Investigating the Factors Affecting the Value Added of Iran's Agricultural Sector

Document Type : Research Paper

Authors

1 Department of Economy, Faculty of Humanities, University of Zanjan, Zanjan, Iran

2 Department of Extension, Communication and Rural Development Faculty of Agricultural, University of Zanjan, Zanjan, Iran

3 Department of Agricultural Economics, Faculty of Agricultural Economics and Development, University of Tehran. Karaj, Iran

Abstract

The agricultural sector in Iran, like other developing countries, is important in several ways. This sector accounts for a significant share of the country's economy and accounts for a much larger share of labor employment. Hence, the added value and welfare created per capita of labor in this sector is less than other sectors. In this regard, it is necessary to upgrade its production capacity and create added value. In this study, an attempt is made to measure the effect of various factors on the value added of the agricultural sector during the period 1967-2017 using the production function method and the ARDL model. The results showed that in the long run, for one percent increase in physical capital, natural resources, human capital and knowledge and technology, the value added of the agricultural sector will increase by 0.44, 0.20, 0.75 and 0.12 percent, respectively. Due to the declining trend of increase in physical capital, the necessary policies should be adopted to enhance investment. In general, the agricultural sector needs sufficient capital, based on appropriate knowledge and technology, and skilled and capable workers.

Keywords

Main Subjects

Extended Abstract

Objectives

The agricultural sector in Iran, like other developing countries, is vital in several ways. In Iran, this sector has five sub-sectors of agriculture, animal husbandry and hunting, forestry, fishing, and agricultural services. It accounts for a significant share of the country's economy and accounts for a larger share of labor employment. This means it doesn’t produce proper value-added per worker. So, producers in the agricultural sector reach lower income and welfare than other sectors. In this regard, it is necessary to upgrade the sector's production capacity and to enhance value-added. In the present study, the effect of production factors on the value-added of the agricultural sector has been measured.

 

Methods

    The study uses a standard classic production function to investigate the impact of factors, including labor, physical capital, human capital, natural resources, and knowledge and technology, on the value-added of the agricultural sector. For this purpose, the variable of net capital stock of the agricultural sector was considered as an indicator for physical capital. The literacy rate in the rural areas was used as an indicator for human capital. Also, the rainfall data was used as a proxy for natural resources. Finally, research and development expenditure in the agricultural sector was selected as a proxy for knowledge and technology. The Cobb-Douglas functional form was estimated using the ARDL as an econometric approach (Autoregressive Distributed Lag Model). The data of the variables used in this study were collected from the National Planning and Budget Organization, the Central Bank of the Islamic Republic of Iran, and the Meteorological Organization for the years 1967-2017. The econometric model was estimated by Eviews 10, and Microfit 5.5 softwares.

 

Results

   The results of estimating the ARDL model in the short-term showed that value-added with one lag, physical capital with two lag, natural resources, human capital, and knowledge and technology have a positive and significant effect on value-added of the agricultural sector; while, labor, statistically, doesn’t have any significant impact on the value-added of the agricultural sector. Based on the results of estimating the ARDL model, in the long run, a one percent increase in the indicator of the human capital will increase the value-added of the agricultural sector by 0.75 percent, which equals more than 898 billion rials (constant 2014 IRR). One percent increase in the indicator of the natural resources increases the value-added of the sector by 0.2 percent. In fact, by a one-millimeter increase in the rainfall, agricultural value-added will be increased by more than 62 billion rials (constant 2014 IRR). Also, a one percent increase in the physical capital leads to a 0.44 percent increase in the value-added of the agricultural sector. This means by one billion rials increase in the average physical capital, the value-added of the agricultural sector will be increased by 249 million rials (constant 2014 IRR). One percent increase in the indicator for knowledge and technology will increase the value-added of the agricultural sector by 0.12 percent. In other words, by a one billion rials increase in R&D expenditures in the sector, the value-added of the agricultural sector will be increased by more than 1.4 billion rials (constant 2014 IRR).  Moreover, the results indicate that two dummy variables, revolution and war (1978-88) and drought (2008-2017), have a negative and significant impact on the value-added of the agricultural sector. Finally, by estimating Error Correction Model (ECM), its coefficient shows the speed of converging to equilibrium. The result indicates that the coefficient of the ECM (-1) is -0.60. It is appropriately signed, which means that all the variables are valid that is giving validity that the entire variables have a long-run equilibrium relationship. The negative sign further indicates that the adjustment portrays the direction to restore the long-run relationship. The magnitude of the ECM (-1) coefficient suggests that the speed of adjustment is relatively high. In fact, any deviation in equilibrium will adjust in less than two years.

 

Discussion

    According to the main purpose of the study, to investigate the impact of production factors on the value-added of the agricultural sector, the results showed that the variables of physical capital, human capital, natural resources, and knowledge and technology in the short-run and long-run have a positive and significant effect on the value-added of Iran’s agricultural sector. Due to the declining trend of increase in physical capital, proper policies should be adopted to enhance investment. The agricultural sector needs sufficient physical capital, based on proper knowledge and technology, and skilled and educated workers.

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Iranian Journal of Agricultural Economics and Development Research
Volume 54, Issue 4
April 2023
Pages 833-850

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