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Industrial output fluctuations in developing countries: General equilibrium consequences of agricultural productivity shocks

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  • Lee, Iona Hyojung

Abstract

This paper shows that a negative shock to agricultural productivity may increase food prices, and labor and capital can move away from manufacturing into agriculture to meet the subsistence requirement for food. This effect depends on income levels and openness to trade. Using annual manufacturing data and rainfall shocks as the instrument for crop yields (proxy for agricultural productivity), I find that an exogenous decline in yield decreases manufacturing output as well as employment and capital investment in manufacturing. Overall, crop yield variation can explain up to 44% of industrial output fluctuations in developing countries (rainfall shocks cause 31% of the fluctuations). Lastly, this paper shows that such perverse phenomena, in which resources move toward the sector with declining productivity, can lead to a significant reduction in aggregate productivity.

Suggested Citation

  • Lee, Iona Hyojung, 2018. "Industrial output fluctuations in developing countries: General equilibrium consequences of agricultural productivity shocks," European Economic Review, Elsevier, vol. 102(C), pages 240-279.
  • Handle: RePEc:eee:eecrev:v:102:y:2018:i:c:p:240-279
    DOI: 10.1016/j.euroecorev.2017.10.024
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    More about this item

    Keywords

    Economic fluctuations; International trade; Development; International comparisons; Agriculture;

    JEL classification:

    • F1 - International Economics - - Trade
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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