Industrialisation, tourism, primary industries, debt relief, aid and international institutions

Industrialisation: the Lewis structural (dual-sector) model

The economy has a traditional agricultural sector with surplus labour (so the marginal product of extra workers is close to zero) and a modern industrial sector with higher productivity.

Workers move from agriculture to industry at a wage only slightly above subsistence. Output rises because they become productive; agricultural output does not fall. Industrial profits are reinvested, expanding industry further, until surplus labour is used up (the 'Lewis turning point'), after which wages rise.

Criticisms: profits may be sent abroad or spent on luxuries; industry may be capital intensive and create few jobs; rural-urban migration can create urban unemployment and slums; agriculture also needs investment.

Tourism and primary industries

Developing tourism: earns foreign currency, creates jobs, encourages infrastructure. Problems: seasonal and low-paid jobs, leakages (profits to foreign hotel chains, imported food), environmental damage, vulnerability to shocks (terrorism, pandemics).

Developing primary industries: use comparative advantage in natural resources, earn export revenue. Problems: Prebisch-Singer, price volatility, the risk of the 'resource curse' (exchange rate appreciation hurting other exports, corruption).

Debt relief and aid

Debt relief: cancelling or reducing debts frees money spent on interest for health, education and infrastructure. Concerns: moral hazard (encourages future over-borrowing); money may not reach the poor if governance is weak.

Aid: bilateral (government to government) or multilateral (through institutions); grants or soft loans; humanitarian or development. Benefits: fills the savings and foreign currency gaps (Harrod-Domar), funds public services. Concerns: tied aid (must be spent buying from the donor), dependency, corruption, crowding out local producers (food aid), and donor priorities rather than local needs.

International institutions

• World Bank: lends to developing countries for long-term development projects (infrastructure, education, health), often at below-market rates, and gives technical advice. It also sets the international poverty line ($3.00 a day in 2021 PPP since June 2025).
• IMF (International Monetary Fund): promotes international monetary stability; monitors economies; lends to countries with balance of payments crises, usually with conditions (fiscal consolidation, structural reforms). Critics argue conditions have sometimes deepened recessions and poverty.
• NGOs (non-governmental organisations): charities and campaign groups that run small-scale projects (clean water, schools, microfinance), deliver emergency aid and campaign on issues such as debt relief. They are close to communities but small and may lack coordination.

Worked example

In a Lewis-type economy, 1,000 surplus farm workers each produce nothing extra on the land. They move to factories where each produces output worth $3,000 a year. Wages are $1,200. Find the rise in output and the profit available to reinvest.

1. Agricultural output does not fall (marginal product is zero).
2. Industrial output rises by 1,000 x 3,000 = $3,000,000
3. Wages paid = 1,000 x 1,200 = $1,200,000; profit = $1,800,000

Answer: Output rises by $3 million; $1.8 million of profit can be reinvested to expand industry.

Check yourself

1. 500 workers with zero marginal product in farming move to industry, each producing output worth $4,000 a year and paid $1,500. Calculate the profit available for reinvestment.
   Show answer

   $1250000. 500 x (4,000 - 1,500) = $1,250,000.

2. In the Lewis model, why does agricultural output not fall when workers leave the land?
   • The marginal product of surplus agricultural labour is close to zero
   • Farm wages rise
   • Farmers buy more machinery immediately
   • Industrial goods replace food
   Show answer

   The marginal product of surplus agricultural labour is close to zero. Surplus labour adds nothing to farm output.

3. Which is the main role of the IMF?
   • Running small water projects in villages
   • Setting world trade rules
   • Lending to countries with balance of payments problems and promoting monetary stability
   • Lending only to private firms
   Show answer

   Lending to countries with balance of payments problems and promoting monetary stability. The IMF is the lender to countries in currency or BoP crises.

4. The World Bank mainly
   • sets exchange rates for its members
   • provides long-term loans and advice for development projects
   • settles trade disputes
   • issues the world's reserve currency
   Show answer

   provides long-term loans and advice for development projects. It funds infrastructure, education and health projects.

5. Explain why tied aid may be less effective than untied aid.
   Show answer

   Tied aid must be spent on goods and services from the donor country, which may be more expensive or less suitable than local or other suppliers, so the aid buys less and benefits donor firms.. Restricting where aid is spent reduces its value.

6. Explain one problem of relying on tourism for development.
   Show answer

   Much spending leaks out of the economy through foreign-owned hotels and imported goods, jobs are often seasonal and low-paid, and tourism is vulnerable to shocks such as terrorism or pandemics.. Leakages and vulnerability are the key problems.

7. Explain one argument against debt relief.
   Show answer

   It creates moral hazard: governments may expect future debts to be cancelled and over-borrow; and if governance is weak, the money saved may not be spent on reducing poverty.. Incentives and governance matter.

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Sources

• Pearson Edexcel International Advanced Level in Economics specification (issue 2)
• World Bank factsheet: June 2025 update to global poverty lines

Last updated 8 November 2026. Spotted a mistake? Tell us.