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Structural change/dual sector model

Structural change

Two economists, Fisher and Clark, put forward the idea that an economy would have three stages of production:

  • Primary production is concerned with the extraction of raw materials through agriculture, mining, fishing, and forestry. Low-income countries are assumed to be predominantly dominated by primary production.
  • Secondary production concerned with industrial production through manufacturing and construction. Middle income countries are often dominated by their secondary sector.
  • Tertiary production concerned with the provision of services such as education and tourism. In high-income countries, the tertiary sector dominates. Indeed having a large tertiary sector is seen as a sign of economic maturity in the development process.

Countries are assumed to first pass through the primary production stage, then the secondary stage and finally the tertiary stage. As economies develop and incomes rise, then the demand for agricultural goods will increase but, due to their low income elasticity of demand, at a proportionately lower rate than income. However, the demand for manufactured goods will have a higher income elasticity of demand. So as incomes grow further, the demand for these goods will grow at a proportionately higher rate. Hence, the secondary sector will grow. As incomes continue to grow, then people will start to consume more services as these have an even higher income elasticity of demand. Thus the tertiary sector will then grow and develop.

However, this may be misleading. Some developing countries may have a large tertiary sector due to a large tourist industry, without having developed a secondary industry. Economists argue that this could be somewhat risky. If the economic base is dominated by an economic activity such as tourism that has a high income elasticity of demand, then a recession in the consuming nations will have a disproportionately large impact on the export earnings of the developing countries. A fall in income will bring about a proportionately greater reduction in demand for the service and this will have a severe impact on the economy. If a developing country does not have a primary or secondary sector to fall back on, then borrowing and debt might be the only prospect.

Lewis dual sector model

This famous West Indian economist felt that productivity was central to the development of an economy. This was best achieved by encouraging migration of workers from the less productive sectors of the economy, for example agriculture, which is traditional, into the newer industries of manufacturing and the tertiary sector. The latter would be more productive and so accumulate greater wealth. In turn, this would generate greater funds for government through taxation, and this would enable them to spend on the essentials of development. Savings would be encouraged as rates of return would increase. Lewis felt that the marginal productivity of a rural worker was low.

However, the Lewis model also has problems and these may include:

  • As increasing rural-urban migration takes place, a more unequal distribution of income is caused, as the rural migrants initially join the ranks of the urban poor.
  • The idea that the productivity of labour in rural areas is almost zero may be true for certain times of the year. However, during planting and harvesting, the need for labour is critical to the needs of the rural areas.
  • The assumption of a constant demand for labour from the industrial sector is questionable. Increasing technology may be labour saving, reducing the need for labour. In addition, if the industry concerned declines, again the demand for labour will fall.
  • The idea of trickle down has been criticised. Will higher incomes earned in the industrial sector be saved? If the entrepreneurs and labour spend their new found gains rather than save it, funds for investment and growth will not be made available.
  • The rural urban migration has for many LDCs been far larger that the industrial sector can provide jobs for. Urban poverty has replaced rural poverty.
  • The model ignores the cost of training and educating the surplus labour from the rural sector who would need to be equipped with new skills to work in the urban sector.