AGEC 340 – International Economic Development Course slides for week 8 (March 2 &4)

1. AGEC 340 – International Economic DevelopmentCourse slides for week 8 (March 2 &4) Is Growth Sustainable?* • Does economic growth use up natural resources? • Can economic growth be sustained over time? * In the textbook, this material is in chapters 9 and 14.

2. Resource Use and Sustainability • So far in AGEC 340 we’ve seen: • Part I: basic facts • economic growth from low to high production & consumption • demographic transition from large to small families • structural transformation from farm to nonfarm activity • Part II: microeconomics • if everyone already optimizes input use and production… • productivity grows only through new technology • But new technology is limited by natural resources: • “natural” in that supply is fixed (land, water, air etc.) • cannot make more of them, even if their value rises • “natural” in that supply is not under individual control • ownership is collective, so use is less likely to be optimized

3. Economic growth involves switching from natural to man-made resources The textbook story, from chapter 14: BOX 14-1: INPUT USE AND AGRICULTURAL OUTPUT IN INDIA acreage expansion ends yield increase takes over fueled by control of water and fertilizer and made possible by new plant genetics

4. The race between people and land, so far… Trends in farm size and yields by region, 1961-1990 Diagonals have same farm size (ha/worker): Y axis shows yield (output per hectare): X axis shows earnings (output/worker):

5. so… why no green revolution in Africa? Slide 5

6. Fertilizer use is not converging to world levels, as it did in Asia

7. One reason for Africa’s lag is that its soils and moisture are unusually difficult Selected Soil Fertility Constraints in Agriculture (as percent of agricultural area) Note: Constraints characterized using the Fertility Capability Classification (Sanchez et al., Smith). Source: Stanley Wood (2002), IFPRI file data.

8. Africa gets relatively little rainfall

9. …and Africa’s rainfall may have worsened in the 1960-1985 period Source: S. Barrios, L. Bertinelli, and E. Strobl (2006), “Climate Change and Economic Growth: Evidence from Africa.” University of Luxebourg: CREA.

10. But crucially, most African farmers still use old seed types; new seeds are coming out now Source: Calculated from data in Evenson and Gollin, 2003.

11. And a key reason for that is simply that Africa has had less local research Public Research Expenditure per Unit of Land, 1971-91 (1985 PPP dollars per hectare of agricultural land) 4 3 2 1 0 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Sub-Saharan Africa All Developing Countries All Developed Countries Source: Calculated from IFPRI and FAOStat file data

12. Africa faces unusually severe population pressures

13. Rural population growth is especially important

14. Changing age structure imposes another burden

15. To respond to farmers’ needs, crop improvement involves multiple innovations Genetic improvement Agronomic improvement (by scientists, using controlled trials) (by farmers, using land & labor)

16. New techniques to manage soils and conserve moisture are spreading traditional “flat” planting labor-intensive “Zai” microcatchments For these fields, the workers are: Slide 16

17. Resource Use and Sustainability • The information we’ve seen so far implies that farmers are already doing the best they can -- and yet observers may feel that some farmers “overuse” certain resources. • For example, in Indiana as in many places around the world, some water supplies are affected by runoff of farmers’ fertilizers, herbicides or pesticides. Do farmers use “too much” of these inputs? To answer, we must ask how this information enters our picture...

18. How do inputs enter farmers’ optimal choices? Qty. of corn (bu/acre) Qty. of corn (bu/acre) Qty. of labor (hours/acre) iso-profit (slope=Pf/Pc) iso-revenue (-Pb/Pc) iso-cost (slope=-Ph/Pm) Qty. of fert. (lbs/acre) Qty. of beans (bushels/acre) Qty. of herbicide (liters/acre)

19. To include runoff costs of input use, we would add water users’ costs to prices paid by farmers: Qty. of corn (bu/acre) Qty. of labor (hrs/acre) slope= (Pf+runoff)/Pc slope= Pf/Pc slope= -(Ph+runoff/Pl) runoff costs added to farmer’s cost slope= -Ph/Pl Qty. of fertilizer (lbs/acre) Qty. of herbicide (liters/acre)

20. …so that from the whole society’s point of view, a lower level of input use would be optimal: Qty. of corn (bu/acre) Qty. of labor (hrs/acre) slope= (Pf+runoff)/Pc slope= Pf/Pc slope= -(Ph+runoff/Pl) slope= -Ph/Pl new optimum from adding runoff costs to farmer’s cost: lower inputs, lower outputs, more work for farmers. Qty. of fert. (lbs/acre) Qty. of herbicide (liters/acre)

21. How can the country movefrom point A to point B? Qty. of corn (bu/acre) Qty. of labor (hrs/acre) slope=social costs slope=farmer’s costs A optimum at social costs B B optimum at farmer’s costs A Reductions in input use to take account of off-farm costs to drinking water

22. To reach the social optimum, we’d need either a tax: Qty. of corn (bu/acre) Qty. of labor (hrs/acre) tax on input use to induce change A B B A

23. To reach the social optimum, we’d need either a tax, or a regulation: Qty. of corn (bu/acre) Qty. of labor (hrs/acre) tax on input use to induce change A B B A rules specifying new input use levels

24. In conclusion, to set environmental policies… what would we need to know? • To set optimal taxes, we’d need to know the cost per unit of the runoff to water users. • To set optimal rules, we’d need to know the new optimal input-use level. • Using taxes is likely to give closer-to-optimal input use, but… • Imposing taxes may be politically harder than specifying rules, so • Most governments use rules instead of taxes.