ECON 450 Development Economics

Transcription

1 ECON 450 Development Economics Structural Transformation University of Illinois at Urbana-Champaign Summer 2017

2 Introduction The Development models we discussed so far are aggregate models. Recall the aggregate production function. The (Neoclassical) one-sector growth model necessarily abstracts from several features of the process of economic growth. The neoclassical growth model cannot explain for instance the massive exodus from countryside to industry taking place in China during the past two decades.

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4 "China s rural-to-urban population movement is largely viewed as a response to the economic reform, and better employment opportunities in destination cities have generally been the main determinant in the decision to migrate."

5 Introduction China s Urban and Rural Populations

6 Outline 1 2 The Lewis Structural-Change Model of Development

7 Structural transformation is defined as the reallocation of economic activity across three broad sectors (agriculture, manufacturing, and services) that accompanies the process of modern economic growth. Before presenting any data, it is useful to briefly note some aspects of measuring economic development and structural transformation.

8 Measures of Structural Transformation The two most common measures of economic development at the aggregate level are: 1 GDP per capita; 2 Some measure of productivity (typically GDP per worker or GDP per hour). We ll use GDP per capita here.

9 Measures of Structural Transformation We now turn to measuring structural transformation. Two of the most common measures of economic activity at the sectoral level are: 1 employment shares; 2 value added shares;

10 We now turn to showing the facts regarding structural transformation across countries. We first review the available historical time series evidence for currently rich economies. We then turn to the evidence for currently rich and poor countries.

11 Figure 1 plots the historical time series of sectoral employment shares and value added shares over the 19th and 20th century for ten developed countries. The vertical axis is either the share of employment or the share of value added in current prices in the three broad sectors of interest. The horizontal axis is the log of GDP per capita in 1990 international dollars.

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13 The figures clearly reveal what the literature views as the stylized facts of structural transformation. Over the last two centuries, increases in GDP per capita have been associated with: 1 decreases in both the employment share and the nominal value added share in agriculture; 2 increases in both the employment share and the nominal value added share in services.

14 Manufacturing has behaved differently from the other two sectors: Its employment and nominal value added shares follow a hump shape, that is, they are increasing for lower levels of development and decreasing for higher levels of development.

15 We now turn to an examination of production measures from several currently rich and poor countries. We first document the evolution of the shares of sectoral hours worked and nominal value added as functions of the level of development for five non-european countries as well as for the aggregate of fifteen EU countries. The data are plotted in Figure 2.

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17 The plots in Figure 2 confirm several patterns from the historical times series. 1 The shares of hours worked and nominal value added for agriculture tend to decrease with the level of development for all countries, whereas the shares for services tend to increase with the level of development for all countries.

18 The plots in Figure 2 confirm several patterns from the historical times series. 2 The data are consistent with a hump shape for the shares in the manufacturing sector. 3 The series for both shares as a function of GDP per capita are quite consistent across countries.

19 It is of interest to verify whether the stylized facts of structural transformation extend to data sets that cover countries that are poor today. This is what we do next figure.

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21 The plots confirm that in terms of sectoral employment shares the basic qualitative regularities of structural transformation also hold outside the set of rich countries. It is the case again that the agricultural employment share decreases in the level of development; Employment share of services increases in the level of development. Employment share in manufacturing is strongly increasing at lower levels of development before flattening out and then decreasing somewhat for higher levels of development.

22 Overall, the stylized facts presented in this section shows that as an economy develops, we see: 1 A decrease in the agricultural sector as a share of the economic activity; 2 An increase in the participation of the services sector; 3 Increasing participation of the manufacturing sector at low levels of development and decreasing participation at higher levels.

23 Outline 1 2 The Lewis Structural-Change Model of Development

24 Structural-Change Models Structural-change theory focuses on the mechanism by which underdeveloped economies transform their domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanized, and more industrially diverse manufacturing and service economy.

25 Structural-Change Models One of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy was that formulated by Nobel laureate W. Arthur Lewis in the mid-1950s.

26 The Lewis Two-Sector Model In the Lewis model, the underdeveloped economy consists of two sectors 1 a traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity (surplus labor) 2 a high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. The primary focus of the model is on both the process of labor transfer and the growth of output and employment in the modern sector.

27 The Lewis Two-Sector Model Finally, Lewis assumed that the level of wages in the urban industrial sector was constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labor to the modern sector is considered to be perfectly elastic. The model is illustrated in a two-sector economy by using the figure in the next slide.

28 The Lewis Two-Sector Model

29 The Traditional Sector Lewis makes two assumptions about the traditional sector 1 there is surplus labor in the sense that MP LA is zero, 2 all rural workers share equally in the output so that the rural real wage is determined by the average and not the marginal product of labor

30 The Traditional Sector Assume that there are L A agricultural workers producing TP A food, which is shared equally as W A food per person (this is the average product, which is equal to TP A /L A ). The marginal product of these L A workers is zero, as shown in the bottom diagram of Figure.

31 The Modern Sector The upper-left diagram of Figure portrays the total product (production function) curves for the modern industrial sector. In the Lewis model, the modern-sector capital stock is allowed to increase from K M1 to K M2 to K M3 as a result of the reinvestment of profits by industrial capitalists.

32 The Modern Sector The process that will generate these capitalist profits for reinvestment and growth is illustrated in the lower-left diagram of Figure. Under the assumption of perfectly competitive labor markets in the modern sector, these marginal product of labor curves are in fact the actual demand curves for labor.

33 The Modern Sector W M in Figure is the real wage in the modern capitalist sector. At this wage, the supply of rural labor is assumed to be unlimited or perfectly elastic, as shown by the horizontal labor supply curve W M S L. In other words, Lewis assumes that at urban wage W M above rural average income W A, modern-sector employers can hire as many surplus rural workers as they want without fear of rising wages.

34 The Modern Sector Given a fixed supply of capital K M1 in the initial stage of modern-sector growth, the demand curve for labor is determined by labor s declining marginal product and is shown by the negatively sloped curve D 1 (K M1 ) in the lower-left diagram.

35 The Modern Sector Total modern-sector output, TP M1, would be given by the area bounded by points 0D 1 FL 1. The share of this total output paid to workers in the form of wages would be equal, therefore, to the area of the rectangle 0W M FL 1. The balance of the output shown by the area W M D 1 F would be the total profits that accrue to the capitalists.

36 The Modern Sector Because Lewis assumes that all of these profits are reinvested, the total capital stock in the modern sector will rise from K M1 to K M2. This larger capital stock causes the total product curve of the modern sector to shift to TP M (K M2 ), which in turn induces a rise in the marginal product demand curve for labor.

37 Conclusions of the Lewis Model This process of modern-sector self-sustaining growth and employment expansion is assumed to continue until all surplus rural labor is absorbed in the new industrial sector.

38 Conclusions of the Lewis Model Additional workers can be withdrawn from the agricultural sector only at a higher cost of lost food production because the declining labor-to-land ratio means that the marginal product of rural labor is no longer zero. This is known as the "Lewis turning point."

39 Conclusions of the Lewis Model The structural transformation of the economy will have taken place, with the balance of economic activity shifting from traditional rural agriculture to modern urban industry.

40 Criticisms of the Lewis Model Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation. What if capitalist profits are reinvested in more sophisticated labor-saving capital equipment rather than just duplicating the existing capital, as is implicitly assumed in the Lewis model?

41 Criticisms of the Lewis Model Surplus labor in rural areas and full employment in urban? Most contemporary research indicates that there is little surplus labor in rural locations.

42 Criticisms of the Lewis Model Institutional factors? Institutional factors such as union bargaining power, civil service wage scales, and multinational corporations hiring practices tend to negate competitive forces in modern-sector labor markets in developing countries. Tendency for these wages to rise substantially over time, both in absolute terms and relative to average rural incomes.

43 Criticisms of the Lewis Model Assumption of diminishing returns in modern industrial sector There is much evidence that increasing returns prevail in that sector, posing special problems for development policymaking.