Paula Bustos - ERC Starting Grant

ERC Starting Grant 2017-2024: Economic Development and Structural Transformation

Project summary

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.

This project contributes 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.

Knowledge, capital and labour – networks of exchange.

Listen to this CORDIS - EU research results episode, featuring Professor Bustos talking about her research for the EDST project.

From early economic activity along the Silk Road to modern-day Brazil. What are the unexpected impacts of the movement of labour and the flow of capital?

Results and data

Comment on “Presidential Address: Demand-Side Constraints in Development: The Role of Market Size, Trade, and (In)Equality” by Pinelopi Koujianou Goldberg and Tristan Reed
Paula Bustos
Econometrica, 91 (6), 2023, 1955–1958. DOI: 10.3982/ECTA22318

Immigration and spatial equilibrium: The role of expenditures in the country of origin
Christoph Albert and Joan Monras
American Economic Review, 112 (11), 2022, 3763–3802. DOI: 10.1257/aer.20211241

We document that international migrants concentrate more in expensive cities—the more so, the lower the prices in their origin countries are—and consume less locally than comparable natives. We rationalize this empirical evidence by introducing a quantitative spatial equilibrium model, in which a part of immigrants' income goes toward consumption in their origin countries. Using counterfactual simulations, we show that, due to this novel consumption channel, immigrants move economic activity toward expensive, high-productivity locations. This leads to a more efficient spatial allocation of labor and, as a result, increases the aggregate output and welfare of natives.

Data and code: available from: openICPSR

VoxEU column · Nada es Gratis · El Economista · Medium · UMR CERDI Webinar presentation

Capital accumulation and structural transformation
Paula Bustos, Gabriel Garber and Jacopo Ponticelli
Quarterly Journal of Economics, 135 (2), 2020, 1037–1094. DOI: 10.1093/qje/qjz044

Several scholars argue that high agricultural productivity can retard industrial development because it draws resources toward 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 toward 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 nonagricultural lending. Within these regions, firms with preexisting relationships with banks receiving funds from the soy area experienced faster growth in borrowing and employment.

Replication data: available from Harvard Dataverse

The effects of climate change on labor and capital reallocation
Christoph Albert, Paula Bustos and Jacopo Ponticelli, 2024

Climate change is expected to reduce agricultural productivity in developing countries. Classic international trade and geography models predict that the optimal adaptation response is a reallocation of capital and labor from agriculture towards sectors and regions gaining comparative advantage. In this paper, we provide evidence on the effects of recent changes in climate in Brazil to understand to what extent factor market frictions constrain this reallocation process. 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.

CEPR VoxEU Video: Presentation by Paula Bustos at CEPR 2022 Paris Symposium
Keynote speech at the 2023 Annual Meeting of the Argentinian Association of Political Economy (AAEP) (in Spanish)
CEPR STEG 2024 Barcelona Workshop: Presentation by Jacopo Ponticelli
VoxEU column · PRI blog · Kellogg Insight · LSE Business Review · Barcelona School of Economics Focus

Industrialization without innovation
Paula Bustos, Juanma Castro Vincenzi, Joan Monras and Jacopo Ponticelli, 2023

Labor-saving technologies in agriculture can foster structural transformation by re-leasing workers who find jobs in manufacturing. The traditional view is that factorreallocation towards manufacturing generates innovation and productivity growth.We document, instead, that regions more exposed to a large and exogenous in-crease in agricultural productivity in Brazil industrialized but experienced lowermanufacturing productivity growth. Workers released from agriculture were mostlyunskilled and primarily moved to the least skill-intensive manufacturing industries.This paper explores the various mechanisms that can account for the observed manu-facturing productivity decline. Changes in worker composition and lower incentivesto innovate within manufacturing play prominent roles.

Labor market competition and the assimilation of immigrants
Christoph Albert, Albrecht Glitz and Joan Llull
Barcelona School of Economics Working Paper 1280, 2021.
Revise and resubmit, American Economic Review.

This paper shows that the wage assimilation of immigrants is the result of the intricate interplay between individual skill accumulation and dy- namic labor market equilibrium effects. When immigrants and natives are imperfect substitutes, rising immigrant inflows widen the wage gap between them. Using a production function framework in which workers supply both general and host-country-specific skills, we show that this labor market competition channel explains about one fifth of the large increase in the average immigrant-native wage gap across arrival cohorts in the United States since the 1960s. This figure increases to one third after also accounting for relative demand shifts due to technological change.

BSE Focus

Access to markets and technology adoption in the agricultural sector: Evidence from Brazil
Diego Astorga-Rojas, 2024

This paper studies how better market access through infrastructure improve- ments leads to the adoption of new agricultural technologies. In particular, I study the case of Brazil, and how the construction of the federal highway network from 1950 to 2000 affected the modernization of the agricultural sector. To address endo- geneity concerns, I use the creation of Brasilia, and the project to connect it to the state capitals, as a natural experiment. I build a predicted network of highways by computing the cheapest way to connect the state capitals with Brasilia and use it to instrument market access. I find that municipalities where market access increased adopted new agricultural inputs such as fertilizers and pesticides, improving agri- cultural productivity as a result. Market access also increased the machinery and equipment used for production, but only when Brazil deregulated its agricultural markets and opened to international trade, after 1990.

Research team / collaborators

Joan Monràs Professor of Economics, Pompeu Fabra University.

Jacopo Ponticelli Associate Professor of Finance, Kellogg School of Management-Northwestern University.

Christoph Albert Assistant Professor, Collegio Carlo Alberto.

Gabriel Garber Researcher, Central Bank of Brazil.

Juanma Castro Vincenzi Michael Chae Post-Doctoral Fellow, Harvard University.

Diego Astorga Asssistant Professor, Pontificia Universidad Javierana

Research Assistants: Dominic Cucic (PhD student, CEMFI), Pedro Degiovanni (Master student, CEMFI), Ruoyu Qian (Master student, CEMFI), Christian Rosario Maruthiah (Master student, CEMFI), Ragip Kaan Erdemli (Master student, CEMFI), Duygu Tutluoglu (Master student, CEMFI), Sophie Marie Nottmeyer (PhD student, CEMFI), Kazuharu Yanagimoto (Master Student, CEMFI), Tomás Budí (PhD Student, CEMFI), Giorgio Pietrabissa (PhD student, CEMFI), Franziska Schwingeler (PhD student, UPF), Luca Looser (PhD student, UPF), Simone Cigna (PhD student, UPF).

Project details

Funded under Horizon 2020-EU - EXCELLENT SCIENCE - European Research Council
€ 1 486 500,00
Beneficiaries: Centre for Monetary and Financial Studies (CEMFI) and Institute of Political Economy and Governance (IPEG), Spain
Project acronym: EDST

This project has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement No 716388).