Explaining Growth in Dutch Agriculture: Prices, Public R&D, and Technological Change



Some analysis was done with respect to the relative contribution of the explanatory variables in
the evolution of agricultural outputs. The normalized arable price increased by 13 percent over the 44-
year period 1950-53 till 1994-1996, but contributed only to a 0.14 percent increase in arable output.
As compared to the other explanatory variables, the (normalized) own price increase for arable
products explained about 0.2 percent. The remaining 99.8 percent of explained arable output growth
was accounted for by the other variables. Similar percentages were found for meat and dairy output.
Looking to the average own price contribution to output growth its relative contribution is less than
3%, with thus 97 percent of the explained output growth accounted for by the other explanatory
variables. It are the quasi-fixed variables rather than (relative) prices which are explaining output
growth. Strange enough the contribution of research and development expenditure is negative for
arable and meat. However, when combining research and development and the capital stock, into an
effective or quality-corrected capital contribution (embodied technical change) the impact on output
growth in the arable, meat and dairy sectors is 27%, 23% and 124% respectively.

Conclusions

In this paper a restricted dual profit function approach is used to get insight into which are the
factors (prices, quasi-fixed factors, public R&D expenditure) which explain the growth in agricultural
output for the arable, intensive livestock and dairy sector in the Netherlands. The analysis is based on
aggregated time series covering the period 1950-1996. Because these series, even after normalization
appeared to be non-stationary, the standard approach of estimating the profit system in levels, as was
for example applied by Bouchet
et al (1989) and Oskam (1992), is no longer valid. In this paper
estimation was in first differences, which solved the time series non-stationarity problems. It is found
that the supply of arable, intensive livestock (meat) and dairy products are price responsive, but the
response of output to price changes appears to be highly inelastic. As such our results support the
conclusion drawn by Bouchet
et al (1989: 292) that the persistence of high support prices due to the
EU’s common agricultural policy (CAP) has only slightly increased agricultural output as compared to
a no-price support policy. As a consequence no big downward adjustments in output have to be
expected from policy reforms which decrease price support (
viz. MacSharry reform, 1992 and Agenda
2000, 1999) or aim for de-coupling (Midterm Review).

However, with price support having only a small direct effect, it is argued that there is likely to be
a significant indirect effect. This indirect effect goes via the relatively increased revenues due to price
support, which lead to increased savings and subsequently to increased investments. These
investments have a significant impact on productive capacity and the growth of this capacity. In
general there seems no reason to believe that when price support is replaced by direct income
payments, this mechanism of using ‘surplus’ profits for investments in the capital stock will change.
The origin of these ‘surplus profits’,
viz. whether they come from coupled or decoupled payments is
not likely to have much impact.

Although the capital stock is subject to depreciation, this ‘capacity’ impact of price support seems
to have a kind of a ‘rachet-effect’. Once done, investments keep their impact on agricultural output,
even under adverse market conditions. The over time increase of the capital stock helped to meet the
resource endowments of the Netherlands, where labor costs are relatively high and land is relatively
scarce. Investment in the capital helps to ease the labor and land scarcity, and by contributing to high
labor and land productivity growth rates, it sustained the competitive position of Dutch agriculture.
The relatively high and increasing labor productivity outside agriculture creates a continuous pressure
on agriculture to also cope with this non-agricultural productivity increase. Therewith agriculture can
secure some kind of income parity, or at least avoid falling behind the general income evolution in the
Dutch economy.

Public research and development (R&D) expenditures appear to affect agricultural output mainly
by influencing biological or genetic progress. This leads to a (price-independent) increase in crop
yields and milk output per cow. To realize the improved biological potential increased amount of
variable inputs (fertilizer, feed) are required. As a result production has become more intensive in
these inputs as would have been the case when the government would not have supported research and

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