Structural changes are not only a part of economic development, but they are also necessary to maintain long-term economic growth. Earlier, the neoclassical view suggested that changes in sectors (like agriculture, industry, and services) are not very important and happen automatically as the economy grows. However, economists like Kuznets challenged this idea and showed through data that economic growth actually happens because of changes in the structure of the economy.
These structural changes are influenced by both demand and supply factors.
(Income ↑ → Demand pattern changes)
(Technology & Capital ↑)
(Agriculture ↓)
(Industry ↑)
(Services ↑↑)
On the demand side, different sectors have different levels of income elasticity of demand. This means that as people’s income increases, their demand for different goods and services changes. The demand for agricultural products grows slowly because people can consume only a limited amount of food. In contrast, the demand for industrial goods, especially manufactured products, increases more rapidly. Even more than that, the demand for services such as education, healthcare, transport, and entertainment rises sharply when income levels become higher. As a result, with rising income, the share of agriculture in the economy declines, while the share of industry increases first, followed by a strong rise in the services sector.
On the supply side, agriculture has natural limitations because it depends heavily on land, which is a fixed resource. Due to this, agriculture faces the problem of diminishing returns after a certain point. On the other hand, industries, especially manufacturing, have much greater scope for growth because they can use more capital and technology. These can be increased almost without limit through human effort. Although labour availability can sometimes limit industrial growth, this problem can be solved by using labour-saving technologies. The same is true for the services sector, where modern technology has created huge opportunities for expansion, as seen in recent decades.
Economic growth is always linked with these structural changes. These changes occur not only in the share of different sectors in the economy but also in the types of jobs people do. The economy is generally divided into three main sectors:
- The primary sector, which includes agriculture and related activities
- The secondary sector, which includes manufacturing and construction
- The tertiary sector, which includes services such as trade, transport, and communication
In the early stages of development, most people work in agriculture, and its share in production and employment is high. As the economy develops, the importance of agriculture declines, and manufacturing becomes more important. In the later stage, the services sector becomes the dominant part of the economy.
Economist Fisher also explained this pattern by stating that in every developing economy, there is a steady shift of employment and investment from primary activities like agriculture to secondary activities like industry, and even more towards tertiary activities, that is, services.