Externalities and labor market linkages in a dynamic twosector model of tropical agriculture

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Externalities and labor market linkages in a
dynamic two-sector model of tropical agriculture
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Motivation

• Upland agriculture
• low input (labor is limiting resource)
• low income (few assets, limited opportunities)
• erosion (outcome of cultivation on steep fields)
• deforestation (land clearing as a way of life)
• Lowland agriculture
• shift from rainfed to irrigated production
• initial (and sustained) boom in the labor
  market
• sedimentation of irrigation canals a problem
• Labor market linkage
• upland households work on lowland farms
• labor market a vehicle for environmental
  improvements
• dynamic externality in feedback form

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Two part story

• Empirical storywhat happens in the uplands
  when lowland farms become irrigated?
• Conceptual storywhat is the dynamic
  relationship between externality-generating and
  externality-receiving sectors?

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Upland Activities
Forest Clearing
CropProduction
Off-farmEmployment
In equilibriumupland households should equate
returns across activities
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Empirical analysis based on panel data
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Empirical story observed changes

• Changes in lowland production
• rainfed to irrigated production
• increases in yields and incomes
• increase in cropping intensity (1.04 to 1.91)
• rise in labor demand (18 to 40 days/ha/yr)
• increase in rate of pesticide use
• increase in use of tractors
• no substantial labor shedding, but large shift
  from family to hired labor

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Empirical story observed changes

• Changes in upland activity
• increase in labor market participation
• increase in incomes
• reduction in cash crop (corn) production
• increase in rate of pesticide use
• reduction in forest clearing ( and area)

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Conclusions from empirical study

• 1. Lowland irrigation has increased labor use
  about half of the labor comes from the uplands
• 2. Net sellers of labor gain from lowland tech
  change
• 3. Upland households with off-farm employment
  deforest less and farm less, they also appear to
  be intensifying production via external inputs
• but
• 4. Nearly half of lowland farms report sediment
  problems in the irrigation canals

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Part two

• simulation over time
• link representative upland and lowland farms
• state variable sediment
• wage clears labor market

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Structure of the model
upland farm labor
on-farm production
off-farm production
erosion and sedimentation
lowland farms
reduction in productivity
wages to upland households
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Model

• Three blocks of equations
• upland households
• lowland households
• erosion externalities
• Endogenous variables
• labor supply, wage, erosion, yields
• upland and lowland incomes

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Logic

• wage depends on labor productivity in lowlands
• labor productivity depends on sedimentation
• erosion rate depends on upland activities
• upland activities depend on wage
• higher lowland productivity and higher wage leads
  to less upland production and therefore higher
  lowland productivity

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Logic of model (continued)

• Downward trajectory
• upland production ? ? sedimentation
  ?
• sedimentation ? ? lowland
  productivity ?
• lowland productivity ? ? lowland wage
  ?
• lowland wage ? ? upland
  production ?
• Upward trajectory
• wage ? ? upland production ? ?
  erosion rate ?
• erosion rate ? ? lowland productivity ? ?
  wage ?

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Outcomes over time
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Impact of wage premium
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Impact of wage premiumin the presence of
externality
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Locus of yields and wages over time
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Conclusions from simulation

• Erosion, sedimentation rates, and lowland
  productivity depend on off-farm employment for
  upland farmers
• Wages depend on upland erosion rates
• No apparent steady-state wage
• Higher wages may lead to higher incomes due to
  the indirect impact on erosion reductions
• Value of a wage premium depends on the severity
  of the externality problem

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Some policy implications

• Potential solutions to upland problems may be
  found in the lowlands. This is important when
  technology transfer is costly or difficult.
• The market may not necessarily internalize the
  external benefit of higher wages. Role for
  policy.
• Wage increases can be self-reinforcing.
  Efficiency based criteria may support
  redistribution from those who are affected by
  pollution to those who pollute.
• Possible alternative to polluter pays.