Agricultural Development Theories Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Objectives Discuss agricultural development theories: Expanding “extensive margin” Expanding “intensive margin” Diffusion High-payoff inputs Induced innovation Induced innovation modified by transactions costs, and collective action

Resource Exploitation: Expanding the Extensive Margin Expand land and labor, moving back the frontier

Resource Exploitation: Expanding the Intensive Margin Resource conservation, higher valued crops: more intensive use of manure, green manure, crop rotations, improve efficiency of water use, etc.

Diffusion Domestic extension, farmer to farmer, international technology transfer

High-payoff inputs Seeds, chemicals, irrigation

Induced Innovation Changed relative prices will stimulate the search for new methods of production which will use more of the now cheaper factor and less of the more expensive one

Induced Technical Change Induced Institutional Change

Theory of induced innovation Technical change in agriculture represents a response to changes in relative resource endowments and to growth in product demand Institutional change in agriculture is induced by changes in relative resource endowments and by technical change

Land and labor are the two primary factors of production, and capital goods substitute for land or substitute for labor Land saving capital: biological, chemical, & water control investments (seeds, fertilizers, insecticides, irrigation) Labor saving capital: machinery & equipment, particularly tractors

Induced innovation (resource endowments change)

Over time, observed changes in factor ratios will result from cumulative effects of three changes: factor substitution along a current production isoquant (I0) factor savings due to technical change along an innovation possibility curve (such as I*0) factor savings due to higher research budgets & scientific advances that shift I*0 to and I*1 (closer to the origin)

Empirical Evidence of Induced Innovation History generally supports (look at Japan and the United States for example) Enormous changes in factor proportions could hardly have occurred as a result of substitution among factors in the absence of endogenous technical change

Induced innovation (output to input price changes)

In pure neoclassical form, theory of induced innovation assumes perfect markets for products, factors, and risks Thus, prices convey all relevant information and all agents face the same prices. Therefore, asset distribution does not affect efficient allocation of resources and there is no room for collective action.

Why then, in some countries, do we observe institutional changes that appear only to benefit a small segment of the population? Answer: Transactions costs and collective action What are they?

Transactions costs Transactions costs: Costs of adjustment Costs of information Costs of negotiation, monitoring, and enforcing contracts T.C. arise because of fixed assets, lack of perfect information and calculation ability, and opportunism

Transactions costs can lead to both economies of size and to unscrupulous behavior When large farmers or self-interested people join together for collective action, they can influence the direction of technical and institutional change

Technical innovation occurs in a direction influenced by: successful collective action commodities that are important as wage goods or for foreign exchange (because State concerned about its own self-interest)

Determinants of successful collective action Need to control free riders which is facilitated by: Relatively small group Relatively homogenous group Previous association helps Close social and physical proximity Difficulty in exit from the group

Induced innovation with transactions costs and collective action

An operational agricultural development strategy must discover ways to develop institutions that protect the majority of its producers so that the policy makers and research systems do not become captive to just a small segment of its producers

Agricultural sector activities Land reform Transportation, marketing, and communications New inputs and credit Reasonable pricing policies Research to provide new technologies Education and extension

Six suggestions Asset redistribution with compensation Improve information flows. How? Decentralized industrial growth Government structure with enforceable laws Improved international laws and institutions These activities should reduce transactions costs and help constrain abuse of collective action

Conclusions Relative price changes will induce the development and spread of new technologies. Relative price changes and new technologies will induce institutional changes Because of transactions costs and collective action, the resulting changes may not be optimal unless efforts are made to reduce transactions costs and constrain abuse of collective action