Structural change model 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.
Two important example of such models are:
1. Lewis’s Model
2. The pattern of development empirical analysis by Chenery
Lewis’s Structural Change Model
Nobel laureate Lewis said that underdeveloped economy consists of two sectors. A traditional, over populated rural subsistence sector with surplus labour and a high productivity modern sector to which this surplus labour is transferred.
The focus of the model is on the process of surplus labour transfer from the traditional sector which leads to the growth of output and employment in the modern sector. Lewis calculated that with an increase of 30% or more in the urban wages, workers will migrate from the rural areas to the urban areas- which would lead to growth in output and employment through the modern sector.
It reflects the historical experience of economic growth in the West
1. Assumes that the faster the rate of capital accumulation the higher is the growth rate of the modern sector and the faster is the rate of new job creation- but it is not necessary that the capitalist profits will be re-invested in more sophisticated labour-saving technologies or there will be no capital flight.
2. Surplus labour exists in the rural areas while there is full employment in the urban areas- this un supported by empirical literature and is generally not valid.
3. Notion of competitive modern-sector labour market that guarantees the existence of constant real urban wages up to the point where the supply of rural surplus labour is exhausted – however, urban wages continue to rise even in the presence of rising levels of open modern sector unemployment and the existence of surplus labour in the rural sector due to the presence of unions, civil services wage scales and Multi National Corporations own hiring practices that tend to negate competitive forces in the LDC modern sector.
4. Finally evidence suggests that increasing returns prevail in the modern sector instead of diminishing returns, which means that the modern sector might continue to use more and more of capital instead of labour.
Structural Change and Patterns of Development
In Structural Change and Pattern of Development, in addition to the accumulation of capital, both physical and human, a set of interrelated changes in the economic structure of the country are required for the transition from a traditional economic system to a modern one.
These structural changes involve all economic functions – including the transformation of production and changes in the composition of consumer demand, international trade and resource use as well as changes in socioeconomic factors such as urbanization and the growth and distribution of a country’s population.
Development shows certain patterns – for instance, a shift away from agriculture to industrial production, the steady accumulation of physical and human capital, the change in consumer demands from emphasis on food and basic necessities to manufactured goods and services. This leads to the growth of cities and urban industries as people migrate from the rural to the urban regions with a decline in overall family size and rate of population growth.
Lack of a proper theory in explaining the pattern of development leads to the problem that we might not be sure about the causation and the effect.