Principles of agricultural economics WYE STUDIES IN AGRICULTURAL AND RURAL DEVELOPMENT Solving the problems of agricultural and rural development in poorer countries requires, among other things, sufficient numbers of well-trained and skilled professionals. To help meet the need for topical and effective teaching materials in this area, the books in the series are designed for use by teachers, students and practitioners of the planning and management of agricultural and rural development. The series is being developed in association with the innovative postgraduate programme in Agricultural Development for external students of the University of London. The series concentrates on the principles, techniques and applications of policy analysis, planning and implementation of agricultural and rural development.
Texts review and synthesise existing knowledge and highlight current issues, combining academic rigour and topicality with a concern for practical applications. Most importantly, the series provides simultaneously a systematic basis for teaching and study, a means of updating the knowledge of workers in the field, and a source of ideas for those involved in planning development. Editorial Board: Henry Bernstein Director, Wye College External Programme Allan Buckwell Professor of Agricultural Economics, Wye College Ian Carruthers Professor of Agrarian Development, Wye College Dr Johnathan Kydd Lecturer in Agricultural Economics, Wye College Professor Ian Lucas Principal of Wye College Other titles in this series Peasant Economics Frank Ellis Extension Science Niels Roling Principles of agricultural economics MARKETS AND PRICES IN LESS DEVELOPED COUNTRIES DAVID COLMAN AND TREVOR YOUNG Department of Agricultural Economics, University of Manchester I CAMBRIDGE UNIVERSITY PRESS PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE The Pitt Building, Trumpington Street, Cambridge CB2 1RP, United Kingdom CAMBRIDGE UNIVERSITY PRESS The Edinburgh Building, Cambridge CB2 2RU, UK http://www.uk 40 West 20th Street, New York, NY 10011-4211, USA http://www.org 10 Stamford Road, Oakleigh, Melbourne 3166, Australia © Cambridge University Press 1989 This book is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press.
First published 1989 Reprinted 1990, 1992, 1993, 1995, 1997 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication data Colman, David. Principles of agricultural economics: markets and prices in less developed countries. David Colman and Trevor Young. Agriculture - Economic aspects - Developing countries.
Agriculture prices - Developing countries.1'09172'4-dcl9 88-10297 CIP Contents Acknowledgements ix 1 Introduction 1 2 Economics of agricultural production: theoretical foundations 5 2.1 The factor-product relationship 1 2.2 The factor-factor relationship 13 2.3 The product-product relationship 16 2.1 Economic optimum: the factor-product relationship 18 2.2 Economic optimum: the factor-factor relationship 19 2.3 Economic optimum: the product-product relationship 27 2.4 Economic optimum: the general case 28 2.4 Summary points 29 3 Product supply and input demand 30 3.1 The need for a dynamic specification 36 3.3 Demand for inputs 40 3.1 The competitive model of input demand 41 3.2 Asset fixity in agriculture 46 3.5 Summary points 48 4 Topics in production economics 49 4.2 Efficiency of resource use 50 4.1 Technical, allocative and economic efficiency 50 4.2 * The myth of efficiency' 52 4.3 Technological change 53 vi Contents 4.1 Technological change in economic modelling 53 4.2 Sources of technological change 59 4.3 Adoption and diffusion of new technologies 60 4.4 Risk and uncertainty 64 4.7 Summary points 69 5 Theory of consumer behaviour 72 5.2 The basic relationships 73 5.3 The analysis of consumer choice 76 5.4 Variations in the consumer's equilibrium 81 5.5 Income and substitution effects 85 5.6 Summary points 89 6 Economics of market demand 91 6.2 Basic demand relationships 91 6.1 The market demand curve 91 6.2 The market demand function 92 6.3 Shifts in the market demand curve 94 6.3 Elasticities of demand 95 6.1 The own-price elasticity of demand 96 6.2 Cross-price elasticity of demand 100 6.3 The income elasticity of demand 101 6.4 Properties of demand functions 105 6.2 The Slutsky equation and Slutsky symmetry 106 6.5 Dynamics in demand analysis 108 6.7 Summary points 112 7 Developments in demand theory 113 7.2 ' New' theories of demand 113 7.1 Lancaster's model of consumer demand 113 7.2 Becker's model of consumer demand 119 7.3 Duality in demand analysis 121 7.5 Summary points 123 8 Equilibrium and exchange 125 8.2 The definition of equilibrium 126 8. general equilibrium 128 Contents vii 8.2 Existence, uniqueness and stability of an equilibrium 130 8.4 Interference with equilibrium 134 8.3 Equilibrium in product markets 138 8.4 Production and consumption activities within the agricultural household 152 8.1 The theory of the agricultural household 153 8.2 The Z-goods model of the agricultural household 163 8.6 Summary points 165 9 Analysis of agricultural markets 167 9.2 Degrees of market competition 168 9.1 Many buyers and sellers 168 9.3 Structure and functions of agricultural markets 186 9.4 Simultaneous equilibrium at two market levels 190 9.5 Marketing margins and farm prices 193 9.7 Summary points 196 10 Welfare economics 198 10.2 Competitive markets and Pareto optimality 200 10.1 The exchange efficiency criterion 201 10.2 The production efficiency criterion 203 10.3 The top level criterion 205 10.3 Reasons for policy intervention in markets 206 10.4 Welfare criteria for policy choice 209 10.5 Consumer and producer surplus 211 10.6 The problem of the second best 217 10.8 Summary points 221 11 Economics of trade 224 11.1 Theory of comparative advantage 226 11.2 Heckscher-Ohlin theory of trade 232 11.3 Yen t-for-surplus 234 viii Contents 11.3 Trade equilibrium with no transport costs 235 11.4 Trade with international transport and handling charges 240 11.5 Terms-of- trade 245 11.1 Measuring terms-of-trade 246 11.2 Interpreting measures of the terms-of-trade 249 11.1 The effects of imposing import tariff's on trade 253 11.2 Non-tariff barriers to trade 255 11.3 Reasons for trade in ter ven tion 257 11.8 Summary points 262 12 Food and agricultural policy 264 12.1 Nature and principles of policy 265 12.1 The elemen ts of policy 265 12.2 Classification of instruments of policy 268 12.3 Rules of policy 272 12.2 Analysing the effects of policy instruments 273 12.1 Partial equilibrium analysis 273 12.2 Classifying the effects of agricultural policy 282 12.3 Economic analysis of selected agricultural policies 285 12.1 Export taxes for Thai rice 285 12.2 Egypt's wheat procurement and distribution policy 290 12.5 Summary points 296 Notes 298 References 308 Index 314 Acknowledgements Our warm appreciation is offered to the many colleagues who attempted to keep us on a straight and narrow path in the preparation of this book. Derek Ray, at Wye College, deserves particular mention for his advice on structural and presentational issues. Also at Wye we would like to thank both Henry Bernstein and Jonathan Kydd for their continual support and advice.
Among our immediate colleagues at Manchester University, Martin Currie, Noel Russell, Ian Steedman and Colin Thirtle all made telling and much appreciated responses to drafts of different chapters of the book. Our thanks are also extended to Hartwig de Haen at the University of Gottingen and Joachim von Braun at the International Food Policy Research Institute for their correspondence in connection with material presented in Chapter 12. Needless to say none of those mentioned is in any way responsible for any tendencies to stray that the book exhibits or for any of the errors that we may have committed. We accept full responsibility for those.
To illustrate the significance of various concepts we have drawn upon the work of others. The authors and publishers would therefore like to thank the following who have kindly given permission for the use of copyright material: The Controller of Her Majesty's Stationery Office for a table from Household Food Consumption and Expenditure 1985 \ the International Bank for Reconstruction and Development for (i) a table from A Survey of Agricultural Household Models by I. Strauss (1986), (ii) a table from Agricultural Price Policies and the Developing Countries by G. Thomas and Chung Ming Wong (1982), and (iii) a table from World Development Report 1986 \ the International Food Policy Research Institute for diagrams and tables from The Effect of Food x Acknowledgements Price and Subsidy Policies on Egyptian Agriculture by J.
von Braun and H. de Haen (1983); the International Rice Research Institute for tables from Adoption, Spread and Production Impact of Modern Rice Varieties in Asia by R. A special debt of thanks is owed to Jennifer Vaughan and Judy Darnton for their heroic efforts in typing and processing the various drafts and many revisions of the book; this they did with unfailing grace and humour. As always, however, much of the strain was transmitted to our immediate families who had to cope with the bouts of moody introspection that accompany a venture such as this.
In what can only be a token recognition of their generous support, this book is lovingly dedicated to Sandy, Sue, Lucy and Sophie. Young 1 Introduction Economists emphasise the importance of the agricultural sector in the development process and there is wide agreement that a necessary condition for economic growth is an agricultural transformation which ensures a large and increasing domestic agricultural surplus. However, it has not always been the case that agriculture has been seen to play such a significant role. In the 1950s the emphasis in development policy was placed on urban industrial growth, with the agricultural sector being regarded as a residual source of inputs (mainly labour) for the manufacturing sector.
There was a shift of emphasis in the 1960s when the importance of' balanced growth' was stressed, which entailed recognition of the need for a certain pattern of agricultural growth to complement that of other sectors. It was also at this time that the contributions of agriculture to the development process were more sharply identified in the work of Kuznets (1961), Mellor (1966) and others, and the positive role of agriculture as an engine of development became accepted. Subsequent events in the 1970s and 1980s have reinforced the need for more attention to be paid to agricultural development policy. The series of 'oil shocks' which raised oil prices had serious consequences for the trade balances of non-oil exporting countries and caused them to focus attention on their trading accounts in agricultural products.
This necessity was intensified by a growing tendency in some Less Developed Countries (LDCs) to increase food imports as demand growth outstripped that of supply. It has forced countries to take a positive view of the benefits of increased agricultural production for both export and domestic consumption, and to focus more attention upon the factors determining supply and demand growth. This has necessitated increasingly sophisticated analysis of the operation of agricultural markets, and of the impacts and effectiveness of government 2 Introduction policies for the sector. Particular emphasis has been given to the economics of production and supply, an area in which agricultural economics has a major contribution to make.
It is our intention to equip the reader with the analytical tools which agricultural economists need for the study of supply, demand and agricultural markets in developing countries. The importance of an analytical framework is stressed since the main contribution of agricultural economists working on development issues lies in their ability to provide a consistent, logical basis for the study of complex policy problems. This framework provides the basis for the systematic quantitative analysis which is a major input into agricultural political decision-making. Because agriculture is special (almost unique) in a number of ways a specialised branch of economics has developed to address the problems associated with it.
In this agricultural economists make extensive use of 'micro-economics' or 'price theory', in which propositions on the functioning of markets, in terms of production, consumption and exchange, are developed from hypotheses about the behaviour of individual producers and consumers.1 The central theme is that resources - land, labour, capital, time etc. - are limited, or too few to satisfy all human wants, and that as a consequence of this scarcity choices must be made.