The Effect of Agricultural Technology on the Speed of Development

Posted by M. Eberhardt and D. Vollrath on January 01, 2018 · 1 min read

Abstract: We examine heterogeneity in the elasticity of agricultural output with respect to labor across countries and the effect this has on structural change and development. Employing panel data from 128 countries over a forty year period we find distinct heterogeneity in the elasticity of agricultural output with respect to labor, which we refer to as heterogeneity in agricultural technology. To do this we employ panel time-series methods that explicitly allow for parameter heterogeneity, while also controlling for unobserved shocks to productivity using common factors. We find that the elasticity is lowest in countries with temperate and/or cold climate regions (around 0.15), but much higher in countries including tropical or highland regions (around 0.55). The elasticities are not correlated with development levels or with stocks of other agricultural inputs, but reflect differences in agricultural technology in different climate zones. We then use a standard model of a two-sector economy with non-homothetic preferences for agricultural goods to show that this agricultural elasticity with respect to labor determines the speed of structural change following changes in agricultural productivity or population. Calibration shows shifts in labor allocations and welfare will be 2–3 times larger in temperate regions than in tropical or highland regions for any given shock when economies are closed. In open economies the welfare effects are similar across climate zones, but the shift in labor allocations in response to world price or productivity shocks are 2-3 times larger in tropical or highland regions.