Francisco Costa, FGV

Paper: Structural Change Through Environmental Regulation: Evidence from São Paulo’s Fire Ban

Abstract: This paper studies the rapid adoption of mechanical harvesting in S ̃ao Paulo’s sug-arcane industry between 2000 and 2010, following a law banning pre-harvest burning.Using land slope as an instrument for mechanization, we find that mechanization trig-gered structural transformation — reducing agricultural and increasing manufacturingemployment. However, labor reallocation occurred only in agriculture-related indus-tries, not broadly across sectors. A one-standard-deviation increase in mechanizationraised employment in linked manufacturing by 3.5 percentage points, primarily amongunskilled workers. This shift generated substantial local economic gains: household in-comes rose 19 percent, and poverty fell 14 percent. These findings challenge the view ofstructural transformation as a shift from agriculture to diverse industries. Instead, tech-nological gains in farming strengthen sectoral linkages, deepening the agro-industrialeconomy rather than diversifying it. Our results also highlight how environmentalregulation can shape industrialization by driving sectoral labor reallocation