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

2. 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

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

4. 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.

5. Diffusion
Domestic extension, farmer to farmer, international technology transfer

6. High-payoff inputs
Seeds, chemicals, irrigation

7. 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

8. Induced Technical Change
Induced Institutional Change

9. 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

10. 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

11. Induced innovation (resource endowments change)

12. 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)

13. 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

14. Induced innovation (output to input price changes)

15. 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.

16. 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?

17. 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

18. 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

19. 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)

20. 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

21. Induced innovation with transactions costs and collective action

22. 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

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

24. 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

25. 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