MACRO: On the investment network and development; Professor Julieta Caunedo (Cornell University)

Abstract

The question of whether economic development requires a broad or focused investment strategy has long been a subject of debate among academics and policymakers alike. Through the lens of a parsimonious multisector model augmented to multiple capital types and intersectoral trade in intermediates and investment, we show that the aggregate output elasticity to sectorial productivity growth and to the terms of trade in investment producing sectors depends on the characteristics of the investment network and its interplay with the input-output structure. This paper provides novel and harmonized measures of the investment network across countries. Through income accounting exercises, we show that on average, 24% of income differences across countries can be accounted for by disparities in the investment network. At early stages of development, output elasticities to investment producing sectors are most similar across sectors, and they become more disperse at later stages of development. Importantly, the importance of different equipment types for total investment changes with income: at early stages of development, the importance of Construction is relatively high; whereas at later stages of development, ICT becomes most important. Transportation contributes similarly across the development spectrum.