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Theories Dualistic Theories
SOCIAL DUALISM
J.H Boeke,1 a Dutch economist, has been one of the pioneers who developed a distinctive theory applicable only to underdeveloped countries. His theory of social dualism is a general theory of economic and social development of underdeveloped economies based primarily on his studies of the Indonesian economy. Meaning. Dr. Boeke maintains that there are three characteristics of a society in the economic sense. They are the social spirit, the organizational forms and the technique dominating it. Their inter-dependence and interrelation are called the social system or social style. A society is homogeneous where only one social system prevails. But a society may have two or more social systems simultaneously. It is then a dual or plural society. Boeke reserves the term dual society for societies showing a distinct cleavage of two synchronic and full grown social styles which in the normal, historical evolution of homogeneous societies are separated from each other by transitional forms, as, for instance, precapitalism and high capitalism by early capitalism.2
1. J.H., Boeke, Economics and Economic Policy of Dual Societies, 1953: Three Forms of Disintegration in Dual Societies, Indonesia. April 1954; and Western Influence on the Growth of Eastern Population. Economics Internationale, May 1954. 2. Ibid., p. 43.

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Such a dual society is characterized by the existence of an advanced imported western system and an indigenous precapitalist agricultural system. The former is under western influence and supervision, which uses advanced techniques and where the average standard of living is high. The latter is native with low levels of technique economic and social welfare. Boeke calls it social dualism and defines it as the clashing of an imported social system with an indigenous social system of another style. Most frequently the imported social system is high capitalism. But it may be socialism or communism just as well, or a blending of them.3 Characteristics of Dualistic Society. Boeke gives the economic theory of a dualistic society to describe and to explain the economic interactions of two clashing social systems, which he terms dualistic economies or eastern economics. He bases his theory largely on the Indonesian experience. There are certain characteristics of the eastern sector of a dualistic economy which distinguishes it from a western society. The needs of an eastern society are limited. People are satisfied when their immediate needs are met. When the price of coconut is high the chances are that less of the commodities will be offered for sale; when wages are raised the manager of the estate risks that less of the work will be done; if three acres are enough to supply the needs of the household a cultivator will not till six; when rubber prices fall the owner of a grove may decide to tap more intensively, whereas high prices may mean that he leaves a larger or smaller portion of tapable trees untapped.4 This is because people are influenced more by social rather than economic needs. Goods are evaluated according to their prestige value rather than value-in-use. It is, therefore, not surprising that eastern economies are characterized by backward-sloping supply curves of effort and risk-taking. Native industry has practically no organization, is without capital, technically helpless and ignorant of the market. People indulge more in speculative activities rather than in regular profit-giving enterprises. They do not believe in capital investments attended by risks. They lack initiative and organizational skill characteristic of the western sector of a dual society. They are fatalists and hesitate to use modern technology. Labour is unorganized, passive, silent, casual and unskilled. People are reluctant to leave the village community. Migration within the country and immigration take place through state intervention. Urban development takes place at the cost of rural life. Export is the main objective of foreign trade in eastern society as distinct from a western society where it is the only means which makes imports possible. Inapplicability of Western Economic Theory. These distinctive features of an eastern society make western economic theory totally inapplicable to underdeveloped economies. According to Boeke, western economic theory is meant to explain capitalistic society, whereas the eastern society is pre-capitalistic. The former is based on unlimited wants, a money economy, and different types of cooperative organisations. Moreover, it is wrong to apply the marginal productivity theory of distribution to explain the allocation of resources or the distribution of income in an underdeveloped economy because of the immobility of resources in such a society. Boeke, therefore, warns that we shall do well not to try to transplant the tender, delicate hothouse plants of western theory to tropical soil, where an early death awaits them.5 Thus it is
3. Ibid., p. 144. 4. Ibid., p. 40 5. Ibid., p. 143

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not possible to apply the same policy for the whole economy because what is beneficial for one society may be harmful for the other. Since eastern economies are dualistic in character, any effort to develop their pre-capitalistic agriculture along western lines will prove not only abortive but may also cause retrogression. Change in the mental attitudes of farmers is essential for the introduction of modern agricultural techniques, otherwise increase in wealth following them will result in further growth of population. If, however, western technology fails the result will be increased indebtedness. Therefore, their existing agricultural system should not be disturbed, for it could hardly be improved upon. In the industrial field, the eastern producer cannot adapt himself to his western counterpart technologically, economically or socially. If the former tries to imitate the latter, he will suffer in doing so. In support of his argument, Boeke cites the Indonesian case where the adoption of western technology to industrialize the Indonesian economy has moved the goal of selfsufficiency farther and ruined its small industry. Boeke refers to five kinds of unemployment in underdeveloped countries: seasonal, casual, unemployment of regular workers, unemployment of the white collared, and unemployment of Eurasians. He believes that it is not within the power of the government to remove them as it would entail a financial burden far beyond the governments means. In underdeveloped countries, limited wants and limited purchasing power hamper all economic development. Increase in food supply or industrial goods will bring a glut of commodities in the markets with the consequent fall in prices and to depression. This does not mean that Boeke is averse to all industrialization and agricultural improvements. Rather, he is in favour of a slow process of industrializaion and agricultural development on a small scale, adapted to the dualistic structure of eastern society. The urge for development should come from the people themselves. New leaders must emerge who should work towards the goal of economic development with faith, charity and patience.6 A Critical Appraisal Boekes theory of dualistic development has been severely criticised by Prof. Benjamin Higgins7 on the following grounds: 1. Wants not Limited. Boekes contention that people in underdeveloped economies have limited wants or backward-sloping supply curves of effort and risk-taking is not borne out by the experience of Indonesia itself. Both the marginal propensity to consume and to import are high there. People do not have limited needs, rather there is a great demand for both domestic and imported semi-luxuries. To restrict their demand the Indonesian Government have to impose import restrictions. This is not peculiar to Indonesia alone. Even the Indian authorities have adopted rigorous import and exchange controls to restrict the illegal inflow of semi-luxuries. A good harvest in India results in a spate of orders for radios, transistors, bicycles, watches, etc. 2. Casual Labour not Unorganised. Boekes characterization of the eastern casual worker as unorganized, passive, and silent is inconsistent with the growing strength of organised labour in Indonesia, India and elsewhere. Casual labour may not be fully organised in agriculture but in tea, coffee, and rubber plantations, the trade union movement is the strongest in such economies.
6. Boeke, Western Influence on the Growth of Eastern Population, pp. 366-69. 7. B. Higgins, The Dualistic Theory of Underdeveloped Areas, Economic Development and Cultural Change, January, 1956.

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3. Eastern Labour not Immobile. It is not possible to accept Boekers view that people in eastern economies are reluctant to leave their village communities. In fact, city life, with all its attractions like cinemas, shops, cafes, and sports events, has always led to migrations from rural areas. Congestion, unemployment and inadequate basic amenities found in larger towns are in turn the consequence of the latter. Further, income incentives also lead to the movement of labour from one plantation to the other and even of casual workers from factories to rural areas during the harvesting season. Higgins opines that I see no evidence that Oriental labour is intrinsically more immobile than western labour. 4. Not Peculiar to Underdeveloped Economies. Boeke ascribes his dualistic theory only to eastern economies though he himself admits that social dualism also exists in underdeveloped economies of Africa and Latin America. But it is not peculiar to underdeveloped areas only. It exists in Italy, Canada and even in the United States. Rather every economy can be divided into distinct regions, with different degrees of technological advance. 5. Applicable to Western Societies. Many of the specific characteristics of the eastern society described by Boeke, seem to Higgins to be attributable to western societies as well. Whenever chronic inflation exists or threatens western economies, people prefer speculative profit to longterm investments. Western economists, according to Higgins, have recently developed a whole field of analysis relating to liquidity preference and safety-preference to take account of the reluctance of investors the world over to accent risk or illiquidity, and their strong preference for keeping their capital in safe and liquid form. Further, Boekes contention that people in eastern economies buy goods for prestige-value attached to them rather than for use value is equally true in the case of western economies. Were it not so, the term conspicuous consumption would not have been coined by Veblen for the American society. Even the backward-sloping supply curve of effort is not peculiar to eastern economies but was experienced by Australia during the post-war period and in the United States in the 1950s. Prof. Higgins contends that this backward-sloping supply curve... appears in any society which stagnates (or slows down) long enough to weaken the demonstration effect, provided by people moving from one standard of living to another, as a result of their own extra effort, directed specifically towards earning additional income. 6. Not a Theory but Description. Dr. Boeke fails to provide a distinctive economic and social theory for underdeveloped economies. His dualistic theory is merely a description of eastern society in which he tries to demonstrate the peculiar features of an eastern society that must not be developed on western lines. Boekes contention that western economic theory is inapplicable to eastern societies is based on the neo-classical theory which has limited applicability even in the western world. 7. Tools of Western Economic Theory Used in Eastern Societies. Some of the tools of western economic theory underlying monetary and fiscal policies and those aimed at removing balance of payments disequilibrium are applicable to eastern societies with slight variations. Prof. Higgins believes that the solution to the problem of underdevelopment can be found by applying familiar tools of economic and social analysis, within a model defined by appropriate institutional assumptions. 8. Does not Provide Solution to the Problem of Unemployment. Boekes dualism centres more on socio-cultural aspects rather than on economic. He regards unemployment of various types as beyond the reach of government help, and makes no mention of underemployment which is a dominant feature of densely populated underdeveloped economies. This is a big lacuna in Boekes dualistic theory.

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Conclusion. In fact, the important problem in dualistic economies is one of providing adequate employment opportunities to the existing and perspective underemployed labour force. This has led to the development of the theory of technological dualism by Higgins which looks to resource endowments and differences in the production functions in the two sectors as the basis of a technological dualism which in turn has resulted in an inadequate number of openings for productive employment. This is a more realistic dualistic theory than Boekes, for it analysis the effects of a dualistic society on the pattern of development.

TECHNOLOGICAL DUALISM
As an alternative to Boekes social dualism, Prof. Higgins 8 has developed the theory of technological dualism. Technological dualism implies the use of different production functions in the advanced sector and the traditional sector of an underdeveloped economy. The existence of such dualism has accentuated the problem of structural or technological unemployment in the industrial sector and disguised unemployment in the rural sector. Higgins theory of technological dualism incorporates the factor proportions problem9 as discussed by R.S. Eckaus and is related to limited productive employment opportunities found in the two sectors of an under developed economy because of market imperfections, different factor endowments and production functions. In fact underdeveloped countries are characterized by structural disequilibrium at the factor level. Disequilibrium at the factor level may arise either because a single factor, receives different returns in different uses or because price relationships among factors are out of line with factor availabilities. Such disequilibrium leads to unemployment or underemployment in two ways in underdeveloped countries, according to Dr. Eckaus. One, imperfections in or malfunctioning of the price system. Two, limitations in the existing technology or the structure of demand leading to surplus labour in densely populated backward countries. Thus technological unemployment in an underdeveloped country may refer to surplus labour arising from malallocation of resources, the structure of demand and technological restraints. Higgins builds his theory around two goods, two factors of production and two sectors with their factor endowments and production functions. Of the two sectors, the industrial sector is engaged in plantations, mines, oil fields, refineries, or large scale industry. It is capital-intensive and is characterized by fixed technical coefficients. In other words, there is no technical substitutability of factors which are combined in fixed proportions. The rural sector is engaged in producing foodstuffs and handicrafts or very small industries. It has variable technical coefficients of production so that it can produce the same output with a wide range of techniques and alternative combinations of labour and capital (including improved land). The production function in the industrial sector is represented in Fig. 1. Units of labour are measured on the horizontal axis, and units of capital on the vertical axis. The curve Ql is an isoquant representing combination of OK of capital and OL of labour producing a certain level of output. The curves Q2, Q3 and Q4 represent higher levels of output which are only possible by increasing the units of capital and labour in the same proportions. Thus points A, B, C and D show fixed combinations of capital and labour used to produce different levels of
8. B. Higgins, Economic Development, pp. 325-33. 9. R..S. Eckaus, The Factor Proportions Problem in Underdeveloped Areas, in Aggarwal and Singh (ed.), op. cit.

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output Q1, O2, O3, and Q4. The line OE joining these points is the expansion path of the industrial sector and its slope represents constant proportions of the two factors. The line K1L1 shows that the production process is capital-intensive, more capital is required to produce a given output relatively to labour. To E produce Q1 output, OK units of capital and OL units of labour are used. If however, the actual factor endowment is at S instead of at A, it means that more labour units (OL1 ) are available to produce the same Q1 output, the units of available Q4 D capital remaining the same (OK). Since there are fixed Q3 C technical coefficients, the excess labour supply will not affect F Q2 production techniques at all, LL units of labour will remain K1 B unemployed. It is only when capital stock increases to SF that S K Q1 it is possible to absorb this excess labour supply in this sector, A otherwise it will have to seek employment in the rural sector. O L L In reality, however, technical coefficients are not so rigidly 1 Labour fixed. Rather, they are somewhat flexible. The dotted Fig. 1 curvature of the isoquants indicates the possibilities of some flexibility in factor proportions. It shows very small changes in factor endownments for which entrepreneurs would not like to make drastic changes in techniques of production. Thus they would prefer to have fixed technical coefficients. The production function for the rural sector is shown in Fig. 2. The isoquant curves Q1, Q2, Q3 and Q4 show variable coefficients of production. In order to produce more output, more labour is employed in relation to capital (improved land). Ultimately good land becomes scarce and all available land is cultivated by highly labour-intensive techniques at point E where the maximum output level Qn On is reached. Given the different production functions in the E two sectors, Professor. Higgins analysis the process K2 whereby technological dualism has tended to increase K1 unemployment and disguised unemployment in the dual K D economies. Of the two sectors, the industrial sector Q4 C develops and expands with the aid of foreign capital. Thus B Q3 industrialization leads to the growth of population much A Q2 in excess of the rate of capital accumulation in the industrial Q1 sector. Since this sector uses capital-intensive techniques O L L1 L2 and fixed technical coefficients, it is not in a position to Labour create employment opportunities at the same rate at which Fig. 2 population grows. Rather industrialization may even bring, a relative decline in the proportion of total employment in that sector. Thus the surplus labour has no other alternative except to seek employment in the rural sector. Before the start of the expansion process, the rural sector has neither an abundance nor scarcity of factors of production. In the beginning, it may be possible to absorb the additional labour force by bringing more land under cultivation. This leads to the optimal combination of labour and capital (improved land) as output increases. Eventually, good land becomes scarce. The ratio of labour to capital available in that sector rises steadily and since technical coefficients are available, techniques become increasingly variable in this sector. For example, in many Capital
1

Capital

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Asian countries, irrigated rice cultivation has been substituted for shifting dry rice cultivation. Ultimately, all available land is cultivated by highly labour-intensive techniques and the marginal productivity of labour declines to zero or even below zero. Thus with continuing growth of population, disguised unemployment begins to appear. Under these circumstances, farmers have no incentive either to invest more capital or to introduce labour-saving technique. Besides, there is no available techniques to increase the output per man, and no incentive on the part of labour to raise production by themselves. As a result, techniques of production, man-hour productivity and socio-economic welfare remain at a low level in the rural sector.10 In the long run, technological progress does not help in removing disguised unemployment. Rather, it tends to augment it. Prof., Higgins contends that during the last two centuries little or technological progress has occurred in the rural sector while there has been rapid technological progress in the industrial sector. This has tended to increase the number of the disguised unemployed. The situation is further aggravated by keeping wage rates artificially high by trade union activities or by government policy. For, high industrial wage rates relative to productivity provide an incentive to entrepreneurs for introducing labour-saving techniques and thereby diminish still further the capacity of the industrial sector to absorb surplus labour. Accordingly, these factors perpetuate the tendency towards technological dualism in underdeveloped countries.11 A CRITICAL APPRAISAL Prof. Higgins tries to present an historical evolution of the modern and traditional sectors leading to a steady rise in underemployment in the latter sector. Technological dualism appears to be superior to Boekes social dualism. It is realistic for it takes into account how disguised unemployment gradually arises in the rural sector of the dualistic societies. Its DefectsBut the theory is not without limitations. 1. Coefficients not Fixed in Industrial Sector. Whereas production has taken place with variable technical coefficient in the rural sector, it is doubtful that production in the industrial sector has been actually carried on with fixed coefficients. It is improper to assume fixed technical coefficients in the industrial sector without any empirical verification. 2. Factor Prices do not Depend upon Factor Endowments. This theory indicates why factor endowments and different production functions have led to rise of disguised unemployment in the rural sector. This is vitally connected with the pattern of factor prices. But factor prices do not solely depend on factor, endowments. 3. Neglects Institutional Factors. Moreover, there are many institutional and psychological factors that also influence factor proportions which have been neglected by Higgins. 4. Neglects the Use of Labour Absorbing Techniques. Further, Higgins contention that highly capital-intensive processes are imported for use in the industrial sector altogether neglects the use of other techniques that are labour absorbing. All imported techniques are not labour-saving. For instance, the Japanese agricultural development cannot be attributed to the use of capitalintensive techniques. Rather, it was due to the application of better seeds, improved methods of cultivation, increasing use of fertilizers, etc. 5. Size and Nature of Disguised Unemployment not clarified. Higgins does not clarify the nature of disguised unemployment in the rural sector and excess labour supply in the industrial
10. B. Higgins, op. cit., p. 329. 11. Ibid., p. 330.

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sector. Nor does he refer to the actual extent of the disguised unemployed resulting from technological dualism.

FINANCIAL DUALISM
Prof. Myint12 has developed the theory of financial dualism. Financial dualism refers to the coexistence of different interest rates between the organised and unorganised money markets in the LDCs. The rate of interest in the unorganised money market in the traditional sector is much higher than the rate in the organised money market in the modern sector. The unorganised money market consists of the non-institutional lenders, such as the village money-lenders, landlords, shopkeepers, traders or the combination of some of them. They charge very high interest rates on loans. The main reason is that there is a real shortage of savings in the traditional sector as substantial amount of savings is hoarded in gold and jewellery. Even though risks and costs of lending money to a large number of small borrowers are very high, yet there are other contributory factors arising from imperfections in this unorganised money market. The village shopkeepers, landlords, money-lenders and traders occupy strategic positions in the village economy and create monopoly powers over the peasants. These arise because of personal and informal dealings with borrowers, flexibility in loan transactions, and blending of money-lending with other types of activities such as selling of goods. The high rates of interest which the peasants have to pay are not only formal interest charges but also an considerable part concealed charges obtained through manipulating the prices of the commodities which the peasants buy or sell. Concealed charges may take the form of very high prices for goods on credit terms at the local shop or the obligation to repay the landlord the loans advanced with a specified amount of the crop at harvest. On the other hand, in the organised money market of the LDCs, the interest rates are low and credit facilities are abundant. The organised money market consists of the commercial banks and other financial institutions which lend short-term credit at low interest rates to the modern business sector consisting of the big foreign-owned enterprises in the export industries, the government and the large-scale modern manufacturing enterprises. Myint points towards two differences between the old financial dualism which existed in the open economy of the colonial period and the new financial dualism which now exists in the closed economy of the LDCs following domestic industrialisation policies. First, under the colonial system, the currency system was automatic and ensured free convertibility at fixed exchange rates. Consequently, there was no shortage of foreign exchange and no balance of payments problem. But the present LDCs are faced with chronic domestic inflation and balance of payments difficulties. As a result, small business units such as peasants, small traders, handicraft producers, etc. in the traditional sector have to face not only high interest rates but also inaccessibility to foreign exchange and imports. Second, under the colonial system, the organised money market of the LDCs consisted of the branches of western commercial banks which were linked with the international financial market. The modern sector in the colonial system consisting of the mines, plantations and foreign trading enterprises could borrow at low interest rates both from the commercial banks and from the world capital markets. But the present LDCs have attained monetary independence with the
12. H. Myint, Economic Theory and the Underdeveloped Countries, 1971 and The Economics of the Developing Countries, 5/e, 1980.

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establishment of their own central banks. They have introduced foreign exchange controls and have restricted profit remittances and transfer of funds by foreign commercial banks. As a result, the organised money market of the LDCs has been separated from the world capital market. Coupled with this, they have been following cheap money policy. This has led to the paradoxical situation in which the central banks in the capital-scarce LDCs are maintaining low interest rates than those prevailing in the capital-rich developed countries thereby overvaluing their exchange rates. They fear that devaluation will lead to repeated devaluation of their currencies and to inflationary pressures. Further, the LDCs are faced with inflationary pressures, declining foreign exchange reserves and balance of payments pressures. Thus there is a chronic excess demand for foreign exchange at the overvalued exchange rates. To overcome this, they have concentrated on foreign exchange and import control and on monetary and fiscal measures and direct controls. This had led to aggravation of the economic dualism between the traditional sector and the modern industrial sector. These fiscal and monetary policies have tended to favour the modern industrial sector as against the traditional sector. The cheap money policy by maintaining an artificially low interest rates has made credit available to large indiistrial concerns at favourable terms. The low interest rates have discouraged the flow of capital funds from abroad and savings from within the country, but have created an excess demand for loans. Thus the bulk of domestic savings at low interest rates have flowed to the modern industrial sector. This has reduced the supply of capital to the traditional small industries and the agricultural sector which have to get it at higher interest rates. Further, the imposition of controls on foreign exchange and imports to correct the adverse balance of payments have benefitted the modern industrial sector as against the traditional sector. The modern sector is usually allocated the major portion of the available foreign exchange and the manufacturing industries are encouraged to adopt highly capital-intensive methods of production because the imported capital goods are obtained cheaply at the overvalued exchange rates. Thus there is a strong incentive to substitute cheaper imported capital goods for domestic labour. The agricultural and small-scale sectors suffer from foreign exchange and import controls on two counts: first, they get imported consumer goods at high prices, and second, they fail to obtain the foreign exchange and import permits easily because of red-tapism and corruption prevailing in the LDCs. The traditional sector also suffers because the government expenditure on public services favours the urban centres as against the rival areas. Public services like transport, communications and electric power are available more readily and at favourable terms to the modern industrial sector than to the traditional sector. The governments in some of the LDCs have tried to improve credit facilities in the traditional sector by establishing agricultural banks and cooperative credit societies and by passing usuary laws. But these tend to take the form of supplying a limited percentage of subsidised loans through the cooperative societies to some highly favoured model villages. These seemingly impressive show pieces however have no effect on lowering the high rates of interest which prevail in the rest of the traditional sector. All this has led to malallocation of resources between the modern and the traditional sectors and to obstruction of the development of an integrated domestic capital market in the LDCs. With the multiplicity of government controls, the free market for credit has developed into the black market. Domestic inflation alongwith overvalued exchange rates have led to speculative

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flight of capital abroad. In countries which have tried to stop this, the capital funds have been channelised into the purchase of gold, jewellery, real estate and into speculative activities. This is because of the cheap money policy which offers low interest rates to the holders of funds for investment purposes. This stands in the way of the growth of an effective capital market. Government controls over the scarce supply of capital have also retarded the growth of financial intermediaries in the LDCs. These controls favour the large manufacturing units and banks. They discriminate against the small borrowers and the money-lenders who provide credit to the small borrowers. The government believes that capital funds invested only in durable capital goods and modern machinery are productive, while those invested in financing agriculture and trading activities are unproductive. According to Myint, the efforts made to control the activities of the money-lenders and to provide cheap and easy credit in the traditional sector through commercial banks and cooperative credit societies have failed due to (a) the high overhead costs and salaries of the officials of the commercial banks in rural areas; (b) the red-tapism in dealing with small borrowers according to the rigid rules of credit worthiness; (c) the lack of coordination between the head office and branches; and (d) the supply of limited amounts of subsidised loans through cooperative credit societies to some favoured parts of the rural sector. Further, credit discrimination against trading activities also stands in the way of the development of an integrated capital market in the LDCs. Due to the non-availability of sufficient capital funds and high costs of holding stocks, the traders have to hold a much lower level of stocks of commodities and circulating capital. As a result, the wholesale and retail prices are widened. Prof. Myint suggests two types of policies to reduce financial dualism in the LDCs. First, such countries should raise the official interest rates in their organised credit markets high enough to reflect their existing shortage of capital funds. This would encourage the growth of an integrated domestic capital market which can effectively attract savings from within the country and from abroad. It would also help to equate the available supply of savings to the demand for loans including the demand for funds by the money-lenders to be re-lent to the unorganised credit market. Second, to create a more integrated domestic capital market, free access on equal terms to capital funds should be provided both to the modern and traditional sectors. This would also reduce the malallocation of resources between the two sectors. The interest rates in the traditional sector should be reduced by providing unlimited access to credit funds on equal terms both to the cooperatives and the money-lenders so that they can compete to lower the interest rates for the small borrowers.