Brown Bag Seminar: Guzmán Ourens

Uneven Growth in the Extensive Margin: A New Explanation for the Divergence of Agricultural Economies

Guzmán Ourens, IRES

Expanding the set of goods produced is typically a part of economic development. We document a new growth fact by showing that growth in the extensive margin is far from being balanced between sectors. Indeed, diversification in the agricultural sector is on average lower than in other activities. We introduce this fact into a simple model of trade to show the relevance of unbalanced diversification for regions that are specialized in the lagging sector. Diversity-loving consumers combined with sectors diversifying their production at consistently different rates, endogenously shifts the share of world expenditure devoted to the more prolific sector. The region specialized in the lagging sector receives a decreasing share of world income which results in diverging income and welfare trajectories with respect to the region producing in the dynamic sector. Appropriating a decreasing share of world value may push downward wages in this region and this can result in terms of trade deteriorating. This possibility, separates our theoretical results from those obtained when divergence is the result of uneven productivity growth between sectors. Finally, we present empirical evidence in support of the main testable results of the model and, in particular, we find support for terms of trade adjustment enhancing, rather than softening divergence for agricultural countries. Our model is the first replicating these facts without the need of heterogeneous consumers or products, nor resorting to political or institutional explanations.