Chapter Three

Theories, Models, and Approaches to

Rural Development.

1
 Structured change Theory
 This 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.

 It employs the tools of neoclassical price and resource allocation

theory and modern econometrics to describe how this
transformation process takes place.

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 3.1 Lewis Model of Development with Unlimited Supply of Labor
 Lewis two-sector model (dual-sector model) is a theory of
development in which surplus labor from the traditional agricultural
sector is transferred to the modern industrial sector, the growth of
which absorbs the surplus labor, promotes industrialization, and
stimulates sustained development (A. Lewis, 1954).

 In this model, underdeveloped economy consists of two sectors: a

traditional, overpopulated rural subsistence sector characterized by
zero marginal labor productivity a situation that permits Lewis to
classify this as surplus labor in the sense that it can be withdrawn from
the traditional agricultural sector without any loss of output.

3
 Cont…
 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.

 The characteristics of the two sectors can be summarized as:-

a. The traditional sector (Surplus of labor sector): is an over-

populated rural subsistent sector consisting of small-scale
agriculture, handicraft and petty trade and is usually characterized
by zero marginal product of labour. Traditional sector also has a
high degree of labour intensity but low degree of capital intensity
and little division of labour; and which is mainly in the rural areas.
4
 Cont…
b. The modern sector (productive or industrial sector) is
an urban industrial sector, which characterizes capital-
intensive industries and plantation oriented agriculture
producing for the world market with a high degree of
productivity and division of labour.

Labour is gradually transferred into this sector and the

movement of labour from traditional to modern sector
brings the expansion in both output and employment.

5
 Cont...
The assumptions of the model are given as in the following.

a. The level of urban industrial real wage rate is constant over time
and is greater than the subsistence income in the rural agricultural
sector.

 This induces continuous migration of surplus labour from rural

subsistence sector to the urban industrial sector and guarantees a
higher quality of life for the rural labour force in the urban areas
than remaining in the rural subsistent economy.

 That is, it gives workers an opportunity to earn higher incomes for

further investment in urban sector.
6
 Cont…
b. The modern sector re-invests all its profit (excess of product
earned over wages paid to the laborers) in the economy.

 This confirms that the modern sector can expand without the need
to raise or reduce the size of wage rates.

 The profits earned by the industrialists would be reinvested and

the demand for labor would increase.

7
 Cont...
c. Supply of labour from the traditional sector to the modern sector is
perfectly elastic at the constant wage rate in the urban sector.

 This implies the subsistent economy of the traditional sector releases

unlimited and continuous supply of labour to the modern sector.

 Real wage and the marginal product of labour in the competitive

modern labour market are equal, (that is, W/P = MPL).

 The demand for labour in the urban sector is determined at the

point where real wage equal to marginal product of labour.

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 Cont...
d. The urban industrial sector maintains proportional rates of labour
absorption (creation of new employment opportunity) and capital
accumulation.

 Labour force migrated from rural to urban sector always gets

employment opportunity in the modern sector.
 The larger the rate of economic expansion in the urban sector, the
higher the rate of labour transfer from rural to urban economies.

 Marginal product of labour in the traditional rural sector is zero or

negative until all surplus labour transfers from rural to urban areas.

 Labour leaving the rural areas is surplus and they would have
virtually no impact on agricultural output in the rural area.
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Illustration of the Lewis model

 According to the model, industrial firms, whether private or publicly

owned could offer wages that would guarantee a higher quality of life
for labourers than they could remain in the rural areas.

 As the level of labour productivity was so low in traditional agriculture,

people leaving the rural areas would have virtually no impact on
agricultural output.

 Indeed, the amount of food available to the remaining villagers would

increase as the same amount of food could be shared among fewer people.

 This might generate a surplus which could then be sold for generating
more income for people remaining in the rural areas.
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 Cont…
 In figure 3.1 below, OA represents the average level of real
subsistence income in the rural traditional sector while OW
represents the real wage in the modern capitalist sector (wage gain
in the industrial sector can be greater than OA
 When the demand for labour is D1, total employment and total

output in the modern sector will be equal to distance OL 1 and area

OHKL1 respectively.
 Accordingly, the share paid to workers in the form of wages would

be equal to the area of rectangle OWKL1, and the balance shown by

the area WHK would be total profits accruing to the capitalist.
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 Cont…
 Since Lewis assumes that all profits would be reinvested, the

capitalist in the modern sector raises investment by employing OL 2

amount of labor. This larger investment causes total product curve
to rise and which induces a rise in the marginal product of labour
(the demand for labour).

 As a result, the outward shift of labour demand is shown by the

curve D2. A new equilibrium output level is established at point L

with OL2 number of workers employed in the modern sector.

 Total output in the sector rises to OGLL2 and total wage and profit

increases to OWLL2 and WGL respectively. This leads to a further

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 Cont...

Figure 3.1 The Lewis Model.

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 Cont…
 In this line of thinking, the main problem is capital formation
because its degree determines the scope and speed of expansion of
the modern sector.
 The speed with which expansion occurs is determined by the rate of
industrial investment and capital accumulation in the modern sector.
Such a phenomenon is possible by the excess of profit over wages
in the modern sector on the assumption that capitalists re-invest all
profit in their economy.
 This growth in output and expansion of employment in the modern
sector is assumed to continue until all surplus rural labour is
absorbed. 14
 Cont…
 At this point, earnings in the two sectors are equalized, and hence the
model becomes irrelevant. Additional workers above the surplus can
only be withdrawn from agricultural sector at higher cost of lost food
production since MPL in rural sector is no longer zero.

 A decrease in food output leads to an increase in food price and

consequently to an increase in wage rate in industrial sector. Similarly,
if the demand for labour in industrial sector tends to exceed beyond
this point, the wage rate in agriculture and industry rise together.

 The supply curve hence becomes positively sloped implying structural

transformation of the economy would take place.

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 Cont…
Limitations of the Model

The idea that the productivity of labour in rural areas is

almost zero may be true for only certain time periods.
 For example, during peak agricultural seasons (plowing,
planting and harvesting) the need for labour is critical,
hence marginal product of labour during these seasons is
positive.

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 Cont...
 Critiques believe that the capitalist wage rate may rise before all
surplus rural labor is absorbed. As workers with zero marginal
productivity migrate from the subsistence agricultural sector, those
workers remaining in this sector will then divide constant output
among fewer persons resulting in a higher wage. Industrial wages,
then, must increase to motivate rural workers to migrate

 The assumption of a constant demand for labour by the industrial

sector is questionable. For example, if the new investment induces
the development of labor-saving technology, it would reduce the
demand for labour. In addition, if the industry concerned declines,
again the demand for labour will fall.
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 Cont…
 For many LDCs the rural-urban migration has been far larger than
the capacity of industrial sector to provide jobs for the new
migrants. Thus, in this case there is a possibility of increased urban
unemployment and poverty.

 Lewis also seems to have ignored the balanced growth between

agriculture and industry.

 Given the linkage between agricultural growth and industrial

expansion in developing countries, if a section of the profit made
by the capitalist is not devoted to agricultural development, the
process of industrialization is jeopardized.
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 Cont…
 In addition, the model assumes that capitalists are the only agents
of growth through the process of capital accumulation. But the
capitalist alone can no longer sustain growth and development
within an economy.

 For example, small holder farmers producing cash crops

in many parts of the developing world have shown to be
quite capable of saving the required capital for new
investments even within agriculture.

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 3.2 Human Capital Centered Model of Development
 The model stresses the importance of investment in human capital
in the process of economic and social development.
 Human capital implies the mental and physical quality or ability of
people.
 This can be improved by education, training, health care and
pursuit of some spiritual methods.
 The classical and neoclassical economists did not explicitly include
the quality of human resources in their theoretical framework.
 It was Theodore Schultz (1964) who elaborated the concept of
human capital, and explicitly considered the investment in human
capital as important determinant of economic development.

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 Cont...
 He illustrated that, human capital is a precondition for efficient
utilization of any means of production and general flexibility of the
economic system.
 The human capital approach to rural development is based on the
following two assumptions, which have been ignored in the classical
theory of development;
1. Human physical and mental capabilities are partly inherited and
partly acquired, and they vary from individual to individual.
2. Human capital directly contributes to development through its
positive effect on productivity. It also assumed to help reduction
in resistance to the diffusion of new technologies especially in the
rural sectors.
21
 Cont...
 This model thus focus on physical capital formation through human capital

formation since human capital development is the base for any development
process.
 This model is appropriate for developing countries where there are a lot of

underdeveloped human resource but is a potential to achieve the

development.
 Thus, since the implementation of any development policies and strategies

are dependent on the available skilled, experienced, innovative, and

healthy human resources, human capital formation must be the priority
than physical capital formation.
 However, unnecessary emphasis on education without appropriate
employment creation is found to lead to the creation of unemployed
people. 22
 In rural development, the importance of human capital formation
include;
1. It directly improve the productivity of agriculture
2. It improve the probability of getting off-farm employment
3. It leads to improved family planning
4. It improves the health and nutrition of the people
5. It widens the horizons of knowledge and facilitates diffusion
of new technologies by reducing resistance of rural people
6. It build the risk taking behavior and managerial (decision
making) capacity of the farmers

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 3.3 Unimodal Approaches to Agricultural and Rural
Development
 The central element of a uni-modal approach is the development
and diffusion of highly divisible innovations that promote
output growth through wide spread increase in the productivity
of land and labor in the agricultural sector.

 This theory focus on the progressive modernization

(transformation) of the entire agricultural sector based on
widespread use of a sequence of technological innovations
which compatible with the socioeconomic structure and
demographic characteristics of the society.

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 Cont…
 It helps to exploit the large potential that exists in the rural economy.
That is, it makes possible to raise the productivity of the agricultural sector
by improving of resource uses (use of labor and land).

 In uni-modal theories, institutional innovations are essential to

achieve the rural development through efficient uses of the existing
resources. That is,

 Creation and provision of cooperative services in order to increase the

negotiation power of farmers in the market

 Creation of microfinance institutions to facilitate access to credit

 Development of research centers and extension services to generate and

diffuse modern way of production and resource use are important.
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 3.4 Bimodal approach for rural dev’t

 Agriculturalists are differentiated and have distinct classes. There are

large scale farmers (agricultural capitalist), small scale farmers, and
land less agricultural employees

 Bimodal theory focuses on the necessity of the development

of large-scale farm units to agricultural development.

 According to this theory, agrarian change in can be achieved by

creating capitalist farmers and agricultural wage laborers.

 Advocates of this approach argue that, large scale farms have strong
advantage over small scale farms.

 These advantages are related to technical, financial, and marketing

economies 26
 Cont...
 For example,

 large scale farmers have production economies of scale which

related to:

 The use of modern and advanced machines

 Benefit from high level labor specialization

 Better utilization of their farm capacity

 Take advantage of research and development

 Large farms also benefit from marketing scale economies such as

transport, storage, information collection and capacity to build
social capital and capacity to bargain for fair price. 27
The end of
Chapter three

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