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Research Details

Capital Accumulation and Structural Transformation

Abstract

Several scholars argue that high agricultural productivity growth can retard industrial development as it draws resources towards the comparative advantage sector, agriculture. However, agricultural productivity growth can lead to industrialization through its impact on capital accumulation. We highlight this effect in a simple model where larger agricultural profits increase the supply of capital, generating an expansion of the capital-intensive sector, manufacturing. To test the predictions of the model we exploit a large and exogenous increase in agricultural profits due to the adoption of genetically engineered soy in Brazil. We find that profits generated in soy-producing regions were not reinvested locally. Instead, agricultural productivity growth generated capital outflows from rural areas. To trace the destination of capital flows we match data on deposit and lending activity of all bank branches in Brazil, bank-firm credit relationships and firm employment. We find that capital reallocated from soy-producing to non-soy producing regions, and from agriculture to non-agricultural activities. The degree of financial integration affects the speed of structural transformation. First, regions that are more financially integrated with soy-producing areas experienced faster growth in non-agricultural lending. Second, firms that are better connected to soy-producing areas through their pre-existing banking relationships experienced larger growth in borrowing and employment.

Type

Working Paper

Author(s)

Paula Bustos, Gabriel Garber, Jacopo Ponticelli

Date Published

2017

Citations

Bustos, Paula, Gabriel Garber, and Jacopo Ponticelli. 2017. Capital Accumulation and Structural Transformation.

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