DP11636 Investment Demand and Structural Change

Author(s): Manuel García-Santana, Josep Pijoan-Mas, Lucciano Villacorta
Publication Date: November 2016
Date Revised: August 2020
Keyword(s): Neo-classical Growth Model, structural change, Transitional Dynamics
JEL(s): E21, E23, O41
Programme Areas: International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11636

We study the joint evolution of the sectoral composition and the investment rate of developing economies. Using panel data for several countries in different stages of development, we document three novel facts: (a) the share of industry and the investment rate are strongly correlated and follow a hump-shaped profile with development, (b) investment goods contain more domestic value added from industry and less from services than consumption goods do, and (c) the evolution of the sectoral composition of investment and consumption goods differs from the one of GDP. We build and estimate a multi-sector growth model to fit these patterns and provide two important results. First, the hump-shaped evolution of investment demand explains half of the hump in industry with development. Second, asymmetric sectoral productivity growth helps explain the decline in the relative price of investment goods along the development path, which in turn increases capital accumulation and promotes growth.