Chapter 4

Economic
Structure and
Structural-change
Models

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4.1 Concepts

-Structural change is associated with modifications in the relative

importance of different sectors over time, measured by their share of
output or employment (Memedovic & Iapadre, 2010, p.3)

-The interrelated processes of structural change that accompany

economic development are jointly referred to as the structural
transformation (Syrquin, 1988, p.206)

- Structural transformation: The process of transforming an economy

in such a way that the contribution to national income by the
manufacturing sector eventually surpasses the contribution by the
agricultural sector. (Todaro & Smith, 2011, p.115)
4.2 Theories of structural
transformation patterns
• 4.2.1 Engel’s law
• 4.2.2 Fisher’s theory
• 4.2.3 Petty-Clark’s law

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4.2.1 Engel’s law

• The law was named after the statistician

Ernst Engel (1821–1896)
• As income rises, the proportion of income
spent on food falls, even if absolute
expenditure on food rises.
=> Engel curve?

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What type of good X in these
Engel’s curves?

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4.2.2 Petty-Clark’s law

• Colin Clark used a speech given by Sir William

Petty, in 1690 => known as Petty-Clark's Law.
• The theory speaks about the primary (extraction of
raw materials), secondary (manufacturing), and
tertiary (services) sector.
• The main focus of the country’s economy will
change: primary => secondary => tertiary
sector, as the country's economy develops.

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4.3 World structural change:
Features and Trends

Source: Memedovic & Iapadre (2010, p.6)

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4.3 World structural change:
Features and Trends

Source: Memedovic & Iapadre (2010, p.10) 2-8

Application
The following table presents data on value added in agriculture,
industry, and services for Bangladesh and Pakistan in 1999, 2002,
and 2003.

Draw a set of bar charts for each country to examine the process of
structural transformation in these countries.
Evidence you are looking for is the falling share of agriculture and the
rising shares of industry and services over time.

Based on your observation, which country is showing a consistent pattern

of transformation?
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Answer

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 4.4 Structural change models
Rostow’s Model

Source: https://www.google.com.vn/search?q=structural+change+in+rostow+model&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjr-
ZiBgr3VAhWFipQKHX4XCkIQ_AUICigB&biw=1280&bih=621#imgrc=WdOXVaN8AjBuyM: 2-11
4.4 Structural change models
A. Lewis’s Model
Observation:
LDCs often have two quite different sectors:
• 1. Traditional (subsistence) agriculture

=> VERY low productivity and

incomes, redundancy in labor

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2. “Modern” Industrial Sector

• Higher K/L, more

modern technology
than traditional sector
(but often low by rich
country standards)
 Higher productivity and
incomes
 Large Urban-Rural
gaps => migration

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The Lewis Model
Modern- Sector Growth in a Two-Sector
Surplus-Labor Economy
TPA
Traditional
(agricultural) TPA2
TPA1
sector

0
LA1 LA2 LA
APLA
MPLA MPLA
APLA

0 LA1 LA2 LA
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The Lewis Model
Modern- Sector Growth in a Two-Sector
Surplus-Labor Economy
Modern
TPM
(Industrial) TPM5 TPM5 (K5)
Sector TPM4 TPM4 (K4)
TPM3
TPM2
TPM1 (K1)
TPM1
0
LM
WM
D3 D4 D5
D1 D2 SML
WM1
WM E5
E1 E2 E3 E4

0
LM1 LM2 LM3 LM4 LM5 LM
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Criticisms - Lewis Model

• Rate of labor transfer and employment

creation may not be proportional to rate of
modern-sector capital accumulation
• Surplus labor in rural areas (no) and full
employment in urban (no)?
• Institutional factors (unions, min wage)?
• Assumption of diminishing returns in modern
sector (agglomeration economies)
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Chapter conclusion

• How does this chapter illustrate the model?

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