STRUCTURAL TRANSFORMATION

Question 1

What is structural transformation?

Answer 1

Reallocation of economic activity across agriculture, manufacturing and services

Question 2

Why does structural transformation matter?

Answer 2

1) Development accounting shows that sectoral productvity differences explain more than 1/2 of cross country income disparities

2) involves changes in relative wages across sectors- convergence of regional wages reduces inequality

3) source of growth: resources move out of low productivity sectors to high

Question 3

Reasons for cross country income differeces”

Answer 3

• lower productivity in agriculture
• hgiher shares of emplyoment in low productivity sectors
• low productivity in non agricultural sectors

Question 4

Encouraging structural transformation

Answer 4

policy intervention can encourage structural transformation away from low productivity agriculture

Question 5

Examoles of policy intervention

Answer 5

1) Broadening access to education - lower costs of obtaining non agricultural skills

2) Infrastructure - increase transportation, decrease travel costs and promote movement - prevent agricultural workers being stuck in rural areas

3) Improving agricultural productivity: new tech- reduce labour intensive prodiction, increase workers seekingn more productive work

Question 6

Empirical patterns of development

Answer 6

As incmoe per capita increases:
- decrease share of agriculutre
- increase share of services
-humpshaped share of manufacturing

Question 7

The Lewis model

Answer 7

shows how surplus labourfrom a low productivity agricultural sector can be increasingly absorbed by a growing modern sector

Question 8

Assumptions of lewis model

Answer 8

• nonhomothetic preferences: low income elasticities of demand for agriculture, high income elasticities of deamnd for services
• differential productivity growth across sectors: fast growing sectors pull reosurces in

Question 9

Two sectors in lewis model

Answer 9

• modern capitalist sector
• traditional subsistence agricultural secotr

Question 10

Overview of the Lewis model

Answer 10

• agricultural sector = unlimited supply of labour
• when marginal productivity of labour driven down to 0, labour can drain away from sector without reducing output
• modern sector profits reinvested into capital, increases profits by drawing more surplus labour away from agricultural sector

Question 11

Modern sector expansion

Answer 11

• shaded area= inital modern sector profits
• as we leave the SR, Lewis assumes modern sector capitalists reinvest profits into capital - KM1 TO KM2
• Increase in capital increases marginal productivity of labour - D1KM1 - D2KM2
  -profit max moves from f to g
• Surplus labour drawn in from agricultural sector, labour increases from L1 to L2, output increases from TPM1 TO TPM2
• Increase in profits leads to increase in capital investment leads to increase in marginal productivity leads to increases in surplus labour being drawn in etc…

Question 12

Lewis turning point

Answer 12

where all surplus labour has been absorbed by the modern sector

• increase in agricultural sector wages
• decrease in agr sector total product
• growth of modern sector slows as cheap labour dries up

Question 13

Example of lewis turning point?

Answer 13

China? Real wages have risen in rural areas

Question 14

Criticism of lewis

Answer 14

1) Surplus agricultutral labour - little evidence for an abundance of surplus labour in rural areas

2) Capital investment- unliekly capitalists will reinvest profits into the same technologu

3) Homogeniety of labour: workers have diffrent skills and experiences that may affect the ability to transition into new sectors and thier productivity in them