GTAP Resources: Resource Display
| GTAP Resource #1044 |
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"Economic Growth and Agriculture's Relative Decline: Implications of Political Economy of Agricultural Policies" by Tsay, Yau-Yuh Abstract Economic importance of the agricultural sector tends to decline relatively to other sectors in a growing economy. The most notable demand-side factor is Engel¡¦s Law, indicating the proportion of income spent on food declines as per capita income increases with economic growth. Supply-side factors include differential rates of technical change between sectors and changes in relative factor supplies with economic growth. Engel¡¦s Law becomes less important in the case of an economy open to international trade. It has been commonly observed that most industrial countries have protectionist policies to support agriculture, while less developed countries discriminate against agriculture. In recent years, economists have looked beyond the traditional welfare maximization perspective to explain changes in agricultural policy as economic growth occurs, following a political economic approach. Hence, a further complicating factor is the possibility that a contracting agricultural sector under economic growth tends to endogenously induce a policy bias in favor of agriculture that may end up offsetting the tendency toward an agricultural contraction. Agricultural protection policies, however, have recently come under criticism in the Uruguay Round of GATT (WTO after 1995) negotiations. The UR Agreement on Agriculture focuses on reversing agricultural protection trend, and hence adds more dimensions into political economy determinants of agricultural policy making process. This study analyzes how the relative economic importance of the agricultural sector in a growing economy is determined by the factors associated with economic development. We develop a two-sector general equilibrium model and explain the mechanisms through which both economic and political factors affect the evolution of agriculture¡¦s relative importance in the context of economic growth. We conduct a simulation analysis to investigate the hypothesis that growth-induced agricultural support policies can generate positive economic effects that will prevent or reduce agriculture¡¦s relative decline with economic growth. The results of various policy scenarios support our hypothesis. The analysis is taken further by conducting an empirical study. A simultaneous equations model is developed and estimated that explicitly takes into account the effect of endogenously determined agricultural protection, using data from six postwar fast-growing Asian economies for the period 1955-96 (before 1997 Asian Financial Crisis). The results show that agriculture¡¦s GDP (and labor) share is a function of the real per capita GDP level, and confirm a relative decline in agriculture with economic growth. The hypothesis that agriculture¡¦s relative decline is not inevitable is also confirmed by the estimation results. Key words: Agriculture¡¦s Relative Share, Economic Growth, Endogeneity of Policy Shifts, Agricultural Protection, Engel¡¦s Law, UR Agreement on Agriculture, Asian Economies. |
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- Agricultural policies - Economic growth |
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Public Access  GTAP Resource 1044 (454.0 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions The file is named paper by Yau-Yuh Tsay |
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Last Modified: 9/15/2023 2:05:45 PM
