Development in Reverse

CAMBRIDGE – One does not have to spend much time in developing countries to observe how their economies are a mish-mash, combining the productive with the unproductive, the First World with the Third. In the modern, more productive parts of the economy, productivity (while typically still low) is much closer to what we observe in the advanced countries.

In fact, this dualism is one of the oldest and most fundamental concepts in economic development, first articulated in the 1950’s by the Dutch economist J.H. Boeke, who was inspired by his experiences in Indonesia. Boeke believed in a stark separation between the modern, capitalist style of economic organization that prevailed in the West and the pre-capitalist, traditional mode that predominated in what were then called underdeveloped areas. Although modern industrial practices had penetrated underdeveloped societies, he thought it unlikely that they could make substantial inroads and transform such societies wholesale.

When contemporary economists think of economic dualism, they think first and foremost of the Nobel laureate Sir W. Arthur Lewis. Lewis turned Boeke’s idea on its head, arguing that labor migration from traditional agriculture to modern industrial activities is the engine of economic development. Indeed, for Lewis, the coexistence of the traditional alongside the modern is what makes development possible.

To take an extreme example, labor productivity in Malawi’s mining sector matches that of the United States economy as a whole. If only all of Malawi’s workers could be employed in mining, Malawi would be as rich as the US! Of course, mining cannot absorb so many workers, so the rest of the Malawian labor force must seek jobs in considerably less productive parts of the economy.

The dualistic nature of developing societies has become more accentuated as a result of globalization. Certain parts of their economies, such as export enclaves, high finance, and hyper-stores, have experienced substantial increases in productivity by linking up with global markets and accessing frontier technologies. Other sectors have not had similar opportunities, and the gaps between them and the globalized sectors have widened.

These gaps are problematic, but, as Lewis emphasized, they also constitute a potential engine for economic growth. The trick is to ensure that the economy undergoes the right kind of structural change: a shift from the low-productivity to the high-productivity sectors. In successful economies, such as China and India, the movement of workers from traditional agriculture to manufacturing and modern services accounts for a substantial part of overall productivity growth, just as Lewis predicted.

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