NS4053

Winter Term 2013

Sector/Dualism Models

Economic Development Theories II

Broad Classes of Theories
Stage Theories
Rostow 5 stages
Bremer and Kasarda failed take-off New Second World
Porter modern upgrading
Sachs environmental settings
World Economic Forum competitiveness stages (empirical section)
Trap Theories
Vicious Circles
Balanced vs. Unbalanced Growth
Big Push Theories
Middle Income Trap
Sector/Dualism Models
Lewis classical model
Fei-Ranis two sector

Dualistic Models I
Types of Dualism coexistence of modern and traditional
parts of an economy
Sociological Boeke
Idea of modern and traditional society co-existing
Easiest seen in colonial settings Indonesia

Technological Higgins
Refuted sociological dualism
Both modern and traditional respond to same incentives
Dualism due to fixed production function in modern, flexible in agriculture

Financial -- McKinnon
Distortions in labor, capital and exchange markets result in dual pricing
system over capital intensive and under capital intensive

Organizational Mynt
Urban services activities few links with rural sector -- banking

Dualistic Models II
Technological Dualism Industrial Sector
Fixed technological coefficients

Dualistic Models III

Technological Dualism Agricultural Sector
Flexible technological coefficients falling wages with
population growth

Two Sector Models I

Lewis Model
Assumes surplus labor in backward sector
Constant institutional wage in backward sector
Growth a function of reinvestment surplus
Emphasis on modern industrial sector
Basic Soviet Model in 1930s
Neglect of agriculture

Two Sector Models II

The significance of Lewis model
Growth takes place as a result of structural change
An economy consisting primarily of subsistence agricultural sector
(which does not save) is transformed into one predominantly in the
modern capitalist sector (which does save)
As the relative size of the capitalist sector grows, the ratio of profits
and other surplus to national income grows

Critique
Critics focus on the assumption of an unlimited labor supply
Believe the capitalist wage rate may rise before all surplus labor is
absorbed
As workers with zero marginal productivity migrate from the
subsistence ag sector those workers remaining in this sector will
then divide constant output among fewer persons resulting in a
higher wage
Industrial wages then must increase for rural workers to migrate
In short Lewis overestimates the extent the availability of cheap
rural migrant labor can stimulate industrial growth

Two Sector Models III

Fei-Ranis Model

More sophisticated than Lewis very mathematical

Both parts of diagram apply to industrial sector

Surplus agricultural labor -- long period of growth at constant wage to

industrial sector

Two Sector Models IV

Fei Ranis
For success we need
Capital accumulation,
Technological progress in modern sector, preverably of labor
absorbing type
Improvements in agricultural productivity to prevent
excessive increases in industrial real wage which would slow
down relative transfer of labor form traditional agricultural to
modern industrial sector
Controversial with some economists finding transition points in
East Asia, but others not
Strongest case -- Said to be a good depiction of Japanese
economic development with transition occurring in the 1920s