Structural Change Theory

Development, regardless of its variety in interpretations, is what an economy aims to achieve

over time. It may cater different factors, forms, or drivers but it all roots down to a certain point
of change. An economy pursuing development is subject to changes in order for it to grow. These
changes may refer to a shift in capital and labor allocation, resources availability, and the entirety
of the market, in short, its economic structure.

Structural Change Theory refers to the shift or change in the basic ways a market acts or
functions, representing the entirety of the economy itself. According to Todoro & Smith,
structural change gives focus on the process in which underdeveloped countries change their way
of emphasizing traditional or subsistence economy, an agricultural-centered system. It is pointed
in this theory that as an economy develops and change, it gradually shifts its focus to a more
modern and urbanized industrial manufacturing structure of an economy. This structural changes
may be best and well represented by two structural change model (1) Lewis Model and (2)
Patterns of development.

Lewis Model

Lewis model, initially known as the Dual-Sector Model, was enumerated by W. Arthur Lewis in
his article titled "Economic Development with Unlimited Supplies of Labor" in 1954. The
introduction of this theory has been characterized by some in that era as the most influential
contribution to the concept and understanding of economic development, particularly in the
essence of structural change (Thomas, 2011).

The Dual- Sector Model explains the growth of developing countries or economies in terms of
labor transition. The movement of labor takes place between two sectors in which Lewis claimed
to exist in an economy. These sectors are known as Subsistence and Industrial Sector. This, an
economy catering these two sectors falls under the concept of Dual Economy.

Subsistence Sector of Economy

A subsistence economy, commonly known as traditional or agricultural sector of the

economy, is where basic needs of the people are fulfilled and met through acquisition and
utilization of natural resources available on local level. This has been one of the founding
and oldest market management approach where activities do not have necessary monetary
value (Pariona, 2017). Wealth is measured back then by the ability of a family to provide and
sustain for themselves. This basically means that the approach on this market merely relies
on natural resources. In a subsistence economy, the only goal for its people is to survive and
maintain their existence. An essential characteristic of this sector is its lack of industry,
technology, and more specifically, profit. Market system in this sector tends to be limited
to barter and exchange only. Market forces here are basically dependent on the available
local resource not allowing them to have surplus on profit to be reinvested for capital
accumulation. This concept is merely away from what our modern world aims now—
creation of surplus for investment and future growth.

Industrial Sector

In today's time, we have globalization as a current driver of structural change in the world
economy. It is something that transforms our basic ways of doing to a more modernized
feature. Thus, as globalization continues to grow over time, our economic structure tags
along with it giving birth to the economy's Industrial sector. In relation to the latter sector
mentioned, industrial sector of an economy usually receives end products from the
traditional sector and consequently transforms it to a finished good catering the wide range
of demand of the market. Industrial sector might include on its list mining, oil, and
manufacturing industry which solely aim for profit and capital accumulation. Industries
under the industrial sector, as it aims for profit, requires and demands a wide range of labor
force to keep the industry operating its functions. Also, one thing that distinguishes the
Industrial sector from the traditional sector is that its is expansionary in nature or it
continues to grow.

Assumptions of the Lewis Model

1. There is surplus labor in the subsistence economy.

The model's basic assumption is that labor transition is prosperous and applicable
because there is a surplus labor in the subsistence sector. These labor refers to those
whose marginal productivity is zero or even if positive, it remains lower compared to the
institutional wage (Aditya, 2007). This model believed that a surplus in labor in the
subsistence sector, provides an unlimited supply of workforce to the latter. Thus, people
migrating towards the industrial sector contributes to the expansion and development of
the said sector.

2. Savings for investment are constant.

This theory comes with an assumption that savings generated by the industrial sector are
automatically reinvested for capital accumulation and industry expansion. Thus,
enlargement in one's capital allows the industry to expand and grow towards
 development. Furthermore, the theory also assumes that savings are more rampant in
the industrial sector compare to the other sector, one thing that pushes people to migrate
towards industrial sector.

The Working of the Lewis Model

As mentioned, Lewis Model presents the process of the transition of labor from one sector to
another. It is stressed in the theory that industrial sector withdraws surplus labor coming from
the traditional sector. This amount of surplus will tend to shift and cater the attraction
provided bu the industrial sector in the form of higher wages. If wages in the capitalist sector
are far higher than the institutional wage prevailing in the subsistence sector, the other sector
will certainly attract unlimited supply of labor from the surplus on the latter sector. This
increase in labor workforce allows the industry to expand and enables them to generate more
savings for further capital expansion. This is where development in an economy arises in the
firm of structural change.