structural transformation Flashcards
What is Structural Transformation?
o the reallocation of economic activity across agriculture, manufacturing and services
o reallocation of resources from low-productivity, labour-intensive sectors to higher-productivity, capital- and knowledge-intensive sectors
Why Does Structural Transformation Matter?
o explains more than half of cross-country income disparities – and more than factors of production
o involves big changes in relative wages across sectors
o Resources move out of sectors with low productivity into sectors with high productivity
Development Accounting
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Caselli (2005) finds that cross-country income differences are due to
1) Much lower productivity in agriculture
2) Much higher shares of employment in the low-productivity sector
3) Slightly lower productivity in non-agriculture
Empirical Patterns 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
Possible Mechanisms for Empirical Patterns of Development
o Non-homothetic preferences
o Differential productivity growth across sectors
The Lewis Two-Sector Model
o two sectors: ‘modern’ capitalist sector and ‘traditional’ subsistence agricultural sector
o The agricultural sector acts as a reservoir containing an unlimited supply of labour
o Profits in the modern sector are re-invested in capital allowing even higher profits by drawing even more labour from the agricultural sector
The Lewis Model - The Traditional Agricultural Sector - Include Graphs
Graphs on slides
The Lewis Model - The Modern Sector - Include Graphs
Graphs on slides
Modern Sector Expansion
Graphs on slides
▪ The area representing profits has also expanded, and this will allow for further increases in capital investment ⟹ higher marginal product ⟹more surplus labour drawn in … etc
The Lewis Turning Point
Graph on slides
o The Lewis Turning Point represents a point where all surpluslabour has been absorbed by the modern sector
o At the turning point the model predicts:
▪ Increasing agricultural sector wages
▪ Agricultural sector total product will begin to fall
▪ Modern sector growth will slow
o Economists have suggested that China may have already passed(or is approaching) the Lewis turning point
Common Criticisms of the Lewis Model
o Surplus Agricultural Labour - no evidence
o Capital Investment - unlikely that capitalists would re-invest profits in the same technology
o The Modern Sector assumptions not realistic
o Homogeneity of Labor - workers can’t easily change profession
Examples of how policy interventions can encourage structural transformation away from low-productivity agriculture
▪ Broadening access to education
▪ Improved transport infrastructure
▪ Improving agricultural productivity
▪ Land tenure
▪ Industrial policies promote the development of specific industries
