Agriculture and Aggregate Produc0vity. September 24, 2012

Transcription

1 Agriculture and Aggregate Produc0vity September 24, 2012

2 Modernization of Agriculture and Long-Term Growth Xiaodong Zhu University of Toronto Joint work with Dennis Tao Yang CUHK

3 World Per Capita GDP

4 Per Capita GDP of China and Western Europe Western Europe China

5 Literature on Stagnation to Growth Human capital and fertility choice: e.g., Becker et al. (1990), Tamura (1998), Lucas (2002) Endogenous technological change and population: e.g., Kremer (1993), Goodfriend and McDermott (1995), Jones (2001), Galor and Weil (2000) Adoption of modern technology: Hansen and Prescott (2002) This paper proposes a new explanation.

6 Three Concurrent Events: #1: Per capita GDP started modern growth Figure 1. Real Per Capita GDP: England, Index of Per Capita GDP Year Data source: Clark (2001), Mitchell (1988)

7 #2: Inception of Agricultural Mechanization

8 #3: Relative price falling until , then stayed flat Figure 2. Price Ratio of Industrial Product to Agricultural Product: England, Relative pric ce (1820=1.0) Year Source: Clark (2002, 4) and Mitchell (1962, )

9 Main Ideas of Our Model The three events are causally linked: Agricultural and nonagricultural (industrial) sectors: Growth in industry not sufficient for sustained growth Growth in industry leads to declines in relative price When relative price falls below a certain threshold, farmers start to use industry-supplied supplied modern inputs Agricultural modernization triggers structural changes g gg g Embark on the takeoff to sustained growth Ag. modernization is a necessary condition for growth

10 More on Related Literature Role of agriculture in growth: Johnston and Mellor (1961), Jorgenson (1961), Schultz (1964), Johnson (1997) Gollin, Perante and Rogerson (2002, 2007): food constraint; multiple ag. technologies, international income differences This paper: Effects of industrial growth on agricultural modernization Central role of relative price Empirically supported mechanisms of transition to modern growth Quantitative analysis of the English economy,

11 The Model Triggering mechanism of modern growth: changes in the relative price, and choice of agricultural technologies Time paths of aggregate variables under stagnation, transition, and growth Two sectors: agriculture and nonagriculture (industry) Population: N t, non-overlapping generations Population growth: N t 1 g y t N t, hump-shaped growth i g c 1; ii g. increasing over 0, y, y c; iii g. decreasing over y,, and lim y g y 1 Land endowment: fixed Z; equal distribution, z t N 1 t Z

12 Income: y t w t r t z t where w t for wage, r t rental price of land Prices: Price of agricultural good: numeraire Price of nonagricultural good: p t Consumption: Agricultural good: c at c, subsistence food Nonagricultural good: c nt p 1 t y t c

13 Production Technologies Nonagricultural production: Y nt A nt L nt Agricultural technologies: Traditional: Modern: Y T at Z 1 t A at L at, 0 1 Y M at Z 1 t A at L at 1 X t, 0 1 One unit of industrial product produces one unit of intermediate input Note: A n and A a grow exogenously

14 Choice of Technology in Agriculture Farmer s problem: max Z T t,z M t,l T at,l M at,x t Z T t 1 A at L T at Z M t 1 A at L M at 1 X t p t X t r t Z t w t L at Resource constraint: Z t T Z t M Z t, and L T at L M at L at Condition for choosing modern technology: / 1 1 pt 1 High price of industrial product p t discourages adopting modern technology; p t endogenous

15 Competitive Equilibrium (1) Farmers only use traditional technology, if: A nt A at Z/N t 1 l, or p t p In the steady-state of traditional economy (stagnation): A nt l A a where A a Aat Z/N t 1 is a constant Rise in A nt ultimately triggers the use of modern technology When p t falls to a critical value, adoption of modern technology will occur, since p t c 1 Aa /Ant

16 (2) Farmers only use modern technology, if: A nt A at Z/N t 1 h (3) Farmers use both technologies, if: A l nt A at Z/N t 1 h where l c 1 and h 1 1 l

17 Stagnation (T) to Transition (X) Threshold for transition: T p t X p t c 1 Aa /Ant p 1 1 p Persistent growth in A nt eventually triggers transition Once reaching the threshold, begins agricultural modernization During transition, relative price p t stays constant

18 Inception of agricultural modernization: T X Z t M Z 0 Z t M Z 1 A nt A at Z/N t 1 Structural break in per capita income: T y t 1 c 1 Aat Z/N t 1 c l X y t 1 1 Ant A at Z/N t 1 A nt 1 Per capita income takes off during transition

19 Features of Modern Growth In the modern economy: Relative price declines continuously Per capita income rises, driven by the growth of A at and A nt Agricultural labor share converges to zero in the long-run Real wage rises, driven by the growth of A at and A nt Rental price of land rises with population growth

20 Compilation of English Historical Data: Two criteria: reliability and completeness Starting year: prices of industrial products, earliest 1700 Ending year: statistical sources switched to UK after 1913; some earlier data only available for England Data coverage: 21 decennial data points for all key aggregate variables relative price, agricultural mechanization, real per capita GDP, labor share in agriculture, real wages, and rental price for land

21 Major Data Sources Clark (2001): historical estimates of GDP, price deflators Clark (2002, 2004): history of agriculture, ag. prices Mitchell (1962, 1988): British historical statistics Crafts and Harley (1992): British industrial production Wrigley and Schofield (1981): population history of England Walton (1979), Thompson (1968): modern ag. Inputs

22 Calibration of the Model Technology parameters: Labor share in traditional agriculture: σ=0.6, Hansen-Prescott (2002), Ngai (2004) Share of modern inputs: α=0.4, Restuccia, Yang and Zhu (2008) TFP growth rates: In industry A nt : Crafts-Harley (1992), Matthews et al. (1982) In agriculture A at : Clark (2002) Initial values: Normalization: initial income, y 0 = 1 Initial population N₀ : England and Wales population in 1700 A a0 : set to match L a0 = 0.55 A n0 : pinned down by labor share and timing of mechanization Subsistence food consumption c: y 0 =[1-σ+σ(L a0 /N 0 )]c

23 Exogenous variables: Simulation of the Model TFP growth in industry and agriculture: A at and A nt Industrial, traditional and modern agricultural technologies Land, subsistence food consumption, population growth profiles A set of parameters: e.g., α, σ, c Solutions to the time paths of: Per capita income y t Relative price p t Employment share in agriculture L at Agricultural mechanization: share of land devoted to modern technology Z M t Real wage and rental price of land Account for English growth experience,

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25 Incorporating Trade We follow closely the assumptions used by Stokey (2001) England as a small open economy: exogenous terms of trade Balanced trade: importing food and exporting industrial products Food import relaxes subsistence constraint

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32 Concluding Remarks Modernization of agriculture is essential for sustained growth Great historical innovations outside agriculture; not sufficient to generate modern growth Yet, these innovations caused the decline in relative price Low relative price triggers ag. modernization Agricultural modernization leads to structural change Economy escapes from Malthusian trap to modern growth

33 Some startling numbers In 1985, the average GDP per worker in the richest 5% countries is 34 0mes that in the poorest 5% countries The difference in agriculture is even larger: 78:1 The difference in non- agriculture is smaller: 5:1 Yet, poorest countries allocate 84% of labor in agriculture, compared to only 4% in the richest countries

34 Agriculture s rela0ve produc0vity by income deciles

35 Intermediate input share in agricultural output

36 Intermediate input use and agricultural produc0vity In the special case when a=0

37 What determines the intermediate input use? In the special case when a=0

38 Barriers to intermediate input use

39 Results