Dual Economy Model a Critique

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The growth models considered in Chapter 2 are highly aggregative and some economists (Lewis 1954; Fei and Ranis 1961, 1964; Jorgenson 1961, 1967; Dixit 1968, 1971; Kelly et al. 1972) began to analyse the problems in terms of two sectors, namely agriculture and industry. Briefly, the socalled traditional noncapitalist agricultural sector is supposed to be unresponsive to economic incentives and here the leisure preferences are imagined to be high; production for the market does not take place and producers apparently do not follow profit-maximizing rules: ‘disguised’ or open unemployment is supposed to prevail throughout the rural sector and indeed the marginal productivity of labour is expected to be zero, and in some cases negative (Nurkse 1953). Income is equal to subsistence level (Leibenstein 1957:154) partly determined by physiological and partly by cultural levels (Lewis 1954). Further, capital has no role to play in agricultural production (Jorgenson 1967:291). Two sectors are linked by the influx of surplus homogenous labour from agriculture to industry. Nothing happens to the transfer of savings or capital and growth takes place when demand rises as a result of ploughing back of profits by the capitalists into reinvestment. The backward sector is eventually ‘modernized’ with the transfer of all surplus labour from agriculture. The extension of the Lewis model by Fei and Ranis (1964) also suffers from some limitations. First, no attempt is made by Fei and Ranis to account for stagnation. Second, no clear distinction is made between family-based labour and wage-based labour and nothing is said about the process of self-sustaining growth. The investment function is not specified and money, price, foreign exchange as well as terms of trade between agriculture and industry are ignored. The dual economy model of Jorgenson is based on familiar neoclassical lines but this hardly helps us to accept it as a more sound theory or, better, in terms of its predictive capacity. For example, Jorgenson considers land and labour only in terms of their agricultural production function and ignores the role of scarce capital. Jorgenson assumes that a surplus arises when agricultural output per head is greater than the income level at which the population growth rate is at its ‘physiological maximum’. This is difficult to comprehend because a clear definition of physiological maximum is lacking and a surplus may exist even before the point at which income corresponding to this maximum is reached. Jorgenson, like Fei and Ranis, neglects the role of money and trade. No capital formation takes place in agriculture in Jorgenson’s model; no attempt is made to analyse the problems of disguised unemployment in agriculture and it is assumed that the industrial wage is equal to the marginal productivity of labour. The shortcomings of the Jorgenson model vis-à-vis the FR model lie in the assumption of a ‘Malthusian response mechanism and a zero income elasticity of the demand for food’ (Hayami et al 1971:22–3). Population growth in LDCs is not always determined by consumption per head. Also, the case for a zero income elasticity of the demand for food is not well supported in practice (NCAER 1972). (For an extension of the Jorgenson model, see Ramanathan (1967), where some of the restrictive assumptions are relaxed.) In both the FR and Jorgenson models, it is implicitly assumed that technical progress would be of a labour-augmenting type. This may not happen in practice (Krishna 1975). The Lewis and FR models suffer from an additional weakness in laying the emphasis only on accumulation and not on technical progress. If growth in the Lewis-FR fashion means rise in income and if the marginal propensity to consume food is positive for any group of income recipients, then, with given output, food prices will rise which will raise wages and reduce profits and growth. Thus any type of accumulation increases...
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