On the Investment Network and Development

Capital accumulation and the systematic reallocation of economic activity across sectors are two of the most salient features of economic development. These two features are interconnected through the production of various types of capital and heterogeneous usage intensity across sectors, which is summarized by the investment network. Our paper introduces the first harmonized measures of the investment network across the development spectrum and documents novel empirical regularities. We propose a simple theory linking disparities in this network to disparities in income per capita across countries. We show that Domar weights and the elasticity of output to sectorial productivity are nontrivial functions of the investment network and equilibrium sectorial investment rates. For our sample of 58 countries, we show that 33% of cross-country differences in income per capita can be accounted for by disparities in the investment network. These differences are twice as large as the role of capital in income disparities estimated through standard development accounting.