NS4053 Winter Term 2013 Sector/Dualism Models

1. NS4053 Winter Term 2013Sector/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 • 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