DP13379 | Structural Transformation, Industrial Specialization, and Endogenous Growth

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The introduction of new technologies in agriculture can foster structural transformation by freeing workers who find occupation in other sectors. The traditional view is that this increase in labor supply in manufacturing can lead to industrial development. However, when workers moving to manufacturing are mostly unskilled, this process reinforces a country's comparative advantage in low-skill intensive industries. To the extent that these industries undertake less R&D, this change in industrial composition can lead to lower long-run growth. We provide empirical evidence of this mechanism using a large and exogenous increase in agricultural productivity due to the legalization of genetically engineered soy in Brazil. Our results indicate that improvements in agricultural productivity, while positive in the short-run, can generate specialization in less-innovative industries and have negative effects on productivity in the long-run.