Agricultural Economics Department


Date of this Version



Journal Paper No. J-14462 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa. Project No. 2998. Published in The Review of Economics and Statistics 75:3 (1993), 471-482. Copyright © 1993 Massachusetts Institute of Technology Press. Used by permission.


Developing countries often tax agriculture heavily, a practice that might affect the productivity as well as the quantity of resources allocated to agriculture. A variable-coefficient cross-country agricultural production function is estimated, with past price expectations among the determinants of the production coefficients. Productivity’s responsiveness to those expectations implies that had these developing economies eliminated price interventions, agricultural productivity would have increased on average by about a fourth.

In agriculture, as any other sector, output prices affect the amount of resources allocated to aggregate production. According to a review by Binswanger (1989) these movements along the supply function reflect an elasticity of about 0.1-0.3. But from decade to decade over this century, there has been virtually no relationship between agricultural output and the amount of resources allocated to it (at least as resources are traditionally measured). The real engine of growth in agricultural output is technical change, not output price. Since Schultz (1956) brought this phenomenon to our attention, there have been many studies examining this technical change—its rate, whether it is factor-augmenting, its input bias, whether it can be captured by appropriate quality adjustments in measuring inputs, to what extent it is determined by government research, etc. But it is a little surprising that, to date, there has been virtually no attention given to the question of the role of prices in determining the rate of technical change. Could we believe that prices affect individuals" choices in almost every realm of life but not those choices that determine the rate of technical change?

This question is of particular significance for the development of agriculture in the less developed countries. While the development community has devoted considerable attention to the issue of getting prices right for a reasonable allocation of resources to agriculture, it might be as important to get prices right for technical change. In this study we estimate from time series data in eighteen LDCs that a 10% increase in output price will increase productivity by a little over 1%, in addition to the 1% to 3% allocative effect indicated by Binswanger The productivity effect is, of course, more significant in that it represents an enhanced level of output in perpetuity, rather than for just the period of higher price.

The paper begins with a review of literature bearing on the relationship between prices and productivity, which yields little in the way of theoretical or empirical consensus. Then a theory is sketched which results in a production function specification which posits that past prices can indeed determine current levels of productivity. The production function is estimated using time series data from eighteen LDCs. Finally, recent estimates of the tax wedges against agriculture in these countries are utilized to examine the potential productivity effect that might have occurred through the lower prices.