Agriculture Modernization, Investment, and Structural Change

Abstract

A key feature of economic growth is the inevitable structural change across sectors: the agriculture sector shrinks, the service sector rises, and the manufacturing sector performs a hump-shaped pattern. In addition, empirical observations reveal that the historical investment rates in today's developed countries also follow a similar hump pattern. This paper intends to explore the theoretical linkage of these two key variables. Following recent research, we propose that the modernization of agriculture is the fundamental mechanism which forms these two hump-shaped patterns simultaneously. We construct a multi-sector general equilibrium model and investigate the growth path in four sub-stages. Unique to our model is the emphasis on the role of capital accumulation in such a process. As workers leave the traditional agriculture sector and entering the modern sectors, their demand for capital goods temporally raises the investment rate. Since the majority of capital goods comes from the manufacturing sector, the manufacturing employment share would first rise, then decline and converge to its long run steady state. This long-run equilibrium of our model is on a generalized balanced growth path as defined by Kongsamut, Rebelo, and Xie, (2001). The empirical test confirms that a more rapid decline of agriculture employment is associated with a higher rate of investment. Using a numerical example, we show that the peak moment of manufacturing employment share is associated with the completion of the technology adoption for modern agriculture technology, which is consistent with historical observations. Our model illustrates that it doesn't require unbalanced technology growth to derive the hump-shaped pattern in manufacturing employment.