Industrialization without innovation

Abstract

Labor-saving technologies in agriculture can foster structural transformation by releasing workers who find jobs in manufacturing. The traditional view is that factor reallocation towards manufacturing generates innovation and productivity growth. We document, instead, that regions more exposed to a large and exogenous increase in agricultural productivity in Brazil industrialized but experienced lower manufacturing productivity growth. Workers released from agriculture were mostly unskilled and primarily moved to the least skill-intensive manufacturing industries. This paper explores the various mechanisms that can account for the observed manufacturing productivity decline. Changes in worker composition and lower incentives to innovate within manufacturing play prominent roles.