Agricultural Development
Theories
AAEC 3204
Dr. George Norton
Agricultural and
Applied Economics
Virginia Tech
Copyright 2009
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
Theory of Induced Innovation
The theory says that technical
change in agriculture represents a
response to changes in resource
endowments and to growth in
product demand. Changes in
institutions are induced by changes
in relative resource endowments and
by technical change
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)
Land
I0
P0 I*1 I*0
I'1 I1
A
N0
I0
P
1
I1
B I'1
N1
I*0
C
I*1
0 L0 L1 P0 P1 Labor
Over time, observed changes in factor
ratios will result from cumulative effects
of three changes:
1. factor substitution along a current
production isoquant (I0)
2. factor savings due to technical change
along an innovation possibility curve
(such as I*0)
3. 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)
C
Yiled per unit of area
P1
u
B
P1 V0 V1
A
P0
Fertilizer input per unit of area
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
Land I'0 I0
N0
I'1 I1
I0
I'0
Z
N1 I1
I'1
0 L0 L1 Labor
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
• How?
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
