Agricultural Trade and Structural Change: Evidence from Paraguay

We study how international trade affects structural change in an agricultural exporting country. For this purpose, we calibrate a three-sector growth model to quantify the role of international trade in explaining structural change patterns observed in Paraguay. This country experienced a significant rise in net agricultural exports as a percentage of aggregate output during the period 1962-2012. We find the following results. First, international trade is crucial to explain the sectoral composition of employment in this country. The model including trade explains 84.2% of observed changes in employment shares during this period, while the model without trade can only account for 35.6% of observed changes. Second, employment in agriculture remains large in order to satisfy foreign demand. Third, employment shifts directly from agriculture into services in the long run, bypassing manufacturing. These patterns can only be explained by the rise in net agricultural exports.