Abstract only

Since the early work by Griliches on hybrid corn, rate- of-return studies have become standard practice in documenting the economic impact of agricultural research and development (R&D). Although the estimated ex-post rates vary quite substantially, the average tends to range in the order of 70-80%. Despite criticisms on the accuracy of these rates, as well as how representative the selected projects were, a widely shared belief is that the estimated rates are robust enough to accommodate such criticisms and still be in a range that is substantially above the social rate. Based on this evidence, Ruttan argued that there is serious under-investment in public agricultural R&D. This argument has become widely accepted among agricultural economists and hence any slowdown or contraction in the growth of public agricultural R&D expenditures is reason for serious concern.||What do we actually know about this under-investment? How real is it? Is under-investment greater in developing than developed countries? Is it greater for some types of research than others? Has it increased or decreased over time? And, how much more should have been invested in agricultural R&D? In order to answer these questions, the under-investment hypothesis needs to be defined more clearly. This can be done by means of the following simple model of R&D project selection. The ex-ante distribution of possible R&D projects on an expected-rate-of-return (ERR) scale can be thought of as declining asymptotically, which can be approximated by a semi-log function with a negative slope coefficient. Assuming full information and rational economic behavior (i.e., selecting the R&D project with the highest ERR first), the under-investment gap can be defined in strict economic terms as the difference between the ERR of the marginal R&D project (the actual cut-off rate) and the social rate. Important findings of the study are: Not the mean but the mode of the ex-post rate-of- return distribution is the relevant variable for assessing under-investment in agricultural R&D. Under the assumption of full information and economic rationality, developed countries could have invested about 40% more in public agricultural R&D and developing countries about 137% more. In terms of agricultural R&D intensity (i.e., expenditures as a percentage of agricultural GDP), developed countries could have invested 2.8% rather than 2.0%, and developing countries 1.0% rather than 0.4% in the period 1981-85. Low investment in public agricultural R&D in developing countries is caused first and foremost by a relatively smaller portfolio of profitable R&D projects to invest in. Under-investment certainly plays a role (the gap is bigger for developing countries), but it explains only a small part of the difference in agricultural R&D intensity between developed and developing countries. While efforts to reduce the under-investment gap should continue (e.g., better information and priority setting), more emphasis should be placed on designing policies that help to shift the portfolio of R&D projects higher up on the ERR scale, even at the risk of increasing the under-investment gap.|

English

0309|R01CIMPU|AGRIS 0301|AL-Economics Program

Juan Carlos Mendieta

CIMMYT Publications Collection