Does agricultural growth have a causal effect on manufacturing growth?
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Though the role of agricultural growth for manufacturing growth has been
at the center of the discourse on economic development, empirically identifying
the causal effect of agricultural growth on manufacturing growth has remained
illusive for the correlation between the two doesn't necessarily imply causality.
This paper attempts to overcome the identification problem. Since agriculture
is heavily dependent on the weather, random weather variations are used as
instruments to identify the causal impact of agricultural growth on manufacturing growth. Results show that agricultural growth has a significant positive
impact on manufacturing growth. The impact is higher the higher is agriculture's share in the economy (as measured by GDP and employment share).
For example, in an economy with 50% of agricultural GDP, a 1% increase in
agricultural output increases manufacturing output by about 1%.