EXPLAINING GROWTH IN DUTCH AGRICULTURE: PRICES,
PUBLIC R&D, AND TECHNOLOGICAL CHANGE
Abstract
This paper analyzes the sources of growth of Dutch agriculture (arable, meat, and dairy sectors).
Because the time series data (1950-1997) are non-stationary and not cointegrated, it is argued that a
model estimated in first differences should be used. Estimated price elasticities turn out to be very
inelastic, both in the short-run and the long-run. The direct distortionary effect of price support has
therefore been rather limited. However, price support has an important indirect effect by improving the
sectors investment possibilities and therewith the capital stock. Public R&D expenditure mainly
affected agriculture by contributing to yield improvement therewith favoring intensification of
production.
Keywords: growth, technology, cointegration, non-stationarity, agricultural policy
JEL classification: Q18 Agricultural Policy; O13 Agricultural development
Introduction
From evidence over the period 1967-1992 including 130 countries, it appeared that 50 percent of
the world food production was produced in countries whose growth rates exceeded 2.25 percent,
whereas the remaining half was produced by countries with lower, but usually still positive growth
rates (Mundlak, 2000, 3). Countries with large agricultural production belong to the category of
economies with the relatively high growth rates. Agricultural output growth is often connected with
distortive agricultural policies, in particular with price support. Whereas nominal prices usually
increased over time, however, more than 70 percent of world production was produced in countries
where the real product prices fell (Mundlak, 2000, 3).
Growth in agricultural trade exceeds output growth. Periods of slowdown in the growth of
agricultural trade, like happened in 1980s and again in the late 1990s intensify the debate about the
degree of distortion of the agricultural policies of the WTO member states. High producer prices and
the general absence of production controls in Europe have been of particular concern to the United
States as the EU, at the cost of substantial export subsidies, emerged to a net cereals exporter (Bouchet
et al 1989). With the Uruguay Round agreement on agriculture, the trade conflicts between the main
world exporters seems to have been balanced, but with the new Doha Round now going on, still there
remain two fundamentally different views on the sources of growth in EU agriculture. According to
the European view, output growth resulted mainly from ‘autonomous’ factors like technological
change and structural policies. In this perspective price support has not been very distortive, and
reducing price support can only have a limited impact on output. According to the alternative view,
held by the US and the CAIRNS group, growth has been created by artificially high prices. As a
consequence, EU agriculture is seen as cost-noncompetitive. Reducing the price support is expected to
have large effects on the EU’s agricultural output, investment and input use. With the MacSharry
reform (1992) and the acceptance of de-coupling in the Midterm Review (2004) the EU gives in and
reduces its distortive price support.
Bouchet et al (1989) tried to address this issue of conflicting views on the EU’s growth of
agricultural output by evaluating the long run changes (1960-84) in French agriculture. Their results
suggest that technological change is the dominant factor explaining output growth. Moreover, they
find that output is price responsive, but more so in the long run than in the short run, but that price
responses are inelastic, even when capital and (family) labor optimally adjust. A similar result was
found by Lopez (1985), who analyzed the short, intermediate and long-run supply responses of the
Canadian food processing industry. The weakness of the Bouchet et al (and Lopez) paper is not their
methodological approach, but rather their ignorance of non-stationarity in the data, which since the