The purpose of this section is to review the theory of induced technical and institutional change in the process of agricultural transformation developed by Hayami and Ruttan (1971 and 1985) (named Hayami-Ruttan model in the chapter). The arguments in this theory are relevant for a better understanding of the important role of technical change and institutional innovations on the growth of agricultural productivity in developing countries. It should be noted that the focus of the thesis is to emphasize policies to promote both agricultural productivity and incomes of farm households in maintaining food security in the face of the rapidly economic structural change in Vietnam.
In the previous section, the Fei-Ranis model examines structural change in a labour- abundant country in the process of industrialization at the aggregate level. The Hayami- Ruttan model relaxes the assumption in the Fei-Ranis model by allowing technical changes and institutions as endogenous to the economic system and agricultural transformation. The Hayami-Ruttan model is examined in two sections. First, it addresses the role of technical changes in economic development when labour is transferred from agriculture to industry. Second, it discusses the theory of induced institutional innovation and the implications of property rights, efficiency and equity in agricultural policy.
2.2.2.1 A model of induced technical change in agricultural transformation
Technical change is defined as any change in production coefficients resulting from the purposeful resource-using activity directed to the development of new knowledge embodied in designs, materials, or organizations (Hayami and Ruttan 1985, p. 86). This definition is similar to the approach of Hicks (1963). According to Hicks’s definition, technical changes developed to facilitate the substitution of other inputs for labour “labour-saving” and ones developed to facilitate the substitution for other inputs for land “land-saving”.10 In addition, technical changes such as new husbandry practices or new varieties of seeds are not themselves substitutes for labour or land, but they are inputs,
10 See Hicks, ‘The Theory of Wages’ (1963), Hayami and Ruttan (1971 and 1985) for further details of
which behave as catalysts to assist the substitution of the relatively scarce factors for the less scarce factors. Hicks (1963) argues that rising wages motivate labour-saving innovations. In agricultural economics, Hayami and Ruttan (1971 and 1985) further contribute to the development of theories related to technical change.
Figure 2.2 The Hayami-Ruttan model of induced technical change in agriculture
Source: Hayami and Ruttan (1985)
The model of induced technical change in agriculture is described in Figure 2.2. There are two phases in this model. It is assumed that the transformation from phase 0 to 1 causes the scarcity of labour relative to land in the agricultural sector, leading to the decline in land rent relative to wage rates. In addition, the model assumes that the price of technical change reduces relative to the wage rate for labour because it is facilitated from industry. As can be seen in Figure 2.2, represents the innovation possibility curve at phase zero. It is the envelope of less elastic unit isoquants that correspond. captures a technical change, which is applied when the price ratio prevails. The point P
in the model is defined as the minimum cost equilibrium point with a certain optimal combination of land, labour and nonhuman power to operate technical change. In this simplified model, technical change can be machinery or organizational changes in farm cultivation. Assume that machinery is substituted for labour in response to a change in wages. The change in the price ratio from BB to ZZ results in the technical
Io* I0 I0* I0 I1* I1 B B Z Z land labour T ec hni cal c hange P Q
change represented by . This change enables a farm labourer to work on larger land areas and use more technical change, for instance, machinery.
Figure 2.2 illustrates the trade-off between labour and land if there is an effect of technical change in agricultural transformation between phases in the industrialization process. The increase in wage rates, due to the shortage of labour as a result of economic structural transformation, induces invention and technical change, which in turn facilitates farm workers to cultivate a larger farmland. When the relative price of labour shifts from BB to ZZ, a new isoquant is chosen, which implies that a less labour and more land-intensive technique is selected. Thus, the model suggests that mechanization can substitute the shortage of labour workers, as shown in the Fei-Ranis model. Nevertheless, this model is not able to explain why East Asian countries such as Japan, Taiwan and Korea failed to expand farmland and transform the agricultural sector successfully during their industrialization. Ruttan (1981) successfully tested the model against the agricultural development experience of France, Great Britain, Germany and Denmark. Regarding the microeconomic version of the induced theory of technical change, Acemoglu (2001) further provides a microeconomic basis for the induced innovation theory. He argues that while the effect of factor prices induces technical change in order to raise the agricultural productivity of the scarcer factor, the growing market effect also induces changes to be geared toward improving the productivity of the more abundant factor of production.
2.2.2.2 A model of induced institutional innovations in agricultural transformation This section continues a discussion on the theory of induced institutional innovations in the Hayami-Ruttan model, including the implications of property rights on efficiency and equity in agricultural policy. According to the model, the shift in the demand for institutional innovation is induced by changes in resource endowments and by technical changes. Institutions are defined as the rules of a society, or of organizations, that facilitate coordination among people by helping them form expectations, which each person can reasonably hold in dealing with others (Hayami and Ruttan 1985). This chapter focuses on property rights and the market institutions that are relevant to the analytical framework of the thesis.
According to the Hayami-Ruttan model, the development of new forms of property rights and more efficient market institutions may satisfy the demand for institutional innovations. The model finds that changes in factor endowments, technical changes, and
the growth in demand, induce changes in property rights and contractual arrangements to enhance more efficient resource allocation through market. Moreover, it shows that assigning more complete private property rights on land or other assets, is an institutional innovation that facilitates the allocation of land more efficiently. The land reform law that gives tenants stronger protection of their tenancy rights is a key such innovation. More interestingly, the model points out that institutional innovation increases efficiency at the expense of equity. On the contrary, institutions increase equity at the expense of efficiency.
There are several studies on the role of land tenure security on economic growth and agricultural development (Deininger and Feder 2009; Basley 1995; Brasselle et al. 2002; Fenske 2011). Secure property rights to land and well-functioning land markets are important in creating investment incentives, improving land allocations, developing financial markets, and increasing farm households’ participation in off-farm labour markets (Deininger and Feder 2009). Moreover, the level and likelihood of land conflicts may decline when land rights are more secure (Fenske 2011). These studies support the Hayami-Ruttan model’s view on institutional innovations
However, the agricultural transformation experience in East Asia in particular, and in other land-poor countries in general has been different, particularly in light of increasing part- time farming. These countries have maintained smallholder agriculture such as small farms and highly fragmented landholdings during their industrialisation and modernisation periods (Otsuka 2013). The average farm sizes showed no increase during the period of rapid economic growth in Taiwan where there are strongly protected tenancy rights (Bain 1993). Japan and Korea also seem to have experienced a similar pattern. Land constraints such as small and fragmented landholdings hinder mechanization in agricultural production in land-poor countries (Otsuka and Estudillo 2010). Although the Hayami- Ruttan model does not provide a comprehensive model of agricultural change in East Asia, it supports a framework to improve agricultural productivity. This can be achieved through the capacity to produce an ecologically adapted, and economically viable, agricultural technology in each country and region. The model also shows that the expected returns to political leaders from institutional changes that facilitate the opportunity to exploit technical change are key inducements to institutional innovations (Hayami and Ruttan 1985). The next section further explores the evolutionary changes of agricultural development in land- poor countries, particularly in Asia.
2.2.3 Agricultural problems and the evolutionary process of agricultural