THEORY OF STRUCTURAL GROWTH
1. THEORY OF STRUCTURAL GROWTH
One of the most well-known theoretical models of developments, which focuses on structural transformation of an economy was initially formulated by W. Arthur Lewis. The framework of thought and the analytical system were based on a simple model of the so-called Lewis' two sector models.
According to Lewis, there are many workers in unlimited quantities and with wages just enough to live (subsistence). The development of economy takes place if capital accumulates as a result of the transition of workers from the subsistence sector to the capitalist sector. The capitalist sector is part of the economy that uses capitals that can be reproduced and pay the owner of capital on the use of such capital. Subsistence sector is part of the economy that does not use capital that can be reproduced. In this sector, the output is lower than in the capitalist sector.
According to Lewis, underdeveloped economy consists of two sectors, namely: First, the rural subsistence sector is overpopulated. According to Lewis, a fraction of the workforce is drawn
from agriculture and this sector will not lose its output at all. Second, workers of the subsistence sector, transferred little by little will have shelter in the modern urban industrial sector which has high productivity levels. The distinction benchmark of the two sectors is that the traditional sectors of economic activity revolves around the fulfillment of consumption (subsistence economy). The industrial sector (modern) is commercial and production is based on consideration and with a view to earning a return (profit motive). In the traditional sector, worker productivity is much lower than in the modern sector of worker productivity. The modern sector needs to attract workers from the traditional sector.
With the increasing population, the supply of worker is as if there are no limitations. This means employers may obtain workers in the desired amount by paying at the rate equal to the applicable wages. Employers do not need to raise the level of wages to attract workforce in greater numbers and business activities can be enhanced and extended with a constant wage for unskilled workers.
The main concern of this model is aimed at the transfer of worker, an increase in output and an increase in employment in the modern sector. The transfer of workers and employment growth arise due to the expansion of output in the modern sector, which is determined by the level of investment in industry and the overall capital accumulation of the modern sector.
There are some criticisms of Lewis' models. The first assumption, the model implicitly assumes that the transfer rate of workers and employment creation
in the modern sector is certainly comparable to the modern sector capital accumulation. The faster the rate of capital accumulation, the higher the rate of growth in the modern sector and the faster creation of new jobs. But if the profits of the capitalists are reinvested in the form of more sophisticated capital goods, less workforce would be needed.
The second assumption assumes that rural areas have surplus workers, while in urban areas optimally absorb the production factors. some of the research actually shows the opposite situation, namely the quite large unemployment in urban areas and only little surplus workers in the rural areas.
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The third assumption claims that a competitive worker market in the modern sector would guarantee the existence of real constant wages at a point where employment worker surplus would be used up. One impressive characteristic from the determination of the market wage level of urban workers in almost all developing countries is likely to highly increase over time.
A famous model of structural change is the model developed by Hollis B. Chenery. According to Chenery, the important factors are the smooth transition from the agrarian economic pattern to industrial economy, sustainability in accumulation of physical and human capital, changes in the types of consumer demands, the development of urban areas due to migration of job seekers and agriculture in rural areas and small towns. In her opinion, the structural transformation process brings positive and negative impacts. One downside is the increasing urbanization in line with the degree of industrialization being performed. Industrialization and urbanization at some points will hamper the process of equitable development.
The structural transformation will only work well if followed by an equal opportunity to learn, decrease in the rate of population growth, and a decline in the degree of economic dualism between towns and villages. According to Chenery, the process of accumulation, allocation, and distribution is the main characteristics in the development of a structural change. The process of accumulation is defined as the process of coaching of resources for the increase of production capabilities in the arrangement of the local economy. The allocation process concerns the usage patterns of production resources that can bring changes to the structure of production (the role and contribution of sectors in national products). The distribution of income is assessed and measured quantitatively with two concepts, namely absolute poverty and relative inequality or dissimilarity.
Allocation process involves systematic changes in the arrangement of the economy with increased production and income. Systematic changes in question concerns structural shifts at the sectoral composition in the structure of production. The development of this pattern is the result of interaction between the impact of supply (supply effect) from the changes on the combination of means of production and technology with the impact on the demand (demand effect) which is associated with increased revenue.
An important characteristic of the role of worker is the allocation issue and their livelihood by sector and economic activity. Changes in worker demand are affected by the changes in the composition of production and technology used. On the other hand, the supply of workers is influenced by demographic factors (population growth), level of education, and population distribution between rural and urban areas. The interaction of demand and supply of workers is affected by allocations or patterns of the use of workers according to the economic sector that shows the difference in worker productivity between sectors of the economy.
The process of accumulation concerns the addition of physical capital or improving the quality of human capital. With the passing of time the change of balance between production factors (proportion factors) involved in the production process also occurs. It brings about changes in the sectoral composition in the structure of production. Thus it appears that the development of the structure revolves around the shift in production and in consumption.
The main hypothesis of Chenery's theory is that the model of structural changes occurring in each country can actually be identified and the general change process of each country basically has the same pattern. Yet this theory tolerant of small variations that occur in the process of structural change that may differ between countries. Differences in the endowment factor, government policies, and accessibility to capital and technology is an important explanatory factor for differences of varied structural transformation that occurs. In general, countries that have a high population level describes the level of high potential demand and tends to establish import substitution industries. This means that these countries produce their own goods which was previously imported to then be sold in the market in the country. Conversely a country with a relatively small population tends to develop international-oriented industries. The theory of structural transformation explains that the acceleration and the pattern of the transformations occurring in a country are affected by internal and external factors that are interrelated to one another.