Wallace E. Huffman C.F. Curtiss Distinguished Professor of Agriculture and Life Sciences and Professor of Economics Iowa State University

Transcription

1 Wallace E. Huffman C.F. Curtiss Distinguished Professor of Agriculture and Life Sciences and Professor of Economics Iowa State University

2 Agriculture is under pressure: population and income growth, climate change, bio-fuel demand, environmental degradation, loss of cropland Agricultural pests continually evolve Limited new arable lands are available; urban conversions are reducing area Agricultural productivity growth may be a cheap source of future agricultural output Potentially high payoff inputs can result from R&D Agricultural productivity must grow to free labor for other sectors R&D is the main source of new agricultural technologies, and agricultural productivity

3 Under traditional agriculture farmers face low rates of return on agricultural factors used for generations - High payoff techniques have been exhausted - Potential of existing knowledge exhausted - Farms may have little incentive to save and invest because of low expected returns - Farmers are generally poor For modernization of agriculture to occur, new high payoff inputs must be developed, adapted and made available to farmers on favorable terms - Discoveries and inventions through R&D are the source of new high payoff inputs - The public sector is the main source of funding and frequently undertakes agricultural research - Farmers education and extension become important; making good decisions can increase farm profitability - Early adopter profits frequently exist

4 The idea that investing in people improves their health, skills for work, information base and geographical location (T.W. Schultz) Many of these investments are deliberate benefits weighted against the costs Not a story about innate ability pre-determining ones lifetime prospects Principles of investment theory are applicable The public sector generally invests heavily followed by private investments of individuals/households These investments have potential for raising living standards, especially in certain environments

5 Human Capital, a strong learning and information flavor Learning and Information Formal Education Elementary, middle, high school, college -Pre-school activities social skill development -Learning while working On-the-job training Informal Education Short courses, extension, seminars, information gathering web, bulletins, newspapers, others Health Public health - treatment of water and waste and vaccination for contagious diseases Pre-natal environment of babies nutrient rich, drug free Access to medical services and pharmaceuticals Healthy lifestyles diet, exercise, weight and stress mgt Human Migration movement for better jobs or consumption

6 Most human capital investment decisions take a similar structure. Lets consider investing in a 4-year college degree, given a high school diploma Y t I = earnings of a high school graduate in t (constant prices) Y t II = earnings while individual is enrolled in college, net of costs of completing a 4-year college degree, and earnings after completing a 4-year degree in t (constant prices) r t = the interest rate or discount rate appropriate for an education investment decision (real) The net earnings profiles are shown in Figure 1

7 $ Y t II (Enrolled in college and college graduate) Benefits: B Y t I (High school grad) Costs 0 18 C 1 C Age Time (years) Source: Adapted from Psacharopoulos (1981), p. 322

8 NPV 18 = 65 II I t ( Y Y ) / (1 + r) t= 18 t t t = II I t 18 ( Y ) / (1 ) + t Yt + r t t= II I t ( Y Y ) / (1 + r) t= 22 t t t 18 = - C + B Decision: If NPV 18 > 0, then invest in 4-year college degree. Alternatively assume r is unknown and set NPV 18 = 0, and solve for r*, the internal rate of return on investment. As long as r* is larger that the interest rate cost of funds, invest.

9 Research for agriculture (Public) - Potential for high payoff inputs Small countries: Borrow discoveries from others and adapt to local conditions, e.g., improve genetic potential of local crops Large countries: Same as small plus some R&D for discoveries in pre-invention sciences (figure 2) Human Capital (largely public) Pre-natal and infant health Universal elementary education useful for information processing and decision making, adoption of new technology, opens many doors to future learning and new jobs New opportunities for middle school and high school Agricultural extension skilled and linked to R&D Facilitate labor mobility seasonal/temporary off-farm work, off-farm migration of young people College education in science and technology

10

11 Huffman and Evenson, Science for Agriculture: A Long Term Perspective. Oxford University Press Huffman and Orazem, Agriculture and Human Capital in Economic Growth: Farmers, Schooling and Nutrition. Handbook of Agricultural Economics, Vol. 3, Evenson and Pingali Huffman, Investing in People for the 21 st Century. TW Schultz Lecture, S. Dakota State University Schultz, T.W. Transforming Traditional Agriculture. Yale University Press 1964.