Macro Prices and Structural Change

Abstract

The role of macro price policy-foreign exchange rates, interest rates, wage rates, and, indirectly, the rural-urban terms of trade (or prices, for short)-in influencing the rate and composition of structural change in an economy has been emphasized recently as a major component of agricultural and food policy (Timmer, Falcon, and Pearson), but empirical measurement of factors influencing structural change has largely ignored these price variables. The classic study by Chenery and Syrquin, for example, measured economic structure by the size of agriculture's share in gross domestic product (AGSHR)-the same as in this study-but it contained only income and country size as explanatory variables. Although this may make sense in a world where basic price relationships among capital, labor, food, and energy remain more or less constant, the 1970s have seen sharp swings in these relationships. In fact, the two oil price shocks of the 1970s offer an opportunity to model a major perturbation as it ripples through the macroeconomy and into the agricultural sector. No other single macroeconomic event in recent history has so opened windows of opportunity for understanding cause-and-effect relationships between the food and agricultural sector and basic macro price variables. The adjustment of the agricultural sector to higher energy prices reflects the net and often-conflicting pressures from both the farm and household micro adjustments and the macro adjustment processes. Not surprisingly, the empirical experience from 1960 to 1980 of the seven Asia-Pacific developing countries analyzed in this paper reflects drastically different agricultural sector adjustments.' The model and empirical specification used here permit such diversity. Energy prices affect the process of structural change primarily by altering the relative terms of trade between the agricultural and nonagricultural sectors of an economy. This effect is caused mostly by macroeconomic pressures on the balance of payments and foreign exchange rates in the face of changed energy prices. As Schuh suggests, agriculture tends to produce a relatively large share of tradable goods and services, and thus energyxporting countries usually face a deterioration of the rural-urban terms of trade when oil prices rise. This causes a more rapid decline in agriculture's share in gross domestic product (GDP) than would be expected on the basis of the Chenery-Syrquin analysis. Oil-importing countries, on the other hand, should see improved rural-urban terms of trade and a relatively healthier agriculture sector when oil prices rise. Their agriculture sectors' shares in GDP should not decline as rapidly as in the Chenery-Syrquin model.