Rainer Klump and Csar Miralles Cabrera Goethe University Frankfurt Department of Applied Econometrics and International Economic

Policy Grneburgplatz 1 60323 Frankfurt am Main, Germany Fon: ##49 69 798 34786 Fax: ##49 69 798 35015 Mail: klump@wiwi.uni-frankfurt.de

Biased Technological Change in Agriculture: The Hayami-Ruttan Hypothesis Revisited This paper presents a consistent explanation for biases in the direction of technical change in agriculture. The emergence of such biases had been pointed out by Hayami and Ruttan (1970) based on a study of long time series of agricultural inputs and technologies in Japan and in the US from 1880 to 1980. Land scarcity in Japan seems to have favored land-saving technologies like new crop varieties and the use of, while land abundance in the US made technological change more labour-saving due to the use of tractors and machinery. A theoretical explanation for the relationship between factor-biases in technological change and relative factor proportions can be given in the framework of the model of directed technical change developed by Acemoglu (1998, 2000, 2001). In this model the elasticity of substitution between factors of production is a key determinant of the direction of the technological bias. In our paper Acemoglus model of direct technical change is adapted to the analysis of agricultural production. The implications of the model are tested with data from 93 countries between 1961 and 2002. Based on this test we can confirm the HayamiRuttan hypothesis in its original form on a global level. When we test across regions, levels of income and levels of land inequality we find that those countries have developed in the most successful way, where the direction of technological bias in agriculture has been the least biased by market imperfections.

1 Introduction Agricultural technical change in the sources of its bias towards a factor of production was first investigated by Hayami and Ruttan (1970). Based on the study of long time series of agricultural inputs in Japan and the United States from 1880 to 1980, they found that changes in factor proportions and factor prices were associated with changes in the use of a specific type of agricultural technologies or inputs. On the one hand, land scarcity in Japan may have increased incentives to develop and apply land-saving technologies and inputs, i.e. new crop varieties and the use of fertilizers, thereby leading to land-biased technical change. On the other hand, labour scarcity in most agricultural areas in the United States, may have encouraged farmers to seek for labour-saving technologies and inputs, i.e. agricultural tractors and machinery, threrefore leading to labour-biased technical change. In the same line, Acemoglus (1998, 2000, 2001) model on directed technical suggests that under a low elasticity of substitution among factors of production, country-specific factor proportions and factor prices may facilitate an substitution of technologies in order to save the relatively more scarce, and replace it with relatively more abundant and cheap factors. Given that most poor areas are characterized by scarce productive land and a large supply of landless and unskilled wage labourers, technical change may facilitate the use of land-saving or labour-intensive technologies rather than labour-saving technologies. This paper contributes to the previous literature in two aspects: (i) .Firstly by introducing an Acemoglu type model of directed technical change to explain agricultural technical change and the bias towards a specific factor of production; secondly (ii) by testing the HayamiRuttan induced innovations hypothesis derived from this model on a global level and also across regions, levels of income and levels of land inequality. The paper is structured as follows: section two reviews the literature on agriculture, innovation and biased technical change and sets up the theoretical framework to test the Hayami-Ruttan induced innovation hypothesis; section three presents the results of the empirical analyses; and section four concludes.

2 Theoretical framework 2.1 Agriculture, technological change and pro-poor growth Agriculture is the most relevant sector for the poor, in particular in the early stages of development. Since most of the poor usually live in remote areas, work in agriculture, and are only endowed with unskilled labour a pro-poor growth strategy should rely on agriculture, and the intensive use of labour in the most poor and remote areas. It is necessary to increase those factors of production which are complementary with the basic asset of the poor, unskilled labour. Those factors are therefore land and human capital. If unskilled labour is the major asset of the poor the income of the poor will not be increased by higher labour productivity alone but by combining high labour productivity with an even higher productivity of the main complementary factor, land. Together this means an increase of agricultural employment and higher agricultural incomes (Byerlee et al., 2005). Poor households are typically land poor or landless.

When the poor do own land, it is often unproductive and frequently lies outside irrigated areas. Many of the poor have access to land without having ownership rights. Tenancy is not common, it does not provide collateral or a secure hedge against risk, and access to the land from one year to the next is often uncertain. In other cases the poor have access to land that is owned by the community or is common property, but the population pressure, the overexploitation of resources, and the deterioration of the environment make this common property resource not sustainable. Therefore land access and tenure security issues constitute an important constraint for the poor in most developing countries. Many of the poor are located in regions where arable land is scarce, agricultural productivity is low, and environmental degradation is common. Others among the poor live in regions that are more endowed with natural resources, but they are unequally distributed. In both cases, there is often a lack of access to public services (education or health), and infrastructure (electricity, irrigation, roads, or market centres). Denying large segments of rural society more equitable access to land and to the benefits of secure tenure can be a major contributing factor to extreme poverty, dependence, social instability, rural migration or land abandonment. On the other hand, more equitable access to land and other assets can play a role in stimulating faster and broad-based economic growth. Agriculture has usually played the role of a net contributor sector, from which resources could be extracted to finance development in the nonagricultural sector (e.g. Lewis, 1954; Rostow, 1956; Ranis and Fei, 1961, Johnston and Mellor, 1961). In this framework, agricultural growth in output and productivity was seen as a precondition for achieving economic development. In particular, agriculture may: (i) satisfy a growing demand for food during the process of development; (ii) provide foreign exchange to import capital goods in the early stages of development through expansion of exports of agricultural products; (iii) contribute to increased demand of industrial output; (iv) facilitate increased saving and investment necessary for industrial expansion. Only recently, the importance of agricultural growth to poverty reduction has been explicitly addressed (e.g. Dorward et al. 2002; Irz et al. 2001, Kydd et al. 2004, Thirtle et al., 2001). For instance, Irz et al. (2001) give a summary of the theoretical linkages for expecting agricultural growth to reduce poverty. Within their theoretical framework, three levels are distinguished: the farm, the rural economy, and the national economy. In addition, pro-poor effects are subject to several qualifications and necessary conditions. Their cross-sectional analyses suggest that agricultural yield per unit of area and measures of poverty are negatively correlated. The authors argued that it may be likely that this ability of agriculture to reduce poverty may act through the impact of agricultural productivity growth on employment generation, the stimulation of the non-farm rural economy and the reduction of the real cost of food. At the farm level, agricultural productivity growth may increase not only the incomes of farmers but also the demand for farm labouring. In addition, the impact on poverty is strongly related to: the extend to which poor have access to farm land and the ability of the poor to adopt improved technology; the access of the poor to inputs and credit; or the degree to which rural poor rely on farm labouring for their incomes. At the rural economy level, agricultural productivity growth can generate not only employment in agriculture, but also in non-farm rural sectors as farmers and farm labourers expend additional incomes (e.g. textiles) and/or require more agricultural inputs (e.g. fertilizers or machinery). In addition, it can generate more local tax revenues that can be re-directed to the poor towards public services (e.g. schools, hospitals, housing or safety nets). In this context, the pro-poor impact on the rural economy crucially depend on the quality of local government and support from central government; the local tax regime; the existence of markets; or distribution of income. Lastly, at the national economy level, agricultural growth can reduce the prices of food or/and raw 3

materials thereby increasing real wages of urban poor or/and reducing costs of non-farm sectors. It can also generate savings and taxes from farming that allow for investment and employment in non-farm sectors. If agriculture output is exported, it can provide foreign exchange to import capital goods and other necessary inputs for non-farm production. As in previous levels, the pro-poor impact may be linked to a variety of conditions, e.g. the extent to which increased output can affect output prices (openness); the emphasis of institutions and governance on re-directing flows from agriculture into productive and pro-poor investments in the economy. Within the rural economy, Kydd et al (2004) distinguishes between tradable and non-tradable goods and services, and identify three types of linkages: direct (upstream and downstream) production linkages; investment linkages; and indirect consumption linkages. An exogenous shock in policy, technology or markets can provoke changes in prices and productivity in the rural economy. Productivity increases may lead to a fall in output prices, thereby increasing consumers real incomes if the good and services (this impact may depend on the average budget share). Increased real incomes may foster demand for local goods and services expanding domestic demand, generating local employment opportunities, and increasing income altogether contributing to a virtuous circle multiplying the benefits from the original gains in real consumer incomes. The pro-poor impact may crucially depend on to which extend: (b) price or productivity increases in tradable products with a high labour input by the poor; (ii) productivity increases in non-tradable products or prices fall in tradable products which have a high average budget share in the poors expenditures; (iii) technical change allows the poor to engage in production of non-tradables (with a high average budget share) which they could not previously engage in; and (iv) incomes of non-poor increase thereby expanding demand for goods and services produced by the poor. Employment is essential to increase income of the poor and therefore the type of technology promoted and developed in the process of technical change may matter. Whether technology allows the poor to engage in or not in productive activities is clearly relevant for generating pro-poor growth processes. Obviously, agricultural technical change is expected to be more pro-poor if it encourages the use of land- saving or labour-intensive technologies rather than labour-saving technologies, given that the poor are typically landless and the only asset they own is their unskilled labour. Economically, agricultural technical change have to be also locally appropriate, so that it may suit properly to local conditions, increasing the use of relative abundant (hence cheap) factors of production rather than scarce (hence expensive) factors. Given that most poor areas are characterized by scarce productive land and a large supply of landless and unskilled wage labourers, technical change may facilitate the use of land-saving or labour-intensive technologies rather than labour-saving technologies. From both perspectives, efficiency and equity, technical change in the agricultural sector is expected to be more pro-poor the higher the bias towards land-saving technologies, in particular among the most poor and remote areas. The Green Revolution is an example of how the increased use of land-saving (labourintensive) technologies could help to reduce poverty and generate pro-poor growth in the agricultural and rural sector. For instance, Lipton (2004) describes the process very clearly: "Total factor productivity far outpaced the fall in staples prices relative to the prices of inputs. The landless poor labourers found that larger harvest, more water control, and more fertilizer consumption all raised their productivity-but the productivity of scarce land much more. The demand for labour increased significantly while their staples requirements became cheaper. The urban, and rural non-farm poor gained also from increased staples output and decreased price of food staples ".However, what drives the bias of technical change? what are the main constraints that make technology to be not suitable for local conditions in some cases? The sources behind the bias of technical change is related to the induced innovations literature (e.g. Hicks, 1963; Salter, 1960; Kennedy, 1964; Samuelson, 1965; Drandakis and Phelps, 4

1965; Nordhaus, 1973; Thirtle et al. 1995, Acemoglu, 1998, 2000, 2001, 2002). Within this framework a change in the relative factor prices is itself a spur to innovation, and to invention of a particular type of technology, which is directed to economizing the use of a factor which has become relatively expensive. In the context of agriculture, the seminal work was made by Hayami (1969) and Hayami and Ruttan (1971), who proposed a model of induced technical change for the agricultural sector, in which development and application of new technology is endogenous to the economic system. They stressed the role of changes in relative resource endowments and factor prices when explaining the induced bias of technical change. Alternative agricultural technologies are then developed to facilitate the substitution of relatively abundant (cheap) factors for relatively scarce (expensive) factors. Technologies are classified in two types: (i) mechanical, which arr labour-saving and aimed at substituting power and machinery for labour; and (ii) biological and/or chemical, designed to substitute labour-intensive techniques and industrial inputs (e.g. fertilizer) for land. Within the Hayami and Ruttan framework, prices efficiently induce changes in the demand and supply of products and factors. While farmers are induced by shifts in relative prices to seek for technical alternatives that save the increasingly scarce factors of production, profitmaximizing technology suppliers respond to demand by supplying new technical possibilities that facilitate profit-maximizing farmers to progressively substitute the increasingly abundant factors for increasingly scarce factors. From an empirical perspective, the "induced innovations hypothesis" suggested and developed by Hayami and Ruttan seems to hold when applied to the historical experiences of agricultural development in the United States and in Japan for the period 1880 to 1980. While technical change in agriculture in the United States, was primarily labour-saving due to increased mechanization and relative labour scarcity, it was mainly land-saving in Japan due to increased application of biological and chemical technology and a relative land scarcity. Clearly, institutional commitment to develop the agricultural sector and good governance are pre-requisites and critical to encourage the private sector to progressively adapt technology to local conditions. This has recently been corroborated by Thirtle et al.(1995), who followed Hayami-Ruttan approach and tested the so-called "induced innovation hypothesis" in South Africa between 1947 and 1992 by applying panel cointegration techniques. Factor prices were found to matter in the selection of production technology in the agricultural sector. In addition, the authors found policy to be a major source of distortion, sustaining the bias towards labour-saving technical change, inappropriate for a labour-surplus economy in which small farmers face a chronic scarcity of land. This bias was found to be influenced by public spending on research and extension, and by favourable tax and interest rate policies.

2.2 A model of technical change in agriculture This section presents the theoretical framework, which will be used in the next section to test the Hayami-Ruttan.s induced innovation hypothesis. This model was primarily developed by Acemoglu (1998, 2000, 2001, 2002). In contrast to Hayami and Ruttans approach, Acemoglus framework does no require information on input prices in the analysis. This fact eases the estimation of the model, given that input prices in agriculture are not available in a panel data basis. This theoretical framework is then useful to investigate the bias of technical change in the agricultural sector and its implications in terms of economic development and poverty reduction strategies. Firstly, the economy is characterized by a representative consumer, which consumes a final agricultural good. This agricultural good is produced by combining two intermediate goods. The representative consumer faces the following utility function: 5

C1 1 t 0 1 e dt Where C denotes consumption, and and capture the rate of time preference and the degree of risk aversion, respectively. The economy produces the final agricultural good Y in the form of a constant elasticity of substitution (CES) production function: (1)

(2) C + I + R Y YL + (1 )YZ

(0,1) denotes the weight of each intermediate good in the production of the final good, and 1/ (1 ) (with 1 ) denotes the elasticity of substitution between the two
intermediate goods. I denotes investment and R the amount spent in research and development. Among the two intermediates, YL requires proportionally more labour than YZ , so that the former is labour-intensive (L-intensive) while the latter is land-intensive (Zintensive). By normalizing the price of the final good in each period to 1, competitive pricing on all markets gives the following relative demand equation for intermediate goods:

P (3) L PZ

YL = 1 YZ

where PL and PZ correspond to the prices of the labour-intensive and land-intensive intermediate goods, respectively. As a rule, producers (farmers) specialize in one of the production of one intermediate good. Secondly, producers face a Cobb-Douglas-type production function in each sector, which takes the following form:
NL 1 L xL ( j )dj j =0

1 YL = 1 (4) 1 YZ = 1

NZ x1 Z ( j ) dj Z j =0

where (0,1) and L and Z denote the supply of labour and the supply of land for productive use in the agricultural sector. This sector-specification permits to investigate the factor-bias of technical change. Note that, the labour-intensive agricultural intermediate good is produced by hiring labour, L; and using a range N L of labour-saving inputs or substitutes of the factor labour, xL . In contrast, the land-intensive agricultural intermediate good is produced by using land, Z , and a range N Z of land-saving inputs or substitutes of the factor land, xZ . Producers (farmers) behave as profit-maximizing agents, where the sector-specific profits are defined as:

NL max PLYL wL L X L ( j ) xL ( j ) dj j =0

(5)
NZ max PZ YZ wZ L X Z ( j ) xZ ( j ) dj j =0

where wL , wZ denote rural wages and rural rental prices for land, respectively. PL , and PZ correspond to output prices, and X L and X Z represent the prices of labour-saving and landsaving technologies, respectively. By solving the farmers maximizing problem, one obtains the following demands for technology:

P xL ( j ) = L L X L ( j) (6) P xZ ( j ) = Z Z X Z ( j)
1

Note that the demand of inputs or technologies is driven by both input and output prices and the amount of the sector-specific factor of production (land or labour).Thirdly, technology is supplied by the so-called technology suppliers, which develop and provide farmers with sector-specific technologies. They behave as monopolists and set the rental prices for their output. In addition, all inputs fully depreciate after use, and the marginal cost of producing these inputs is expressed in terms of the final good and equal across inputs, . Labour-saving and land-saving inputs are both elastically supplied by technology supplier, which after having invented a new variety of agricultural inputs, conserve a constant mark-up. Under these conditions, monopolist profit functions for the input j can be defined as follows:

L ( j ) = [ X L ( j ) ] xL ( j )
(7)

Z ( j ) = [ X Z ( j ) ] xZ ( j )

where X L ( j ) , X Z ( j ) correspond to the prices set by the technology suppliers. By substituting producers input demands into the technology suppliers profit functions, defining

marginal costs as (1-), and assuming input prices, X L ( j ) = X Z ( j ) = 1 , the following relative technology suppliers profit functions can be derived:

P (8) L = L Z PZ

L Z

In addition, by introducing the market price clearing condition, producers production functions, and producers input demands, the following relative technology suppliers profit functions are obtained: 1 Z (9) L = Z L

Z L

where = ( 1)(1 ) denotes the elasticity of substitution between the factors of production Z and L. Finally, and after defining how technology users and technology suppliers behave, one needs to model the production function of the new inputs. Following Acemoglu, this can be done as follows: N L = L RL (10) N Z = Z RZ where RL + RZ = R correspond to the expenditures on research and development directed to develop labour-saving and land-saving technologies, respectively. L and Z are the costs of innovation in the two different sectors. Along the balanced growth path both type of innovations growth at the same rate, so that: (11) L L = Z Z This implies that it is equally profitable for the technology suppliers to be involved either to develop labour-saving or land-saving technologies. The long-run equation of technical change can now be derived as follows:

N (12) Z NL

Z 1 Z = L L

This equation models the direction of agricultural technical change in the long-run in a given economy. Note that input prices do not appear in the equation. Summarizing, the factor-bias of technical change is driven by:
Z - relative factor endowments, i.e. land per labour , L - the elasticity of substitution between land and labour, , - the relative cost or complexity of innovation, Z , L - and the weight or importance of each intermediate sector in the production of the final good, .

The elasticity of substitution between factors of production (land and labour in our model of agricultural technical change) crucially determines the sign of the relationship between the bias of technical change and the relative factor endowments in the economy. Assuming three reasonable conditions: that land and labour are complements rather than substitutes in agriculture ( < 1); stagnant supply of agricultural land (i.e. constant Z); and increasing agricultural population (i.e. increasing L); the model predicts land-saving technical change (i.e. increasing N Z / N L ). This result will be in line with the Hayami-Ruttan induced innovation hypothesis. While farmers are induced by shifts in relative prices to seek for technical alternatives that save the increasingly scarce factors of production, profitmaximizing technology suppliers respond to demand by supplying new technical possibilities that facilitate profit-maximizing farmers to progressively substitute the increasingly abundant factors for increasingly scarce factors.

3 Empirical analysis 3.1 Estimation procedure and data description

The "induced innovation hypothesis" can be tested by regressing relative input quantities on relative input prices (see Thirtle et al., 1995). However, input prices , i.e. fertilizer prices, tractor prices, rental price of land or agricultural wages, are not available on a panel data basis. However, Acemoglus approach does not require input prices and can be also used to test this "induced innovation hypothesis". The reason is that it replaces input prices with input quantities, i.e. the price of land and agricultural wages with the supplies of land and labour. Both, changes in relative factor prices or/and changes in relative factor endowments should lead to the same pattern of technical change if the Hayami and Ruttan hypothesis holds. In other words, either an increase of the price of land relative to the price of labour, or an increase in the supply of labour relative to land, may end up with a pattern of technical change based on land-saving technologies (hence saving the factor of production which is getting more scarce and expensive, land). Acemoglus model of technical change (i.e. equation 12) can be expressed as follows:
N Z (13) log Z = i + log + log ( X it ) + it L it NL

where i and t index the country and the time period under consideration. In addition, Z, L, and X denotes agricultural land, agricultural labour, and a set of control variables, respectively. In addition, the model presented in equation 13 is then estimated by using the fixed effects estimator. Regarding the estimation procedure, firstly we estimate the model by assuming heterogeneity in the intercept across countries, so that we include the whole sample of countries in the estimation (93 countries within 1961 and 2001). Secondly, and once a preferred model is selected, it is estimated across regions, and several levels of income and levels of land inequality. This exercise will serve to do a robustness check but it can also inform about the existence of differences across regions, income, and land inequality. As suggested by Hayami and Ruttan (1971), two types of technology generally exists: mechanical innovations (i.e. N L in our model) which serve to save labour; and biological and chemical innovations (i.e. N Z ) which basically save the factor of production land. The former are designed to facilitate the substitution of power and machinery for labour, while the latter are designed to facilitate the substitution of labour and/or industrial inputs for land. Overall, it seems plausible to consider that new seeds in which new biological and chemical technologies are embodied (e.g. fertilizers) can be viewed primarily as the inputs which facilitate the substitution for land rather than for labour. As in Hayami and Ruttan (1971), land-saving technologies are proxied by fertilizer consumption while labour-saving technologies are proxied by the number of agricultural tractors in use. Note that if the term in equation 13 were statistically significant and negative, results would provide support for the "induced innovation hypothesis". Regarding data, table 1 defines the variables used in the empirical analysis as well as the sources and time periods related to each variable. In addition, table 2 provides some descriptive statistics among regions. Overall the panel data includes 93 countries and 41 time periods. Across regions the sample covers 14 South and East Asian (SEA) countries, 18 European and Central Asian (ECA), 22 Latin American and Caribbean (LAC), 24 Sub10

Saharan African (SSA), 10 Middle East and North African (MENA), and 5 North American and Pacific (NAP) countries. Country selection has been strictly based on the availability of time series of agricultural data. The data set have been collected mainly from three sources: (i) The Food and Agriculture Organization (FAO); (ii) The World Development Indicators (WDI); and (ii) International Country Risk Guide (ICRG). The set of control variables ( X i in equation 13) includes three broad categories of variables: (i) strictly agricultural variables (e.g. irrigated land, arable land, rural density, or rural population); (ii) human capital-related (e.g. literacy rates or expenditures in education); and (iii) other economic variables (e.g. changes in the effective exchange rate, trade openness or the amount of domestic credit to private sector). We use the R 2 and the most parsimonious model to select the preferred model by including several control variables, such as the proportion of irrigated land, the proportion of arable land, rural density and the proportion of rural population in the economy. The inclusion of human capital-related variables was motivated by Hayami and Ruttan (1971), who had included literacy ratios in their studies. We, in contrast, do not only test for the effects of literacy ratios but also of educational expenditures. Educated workers have a comparative advantage with respect to adjustment and implementation of new technologies, because they usually have a broader set of basic skills, which facilitates the assimilation of new knowledge. In addition, education gives workers a wider range of self-employment options and allows them to choose more profitable alternatives. Also other economic factors may affect farmers behaviour, such as trade openness or the amount of credit to the private sector. For example, a higher development of the financial system may facilitate borrowing in the private sector, thereby facilitating technical change and the acquisition of new agricultural inputs. Changes in real effective exchange rate could have an impact on factors substitution if agricultural inputs (e.g. fertilizers or agricultural tractors) are mainly imported from abroad as it is the case in many developing countries. In addition, whether agricultural output satisfies only domestic demand or whether it is mainly exported may also influence factor substitution. All these variables will be included in the empirical analysis, whose results will be given in the following section. Figures 1 and 2 show the proportion of rural population and rural densitiy across regions. Around 70 percent of the population reside in rural areas in SEA and SSA. In addition, rural areas are extremely overpopulated in these regions. This commonly leads to rapid increases in the price of land, to a deterioration of public services and infrastructure, to an unsustainable use of natural resources, and to increases in the risk of diseases in these areas. In SEA, around 600 people live per squared Km, the most overpopulated region. In contrast, rural areas in richer countries, such as ECA or NAP contain around 36 percent and 28 percent of the population, respectively. In addition, rural areas are also less populated, around 127 and 86 persons per squared Km in ECA and NAP, respectively. Furthermore, figure 5 presents the evolution of land per labour (i.e. Z/L in equation 13) in agriculture across regions and over the period between 1961 and 20014. Note that land per worker is the highest in the NAP region over the whole period. In addition, before 2000, land per labour increased remarkably in MENA, LAC, and ECA regions, while decreased in SSA. As expected, landlabour ratios are extremely low in SEA. Since 2000 land-labour ratios have changed due mainly to large increases in agricultural land in LAC, SSA, ECA, and decreases in SEA and MENA. The latest data (2001) indicate that land per labour are the highest in NAP, 4By taking logs, the slope of the curve in each point corresponds to the growth rate. In addition, it reduces the scale. 11

Growth in agricultural ouput and productivity is not only affected by relative factor endowments but also by land quality and other complementary inputs, which makes land more productive. The use of fertilizers and/or mechanization, and the availability of arable and irrigated land in agriculture may crucially determine both land and labour productivity in the sector. Figure 5 shows that the use of biological and chemical inputs (i.e. fertilizers) is common and high in ECA and SEA countries, while still low in SSA countries. In addition, figure 6 indicates that the use of mechanization (i.e. agricultural tractors) is high again in ECA and SEA, while the very low in SSA countries. Regarding the quality of land, figure 4 suggests that the proportion of arable land is the highest in ECA countries and the lowest in MENA and LAC. Around 35 percent of total land is considered arable in ECA countries. Among the poorest regions, arable land remains between 5-10 percent, for instance in SSA, LAC, and MENA. In contrast, SEA countries are an exception, in which arable land remains over 20 percent, a bit lower than in ECA countries, but considerably higher related to most poor regions. In addition figure 3 shows the proportion of irrigated land across regions, which is especially widespread in SEA and MENA countries, i.e. over 20 percent, and extremely low in SSA countries, i.e. below 5 percent. Overall, conditions are extremely different when comparing with of the poorest regions, SSA and SEA. While SEA countries benefit from high levels of irrigation, relative land scarcity (i.e. low land per worker ratios), SSA countries are characterized by low levels of irrigation, and a relative less land scarcity than SEA. Regarding the bias of technical change, while SEA have experienced an increase in the use of both chemical and mechanical inputs, the use of both chemical and mechanical inputs remains still low in SSA.

3.2 Results

Table 4 and 5 show the estimated coefficients of equation 13 by using fixed effects in different model specifications. Looking at the 13 different models, and using the whole sample of countries, it is found to be significantly different from zero and negative. In other words, the Hayami-Ruttan hypothesis is supported by the data when modelling agricultural technical change through an Acemoglus model of directed technical change. corresponds to an elasticity, which represents the percentage change in the ratio N Z / N L (i.e. land-saving to labour saving agricultural inputs) when the ratio Z/L (i.e. the land-labour ratio) increase a one percent. It ranges between -0.029 and -0.152 depending on the model specification. The inclusion of control variables related to the degree of agricultural development in the economy (model 3 to 7) improves the R 2 and does not affect the significance of suggesting that one should include them in the model. A higher proportion of both arable and irrigated land is also significantly and positively correlated with a relatively higher use of fertilizer or land-saving inputs. In addition, higher rural density and a higher share of rural population is also significantly and positive associated with a higher relatively use of land-saving inputs. Note that while a dummy variable for the 20s is found to be significant, a trend was found to be not significant in the model of directed technical change. When including literacy rates (see model 8 to 9) the R 2 decreases, and appears to be very instable depending on whether one includes youth or adult literacy rates. However, when introducing educational expenditures as control variable, the R 2 considerably improves (from 2 to 13 percent) and the sign seems to be as expected (negative) indicating that the higher the expend in education, the higher the increase in the use of land-saving inputs when land became more scarce. Furthermore, the inclusion of other economic variables as controls (see model 11 to 13) slightly improves the models fit. Credit to the private sector (as percent of GDP) is positive 12

and significantly correlated with the relative use of land-saving technologies. This variables represents a common proxy for the level of development of the .financial system. Results suggest that the higher the degree of development of the .financial system, the higher the degree of replacement of relative expensive (scarce) factors with relative cheap factors (abundant). Note that the inclusion of control variables, especially other economic variables considerably reduces the number of observation. The exception is model 13, in which only food exports is included together with the agricultural-related variables. In this case, the R 2 increases with respect to the models 1 to 9 and the number of observations remains high, i.e. 2830 observations. This is the preferred model to make comparisons and robustness checks across regions, income levels, and land inequality. Note that model 10 presents the highest R 2 and could be a preferred model but it has the inconvenient that reduces considerably the sample (only 278 observations) due to the lack of data on educational expenditures on an annual basis. Therefore, even it presents the best .t, it is rejected as the preferred model. These results strongly provide support for the existence of an "induced innovation hypothesis" in agriculture, as suggested by Hayami and Ruttan. In other words, it seems to be the case that farmers indeed replace scarce (hence expensive) factors of production with relatively more abundant (hence cheaper) factors. Of course, one may be cautious when interpreting these results, given that we only control for two sectors and two types of inputs (i.e. fertilizers and tractors). In addition, no data were found about factor prices, so that here is assumed that changes in factor prices are related to changes in factor endowments.

3.3 Robustness analysis

Table 6 to 8 present the estimated coefficients of equation 13 across different regions, income levels, and land inequality levels. Due to space considerations, only the most relevant model specifications are shown. Table 6 shows the estimated coefficients across six regions8 when using three different model specification (model 14 to 16). Note that the R 2 , the number of observations and the number of countries varies importantly across the different sub-regional samples. The first block present the results of estimating model 14, which contains only controls variables for the degree of development of the agricultural sector. Note that the best fit of model 14 is found in the sub-sample of SEA and NAP countries, with R 2 of 47 and 30 percent, respectively. However, the model poorly fits in the sample of SSA countries, in which did not become significant. When estimating model 14 in the whole sample, the estimated was -0.132 (see model 6), which is very closed to the estimated when using sub-samples across regions (from -0.103 to -0.132) with the only exception of Sub-Saharan Africa (-0.029). The inclusion of youth literacy rates (both female and male) improves in some cases the R 2 but it worsens it in another cases, similar what happens when including human capital-related variables in the whole sample (see model 8 and 9). Lastly, the inclusion of other control variables, such as food export, worsens results, more specifically, is not significant in out of 6 sub-samples or regions (SEA, SSA, and MENA). Overall, results presented in table 6 suggest that, across regions the model of directed technical change perform better in the richest regions (NAP, ECA, and LAC). Secondly, table 7 presents the estimated coefficients across three levels of income. Again, note that the R 2 , number of observations and the number of countries vary importantly across regions. Model 17, which is the model with only agricultural-related variables as controls, fits specially well in the sample of high income countries (HIC), while it fits relatively poorly in the sample of middle income countries (MIC) and low income countries (LIC). In addition, is found to be not significant in the sub-sample of LIC, even if this sub-sample is the largest 13

among levels of income with around 1192 observations. The inclusion of human capitalrelated and other economic control variables improves overall the fit of the estimation but do not change results concerning significance of the coefficients. In other words, is not significant in the sub-sample of LIC. Thirdly, table 8 provides the estimated coefficients across levels of land inequality. Results suggest that land inequality does not have an impact on . Unfortunately, it was not possible to test the influence of land inequality as explanatory variables (rather than splitting the sample) due to the lack of data on an annual basis. Summarising, the analysis presented in this section suggests that the "induced innovation hypothesis" seems to better suit to the experiences in developed countries rather than poor countries. In particular, it does not hold in the Sub-Saharan African sample of countries. This fact will be investigated in more detail in the next section.

14

3.4 The Sub-Saharan African Experience 3.4.1 Motivation and procedure

Results from previous section neglect the "induced innovation hypothesis" in the sub-sample of low and middle income countries, and in particular in the sub-sample of Sub-Saharan African countries. This section is aimed at understanding the factors behind this rejection. Here, the strategy is different than previous sections. More specifically, we are interested in the sources, which explain the use of land-saving technologies (fertilizers per hectare of land) and labour-saving technologies (tractors per agricultural worker), separately (rather than the ratio of them). Formally, the following equations are estimated:
NZ (Z ) (Z ) = ( Z ) + ( Z ) X i + i Z

(14)
NL ( L) (L) = ( L ) + ( L ) X i + i L

Note that, alternatively to the previous section, the index t of time is dropped in the equation to estimate. The analysis here is cross-sectional given the lack of data on an annual basis for most of the variables included in this exercise. The stress is given to the cross-sectional differences rather than the sources behind the changes over time. Again, table 1 (second block) describes the data and table 3 provides the standard descriptive statistics, at this time only for Sub-Saharan African countries. This exercise focuses on the impact of institutional development and good governance on the use of technology in the agricultural sector. The idea behind the inclusion of such institutional variables is related to the so-called discrimination against agriculture or pro-urban bias in own-country policies (Anderson, 2004). Undoubtedly, a major issue in economic development in Africa is governance and the degree of institutional development. Good governance and institutional development is essential for stimulating economic growth and achieving poverty reduction. Transparent and clear rules provide an appropriate climate to innovation. Improving governance and institutions require consolidation of the rule of law, strengthening justice and personal security, greater transparency and efficiency in public expenditures, promotion of democracy, and modernization and decentralization of the public administration. Clearly, poor governance, corruption, and political instability damage investment, innovation, growth, and poverty reduction. Linking the debate to the Hayami-Ruttan hypothesis, it seems reasonable to believe that its apparent failure in the case of Sub-Saharan African may be related to governance and institutional issues. The goal of this section is to investigate whether institutional development and governance issue have any significant impact on the use of agricultural technology across Sub-Saharan African countries. If so, this would give us an idea of the reasons behind the rejection of the "induced innovation hypothesis" in this region. Several authors have pointed out the potential impact of institutional development and governance on innovation and productivity growth in agriculture in developing countries. For instance, Kydd and Dorward (2001a) stressed the existing biases in economy-wide policies against agriculture in poor countries, often reinforced by biases within the sector towards larger farms (private, state, collective), even if small-holder and family farming seems to be an efficient form of 15

economic organisation in poorer countries. In this line, Wiebe et al. (2006) emphasise the role to be played by policy reforms to improve political stability, and the institutional environment to facilitate access to and incentives to use agricultural technology. Bad governance and underdeveloped institutions may affect not only farmers incentives but also the impact of growth on poverty. For instance, Kydd et al (2004) suggest bad governance by unaccountable and predatory elites, inter and intra-state conflicts and poor agricultural performance among the factors contributing to the high levels of poverty and the bad economic performance of Africa. Sustained agricultural growth is possible only if economic and political constraints are addressed and removed, and this requires institutional commitments to supporting pro-poor and pro-growth policies. Recently, Dorward et al. (2002) argued that government regulations, which usually protect monopolistic and monopsonistic positions, together with overstaffing in institutions (based on patronage rather than ability) and corruption, corresponds to the major roots of failures to innovate and develop the agricultural sector in developing countries.

3.4.2 Data description and empirical results

The data used in the analysis is described in table1 and summarized in table 3. The institutional variables have been collected from The International Country Risk Guide (ICRG), which is an organisation specialised at constructing country risks ratings and used broadly by the empirical literature. The ICRG distinguishes among three types of risk: economic, political and .financial. While political risk (RISK_POL) rating, assesses the political stability of the country, the economic risk (RISK_ECO) rating provides a means of assessing a countrys current economic strengths and weaknesses. In addition, the financial risk (RISK_FIN) rating assesses the countrys ability to finance its official, commercial, and trade debt obligations. While political risk ranges between 0 and 100, the financial and economic risk range between 0 and 50 points. In this data, the lower the risk point total, the higher the risk, and the higher the risk point total the lower the risk10. The political risk rating includes 12 weighted variables covering both political and social issues, such as government stability, corruption, ethnic and religious tensions, law and order or democratic accountability. These sub-components are also separately included in the empirical analysis. Government stability (GOVERN) considers both the governments ability to carry out its declared program, and its ability to stay in office. Corruption (CORRUP) takes into account the use of demands for special payments and bribes connected with import and export licenses, exchange controls, tax assessments, police protection, or loans. Tensions are classsified into religious and ethnic. Religious tensions (RELIGION) include the domination of society and/or governance by a single religious group with the purpose of replacing civil law by religious law and of excluding other religions from the political and/or social process. Ethnic tensions (ETHNIC) weigh up the degree of tension within a country linked to racial, nationality, or language divisions. Law and Order (LAO) is divided into law and order. The law sub-component measures the strength and impartiality of the legal system, while the order sub-component considers the popular observance of the law. Lastly, democratic accountability (ACCOUNT) is a measure of how responsive government is to its voters. One may expect, the less responsive it is, the more likely it is that the government will fall, peacefully in a democratic society, but also possibly violently in a non-democratic one. Furthermore, in influence of tax policy and of monetary policy is tested for. The highest marginal tax rate (both on individuals and corporations), and taxes on international trade are included in the analysis. Inflation, real interest rate, and lending interest rate control for the efficacy and efficiency of monetary policy. In addition, Gini indices of land and income are included in the estimation to test for potential effects of asset and income inequality on the 16

use of appropriate technology in agriculture. To this connection, Thirtle et al (1995) argued that current policies in developing countries may be sustaining the bias towards labour-saving technical change, inappropriate for a labour-surplus economy in which small farmers face a chronic scarcity of land. The authors argued that its bias may be influenced by public spending on research and extension, and by favourable tax and interest rate policies. Table 3 provides some descriptive statistics on the cross-section of Sub-Saharan countries, on a country by country basis. Tables 9-10 show the results of applying ordinary least squares (robust) to equation14. Note that as in previous sections, we only present the most relevant model specifications. Table 9 presents the estimated coefficients when we regress the use of land-saving technologies (fertilizers consumption per hectar of agricultural land) in SubSaharan African countries on several economic, financial and political factors. Overall, tax policy has a significant impact on the use of land-saving technologies in the agricultural sector. More specifically, the use of fertilizers (land-saving technologies or inputs) is positively correlated with the highest marginal tax on corporates and negatively with taxes on international trade and the highest marginal tax on individuals. In addition, income inequality (but not land inequality) is significantly and positively correlated with the use of land-saving technologies. The number of patent applications, i.e. a proxy for innovation enters also significantly in the estimation of the use of land-saving technologies. Lastly, political risk and corruption were also found to be significantly associated with the use of land-saving technologies. Table 10 shows the estimated coefficients when we regress the use of laboursaving technologies (agricultural tractors in use per agricultural worker) in Sub-Saharan African low income countries on the various economic, financial and political factors. In this case, and regarding tax policy only taxes on corporates and on international trade are correlated with the use of labour-saving technologies, but not taxes on individuals. In addition, income inequality (measured by the Gini index) and real interest rates significantly enter the estimation. Comparing results from table 9 and 10, taxes on individuals, and the level of political risk are negatively correlated with the use of land-saving technologies but not with the use of laboursaving technologies. These results are in line with Thirtle et al (1995) findings, which suggest that economy-wide policies may be biased against land-saving technologies, which in turn could explain the rejection of the "induced innovation hypothesis" suggested by Hayami and Ruttan in the case of Sub-Saharan Africa.

4 Concluding remarks

Agricultural growth in productivity is critical for generating pro-poor growth, especially in low income countries, where the agricultural sector employs (or self-employs) most of the poor. At the farm level, it can increase not only the incomes of farmers but also the demand for farm labouring. At the rural economy level, it can increase domestic demand for goods and services produced by the non-farm rural sector (e.g. fertilizers or machinery), and/or generate more local tax revenues. Governments should ensure that the poor also benefit from the process of agricultural productivity growth. In particular, pro-poor effects can be fostered by increasing access to farm land for the poor; by facilitating the poor to adopt the appropriate technology to local conditions; and by re-directed towards the poor all kinds of public services (e.g. schools, hospitals, housing or safety nets). Employment is essential to increase the income of the poor and therefore the type of technology promoted and developed in the process of technical change may matter. The magnitude of the impact on poverty of agricultural productivity growth crucially depends on the type of innovations and inventions 17

developed and used in the process of agricultural technical change. Whether technology allows the poor to engage in or not in productive activities is clearly relevant for generating pro-poor growth processes. From a pro-poor perspective, agricultural technical change is expected to be more pro-poor if it encourages the use of land-saving (labour-intensive) technologies rather than labour-saving technologies, given that the poor are typically landless and the only asset they own is their unskilled labour. In addition, and from a more economic perspective, agricultural technical change have to be also locally appropriate, so that it may suit properly to local conditions. In other words, it may increase the use of relative abundant (hence cheap) factors of production rather than scarce (hence expensive) factors. Given that most poor areas are characterized by scarce productive land and a large supply of landless and unskilled wage labourers, technical change may facilitate the use of land-saving (labour-intensive) technologies rather than labour-saving technologies. From both perspectives, technical change in the agricultural sector is expected to be more pro-poor the higher the bias towards land-saving technologies, in particular among the most poor and remote areas. The first model explaining the determinants of the bias of technical change in the agricultural sector was proposed by Hayami (1969) and Hayami and Ruttan (1971), in which alternative agricultural technologies are developed to facilitate the substitution of relatively abundant (cheap) factors for relatively scarce (expensive) factors. The assumptions behind this framework relates to three main issues: (i) prices efficiently reflect changes in the demand and supply of products and factors; (ii) farmers and technology suppliers interact effectively, so that farmers are induced by shifts in relative prices to seek for technical alternatives that save the increasingly scarce factors of production; and (iii) profit-maximizing technology suppliers respond to demand by supplying new technical possibilities that facilitate profit-maximizing farmers to progressively substitute the increasingly abundant factors for increasingly scarce factors. In this paper we show how the basic ideas of Hayami and Ruttan can be translated in a more recent and more consistent model of biased endogenous innovations proposed by Acemoglu. One main advantage of Acemoglus approach is that it directly relates relative factor endowments to possible biases in the direction of technical change. This makes it possible to test for the induced innovation hypothesis without data on relative prices. On a global level and based on panel data for 93 countries and 41 time periods we find convincing support for the Hayami-Ruttan theory. The estimation of several sub-samples, however, rejects the "induced innovation hypothesis" in the sub-sample of low income countries, and in particular in the sub-sample of SubSaharan African countries. Linking these results to the debate on the Hayami-Ruttan hypothesis, it seems reasonable to believe that its rejection in the case of Sub-Saharan African may be related to governance and institutional issues. Sustained agricultural growth is possible only possible if economic and political constraints are addressed and removed, and this requires institutional commitments to supporting pro-poor and pro-growth policies. As suggested by Thirtle et al (1995) an urban bias and lobbying power of large commercial privileged farmers may be a source distorting the technical bias towards labour-saving technical change leading to inefficient patterns of agricultural technical change. There are still some caveats in the analysis of the "induced innovation hypothesis". The most important is related to the data availability, and in particular to panel data on: (i) the distribution of income and land ownership; and (ii) input and factor prices (agricultural wages, rental price of land, fertilizer and agricultural tractors). Finally, further work is needed to test the impact of lobbying power on technical change. In other words, one should modify Acemoglus

18

framework by explicitly including lobbying power and/or not-competitive behaviour of some farmers.

19

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[25] Irz, X., L. Lin, C. Thirtle, and S. Wiggins (2001) "Agricultural productivity, growth and poverty alleviation", Development Policy Review, 19, 449-466. [26] Johnston, B. F., and J. W. Mellor (1961) "The role of agriculture in economic development", American Economic Review 51, 566-594. [27] Kawagoe, T., Y. Hayami, and V. W. Ruttan (1985) "The intercountry agricultural production function and productivity dierences among countries", Journal of Development Economics 19, 113-132. [28] . -, and K. Otsuka, and Y. Hayami (1986) "Induced bias of technical change in agriculture: The United States and Japan, 1880-1980", Journal of Political Economy 94, 523544. [29] Kennedy, C. (1964). "Induced bias in innovation and the theory of distribution", Economic Journal 74, 541-547. [30] . - (1973) "A generalisation of the theory of induced bias in technical progress", Economic Journal 83, 48-57. [31] Kydd, J. and A. Dorward (2001a) "The Washington consensus on poor country agriculture: analysis, prescription and institutional gaps", Development Policy Review, 19, 467-478. [32] . -., and A. Dorward (2001b) "The role of agriculture in pro poor economic growth in Sub-Saharan Africa", London: Imperial College. [33] . . , A. Dorward, J.Morrison, and G. Cadish (2004) "Agricultural development and propoor economic growth in Sub-Saharan Africa: potential and policy", Oxford Development Studies 32. [34] Lewis, W. A. (1954) " Economic development with unlimited supply of labor", Manchester School of Economic and Social Studies. [35] Lipton, M. (2004) "Crop science, poverty, and the family farm in a globalising world", Plenary session, Brisbane International Crop Science Conference, September. [36] . -.. (1977) "Why poor people stay poor?Urban bias in world development". London: Temple Smith. [37] McCain, R. A. (1970) "Land in Fellners model of economic growth: Comment", American Economic Review 60, 495-499. [38] Nordhaus, W. D. (1973) "Some skeptical thoughts on the theory of induced innovation", Quarterly Journal of Economic 87, 208-219. [39] Ranis, G., and J. C. H. Fei (1961) "A theory of economic development", American Economic Review 51, 533-65. [40] Ravalllion, M, and Datt, G. (1999) "When is growth pro-poor? evidence from the diverse experiences of India.s states", World Bank policy research working paper 2263. [41] Rostow, W. W. (1956) "The take-off into self sustained growth", Economic Journal 66, 25-48. [42] Ruttan, V. W. (2002) "Productivity growth in world agriculture: sources and constraints", Journal of Economic Perspectives 16. 161-184. [43] Salter, W. E. G., Salter 1960 "Productivity and technical change", London: Cambridge. [44] Samuelson, P. A. (1965) "The theory of induced innovation along Kennedy-Weizsaecker lines", Review of Economics and Statistics 47, 343-356. [45] Schultz, T. W. "Transforming traditional agriculture", New Haven: Yale University Press. [46] Thirtle, C., X. Irz, L.Lin, V. McKenzie-Hill, and S. Wiggins (2001) "Relationship between changes in agricultural productivity and the incidence of poverty in developing countries", DFID Report No. 7946. [47] . - ., L. Lin, and J. Piesse. (2003) "The impact of research-led agricultural productivity growth on poverty reduction in Africa, Asia, and Latin America", World Development 31, 1959-1975. 21

[48] .- , R. Townsend, and J. van Zyl (1995) "Testing the induced innovation hypothesis in South African agriculture", Policy Research Working Paper 1547, The World Bank. [49] Wiebe, K. D., M. J. Soule, and D. E. Schimmelpfenig (2006) "Agricultural productivity for sustainable food security in Sub-Saharan Africa", FAO.

22

FIGURES Figure 1: Rural population across regions

LAC 90 80 70 60 Percent 50 40 30 20 10 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 SSA ECA SEA MENA NAP

Figure 2: Rural density across regions

LAC 700 600
people per sq Km

SSA

ECA

SEA

MENA

NAP

500 400 300 200 100 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

Source: World Development Indicators (2005)

Source: World Development Indicators (2005)

Figure 3: Irrigated land across regions

LAC
LAC 40 35 30 Percent SSA ECA SEA MENA NAP

Figure 4: Arable land across regions

SSA ECA SEA MENA NAP
40 35 30 25

Percent

25 20 15 10 5 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

20 15 10

Source: World Development Indicators (2005)

5 0

Source: World Development Indicators (2005)

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

23

Figure 5: Fertilizer consumption per hectare (NzZ)

LAC 0.00 SSA ECA SEA MENA NAP

Figure 6: Tractors in use per hectare (NlZ)

LAC -2.00 SSA ECA SEA MENA NAP

Log (Metric tones per hectare)

-1.00

-3.00
-2.00 -3.00 -4.00 -5.00 -6.00 -7.00

Log (tractors per hectare)

-4.00 -5.00 -6.00 -7.00 -8.00 -9.00

-8.00 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

Source: WDI (2005) and FAO (2005)

Source: WDI (2005) and FAO (2005)

Figure 7: Agricultural land per worker (Z/L)

LAC 6.00 Log (hectare per worker) 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 SSA ECA SEA MENA NAP

Source: FAO (2005)

24

TABLES Table 1: Data description

Variable APOP RPOP RDEN AGRL IRRI ARAB FERT TRAC LITAM, LITAF LITYM, LITYF EDUC PCTT FEXP TRAD CRED TAX_IND TAX_CORP TAX_INT INT_LEND INT_REAL INF GINI_INC GINI_LAND PATENT RISK_FIN RISK_ECO RISK_POL RELIGION ETHNIC LAO GOVERN ACCOUNT CORRUP Note: WDI: World Guide (2005) Description Source Type Period Agricultural population (1000 people) FAO panel 1961-2002 Rural population (% of total) WDI panel 1961-2002 Rural density (people per sq Km) WDI panel 1961-2002 Agricultural land (1000 hectares) FAO panel 1961-2002 Irrigated land (% of cropland) WDI panel 1961-2002 Arable land (% of land area) WDI panel 1961-2002 Fertilizer consumption (1000 metric tones) WDI panel 1961-2002 Agricultural machinery, tractors (1000 units) WDI panel 1961-2002 Literacy rate, adult: male, and female (% of people ages 15 and above) WDI panel 1961-2002 Literacy rate, youth: male and female (% of people ages 15-24) WDI panel 1961-2002 Public spending on education, total (% of GDP) WDI panel 1961-2002 Changes in real effective exchange rate (%) WDI panel 1961-2002 Food exports (% of merchandise exports) WDI panel 1961-2002 Sum of exports and imports of goods and services (% of GDP) WDI panel 1961-2002 Domestic credit provided by the banking sector (% of GDP) WDI panel 1961-2002 Highest marginal tax rate, individual rate (%) WDI cross-sectional 1995-2002 Highest marginal tax rate, corporate rate (%) WDI cross-sectional 1995-2002 Taxes on international trade (% of current revenue) WDI cross-sectional 1990-2002 Lending interest rate (%) WDI cross-sectional 1990-2002 Real interest rate (%) WDI cross-sectional 1990-2002 Inflation, consumer prices (annual %) WDI cross-sectional 1990-2002 GINI index of income WDI cross-sectional 1990-2002 GINI index of land concentration FAO cross-sectional 1990 Patent applications, residents WDI cross-sectional 1995-2002 Financial Risk Rating ICRG cross-sectional 1990-2004 Economic Risk Rating ICRG cross-sectional 1990-2004 Political Risk Rating ICRG cross-sectional 1990-2004 Religious Tensions Index ICRG cross-sectional 1990-2004 Ethnic Tensions Index ICRG cross-sectional 1990-2004 Law & Order Index ICRG cross-sectional 1990-2004 Government Stability Index ICRG cross-sectional 1990-2004 Democratic Accountablity Index ICRG cross-sectional 1990-2004 Corruption Index ICRG cross-sectional 1990-2004 Development Indicators (2005); FAO: Food and Agriculture Organization (2005); ICRG: International Country Risk

25

Table 2: Descriptive statistics (cross-sectional time series)

SEA
Obs AGRL APOP TRAC FERT IRRI ARAB RDEN RPOP LITYM LITYF LITAM LITAF CRED EDUC PCTT FEXP TRAD Mean Std. Dev. Min Max Obs Mean

ECA
Std. Dev. Min Max Obs Mean

LAC
Std. Dev. Min Max

588 588 588 588 588 588 588 588 378 378 379 379 485 44 124 453 527

52495 109889 197 2344 29 23 618 71 82 69 73 55 60 3 -2 23 48

115518 209013 445 5826 21 17 304 20 18 29 20 29 58 1 9 20 35

513 3663 0 0 2 3 176 17 43 6 29 4 -6 1 -27 0 4

544962 853773 2142 39600 82 71 1607 97 99 99 97 94 322 8 28 82 229

756 756 756 756 756 756 756 756 294 294 294 294 604 60 397 621 634

14190 4309 412 1274 15 31 127 36 99 96 94 85 77 5 1 16 56

20239 5080 465 1381 16 14 71 17 2 7 7 16 33 1 8 14 23

460 187 3 5 0 7 31 10 90 64 66 37 5 3 -38 1 8

263580 21512 1660 6103 62 66 362 78 100 100 99 99 160 9 57 68 154

924 924 924 924 924 924 924 924 652 652 652 652 911 74 247 800 905

30178 4953 49 274 15 10 279 43 91 90 85 81 40 4 4 45 62

63619 9164 128 788 17 9 239 17 9 11 12 14 37 2 56 25 40

19 10 0 1 2 0 12 8 61 47 53 37 -9 1 -100 0 9

555156 45028 806 7682 89 37 1023 77 100 100 100 100 334 9 799 96 282

SSA
Obs AGRL APOP TRAC FERT IRRI ARAB RDEN RPOP LITYM LITYF LITAM LITAF CRED EDUC PCTT FEXP TRAD Mean Std. Dev. Min Max Obs Mean

MENA
Std. Dev. Min Max Obs Mean

NAP
Std. Dev. Min Max

1008 1008 1008 1008 1003 1008 1008 1008 644 644 645 645 780 67 229 481 867

25773 7443 10 59 5 10 293 76 72 59 59 43 27 4 -2 49 65

25194 7470 29 155 8 11 153 13 19 28 20 26 28 2 19 29 35

88 131 0 0 0 1 55 42 19 4 12 2 -77 1 -68 0 6

173793 38227 176 1233 43 49 702 98 99 99 94 94 165 13 123 98 193

420 420 420 420 419 420 420 420 290 290 291 291 336 22 119 291 328

27939 7447 33 222 27 11 301 50 81 58 64 37 59 6 -1 17 63

33855 7271 48 320 27 9 290 17 14 24 16 20 33 2 22 16 26

133 117 0 0 2 1 48 10 40 5 27 2 -50 2 -58 0 9

173785 26720 290 1394 100 35 1337 91 99 100 96 86 192 10 193 75 155

210 210 210 210 210 210 210 210 27 27 27 27 206 16 124 192 195

190397 2364 1197 4156 4 9 86 28 96 94 88 80 74 6 0 35 53

208926 3312 1878 6756 4 6 143 17 2 4 4 7 56 1 8 26 31

219 239 1 2 0 4 3 8 92 86 80 66 6 5 -23 6 9

487773 12841 5470 21500 13 21 514 70 99 99 94 91 264 7 56 97 139

Notes:
SEA: East and South Asia; ECA: Europe and Central Asia; LAC: Latin America; SSA: Sub-Saharan Africa; MENA: Middle East and North Africa; NAP: North America and Pacific. SEA: India, Indonesia, Vietnam, Nepal, Bangladesh, Malaysia, Korea, Rep., China, Japan, Philippines, Sri Lanka, Pakistan, Thailand and Cambodia. ECA: Hungary, Germany, Turkey, Poland, Romania, France, Austria, Albania, Italy, Portugal, United Kingdom, Sweden, Denmark, Spain, Finland, Netherlands, Bulgaria, and Greece. LAC: Paraguay, Guyana, Brazil, Costa Rica, Trinidad and Tobago, Colombia, Dominican R., Peru, Ecuador, Guatemala, Mexico, Nicaragua, Chile, Panama, Argentina, Barbados, Jamaica, Uruguay, El Salvador, Suriname, Venezuela, R.B., and Honduras. SSA: Sierra Leone, Guinea, Cote d 'Ivoire, Tanzania, Kenya, Chad, Swaziland, Mali, Cameroon, Lesotho, Angola, Zimbabwe, Zambia, South Africa, Ghana, Mozambique, Nigeria, Malawi, Madagascar, Uganda, Senegal, Mauritius, Burkina Faso, and Bostwana. MENA: Algeria, Egypt, Arab.Rep., Iran, Islamic Rep., Jordan, Morocco, Saudi Arabia, Syrian Arab. Rep., Tunisia, and Yemen, Rep. NAP: Canada, United States, New Zealand, Australia, and Fiji.

26

Table 3: Descriptive statistics (cross-sectional time series)

ACCOUNT 3 4 3 2 3 3 2 3 4 3 3 3 2 4 2 4 3 2 4 2 3 1 RELIGION INT LEND INT REAL RISK ECO RISK POL GOVERN RISK FIN TAX IND GINI INC CORRUP 2 3 3 2 3 3 3 3 4 3 2 3 2 3 2 4 3 2 3 2 2 1
.

TAX INT

PATENT

Angola 2 Botswana 1 Burkina Faso 14 Cameroon 13 Chad 3 Cote d'Ivoire 9 Ghana 15 Guinea 3 Kenya 8 Lesotho 11 Madagascar 5 Malawi 21 Mali 3 Mozambique 5 Nigeria 32 Senegal 12 Sierra Leone 7 South Africa 12 Tanzania 4 Uganda 26 Zambia 7 Zimbabwe 8 Mean* 16 Std. Dev. 8 * weighted by ARAB

2 0 1 0 1 1 0 6 1 0 31 1 4 3 1 3 5 9 3 0 1 4 2 6

255 211 235 125 156 286 351 595 440 387 355 420 209 311 232 204 619 128 581 359 104 253 301 147

68 53 85 55 77 58 65 74 70 75 73 87 72 72 60 56 66 46 72 87 61 67 69 11

86 26 86 59 57 88 93 89 68 31 56 82 46 90 88 75 86 96 68 21

74 17 65 36 43 66 78 81 57 22 40 58 34 84 70 63 74 85 54 21

15 39 35 34 32

28 60 10 33 32

38 35 29 35 31 30 30 35 33 26 6

38 20 25 50 44 33 30 30 47 27 13

17 24 22 20 48 33 59 14 54 50 16

-44 110 5 14 17 16 15 20 13 20 18 16 9 12 7 11 9 13 14 0 15 2 7 3 6 -1 1 7 13 22 25 18 28 38 16 22 22 16 35 18 28 24 52 35 24 20

63 48 45 45 30 40 45 63 47 50 51 40 51 41 59 38 43 53 57 45 8

2 18 2 5 3

891 10 4 5 7 5 27

47 74 57 53 58 62 50 57 60 60 56 55 48 57 41 68 63 52 61 54 52 7

23 42 26 29 29 31 29 33 26 27 26 27 33 31 19 37 27 29 23 26 27 5

29 41 33 34 31 29 31 30 29 28 30 21 31 34 22 35 29 28 25 21 28 5

5 5 5 4 5 6 3 4 5 4 4 6 2 3 4 5 5 4 5 5 4 1

2 4 4 2 3 3 3 3 3 3 3 3 2 3 3 2 5 3 3 3 3 1

8 9 8 8 7 8 8 7 8 7 7 8 8 8 7 9 9 8 6 7 7 1

39 43 3 39 19 23 16

15 2 16 29 4 1 30 27 4 0 35 160 9 1 19 2 13 4 64 7 43 11 28 42 187

27

ETHNIC 3 5 4 2 3 3 3 3 2 4 4 3 3 3 3 3 4 3 5 4 3 1

LITYT

LITAT

ARAB

RDEN

TAX CORP

RPOP

LAO

IRRI

INF

Table 4: Fixed effects estimation results

CONSTANT DUMMY 00s TREND ZL -0.151 (7.90)** m1 2.026 (94.02)** m2 2.004 (68.19)** -0.092 -1.85 0.001 -1.34 -0.152 (7.97)** m3 -4.172 (7.15)** -0.097 (2.04)* m4 -1.077 (2.84)** -0.062 -1.32 m5 -2.935 (5.97)** -0.172 (3.84)** m6 0.02 -0.06 -0.045 -0.94 m7 1.555 (4.37)** -0.119 (2.63)**

-0.087 (4.38)** ARAB 0.96 (11.26)** IRRI 0.197 (5.82)** RDEN 0.296 (3.81)** RPOP 0.516 (6.15)** Obs. 3885 3885 3879 Countries 93 93 93 R-squared 0.02 0.02 0.06 Absolute value of t statistics in parentheses * significant at 5%; ** significant at 1%

-0.12 (6.23)** 0.836 (10.71)**

-0.096 (4.88)** 0.994 (12.05)**

-0.132 (6.87)**

-0.147 (7.54)**

0.248 (7.88)** 0.493 (6.93)** 0.293 (3.95)** 3885 93 0.05 0.4 (4.93)** 3879 93 0.03

0.174 (5.95)** 0.031 -0.45

3885 93 0.05

3879 93 0.03

Table 5: Estimation results with other control variables

CONSTANT DUMMY 00s ZL IRRI RPOP LITAF LITAM LITYF LITYM EDUC FEXP CRED PCTT TRAD Obs. 2274 2271 278 Countries 71 71 83 R-squared 0.02 0.02 0.13 Absolute value of t statistics in parentheses * significant at 5%; ** significant at 1% m8 7.398 (6.11)** -0.016 -0.33 -0.06 (2.87)** -0.1 -1.77 -0.341 (2.90)** 0.954 (5.03)** -1.756 (4.50)** m9 6.68 (4.84)** -0.03 -0.6 -0.049 (2.34)* -0.115 (2.04)* -0.31 (2.74)** m10 3.389 -0.88 -0.024 -0.66 -0.029 (2.43)* -0.721 -1.35 0.195 -0.21 m11 1.226 -1.25 -0.132 (2.70)** -0.074 (3.47)** -0.012 -0.11 -0.013 -0.06 m12 1.216 -1.46 -0.136 (2.82)** -0.074 (3.43)** -0.012 -0.11 -0.009 -0.04 m13 -0.765 (2.07)* -0.006 -0.15 -0.129 (7.16)** 0.279 (7.14)** 0.507 (5.74)**

0.836 (4.71)** -1.505 (3.57)** -0.444 (3.75)** 0.079 -1.7 0.122 (2.40)* 0.003 -0.24 -0.029 -0.37 537 51 0.07 0.086 -1.9 0.087 -1.74 0.005 -0.37 0.133 (5.79)**

539 51 0.07

2830 92 0.06

27

Table 6: Estimation results across regions

m14 SEA ECA LAC SSA CONSTANT -18.049 -4.805 6.388 -0.512 (17.70)** (8.45)** (12.21)** -0.36 ZL -0.132 -0.116 -0.108 -0.029 (2.33)* (3.38)** (4.26)** -0.62 IRRI 0.692 0.298 -0.016 0.135 (7.36)** (7.60)** -0.23 (2.21)* RPOP 4.495 1.628 -1.184 0.564 (20.32)** (11.13)** (10.60)** -1.73 LITYF LITYM FEXP Obs. 579 756 924 Countries 14 18 22 0.47 0.23 0.17 R-squared Absolute value of t statistics in parentheses * significant at 5%; ** significant at 1% 996 24 0.01 414 10 0.09 210 5 0.3 369 12 0.05 294 9 0.34 652 20 0.12 640 20 0.04 MENA 1.799 -1.73 -0.126 (1.98)* 0.431 (2.52)* -0.34 (2.12)* NA 5.155 (5.57)** -0.103 (2.53)* 0.201 -1.89 -1.17 (4.52)** SEA 14.977 (2.51)* -0.061 -0.78 0.158 -0.95 -0.323 -0.7 1.702 (2.56)* -4.1 (2.34)* ECA 86.459 (3.02)** -0.14 (2.86)** -0.093 -0.66 1.207 (4.07)** 2.918 -1.71 -22.319 (2.91)** m15 LAC 12.315 (3.45)** -0.115 (4.15)** -0.028 -0.32 -1.045 (6.21)** 2.756 (2.19)* -4.159 (2.30)* SSA -0.659 -0.23 0.023 -0.51 -0.474 (4.01)** 0.637 -1.6 0.815 (2.64)** -0.723 -1.11 MENA SEA 39.755 -19.542 (8.52)** (17.84)** 0.11 -0.086 -1.96 -1.67 -0.642 0.446 (3.25)** (2.83)** -0.811 5.272 (3.84)** (20.42)** 4.286 (8.17)** -11.472 (7.85)** -0.218 (2.88)** 289 450 9 14 0.28 0.62 m16 ECA LAC SSA -2.629 6.525 -3.212 (5.00)** (11.66)** -1.51 -0.121 -0.099 -0.011 (3.91)** (3.98)** -0.28 0.123 -0.107 0.348 (2.90)** -1.4 (4.21)** 0.858 -1.232 1.442 (5.56)** (10.33)** (2.80)** MENA 2.023 (2.17)* -0.049 -1.04 0.255 -1.76 -0.337 (2.24)* NA 5.479 (6.02)** -0.094 (2.50)* 0.168 -1.58 -1.141 (3.96)**

0.335 (5.76)** 621 18 0.28

0.062 -1.44 800 22 0.17

-0.203 (4.26)** 477 23 0.06

0.129 (3.88)** 290 10 0.11

-0.138 -1.33 192 5 0.34

Table 7: Estimation results across levels of income

CONSTANT ZL IRRI RPOP LITYF LITYM FEXP Obs. 1192 1889 798 Countries 29 45 19 R-squared 0.01 0.07 0.56 Absolute value of t statistics in parentheses * significant at 5%; ** significant at 1% 787 25 0.05 1319 41 0.06 165 5 0.66 LIC 2.935 -1.7 -0.028 -0.53 0.131 (2.17)* -0.194 -0.5 m17 MIC 2.68 (7.86)** -0.067 (3.63)** 0.295 (6.38)** -0.367 (5.21)** HIC -12.588 (21.49)** -0.163 (3.78)** 0.783 (14.25)** 3.921 (25.78)** LIC -1.654 -0.52 0.018 -0.31 -0.238 (2.20)* 1.06 (2.15)* 1.011 (3.60)** -0.973 -1.5 m18 MIC 17.747 (8.43)** -0.056 (2.67)** -0.058 -0.89 -0.943 (7.90)** 0.717 (2.81)** -3.37 (5.41)** HIC 17.089 -0.34 -0.242 (4.81)** -0.581 (3.15)** 0.61 (2.07)* -13.531 -1.04 9.965 -0.43 LIC -6.752 (4.03)** 0.016 -0.38 0.344 (4.99)** 2.262 (5.78)** m19 MIC 4.49 (10.62)** -0.058 (3.25)** 0.067 -1.11 -0.764 (9.09)** HIC -10.492 (18.58)** -0.128 (3.33)** 0.74 (14.08)** 2.714 (15.58)**

-0.258 (6.64)** 664 28 0.09

0.084 (3.36)** 1397 45 0.1

0.774 (11.89)** 769 19 0.65

28

Table 8: Estimation results across levels of land inequality

gini > 70 CONSTANT 0.028 -0.08 ZL -0.129 (6.72)** IRRI 0.244 (7.67)** RPOP 0.399 (5.15)** LITYF LITYM FEXP Obs. 3833 3825 3812 Countries 93 93 93 R-squared 0.03 0.03 0.03 Absolute value of t statistics in parentheses * significant at 5%; ** significant at 1% 2252 71 0.02 2248 71 0.02 2237 71 0.02 m20 gini > 80 0.028 -0.08 -0.129 (6.71)** 0.244 (7.67)** 0.399 (5.14)** gini >90 0.037 -0.11 -0.129 (6.68)** 0.243 (7.64)** 0.397 (5.10)** gini > 70 6.612 (4.79)** -0.05 (2.39)* -0.114 (2.00)* -0.29 (2.66)** 0.833 (4.66)** -1.507 (3.55)** m21 gini > 80 6.612 (4.79)** -0.05 (2.39)* -0.114 (1.99)* -0.29 (2.66)** 0.833 (4.65)** -1.506 (3.55)** gini >90 6.644 (4.80)** -0.049 (2.36)* -0.113 (1.98)* -0.298 (2.72)** 0.83 (4.62)** -1.503 (3.53)** gini > 70 -0.632 -1.77 -0.127 (7.06)** 0.272 (6.87)** 0.477 (5.61)** m22 gini > 80 -0.634 -1.77 -0.127 (7.05)** 0.272 (6.88)** 0.478 (5.61)** gini >90 -0.623 -1.74 -0.127 (7.01)** 0.272 (6.84)** 0.476 (5.58)**

0.13 (5.66)** 2788 92 0.06

0.13 (5.65)** 2780 92 0.06

0.129 (5.61)** 2767 92 0.06

29

Table 9: The use of land-saving technologies in Sub-Saharan Africa

Constant IRRI ARAB TAX_IND TAX_CORP TAX_INT INT_LEND INF INT_REAL GINI_INC PATENT RISK_POL RISK_FIN RISK_ECO ETHNIC RELIGION GOVERN CORRUP LAO ACCOUNT LITYT LITAT Obs. 10 20 18 R-squared 0.98 0.5 0.35 Robust t statistics in parentheses * significant at 5%; ** significant at 1% 19 0.53 13 0.67 20 0.58 20 0.44 20 0.52 20 0.65 m1b m2b m3b m4b m5b m6b -25.268 -8.3 -9.063 -25.005 -8.766 -34.451 (6.92)** (2.85)* (10.75)** (4.84)** (15.30)** (4.67)** 0.315 0.515 0.377 0.448 0.263 0.654 -2.52 -1.45 -1.05 -1.7 -0.89 (2.15)* -1.187 1.195 1.233 1.336 0.8 1.545 (3.50)* (3.52)** (2.95)* (5.54)** -1.96 (6.68)** -1.296 (4.54)* 9.314 (6.29)** -1.74 (6.66)** 0.291 -0.22 -0.544 -1.16 0.115 -0.28 4.163 (3.27)** 0.78 (5.84)** 3.965 -1.75 2.198 -0.79 0.407 -0.15 m7b 0.31 -0.02 0.392 -0.97 1.182 -1.89 m8b m9b m10b -10.312 -46.924 -7.502 (3.50)** (5.40)** -1.64 0.33 0.872 0.776 -1.29 (2.96)** -2.02 1.308 1.453 1.079 (3.14)** (7.03)** (4.48)**

10.256 (4.24)**

-0.008 0 0.219 -0.21 -4.665 -0.8 -1.387 -0.77 -0.713 -0.4 3.157 -1.95 -4.1 (2.60)*

-4.455 -1.06 4.529 -1.32 18 0.58

30

Table 10: The use of labour-saving technologies in Sub-Saharan Africa

CONSTANT RDEN RPOP TAX_IND TAX_CORP TAX_INT INT_LEND INF INT_REAL GINI_INC PATENT RISK_POL RISK_FIN RISK_ECO ETHNIC RELIGION GOVERN CORRUP LAO ACCOUNT LITYT LITAT Obs. 10 20 18 19 R-squared 0.79 0.21 0.28 0.58 Robust t statistics in parentheses * significant at 5%; ** significant at 1% 13 0.62 20 0.52 20 0.48 20 0.31 20 0.43 m11b 14.26 -2.09 0.073 -0.04 -0.66 -0.24 -1.083 -1.82 -3.1 (4.05)* -1.601 (4.37)* m12b m13b m14b m15b m16b 9.018 10.382 -16.79 10.276 -13 -0.86 -0.97 -1.4 -1.08 -1.09 0.046 -0.491 1.013 -0.972 -0.632 -0.04 -0.45 -1.56 -0.92 -1.21 -3.524 -3.329 -4.29 -2.907 -1.809 -1.13 -1.23 (2.82)* -1.11 -1.41 m17b 1.79 -0.19 -0.331 -0.37 -4.093 -1.83 m18b 4.83 -0.47 -0.629 -0.71 -2.755 -1.25 m19b m20b -20.2 11.478 -1.24 -1.22 -0.251 0.325 -0.36 -0.53 -2.515 -3.378 -1.48 -1.65

-1.135 -0.45 0.559 -0.54 -0.709 (2.62)* 5.595 (2.83)* 0.311 -1.42 3.918 -1.61 4.308 -2.08 -4.085 -1.63 2.493 -1.66 1.302 -0.97 2.318 -0.83 0.159 -0.1 1.189 -0.71 1.035 -0.5 -1.252 -0.9 6.371 -2.13

-12.08 (3.37)** 11.142 (3.85)** 18 0.64

31