south east asia development 2b pptx

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

2b: Growth and structural

change

1

 Classical development theory: the dual economy

 Neoclassical two sector model

2

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)

3

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

8

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):

 Factor employment:

Total factor supply:

So full employment of factors constrains total output:

 Ex.:

 Maximum output that can be produced subject to

factor supply constraints: production possibilities

Growth implies outward shift of PPF

Assume: M sector is K-intensive, A sector is L-intensive

Growth: factor accumulation: ΔK, ΔL, orK, ΔK, ΔL, orL, or technical

progress

10

Equal rates of K and L accumulation

OR Equal rates of technical progress

in both sectors

Faster rel rate of K accumulation

OR faster technical progress in

manufacturing sector

Balanced growth: equal rates of K and L accumulation

> equal growth rates of ag & mfg sectors

Agriculture

Manufacturing

Unbalanced growth: faster rate of K accumulation

 faster relative growth rate of M sector.

• What happens to the composition of GNP?

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, p A /p M will decline

• Policies that alter prices Ex tariff at rate tM:

pM(1+tM) > pM, so pA/pM(1+tM) < pA/pM

14

ManufacturingC

E

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

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

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?

17

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

21

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

22

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

 “Vent for surplus”

 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

24