THE POLITICAL-ECONOMY OF UNDERINVESTMENT IN AGRICULTURE

Owners of sector-specific factors form political lobbies in order to i nfluence government policy. In a closed economy, public investment in agriculture shifts the internal terms of trade against agriculture (du e to Engel's law) and thereby increases the surplus of unorganized cla sses which cannot be appropriated by the lobbies. As a result, the lat ter push the government to increase subsidies (or reduce taxes) to the ir members at the expense of public investment which falls below its s ocially optimal level, Trade liberalization, by making the terms of tr ade invariant to public investment, tends to reduce the extent of unde r-allocation of public investment in agriculture. (C) 1998 Elsevier Sc ience B.V.