In the first industrialized countries, technical improvements in agriculture favored the development of industry and services by generating demand and capital for other activities. However, this structural transformation process has not taken off in several developing countries. The theoretical literature has offered an explanation: the demand and capital channels might not be operative in open economies where industrial goods can be imported and savings can be exported. However, there is scarce direct empirical evidence testing the mechanisms proposed by these models.
In our work, we bridge theory and evidence by tracing the effects of recent agricultural technical innovations such as GM crops matching several large micro-data sets from Brazil. First, we study their effects on local labor markets. We show that new technologies are labor-saving. Thus, their adoption increased comparative advantage in agriculture but released agricultural workers who found employment in the local industrial sector (Bustos et al., AER 2016).
Second, we study the effects of structural transformation on long run growth. We find that workers leaving the agricultural sector were unskilled. As a result, they reallocated towards the least skill-intensive manufacturing industries, reinforcing their comparative advantage. Growth in low-skill industries attracted workers formerly doing R&D in high-skill industries. Thus, aggregate manufacturing productivity growth slowed down (Bustos et al., NBER WP 2019).
Third, we study the effects of the agricultural boom on capital markets. We use detailed agriculture census and bank-branch level data to show that agricultural productivity growth did not generate an inflow of capital into the agricultural sector. Instead, it led to capital outflows from rural areas. Banks redirected agricultural savings to urban areas within the country where they were invested in the manufacturing and service sectors (Bustos et al., QJE forthcoming).