Transformation from Agrarian to Industrialized Modern Society

1. Transformation from Agrarian to Industrialized Modern Society Koichi Fujita CSEAS, Kyoto University Japan

2. Dual Sector Economic Development Model • A. Lewis (1954), "Economic Development with Unlimited Supplies of Labor“ First published in The Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of Developmental Economics. • G. Ranis and J.C.H. Fei (1961), “A Theory of Economic Development”, American Economic Review, Vol.51. Developed and elaborated the idea of A. Lewis. • The ‘Dual Sector Model’ is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labor, promotes industrialization and stimulates sustained development.

3. Structure of the Model • Traditional Sector 1) Since the agricultural sector has a limited amount of land to cultivate, the marginal product of an additional labor is assumed to be zero as the law of diminishing marginal returns has run its course due to the fixed input, land. 2) It is assumed that there is a lot of surplus labor in the agricultural sector in the sense that the marginal product of their labor is zero. 3) But they are paid an average product of labor (subsistence wage) by the village community and/or the landlords. 4) They can be transferred to the modern sector without any major cost. 5) Production of the agricultural sector does not decrease because the marginal product of the surplus labor was zero. • Modern Sector 1) Capitalists (Entrepreneurs) invest money and employ laborers up to the point where marginal productivity of labor equals the wage rate. 2) The wage rate is higher than the wage rate (subsistence wage) in the agricultural sector. 3) They re-invest all the profit to their enterprise and expand employment (= capital accumulation).

4. The Traditional Sector (1) Surplus labor Subsistence wage

5. The Modern Sector By re-investment of profit Unlimited supply of labor Turning Point

6. The Traditional Sector (2) Turning Point Wage rate in the Modern Sector Subsistence wage Surplus labor

7. The Turning Point • The end result of this transition process is that the agricultural wage equals the modern sector wage, the agricultural marginal product of labor equals the modern sector’s marginal product of labor, and after that the labor market is integrated and works according to the economic principle in both agriculture and the modern sector. This point is called ‘Turning Point’. • In Japan and other countries, by estimating marginal product of labor and comparing it with the wage rate in industrial sector, some scholars determined when Japanese economy passed the ‘Turning Point’; i.e. in the 1920s first (then during WWII it returned to the surplus labor economy) and again passed the ‘Turning Point’ in the 1960s.

8. Problems in the Dual Sector Model (1) • The idea that the marginal productivity of labor in rural areas is almost zero may be true for certain times of the year; however, during planting and harvesting the need for labor is critical to the needs of the village. • The assumption of a continuous increase of demand for labor from the industrial sector is questionable. Increasing technology may be labor saving reducing the need for labor. • Will higher incomes earned in the industrial sector be saved? If the entrepreneurs spend their profit for consumption rather than save it, funds for investment and growth will not be made available. • The rural urban migration has for many LDCs been far larger than the industrial sector can provide jobs for. Urban poverty has replaced rural poverty as urban informal sector swelled.

9. Problems in the Dual Sector Model (2) • Agricultural production will decrease after the ‘pure’ surplus labor (their marginal product of labor is zero) is disappeared. After that point, food problems may happen because of the stagnation of agricultural sector. • The need for tackling food problem will emerge. There should be technological innovation in agriculture which substantially raise output per acre, because land frontier is already disappeared. • If we look at history, many countries accomplished ‘agricultural revolution’ before the modern economic growth started. Therefore, we should emphasize the role of agricultural development before starting industrialization or the modern economic growth.

10. The Essential Importance of Agricultural Development before Industrialization (1) • Ricardian Trap If the policymakers hurry industrialization while neglecting agricultural sector development, what happens? First, because of the stagnation of agricultural sector, food production became shortage and therefore food price will increase. Food is the basic necessity, and the Engel Coefficient (% of food and beverages to total household expenditure) is very high (around 70% in the typical case) at the time of the infant stage of development, if food price rises people can not survive unless wage rate will rise. Therefore, the development of the modern sector will be limited due to the higher wage rate they have to offer. Or, for avoiding the surge of food prices if the government decides to import food from abroad, the foreign exchanges indispensable for the development of modern sector will be limited, and therefore the industrialization will be constrained.

11. The Essential Importance of Agricultural Development before Industrialization (2) • The problem of Lack of Purchasing Power (Outlet Market) In the infant stage of development, almost all the people lives in rural areas, depending on agriculture directly or indirectly. Therefore, if industrialization is promoted with neglecting agricultural sector, the income level of the majority of people remained stagnated at a low level, so that they cannot purchase manufactured goods which may be supplied from the domestic industrial sector. Because of the limited outlet market for their product, industrialization will fail soon. Through agricultural development based on technological innovation income in rural areas can be increased and the rural people can purchase non-agricultural goods and services, which promote industrialization and the development of service sectors as well.

12. Why Asia Succeeded while Sub-Saharan Africa Failed? • Because of the adoption of ‘agriculture first’ policy in Asia • Success of the ‘Green revolution’ in Asia • Failure of agricultural modernization and overall economic development in Sub-Saharan Africa because of 1) the adoption of ‘industry-first’ policy, 2) the severe ecological constraints.

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