The Role of Trade in Structural Transformation

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1 1 The Role of Trade in Structural Transformation Marc Teignier UNIVERSIDAD DE ALICANTE European Summer Symposium in International Macroeconomics 23 May 2012, Tarragona

2 Question Contributions Road Map Motivation Main Results High agricultural productivity growth is typically considered a necessary condition for the start of industrialization and growth. Schultz (1953); Gollin, Parente, Rogerson (2007). Goal of the paper: Can international trade in agricultural good accelerate transition process of countries with low agricultural productivity? What is the quantitative effect of trade on the structural transformation of net agricultural importers? Main idea: Under autarky, because of need to feed population: Low agricultural productivity Large agricultural sector, low aggregate productivity. Under international trade: Low agricultural productivity Food imports from abroad, faster structural transformation. 2

3 Main Contributions Question Contributions Road Map Motivation Main Results Related literature: Structural transformation in closed economy: Gollin, Parente, Rogerson (2007); Hayashi and Prescott (2008). Structural transformation in an open economy: Matsuyama (1992, 2009); Stokey (2001); Yi and Zhang (2010). Main contributions of this paper: Introduce trade into two-sector neo-classical growth model. Show model is able to replicate structural transformation data: model: United States : United Kingdom , S. Korea Related Quantitatively evaluate role of trade in the transformation of: United Kingdom, South Korea. 3

4 Outline of the presentation Question Contributions Road Map Motivation Main Results 1 2 Structural transformation model 3 simulation, numerical results 4 for low-development countries 5 4

5 Motivation: income and agriculture size Question Contributions Road Map Motivation Main Results Structural transformation is a key element of the development process: poor countries have much larger agricultural sectors than rich ones. Agricultural employment share BTN BFA NPL BDI RWA NER ETH GNB MWI MOZ GIN TZA GMB MLI UGA SYC ERI TCD LAO DJI MDG KEN PNG CAF COM SEN AGO KHMSOM SLB GNQ LBR ZMB VNM CHN ZAR AFG SLE HTI STP ZWE TGOSDN CMR IND GHA BEN BGD THA MRT YEM CIV IDN ALB GTM BOL LKA BWA LSO PAK COG PHLFJI TUR VUT GAB OMN NGA TJK WSM TON SWZ MAR TKM PRK HND EGY AZE SLV KGZ UZBPER PRY KIR BLZ IRN MNG FSM SYR ECU CPV DZA GRD DMA MDA MDV NIC LCAVCT TUN ATG GEO JAM MEX COL PAN POL PLW SCG CRI GUY SUR BRA CHL ARM CUB DOM KAZ MYS GRC UKR ROM LVA LTU BLR URY EST IRQ JOR ARG HUN MUS PRT ZAF RUS BGRHRV SVK CZE KOR SAU VEN TTO NZL CYPIRL ESP ISL BIH LBY BRBHS ITA FIN LBN AUS AUT BHR ISR JPN BEL FRA GER NLD CAN DNK NOR SVN MLT PRISWE BMU KWT CHE ARE GBRQAT USA LUX ANT BRN SGP Log GDP per capita - year 2000 (2002 International prices) 5

6 for US, UK, S. Korea Question Contributions Road Map Motivation Main Results Transformation expenciered at very different points in time: United States: Transition during 19th and 20th century. United Kingdom: Transition earlier than in the US. South Korea: Transition 2nd half 20th century, much faster. Agricultural Employment Share United States France Japan United Kingdom Australia Egypt India Kenya South Korea Year 6

7 Question Contributions Road Map Motivation Main Results for US, UK, S. Korea Controlling for income, size agricultural sector similar in US and Korea; much smaller in UK. Agricultural Employment Share SK 1820US 1820UK 1856UK 1874US 1980SK 1920UK 1960UK 2000SK 1960US Log GDP per capita (1990 International Dollars) 7

8 Main Results: United Kingdom Question Contributions Road Map Motivation Main Results Trade very important for United Kingdom s early transformation: In 1800, 80% empl in agr under autarky instead of 35% under trade. Trade had very large effects on income growth and welfare: Gain in welfare equivalent to 5.5% increase in consumption exp. Agricultural Employment Share South Korea. United Kingdom Autarky United Kingdom United States Log GDP per capita (1990 International Dollars) 8

9 Question Contributions Road Map Motivation Main Results Main Results: South Korea In South Korea, positive but smaller effects of trade in transformation. Initial agricultural employment 70% instead of 63%. If no agr protection, faster transition and lager effects trade: Agricultural employment below 10% in 1979 instead of Gain in welfare equivalent to 5.4% increase in consumption exp. Agricultural Employment Share South Korea. South Korea Free Trade United Kingdom United States South Korea Autarky Log GDP per capita (1990 International Dollars)... 9

10 Description Description Analysis Two Sectors: Agricultural good (consumption). Nonagricultural good (consumption and investment). Production functions: Agricultural sector inputs: land (fixed), capital, labor. Nonagricultural sector inputs: capital, labor. Exogenous technology growth; different rates across sectors. : Low income elasticity agricultural good. Low price elasticity agricultural good. Environment: Perfect competition. Perfect input mobility. 10

11 Technology Description Description Analysis Production functions: Nonagricultural sector: Y n = A n (K n ) α (N n ) 1 α Agricultural sector: Exogenous technological change: Y a = A a (K a ) η (N a ) β (L) 1 η β Capital accumulation: Ȧ n A n γ n, Ȧ a A a γ a K = (Y n C n ) δk 11

12 Description Analysis Description : U (t) = e ρs N (s)u(c a,c n )ds t { µ0 log ( ) c u(c a,c n ) = log(c n ) + a c a B + µ 1 log(c a c a A) if c a c a if c a > c a A = µ 1 µ 0 ( c a c a ) to get differentiability at c a. B = µ 0 log ( c a c a ) µ1 log( µ1 µ 0 ( c a c a ) ) to get continuity at c a. Utility at different levels of agricultural consumption Agricultural good expenditure share ParameterValues : c a = 100 Utility level ParameterValues : c a = c a = c a = Agricultural Consumption Total consumption expenditure 12

13 Main mechanisms Description Analysis Agents optimization: Firms choose capital, labor, and land demand to maximize profits. Households choose savings, consumption, allocation of labor and capital to maximize intertemporal welfare. Market clearing: Under autarky, domestic supply = domestic demand. Under trade, imports = exports (labor, capital not mobile). Main mechanims leading to structural transformation: Technological change + capital accumulation income agricultural consumption share. Structural transformation in a closed economy: Agricultural consumption share agricultural employment share. Structural transformation in an open economy: If international price agricultural good < domestic price, trade agricultural imports, agricultural employment. 13

14 Description Analysis Equilibrium analysis If population growth not too high relative to TFP growth, η 1 α γ n + γ a (1 η β )ν > 0, economy behaves asymptotically as if homothetic preferences: u(c a,c n ) = µ 1 log(c a ) + log(c n ). Then, for any initial condition, economy converges asymptotically to the homothetic preferences Balanced Growth Path. Closed economy BGP: Positive and constant employment shares in both sectors. Constant (not necessarily equal) growth rates of all other variables. Small open economy: Specialization in agriculture if agricultural price high enough. BGP growth rates depend on sectoral composition: If growth rate agricultural price high enough, agricultural specialization. If not, non-agricultural specialization. 14

15 Calibration United States United Kingdom South Korea Results 1 Parameter values specified. 2 Exogenous variables specified: United States: A a, A n, N. United Kingdom: A a, A n, N, p a /p n. South Korea: A a, A n, N, p a /p n, t a, σ a. 3 Initial capital stock taken from the data. 4 Simulation results compared with the data. United States: United Kingdom: South Korea: Counterfactual experiments: United States: different initial productivity. United Kingdom: autarky. South Korea: autarky, free trade (no agricultural policy). 15

16 Parameter Values Calibration United States United Kingdom South Korea Results Description Value Source α Capital share nonagr sector 1/3 standard η Capital share agr sector 0.1 Korea Development Institute β Labor share agr sector 0.5 Korea Development Institute δ Capital depreciation rate 0.10 Christensen, Jorgenson (1995) ρ Intertemporal discount 0.06 To match SS capital US µ 0 Agr good initial weight 0.5 To match Korea cons data µ 1 Agr good weight 0.01 To match SS agr empl US c a/c a Agr cons threshold 1.5 To match Korea cons data c a Agr subsistence level (as % initial agr cons) 60% 85% 91% To match US cons data To match Korea cons data To match UK cons data Levels Comparison 16

17 Calibration United States United Kingdom South Korea Results United States Baseline Simulation Fraction of Employment in Agricultural Sector Kendrick Data NIPA data Exogenous Variables 17

18 United States Baseline Simulation 220 Agricultural production per capita Nonagricultural production per capita Calibration United States United Kingdom South Korea Results Agricultural relative price 160 Aggregate capital stock (in logs)

19 United Sates : changes in initial TFP Calibration United States United Kingdom South Korea Results Agricultural Emloyment Share Initial Agricultural Productivity A a (0)=100 (Baseline) A (0)=50 a Initial Nonagricultural Productivity A (0)=100 (Baseline) n A (0)=50 n Agricultural Emloyment Share

20 United Kingdom Baseline Simulation Fraction of Employment in Agricultural Sector 0.4 Data Agricultural production per capita Data Calibration United States United Kingdom South Korea Results Agricultural net imports per capita Data Aggregate capital stock (in logs) Data Exogenous Variables 20

21 Policy experiment: Autarky Calibration United States United Kingdom Relative price agricultural good Agricultural Sector Employment Share Autarky Simulation Baseline Simulation South Korea Results Agricultural Good Consumption 200 Nonagricultural Good Consumption (in logs) Results Summary 21

22 Calibration United States United Kingdom South Korea Results South Korea Baseline Simulation Fraction of Employment in Agricultural Sector Data Exogenous Variables 22

23 South Korea Baseline Simulation Calibration United States United Kingdom Agricultural consumption per capita Agricultural production per capita South Korea Results Nonagricultural production per capita (in logs) Aggregate capital stock (in logs)

24 Policy experiment 1: Autarky Calibration United States United Kingdom South Korea Results Relative price agricultural good Autarky Simulation Baseline Simulation Agricultural Sector Employment Share Autarky Simulation Baseline Simulation Agricultural Good Consumption Autarky Simulation Baseline Simulation Nonagricultural Good Consumption (in logs) Autarky Simulation Baseline Simulation

25 Policy experiment 2: No Agricultural Policy Agricultural Good Imports Agricultural Sector Employment Share Calibration United States United Kingdom No Agr Policy Simulation Baseline Simulation No Agr Policy Simulation Baseline Simulation South Korea Results Agricultural Good Consumption Nonagricultural Good Consumption (in logs) No Agr Policy Simulation Baseline Simulation No Agr Policy Simulation Baseline Simulation Results Summary 25

26 Results Summary Calibration United States United Kingdom South Korea Results Real income growth: Autarky Baseline No agr policy United Kingdom 1.28% 1.44% South Korea 4.5% 4.71% 5.47% Intertemporal Welfare gain with respect to Autarky: (in terms of annual consumption expenditures) Baseline No agr policy United Kingdom 5.5% South Korea 0.4% 5.4% 26

27 International evidence. Agricultural and non-agricultural productivity Poor countries are particularly unproductive in agriculture: Nonagricultural output per worker - ratio to US NOR CHE USA AUTFRA ITA BEL NLD JPN GRC GER SWE ISR DNK CAN FINESP GBR AUS MEX NZL IRL ZWE DZAPRT NERNPL CMRPNG NIC IRN VEN ZAF CRI HUN ARG KOR MYS RWA PER GTM TUR TUN ECU COL PRY THA BRA DOM CHL SEN GIN SLV URY BDIHTI MAR HND PHL EGY KEN LKACIV IRQ BFA INDIDN PAK BOL MOZ BGD SYR NGA TCD ZAR MDG MWI SDN MLI UGAGHA SOM ETH TZA Agricultural output per worker - ratio to US 27

28 International evidence. Agricultural relative price The relative price of agricultural goods is higher in poor countries: FAO Agricultural PPP / PWT Aggregate PPP HTI PNG DOM IRN DZA KOR NPL IDN NIC BGD NER LKA PHL TUN PRT RWA IND SLV ECU MYS UGA EGY GHA PAK ZWE MLI SEN GTM CRI HUN KEN CMR TUR PER PRYBRA URY MEX MOZ SDN COL ZAF THA VEN MWI SYR BOL CHL ZAR HND ARG JPN GRC FIN ESP ISR ITA FRA AUT NOR GER GBR SWE DNK NLD BEL IRL CAN NZLAUS USA Output per worker - year 1985 (2002 international prices) 28

29 for Low-Development Countries There seem to be important potential benefits from agricultural imports for many poor countries: Year: 1985 Ratio 10th - 90th percentile Agricultural Employment Share 0.85/0.05 Aggregate labor productivity 1/30 Agriculture labor productivity 1/50 Relative price agricultural good 2 Agricultural trade flows very low in poor countries, but they are more food importers than rich countries. (World Bank, year ) Net Food Net food Exporters Importers # Countries Industrial 39% 61% 33 Middle-income 34% 66% 105 Low income 28% 72% 58 International 29

30 Results summary: Large effects of trade in United Kingdom. Positive but smaller effects of trade in South Korea. Trade effects in South Korea much larger if no agriculture protection. Policy implications: Important welfare gains from eliminating agricultural protection policies. Future extensions: Robustness analysis (functional forms, parameter values). Study potential benefits of agricultural trade for low-development countries. Examine relation land quality and income for closed and open economies. 30

31 APPENDIX 31

32 . Related Why countries experience structural transformation: Differences in goods income elasticities: Kongsamut et al. (2001). Differences in TFP growth across sectors: Ngai, Pissarides (2008). Differences in sectoral factor intensities: Acemoglu, Guerrieri (2008). Structural Transformation in a : Shin (1990); Echevarria (1997); Laitner (2000); Lucas (2000, 2007); Caselli and Coleman (2001); Gollin, Parente and Rogerson (2002, 2004, 2007); Hansen and Prescott (2002); Hayashi and Prescott (2008); Restuccia, Yang and Zhu (2008). Structural Transformation in an : Matsuyama (1992, 2009); Stokey (2001); Echevarria (2007); Stefanski (2010); Ungor (2010); Deardorf, Park (2010); Yi and Zhang (2010); Betts and Verma (2011); Choi and Ma (2011); Tombe (2011). Agricultural vs Nonagricultural productivity: Caselli (2005); Cordoba and Ripoll (2006); Vollrath (2008); Lagakos and Waugh (2009). East Asian countries growth episodes: Young (1992, 1995); Hsieh (2002); Connolly and Yi (2009). Back 32

33 . evidence Structural transformation experienced by countries at different points in time. Agricultural Employment Share Year 33

34 . evidence Structural transformation process closely related to income growth. Agricultural Employment Share Log GDP per capita (1990 International Dollars) 34

35 . evidence Also, at a given point in time, negative relation between income and size agriculture across countries : Agricultural employment share BTN BFABDI NPLRWA NER GIN GNBMWI TZA UGA MLI MOZ TCD GMB CAF DJI MDG KEN PNG LAO SEN COM KHM SOM GNQSLB CHN ZMB LBR CMR ZAR SDN SLE STP BGD HTI AFG ZWE TGO BEN IND THA MRT GHA CIV GAB IDN PAK COGGTM BWA TUR HND LKA NGA BOL EGY PHL MAR FJI SWZ LSO MDV TONVUT WSM OMN PRK MNG SLV BLZ PER ECU PRY IRN KIR CPV MYS COL NIC SYR VCTLCA TUNDZA ATG DOM GRDMACRI BRA MEX JAM POL ROM SAU KOR PAN GRC IRQ SUR CHL CUB MUS PRT CYP JOR HUN URY IRL VEN ZAF ESP ARG TTO ITA NZL FINISL BRB JPN AUT MLT GER FRA ISR NLD BHS AUS CAN DNK NOR PRI SWECHE ARE BHR BMU SGP GBRKWT USA BRN QAT ANT Log GDP per capita - year 1985 (2002 International prices) 35

36 . evidence Relationship between income and agricultural sector size less strong for open economies: Agricultural employment share ZAR BDI BFA RWA NER ETH MOZ TZA UGA CAF SOMZMB SLE SDN 25% Least Open Economies R-squared=0.7 PRK GIN HTI CMR IND BGD SCG CHN ALB GTM PAKBOL IRQ TUR EGY PERPRY IRN COL CUB DOM BRA URY VEN ZAF ARG LBY ITA JPN AUS USA Agricultural employment share KHM 25% Most Open Economies R-squared=0.45 STP AGO SLB COG LSO TJK MNG MDA VUT FJI GNQ THA SWZ SYC GRD DMA MDV PAN ATG GUY MYS UKR BLR EST MUS SVK HUN IRL BGR CZE LBN BHS NLD ARE SVN BHR PRI BEL ANT MLT BRN SGP LUX Log GDP per capita - year 2000 (2002 International prices) Log GDP per capita - year 2000 (2002 International prices) 36

37 . evidence Back Poor countries more likely to be food exporters than rich ones (World Bank, year ): Net Food Net food Exporters Importers # Countries Industrial 39% 61% 33 Middle-income 34% 66% 105 Low income 28% 72% 58 Food net exports over total income ( ) ZAR CIV CRI GNB MDASWZ NZL KEN GHA VNM ECU GTM THAURY ARG BDI MWI UGA NICHND AUS CMR BOL BRA CHL BEL TCD CAF CHN COL HUN MUS IRL DNK MDG PRY NLD TZA ZWE UKR IND LKA PAK SLV ZAF BGR KAZ LTU TUR CAN IDN DOM PER GNQ BLR AUT BGDKHM HRV CZE GRC GER FIN FRA IRN PANPOL ESP RWA MEX SDN KOR ISRITAJPN MLI LAO KGZMAR JAM NAM NOR NER NPLNGA PHL ROM SYR MYS SVK SWE CHE USA TGO ZMB GIN EGYGAB RUS PRT HKG AGOBFA BWA OMN SAU QAT SVN GBR UZB VEN SGP TUN TTO KWT BEN MOZ COG LBY AZE DZA BHR LVA EST ARE COM MNG TKM AFG LBN TJK STP ALBGEOJOR SYC HTI SEN IRQ YEM ARMBIH SLE MRT DJI GMB LBR CPV LSO Log GDP per capita - year

38 . Equilibrium Households optimization: max e (ρ ν)t u(c a,c n )dt {c s,n s,k s,} s=a,n 0 s.t. Firms optimization: k = w + p l Le νt + (r δ ν)k qc a c n { } max A n (k n ) α (n n ) 1 α rk wn n k n,n n { max qa a (k a ) η (n a ) β ( Le νt) 1 η β rka wn a p l Le νt} k a,n a 38

39 . Closed economy equilibrium conditions Consumers optimization conditions: ċ n = c n (r δ ρ) { c ca + µ nq c a = 0 if c a + µ 0 a c n q c a c c a A + µ nq 1 else Firms optimization conditions: r (t) = qηa a (k a ) η 1 (n a ) β ( Le νt) 1 η β = αan (k n ) α 1 (n n ) 1 α w(t) = qβa a (k a ) η (n a ) β 1 ( Le νt) 1 η β = (1 α)an (k n ) α (n n ) α Market clearing: y a = c a, y n = k + (δ + ν)k + c n k a + k n = k, n a + n n = 1 39

40 . Equilibrium u(c a,c n ) = µ 1 log(c a ) + log(c n ) (1) { µ0 log ( ) c u(c a,c n ) = log(c n ) + a c a if c a c a B + µ 1 log(c a c a A) if c a > c (2) a If preferences as in equation (1), economy converges asymptotically to BGP. If preferences as in equation (2), equilibrium system converges to the equilibrium system for preferences (1), as long as η 1 α γ n + γ a (1 η β )ν > 0 (3) For any initial condition, economy converges asymptotically to BGP of preferences (1). 40

41 . Closed economy BGP growth rates lim t lim t lim t lim t lim t { } s e (t) s e (t) { } s k (t) s k (t) { } k(t) k (t) { } q(t) q(t) { c a (t) c a (t) } = lim t = 0, where s e N a N = 0, where s k K a K { c n (t) c n (t) } = 1 1 α γ n = 1 η 1 α γ n + (1 η β )ν γ a = γ a + η 1 α γ n (1 η β )ν 41

42 . Autarky equilibrium analysis Structural transformation under autarky: Evolution of fraction of employment in agricultural sector: If c n y n constant, as c a increases n a = µ β c n y n 1 n a 1 α 1 c a A c a c a A s e c a Evolution of agricultural good relative price: q = Φ A n ( Le νt ) η+β 1 k α η (n a ) 1 η β ( ( A a β η n β a η 1 α α )) α η Structural transformation has negative effect on agricultural price: n a q Other variables also affect agricultural price: A n A a q, k q, Le νt q Back 42

43 . Equilibrium Market clearing conditions: y a = c a + x a y n = k + (δ + ν)k + c n + x n k a + k n = k n a + n n = 1 Balanced trade: Small open economy: qx a + x n = 0 t q exogenous, with q q γ q 43

44 . Equilibrium Specialization in the short run: If q(t) is high enough, specialization in agricultural good: { } αa n ((1 s q > lim k )k) α 1 ((1 s e )) 1 α s e 1,s k 1 ηa a (s k k) η 1 (s e ) β N η+β 1 = Θ A n A a N 1 η β k α η Specialization in nonagricultural good not possible in the short run: { } αa n ((1 s q lim k )k) α 1 ((1 s e )) 1 α s e 0,s k 0 = Ψ A n A a N 1 η β k α η ηa a (s k k) η 1 (s e ) β N η+β 1 ( ) lim s e 0 s1 η β e 44

45 . Equilibrium As before, if condition (3) is satisfied, convergence to BGP of (1). Specialization in the long run: If γ q = (1 η β )ν + 1 η 1 α γ n γ a, no specialization. If γ q < (1 η β )ν + 1 η 1 α γ n γ a { } lim {n ka (t) a (t)} = lim = 0 t t k (t) If γ q > (1 η β )ν + 1 η 1 α γ n γ a, { } lim {n ka (t) a (t)} = lim = 1 t t k (t) 45

46 . Open economy BGP growth rates lim t If γ q (1 η β )ν + (1 η)γ n βγ a (and q not too high ): { } k (t) lim t k (t) } {ċa (t) c a (t) lim t } {ċn (t) = lim = 1 t c n (t) 1 α γ n 1 = 1 α γ n γ q If γ q > (1 η β )ν + (1 η)γ n βγ a (or q high enough ): { } k (t) lim t k (t) } {ċa (t) c a (t) } {ċn (t) = lim = 1 t c n (t) 1 η γ a η γ q 1 η β 1 η ν 1 = 1 η γ a + η 1 η γ q 1 η β 1 η ν Back 46

47 Comparison subsistence levels If good a is tradable and country i imports it from country j, then E (t)p i a (t) = P j a (t) ( 1 + τ i a (t) )( 1 + d i a (t) ) where E is the exchange rate, τ the import tariff, and d the transport cost. Using this, possible to compare c a for the three countries: Comparison United States, South Korea: P us a (1990)c sk a P us a (1990)c us = a E(1990)P us a (1990) (1+τ sk a (1990))(1+da sk (1990)) c a sk P us = a (1990)c us a 1.47 (1 + d sk a (1990)) If transportation cost equal to 47%, then the two subsistence levels are equivalent. Comparison United States, United Kingdom: P us a (1900)c uk a P us a (1900)c us = a E(1900)P us a (1900) (1+τ uk a (1900))(1+da uk (1900)) c a sk P us = a (1900)c us a Even if no import tariffs and no transportation costs, value subsistence level in UK lower than in US! 0.52 (1 + d uk a (1900)) Back 47

48 . United States Exogenous Variables ν γ a γ n Description Population growth Agr TFP growth Nona TFP growth Sample period growth Smoothed data ( ) Smoothed data ( ) Smoothed data ( ) Future growth Data source Kendrick (1961) NIPA Kendrick (1961) NIPA Kendrick (1961) NIPA K (0) Description Value Data source Initial capital stock K Y n = 2.03 in 1890 Kendrick (1961) 48

49 . United States Exogenous Variables Total Population Simulation Exogenous Variable Measured Data Agricultural TFP (in logs) Simulation Exogenous Variable Measured Data 120 Nonagricultural TFP (in logs) Simulation Exogenous Variable Measured Data

50 . United States Data US Net Agricultural Exports over Agricultural Production Back 50

51 . South Why study South Korea? Agr emp % GDP capita (Korea / US) % Openess (X+M)/GDP) Agr imports (over Agr GDP) % (approx) % % % % % %

52 . South Korea exogenous variables Agricultural policy variables: σ a t a Import tariff (iceberg-cost type): t a Production subsidy: σ a Lump-sum tax to households: τ Balanced government budget constraint: σ a qy a = τ Description Value Data source Agr prod subsidy 0 ( ) 10% ( ) To match n a data Agr import tariff USDA (1990: 104%) 52

53 . South Korea exogenous variables ν γ q γ a γ n Description Population growth Rel agr price growth Agr TFP growth Nonagr TFP growth Sample period growth Smoothed data (0.025, 0.005) P a Y a /Y a P n Y n /Y smoothed n (-0.012, 0.023) Future growth Data source Bank of Korea Bank of Korea To match n a To match n a K(0) Description Value Data source Initial capital stock K Y n =2.87 in 1963 Korea Development Institute 53

54 . South Korea exogenous variables 5 Relative price agricultural good Simulation Exogenous Variable Data 1.6 Relative price agricultural good No Agr Policy Simulation Baseline Simulation Agricultural Sector TFP Nonagricultural Sector TFP Simulation Exogenous Variable Measured Data Simulation Exogenous Variable Measured Data

55 . South 0.15 Exports minus Imports over GDP Back 55

56 . South Korea Policy experiments results Sample period results ( ): % Avg. change (w.r.t. Baseline) q n a c n c a k Autarky No subsidy No subs No tariff Real income growth: Autarky Baseline No subsidy No ag policy 4.5% 4.71% 4.72% 5.47% Intertemporal Welfare gain with respect to Autarky: (in terms of annual consumption expenditures) Autarky Baseline No subsidy No ag policy 0 0.4% 0.45% 5.4% Back 56

57 . United Kingdom Exogenous Variables ν γ q γ a γ n Description Population growth Rel agr price growth Agr TFP growth Nonagr TFP growth Sample period growth Smoothed data (0.016, 0.08) Smoothed data ( ) Future growth Data source Mitchell (1962) Maddison (2003) Mitchell (1962) Deane,Cole (1969) To match n a To match n a K(0) Description Value Data source Initial capital stock K Y n = 2.52 in 1800 Feinstein (1988) 57

58 . United Kingdom Exogenous Variables 4.5 Agricultural relative price Simulation Exogenous Variable Data Total Population Simulation Exogenous Variable Measured Data Agricultural Sector TFP Simulation Exogenous Variable Measured Data Nonagricultural Sector TFP Simulation Exogenous Variable Measured Data Back 58

59 . United Kingdom Policy experiment results Sample period results ( ): % Avg. change (w.r.t. baseline) q n a c n c a k Autarky Real Income Growth: Autarky Baseline 1.28% 1.44% Intertemporal Welfare gain with respect to Autarky: (in terms of consumption expenditures) Autarky Baseline 0 5.5% Back 59

60 . Alternative preferences simulations Household preferences: 0 e ρt N (t)u(c a (t),c n (t))dt ( ) 1 σ u(c a,c n ) = µ σ ca c a + log(c n ) 1 σ Simulation parameter values: Description Value Source µ Agr good weight 47 to match c a data σ Agr subsistence level 7.75 to match c a data c a Agr cons threshold 35% agr cons 1963 to match c a data Sample period results ( ): comparison S. Korea simulations Growth % q % s e % c n % c a % Autarky No subsidy No subs No tariff

61 . Alternative preferences simulations 0.7 Fraction of Employment in Agricultural Sector 150 Agricultural consumption per capita 0.6 Data 140 Data Agricultural production per capita 150 Aggregate capital stock (in logs) 150 Data 140 Data

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