The Economics of Research and Development in Agricultural Technology

Senior Fellow, RIETI

The Ministry of Agriculture, Forestry and Fisheries recently drew up its "Basic Plan for Agriculture, Forestry and Fisheries Research" based on the new "Basic Plan for Food, Agriculture and Rural Areas." In addition to citing the social contributions that the research should strive to make, such as boosting competitiveness and ensuring the steady development of Japan's agriculture, forestry and fisheries industry; securing food safety and public trust in the food supply; and realizing a healthy diet, the plan also outlines priority targets such as improving productivity and sustainable development, developing high-quality products and foods that match market needs, and conducting research and development on such issues as food safety.

These proposals come at the right time and as a layman in the area of technology, I cannot help but imagine how strong the agriculture, forestry and fisheries industry will become once the items listed in the plan are realized. However, upon calm consideration, it is hard to envision that researchers, as well as officials at the Ministry of Agriculture, Forestry and Fisheries, who basically follow past precedents, have suddenly turned over a new leaf. It is more than likely that similar objectives were included in previous documents such as "basic research goals." Even in documents concerning agriculture policy itself, phrases such as "increasing farming scale," "reducing costs," and "boosting international competitiveness" have been around for decades but have yet to be realized. Similarly, we have yet to see the emergence of an agriculture, forestry and fisheries industry that embodies advanced technologies. Why?

Contradictions in agriculture policy and confusion in technology development

A major reason for the lack of progress is confusion in the research and development of technology due to contradictions among farm policies. For example, if international competitiveness is to be boosted, the prices of farm produce must be slashed. Some ¥1 trillion in projects to preserve and maintain farmland and other agricultural resources have been implemented annually to maintain farmland owned by private farmers, with the farmers themselves shouldering just 10% of the cost. Since 1950, the grounds for carrying out farmland maintenance, which is in essence private investment, as public works projects has been that it helps to cut costs, to bring down prices of agricultural produce, and to benefit consumers.

On the other hand, the Ministry of Agriculture has continued to raise the producer rice price under the Food Control System, and since 1970 (even after the system's abolition) have spent ¥6 trillion on production adjustment and more than ¥3 trillion to dispose of excess rice so as to prevent the rice price from falling. The expansion of farm size by accumulation of farmland would lower costs. Because it is cheaper, even for small-scale part-time farmers whose production cost is high, to grow rice rather than buy it if rice prices are high, however, they have not sold or leased their land, which means full-time farmers have not been able to increase their scale. Also, because the unit cost of farm produce is determined by dividing cost per unit area by the yield, if the denominator (i.e., yield) increases, costs decline. However, because an increase in yield through means that lower the cost of growing rice such as improvement of varieties leads to more farmland for production adjustment, such innovation has been discouraged. Rice, which until 1953 was less expensive in Japan than in international markets, is now protected by a tariff of 490%. Although agricultural policymakers themselves have cited the need to boost international competitiveness, they have been implementing policies that have the opposite effect.

One goal of agricultural infrastructure maintenance projects to boost productivity has been to shorten farmers' working hours. The latest basic plan also lists among its targets the reduction of working hours through the development of no-till planters. Is technological development designed to shorten working hours sufficient for rice production, which has fallen behind in structural reforms and where "enhanced competitiveness through higher productivity" is most necessary? Even if the number of hours spent in the fields were to be reduced for full-time farmers, in a situation where they cannot accumulate farmland, this would only translate to more idle time with no increase in farming income. It thus appears that the idea of boosting yield for rice is still a taboo. It is obvious that while aiming to improve competitiveness, contradictions in agricultural policies have militated against the development of technology that would help achieve that goal.

Also, because the "Basic Plan for Food, Agriculture and Rural Areas" says that in order to boost food self-sufficiency there should be a 49% increase in the production of feed crops, rather than an increase in production of wheat and soybeans, it calls for the cultivation of high-yield rice varieties of feed rice. In order for feed rice to be grown, however, not only must it be more advantageous for livestock farmers than imported enriched feed in terms of cost, it must also be more profitable than rice grown for human consumption (profits: units produced × unit price - cost). If the cost is the same, high-yield rice strains would boost the amount of rice produced and would be a step toward achieving this goal, but unless the price of rice for human consumption also falls considerably at the same time (a decline in the price gap between rice for food and feed rice), rice farmers will not consider growing feed rice. This is another reason why the production adjustment policy must be abolished. In other words, agriculture will not improve if technological development is pursued without any improvement in agriculture policy itself.

The objectives of economic policy and selection of appropriate technologies

In order to translate the economic policy objective of boosting international competitiveness into a target for science and technology, it must be shown from the standpoint of economics which of the numerous technologies available is necessary to realize that policy. To illustrate, when we say we must prevent global warming, we must show which policy option (e.g., improving the fuel efficiency of automobiles or promoting the use of nuclear energy) is more cost effective and efficient for our country given the limited resources we have. Similarly, when we say we want to boost the international competitiveness of agriculture, we must show what sort of technology development is most effective and efficient given the constraints our country faces - whether we want to boost the productivity of capital, labor or land. No economic policy matter can be decided without taking into account such constraints as gross domestic product, public finances and land factors. Economics is thus indispensable for technological development. So long as the Ministry of Agriculture, Forestry and Fisheries operates as an economic policy-planning agency, people who understand economics must be on its Agriculture, Forestry and Fisheries Research Council.

What sort of technologies should be promoted in order to boost the international competitiveness of Japan's farming sector? The point of the Heckscher-Ohlin theorem, one of the most basic theories in international economics, is that a country has a comparative advantage in the goods that it produces (intensively uses) by making use of the production factor in which it is relatively abundant, and has a comparative disadvantage in goods utilizing factors of production that are relatively scarce.

Generally speaking, agriculture makes intensive use of the production factor called land. Therefore, according to the Heckscher-Ohlin theorem, Japan, which is relatively poor in terms of land resources, cannot have a comparative advantage in agriculture. This is the economic explanation for why countries with an abundance of land such as the United States and Australia are farm produce exporters while Japan is an importer. However, this theorem presupposes that each country has identical technology. If Japan were to create a miracle technology that could transform agriculture into an industry that was not land-intensive, Japan could become a farm produce exporter. Even without such a breakthrough, if there were some technological advances unique to our country, where land is relatively scarce and capital is relatively abundant, such as an increase in yield through improvement of varieties, it would be possible to reduce the degree of our comparative disadvantage in agriculture. This is the sort of technological development that is necessary if Japan's agriculture is to become more internationally competitive. However, because the issue of boosting the yield of rice has long been viewed as a taboo, the yield of California-grown rice is now 30% higher than that grown in Japan. Due to the contradictory agricultural policies mentioned above, we are seeing the exact opposite of the technological development that leads to greater international competitiveness.


I would like to conclude by expressing my concern that the items cited in the basic plan try to please everyone. By seeking to hit multiple birds with one stone, we risk missing them all. Although I do not think this is the case with the latest plan, it would be getting things backwards if administrators drew up their plan based on the approach that "Technologies X, Y, and Z are needed because we now have researchers and research institutions specializing in these areas working for us."

Also, why not utilize the concept of modularization as a research structure for technology development in the agriculture, forestry and fisheries industry? Modularization is an organizational procedure that makes it possible to construct complex products and operational processes by breaking down and encapsulating the work into smaller specialized sub-systems under comprehensive design rules that unify the whole. In today's era of rapid technological innovation, the development of new technologies holds the key to the success of a project. However, technological innovation comes with huge uncertainties, and the potential for success is greater if several modules compete with one another to develop technologies rather than staking everything on a single technology. Modularization would also make it possible to concentrate research resources in line with the specific policy needs that crop up.

It seems that agricultural policy has seen more failure than success in the area of economic policy, but I believe that it has achieved high levels in terms of technology. I therefore continue to have high expectations for the future of technological development in Japanese agriculture.

>> Original text in Japanese

* Translated by RIETI.

June 15, 2005 The Shukan Norin

July 7, 2005

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