Download Growth and structural change

2b: Growth and structural
change
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Overview
 Stylized facts of economic structure and structural change
 Simple 2-sector models of economic structure & change
 Classical development theory: the dual economy
 Neoclassical two sector model
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Growth and structural change
 Growth inevitably involves change in product mix of
production, demand and trade
 Growth causes structural change:
 in the sectoral composition of GDP
 in the allocation of labor and other resources
 in the distribution of income


by factors (L, K, etc)
by households (rural, urban, etc)
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Structural change: ag share of GDP
Agriculture share in value-added (%)
60
50
40
Indonesia
30
Malaysia
Philippines
20
Thailand
Vietnam
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
0
Source: WDI
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Structural change: industry share of GDP
Industry share in value-added (%)
60
50
40
Indonesia
30
Malaysia
Philippines
20
Thailand
Vietnam
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
0
Source: WDI
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Changing composition of labor demand (1)
Agriculture share of total employment (%)
90
80
70
60
Indonesia
Lao PDR
50
Malaysia
40
Philippines
Thailand
30
Vietnam
20
10
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
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Changing composition of labor demand (2)
Industry share in total employment (%)
40
35
30
25
Indonesia
Lao PDR
20
Malaysia
15
Philippines
Thailand
10
Vietnam
5
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
Source: WDI
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Growth & structural change: stylized facts
 In the poorest countries, agriculture generates largest share of
income, employment and trade revenues
 The relative decline of agriculture is driven (in part) by economic
expansion & growth of per capita income
 Demand changes: Engel effects
 Relative factor endowment growth rates (“Rybczinski effects”)
 Relative factor productivity differentials
 Policies & global markets may also play a role
 In general, poor countries tax agriculture to finance
industrialization, reducing agr. profitability and investment
 Global market prices may signal incentives for some sectors to
expand, others to contract

Policies that increase international integration may matter
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Tools: sectoral production functions
 Aggregate production function Y = F(K, L)
 Sector (industry) level production function Yj = Fj(Kj, Lj),
for all industries j
 GDP (value-added): G 
 Factor employment:
 Total factor supply:
j j
j j
P
Y

P
F
(K
L)
 j1
 j1
N
j
j
N
L, K
 So full employment of factors constrains total output:

Ex.: L 
 L1  L2  L3 ...
 Maximum output that can be produced subject to factor

supply constraints: production possibilities frontier

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Growth implies outward shift of PPF
Assume: M sector is K-intensive, A sector is L-intensive
Growth: factor accumulation: ΔK, ΔL, or technical progress
Equal rates of K and L accumulation
Faster rel. rate of K accumulation
OR Equal rates of technical progress
in both sectors
OR faster technical progress in
manufacturing sector
A
A
M
M
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Balanced growth at constant prices
Agriculture
‘Balanced growth’ line - no str. change
D
C
Manufacturing
Balanced growth: equal rates of K and L accumulation
--> equal growth rates of ag. & mfg. sectors
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Balanced growth at constant prices
Agriculture
‘Balanced growth’ line - no str. change
D
C
Rise in GDP, measured in terms
of manufactures at constant
prices
Manufacturing
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Structural change at constant prices
Agriculture
C
E
Manufacturing
Unbalanced growth: faster rate of K accumulation
 faster relative growth rate of M sector.
• What happens to the composition of GNP?
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Price changes and structural change
• Exogenous change in world market price ratio
 Ex. Food price rise: pA’ > pA, so pA’/pM > pA/pM

Alters optimal mix of goods produced
• Endogenous changes
– Engel effects: As incomes rise, budget share of food
diminishes.
–
Domestic valuation of ag. relative to mfg. will decline; if
prices are set in domestic markets, pA/pM will decline
• Policies that alter prices. Ex. tariff at rate tM:
pM(1+tM) > pM, so
pA/pM(1+tM) < pA/pM
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Structural effects of price changes
Agriculture
E
C
Manufacturing
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Is full employment constraint realistic in a
poor economy?
 Structural change stories are driven in part by the need to
‘give up’ factors from one sector in order to permit another
to expand
 Assume full employment of factors
 Much ‘hidden’ unemployment in low-income economies
 Ex.: in Vietnam, many rural and unskilled workers report
working less hours than they would like
 “Classical” development models did not assume full
employment
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The dual economy model
 Examines growth and str. change of an economy with
surplus labor in agriculture.
 Surplus labor: marginal product of labor in ag. is initially
zero
 Output sharing: each ag. worker receives average product, not
marginal product, so wage in ag > marginal product of L
 Can withdraw some labor without reducing total ag.
production
 Thus growth = expansion of industry, with unchanged ag.
output (compare Rybczinksi)
 What happens to sectoral GDP shares?
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Development of the dual economy
Industry labor demands
Industry wage
D1
Wage in ag.
Labor in industry
L1M
Subsistence ag
wage = AP(L)
Labor in ag.
Total ag.output
(read from right
to left)
YA
f
L1A
g
h
0
Labor in ag.
Industry labor demands
Industry wage
D1
L1
Wage in ag
M
D2
Labor in industry
L2M
Subsistence ag
wage
Labor in ag.
Total ag.output
(read from right
to left)
YA
f
L1A
YA
L2A g
h
0
Labor in ag.
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Industry labor demands
Industry wage
D1
L1
Wage in ag
M
D3
D2
L2M
L3
Labor in industry
M
Subsistence ag
wage
Labor in ag.
Total ag.output
(read from right
to left)
YA
f
L1A
YA
L2A g
YA
L3A
h
0
Labor in ag.
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Thoughts on dual economy
 “Traditional” vs. “modern” dichotomy; assumed
“irrationality” of behavior in former sector
 Origins in studies of SE Asia (Boeke; Higgins, 1950s)
 Alt. characterization: “traditional” sectors are constrained
by mkt failures (esp. capital mkt) & by risk, social norms
 Dual development patterns consistent with this
 What kinds of data might verify DE assumption?
 What about income distribution as dual economy
develops?
 Functional distbn = shares of income paid to labor, land, capital
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The neoclassical two sector model
 Similar to “final” phase of Lewis model
 No labor can be transferred without a reduction in ag. output
 A stagnant agricultural sector, i.e., one with little new investment or
technological progress, will cause wages of workers in industry to rise
rapidly and thereby reduce profits and investment
 Industry will develop successfully only if agriculture grows fast enough to
catch up with higher levels of consumption and prevent the terms of
trade from turning against industry
 In the labor-surplus model, planners can ignore agricultural
development until the surplus of labor is exhausted
 But in the neoclassical model there must be a balance of growth rates
between industry and agriculture
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Industry labor demands
Industry wage
D1
L1
Wage in ag
M
D3
D2
L2M
L3
Labor in industry
M
Subsistence ag
wage
Labor in ag.
Total ag.output
(read from right
to left)
YA
f
L1A
YA
L2A g
YA
L3A
h
0
Labor in ag.
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Prying open the Lewis and Solow models
 Why are product prices assumed fixed if producers sell only
to the domestic market?
 Does industry growth really come only from domestic
savings and investment?


Imports of capital goods and intermediates are important
How are these paid for? Natural resource exports
 Does structural change explain part of divergence?
 Product cycle: increasing capital-intensity in production
delays diminishing returns to capital

Depends on international markets with elastic demand
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