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 Critique 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