Financial Sector Development and Structural Transformation

University of 黑料传送门 Booth

Gabriel Garber 

, Centre de Recerca en Economia Internacional (CREI)

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 increase savings and the supply of capital, generating an expansion of the capital-intensive sector, manufacturing. We highlight this mechanism in a simple model and test its predictions in the context of a large and exogenous increase in agricultural productivity due to the adoption of genetically engineered soy in Brazil. We find that agricultural productivity growth generated an increase in savings, but these were not reinvested locally. Instead, there were capital outflows from rural areas. Capital reallocated towards urban regions, where it was invested in the industrial and service sectors. The degree of financial integration affected the speed of structural transformation. Regions that were more financially integrated with soy-producing areas through bank branch networks experienced faster growth in non-agricultural lending. Within these regions, firms with pre-existing relationships with banks receiving funds from the soy area experienced faster growth in borrowing and employment.