Capital as an Anchor of Economic Activity : Evidence from the 1975 Frost

Does physical capital anchor the spatial distribution of economic activity? If so, how does capital destruction affect local economic activity in the short and the long term? I investigate these questions by examining the 1975 frost that damaged coffee trees in the Brazilian state of Paraná. I find that capital destruction can have persistent effects on the spatial distribution of labor. I identify the effects of capital destruction by comparing the evolution of local economies that had different coffee tree densities before the frost. The frost resulted in a large and persistent displacement of agricultural workers. There was a permanent decline of the local coffee industry after the one-time shock, which reduced labor demand as coffee requires more labor than alternative land uses. The results are consistent with a model in which agglomeration economies within the coffee sector lead to multiple spatial equilibria and in which persistent capital investments keep the spatial distribution of the coffee industry from changing