1. NS4540 Winter Term 2016 Sector/Dualism Models

2. 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

3. 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

4. Dualistic Models II Technological Dualism – Industrial Sector
Fixed technological coefficients

5. Dualistic Models III Technological Dualism Agricultural Sector
Flexible technological coefficients – falling wages with population growth

6. 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

7. 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

8. 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

9. 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