[OLIcY RFSEARCH WORKIN, PAPER 1547

# Summary findings

Thiirtle, Townsenid, anid van Zyl investigate whether factor prices matter in agricultural production and in the selection of production technology.

Eaclh stage of the analysis corroborates the inducement hypothesis, which implies that factor prices do matter in agricultural production **and** in the selection of produictioni technology.

T'he empirical resuLlts also suggest that observed rates anid biases of techniological change are influenced by average farm size, by spernding on research and extensionl, and by favorable tax and interest-rate policies.

In Soutth Africa, the authors conitenid, more attention should be focused on1 the technological needs of smallscale farmers. 'I'he lobbying power of the large commiiiercial farmers, combined with policies followed under apartheid, must have influenced the allocation of researchi and developmenit tunlds between labor- and land-saving techlnical change. This will have distorted the technological kias towardl labor-saving technical change, which is hardly appropriatc for a labor-sturpluis economy in which small farmers in the former homelands face a chronic scarcity of land.

These results show that factor prices do matter in agricultural production and the selection of production technology. And there seems to be merit to the World - Bank's usual policy prescription structural adjustment and market liberalization - for economies in which prices are controlled and distorted.

They investigate the role of factor prices by applying cointegration techniques to a model of induced innovation based on the two-stage constant elasticity of substitution production function. This approach results in direct tests of the inducement hypothesis, which are applied to data for South African agriculture for the period 1947-92. They check the time series properties of the variables, establish cointegration, and construct an error correction model (ECM) that allows factor substitution to be separated from technological change. Finally, they subject the ECM formulation to tests of causality, which show that the factor price ratios induce the factor-saving biases of technological change.

This paper - _--_ a product of the Office of the Director, Agriculture and Natural Resources Department - is part of a larger effort in the department to design appropriate agricultural policies. Copies of the paper are available free from the World Bank, lX18 ti Street NW, Washington, DC 20433. Please contact Melissa Williams, room S8-222, telephone 202-4587297, fax 202-S 22-1 142, Interniet address mwilliams(@zworldbank.org. November 1995. (31 pages) _The Policy Researci' W:orking Paper Series disseminates the_ **_findings_** _of work_ **_in progress_** _to_ **_encourage the exchange_** _of ideas about_ **_dlevel')pnient issues._** _An ob!ec_ **_tive_** _of the series is to get the findings_ **_out_** _quickly, even ifthe presentations are less than fully polished. The papers carry_ **_the_** _names_ **_(,f_** _the authors and should be used and cited accordingly. The findings, interpretations, and conclusions are the ith(ns 'oewn_ **_adl shotuld not_** _he .attributed to the World Bank, its Executive Board of Directors, or any of its member countries._ 1'roduced by the l'olicy Research Dissemination Center