1 The Role of Trade in Structural Transformation Marc Teignier UNIVERSIDAD DE ALICANTE European Summer Symposium in International Macroeconomics 23 May 2012, Tarragona
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
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 1890-2007. : United Kingdom 1800-1900, S. Korea 1963-2007. Related Quantitatively evaluate role of trade in the transformation of: United Kingdom, South Korea. 3
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
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 0 20 40 60 80 100 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 6 7 8 9 10 11 Log GDP per capita - year 2000 (2002 International prices) 5
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 0 20 40 60 80 United States France Japan United Kingdom Australia Egypt India Kenya South Korea 1800 1850 1900 1950 2000 Year 6
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 0 20 40 60 80 1960SK 1820US 1820UK 1856UK 1874US 1980SK 1920UK 1960UK 2000SK 1960US 6 7 8 9 10 Log GDP per capita (1990 International Dollars) 7
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 0 20 40 60 80 South Korea. United Kingdom Autarky United Kingdom United States... 6 7 8 9 10 Log GDP per capita (1990 International Dollars) 8
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 2002. Gain in welfare equivalent to 5.4% increase in consumption exp. Agricultural Employment Share 0 20 40 60 80 South Korea. South Korea Free Trade United Kingdom United States South Korea Autarky 6 7 8 9 10 Log GDP per capita (1990 International Dollars)... 9
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
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
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 8 7.5 0.9 0.8 Agricultural good expenditure share ParameterValues : c a = 100 Utility level 7 6.5 ParameterValues : 0.7 0.6 c a = 150 6 c a = 100 0.5 c a = 150 0.4 5.5 110 120 130 140 150 160 170 180 190 200 210 Agricultural Consumption 150 200 250 300 350 400 450 500 Total consumption expenditure 12
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
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
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: 1890-2007. United Kingdom: 1800-1900. South Korea: 1963-2007. 5 Counterfactual experiments: United States: different initial productivity. United Kingdom: autarky. South Korea: autarky, free trade (no agricultural policy). 15
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
Calibration United States United Kingdom South Korea Results United States Baseline Simulation 0.45 0.4 0.35 0.3 0.25 Fraction of Employment in Agricultural Sector Kendrick Data NIPA data 0.2 0.15 0.1 0.05 0 1900 1920 1940 1960 1980 2000 Exogenous Variables 17
United States Baseline Simulation 220 Agricultural production per capita 1000 900 Nonagricultural production per capita Calibration United States United Kingdom 200 180 800 700 South Korea Results 160 140 120 100 600 500 400 300 200 80 1900 1920 1940 1960 1980 2000 100 1900 1920 1940 1960 1980 2000 11 Agricultural relative price 160 Aggregate capital stock (in logs) 10 9 150 8 7 140 6 130 5 4 120 3 2 110 1 1900 1920 1940 1960 1980 2000 100 1900 1920 1940 1960 1980 2000 18
United Sates : changes in initial TFP Calibration United States United Kingdom South Korea Results Agricultural Emloyment Share 0.6 0.5 0.4 0.3 0.2 0.1 0.6 Initial Agricultural Productivity A a (0)=100 (Baseline) A (0)=50 a 1900 1920 1940 1960 1980 2000 Initial Nonagricultural Productivity A (0)=100 (Baseline) n A (0)=50 n Agricultural Emloyment Share 0.5 0.4 0.3 0.2 0.1 1900 1920 1940 1960 1980 2000 19
United Kingdom Baseline Simulation Fraction of Employment in Agricultural Sector 0.4 Data 0.35 160 150 Agricultural production per capita Data Calibration United States United Kingdom South Korea Results 0.3 0.25 0.2 0.15 140 130 120 110 100 0.1 1820 1840 1860 1880 1900 90 1820 1840 1860 1880 1900 150 140 130 120 Agricultural net imports per capita Data 135 130 125 Aggregate capital stock (in logs) Data 110 120 100 115 90 110 80 70 1820 1840 1860 1880 1900 105 100 1800 1820 1840 1860 1880 1900 Exogenous Variables 20
Policy experiment: Autarky Calibration United States United Kingdom 5.5 5 4.5 4 Relative price agricultural good 0.8 0.7 0.6 0.5 Agricultural Sector Employment Share Autarky Simulation Baseline Simulation South Korea Results 3.5 3 2.5 0.4 0.3 0.2 2 0.1 1850 1900 1950 2000 1850 1900 1950 2000 Agricultural Good Consumption 200 Nonagricultural Good Consumption (in logs) 160 150 140 130 120 110 190 180 170 160 150 140 130 120 110 100 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 100 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Results Summary 21
Calibration United States United Kingdom South Korea Results South Korea Baseline Simulation 0.7 0.6 0.5 0.4 Fraction of Employment in Agricultural Sector Data 0.3 0.2 0.1 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 Exogenous Variables 22
South Korea Baseline Simulation Calibration United States United Kingdom 170 160 150 Agricultural consumption per capita 145 140 135 130 Agricultural production per capita South Korea 140 125 Results 130 120 120 115 110 110 105 100 1965 1970 1975 1980 1985 1990 1995 2000 2005 150 140 130 120 110 100 Nonagricultural production per capita (in logs) 1965 1970 1975 1980 1985 1990 1995 2000 2005 100 1965 1970 1975 1980 1985 1990 1995 2000 2005 Aggregate capital stock (in logs) 145 140 135 130 125 120 115 110 105 100 1965 1970 1975 1980 1985 1990 1995 2000 2005 23
Policy experiment 1: Autarky Calibration United States United Kingdom South Korea Results 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 0.9 Relative price agricultural good Autarky Simulation Baseline Simulation 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Agricultural Sector Employment Share Autarky Simulation Baseline Simulation 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 150 145 140 135 130 125 Agricultural Good Consumption Autarky Simulation Baseline Simulation 170 160 150 140 Nonagricultural Good Consumption (in logs) Autarky Simulation Baseline Simulation 120 115 110 105 100 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 130 120 110 100 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 24
Policy experiment 2: No Agricultural Policy Agricultural Good Imports Agricultural Sector Employment Share Calibration United States United Kingdom 160 140 120 100 No Agr Policy Simulation Baseline Simulation 0.6 0.5 0.4 No Agr Policy Simulation Baseline Simulation South Korea Results 80 60 40 20 0.3 0.2 0.1 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Agricultural Good Consumption Nonagricultural Good Consumption (in logs) 170 160 No Agr Policy Simulation Baseline Simulation 170 160 No Agr Policy Simulation Baseline Simulation 150 150 140 140 130 130 120 120 110 110 100 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 100 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Results Summary 25
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
International evidence. Agricultural and non-agricultural productivity Poor countries are particularly unproductive in agriculture: Nonagricultural output per worker - ratio to US.00625.025.1.4 1.6 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.00625.025.1.4 1.6 Agricultural output per worker - ratio to US 27
International evidence. Agricultural relative price The relative price of agricultural goods is higher in poor countries: FAO Agricultural PPP / PWT Aggregate PPP 0 2 4 6 8 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 0 10000 20000 30000 40000 50000 Output per worker - year 1985 (2002 international prices) 28
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 2004-05) Net Food Net food Exporters Importers # Countries Industrial 39% 61% 33 Middle-income 34% 66% 105 Low income 28% 72% 58 International 29
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
APPENDIX 31
. 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
. evidence Structural transformation experienced by countries at different points in time. Agricultural Employment Share 0 20 40 60 80 1800 1850 1900 1950 2000 Year 33
. evidence Structural transformation process closely related to income growth. Agricultural Employment Share 0 20 40 60 80 6 7 8 9 10 Log GDP per capita (1990 International Dollars) 34
. evidence Also, at a given point in time, negative relation between income and size agriculture across countries : Agricultural employment share 0 20 40 60 80 100 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 6 7 8 9 10 Log GDP per capita - year 1985 (2002 International prices) 35
. evidence Relationship between income and agricultural sector size less strong for open economies: Agricultural employment share 0 20 40 60 80 100 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 0 20 40 60 80 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 6 7 8 9 10 11 Log GDP per capita - year 2000 (2002 International prices) 6 7 8 9 10 11 Log GDP per capita - year 2000 (2002 International prices) 36
. evidence Back Poor countries more likely to be food exporters than rich ones (World Bank, year 2004-05): 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 (1995-2005) -.2 -.1 0.1.2 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 5 6 7 8 9 10 Log GDP per capita - year 2000 37
. 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
. 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
. 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
. 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
. 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
. 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
. 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
. 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
. 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 + 1 1 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
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
. United States Exogenous Variables ν γ a γ n Description Population growth Agr TFP growth Nona TFP growth Sample period growth Smoothed data (0.018-0.009) Smoothed data (0.005-0.06) Smoothed data (0.002-0.015) Future growth 0.01 0.06 0.015 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
. United States Exogenous Variables 450 400 350 300 250 200 150 100 Total Population Simulation Exogenous Variable Measured Data 1900 1920 1940 1960 1980 2000 170 160 Agricultural TFP (in logs) Simulation Exogenous Variable Measured Data 120 Nonagricultural TFP (in logs) Simulation Exogenous Variable Measured Data 150 115 140 130 110 120 105 110 100 1900 1920 1940 1960 1980 2000 100 1900 1920 1940 1960 1980 2000 49
. United States Data US Net Agricultural Exports over Agricultural Production 0.25 0.2 0.15 0.1 0.05 0 0.05 0.1 1930 1940 1950 1960 1970 1980 1990 2000 Back 50
. South Why study South Korea? Agr emp % GDP capita (Korea / US) % Openess (X+M)/GDP) Agr imports (over Agr GDP) % 1955 80 (approx) 11.3 11.6% 1965 58.5 11.1 24.22% 7.8 1975 45.7 17.9 62% 19.6 1985 24.9 25.2 64.4% 17.2 1995 11.8 45.4 58.7% 18.5 2004 8.1 51 84% 24.1 51
. 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 (1963-1972) 10% (1973-2007) To match n a data Agr import tariff USDA (1990: 104%) 52
. 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 0.005 Bank of Korea -0.0216 Bank of Korea 0.032 0.032 To match n a 0.021 0.021 To match n a K(0) Description Value Data source Initial capital stock K Y n =2.87 in 1963 Korea Development Institute 53
. 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 4.5 4 1.4 1.2 1 3.5 0.8 3 0.6 2.5 0.4 1965 1970 1975 1980 1985 1990 1995 2000 2005 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Agricultural Sector TFP Nonagricultural Sector TFP 280 260 240 Simulation Exogenous Variable Measured Data 190 180 170 Simulation Exogenous Variable Measured Data 220 160 200 150 180 140 160 130 140 120 120 110 100 1965 1970 1975 1980 1985 1990 1995 100 1965 1970 1975 1980 1985 1990 1995 54
. South 0.15 Exports minus Imports over GDP 0.1 0.05 0 0.05 0.1 0.15 0.2 1965 1970 1975 1980 1985 1990 1995 2000 2005 Back 55
. South Korea Policy experiments results Sample period results (1963-2007): % Avg. change (w.r.t. Baseline) q n a c n c a k Autarky 16.5 21 0.3-1.1-3.5 No subsidy 0-17 0.65 0.04 2.8 No subs No tariff -42-73 10.9 5.5 12.1 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
. 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 (-0.0043) Future growth 0.01-0.0043 Data source Mitchell (1962) Maddison (2003) Mitchell (1962) Deane,Cole (1969) 0.0125 0.0125 To match n a 0.0065 0.0065 To match n a K(0) Description Value Data source Initial capital stock K Y n = 2.52 in 1800 Feinstein (1988) 57
. United Kingdom Exogenous Variables 4.5 Agricultural relative price Simulation Exogenous Variable Data 2.6 2.4 Total Population Simulation Exogenous Variable Measured Data 4 2.2 2 3.5 1.8 1.6 3 1.4 1.2 2.5 1820 1840 1860 1880 1900 1 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 300 Agricultural Sector TFP Simulation Exogenous Variable Measured Data 220 200 Nonagricultural Sector TFP Simulation Exogenous Variable Measured Data 250 180 160 200 140 150 120 100 100 1820 1840 1860 1880 1900 1820 1840 1860 1880 1900 Back 58
. United Kingdom Policy experiment results Sample period results (1800-1900): % Avg. change (w.r.t. baseline) q n a c n c a k Autarky 45.8 155.7-10.5-5.4-20.8 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
. 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 (1963-2007): comparison S. Korea simulations Growth % q % s e % c n % c a % Autarky 6.4 19.8 22.1-0.1-1.7 No subsidy 5.8 0-21 0.1 0.09 No subs No tariff 5.5-44 -76 13.18 7.45 60
. Alternative preferences simulations 0.7 Fraction of Employment in Agricultural Sector 150 Agricultural consumption per capita 0.6 Data 140 Data 0.5 130 0.4 120 0.3 110 0.2 0.1 100 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 90 1965 1970 1975 1980 1985 1990 1995 2000 2005 160 Agricultural production per capita 150 Aggregate capital stock (in logs) 150 Data 140 Data 140 130 130 120 120 110 110 100 100 90 1965 1970 1975 1980 1985 1990 1995 2000 2005 90 1965 1970 1975 1980 1985 1990 1995 2000 2005 61