INSTITUTE OF DEVELOPING ECONOMIES

IDE Discussion Papers are preliminary materials circulated

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IDE DISCUSSION PAPER No. 300

The Rise and Fall in the Price of Food, Fuel and
Manufactured Goods: Interdependency between
Prices and Technology Determining Comparative
Advantages and Development Paths
Tatsufumi YAMAGATA* and Yoko ASUYAMA**
June 2011

Abstract
Green innovation, which enables us to extract energy from food crops, caused a food
shortagein2008.Countriessufferingseveredamagestartedtoreconsidertheiragricultural
policywiththeaimofbecomingmoreautonomous.Thefoodpricehikeofthetimelooks
like a reversal of the celebrated SingerPrebisch thesis proposed in the 1950s. This paper
examinestheconsequencesofthistrendonthecomparativeadvantagesanddevelopment
strategiesofdevelopingcountries.Forthatpurpose,first,trendsandshortrunfluctuations
inthepricesoffuelandbioenergycropsareinvestigated.Itisshownthatthepriceseries
offuelsandthecropsaresynchronizedonlyafterthefuelextractingtechnologycameinto
effect.Second,thereversaloftheSingerPrebischthesisisunderpinnedbythegenericform
of an endogenous growth model developed by Rebelo (1991). It is shown that as an
economygrows,appreciationofthenonreproducible,suchasmineralresourcesandraw
labor, over the reproducible, such as capital goods, is the norm rather than an anomaly.
Third,theconsequencesofthefoodpricehikeandunderlyingcapitalaccumulationonthe
development strategies of laborabundant and lowincome countries are explored. It is
concluded that the impact of the food price hikes on the alteration of a development
strategy is only incremental, without reinforcement from rawlaborsaving innovation. A
case study of inventions by JUKI Corporation, a worldleader in the sewing machine
market exemplifies the fact that, of all the major inventions the company have made,
rawlaborsavinginventionshavenotdominated,althoughJUKIsmachinesaresoldtoone

ofthemostrawlaborintensiveindustries.

Keywords: Bio-energy, Singer-Prebisch thesis, directed technical change, development

strategy
JEL classification: O13, O33, O40, Q32, Q42
* Deputy Director-General, Development Studies Center, IDE (tatsufumi_yamagata@ide.go.jp)
** Poverty Alleviation and Social Development Studies Group, Development Studies Center, IDE
(Yoko_Asuyama@ide.go.jp)

The Institute of Developing Economies (IDE) is a semigovernmental,

nonpartisan, nonprofit research institute, founded in 1958. The Institute
merged with the Japan External Trade Organization (JETRO) on July 1, 1998.
The Institute conducts basic and comprehensive studies on economic and
related affairs in all developing countries and regions, including Asia, the
Middle East, Africa, Latin America, Oceania, and Eastern Europe.

The views expressed in this publication are those of the author(s).

Publication does

not imply endorsement by the Institute of Developing Economies of any of the views
expressed within.

INSTITUTE OF DEVELOPING ECONOMIES (IDE), JETRO

3-2-2, WAKABA, MIHAMA-KU, CHIBA-SHI
CHIBA 261-8545, JAPAN

2011 by Institute of Developing Economies, JETRO

No part of this publication may be reproduced without the prior permission of the
IDE-JETRO.


TheRiseandFallinthePriceofFood,FuelandManufacturedGoods:
InterdependencybetweenPricesandTechnologyDeterminingComparative
AdvantagesandDevelopmentPaths*

TatsufumiYamagataandYokoAsuyama
InstituteofDevelopingEconomies,JETRO

March2011

Abstract
Greeninnovation,whichenablesustoextractenergyfromfoodcrops,causedafoodshortagein2008.
Countries suffering severe damage started to reconsider their agricultural policy with the aim of
becoming more autonomous. The food price hike of the time looks like a reversal of the celebrated
SingerPrebischthesisproposedinthe1950s.Thispaperexaminestheconsequencesofthistrendonthe
comparative advantages and development strategies of developing countries. For that purpose, first,
trendsandshortrunfluctuationsinthepricesoffuelandbioenergycropsareinvestigated.Itisshown
that the price series of fuels and the crops are synchronized only after the fuel extracting technology
cameintoeffect.Second,thereversaloftheSingerPrebischthesisisunderpinnedbythegenericformof
an endogenous growth model developed by Rebelo (1991). It is shown that as an economy grows,
appreciationofthenonreproducible,suchasmineralresourcesandrawlabor,overthereproducible,
suchascapitalgoods,isthenormratherthanananomaly.Third,theconsequencesofthefoodpricehike
andunderlyingcapitalaccumulationonthedevelopmentstrategiesoflaborabundantandlowincome
countries are explored. It is concluded that the impact of the food price hikes on the alteration of a
developmentstrategyisonlyincremental,withoutreinforcementfromrawlaborsavinginnovation.A
casestudyofinventionsbyJUKICorporation,aworldleaderinthesewingmachinemarketexemplifies
thefactthat,ofallthemajorinventionsthecompanyhavemade,rawlaborsavinginventionshavenot
dominated,althoughJUKIsmachinesaresoldtooneofthemostrawlaborintensiveindustries.

Keywords:Bioenergy,SingerPrebischthesis,directedtechnicalchange,developmentstrategy

ThispaperwaspresentedattheERIAIDEUNIDOExpertGroupMeetingGreenEconomy,Sustainable
Innovation,andStructuralChange:ChallengesandOpportunities,inJakartaonMarch78,2011.

I.Introduction

Aninnovationmaydrasticallychangesubstitutabilityandcomplementarityamong

commodities.Therecentdevelopmentoftechnologytoextractenergyfromsomegrainsandplantsis
oneexampleamongmany.Someediblecrops,suchasmaize,sugarandrapeseed,withethanolbeing
extractedfromthem,becamegoodsubstitutesforpetroleum,coalandnaturalgas.Itisnotablethatthe
additionaldemandforcropsforenergybroughtaboutahikeintheirpricein2008,aswellasahikefor
othercrops.Netimportersofgrain,suchasIndonesiaandthePhilippines,sufferedfromthehikeand
fromashortageintheirgrains,andsomenetexporters,suchasIndiaandVietnam,imposedexport
restrictionstosecuresufficientfoodfortheircitizens.Thisiscompletelyoppositetothesituation
predictedbyHansSingerandRalPrebischhalfacenturyago.

Thisseriesofchangesinthepricesofgrainhasalreadyaffectedtheallocationofresourcesto

somesectors.ThePhilippinesmovedtowardsareductionintheirdependenceonimportedfoodandan
expansionofdomesticproduction.Ifsimilarinnovationsaremadeinthefuture,theywillinevitably
changethestructureofthecomparativeadvantageofcommoditiesamongcountries,andmay
consequentlyalterthedevelopmentpathsofdevelopingcountries(Figure1).

Thispaperaimstoinvestigatetheimpactoftheinnovationofbiomassfuelonfoodpricesand

theirinfluenceonthestructureofcomparativeadvantageandthedevelopmentpathsofdeveloping
countries.Firstly,comovementsofthepricesofmineralcommoditiesforenergyandcropsforbiomass
fuelareexaminedthroughtimeseriesanalyses.Itisfoundthatbothlongtermtrendsandshortterm
fluctuationbetweenthemineralandbiomassfuelshavenotbeensignificantlyrelateduntilrecently,
whilethecomovementsinthelastfiveyearsareremarkable.

Secondly,acelebratedgrowthmodelproposedbyRebelo(1991),whichisabletoexplainthe

reversaloftheSingerPrebischthesis,isreviewed.Themodelindicatesthattherelativepriceofthe
nonreproducible,suchasnaturalresourcesandrawlaborforce,overthereproducible,suchas
manufacturedgoods,isdestinedtoriseastheproductionofthereproducibleexpands.Accordingtothis
model,theappreciationoffoodandfuelpricesovermanufacturedgoodsisnotatransitorymovement
butanunderlyingtrend.

Thirdly,theconsequencesofthechangesinthepricesofmineralandbiomassfuelsare

discussed.Theconsequencesmaybestaticordynamic,usingtheterminologyofeconomics.Thatis,the
pricechangesmayderivestaticadjustmentofresourceallocationbysectoranddynamicevolution
throughinnovationandfactoraccumulation.Thus,thegreeninnovationenablingthetransformationof
cropsintofuelmightinducefurtherinnovationthatisdirectedbypricechanges.
2

Therestofthepaperisorganizedasfollows.Thenextsectionshowstheevolutionintheprices

ofnaturalandbiomassfuels,whichshowsareversaloftheSingerPrebischthesis.Anendogenous
growthmodel,whichunderpinsthetrendinrelativeprice,isgiveninthethirdsection.Thestaticand
dynamicconsequencesofchangesinthepricesofmineralandbiomassfuelsarediscussedinthefourth
section.Finalremarksaregivenattheend.

II.ThereversaloftheSingerPrebischthesis

Abriefhistoryoftheriseandfallinprices

Inthe1950s,mostcountrieswereyettocompletelyrecoverfromthedamageofWorldWarII

andcolonization.Monoculturewasatypicalfeatureoftheindustrialstructureofdevelopingcountries.
Industrializationandinnovationintheworlddevelopedmanufacturedgoods,someofwhichwere
replacingprimaryproducts.Asymbolicinnovationisthedevelopmentofchemicalproductssuchas
syntheticfibers,rubberandplastic,whichsubstitutedfornaturalfibers,rubber,andwooden,ceramic
andmetalproducts.Seeingthis,RalPrebischestimatedthetrendinthepricesofprimarycommodities
andmanufacturedgoods,andreleasedareportin1949whichstatedthattherewasalongterm
tendencyinwhichthepriceofmanufacturedgoodswouldappreciateincomparisonwiththatfor
primarycommodities(Prebisch[1962]1).HansSingerinterpretedPrebischsfinding,whichfeaturedthe
roleofforeigninvestmentandinnovationinstrengtheningthecompetitivenessofmanufacturedgoods
overthatofprimaryproducts(Singer[1950]).Thisobservationhasbeencriticallyexaminedbymany
researchersanddubbedtheSingerPrebischthesis.2

Inthe1970s,thereweretwooilpricehikes.Thefirstcausedtheappreciationofallother

primarycommoditiesintandem.Thisalmostcoincidedwithariseinconcernaboutenvironmental
pollution,andthescarcityofresourcesbecameahottopic.Sincethen,therehavebeenupsanddownsin
1

ThepaperwasoriginallypublishedinSpanishinamimeographedformin1949.Itwastranslatedinto
EnglishandpublishedbytheEconomicCommissionforLatinAmerica(ECLA).Thisisareprintofthe
paperthatwaspublishedinajournaloftheECLAin1962.
2
Althoughmanyempiricalstudieshavetestedwhetheraseculardownwardtrendinrelative
commoditypricesisobservedaspredictedbytheSingerPrebischthesis,theresultssofarhavebeen
mixed.Forexample,GrilliandYang(1988),LenandSoto(1997),Zanias(2005),andHarveyetal.(2010)
providesomesupportingevidence,whileCuddingtonandUrzua(1989),Cuddington(1992),Kellard
andWohar(2006),Cuddingtonetal.(2007),andGhoshray(2010)castdoubtonthethesis.Itshouldbe
notedthatthesestudiesdifferintermsoftheirmodelspecifications(e.g.whethertheychoose
trendstationaryordifferencestationarycontainingaunitroot,andwhethertheyallowforstructural
breaksornot),theperiodstheycover,andthecommoditiestheyexamine.
3

commodityprices.Oneunderlyingtrendbehindthepricechangeswasinnovationdirectedtoward
scarceresourcesthatneededtobesaved.Suchdemanddriveninnovationscontinue,andthemostrecent
andinfluentialinnovationshaveenabledtheextractionofindustrialenergyfromfoodcrops,suchas
rapeseed,maizeandsugar.

Trendsandfluctuationsintherelativepricesofprimarycommoditiestomanufacturedgoods

Thefirstfocusinthispaperistolookintolongtermtrendsandshorttermfluctuationsinthe

pricesofgroupsofcommodities.

Figures2and3displaytimeseriesofrelativepricesofenergyandnonenergyprimary

commoditiestomanufacturedgoods,respectively.Thepriceofmanufacturedgoodshasincreased
almostmonotonicallysincethe1960s.Exceptfortheperiods19811985and19952002,thetrendlooks
smoothandrisescontinuously.Hence,theupsanddownsintherelativepricesarelargelydueto
changesinthecommodityprices.Bothfiguresshowthattherewerehikesinpriceinbothenergyand
nonenergycommoditiesagainstmanufacturedgoodsinthe1970sandduringthefirstdecadeofthe
newmillennium.Atthesametime,downwardtrendsareapparentinthe1980s.Astarkdifferenceisthat
theenergypriceappreciatedinthelate1970s,becauseofthesecondoilcrisis,whilethepricesof
nonenergycommoditiesremainedstable.

Theincreaseinenergypricesinthelastdecadehasbeensteepenoughfortheleveltoexceed

thepeakreachedin1980,sotheoveralltendencyofthetrendslopesupward.Inotherwords,thetrend
goesagainsttheSingerPrebischthesisasfarastherelationshipofenergytomanufacturedgoodsis
concerned.

PricesofEnergyandBioEnergyCrops

Itisconsideredthatanimportantdeterminantofhikesincommoditypricesisthefood

shortagecausedbythedevelopmentoftechnologytoextractindustrialenergyfromsomefoodcrops.3
RapeseedisthemainbiodieselfoodstockinEuropewhilemaizeisthemaincropforbioethanolinthe
UnitedStates(IMF[2008],p.97).Sugarisanotherpotentialfoodcropsupplyingethanolforindustrial
use.Doestheevolutioninthepriceofthesecropsandoftraditionalenergyreflectthisrecentinnovation
toextractindustrialenergyfromthesecrops?
3

Mitchell(2009)claimsthatthemostimportantfactorbehindtherapidincreaseinfoodpricesbetween
2002 and 2008 was the increase in biofuel production in the US and EU. Baffes and Haniotis (2010)
reviewvariousstudies,includingMitchell(2009),andconcludethattheimpactofbiofuelproductionon
therecentfoodpricehikehasnotbeenverylargesofar.
4

Timeseriesofthepricesofenergycommoditiesandthesefoodcropsprovideempirical

materialwithwhichtoaddressthisquestion.

Figure4displaysatimeseriesofthenaturallogarithmofthepricesofcrudeoilandnaturalgas.

Therearesomeinterestingobservations.Firstly,sincethemid1970s,themovementsofthetwotime
serieshavebeenquitesimilar.Secondly,fromthemid1970sonwardthepriceofcrudeoiltendstolead
thatofnaturalgas.Thirdly,crudeoilwasmorevolatileintheearly1970s.

Docrudeoilandnaturalgassynchronizebecausetheyarebothenergycommodities?Or,do

allotherprimarycommoditiestendtocomove?Theanswertothelastquestionisno.Figure5
demonstratesthatthepricesoffoodcropswhichturnedouttobeusedforenergyfluctuatedistinctly
fromthatofcrudeoil.Butwhataboutthelongtermtrendandshorttermfluctuations?Oncethetwo
partsaredecomposed,eitheronemightcomovewellwithitscounterpart,crudeoil.

Fortheinvestigationofthelongtermtrend,cointegratingrelationsareestimatedbetween

crudeoilandthecommoditiesmentionedabove.Thebaselineformulaforthecointegratingrelationsis
thefollowing4:

ln

ln

(1)

Iftheerrorterm( )isstationaryintime,therelationbetween ln

and ln

issustainableinthe

longrun.

Figure4hintsthatthepriceofcrudeoilandthatofnaturalgasshareacommontrend,evenif

eachseriesfollowsarandomwalk.Table1summarizestheresultsofexercisestoestimatethe
cointegrationrelationsbetweenthepriceofcrudeoilandthoseofrapeseedoilandmaizefor19752010.
Irrespectiveofvariousassumptionsconcerningtrendsandinterceptsforthecointegratingrelations,the
hypothesisthatthereisacointegratingrelationbetweenthepriceofcrudeoilandthatofnaturalgasis
accepted5.Moreover,theestimatesofthecoefficientonthelogarithmofthepriceofnaturalgas()areall
closetounitywithsmallstandarderrors.Theseobservationsimplythatnaturalgashasbeenagood
substituteforpetroleumsincethemid1970s.

Thesameestimationexerciseindicatesthattherewasnostationarylinearrelationbetweenthe

priceofcrudeoilandthepricesofeitherrapeseedoilormaize(Table1).Thisobservationsuggeststhat
4

Asforthevariationinassumptionsoninterceptsandtimetrends,seethefootnotetoTable1.
Onereservationisthatoncetheperiodisextendedtowards1960,anycointegratingrelationsarenot
detectedwiththesamesetofexercises.Naturalgasdoesnotseemtohavebeenaneffectivesubstitutefor
crudeoilbeforethemid1970s.
5

fromalongtermperspective,rapeseedoilandmaizehavenotbeengoodsubstitutesforpetroleum,in
contrasttonaturalgas.

Inthemeantime,theshorttermfluctuationinpricesmightbedifferent.Inordertoexamine

shorttermcomovementamongtheprices,HodrickPrescott(HP)filteredseriesarescrutinized.The
HPfilterisanoperatorforatimeseriestosingleoutcyclesatfrequenciesofeightyearsorhigher.Cycles
incorporatedinatimeseriesatfrequencieslowerthaneightyearsarecountedasalongterm
(nonlinearandlinear)trendwhichremainsaftertheHPfilterisapplied6.

HPfilteredlogpricesofcrudeoilandnaturalgasareshowninFigure6.Generallyspeaking,

theHPfilteredpriceofnaturalgasmimicsthatofcrudeoilwell.Thepriceofcrudeoiltendstoleadthat
ofnaturalgasanditsvariationismoreamplifiedthanitscounterpartforthe1960s90s.

HPfilteredpricesofrapeseedoilandmaizebehaveintotallydifferentways.Untilvery

recently,theshorttermfluctuationinthepriceofrapeseedoilisalmosttheoppositeofthatofits
counterpartforcrudeoil.Ontheotherhand,for200710thesealmostcoincide(Figure7).Similarly,the
priceofmaizehasfollowedthatofcrudeoilonlyfaintlyuntil2006,whilethecomovementsofthetwo
for200709areimpressive.Thissuddenchangeinthecomovementsinpriceamongcrudeoil,rapeseed
oilandmaizeappearstoreflecttheinnovationmakingrapeseedoilandmaizeeffectivesubstitutesas
sourcesofenergy.

TheRelativePriceofEnergytoCapitalGoods

Acriticalissueiswhetherthisappreciationinfuelsandfoodcropsisatransitoryor

fundamentaltrend.Agrowthmodelthatshedslightonthisaspectwillbeintroducedinthenextsection.
Herewemakesomestatisticalobservations,whichwillbeincorporatedinthemodel.

Animportantobservationisthattherelativepriceofcapitalgoodstobothenergyand

consumptiongoodshassteadilydeclinedsincetheendofWorldWarII.Therelativepriceofcapital
goodstoenergygraduallyincreasedintheinterwarperiodanditexhibitsaremarkabledeclineinthe
latterhalfofthecentury(Figure9).Thispostwardeclineintherelativepriceofcapitalgoodstoenergy
6

Moreprecisely,theHPfilterisanapplicationofthefollowingoptimizationproblemtoattaina
nonlineartrend:
Min.

where and denotelongtermtrendsandshorttermfluctuations,respectively,and

.
Thefirsttermdictatesalinearregressionwhilethesecondtermexhibitsasmoothingtrend.worksasa
weightbalancingthetwoterms.Conventionally,100isassignedtoforanannualseries.SeeHodrick
andPrescott(1997),CooleyandPrescott(1995,pp.2729)andStockandWatson(1999,pp.1014),among
others.
6

cannotbecompletelyattributedtocontinuousincreasesinthepriceofenergyasshowninFigure2,
becausethepriceofcapitalgoodsdeclinedagainstconsumptiongoods,too7(Figure10).Thistendencyof
adeclineinthepriceofcapitalgoodsandariseinthepriceofenergyisexplainedinconjunctionwith
SergioRebelosAKmodelofeconomicgrowth,whichiselaboratedinthenextsection.

III.AgrowthmodelunderpinningthereversaloftheSingerPrebischthesis

Acontinuousriseinthepriceofenergyandarelativedeclineinthepriceofcapitalgoodsmay

beconsistentoutcomesofthereasonablemechanismofeconomicgrowththatwasdepictedinaseminal
paper,Rebelo(1991),knownastheAKmodelintheliteratureofendogenousgrowth.Thetwosector
versionoftheAKmodeliselaboratedinthepaper,whichischaracterizedbyadeclineintherelative
priceofacommodityproducedwithaconstantreturnstoscaletechnologyinreproducibleinputsanda
riseintherelativepriceofnonreproduciblegoodsandacommodityproducedwith
diminishingreturnstoscaletechnologyinreproducibleinputs8.Thesefeaturesareharmoniouswiththe
observationsdemonstratedintheprevioussection.

Themodelworksasfollows.Thereisacapitalgoodproducedwithaconstantreturnstoscale

technology:

(2)

where ,

,andAaretheamountsofinvestmentandcapitalstock,andtheproductivityparameter,
isassumedtobeusedtoproducebothinvestmentgoodsandconsumptiongoods.

respectively.

denotesthepercentageshareofcapitalstockusedtoproduceconsumptiongoods,sothattherest,
1

,istobeusedtoproduceinvestmentgoods.
Capitalisaccumulatedfrominvestmentwithdepreciationattherateof:

(3)

Akeyassumptionisthatconsumptiongoodsareproducedwithaconstantreturnstoscale

Thedeclineintherelativepriceofcapitalinthepostwarperiodmotivatedresearchoncapitalskill
complementarityanddirectedtechnicalchange.SeeHornsteinetal.(2005,pp.13081311)asanexample.
8 Thistechnologymaybeconstantreturnstoscaleinallinputs,includingboththereproducibleandthe
nonreproducible.
7

technologyincapitalstockandnonreproducibleinputs,T.Inotherwords,thetechnologyis
diminishingreturnstoscaleinreproducibleinputs:

(4)

where 0

1.Typicalnonreproducibleinputsarelaborandland.
,whereandare

Assumingatimeadditivelyseparableutilityfunction,

parameterssignifyingtimepreferenceandrelativeriskaversion,respectively,arationalconsumer
allocatesresourcessothatthegrowthrateofconsumption,

,isequalto

,where istheinterest

rateinconsumptiongoods.Nationalincomeisformulatedas
istherelativepriceofcapitalgoodstoconsumptiongoodsand

,where
isthefactorpriceofthe

nonreproducible.Notethattherelativepriceofcapitalgoodstothenonreproducibleis

Inanequilibrium,thevalueofthemarginalproductofcapitalisequalizedbetweenthe

productionofinvestmentgoodsandconsumptiongoodsthroughthefreemovementofcapital.
Therefore,bydifferentiatingtherighthandsidesofeqs.(2)and(4),thefollowingstaticequilibrium
conditionisattained:

(5)

Themarketequilibriumgrowth9ofthiseconomyischaracterizedbythefollowingrelations:

(6)

(7)

Thatis,capitalgoodsgrowby

whichisfasterthantherateofgrowthforconsumptiongoods

.Therelativepriceofcapitaltoconsumptiongoodsdeclinesby
priceofcapitaltononreproducibleinputsdecreasesevenfaster,by

,andtherelative

.10

Asamatteroffact,whatdeterminesthegrowthrateinthismodelisnotthefunctionofa

commodity,suchasinvestmentandconsumption,butwhetherthetechnologyis

Notethatthereisasteadystateequilibriuminthiseconomyandthatwithouttransitionthesteady
stateequilibriumisachieved.
10
.

constantreturnstoscaleinreproducibleinputsordiminishingreturnstoscale.However,the
fundamentalmechanismbehindtheeconomicgrowthisthattheoutputofacommoditygrowsmore
slowlyifitspricerisesmorequickly. Putdifferently,thepriceadjuststoquantitativechangessothata
stableindustrialstructureandexpenditurecompositionaremaintainedinthelongrun.

Aconsequenceofthiseconomicmechanismisthatinagrowingeconomythereproducible

growwhilethenonreproducibledonot(byconstruction).Offsettingthissetofevolutions,therelative
priceofthereproducibletothenonreproducibledeclines.Moreover,ifthereproducibleare
heterogeneous,thosegrowingfasterdepreciateintermsofpriceovertherest.Thus,therelativepriceof
capitalgoodstothenonreproducibledeclinesfasterthanthatbetweencapitalgoodsandconsumption
goods.

ThisisexactlywhatappearstohavehappenedwiththeU.S.dataforthepostwarperiod,see

Figures9and10.Iftheabovementionedmechanismliesbehindthefigures,thereversalofthe
SingerPrebischthesisisnottemporarybutdeepseated.Thispossibilitymustbetakenseriously.

IV.ImpactsonComparativeAdvantagesandDevelopmentPaths

Reproducibleandnonreproduciblefactors

SupposeRebelosmodelunderpinstheevolutioninthepricesofcommoditiesobservedin

sectionII.Then,howisthestructureofcomparativeadvantagesandthedevelopmentpathsof
lowincomecountriesaffected?Inordertoaddressthisquestion,letusapplyRebelosgeneralmodelfor
therealeconomyofalowincomecountry.Table2summarizesthecharacteristicsoffactorsof
productionthatareavailableinlowincomecountries.ThefactorsstudiedinsectionIIwereenergyand
capitalgoods,theformerarenonreproduciblewhilethelatterarereproducible.Theconventional
conceptoflaborcanbedividedintorawlaborandskill.Theformerisnothingbutmanhours
devotedtoproduction,sothisisnonreproducibleanditsgrowthisboundedbythegrowthrateofthe
population.Skillrepresentsallqualitativefactorsenhancingthehumancontributiontoproduction,
includingphysicalskills,techniques,knowledge,knowhow,evendisciplineandattitude.Thisportion
ofhumaninputsmaybereproduciblethrougheducation,training,learningbydoingandscientific
research,andcan,intheory,growunboundedly.Finally,landisanothernonreproducibleandbounded
factor.

AccordingtoRebelosmodel,therelativepriceofthereproducibletothenonreproducibleis

likelytodeclineinthelongrun.Thedirectionofchangeintherelativepriceamongreproduciblefactors
9

dependsontheintrinsicpotentialforthegrowthofthecommodityasreflectedbyitsmarginal
productivitywithrespecttoacompositeofreproduciblefactors(Table2).

Staticanddynamicsubstitutabilityamongfactors

TheevolutionofrelativepricesinTable2hasimportantimplicationsforthestructureof

comparativeadvantagesandthedevelopmentpathsoflowincomecountries.First,countrieswith
mineralandbiomassenergywillheightentheirdegreeofspecializationinenergyproduction.Second,
othernonreproducibleinputs,suchasrawlaborandland,becomescarcer,solabor(land)abundant
countriesmayderiveanadvantagefromspecializinginlabor(land)intensiveindustries.Generally,
developedcountriesownreproducibleinputsduetotheirgreateraccumulationofphysicalandhuman
capital.Thus,theoriginalstructureofcomparativeadvantagesmightbestrengthenedbyeconomic
growthofRebelostype.11

However,thisisnottheendofthestory.Whatalsomattersissubstitutabilityamongfactors.If

thesubstitutabilitybetweenanonreproduciblefactor(e.g.rawlabor)andareproduciblefactor(e.g.
capitalgoods)ishigh,then,asthereproduciblefactorisreproducedandaccumulates,thescarcityofthe
nonreproduciblefactorisattenuated.Moresimply,iftherearecheapmachineswhicharegood
substitutesforrawlabor,theabundanceofrawlaborisnolongerasourceofcomparativeadvantage.

Substitutabilitybetweenfactorsisgenerateddynamically,too.Inparticular,theevolutionof

relativepricesamongfactorsinducesinnovationinordertosavefactorsthatcandemandahigherprice.
Thisisdubbedinducedinnovationordirectedtechnicalchange.12Itiswellknownthattheenergy
pricehikesinthe1970swerefollowedbyenergysavingtechnicalprogress.Thus,demanddriven
innovationmayplayanimportantroleinchangingthestructureofcomparativeadvantages.Thisis
missinginRebelosmodel,wheretheelasticityofsubstitutionisassumedtobeconstant.

Oncethepossibilityofstaticanddynamicsubstitutionbetweenfactorsistakenintoaccount,

ourperspectiveontheevolutionofcomparativeadvantagesanddevelopmentpathsismodified.In
11

Infact,theauthorsfindthatsomelaborabundantandlowincomecountries,suchasBangladeshand
Cambodia,succeededinnurturingthegarmentindustry,atypicallaborintensiveindustry,andin
raisingwagesinasporadicmanner.SeeAsuyamaetal.(2010),Bakhtetal.(2009),Fukunishietal.(2006),
andYamagata(2006,2009).
12
ThisideawasalreadymentionedinHicks(1932),andwasexaminedeithertheoreticallyorempirically
bytheearlyinducedinnovationliterature(e.g.Habbakuk,1962;Kennedy,1964;Samuelson,1965;and
HayamiandRuttan,1970).Morerecently,Acemoglu(2002)constructedamoresophisticatedtheoretical
modelthatexplainsthedirectedtechnicalchangemechanism.Regardingtheimpactofenergyprices
oninnovation,Newelletal.(1999)andPopp(2002)foundpositiveassociationsbetweenenergyprices
andenergysavinginnovation.SeeAcemoglu(2009,chapter15)forasurvey.
10

additiontotheendowmentofnonreproduciblefactors,thedirectionsanddegreeofinnovationtomake
areproduciblefactormoresubstitutableforanonreproduciblefactormatter,too.Forexample,the
accumulationofreproduciblefactors,whichisnothingbutcapitalaccumulation,raisesthecapitalto
laborratioandtherelativewageintermsofcapital(seeTable3).Thatis,thepriceofrawlabor
appreciatesoverthatforcapitalgoods.Thischangemayinduceeffortstoinventnewmachinesasa
substituteforrawlabor.Ifthisissuccessful,theadvantagethatliesinabundantlaborisdilutedbecause
oftheproliferationofnewmachines.Ifthismomentumisgreatenough,theHecksherOhlinlikechoice
ofstrategicindustriesdoesnotmakesenseanymorebecauseinnovationcompletelyreorganizesthe
structureofanycomparativeadvantagebasedonfactorendowment.

Casestudy:Varioustypesofinventionsforthesewingmachine

Isongoinginnovationstrongenoughtonullifythestaticstructureofcomparativeadvantages?

Toaddressthisquestion,theauthorstakeacoreproductionprocessinatypicallaborintensiveindustry
foracasestudy.Thisisthesewingprocessintheapparelindustry.Obviously,themaindeviceusedin
thesewingprocessatpresentisthesewingmachine.Aleadingfirmsupplyingsewingmachinesallover
theworldisJUKICorporation,aJapanesefirmwhichwasfoundedin1938.Majorinventionsinthe
sewingmachinesmadebyJUKICorporationaresummarizedinTable4.

AninterestingobservationfoundinTable4isthatthereareasmanyskillsaving(denotedby

SS)inventionsasrawlaborsavinginventions(RT,RW)forthesewingmachineduringthisfirmslife.
Thisobservationprobablyreflectsthefactthatskilledworkersarenotabundantinthecountriesto
whichJUKIexportsitsmachines.Therefore,inventionsthatsaveskilledworkersmakesense.

Inanutshell,rawlaborsavinginventionsarenotdominantenoughtooverturnthestructure

ofcomparativeadvantagebasedonfactorendowment.

V.Concludingremarks

Hasgreeninnovationwhichenablestheextractionoffuelfromfoodcropsdramatically

changedtheincentivestructureforfactorsofproductionintherecentpast?Istheriseinthepricesof
foodandenergytransitory,orisitbasedonfundamentals?Ifthelatteristrue,howdoesitaffectthe
structureofcomparativeadvantagesandthedevelopmentpathsoflowincomecountries?Theseare
threequestionsposedinthispaper.Eachoftheabovequestionswasassignedadifferentsection(sections
IIIVinorder).
11

Theanswertothefirstquestionisyes.Thisisobviousfromthefactthatthegreeninnovation

causedfoodshortagesforsometimeperiod.Theanswertothesecondquestionisbasedonthesimple
twosectorgrowthmodelformulatedbyRebelo(1991).Aslongasreproduciblecommoditiesare
reproducedsteadily,therelativepriceofthenonreproduciblerisestobalanceindustrialstructureandto
maintainanequilibrium.Fromthisviewpoint,thereversaloftheSingerPrebischthesisisnotan
anomalybutthenorm.

Finally,facedwithadramaticriseinfoodprices,whilemoderatelylaborabundantcountries

haveturnedtheirresourcestofoodproduction,extremelylaborabundantcountrieshavetakenoverthe
releaseddemandforlaborintensiveproductsfrommoderatelylaborabundantcountries.Therefore,the
modificationofthedevelopmentstrategyforhighlylaborabundantcountriesisincremental.Inreality,
however,thereisanotherunderlyingforce,innovation,whichcreatesnewproductiveinputsthat
substituteforotherfactorsofproduction.Ifmanysortsofnewmachinesareinventedandeffectively
substituteforrawlabor,thenthegroundforcomparativeadvantageinrawlaborintensiveindustries
willbefurtherdiminished.Thecasestudyoftheinventionsinsewingmachinesforthegarment
industryshowsthattheactualdirectionofinventionsisnotmonotonicbecausemultiplefactorsof
production(inparticular,skilledandlowskilledworkers,andvarioustypesofmachinesand
equipment)areallinvolvedinafactory.

Marketforcesraisethevalueofthenonreproducible,i.e.naturalresourcesandrawlabor,

evenly,asthereproducibleaccumulate.Greeninnovationsmayplayaroleinreorganizingthestructure
ofcomparativeadvantages.However,notmanyinventionsseemtobegreatenoughforalowincome
countrytoswitchtheirdevelopmentstrategy.

12

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14

Table1.NumberofCointegratingRelationsbetweenthePriceofCrudeOilandthatofOtherFuels
(19752010)
Model
1
2
3
4
5
TrendinOriginalSeries
No
No
Linear
Linear
Quadratic
InterceptsinC.E.
No
Yes
Yes
Yes
Yes
TrendsinC.E.
No
No
No
Yes
Yes
NaturalGas
TraceTest
1
1
1
1
1
MaximumEigenvalueTest
1
1
1
1
1
Coefficient:
0.992
1.130
1.130
1.155
1.155
Standarderror
0.006
0.038
0.038
0.050
0.050
RapeseedOil
TraceTest
0
0
0
0
0
MaximumEigenvalueTest
0
0
0
0
0
Coefficient:
0.894
1.926
1.926
2.387
2.365
Standarderror
0.030
0.314
0.320
0.423
0.429
Maize
TraceTest
0
0
1
0
0
MaximumEigenvalueTest
0
0
1
0
0
Coefficient:
0.966
4.485
4.466
4.172
4.191
Standarderror
0.046
0.941
0.952
0.889
0.907
Notes:C.E.standsforcointegratingequation.Acointegratingequationisformulatedasalinear
combinationoftheloggedpriceofcrudeoilandthatofthepriceofitscounterpartcommodity,plus
,formsalinearcombinationas
interceptsandtrends,ifany.Thecointegratingvector,
1

ln
ln

.TheTraceTestandMaximumEigenvalueTestprovidethenumberof

cointegratingrelations,ofwhichthemaximumisthenumberoftheoriginalseries,whichistwointhis
case.Themodels#1#5areasfollows:
Model1:

Model2:

Model3:

Model4:

Model5:

The vector representation is

term.

, and a one year lag is assumed for the log difference

15

Table2.DifferencesinCharacteristicsbyFactor

Energy

Capitalgoods

Rawlabor
(Manhour)

Skill

Land
(Area)

Reproducibility/
Unboundedgrowth

No

Yes

No

Yes

No

Relativepriceto
capitalgoods

Rise

Rise

Rise

Table3.
EventsEncounteredbyLaborAbundantandLowIncomeCountriesandTheirConsequences

BiofuelDevelopment
CapitalAccumulation
UnderlyingEvent
Greeninnovationenablingthe
Accumulationofreproducible
extractionoffuelfromcrops
factors
Initialimpact
Riseinthepriceofland
Riseinthecapitaltolaborratio
RepercussionontheRelative
Declineintherelativepriceof
Riseintherelativepriceofraw
PriceofRawLabor
rawlabortoland
labortocapitalgoods
Secondaryimpact
Directedtechnicalchangetosave

rawlabor
ComparativeAdvantagein
Dichotomized
Weakened
LaborintensiveIndustries
Lost:moderatelylaborabundant
countries
Kept:highlylaborabundant
countries
RecommendedDevelopment
Conventionalmarketoriented
(noguideline)
Strategy
(endowmentbased)strategy

16

Table4.MajorinventionsonthesewingmachinemadebyJUKICorporation
Machine
type

Technology

Automatic
machines

Details of technology

Major expected
effects

One-needle, straight stitch

1953

The most standard sewing machine which stitches straight seams by

lockstitch.

SS, RT, QC

Automatic thread trimmer

1969

Automatically cuts thread at the end of a sewing cycle.

RT

Bottom and variable top-feed

1979

Responds flexibly to various kinds of material. Ensures sewing with

higher precision and quality by separating the bottom of the adjusting
feed mechanism from the top.

SS, QC

Bird's nest prevention

1992

Prevents "bird's nests" (thread tangling up on the underside of the

material at the beginning of sewing) by keeping the needle thread
clamped.

QC

1996

Changes the bobbin thread automatically.

RT

1996

Eliminates oil stains from the frame by reducing the amount of oil needed.
RT, QC
This reduces the work involved in removing the stain and re-stitching.

Direct-drive motor

1999

Saves electricity and mitigates operator fatigue by reducing vibration and

RE, ENV
noise.

High sewing speed

Increases the speed of stitching. The maximum stitching speed is 8,500

rotations per minute, which is even faster than that of a sports car's
engine (JUKI's website).

RT

White machine surface

Makes the surface of the sewing machine white, and thus improves the
brightness of the needle drop point. This is better for operators' eyes.

ENV

Lockstitch
sewing
Bobbin thread automatic feeder
machines
and sewing
machines in Dry-head
general

Special
sewing
machines

Year of
introduction

Bartack

1958

A sewing machine which makes special stitches that prevent open seams
SS, RT, QC
in areas such as pocket openings.

Buttonholing

1961

A sewing machine which stitches buttonholes.

SS, RT, QC

Chainstitch, button sewing

1962

A sewing machine which stitches a button using a chain stitch.

SS, RT, QC

Overlock

1964

A sewing machine which stitches the edges of material so that they do

not fray.

SS, RT, QC

Lockstitch, button sewing

1979

A sewing machine which stitches a button using a lockstitch, which is

superior to a chain stitch in terms of preventing raveling.

SS, RT, QC

Computer-controlled
buttonholing

1999

By making buttonholing computer-controlled, less time is needed for

making changes to the specifications.

SS, RT, QC

Buttonholing indexer

1968

A machine which feeds materials (e.g. fabrics) automatically and executes

multiple buttonholes successively. Many machines can be operated by a SS, RW, RT, QC
single operator.

Automatic serging machine

1973

A machine which automatically cuts the edges of the material and sews SS, RW, RT, QC,
them so that they do not fray. A sensor prevents any mistakes in cutting. RWT

Edge control seamer

1976

A machine which enables the accurate joining of materials, which was

done by a skilled operator, and sews them automatically.

SS, RW, RT, QC

Automatic welting machine

(automatic pocket sewing)

1979

A machine which automatically sews pockets with welts and flaps on

suits, jackets and pants.

SS, RW, RT, QC

Automatic pocket setter

1991

A machine which automates a series of pocket-attaching processes,

including folding, sewing, and bartacking a pockets openings.

SS, RW, RT, QC

Reduces the time for specification changes through a panel that is easy
to operate.

SS, RW, RT

A folder, hemmer, and binder replace manual tasks such as folding or

binding fabrics. A gauge set including a needle plate, feed dog, and
presser feet, helps operators sew smoothly and accurately.

SS, RW, RT, QC

Computer-controlled operation
panel
Attachments (e.g. folder, hemmer, binder,
needle plate, feed dog, presser feet

Notes : Year of introduction indicates when JUKI introduced the model with the technology cited onto the market. The major expected effects are SS:
substitution of skilled labor with a machine + unskilled labor; RW: reduction of the number of workers necessary for the production process; RT:
reduction in processing time; QC: quality stabilization and improvement; RWT: reduction in waste; ENV: improvement in the working environment; and RE:
reduction in the amount of electricity used.

Source: Asuyama (2009). Compiled from JUKI (2008), JUKI's website, Ishikawa (1994), and Yasuda (2004).
17

Figure1.Motivation

18

Figure2.TheRelativePriceofEnergytoManufacturedGoods
300

Energy,2000=100,constant2000$
250
200
150
100
50
0

Source:WorldBank,GlobalEconomicMonitordatabase(accessedonJan.13,2011).
Note:ThenumeraireindicatoristheManufacturesUnitValueIndex.

Figure3.TheRelativePriceofNonEnergyPrimaryCommoditiestoManufacturedGoods
300

Nonenergycommodities,2000=100,constant2000$
250
200
150
100
50
0

Source:ThesameasFigure2.
Note:ThesameasFigure2.

19

Figure4.PricesofCrudeOilandNaturalGas(logarithm)
6

1
60

65

70

75

80

85

Crude Oil

90

95

00

05

10

Natural Gas

Source:WorldBank,GlobalEconomicMonitordatabase.
Note:Bothseriesareindicessetat100intheyear2000.

Figure5.PricesofCrudeOil,RapeseedOil,MaizeandSugar(logarithm)
7

1
60

65

70

75

80

85

Crude Oil
Maize

90

95

00

05

10

Rapeseed Oil
Sugar

Source:WorldBank,GlobalEconomicMonitordatabase.IMF,PrimaryCommodityPrices.
Note:ThesameasFigure4.

20

Figure6.HPFilteredFluctuationintheLogPricesofCrudeOilandNaturalGas
.8
.6
.4
.2
.0
-.2
-.4
-.6
60

65

70

75

80

85

Crude Oil

90

95

00

05

10

Natural Gas

Figure7.HPFilteredFluctuationintheLogPricesofCrudeOilandRapeseedOil
.8
.6
.4
.2
.0
-.2
-.4
-.6
60

65

70

75

80

85

Crude Oil

21

90

95

Rapeseed Oil

00

05

10

Figure8.HPFilteredFluctuationintheLogPricesofCrudeOilandMaize
.8
.6
.4
.2
.0
-.2
-.4
-.6
60

65

70

75

80

85

Crude Oil

22

90

95

Maize

00

05

10

Figure9.TheRelativePriceofCapitalGoodstoEnergyintheUnitedStates
3.5
3
2.5
2
1.5
1
0.5

2009

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

1953

1949

1945

1941

1937

1933

1929

Source:BureauofEconomicAnalysis,UnitedStates,NIPAtables(http://www.bea.gov/national/nipaweb
/SelectTable.asp?Selected=N).

Figure10.TheRelativePriceofCapitalGoodstoConsumptionGoodsintheUnitedStates
3.00

2.50

2.00

1.50

1.00

0.50

Source:ThesameasFigure9.

23

2009

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

1953

1949

1945

1941

1937

1933

1929

0.00

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Castellanos, Pravakar Sahoo

The Role of Home and Host Country Characteristics in FDI: FirmLevel Evidence from Japan, Korea and Taiwan
Determinants of Government Consumption Expenditure in
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COMMERCIALIZATION OF AGRICULTURE IN THE
HIMALAYAS
Yangtze River Deltas System Integration: Institutional Barriers and
Countermeasures
Tax Differentials and Inflow of Foreign
g Direct Investments: Evidence
from Foreign Operations of U.S. Multinational Companies
The Making of a State-Centered Public Sphere in Turkey:
A Discourse Analysis

The Urban Middle Class in the Instability of New Democracies

2010
2010
2010
2010
2010
2010

Smuggling and Import Duties in Myanmar

2010

Myanmar Migrant Laborers in Ranong, Thailand

2010

Performance of Financial Institutions in Bhutan

2010

255

Mitsuhiro KAGAMI

Recent Trends in Asian Integration and Japanese Participation

2010

254

Hisaya ODA, Yuko TSUJITA

The Determinants of Rural Electrification in Bihar, India

2010

253

Kiyoyasu TANAKA, Naomi

HATSUKANO

The Size Distribution of All Cambodian Establishments

2010

252

Kazunobu HAYAKAWA, Fukunari

KIMURA, Tomohiro MACHIKITA

Globalization and Productivity: A Survey of Firm-level Analysis

2010

251

Location Choice of Multinational Enterprises in China: Comparison

Kuo-I CHANG, Kazunobu
HAYAKAWA, Toshiyuki MATSUURA between Japan and Taiwan

250
249

Kazunobu HAYAKAWA, Kiyoyasu

Are Trading Partners Complementary in International Trade?
TANAKA, Yasushi UEKI
Takeshi INOUE,, Shigeyuki
g y
How Has Financial Deepening
p
g Affected Povertyy Reduction in India?
HAMORI
Empirical Analysis Using State-Level Panel Data

2010
2010
2010