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Investment Demand and Structural Change

Author

Listed:
  • Lucciano Villacorta

    (CEMFI)

  • Josep Pijoan-Mas

    (CEMFI)

  • Manuel Garcia-Santana

    (Universite Libre de Bruxelles (ECARES))

Abstract

The standard hump-shaped relationship between the size of the manufacturing sector and the level of development of countries has been a challenge for theories of structural transformation under balanced growth path. Using a standard multi-sector neo-classical growth model, we argue that this relationship can be explained by countries in transition towards balanced growth paths with higher capital intensity. Our key mechanism is that the set of goods used for final consumption is different from the set of goods used to form physical capital. Hence, when the investment rate of the economy changes so does the relative demand of different goods. We exploit this insight to estimate the sectoral composition of an aggregate consumption good and an aggregate investment good as the investment rate of the economy changes over time. Using panel data from a large set of developing economies we find that the difference in the share of manufactures between investment goods and consumption goods is on average around 45 percentage points. We find that the increase in the investment rate in China, South Korea, Malaysia, and India account for more than 10 percentage points of the increase in the value added share of manufacturing since the 60's. Conversely, the decline of manufacturing in Japan, Hungary, Portugal and Finland is partly explained by the fall in the investment rate in these economies.

Suggested Citation

  • Lucciano Villacorta & Josep Pijoan-Mas & Manuel Garcia-Santana, 2015. "Investment Demand and Structural Change," 2015 Meeting Papers 1207, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1207
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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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