STRUCTURAL CHANGE / DUAL SECTOR MODEL (LEWIS) Done by: Tip

Explanation

The model explains how the developing economy moves from a traditional agriculture base to a manufacturing led economy Developing economies had dual sector 1) large agricultural sector - labor was employed very inefficiently, low productivity, low income and low savings 2) small industrial sector - high productivity, high income, high savings

Application to economic development The industrialists would have to offer higher wages to the workers to attract them to migrate into the cities. The model suggested that if there is a surplus in the number of workers, by taking out the workers from the agricultural sector and employing them into the industrial sector would not decrease the food production

Those workers who moved away to the industrial sector would earn more income and generate more savings, the amount of food available for the remaining villagers will increase as the same amount food is distributing to fewer people. This might generate a surplus in which it could be sold and generated more incomes. The profits earned by the industrialists would be reinvested and the demand for labor would increase. Increased in national output, investment and employment  economics growth

Criticism The idea of low productivity in the agricultural sector may not always be true, it’s also depending on the season of the year, during the time for harvest, there may be high needs for labors Increasing in technology would lead to a lower demand for labor in the industrial sectors.

Higher income in the industrial sectors doesn’t mean that people will save more, they may choose to spend more on imports The migration from rural area to urban area has gone too large that the industrial sector can provide job for, thus lead to urban poverty rather than rural poverty

May worsen the gap between the rich and the poor, worsen the income distribution since the industrial workers’ earnings outstripping those in the farming sector

Examples Dual sector on Cambodia Cambodia has surplus labor There is a technological changes in the agricultural sector  low demand for labors People are moving to industrial sector  generate more income  more savings Firms  more profits  reinvested Other places (in capitalists and communist countries) Soviet Union – agriculture was squeezed by the state through high prices for capital investment, low prices for agricultural output, and collectivization  people are moving into the cities South Korea, Taiwan – land reforms

Reference Ziogas, Constantine. Economics for the IB Diploma Revision Guide. Oxford New York copyright 2008.