8. Structural transformation Flashcards
What is the Lewis model aimed at doing?
Putting a positive spin on transformation between agriculture and urban development
What is structural transformation and policy aimed at doing?
How to encourage unproductive labour into higher productivity sectors
What are some of the general processes in economic development?
- A steady accumulation of physical and human capital over time
- Rural-urban migration and urbanisation
- Population growth - first increasing, then decreasing with family size
- Structural transformation
What is structural transformation?
The reallocation of economic activity across agriculture, manufacturing and services. Usually associated with a reallocation of resources from low-productivity, labour intensive sectors to higher-productivity, capital and knowledge intensive sectors
What explains cross-country income disparities?
Caselli 2005 Development accounting shows sectoral productivity differences explain more than half of cross-country income disparities
How does structural transformation effect relative wages?
The convergence of regional wages which reduces inequality
Why is structural transformation matter?
- Income disparities decrease with structural transformation
- Transformation can also be an important source of growth
How can structural transformation be a source of growth?
Resources move out of sectors with low (relative and absolute) productivity into sectors with high (relative and absolute) productivity
Which paper uses development accounting?
Caselli 2005
What does the Caselli 2005 paper?
This paper finds that cross-country income differences are due to:
- Much lower productivity in agriculture
- Much higher shares of employment in the low-productivity sector
- Slightly lower productivity in non-agriculture
What are some empirical regularities/ stylised facts that we see in empirical studies of development?
As a country’s income per-capita increases we observe:
- A declining share of agriculture
- An increasing share of services
- A hump-shaped share of manufacturing
What are some of the causes of moving from agriculture to manufacturing to services?
- Non-homothetic preferences
- Differential productivity growth across sectors (Lewis model)
What are non-homothetic preferences?
Low income elasticities of demand for food and agriculture and high income elasticities of demand for services
When was the Lewis model created?
1954, it’s one of the earliest and best-known models of structural change
What are the two sectors the model features?
- A modern capitalist sector
- A traditional subsistence agricultural sector
Give a brief overview of the model?
- The agricultural sector acts as a reservoir containing an unlimited supply of labour
- When the marginal productivity of labour has been driven down to 0, labour can drain away from the sector without reducing output
- Profits in the modern sector are re-invested in capital allowing even higher profits by drawing even more labour from the agricultural sector
What type of returns do we have to labour and what does this imply?
Diminishing marginal returns to labour, when the marginal product reaches 0, there is no value to employing more labour and any additional workers become surplus labour
What is fixed in the short-run in the modern sector?
Capital and technology
What type of labour supply do modern sector firms face?
Perfectly elastic supply of labour as there is surplus labour in the agricultural sector
How do modern sector firms maximise profits?
By employing workers until MP_LM=W_M
As we leave the short run, what does Lewis assume is done with profits?
The profits get invested moving K up which moves the marginal product of labour higher
How do firms respond in the Lewis model to increased marginal product of labour?
Wage hasn’t changed, so more productivity from reinvesting is going to increase profits, capitalists therefore want to bring in more labour. Given the models assumption of infinite pool of labour, this theoretically would happen again and again drawing in more and more labour. This is how the modern sector sweeps up surplus labour and therefore develops by taking the excessive labour in agriculture that has zero marginal product and making it more productive.
What is the Lewis turning point?
The Lewis turning point represents a point where all surplus labour has been absorbed by the modern sector. Thereafter, additional workers can be withdrawn from the agricultural sector only at a higher cost of lost food production because the declining labour-to-land ratio means that the marginal product of rural labour is no longer zero
What does the Lewis turning point predict will happen?
- Increasing agricultural sector wages as additional workers moving to the modern sector will n longer by surplus labour but have +MP
- Agricultural sector total product will begin to fall
- Modern sector growth will slow as ‘cheap’ labour dries up