Estonia

Georgia Kazakhstan


Lithuania Moldova



Uzbekistan



Source:

http://www.feradi.in

fo/en/visualizations/

2012-2016-georgian-

budget-for-

agriculture

In Georgian:

http://www.feradi.in

fo/ka/visualizations/

soplis-meurneobis-

biujeti-2012-2016

Average monthly salary of employees by economic activity GEL

2011

Total 636.0

Agriculture, hunting and forestry 392.6

Fishing 271.1

Mining and quarrying 838.6

Manufacturing 552.2

Production and distribution of electricity, gas and water 877.0

Construction 738.5

Wholesale and retail trade; repair of motor vehicles and personal and

household goods 548.9

Hotels and restaurants 342.4

Transport and communication 873.8

Financial intermediation 1386.3

Real estate, renting and business activities 674.3

Public administration 998.8

Education 319.6

Health and social work 522.9

Other community, social and personal service activities 511.5

Georgias Agricultural Sector

Source: http://www.geostat.ge/

OUTPUT OF AGRICULTURAL PRODUCTS IN GEORGIA (mil. GEL)

Cereals and other crops n.e.c. 471.3

Fruit, nuts, beverage and spice crops 476.5

Vegetables, horticultural specialities and nursery 290.1

Live animals and animal products 1,336.8

Agricultural services 99.3

Total 2,674.0

OUTPUT OF FOOD PRODUCTS MADE BY PROCESSING AGRICULTURAL

PRODUCTS (mil. GEL)

Grain mill products, starches and starch products; prepared animal feeds 476.9

Bread, fresh pastry goods and cakes; rusks and biscuits; preserved pastry goods and cakes 1,255.6

Meat and meat products; processed and preserved fish and fish products 124.7

Dairy products and ice cream 463.2

Alcoholic beverages 443.2

Other food products 792.0

Total 3,555.6

Total output of agrobusiness, mil. GEL 6,229.6

Total output by economy, mil. GEL 36,430.7

Share of agrobusiness in the output of total economy (%) 17.1


Georgias Agrobusiness Sector in 2011


Georgias Agrobusiness Sector

0.0

5.0

10.0

15.0

20.0

25.0

2006 2007 2008 2009 2010 2011

Share of Agrobusiness in Total Economic Output (%)

Georgias Employment Situation


Kan, Iddo, Ayal Kimhi, and Zvi Lerman. (2006). Farm Output, Non-farm Income and Commercialization in Rural Georgia.

Journal of Agricultural and Development Economics, 3(2): 276-286.

Transition in Agriculture

Institutional changes: Property and land use rights

Their definition and enforcement, whether formal or informal

Contract enforcement Constraints on executive authority

Macroeconomic changes (LCF 2004: p. 5): Abolition of central planning Reduction of government intervention Elimination of central controls Price and trade liberalization Economic stabilization

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet

Countries. Lexington Books, Maryland.


Sectoral policies (LCF 2004: p. 5)

Demonopolized and competitive upstream and downstream industries

Rural credit institutions

Technological improvements

New capital investment patterns in agriculture

Rural non-farm job creation




Land reform (LCF 2004: p. 5)

Restructuring of Soviet farms

Privatization of state-owned farms

The political environment shapes how land reform and farm restructuring will occur



Agriculture in the Soviet Period

(LCF, 2004: 25-26) Large-scale collective and state farms

Subsistence agriculture on small rural household plots A dual farm structure Entire value chain (e.g., upstream input industries) controlled by

state organizations In practice, gray/black market activity

95% of agricultural land publicly controlled Yet the individual sector had a far higher level of land productivity

than did the socialized farm sector

Centrally dictated production targets Soft budget constraints




(LCF, 2004: 25-26)

Soviet state farms ( , sovkhoz) and collective/cooperative farms ( , kolkhoz)

Sovkhoz: Productive assets owned by the state, farm workers were mainly salaried state employees; land state

owned

Kolkhoz: Productive assets jointly owned by members, compensated by distribution of farm earnings; land state

owned

Also a guaranteed minimum wage since the Khrushchev era

No freedom of exit from cooperatives/collectives




(LCF, 2004: 28) Housing, power, water, heat provided in villages by local farm

enterprises

Salaries of teachers, doctors, postal workers paid by government, but disbursement carried out by local farm enterprises

Subsidized inputs, financial transfers to loss-making farms, redistribution of funds from profitable to unprofitable farms

Allocation of often interest-free long-term government credits



Efficiency and Profitability

(LCF, 2004: 29-30)

Socialist collective and state farms: woefully inefficient

Efficiency and profitability were not the focus; improving production was the focus



Operating Decisions in Market-based and Socialist Farms

Business component Decisions in a market

economy

Decisions in a socialist

economy

Sales Choose where =

centrally imposed

Costs Cost minimization Cost overruns covered by

state

Labor Adjust labor force to

changing production

volume/mix

Labor force fixed;

workers guaranteed

lifetime employment

Inputs Seek best suppliers,

control purchase

quantities

Inputs at state-fixed

prices; in quantities

determined by production

quotas



Operating Decisions in Market-based and Socialist Farms

Business component Decisions in a market

economy

Decisions in a socialist

economy

Depreciation New capital investment if

needed for profitability

New capital investment if

decided by the plan

Credit/financial expenses Hard budget constraints Credit allocated centrally

to cover deficits (soft

budget constraints)

Profit Maximize profit

(minimize cost) by

producing where =

Profit uncontrollable



Inefficiencies of Soviet Agriculture

Attribute Inefficiencies due to..

Centrally commanded production targets Lack of consumer orientation; insensitivity

to market signals

Soft budget constraints Lack of profit orientation; reliance on

writeoffs and subsidies

Collective organization of production Free riding, moral hazard, lack of individual

incentives; payment not linked to effort

Large farms (2,000 ha; 500 workers) High monitoring costs, anonymity, lack of

transparency

Lifetime employment Inability to control costs by adjusting labor

No effective individual ownership of land

and productive assets

Nontransferability of land and assets; lack

of incentives associated with property rights



Optimal Farm Sizes

Super large farms relatively inefficient due to high transaction costs (agency costs with hired management, costs of labor monitoring) (LCF, 2004: 45)

Allow farm sizes to be decided in land markets (LCF, 2004: 35)

But there may be other political determinants of the optimal size of a farm as well, something we will look at later



Agricultural Markets

Section Readings

Binswanger, Hans P. and Klaus Deininger (1997). Explaining Agricultural and Agrarian

Policies in Developing Countries. Journal of

Economic Literature, XXXV: 1958-2005.

Bezemer, Dirk and Derek Headey (2008). Agriculture, Development, and Urban Bias.

World Development, 7: 1-40.

Income from Agriculture

To improve farmers incomes, policies must somehow increase farmers revenues or reduce

their costs (Gardner, 1987)

Sometimes this comes about through efforts to restrict supply or increase demand, so that there is

an increase in farmers receipts

Lets consider a few different policy approaches and their market effects

Source: Gardner, Bruce (1987). The Economics of Agricultural Policies. Macmillan Publishing Company, New York.

The Market Price

Quantity

Supply

Demand

Quota

Price

Quantity

Supply

Demand

Source: Gardner (1987)

Quota

Price

Quantity

Supply

Demand


Effective Supply

A Quota

Quotas limit how much each farmer can supply to the market

A quota reduces quantity supplied from to and increases the market price from to .

Producers therefore receive a higher price for each of the units (up to ) supplied to the market. The total area under the supply curve from to indicates the industrys cost

savings from reducing output.

However, these units could have been sold at market price and these units therefore would have had marginal revenues exceeding marginal costs, resulting in producer benefits.

Therefore the total gain to producers is . The loss in consumer surplus is represented by areas + . From societys point of view, the quotas result in a net loss of + since these

units were never produced and traded, whereas they would have been under baseline market conditions. This net loss therefore represents a misallocation of resources.


Price Supports

Price

Quantity

Supply

Demand


Price Supports

Producers receive price (up to a certain point, say ), which is higher than the market price. They choose to produce more than they would under normal market

conditions.

With price supports, producers gain area . Consumers gain area because at the quantity being supplied due to

the price support, they pay and demand the quantity . Yet there is a cost! The cost of the price support program to taxpayers.

Taxpayers must fund the area which can be rather substantial. These payments equal + + so net of the producer () and

consumer () gains, there is a social net loss of . This area also represents the misallocation of resources that occur since the units are produced at the expense of something else.


Prices and Incomes in Agriculture

Is the agricultural sector affected more or less than other sectors in an economy during a

recession?

Consider the case of a closed economy with a simple supply and demand model

Source: Koester, Ulrich and Ali El-Agraa (2003). The Common Agricultural Policy. In Ali El-Agraa (ed.), The European Union:

Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.


If = (, ) and =

=

+

Let

= < 0 and

= > 0

Then

=

+




We also know that since = () then

=

and let

= > 0

Then

=




Since = we know that

+

=

Thus

=

So prices for agricultural products will decline more,

given an income shock (

< 0), when, ceteris paribus,

The income elasticity of demand is larger

The price elasticity of demand is smaller

The price elasticity of demand is smaller




0

1

0

0

1

0

1

0

1

Large supply

overhang for the

manufacturing

sector

Small supply

overhang for the

agricultural

sector

Yet the

percentage

change of prices

in the agricultural

sector is much

higher

1




With relatively small price elasticities of supply and demand, small changes in supply or demand will have significant implications for the prices for agricultural products seen by farmers and thereby their incomes

Agriculture may thereby suffer more during business cycles than other sectors (though this is a closed economy model)

What might happen in an open economy setting?



Income Elasticity of Demand for

Calories

Income elasticity of demand for calories:

Percentage change in calories consumed given a percentage change in household income

Among the poor in developing countries, this may range anywhere from 0 to 0.5

Depends on region, statistical methods

Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York:

Perseus Books.

Income Elasticity of Demand for

Calories

Income is spent on other goods rather than food Medicine, media, festivals, weddings, funerals, etc.

Increases in food variety (especially better tasting foods) without a necessary increase in caloric consumption

Income consumption of better-tasting, more expensive calories (rather than calories altogether or more micronutrients)


Perseus Books.

Studies on Caloric Intake Among the

Poor (B&D, 24)

Robert Jensen and Nolan Miller

Two regions of China

Offered randomly selected poor households a large subsidy on the price of the basic staple (wheat

noodles in one region, rice in the other)

Effectively decreasing the price

What happens?


Perseus Books.

Studies on Caloric Intake Among the

Poor (B&D, 24)

Jensen and Miller:

Households receiving subsidies for rice or wheat consumed less of those two items and ate more shrimp and meat

Caloric intake of those who received the subsidy did not increase (and may have very well decreased)

No real improvement in nutritional content of total food consumption


Perseus Books.

Giffen Good

Classic case of the Giffen good The price of a commodity decreases and you consume less of it

because of the magnitude of the income effect

Because the prices of rice and wheat declined, they were able to spend more money on all other commodities and they actually consumed less rice and wheat as a result

Because all Giffen goods are inferior goods, it must be the case that those receiving subsidies for purchases of rice or wheat saw them as inferior to consumption of other types of foods


Perseus Books.

Agricultural Markets

Non -

governmental

organisations

L E

U

R U S

Agriculture Upstream

sectors

Downstream

sectors

Consumers

Government

The red arrows affect activities of organisations. The green arrows affect exchange between the organisations.

Source: Koester (2012) Lecture

R L E S

Imperfect and Missing Markets

Rural credit markets and insurance markets Especially important given volatility of income from the agricultural

sector (Bezemer and Headey, 2008)

Land markets Heterogeneous labor market arrangements Markets for research and development

Developing new technologies, crop varieties, etc.

Lack of information What options exist for value chain integration

Asymmetric information Different information sets for smallholder farmers, wholesalers, input

suppliers, etc.

High transaction costs

Bezemer, Dirk and Derek Headey (2008). Agriculture, Development, and Urban Bias. World Development, 7: 1-40.

Binswanger, Hans P. and Klaus Deininger (1997). Explaining Agricultural and Agrarian Policies in Developing Countries. Journal of Economic Literature,

XXXV: 1958-2005.

Income Risk and Insurance

IN INDIA, when monsoons are delayed and crops fail as a result, farmers often dont know how to pay back the debts they have taken on to purchase seeds. More than 15,000 commit suicide every year. These fates are a shocking reminder of a global problem caused by global warming. Farming has always been a gamble, but the growing number of unusual weather events, as experts call them, make seeding and harvesting an even riskier business.

The Economist

A Land Market Without Exchange

Price

Quantity

Supply

Demand

Illustrates the importance of

insights from new institutional

economics (e.g., informal norms,

the importance of transaction

costs, property rights, etc.)

Source: Koester, Ulrich and Ali El-Agraa (2003). The Common Agricultural Policy. In Ali El-Agraa (ed.), The

European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Suppliers: High

reservation

prices for land

(e.g., because of

risk hedging,

tradition, etc.)

Buyers:

Uncertainty

about future

returns from

land

A Land Market Without Exchange

Back to the institutional environment

Poorly defined and enforced property and land use rights

Uncertainty due to political instability, conflict, economic environment

Attachment to land as a function of the risk environment Land owners may be hesitant to sell land since its a critical asset for

risk hedging (Koester and Petrick, 2010)

Low access to credit

Koester, Ulrich and Martin Petrick (2010). Embedded Institutions and the Persistence of Large Farms in Russia. In Imre Ferto,

Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Rural Insurance Markets

How is risk managed in rural areas in developing countries? Individuals often have to manage

considerable risks, including but not limited to

weather shocks (e.g., too much precipitation or

too little), price shocks, and even risks which are

more political in nature, like land tenure

insecurity.

Source: http://www.civil.ge/eng/article.php?id=25021

Rural Financial Markets

Besley (1994): A market failure [in rural credit markets] occurs when a competitive market fails

to bring about an efficient allocation of credit.

Potential for poor financial intermediation

How are savers and borrowers matched up when there is no intermediary?

Besley, Timothy (1994). How Do Market Failures Justify Interventions in Rural Credit Markets? The World Bank Research

Observer, 9(1): 27-47.

Rural Insurance Markets

Cole, Gin, Tobacman, Topalova, Townsend, and Vickery (2013) use randomized field experiments to evaluate demand for a rainfall insurance product in rural areas in Andhra Pradesh and Gujarat, India

Premiums are higher than expected payouts in many developing countries, including India

Along with being price sensitive, demand seems to be limited by a lack of trust, liquidity constraints, and relatively low product salience

Cole, Shawn, Xavier Gin, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery (2013). Barriers to Household Risk Management:

Evidence from India. American Economic Journal: Applied Economics, 5(1): 104-135.

Rural Private Banking Sector

Problem areas (Koester, 2001):

Small amount of credit needed, though high transaction costs for a bank

Knowledge and capacity limitations with respect to assessing creditworthiness

Also uncertainty with respect to return on investment

Risk level associated with agricultural credit

Geographic dispersion

Low average incomes

Koester, Ulrich (2001). Agricultural Finance and Institutional Reforms in Transition Economies: The 1990s and Challenges Ahead. Quarterly Journal of

International Agriculture, 40(4): 301-323.

Rural and Agricultural Credit

Cooperatives

Koester (2001):

May lower transaction costs if smaller, village based, and have better knowledge of credit

history/creditworthiness

Preference for small loans



Rural Financial Markets

Importance of the overall institutional environment for the functioning of rural credit markets (see,

e.g., Koester, 2001)

Particularly with regard to the quality of legal institutions, their transparency and efficiency

Protection of property rights

Unbiased enforcement of contracts



Section Readings

North, Douglass (1991). Institutions. Journal of Economic Perspectives, 5(1): 97-112.

Olson, Mancur. (1996). Distinguished Lecture on Economics in Government: Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor. Journal of Economic Perspectives, 10(2): 3-24.

Lindsay, Stace (2000). Culture, Mental Models, and National Prosperity. In Lawrence E. Harrison and Samuel P. Huntington (eds.), Culture Matters: How Values Shape Human Progress, Basic Books, pp. 282-295.

Williamson, Oliver (2000). The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic Literature, XXXVIII: 595-613.

Section Readings

Koester, Ulrich (2005). A Revival of Large Farms in Eastern EuropeHow Important Are Institutions? Agricultural Economics, 32(s1): 103-113.

Koester, Ulrich and Martin Petrick (2010). Embedded Institutions and the Persistence of Large Farms in Russia. In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Swinnen, Johan F. M., Anneleen Vandeplas, and Miet Maertens. (2010). Liberalization, Endogenous Institutions, and Growth: A Comparative Analysis of Agricultural Reforms in Africa, Asia, and Europe. World Bank Economic Review, 24(3): 412-445.

Problems Related to the Protection of Property Rights The Case of Mestia. Available at: http://transparency.ge/en/post/report/problems-related-protection-property-rights-case-mestia-july-2011.


In Institutions, Institutional Change, and Economic Performance, Douglass North wrote that (p. 3):

Institutions are the rules of the game in a society or, more

formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change.

The rules of the game and their enforcement Organizations as the players of the game



North (1991):

Institutions may consist of either:

Informal constraints

Sanctions, customs, traditions, etc.

Formal rules

Constitutions, codified laws, recorded and enforced property rights



Another widely accepted view is that institutions are rules of human interaction that

constrain possible opportunistic and erratic

behavior, thereby making human behavior more

predictable and thus facilitating the division of

labour and wealth creation (Kasper and Streit,

1999: 30).

Kasper, Wolfgang and Manfred E. Streit (1999). Institutional Economics: Social Order and Public Policy. Edward Elgar Publishing.

Focusing on Institutions

Two broad views of economics:

Economics as the study of the allocation of resources

Economics as the study of coordination and exchange

Buchanan (1964): economists should focus on the latter

Buchanan, James (1964). What Should Economists Do? Southern Economic Journal, 30(3): 213-222.

Coordination and Exchange

A market is not competitive by assumption or by construction. A market becomes competitive, and competitive rules come to be established as institutions emerge to place limits on individual behavior patterns. It is this becoming process, brought about by the continuous pressure of human behavior in exchange, that is the central part of our disciplineA general solution, if there is one, emerges as a result of a whole network of evolving exchanges, bargains, trades, side payments, agreements, contracts which, finally at some point, ceases to renew itself. At each stage of this evolution towards solution, there are gains to be made, there are exchanges possible, and this being true, the direction of movement is modified.


Coordination and Exchange

Individuals are observed to cooperate with one another, to reach agreements, to trade. The network of relationships that emerges or evolves out of this trading process, the institutional framework, is called the market.

Economists should concentrate attention on the institutions, the relationships, among individuals as they participate in voluntarily organized activity, in trade or exchange, broadly considered.


Source: Williamson, Oliver (2000). The New Institutional Economics: Taking Stock, Looking Ahead. Journal of Economic

Literature, XXXVIII: 595-613.

Williamsons

Four Levels of

Social

Analysis

Solid arrows

signify

that the

higher level

imposes

constraints

on the level

immediately

below.

Reverse

arrows

signal

feedback

The Coordinating Role of Institutions

The institutional environment

influences how

different agents

interact and

coordinate in a

market economy

Big Bills Left on the Sidewalk: Why Some

Nations are Rich, and Others Poor.

Mancur Olsen

1996 Journal of Economic Perspectives

Inclusive Economic Institutions

Acemoglu and Robinson (2012: 74) define inclusive economic institutions as those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.

Acemoglu, Daron and James A. Robinson (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown

Publishers, New York.

Inclusive Economic Institutions

Acemoglu and Robinson (2012: 75) argue that Inclusive economic institutions foster economic

activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations. But such rights must exist for the majority of people in society.

Acemoglu, Daron and James A. Robinson (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown

Publishers, New York.

North Korea

South Korea Henderson and Storeygard

(2012). Measuring

Economic Growth From

Outer Space. American

Economic Review, forthcoming.

Easterly on Institutional Design

The top down view of institutions sees them as determined by laws written by political leadersthe bottom up view sees

institutions instead as emerging spontaneously from the social

norms, customs, traditions, beliefs, and values of individuals

within a society, with the written law only formalizing what is

already maintained by the attitudes of individuals

Institutional change in the bottom up view is always gradual, evolutionary rather than revolutionary.

Easterly, William (2008). Institutions: Top Down or Bottom Up? American Economic Review,

98(2): 95-99.

Easterly on Institutional Design

Even if the bottom up economists can think of NO reason why a particular institution exists, they are still cautious about

changing existing institutions abruptly (assuming such

institutions are not too obviously destructive) with the

knowledge that there is SOME reason, not yet understood and

perhaps never to be understood, for their existence.

As Richard Dawkins said about the analogous exercise in evolutionary biology of trying to understand the rationale for the

anatomy of each species, evolution is smarter than you are.

Easterly, William (2008). Institutions: Top Down or Bottom Up? American Economic Review,

98(2): 95-99.

A Rights-Based Approach

Property rights -- 2012 According to information obtained by Transparency

International Georgia, government representatives pressured land owners in Anaklia into giving up their lands during the period 2009-2010. While this information was previously known to the public, now for the first time the victims have been openly discussing the alleged cases. A video shows government officials threatening landowners with arrest or the dismissal of family members from their work if they failed to relinquish their property.

Source: http://transparency.ge/en/blog/property-seizure-officials-case-anaklia

Important Topics in New Institutional Economics

Relevant for Agricultural Development

Trust and informal norms Without trust in exchange partners, transactions will be

limited or will have high costs (Koester and Petrick, 2010)

Particularly important for agriculture considering that most farm products are experience goods (quality is revealed upon consumption) or credence goods (neither the quality nor the production process are known ex ante) rather than search goods (quality is known at the time of purchase) (Koester and Petrick, 2010)

Transaction costs Enforcement costs Institutional change and development



Transaction Costs

Transaction costs The time, effort, and other resources needed to

search out, negotiate, and complete an exchange (Gwartney, Stroup, Sobel, and Macpherson, 2011: 31)

Suggests the importance of brokers who bring buyers and sellers of agricultural products together and arrange trades

Help to reduce transaction costs

Gwartney, James D., Richard L. Stroup, Russell Sobel, and David A. MacPherson (2011). Microeconomics: Private and Public Choice,

South-Western, Cengage Learning.

Transaction Costs

Transportation infrastructure

Internal transaction costs For example, managing and monitoring workers and enforcing labor contracts

Evaluating agricultural productivity levels among different farmers

External transaction costs For example, negotiating with input suppliers, finding buyers and export markets Uncertainty with respect to others behavior

Can input suppliers be trusted? Are they reliable? How can this be evaluated ex ante? As producers of agricultural products, the quality of these products may need to be

inspected by end users (consumers or processors, for instance), which lead to the incurrence of transaction costs as well

Biased contract enforcement or weak definition and enforcement of property rights also lead to uncertainty

Transaction Costs

These transaction costs are then added to the transformation costs

Transformation costs: the pure costs of production (transforming inputs into final output)

Implications of Transaction Costs for

the Optimal Farm Size

Farm Size

Average

Costs Internal transaction costs

(e.g., monitoring labor)

External transaction costs

Transformation costs

(Costs of production)

Average

Total costs

Optimal

Farm Size

Implications of Transaction Costs for

the Optimal Farm Size

Is there just one optimal farm size?

No; it varies considerably based on different cost structures and the relative profitability of different farming activities

Depends on management, production methods, etc.

The previous graph is just one potential setup of a cost structure for a farm

Illustrates that small farms may indeed be profitable, perhaps more so than relatively large farms

Implications for Transaction Costs for

Farm Gate Prices

With a given market price, the presence of high transaction costs will reduce farm gate prices

If transaction costs were lower, this would thereby improve the prices seen by farmers for their agricultural products

This could be seen as one policy objective in order to support incomes in rural regions

Market price Farm gate

price

Transaction costs

Embedded Institutions and the

Persistence of Large Farms in Russia

Lets look at a specific case study to better understand the importance of institutions for

the agricultural sector

The paper by Koester and Petrick (2010) illustrates:

The importance of embedded or informal institutions

The role played by mental models in policy reform and current sector structure

Why neoclassical economic approaches alone cannot explain the structure of the farm sector in Russia



Embedded Institutions and the

Persistence of Large Farms in Russia

The original expectation was that state and collective farms would be transformed into family farms

The starting point was state and collective farms, as well as household farms

Yet the actual development was relatively few family farms, super large corporate and cooperative farms, and extended family farms

Some agroholdings have more than 50,000 hectares



Embedded Institutions

These are the first level institutions identified in Williamson (2000)

They are deeply ingrained, based on tradition, religion, and culture

The informal institutions are informal rules of the game and their enforcement

They influence the mental models of individuals

Individuals beliefs, inferences, and goals



Koester, Ulrich (2005). A Revival of Large Farms in Eastern EuropeHow Important Are Institutions? Agricultural Economics,

32(s1): 103-113.

Embedded Institutions in Russia

Potential farmers relatively less willing to take risks, make changes, and be entrepreneurial Employees preferring to work on large farms

Mental models of large farm managers, policy makers, and bureaucrats orienting them toward viewing large farms as having a comparative advantage Also with regard to ensuring food security

Distrust of markets in ensuring food security

Facing soft budget constraints, still Managers feeling partly obliged to provide social services

Low willingness to rely on credit among farmers; issues with ascertaining credit-worthiness of potential clients among banks



Economic Implications

Sectoral production is fairly high, but

Distorted markets

High unemployment in rural areas

Overly capital-intensive production

High level of political influence of super-large farms



Prospects

With market-driven structural change, the situation may change Yet this requires better functioning land, credit, insurance markets Better information and training

Along with economies of scale arising from technological change, the return of the family farm is unlikely Will drive down internal transaction costs due to new monitoring

technologies

Will drive down transformation costs External transaction costs are biased in favor of large farms

Think about political economy considerations here



Prospects

With policy driven structural change, the situation may change Yet mental models are sticky over time Path dependence in agricultural organizational

arrangements, institutional arrangements, and economic behavior

Political influence of large agroholdings

May have unintended consequences, high transition costs in the short run with policy driven structural change



Agricultural and Food Policy

Section Readings

Koester, Ulrich and Ali El-Agraa (2003). The Common Agricultural Policy. In Ali El-Agraa

(ed.), The European Union: Economics and Policies.

Seventh Edition. Pearson Education Limited.

Harlow, Essex, UK, pp. 354-390.

Agricultural and Food Policies

Some often stated objectives among agricultural and food policy analysts (which may be [or are!] in discord with one another):

1. Food security

2. Agricultural income

3. Efficiency in the agricultural sector

4. Price stability

5. Food safety

6. Environmental concerns



Food Security

Food security, as defined at the World Food Summit in 1996:

Food security as existing when all people at all times have access to sufficient, safe, nutritious food

to maintain a healthy and active life.



Food Insecurity

Food insecurity exists, as defined in Cafiero (2013): (a) When people cannot access food, simply because food is

not physically available where and when it is needed;

(b) When people do not have economic access to food, meaning they lack the means to acquire the food even if the food would be at their physical reach;

(c) When people can only afford to procure and eat combinations of foods that do not meet their preferences, are not safe, or are nutritionally unbalanced;

(d) When any one of the above conditions holds even occasionally.

Source: Cafiero, Carlo (2013). What Do We Really Know About Food Security? NBER Working Paper No. 18861.

Monthly Real Food Price Indices (FAO, 2002-2004=100)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

1/

1990

7/

1990

1/

1991

7/

1991

1/

1992

7/

1992

1/

1993

7/

1993

1/

1994

7/

1994

1/

1995

7/

1995

1/

1996

7/

1996

1/

1997

7/

1997

1/

1998

7/

1998

1/

1999

7/

1999

1/

2000

7/

2000

1/

2001

7/

2001

1/

2002

7/

2002

1/

2003

7/

2003

1/

2004

7/

2004

1/

2005

7/

2005

1/

2006

7/

2006

1/

2007

7/

2007

1/

2008

7/

2008

1/

2009

7/

2009

1/

2010

7/

2010

1/

2011

7/

2011

1/

2012

7/

2012

1/

2013

Food Price Index

Meat Price Index

Dairy Price Index

Cereals Price Index

Oils Price Index

Sugar Price Index

Source: http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/


0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

1/

1990

7/

1990

1/

1991

7/

1991

1/

1992

7/

1992

1/

1993

7/

1993

1/

1994

7/

1994

1/

1995

7/

1995

1/

1996

7/

1996

1/

1997

7/

1997

1/

1998

7/

1998

1/

1999

7/

1999

1/

2000

7/

2000

1/

2001

7/

2001

1/

2002

7/

2002

1/

2003

7/

2003

1/

2004

7/

2004

1/

2005

7/

2005

1/

2006

7/

2006

1/

2007

7/

2007

1/

2008

7/

2008

1/

2009

7/

2009

1/

2010

7/

2010

1/

2011

7/

2011

1/

2012

7/

2012

1/

2013

Food Price Index

Food Price Index



0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

9/

2006

11/

2006

1/

2007

3/

2007

5/

2007

7/

2007

9/

2007

11/

2007

1/

2008

3/

2008

5/

2008

7/

2008

9/

2008

11/

2008

1/

2009

3/

2009

5/

2009

7/

2009

9/

2009

11/

2009

1/

2010

3/

2010

5/

2010

7/

2010

9/

2010

11/

2010

1/

2011

3/

2011

5/

2011

7/

2011

9/

2011

11/

2011

1/

2012

3/

2012

5/

2012

7/

2012

9/

2012

11/

2012

1/

2013

Food Price Index

Food Price Index


Can the FAO Food Price Index Be Seen

as a Measure of Food Security?

Perhaps not.

as more evidence is gathered on actual food availability and food consumption worldwide, there

appears to be very limitedif anyrelationship

between the time evolution of the FAO Food

Price Index and the dynamics of supply and

demand, what should be considered the

fundamentals of price formation and food security

(Cafiero, 2013)

Source: Cafiero, Carlo (2013). What Do We Really Know About Food Security? NBER Working Paper No. 18861.

Food Security

Roles played by transaction costs, market integration, and information flows

Focus on understanding the policy and institutional environment

Specific factors (e.g., extractive political and economic institutions) may be hindering trade flows

across regions or investments in stockpiling



Back to Thinking About Policy

Objectives

With which other policy objective(s) might the objective of food security conflict?

With the agricultural income objective If price support is used a policy instrument this would

likely reduce food security

With the efficiency objective Keeping farm prices artificially low wouldnt be cost-

effective and may have other (political) economic distortions

With other objectives it may be difficult to say



Given the Objective of Efficiency

May seek to improve household incomes of those working in the rural economy or agricultural sector by improving incentives (e.g., not violating property rights) and promoting an enabling environment All of which require some form of redistributive

transfers or taxation (even if just to invest in legal capacity for improving the definition and enforcement of property rights and the unbiased enforcement of contracts)

Overarching roles of income and food prices



Income Growth in Agriculture

There is a perception that income from the agricultural sector doesnt increase as much as

income from other sectors in a growing

economy

Consider the following closed economy model with limited mobility of labor.

Somewhat similar to the model above, but with some additional variables to consider.




Let demand for an agricultural product () depend on income (), the price of the product () and the size of the population (N):

= (, , )

Let the supply of an agricultural product () depend on the price of the product () and technology ():

= ,

Assume that supply and demand are equated by the prevailing price, or that:

=



Source: http://www.fastcoexist.com/1680400/100-years-ago-french-artists-predicted-the-future-with-eerie-accuracy#4


Fully differentiating , we find the following:

=

+

+

Let =

=

and

= 1; then we have

=

+

+

Source: Koester, Ulrich and Ali El-Agraa (2003). The Common Agricultural Policy. In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.


=

+

+

(Let be negative)

Letting

= 1, we also have

=

+

Because we assume that = , we have the following:

+

+

=

+

We can solve for

=




=

If the rate of technological change (

) is larger

than the sum of the growth rate of income per

person (times the income elasticity of demand)

plus the growth rate of the population, then the

price of the agricultural product will decrease

(This is because < 0)




Thus, technological change in agriculture will depress prices, but only under certain conditions

With growth in income and population only, this would increase agricultural prices

Yet technological change in agriculture has been sufficiently large to offset these effects for most of the past 50 years Along with a declining income elasticity of demand with

higher incomes, flattening of population growth, technological progress has led to a lowering of food prices

Yet think about the recent price spikes in food prices and other changes in supply and demand of agricultural products




What happens to labor income with falling prices?

Labor income in agriculture may not decline that much with growth in agricultural technology

Depends critically on the price elasticities of supply and demand, which are functions of how well

integrated sectoral labor markets may be



Growth in Different Sectors

Idea that growth in the agricultural sector sparks growth in other sectors (Bezemer and Headey, 2008)

Agricultural growth as pro-poor growth, especially if occurring on small family farms

May aid growth by providing cheap food, raw materials, labour, savings, and demand for non-agricultural goods (Bezemer and Headey, 2008).

Bezemer, Dirk and Derek Headey (2008). Agriculture, Development, and Urban Bias. World Development, 7: 1-40.

What Are Some (But Not All) Potential Sources of

Agricultural Growth?

Improvements in the institutional environment Importance of the absence of political violence The rule of law Constraints on the executive Protection of property rights Unbiased contract enforcement

Market access Import bans or regulated and protected markets distort the prices seen by

farmers in developing countries for their agricultural products

Reduction of transaction costs Information flows, research and development, extension Development of rural markets for credit (e.g., micro-finance, rural

banks, training of those working in these institutions to assess credit-worthiness, etc.), insurance, inputs, and outputs

Why Isnt Neoclassical Growth Theory

Very Helpful?

Not all factors may be employed

(Restrictive) assumptions regarding the role of capital in the production process

Other important inputs not considered

Doesnt consider the sources of long run economic growth, how reorganization of the

factors of production plays a role

Rodrik (2005)

Policies that promote growth tend to be context specific and context appropriate

Rodrik, Dani (2005). Growth Strategies. In Philippe Aghion and Steven Durlauf, eds.

Handbook of Economic Growth, Amsterdam: North-Holland.

Rodrik, Dani (2005). Growth Strategies. In Philippe Aghion and Steven Durlauf, eds.

Handbook of Economic Growth, Amsterdam: North-Holland.

Income Support Measures

A large literature on the role of (conditional) cash transfers aimed at poverty reduction, improvements in child health and education

In general: policy measures aimed at poverty reduction should focus as near as possible to the source of the problem and not its symptom(s) By-product distortions should be avoided as much as possible

Lets think about the behavior of subsistence farmers and what policies may help reduce poverty among such farm households

Efficiency in Agriculture

Importance of information about new technologies, production methods Research and extension

Role of property rights and title transferring May incur high transaction costs if improper registration Uncertainty about the future returns of the land, interest rates for

both buyers and sellers of land

May be market challenges with respect to markets for land, rural credit, and insurance as a result of the general institutional environment, which may reduce the efficiency of the agricultural sector



Price Stability

Consider a simple closed economy case in which supply is perfectly price inelastic. Suppose there is no storage and that all which is produced in the current period must be consumed at the same time:

=

Let = such that

=

=

With = then

=

1

Here, the percentage change in the price with a 1 percent change in quantity supplied will be larger when the price elasticity of demand is lower (in absolute terms)

Of course, in the real world there will also be storage, so that market demand will be a function of current demand and of demand for storage The latter is a function of expected agricultural prices in future periods, storage

costs



Policy Against Price Increases

Quantity

(khachapuris)

2 GEL

D1

S1

Price (khachapuri)

Q1 Q2

1 GEL

D2

Quantity Doesnt Increase

Price Doesnt Change

Results in Shortages of Khachapuris!

<

Q3

Price ceiling

Food Safety

Most farm products are experience goods (quality is revealed upon consumption) or credence goods

(neither the quality nor the production process are

known ex ante) rather than search goods (quality is

known at the time of purchase)

Incentives to create and preserve trust among producers, traders, especially with brand name products

Yet there may be issues related to water quality, failures in supply chains, principal-agent problems, etc.



Environmental Concerns

May be positive and negative externalities with agriculture

Rapid transformation of the agricultural sector may induce environmental damage unless handled properly



Source: Yandle, Vijayaraghavan,

and Bhattarai (2002)

Additional Objectives

Agricultural development and rural development

Solely supporting the former may not have the intended poverty alleviation effects

Importance of investments in rural i

lecture notes - agricultural and food policy analysis (eng)

Documents