Development Economics

GS F234
Leela Rani, PhD
Associate Professor, Management
BITS Pilani Email: leela_r@pilani.bits-pilani.ac.in
Pilani Campus
 BITS Pilani
Pilani|Dubai|Goa|Hyderabad

Development Economics
Chapter 4: Breaking the natural
resource constraint
Overview and issues
1. Handling three problems at a time: food production, increasing population and sustainability
2. When people move to agriculturally unsustainable lands => environmental degradation is faster
3. Due to soil erosion, desertification, deforestation and resulting climate change
4. Exhausting resources then strengthens the trap of natural resource
Solutions:
5. Refer to Malthus's trap and Ricardo's trap Capital accumulation
6. Trap = constraint on capacity to produce ( mainly based on natural resources available) Tech. progress

1. Natural resources include, land forest, minerals, water resources and the likes
2. The focus here (this chapter) is on land and agricultural productivity
3. Agricultural productivity is importantly based on other natural resources… impact of climate change

Climate-Smart Agriculture: Helping the World Produce More Food

https://www.youtube.com/watch?v=i0V2xzEw44Y

FAO Policy Series: Sustainable Food and Agriculture 5 Most Epic Earth Healing Projects!
https://www.youtube.com/watch?v=WeoIsjYBQH0 https://www.youtube.com/watch?v=Tpozw1CAxmU
Improvement in agricultural production & productivity
Last half of 20th century: Population up 2.5 times, ag land per capita up by 30%
1. Development of science-based agriculture:
Examples are: rotation based cropping, intensive cropping, resource-based cropping, fertilizers,
pesticides, mechanization, new irrigation techniques, hybrid varieties of seeds (coming from
Agricultural Research)
=> improvement in technologies in virtually all aspects of the agricultural supply chain from production
to storage to distribution and processing
2. Important Trends and evidence about agricultural productivity:…………..output/land……O/Popu
=> Increase in per capita production of output does not satisfy consumption needs, as income has grown
and per capita food demand also has grown with income
=> Important to consider real domestic price of agricultural output by using a deflated consumer price index
……CPI deflator…..IFPRI (International Food Policy Research Institute).
=> The advantage of using a CPI deflator is to remove the effect of price increases
……..One is really interested in looking at the real output per capita or total real output
In the 1970s, the nominal prices of food in the United States increased substantially, while the real
prices of food remained relatively stable. The primary reason for this difference is inflation.

Nominal prices are the prices that are actually paid for goods and services, while real prices are prices
adjusted for inflation. In the 1970s, inflation in the United States was high, with the Consumer Price
Index (CPI) increasing by an average of 6.5% per year. This meant that the nominal prices of food were
increasing at a fast pace, driven by factors such as rising energy costs and supply disruptions caused
by events like the OPEC oil embargo.
Story of food production in USA  Yields per acre
 Real domestic prices (deflated
by the consumer price index)
 For corn and wheat in the USA

Trend was driven by:

1. Modern varieties, represented by hybrid
corn
2. High capacity to absorb plant nutrients
3. Extra supply of nutrients (other than
natural soil fertility needed)
4. Developments in fertilizer industries
5. Innovations - aerial nitrogen fixation,
mining and transportation.
Also seen:
6. Lowering the price of chemical fertilizers
relative to the price of ag. Commodities
 by about 40 per cent during the 1900-
30 period
7. Science-based agriculture - case of induced
technological innovation
8. World could escape from the Malthusian
crisis
Improvement in agricultural production & productivity….contd.

3. The development of science-based agriculture can be considered induced innovation

=> movement from I zero to I one (fig. 2.1)
4.This had largely saved from traps and crisis mentioned by economists
5. It also got critical support from private profit seeking farmers, public institutional and
infrastructural support provided by governments
6. All of it lead to induced innovation.
7. Green revolution came about in developing countries in 1960s
8. It was largely driven by technology borrowing and Government support
9. An important characteristic was adaptive research
10. However its effects failed to be sustainable
"India’s Green Revolution: More Harm Than Good" by Vandana Shiva
https://www.youtube.com/watch?v=nze2K2hgTqY
Development and diffusion of modern varieties 4.2.1 : Omitted
 Conditions for technology transfer (TT)
1. Agricultural Technologies depend critically on soil, climate, topography and other natural characteristics
2. Since these differ from country to country, direct and unchanged technology transfer, usually doesn't work
3. Thus, adapting the varieties to host country conditions is important
Case of Japan’s rice TT
1918: Japan faced problems in the availability of rice
=> growing population around World War 1, booming economy & rising incomes, farmer protests, inflation, govt.’s stocks
purchase => rising price of rice and rice shortages
4. It transferred its rice technologies and seeds to Korea and Taiwan ( Japanese colonies then)
5. While Korea did not need adaption (in variety), Taiwan needed it, and it was done
6. However Taiwan did better than Korea in rice production - this was mainly because Taiwan could develop irrigation
systems faster than Korea
7. Similarly Philippines did well with an irrigation system that was developed well in advance
8. Countries like Japan which are densely populated and have limits in how much land they can increase for agriculture, face
special problem of food availability
9. Japan imported rice which was produced in Korea and Taiwan
Figure 4.3, the spurt of rice yield per
hectare in Korea lagged almost a
decade behind Taiwan's.

Þ Greater similarity between

climate of Japan and Korea than
Japan and Taiwan

Þ the lack of irrigation was

identified as the critical cause of
low productivity and stagnant
yields in Korea
External and internal land argumentation

1. Internal land augmentation come from basic & advanced agricultural improvements made on
the existing fields
2. External land augmentation (EA) means taking more and more land into cultivation
3. EA makes it more costly to cultivate, as less and less fertile land has to be used
4. Both types of land augmentation happen parallelly with time
5. Normally the marginal cost of agricultural production increases faster for an external
augmentation than for internal augmentation
6. Internal argumentation that depend on the farmer or private parties has less time lag
7. Internal argumentation that depends on government facilities like irrigation canal to a certain
zone, takes more time
Graphical view
1. However government facilities, are public goods, which work on the principle of
indivisibility and externality (benefit coming without cost)
2. Therefore government facilities lead to lowering of marginal cost of production
3. Marginal means for the nth quantity
4. Marginal cost means the cost incurred buy the nth unit of production
5. This depend on: how govt. brings public utilities – quantity, quality and speed
6. This will in turn depend on the social and political climate

1. Fertility of initial land expansions (EA) is

beneficial and so MC is low
2. Later MC rises fast as fertility goes down.
Barriers to induced innovation

Innovations need involvement of both Govts and private parties (funds, policies, ground-work, R&D)
Agriculture: adaptation of seeds is not (always) possible; water crisis.

Several induced innovations showed a movement to better productivity initially

However several of them failed to provide sustainable benefits as well as a sustainable ecosystem
Green revolution and white revolution are two such examples

Barriers to induce innovations can be seen from two perspectives

1. Barriers and drivers of initial implementation
2. Barriers and drivers to sustained implementation, inclusive of a sustained ecology

While, the first set of barriers a short-term oriented

The second set of barriers is long term oriented and needs long-term vision

List of other barriers:

Non-common aim of donor and receiver nations
Low food prices in international markets
https://www.fiapo.org/fiaporg/news/bitter-truth-of-white-revolution/
For example, green revolution in India (was initiated in the 1960s by introducing high-yielding varieties of
rice and wheat to increase food production in order to alleviate hunger and poverty),
=> doubled the production of wheat and rice in 30 years, due to initiatives of the government (averaging
more than 3% per year)

Similarly in Philippines during the Green Revolution period, the yield growth rate was as high as 4%
In the same time in Philippines, the population growth rate was 3%

Policymakers and thinkers said that if this trend is extended for the low income economies
Þ such as sub-Saharan Africa
Þ They should be able to overcome the constraint of natural resources on their agricultural and
economic developments.

This question proved to be the most critical one

- the answer reflected by reality resulted in more harm than benefits
So much so, so that many people wished - could this be undone?
Long-term major hindrances: Omit from page 109….except “Dutch Disease” page 119-120
1. excessive need of water for the developed varieties
2. Increasing amounts of fertilizer needed to get the same production
3. Loss of fertility and quality of soil due to excessive use of fertilizers and pesticides
4. Ignoring development of subsistence crops
Þ usually more suitable for local climatic and resource conditions
Þ like millets pulses, roots and tubers.

The non viability of Green revolution supported agricultural production gradually lead to:
Several economic & development problems
1. related to livelihood
2. as well as terrible health conditions for farmers.
These in turn lead to fight for resources, protest and deaths of hundreds of farmers who could not pay back
their debts

Eliazer Nelson, A.R.L., Ravichandran, K. & Antony, U. The impact of the Green Revolution on indigenous crops of
India. J. Ethn. Food 6, 8 (2019). https://doi.org/10.1186/s42779-019-0011-9
https://journalofethnicfoods.biomedcentral.com/articles/10.1186/s42779-019-0011-9
 Dutch Disease
A phenomenon where countries that are rich in natural resources witness uneven growth across sectors.

Usually follow sudden discovery of a big (tradable) natural resource

When resource-rich countries export their resources to the rest of the world, it causes the exchange rate of their
currency to appreciate significantly
Þ Affects other sectors in the country by discouraging their exports
Þ while encouraging the import of cheaper alternatives.

The term was coined by The Economist in 1977* to describe the decline of the manufacturing industry in the
Netherlands.

 These booms in economy are abrupt, specific to certain sector(s) and short lived.
 They create unemployment in other other sectors due to un-competiveness in exports and cheap imports which
kills domestic markets too!

Example: crisis that occurred in The Netherlands after the discovery of vast natural gas deposits in the North Sea
in 1959. The newfound wealth and massive exports of oil caused the value of the Dutch guilder to rise sharply,
making Dutch exports of all non-oil products less competitive on the world market. Unemployment rose from
1.1% to 5.1%, and capital investment in the country dropped

* The idea, however, was first proposed by economists Peter Neary and Max Corden in a paper published in 1982.
 Self read
Examples of Dutch Disease

In the 1970s, Dutch Disease hit Great Britain when the price of oil quadrupled, making it economically viable to drill
for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil, though it had
previously been a net importer. Although the value of the pound skyrocketed, the country fell into recession as
British workers demanded higher wages and Britain's other exports became uncompetitive.31

In 2014, economists in Canada reported that the influx of foreign capital related to exploitation of the country's oil
sands may have led to an overvalued currency and a decreased competitiveness in the manufacturing sector.
Simultaneously, the Russian ruble greatly appreciated for similar reasons.4
In 2016, the price of oil dropped significantly, and both the Canadian dollar and the ruble returned to lower
levels, easing the concerns of Dutch disease in both countries.5

Source: https://www.investopedia.com/terms/d/dutchdisease.asp
https://www.youtube.com/watch?v=VpugptKO3dM
Additional interesting information:
https://www.youtube.com/watch?v=tdj5Lfv1X2c

https://www.youtube.com/watch?v=2ANBgCbVdo4

https://www.youtube.com/watch?v=Fbc5K9EpTQw

https://www.youtube.com/watch?v=9hmkgn0nBgk

https://www.youtube.com/watch?v=-foEwcAu_zw

https://www.youtube.com/watch?v=I1Vt8oPCZiE