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A model of the labor surplus dualistic economy in the notions of J.C.H. Fei and G. Ranis Krumins, Juris Talivaldis

Abstract

The dynamic dual sector model of this thesis is constructed in the notions of John C.H. Fei and Gustav Ranis as expressed in their book, Development of the Labor Surplus Economy.¹ The construction takes the form of three stages of balanced economic growth which are demarcated by the value of the agricultural marginal product of labor; stage one is concerned with the time period when this equals zero, stage two when it lies between zero and the real agricultural wage, and stage three, which is omitted, when it is equal to the real agricultural wage. The model shows that in the large labor surplus type of underdeveloped economy, successful development is more a question of domestic policy, rather than foreign aid or trade. The distinctive features of the type of economy analyzed are "disguised" unemployment and institutional wage in the agricultural sector coupled with a small, growing industrial sector. The solution for development lies in the relocation of this surplus labor in the agricultural sector to the industrial sector, with a consequent increase in productivity per capita in the agricultural sector, where a smaller percentage of the total labor force now provides the entire economy with food and basic inputs. This, then, is accompanied by an increase in the industrial employment and development, the expansion of which depends on the two real resource components, the agricultural "surplus" and agricultural labor force which are provided by the agricultural sector. The essential feature of the industrial sector is seen to be the absorption of surplus labor from the agricultural sector, which in turn results in the expansion of the industrial output and economic growth.

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