Economic Development and Structural Transformation

Project Information

EDST

Grant agreement ID: 716388

DOI

10.3030/716388

Project closed

EC signature date 15 February 2017

Start date 1 March 2017

End date 29 February 2024

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 1 486 500,00

EU contribution

€ 1 486 500,00

Coordinated by

INSTITUTE OF POLITICAL ECONOMY AND GOVERNANCE
Spain

Periodic Reporting for period 5 - EDST (Economic Development and Structural Transformation)

Reporting period: 2022-09-01 to 2024-02-29

Summary of the context and overall objectives of the project

Based on the experience of the first industrialized countries, the classic development literature has highlighted how increases in agricultural productivity can foster industrialization and economic development. In particular, the literature has emphasized three main channels through which this structural transformation process can occur. First, the labour channel: productivity growth in agriculture can release workers who find employment in other sectors. Second, the demand channel: growth in agricultural income can sustain demand for industrial goods and services. Third, the finance channel: larger agricultural profits can generate savings that are reinvested in industrial projects.

However, the experience of several low income countries appears inconsistent with the idea that high agricultural productivity leads to economic development. Explanations proposed by the theoretical literature include openness to trade (in an open economy, industrial goods can be imported and savings can be exported) and market failures that characterize developing economies and can limit the reallocation of factors of production across sectors. For example, financial frictions might constrain the reallocation of capital and thus retard the process of labor reallocation.

Our work aims to contribute to our understanding of the role of agricultural productivity on structural transformation by providing direct empirical evidence on i) the effects of the adoption of new agricultural technologies in Brazil ii) the effects of a reduction in agricultural productivity caused by recent changes in climate in Brazil. The evidence is based in micro-data from the agriculture and population census, yearly industry survey, technology and innovation survey, social security data and credit registry.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

"Industrialization without innovation." (Bustos, P., Castro-Vincenzi, J., Monràs, J., & Ponticelli, J., working paper, 2023) reports on our study of the effects of recent agricultural technical innovations such as GM crops on local labor markets. We show that new agricultural technologies are unskilled-labor-saving. Thus, their adoption increased comparative advantage in agriculture but released unskilled agricultural workers who found employment in the local industrial sector. This inflow of unskilled workers reinforced the comparative advantage of the least skill-intensive manufacturing industries, which expanded. As a result, they attracted workers formerly doing R&D in high-skill industries. Thus, innovation and manufacturing productivity growth slowed down.

“Capital accumulation and structural transformation” (Bustos, Garber, and Ponticelli, Quarterly Journal of Economics, 2020), documents the effects of the agricultural boom on capital markets. We use credit registry data to show that agricultural productivity growth did not generate an inflow of capital into the agricultural sector but generated capital outflow from rural areas. Banks redirected agricultural savings to urban areas within the country where they were invested in the manufacturing and service sectors.

“The effects of climate change on labor and capital reallocation” (Albert, Bustos, and Ponticelli, working paper, 2024) presents evidence on the economic consequences of a reduction in agricultural productivity caused by recent changes in climate in Brazil that increased the severity of droughts. Classic international trade and geography models predict that the optimal adaptation response is a reallocation of capital and labor from agriculture towards other sectors and regions gaining comparative advantage. We document that persistent increases in dryness do not generate capital reallocation but a sharp reduction in credit to all sectors in both drying areas and financially integrated regions. In addition, dryness generates a large reduction in agricultural employment. Workers staying in drying regions reallocate towards manufacturing but climate migrants are allocated to small firms outside of manufacturing in destination regions. The evidence suggests that frictions in the interbank market and spatial labor market frictions constrain the reallocation process from agriculture to manufacturing.

"Immigration and spatial equilibrium: The role of expenditures in the country of origin" (Albert, C., and Monràs, J. American Economic Review, 2022) and "Labor market competition and the assimilation of immigrants" (Albert, C., Glitz, A., and Llull, J. 2022) Revise and Resubmit, American Economic Review 2022 study asymmetries between natives and migrants that are important for assimilation at destination.

The scientific output for this project has been disseminated through i) presentations ii) publications iii) open access to data iv) social media: Twitter and Linkedin; v) a project website.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

Our work contributes to a large literature characterizing the development process as one where production factors reallocate from the rural agricultural sector to the urban industrial and service sectors. In particular, our knowledge of the process of capital reallocation is extremely limited. The scarcity of empirical studies on the reallocation of capital is often due to the limited availability of data on the spatial dimension of capital movements. In the article “Capital Accumulation and Structural Transformation,” we are able to track internal capital flows across regions in Brazil using detailed data on deposit and lending activity at branch level for all commercial banks operating in the country. A second challenge we face is to sign the direction of capital flows: from the agricultural rural sector to the urban industrial sector. For this purpose we design a new empirical strategy that exploits differences in the geographical structure of bank branch networks to measure differences in the degree of financial integration across origin and destination municipalities. A third challenge is to isolate the capital supply channel from other effects of agricultural technical change which could spill over to connected regions. To overcome this difficulty we match data on capital flows within bank branch networks with the universe of bank-firm credit relationships and social security data containing the employment histories and wages for the universe of formal firms. This allows us to construct firm-level credit supply shocks by exploiting differences in the geographical structure of the branch network of their lenders.

Our article "Industrialization without Innovation" informs the debate on whether reallocating agricultural workers into manufacturing can increase aggregate productivity. In this sense, our findings are a cautionary tale on the effects of structural change on productivity growth, by highlighting the importance of skilled-labor scarcity for innovation in the manufacturing sector.

“The effects of climate change on labor and capital reallocation" contributes to the literature studying adaptation to climate change in developing countries. A key channel of adjustment highlighted by the theoretical literature is factor reallocation from the directly affected rural agricultural sector to the industrial and service sectors in urban regions. Our finding that this process is constrained by spatial labor and capital market frictions implies that the costs of climate adaptation in developing countries are likely to be larger than those predicted by classic models without factor market frictions.

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