Agricultural Economics Lecture 1

What is Agricultural Economics? “…an applied social science that deals with how producers, consumers and societies use scarce resources in the production, processing, marketing and consumption of food and fiber products”.

What is Agricultural Development? Here development means what happens over time change, evolution, growth it may be an improvement… or not. We’ll focus on what happens to the whole country to the entire agricultural sector, given overall economic development: – higher income, production and consumption – improved health and life expectancy – and many other changes…

A key change over time is that people get richer, so when we talk of “more” or “less” developed, what we usually mean is “richer” or “poorer”. We will usually be descriptive, asking: – what happens over time, as countries get richer? – what differs across countries between rich & poor? And sometimes we will be prescriptive, asking – what should be done, to help people get what they want?

Development involves accumulation, that economists call “capital”: – physical capital (houses, roads, machines) – human capital (education, health) – institutional capital (“rules of the game”) The accumulation of capital makes it more abundant and cheaper. But accumulation doesn’t happen automatically. To build up capital, people must save and invest from one year to the next.

Development also involves innovation, which economists call “technical change”: – new physical things (seeds, chemicals, etc.) – new ideas (crop rotations, etc.) – new institutions (futures markets, etc.) Innovation makes it possible to produce more of what people want, from the resources they have. But innovation doesn’t happen automatically. To innovate, people must be able to change what they do.

Agriculture as a share of GDP vs. GNP per capita, 1989 Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

Agriculture as a share of employment vs. GNP per capita, 1985 Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

Percent of income spent on food vs. GNP per capita, 1980s Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development. New York: McGraw Hill, 1993.

Years GDP (Millions, $) Agricultural GDP (Millions, $)Per Capita GDP ($)

YEARSGNP (billions, TL)AGRICULTURE (billions, TL) INDUSTRY (billions, TL) SERVICES (billions, TL)

YEARSSHARE OF AGRICULTURE (%)SHARE OF INDUSTRY (%)SHARE OF SERVICES (%) ,220,555, ,621,555, ,721,955, ,622, ,323,156, ,423, ,82556, ,224,957, ,325,156, ,625,957, ,325,957, ,126,557, ,826,557, ,526, ,326,658, ,427,757, ,758, ,728,159, ,427, ,427,958, ,127, ,728,557, ,729,356, ,629,957,5

YEARSPOPULATION (TOTAL)POPULATION (CITY)POPULATION (VILLAGE)VILLAGE / TOTAL (%) , , , , , , , , , , , , , , , , , , , ,

YEARS EMPLOYMENT (x1000)EMPLOYMENT IN AGRICULTURE (x1000) SHARE OF AGRICULTURE IN EMPLOYMENT (%) , , , , , , , , , , , , , , , , , ,26

1. AGRICULTURE IS THE BASIC OCCUPATION OF HUMANKIND. 2. RURAL LIFE IS MORALLY SUPERIOR TO URBAN LIFE. 3. A NATION OF SMALL INDEPENDENT (FAMILY) FARMERS IS THE PROPER BASIS FOR A DEMOCRATIC SOCIETY.

The Functions of Agriculture Function 1: Provide food for humankind Malthus’ theory of the capacity of world to feed humankind: Geometric increase in human population vs. arithmetic increase in food poduction.

Function 2: Provide raw material for the industry Function 3: Provide opportunity for rural lanscape Function 4: Source for capital accumulation for development Function 5: Source of labor for the industry

Fisher Clark's Theory of Structural Change Two economists, Fisher and Clark, put forward the idea that an economy would have three stages of production 1. Primary production is concerned with the extraction of raw materials through agriculture, mining, fishing, and forestry. Low- income countries are assumed to be predominantly dominated by primary production. 2. Secondary production concerned with industrial production through manufacturing and construction. Middle income countries are often dominated by their secondary sector. 3. Tertiary production concerned with the provision of services such as education and tourism. In high-income countries the tertiary sector dominates. Indeed having a large tertiary sector is seen as a sign of economic maturity in the development process.

Countries are assumed to first pass through the primary production stage then the secondary stage and finally the tertiary stage. As economies develop and incomes rise then the demand for agricultural goods will increase but due to their low income elasticity of demand at a proportionally lower rate than income. However, the demand for manufactured goods will have a higher income elasticity of demand. So as incomes grow further the demand for these goods will grow at a proportionately higher rate. Hence the secondary industry will grow. As incomes continue to grow then people will start to consume more services as these have an even higher income elasticity of demand. Thus the tertiary sector will then grow and develop.

Why Does Agriculture’s Share Declines in Economic Development? 1. Income elasticity of demand for agricultural products Engel’s law 2. Some of the raw materials are now being produced by the industry itself 3. Diminishing returns to scale in agriculture 4. Agricultural product prices are generally lower than instrial product prices

Almost always, agriculture declines – as a share of employment – as a share of GDP or GNP (national income) – as a share of consumer expenditure Do farmers get poorer? Are there fewer farmers?

Agricultural Policy Policy is guiding principle leading to a course of action that is pursued by the government. Policies and programs Major forces for policy change: – Instability – Globalization – Technology – Food safety – Environmeny – Industrialization of agriculture – Politics – Unforseen events

A subset of public policy directed primarily but not exclusively at the farm and agribusiness sectors of society. What is Agricultural Policy?

Agricultural policy applies to two markets: 1. AGRICULTURAL INPUT MARKETS USE OF LAND AND OTHER NATURAL RESOURCES AGRICULTURAL CREDIT AND FINANCE LABOR INDUSTRIAL PRODUCTS 2. AGRICULTURAL OUTPUT MARKETS PRODUCTION CONSUMPTION MARKETING INTERNATIONAL TRADE

What Should Agricultural Policies Be? Everyone involved in agriculture has his/her own idea of the answer to that question which is based on the interaction of FACTS, BELIEFS, and VALUES.

FACTS: WHAT IS KNOWN WITH CERTAINTY. DESCRIBE WHAT IS. THERE CAN BE NO ARGUMENT. BELIEFS/MYTHS: DESCRIBE WHAT PEOPLE THINKARE FACTS. VALUES: CONCEPTS OF WHAT SHOULD BE.

Facts, beliefs/myths, and values interact to provide motivation for the formulation and implementation of agricultural policy by the government.