Eﬀects of Continued Opening of Japan’s Agricultural Sector on Prices,
Wages, Employment and Welfare From 2000 to 2005
Hidetaka Kawano∗
School of Management and Economics
Aomori Public College

Hiroshi Ohta†
School of International Politics, Economics and Communication
Aoyama Gakuin University
For Presentation at the 47th Annual Meeting of the Japan Section of
the Regional Science Association International,
National Graduate Institute for Policy Studies.

October 10th, 2010
1

Introduction

Debates over the economic merits of free trade
have recently surfaced. Trade tends to bring about
what Ohta and Nakagawa (2008) called the ‘worsening terms’ of exchange, which is a more intranational than international phenomenon. Yet thismore intra-national, distributional conﬂict comesout as a stumbling block to international trade assuggested almost three score and ten years ago by
Stolper and Samuelson (1941) (SS).1 An enormous
amount of subsidy is reportedly poured into the adversely aﬀected sectors, agriculture in particular.
Further increased open trade will be an importantfactor in raising average living standards of people
in the country. However, agricultural trade liberalization has remained controversial and should be
debated.2 Sound agricultural policies eliminating
1 The same Paul Samuelson went on even further to say,“comparative advantage cannot be counted on to create...
net gains greater than the net losses from trade BusinessWeek (2004).” His concern, among other prominent tradeexperts, seems to be high-skilled workers in the developed
countries rather than the low skilled, who are going to
be “exposed to international competition.” They may turnpoor under free trade, “although it’s not clear how muchit will hurt their wages,” as Jagdish Bhagwati is quoted assaying.
2 Irwin (1996) and Bhagwati (2002) have debated the economic merits of free trade.The negative eﬀects of protectionism are well documented by Bhagwati (1988). Krugman(1987) has stated: “...the case for free trade is currently
more in doubt than at any time since the 1817 publicationof Ricardo’s Principles of Political Economy...” However, hemarket distortions would be based on an economic
rather than a political rational.3
The huge costs of agricultural protection werereported by the the Organization for Economic Cooperation and Development (OECD, 1998); Producer subsidy equivalent (PSE), a measure of thevalue of total support to agricultural producers as
a percent of the value of agricultural production,
averaged 35 percent of the value of production in
the OECD countries in 1997; In the recent OECDestimates (OECD, 2007), for all OECD countries,
the PSE averaged 28 percent in 2005 and 23 percent in 2007. For Japan, the PSE was 54 percent
in 2005 and 45 percent in 2007.4 The beneﬁts ofagricultural liberalization were also discussed in a
recent book by Southgate et al. (2007). Japan is no
exception in its resistance to ongoing agriculturalliberalization.
This paper extends the underlying theoreticaldevelopments in Ohta (2004), Ohta (2005), Ohta
(2006), Ohta and Nakagawa (2008) to build an emalso noted that “ ... free trade is not passé.... Its status has
shifted from optimum to reasonable rule of thumb. Thereis still a case for free trade as a good policy, and as a usefultarget in the practical world of politics, ...”
3 Herrmann (2007) discusses the linkages between agricultural support measures in developed countries and foodsecurity in developing countries. He argues that ”A credible
phasing-out of agricultural support should receive priority
in multilateral trade negotiations.”
4 The costs of agricultural protection and some misconceptions about agricultural trade liberalization were discussed in Tokarick (2008).

pirical model which improves upon the earlier versions in Kawano (2007), Ohta and Kawano (2008)
and Kawano (2009). For the empirical model construction, a two-sector applied general equilibrium
model is used as a framework to measure the impact of further opening of the agricultural sector
on wages, employment, and welfare in Japan. Further opening of trade volume can be theoreticallyexplained by many possible causes,as in Deardorﬀ
and Hakura (1994).5 The model was kept simple
to best match the task at hand.
For the empirical characterization, calibrationis achieved through the use of year 2005 Japan’s 32sector input-output data (Statistics Department,
Ministry of Public Management, Home Aﬀairs, Posts
and Telecommunications, 2009). The data is grouped
into two sectors. One is the agricultural sector,
classiﬁed as code 001 in the data, deﬁned as industry 0. The other is a highly aggregated nonagricultural sector, deﬁned as industry 1. Also incorporated is Leontief type input-output accounting data. The model closure is a small open economy with free capital inﬂow and outﬂow, so thatthe balance of payments is balanced. In this way,
the original input-output data was used without
modiﬁcation.
A crucial step in the empirical characterizationof an applied general equilibrium model (AGE) iscalibration, deﬁned as “the requirement that theentire model speciﬁcation be capable of generating a base-year equilibrium observation as a model
solution” (Shoven and Whalley, 1992). An AGE
model is a very powerful framework for analysis ofpolicy reforms that could be instituted for Pareto
improvements in the current state of the economy.
An important development since Scarf (1967) has
been the use of observed data, such as that in an
input-output table, in developing an AGE model.
The solution procedure for coding the model
follows Shoven and Whalley (1992) by reducing thedimensionality of the solution space to the numberof factors of production in this general equilibrium
structure. The solution algorithm used for calibration is a ﬁxed-point algorithm originally developed by Kimbell and Harrison (1986) and modiﬁedby Kawano (2003). In his recent paper (Kawano,2006), four alternative ﬁxed point algorithms werecompared. Among the four alternatives, the mod5 Among the causes are tariﬀ cut on imports, the foreign
expansion of import-competing goods, technical progress inexporting goods at home, technical progress at home inimport-competing goods, and rise in expenditure at home.
The main message of their examples is that there are many
possible reasons for the volume of trade increase.

iﬁed Kimbell-Harrison approach was shown to be
the best for an AGE modeling.
This paper revisits the same simple model ofcomputable or applied general equilibrium with tradein Ohta (2005) and Ohta (2006) to probe the orthodox Hecksher-Ohlin (HO) and Stolper- Samuelson (SS) theorems for shedding some new light oneach. Set forth against the HO orthodoxy was an
H.O. heresy to introduce heterogeneity in tastes
rather than endowments/technologies as a theoretical framework to interpret the simulation results.
If Japan is reasonably assumed to be relatively
capital-rich, then the H.O. heresy does better explain the empirical results than the HO theorem
does. Therefore, the earlier claim that the Leontief paradox is no more a paradox than the H.O.
heresy is empirically supported. First, we review
changes in the industrial structure from 2000 to2005 and then measure the possible economy-wide
eﬀects of further opening of the agricultural sector.
First, notable changes in the structure of theeconomy during the ﬁve years between 2000 and2005 were examined. The aggregate eﬀects of all
13 parameters’ changes over the ﬁve years were
the followings: 1) both labor employment and labor income in the agricultural sector increased by
26.9 percent, but capital employment and capitalincome in the same sector decreased by 26.5 percent; 2) consumption and production in the agricultural sector decreased by 18.4 percent and 15.9
percent; 3) capital-labor ratio in the agricultural
sector decreased by 42.0 percent; 4) the national
welfare was reduced by 8.9 trillion yen in CV and
EV measures. In sum, these imply 1) the agricultural sector became less capital-intensive than
before; 2) labor employment and labor income increased in the agricultural sector, but capital employment and capital income decreased in the same
sector; 3) still the agricultural sector continued
to decrease in size, in terms of both decreased ﬁnal consumption and production in the agricultural sector; 4) the Hicksian technical innovation in
the non-agrucultural sector in particular, increased
factor employment and income in the agricultural
sector; 5) the national welfare declined during theﬁve years between 2000 and 2005.
Second, with the use of year 2005 Japan inputoutput data, the major simulation results of a balanced budget 79.8% import expansion of the agricultural sector lead to the following conclusions:(1) the total national income is increased by 0.23%(the CV and EV measures of the welfare increase
are 1.285 trillion yen and 1.287 trillion yen, respectively); (2) both wage and capital income in theagricultural sector are decreased by 20.68 %; (3)employment in the agricultural sector is decreased
by 20.68%; (4) the Stolper-Samuelson eﬀect, which
deals precisely with the eﬀects of trade on wages
and other factor prices, is demonstrated, since real
return to labor w/p0 and w/p1 increase by 0.18%
and 0.12%. In addition, real return to capital r/p0
and r/p1 decrease by 0.07% and 0.13%, respectively. Meanwhile the relative price of capital- intensive commodity p0 /p1 decreases by 0.24 %. In
brief, the major simulation results of a balanced
budget and import expansion of the agricultural
sector lead to the following conclusions: 1) Japan,
with any further opening of her agricultural sector, will have an increasingly higher wage rate; 2)
The agricultural sector turns out to be increasingly
more capital-intensive; 3) The aggregate GDP gainsof 1.29 trillion yen (more than US$ 10 billion) a
year can further raise the general welfare of the
population.
Third, the proposed theoretical framework ofheterogeneity in tastes rather than endowments/technologies does better explain the empirical results than the traditional Hecksher-Ohlin theorem
does. Therefore, Ohta’s earlier claim that the Leontief paradox is no more a paradox is empiricallysupported.
This experiment was programmed in C-language,
and conducted on the gcc version 2.6.0 compiler
using Intel’s 333M Hz Pentium II processor. The
veriﬁed reliability of the simulation results in double precision (1.0e − 15). The converged equilibrium values in this benchmark model were obtained
through 51 iterations over the entire model.
Section 2 reviews the underlying theories: theorthodox Heckscher-Ohlin (HO) versus a heretical H.O. Section 3 reviews the main features ofan AGE model. Section 4 reviews the structuralchange occurring between 2000-2005. In section 5,
the major simulation results are presented. The
conclusion follows in section 6.

ties, called nuts and bananas. Assume that N is
endowed with more capital and less labor than B
to produce nuts and bananas, labeled N and B, respectively. The two nationals share the same tastes
for the produces under consideration. The production functions for each good (i = N, B) are identical between the two countries and are linear homogeneous with variable factor proportions. Derived
from these basic assumptions are the following autarky equilibria identiﬁed as E N A and E BA on the
production possibilities frontier (PPF) of the Nutties and that of the Bananans.

Good N6¸

N’s PPF
N
EP
E NA

N,B
EC

TN

E BA
T

B

U After Trade
U Before Trade

BEP*
B’s PPF- Good B

02.2

A H.O. Heresy.

Good N6NECTNU N Before TradeU N After Trade

®ª

E NA
N
EP

¸

N’s PPFU B After Tradeª U B Before Trade
¼

µPPF
B’s
B
EP

E BA
0

2

2.1

The Underlying Theoretical
Developments
The HO Orthodoxy

We now summarize the underlying theories developed over the years in Ohta (2004), Ohta (2005),
Ohta (2006), Ohta and Nakagawa (2008), startingwith the HO Orthodoxy. Consider two countries,
labeled N and B, each producing two commodi-

TB
B
EC

- Good B

Figure 2: A H.O. Heresy
We now turn to the H.O. heresy in Figure 2 thatis predicated on the same assumptions as HO’s
but one: tastes are diﬀerent between the two trading nations. Then it follows that the familiar HO
theorem remains to be unaltered if only the taste
diﬀerences between the two nations remain smallenough. But if and when tastes become suﬃciently

diﬀerent for the two nationals as illustrated by Figure 2, then the HO theorem is reversed. It is
its labor-intensive sector (Good B) that is to be
the capital-rich Country N’s export sector, andcapital-intensive goods N are to be imported. Thismay make the Leontief paradox no more a paradox
than the H.O. heresy is, should it sound paradoxical. This H.O. heresy is used here as a theoreticalframework to interpret the simulation results.

3

The Empirical Structure of theModel

The objective of the present AGE simulation
model is to measure the impact of import expansion of the agricultural sector on wages and employment in Japan; a two-sector applied generalequilibrium model is used as a framework. Expansion of trade volume can be theoretically explained by many possible causes, as in Deardorﬀ
and Hakura (1994). In this paper, regardless ofthe causation of the volume of import increase, theimpact of import expansion of the agricultural sector on wages, employment, and the total welfarechanges is measured.
The empirical model was kept very simple.6
For example, both domestic and international prices
were assumed to move together and that both were
the same for the simplicity of the model.7 The supply side of a theoretical general equilibrium model
is made more empirically plausible by incorporating the Leontief type input-output accounting data.
An important step in building an empirical model
is to incorporate ﬂow of intermediate goods into
the model structure. The ﬂow of intermediate goods
among diﬀerent sectors is built into the model aspart of production activity in the economy. The
overview of the theoretical structure of the modelwith the case of current account surplus is presented in Figure 3.

6 For example, assuming that both domestic and international prices move together, we use only a price for eachcommodity and do not introduce any distortion in the model
economy.
7 Both domestic and international prices converge as allimport restrictions like tariﬀs and quotas are gradually removed to open up the agricultural sector.

4

Structural Change Occurring
Between 2000-2005

During the ﬁve years between 2000 and 2005,
the aggregate eﬀects of all 13 parameters’ changes
over the ﬁve years in simulation ex-14.c in Table 5 were the followings: 1) both labor employment and labor income in the agricultural sector
increased by 26.9 percent, but capital employment
and capital income in the same sector decreased
by 26.5 percents; 2) consumption and productionin the agricultural sector decreased by 18.4 percent and 15.9 percent; 3) capital-labor ratio in the
agricultural sector decreased by 42.0 percent; 4)
the national welfare was reduced by 8.9 trillion
yen in CV and EV measures. In sum, these imply 1) the agricultural sector became less capitalintensive than before; 2) labor employment and labor income increased in the agricultural sector, but
capital employment and capital income decreasedin the same sector; 3) still the agricultural sector
continued to decrease in size, in terms of both decreased ﬁnal consumption and production in the
agricultural sector; 4) the Hicksian technical innovation in the non-agrucultural sector in particular, increased factor employment and income in the
agricultural sector; 5) the national welfare declined
during the ﬁve years between 2000 and 2005.

5

Simulation Results for Import
Expansion

If and when tastes become suﬃciently diﬀerent for the two nationals as illustrated in the H.O.
heresy, then the HO theorem is reversed. In thisempirical study, it is its relatively labor-intensive
non-agricultural sector that is to be the capitalrich Japan’s export sector, and capital-intensive
agricultural goods are to be imported. This is contrary to a common belief that agricultural goods
are labor-intensive. If Japan is reasonably assumed
to be relatively capital-rich, then the H.O. heresy
does better explain the empirical results than the
HO theorem does. Therefore, the earlier claim that
the Leontief paradox is no more a paradox than the
H.O. heresy is empirically supported.
As a comparative statics exercise summarizedin Table 6, the major simulation results of a balanced budget 79.8% import expansion of the agricultural sector are the following: (1) the total national income is increased by 0.23% (the CV and
EV measures of the welfare increase are 1.285 tril-lion yen and 1.287 trillion yen, respectively); (2)both wage and capital income in the agricultural
sector are decreased by 20.68 %; (3) employment
in the agricultural sector is decreased by 20.68%;(4) the Stolper-Samuelson eﬀect, which deals precisely with the eﬀects of trade on wages and otherfactor prices, is demonstrated, since real return tolabor w/p0 and w/p1 increase by 0.18% and 0.12%.
In addition, real return to capital r/p0 and r/p1
decrease by 0.07% and 0.13%, respectively. Meanwhile the relative price of capital-intensive commodity p0 /p1 decreases by 0.24 %. These comparative statics results are illustrated in Figures 6
and 7, where the small-boxed values indicate theincreased values from the benchmark results in Figures 4 and 5.
The simulation results imply that the more thecapital-intensive agricultural sector shrinks, the higher
the factor payment to its sector’s non-intensive factor of labor. In other words, the shrinking capitalintensive agricultural sector releases labor and capital. Then these factors are reemployed in the
expanding labor-intensive non-agricultural sector
over time. Labor becomes increasingly scarcer thancapital does. As a result, the value of the marginal
product of labor and the corresponding real wage
rate tend to increase, which in turn increases thecapital intensity of the labor-intensive non-agricultural
sector (Relatively more capital than labor is usedin production). In the end, the overall economywide capital intensity tends to increase as the laborintensive non-agricultural sector expands and thecapital-intensive agricultural sector becomes smaller.
Therefore, both sectors become more capital-intensive,
which also implies increasingly scarce labor and ahigher wage rate (or increasingly abundant capitaland a lower rental rate) in the economy.

6

Conclusion

This paper revisits the same simple model ofcomputable or applied general equilibrium with tradein Ohta (2005) and Ohta (2006) to probe the orthodox Hecksher-Ohlin (HO) and Stolper- Samuelson (SS) theorems for shedding some new light oneach. Set forth against the HO orthodoxy was an
H.O. heresy to introduce heterogeneity in tastes
rather than endowments/technologies as a theoretical framework to interpret the simulation results.
If Japan is reasonably assumed to be relatively
capital-rich, then the H.O. heresy does better explain the empirical results than the HO theorem

does. Therefore, the earlier claim that the Leontief paradox is no more a paradox than the H.O.
heresy is empirically supported.
First, we reviewed changes in the industrial structure from 2000 to 2005 and also to measure the possible economy-wide eﬀects of further opening of the
agricultural sector. Notable changes in the structure of the economy during the ﬁve years between
2000 and 2005 were examined. In sum, these imply 1) the agricultural sector became less capitalintensive than before; 2) labor employment and labor income increased in the agricultural sector, but
capital employment and capital income decreasedin the same sector; 3) still the agricultural sector
continued to decrease in size, in terms of both decreased ﬁnal consumption and production in the
agricultural sector; 4) the Hicksian technical innovation in the non-agrucultural sector in particular, increased factor employment and income in the
agricultural sector; 5) the national welfare declined
during the ﬁve years between 2000 and 2005.
Second, with the use of year 2005 Japan inputoutput data, we conducted the simulation of a balanced budget and import expansion of the agricultural sector which lead to the following conclusions:Japan, with any further opening of her agricultural
sector, will have an increasingly higher wage rate
as both agricultural and non-agricultural sector become increasingly more capital intensive with aportion of scarce labor relocating from the shrinking capital-intensive agricultural sector to the expanding labor-intensive non-agricultural sector. The
agricultural sector, which contrary to common belief turns out to be increasingly more capital-intensive,
is reduced by import expansion. However, the aggregate GDP gains of 1.29 trillion yen (more than
US$ 10 billion) a year can further raise the general
welfare of the population. The agricultural sector
needs to be further exposed to international competition.

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