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Agriculture's decline in Indonesia : supply or demand determined

  • Martin, Will
  • Warr, Peter G.

Agriculture's share in an economy invariably declines as per capita income rises and as the economy develops. The literature on its causes has focused on the relative price effects arising from demand factors--especially Engel's Law (that the proportion of income spent on food declines as incomes rise)--rather than on such supply-side influences as changes in relative factor endowments and different rates of technical change. Engel's Law is convincing at the global level but it does not explain why agriculture's share should decline sharply in small open economies that experience rapid economic growth. A simple structural model of the transformation of the Indonesian economy, applying the Error Correction Mechanism to capture the dynamics resulting from disequilibria and costs of adjustment is developed. The authors develop an econometric model of the economy's supply side so they can explain agriculture's decline by the three theoretical factors: relative price changes, technical change, and factor accumulation. Based on the model's results, the authors conclude that the decline in the relative price of agricultural output contributed relatively little to the decline in agriculture's share. Technical change actually had a positive effect on agriculture's share, retarding the pressures for a decline in its share over time. By far the most important influence appears to have been the rapid accumulation of capital relative to labor over the period studied (1960-87).

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 798.

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Date of creation: 31 Oct 1991
Date of revision:
Handle: RePEc:wbk:wbrwps:798
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  1. Hansen, B.E., 1990. "A Powerful, Simple Test For Cointegration Using Cochrane- Orcutt," RCER Working Papers 230, University of Rochester - Center for Economic Research (RCER).
  2. Martin, Will & Warr, Peter G., 1990. "The Declining Economic Importance of Agriculture," 1990 Conference (34th), February 13-15, 1990, Brisbane, Australia 145213, Australian Agricultural and Resource Economics Society.
  3. W.E. Diewert, 1986. "Export Supply and Import Demand Functions: A Production Theory Approach," NBER Working Papers 2011, National Bureau of Economic Research, Inc.
  4. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  5. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
  6. Leamer, Edward E, 1987. "Paths of Development in the Three-Factor, n-Good General Equilibrium Model," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 961-99, October.
  7. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
  8. Hendry, David F, 1986. "Econometric Modelling with Cointegrated Variables: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 201-12, August.
  9. Denis Lawrence, 1989. "An Aggregator Model of Canadian Export Supply and Import Demand Responsiveness," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 503-21, August.
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