Uneven Growth in the Extensive Margin: Explaining the Lag of Agricultural Economies

Abstract

This paper documents that growth in the extensive margin is on average lower in the agricultural sector than in other activities. I introduce this new fact into a simple model of trade with expanding-variety growth, to show its relevance for regions specialized in the lagging sector. Diversity-loving consumers endogenously reduce the share of their expenditure devoted to that sector. The region specialized in it receives a decreasing share of world income, which results in diverging income and welfare trajectories with respect to the rest of the world. Appropriating a decreasing share of world value pushes downward the relative wage of the agricultural region and lowers the price of its exports relative to that of its imports, resulting in terms of trade deterioration. The prediction of falling terms of trade for the region specialized in the lagging agricultural sector is supported by empirical evidence and separates the results of my theory from those obtained in a similar model of uneven output growth between sectors. I present empirical evidence for the main testable results of the model. This theory is the first replicating these facts without the need of heterogeneous consumers or products, nor resorting to political or institutional explanations.