Chapter 4

Economic Structure and Models of Change in Industrial Structure

Chapter 4

I. Concepts

II. Laws on change in industrial structure

III. Commons in change in industrial structure IV. Models of change in industrial structure

Chapter 4

I. Concepts
1. Economic structure

2. Industrial structure

3. Change in industrial structure

Chapter 4

1. Economic structure
The relationship between different parts of the whole economy Classification of economic structure:
Industrial structure Regional structure Ownership structure Institutional structure Saving and investment structure International trade structure ...
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Industrial structure

Industry Agriculture Service

Chapter 4

Sectoral share of GDP-2003 (%) Groups of countries High-income Middle-income Low-income Agri 2 11 25 Industry 27 38 25 Service 71 51 50

VN-2003
VN-1980

22
50

40
23

38
27

Source: WDR-2005
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Industrial structure of VN
% A I S 1990 38.7 22.7 38.6 1995 2000 2003 Labor 65.6 13.5 20.9

GDP Labor GDP Labor GDP Labor GDP 73.0 27.2 11.2 28.8 15.8 44.0 71.3 24.5 11.4 36.7 17.3 38.8 68.2 21.8 12.1 39.9 7 19.7 38.2 3

Source: Statistics Pub. House - 2004

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Regional structure
Natural pop growth rate Low-income Middle-income High-income VN 2.0 1.7 0.6 1.7 Urban pop growth rate 3.9 2.8 0.8 2.5

Source: WDR-2005; VN from 1990-2003

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Ownership structure (%)

1995 State Non-state Collective Private 40.18 53.52 10.06 7.44 2000 38.52 48.20 8.58 7.31 2005 38.40 45.61 6.81 8.89 2007 36.43 45.91 6.19 10.11

Household
Foreign investment sector

36.02
6.30

32.31
13.28

29.91
15.99

29.61
17.66

Source: GSO

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Institutional structure

Government sector Financial sector Non-financial sector Household sector Non-profit sector ...

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Saving and Investment Structure

Saving Investment Consumption

2000 Consumption (% GDP) 72.87

2002 71.33

2004 71.47

2006 69.38

2007 70.92

Source: GSO

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International Trade Structure

Export Import

2000 E (%GDP) I (%GDP)

2001

2002

2003

2004

2005

2006

2007

55.03 54.61 56.79 59.29 65.74 69.36 73.56 76.79 57.5 56.89 61.96 67.65 73.29 73.54 78.61 90.22 Source: GSO

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2. Industrial Structure
Different classifications; commonly: - Agriculture - Industry - Service Indices: Number of sectors Sectoral share of GDP Sectoral share of labor Sectoral share of capital
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3. Change in industrial structure

can be any of the following changes in: Number of sectors Sectoral share of GDP, labor, capital Relationship among sectors

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II. Laws on the change in industrial structure

1. Engels law 2. Fishers law on substitution of labor by technology 3. Petty-Clarks law

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1. Engels law
Agri. goods (food): ...... goods (eX,I .......) Proportion of income spent on food:......................................................
Prove mathematically the above argument: If Sx=xpx/I then dSx/dI < 0 in which x=quantity of agri. food, px= price of agri. food, I = total income
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Engels Law
Food consumption

Income

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17

Chapter 4

18

Source: http://www.child-centre.it/papers/child28_2001.pdf
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2. Fishers law on substitution of labor by technology In agriculture: relatively easy so that agricultural

share of labor decreases

In Industry: relatively less easy so that industrial

share of labor tend to increase

In service: difficult so that service share of labor increases

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20

3. Petty Clarks law

GDP / capita
100 1000

Share of GDP % A
50 20

I
10 40

S
40 40

Manufactured / Export goods

10 60

10000
Vietnam

5
20.4

35
41.5

60
38.1

80
52 (2006)

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Employment by sector and income/capita,1998.

% primary %secondary %tertiary Income$/person

Sierra Leone Kenya Algeria Botswana Costa Rica Argentina Russia Taiwan France

70 81 11 28 20 6 7 3 4

14 7 37 11 22 32 34 33 25

16 12 52 61 58 62 59 64 71

130 350 1580 3300 3810 7460 16600 17400 24090

Netherlands

4
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23

73

24970
22

% DV

Due to the change in the consumption preference

% CN

% NN

Y/N

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The UK

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The US

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Japan

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GDP at current prices by economic sector Year 1990 1991 1992 1993 Agri 38.74 40.49 33.94 29.87

Vietnam
Indus. 22.67 23.79 27.26 28.90 Service 38.59 35.72 38.80 41.23

1994
1995 1996 1997

27.43
27.18 27.76 25.77

28.87
28.76 29.73 32.08

43.70
44.06 42.51 42.15

1998
1999 2000 2001 2002 2003 2004 2005 2006

25.78
25.43 24.53 23.24 23.03 22.54 21.81 20.97 20.40
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32.49
34.50 36.73 38.13 38.49 39.47 40.21 41.02 41.54

41.73
40.07 38.74 38.63 38.48 37.99 37.98 38.01 38.06
27

Prel. 2007

20.30

41.58

38.12

III. Commons in the change in industrial structure Share of GDP: Agriculture Industry-Agriculture Industry-service-agriculture Service-industryagriculture Share of labor: decline in agriculture, increase in industry and service Growth rate: Service > Industry Different countries tend to move in the same direction but at different speed.
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IV. Models of change in industrial structure 1. 2. 3. 4. Rostow model Dual economy model Neo-classical dual economy model Oshima model

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1. Rostow model
Traditional society Preconditions for take off Take off Drive to maturity High mass consumption

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Traditional Society Subsistence economy dominated by agriculture, which is labor intensive and uses limited quantities of capital
Trade is by barter

Limited technology to process raw materials

Investment is almost 0 Productivity is low

Industrial structure: Agriculture

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Preconditions for take off

A prerequisite: Industrial revolution

Surpluses for trading emerge supported by a developing transport infrastructure

Agriculture becomes more commercialized and mechanized with technological improvements Savings and investment growth Entrepreneurs emerge

A single industry begins to dominate often textiles

Industrial structure: Agriculture-Industry
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Take off
Industrialization increases may cause large scale ruralurban migration Growth is concentrated in few regions and in few industries New institutions evolve to support industrialization

Investment is higher (min 10%)

Airports, roads, railways are built intensively Lasts for 2-3 decades

(England in mid 17th century; Germany in late 17th century)

Industrial structure: Industry-Agriculture-Service
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Drive to maturity
Growth is diverse supported by technological innovation Economic development spread to all parts of country A more complex transport system develops Increase in number and new types of industries; early industries decline Continued rapid urbanization Investment is high: 40-60 % of GDP Industrial structure: Industry-Service-Agriculture
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High mass consumption

Rapid expansion of tertiary industry Industry shifts to produce durable consumer goods (Western nations; 100 years for the U.S.) Industrial structure: Service-Industry

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2. Dual economy model (Lewis-Fei-Ranis)

Arthur Lewis (1954) 2 sectors of the economy:........................................ Assumptions: Industrial sector: w =.............................................. Agri. sector: w = .................................................... Characteristics of excess labor in agri.: ................ Mechanism of the labor supply: ............................

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Industrial wage rate

SL' D1 D0 G F H

SL

S O1

T
W

O2

A R B Q
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Agricultural output

37

What is T point:........................................

What is S point:.......................................

What is the difference between Lewis and Lewis-Fei-Ranis models: ........................... ................................................................ ............................................................
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Dual economy model: contribution

Addresses the importance of the relationship between industry and agriculture during the economic development

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Dual economy model: limitations*

1) The rate of labor transfer and employment creation is proportional to the rate of modernsector capital accumulation. However, investment can be capital-intensive; in open economy: capital can be invested overseas.
* More limitations are in Dutt (1990), World Development, Vol. 18, No. 6.

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40

Moshe Sirquin (1989) in the Proceedings of the Eighth World Congress of the International Economic Association reports the results of an analysis of about 100 countries ranging from some of the poorest economies to the industrial market economies over the period 1950-1983: While industry generated progressively larger fractions of national income in both groups of countries in their respective phases of industrialization, the secondary sector in the less developed countries failed to absorb labor in proportionate numbers.

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2) Surplus labor exists in rural areas, while there is full employment in urban areas.
However, this assumption is not valid: little surplus labor in the rural, excess labor can be in the urban; jobs can be created in the rural and migration is not always.

3) Industrialists do not have to increase wage paid to workers coming from agricultural sector
However, wage in industrial sector is always higher because: workers are more skillful; and pressure from Trade unions.
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3. Neo-classical dual economy model Criticize the classical dual economy model:

Labor surplus; MPL in agriculture >0 impossible to move labor to the industry without reducing agricultural output; WL in agricultural sector = MPL No horizontal part in the concave O2ABR curve like in the Lewis-Fei-Ranis model; Labor supply in industry is upward slopping
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Agricultural output

TPa

R MPL is decreasing but > 0

O2
Chapter 4

La
44

Labor supply in industrial sector

W SL

L
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Labor supply and demand

W

SLm

DLm

Lm
Chapter 4 46

W in industrial sector is higher than in agricultural sector to attract workers. W in industrial sector is increasing: Labor leaves agricultural sector - MPL increases. Agricultural output decreases food price increases.

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Investment policies

Invest in industrial and agricultural sectors simultaneously prevent agricultural output from declining, food price from increasing, and w from increasing.

Labor-saving investment in industry reduce labor demand. MPLa is decreasing gradually lower investment in agriculture and raise investment in industry.
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4. Oshima model (two-sector model)

Criticize Ricardo: impossible to import food Criticize Lewis: labor is not surplus during peak seasons; impossible to move labor to the industrial sector without lowering agricultural output from the beginning of the economic development

Harry Oshima (1990) draws on the experiences of Japan, Taiwan, South Korea, and Malaysia to conclude that labor cannot be redeployed to the cities without reducing rice production unless irrigation and other steps are taken to facilitate multiple cropping
Chapter 4 49

Oshima suggests to invest in 3 phases.

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Phase 1 (beginning of economic growth)

Targets: Reduce unemployed in the off-peak season (village-based industrial clusters) Increase agricultural output (food) save and increase foreign exchange to prepare to import technology for the next phase.

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Measures:

Diversify and intensify agricultural production by: new varieties, fertilizer, pesticide, machines and tools increase farm income. Invest in infrastructure: irrigation, transportation, education, electrification. Improve production and marketing organization (cooperatives, financial organization, extension services).

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Signals of ending phase 1:

Categories of agricultural products increase Agri. production scale expands Demand for input of agricultural production increases Agricultural products are increasingly processed

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Phase 2 (Invest to expand agriculture and industry to create jobs)

Agricultural development market for industrial and service products

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Measures:

Diversify agricultural production. Large scale agricultural production. Develop food processing industries jobs. Develop manufacturing of agricultural tools, fertilizer, pesticide. New agricultural-industrial business forms: largescale capitalist farms, corporations...

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Signals of ending phase 2:

Labor migration to the urban. Demand for labor > Supply of labor real wage increases

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Phase 3 (Develop industries intensively) Characteristics of the beginning of phase 3:

Real wages rise. Dramatic expansion of industries: export increases. Expansion of the tertiary sector. Shortage of labor in the economy

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Measures

Replace labor by technology (e.g., biotechnology in agriculture) Development of industrial production: exportoriented; K-intensive

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Outcomes:

Production efficiency and competitiveness of industries are high. Demand of labor gradually decreases. Industrial and agricultural output increase. The highest level of development.

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Oshimas model: conclusion

Start by keeping labor in the agricultural sector but need to create jobs during off-peak seasons. Employ labor in labor-intensive industries raise income market for industrial and service products. When labor becomes scarce real wages rise technological application higher labor productivity. Inequality in income distribution is minimized.

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