In economics, if each person is already doing the best they can…

1. AGEC 340 – International Economic DevelopmentCourse slides for week 7 (Feb. 23 & 24)What drives growth?Market prices and innovation* In economics, if each person is already doing the best they can… How can there be improvement over time? * If you are following the textbook, this is chapter 12.

2. The story so far... if each person already does the best they can, given what’s physically possible and what things are worth: How can conditions ever improve? Qty. of corn (bu/acre) Qty. of corn (bu/acre) Qty. of machinery (hp/acre) iso-profit (slope=Pl/Pc) iso-revenue (-Pb/Pc) iso-cost (-Pl/Pm) Qty. of labor (hours/acre) Qty. of beans (bushels/acre) Qty. of labor (hours/acre)

3. Output can increase if prices change… Qty. of corn (bu/acre) Qty. of corn (bu/acre) Qty. of machinery (hp/acre) Price of labor rises, relative to cost of labor-saving technologies Price of an output rises, relative to other outputs Price of an input falls, relative to the output Qty. of labor (hours/acre) Qty. of beans (bushels/acre) Qty. of labor (hours/acre)

4. Our textbook picture:Box 5.1: Sources of Growth and the Production Function when price changes cause output growth, that growth encounters diminishing returns, so productivity must fall: the ratio of Qoutput to Qinput declines output grows but productivity falls

5. Our textbook picture:Box 5.1: Sources of Growth and the Production Function productivity growth is possible only with new technology output grows but productivity falls output grows with higher productivity

6. …but what kind of new technology?Box 5.2: New technologies, input useand the demand for innovation new technologies that are profitable all raise productivity ….but they have varying effects on output levels and input use

7. Where does new technology come from? • Chapter 12: Research, extension and education • R&D changes what is technically possible • extension and education helps people adapt faster to change • This is surprisingly important for world economic development! look at examples of: • higher-yielding hybrid corn seed • more effective herbicides

8. How does economics predict farmerswill respond to a new technology? Ag. output (tons/hectare) Qty. of labor (days/hectare) Hybrid corn Better herbicides (same output with less labor & tractor time) Qty. of traction (hp/hectare) Qty. of fertilizer (tons/hectare)

9. If the price ratio stays the same, does input use also stay the same? Ag. output (tons/hectare) Qty. of labor (days/hectare) IRC w/new Isoquant w/new IRC w/old Isoquant w/old old qty. of fertilizer old tractor set

10. If farmers adopt these new technologies at the old input levels… Ag. output (tons/hectare) Qty. of labor (days/hectare) IRC w/new Isoquant w/new IRC w/old Isoquant w/old old qty. of fertilizer old tractor set

11. So the new technology is good,without changing input levels higher profit Ag. output (tons/hectare) Qty. of labor (days/hectare) IRC w/new lower costs Isoquant w/new IRC w/old Isoquant w/old more output less labor same qty. of fertilizer same tractor set

12. But adjusting input use to the new technologyis even better (highest profits, lowest costs) Ag. output (tons/hectare) Qty. of labor (days/hectare) even more output lowest-possible cost along the isoquant w/ new herbicides highest-possible profit along the IRC w/ new hybrids more labor more fertilizer less horsepower

13. It’s the slope of the IRC and the isoquant, relative to the price line, that determines change in input use Ag. output (tons/hectare) Qty. of labor (days/hectare) When the isoquant gets flatter, farmers are induced to use more labor and less horsepower When the input response curve gets steeper, farmers are induced to use more fertilizer and increase output Qty. of traction (hp/hectare) Qty. of fertilizer (tons/hectare)

14. Can this type of thinking help us predict what types of new technology are most desirable? Ag. output (tons/hectare) Qty. of labor (days/hectare) New techniques using much fertilizer New techniques using little horsepower New techniques using few workers New techniques using little fertilizer Qty. of traction (hp/hectare) Qty. of fertilizer (tons/hectare)

15. New techniques are most desirable if they help farmers use what is increasingly abundant Ag. output (tons/hectare) Qty. of labor (days/hectare) biochemical, labor-using innovations input-using, yield-increasing innovations mechanical, labor-saving innovations input-saving (but yield-reducing) innovations Qty. of traction (hp/hectare) Qty. of fertilizer (tons/hectare)

16. Example: the U.S. and Japan, 1880-1980 In the US… abundant cropland, expanding until 1935; so farm machinery spread early, and there was no big yield growth until 1930s In Japan… scarce cropland, limited since 19th century, so fertilizer and new seed varieties spread early, and machinery was not adopted until 1960s

17. What happened to productivity? U.S. changes 1880-1935 attract more inputs Japan changes 1880-1940 use same inputs better Source: Y. Hayami and V. Ruttan (1985) Agricultural Development: An International Perspective. Baltimore, The Johns Hopkins University Press.

18. New plant varieties have driven productivity growth Source: Y. Hayami and V. Ruttan (1985) Agricultural Development: An International Perspective. Baltimore, The Johns Hopkins University Press.

19. Adoption of individual technologies typically follows S-shaped curves, whose start date, speed and ceiling varies widely by region Source: Z. Griliches (1957), “Hybrid corn: an exploration in the economics of technological change.” Econometrica 25: 501-522.

20. The spread of economic growth in Asia is closely linked to the “Green Revolution” In 1920s and 1930s, Japanese agronomists developed high-yielding, labor- and fertilizer-using varieties of rice suitable for Japan’s colonies in East Asia (Taiwan & Korea). After WWII, new international ag. research institutions, financed mainly by the U.S., developed rice varieties with similar characteristics for South & Southeast Asia, and wheat varieties for South Asia & Latin America.

21. Key characteristics of Green Revolution technology • short stature, to • concentrate nutrients in grain, not stalk, and • support more grain without falling over (lodging); • photoperiod insensitivity, to • give flexibility in planting/harvest dates, • control maturation speed, with • more time for grain filling, and • early maturity for short rains or multicropping • new plant architecture, to • concentrate energy and protect the grain.

22. The Green Revolution in wheat… Yield improvement begins after WWII Yields rise only with “green revolution” in 1960s (tons/hectare) Slide 22

23. Your textbook table:Payoffs from agricultural research are very high Many studies; payoffs are measurable and interesting Payoffs are compared as percent/year earnings on investment Which targets give the highest payoffs? Why? Why are the means higher than the medians?

24. The latest wave of ag research is biotechnology Note: The top line counts crop traits rather than crop varieties, as an increasing number of varieties are bred with two or more “stacked” biotech traits. Source: Reprinted from Clive James (2009), “Global Status of Commercialized Biotech/GM Crops: 2008.” ISAAA Briefs No. 39.

25. Global Area of Biotech Crops, 1996 to 2007: By Trait (Million Hectares) 80 70 Herbicide Tolerance Insect Resistance 60 Both together 50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Reprinted from Clive James (2008), “Global Status of Commercialized Biotech/GM Crops: 2007.” ISAAA Briefs No. 37.

26. 70 Soybean 60 Maize Cotton 50 Canola 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Global Area of Biotech Crops, 1996 to 2007: By Crop (Million Hectares) Source: Reprinted from Clive James (2008), “Global Status of Commercialized Biotech/GM Crops: 2007.” ISAAA Briefs No. 37.

28. How does technology adoption vary across farms? • Do smaller farms have “less technology”?

29. Do smaller farms have lower crop yields?

30. Do smaller farms adopt new technologies slower?

31. Conclusions… and next steps • New technologies drive productivity growth… • but can that be sustained over time? we need to modify our economic analysis to account for natural resources and the environment (week 8, chapters 9 & 14) • Then, after the midterm exam • where do prices come from? we need to expand our analysis in a different way (weeks 11-15, chapters 15-19)