NS4053
Winter Term 2013
Sector/Dualism Models
Economic Development Theories II
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Broad Classes of Theories
Stage Theories
• Rostow – 5 stages
• Bremer and Kasarda – failed take-off – New Second World
• Porter – modern upgrading
• Sachs – environmental settings
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• World Economic Forum competitiveness stages (empirical section)
Trap Theories
• Vicious Circles
• Balanced vs. Unbalanced Growth
• Big Push Theories
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• Middle Income Trap
Sector/Dualism Models
• Lewis – classical model
• Fei-Ranis – two sector
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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
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Dualistic Models II
• Technological Dualism – Industrial Sector
• Fixed technological coefficients
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Dualistic Models III
• Technological Dualism Agricultural Sector
• Flexible technological coefficients – falling wages with
population growth
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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
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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
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Two Sector Models III
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Fei-Ranis Model
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More sophisticated than Lewis – very mathematical
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Both parts of diagram apply to industrial sector
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Surplus agricultural labor -- long period of growth at constant wage to industrial
sector
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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
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