This paper studies the rapid adoption of mechanical harvesting in São Paulo’s sugarcane industry between 2000 and 2010, following a law banning pre-harvest burning. Using land slope as an instrument for mechanization, we find that mechanization triggered structural transformation --- reducing agricultural and increasing manufacturing employment. However, labor reallocation occurred only in agriculture-related industries, not broadly across sectors. A one-standard-deviation increase in mechanization raised employment in linked manufacturing by 3.5 percentage points, primarily among unskilled workers. This shift generated substantial local economic gains: household incomes rose 19 percent, and poverty fell 14 percent. These findings challenge the view of structural transformation as a shift from agriculture to diverse industries. Instead, technological gains in farming strengthen sectoral linkages, deepening the agro-industrial economy rather than diversifying it. Our results also highlight how environmental regulation can shape industrialization by driving sectoral labor reallocation.

Researcher: Francisco Costa
EPGE Brazilian School of Economics and Finance (FGV EPGE)
Learn more