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

• Main Author: LEE, Iona Hyojung
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Two-sector general equilibrium models; economic fluctuations; volatility; instrumental variable analysis; agricultural productivity; Agricultural and Resource Economics; Economics; Economic Theory; Macroeconomics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1728; https://ink.library.smu.edu.sg/context/soe_research/article/2727/viewcontent/IndustrialOutputFluctuations_updated.pdf
• Institution: Singapore Management University

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.