Biased technical changes

Equations (6.2) describe the constant-price effects of a technical change which substitutes capital for labour with no increase in output. Recent Philippine examples of this type of change include the mechanisation of land preparation (Sison, Herdt and Duff 1985; McCoy 1983) and of rice threshing (Hayami and Kikuchi, 1981; Smith and Duff 19846); and ‘direct seeding’, which is the substitution of herbicides for crop establishment and weeding labour when the rice crop is established by broadcasting seed instead of transplanting (Coxhead 1984; Moody and Cordova 1985; Erguiza etal. 1989).

Table 6-14, column 2 summarises the total change in each variable from both the resource movement and spending effects for a labour-saving, capital-using shock. The substitution of capital for labour in sector 1 results in a real wage decline of 1.69%, in spite of the substitution of labour for capital in all other sectors. Sectors facing elastic demand for their output (1,2 and 4) benefit from falling wages and their outputs rise

6Smiih and D uff’s study claims that the switch from hand to machine threshing in rice results in an increase in output per farm. What their data actually show, however, is a redistribution of gross rice output away from hired threshing labour and "gleaners" (who collect residual grain from hand-threshed rice stalks) and towards the farm operators themselves.

Table 6-14: Production and price effects of neutral and non-neutral technical change shocks in sector 1

E n d o g e n o u s V a ria ble F a cto r- N e u tra l ( 7 / = 10.0) (1) L a bo ur-sa vin g , C apital-using (A / = 10.0) (2) L a b o u r-u sin g , L a n d -sa v in g ( A / = 10.0) (3) L a b o u r d e m a n d A g ricu ltu re 1 2.65 -9.21 18.51 A g ricu ltu re 2 -0 .4 6 0.19 -0.77 S ervices 1.35 1.71 -2.51 M an u fa c tu rin g -2.77 2.80 -6.24 C a p ita l d e m a n d A g ricu ltu re 1 3.35 14.08 7.66 A g ricu ltu re 2 -0 .1 2 -0.27 0.12 S erv ices 3.87 -1.35 1.18 M an u fa c tu rin g -3 .3 4 -1.84 -2.37 O u tp u t A g ricu ltu re 1 11.99 0.67 7.31 A g ric u ltu re 2 -0 .4 2 0.18 -0.70 S ervices 3.40 0.59 -1.30 M an u fa c tu rin g -3.68 0.84 -5.43 R e a l P r ic e s a L ab o u r 0 .9 4 -1.69 5.12 C ap ital 0.47 0.22 2.64 S ervices 4 .1 0 -0.18 2.58 F ix ed fa c to r 1 16.46 1.61 -10.00 F ix ed fa c to r 2 -6.79 1.52 -7.72 F ix ed fa c to r 3 11.96 1.44 -0.88 F ix ed fa c to r 4 -11 .4 7 1.75 -13.80 R e a l G D P 1.21 0.63 -1.75 R e a l h o u s e h o ld in c o m es L abo urers 2.49 -1.74 5.85 U rban 3 7 .2 4 1.14 -0.75 U rban 4 -9 .1 6 1.14 -9.80 L an d lo rd s 1 7 .9 0 0.95 -4.20 L an d lo rd s 2 -3 .7 4 1.01 -3.68 F arm ers 1 6.26 0.04 -0.10 F arm ers 2 -0 .6 9 -0.07 0.21

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slightly. Sector 3’s output rises by a similarly small amount (0.59%), but the price of its output falls - a real depreciation. In spite of this the spending effect ensures that real returns to the services-specific factor rise almost as fast as returns to other specific factors.

Households owning only labour lose from the labour-saving change: their real incomes fall by 1.74%. Farmers in sector 2 also derive much of their income from

labour, and - since they do not benefit as landowners from the boom in sector 1 - their real incomes fall slightly. Households not dependent on labour experience small rises in real income. For sector 1 farmers, the gains from rises in land returns just offset losses in their labour incomes. Since labourers and small farmers comprise most of the low-income families in the Philippines, a labour-saving, capital-using technical change bias must lead to a worsening of income distribution. The testing of this result on actual household data - in a general equilibrium framework - is a topic for further research.

The second non-neutral component of technical progress considered in Table 6-14 is that in which labour is substituted for land. Declining per capita availability of arable land in the Philippines has spurred the adoption of a range of technologies which economise on its use. Irrigation and high-yielding grain varieties rely on substantial increases in the per hectare inputs of both labour and intermediate goods. The Philippines’ recent economic circumstances have generated considerable interest in innovations which tend to increase the input of labour per unit of land by much more than any other input: primary among these are multiple cropping and intercropping (IRRI 1983).

Column 3 of Table 6-14 reports total changes in price and quantity variables following the labour-using, land-saving shock described by equations (6.3). The results show a large increase in sector 1 labour demand. Since both mobile factors are

complementary with land and the effective land area has been increased by the shock, capital demand in sector 1 also rises. Real wages increase greatly relative to capital’s price (the difference is 2.48%), and real returns to fixed factors are greatly reduced. Together, these results ensure a strongly positive effect on the distribution of income, given that labourers and small farmers are the poorest household groups in the economy. Labourers’ real incomes rise by 5.85%, and those of small farmers in the lagging sector by 0.21%. (By implication many farmers in sector 2 derive considerable additional income as labourers in sector 1 farms.) The incomes of urban households and landlords fall by up to 10%. An increase in the endowment of any specific factor reduces the returns to all specific factors.

The redistribution of income from landlords to labourers within sector 1 following land-saving, labour-using technical progress is predicted by most single-sector or partial equilibrium models of agricultural growth in which demand for agricultural goods was inelastic (for an example, see Ahammed and Herdt 1983). An important side-effect of the sector 1 changes would not, however, be captured without explicit modelling of distinct agricultural regions and/or intersectoral linkages. This is the dramatic fall in returns to land in sector 2, which results in a real income decline of 3.68% for landlords in that sector.

Parenthetically, the negative change in real GDP (-1.75%) from a labour-using, land­ saving technical change bias implies immiserising growth, which may appear paradoxical in a "textbook" neoclassical economy with no market distortions (Bhagwati 1968; Corden and Neary 1985, p.227). It is important to remember that the technical change shock in this experiment involves the substitution of one factor (land) for another (labour) with no change in the overall sectoral rate of technical change, Tx\ Since the model is linear in percentage changes, the combined effects of growth and land-saving bias can be obtained by adding the values of changes in variables from a neutral technical progress shock to those from the land-labour substitution shock. Naturally the actual figures obtained in this as in other experiments reflect the assumptions made on factor supply, product demand, factor substitution and length of run.