The Dual Sector Model of Economic Development: A Comparative Analysis of Moldova and Romania

By Hall, Sarah | Indian Journal of Economics and Business, March 2012 | Go to article overview

The Dual Sector Model of Economic Development: A Comparative Analysis of Moldova and Romania


Hall, Sarah, Indian Journal of Economics and Business


Abstract

This paper examines W. Arthur Lewis's Dual Sector Model of Development. Lewis, a founder of Development Economics, has been one of its most significant contributors. This paper applies the Dual Sector Model to Moldova and Romania and explores the economic growth occurring in each country. Considerations are made for each country's unique situation, and observations not accounted for in the original Model are acknowledged. Lewis' s Dual Sector Model can be successfully applied to both Moldova and Romania, although each one is at a different stage economically, and certain modifications need to be made concerning the situation of contemporary developing countries.

I. INTRODUCTION

The first section of this paper will focus on Lewis's Dual Sector Model as presented in his famous article, "Economic Development with Unlimited Supplies of Labor," written in 1954. In that article he laid out the framework theory and rationale of the Dual Sector Model and explained how it was relevant to economic growth in developing countries. It was a great contribution to the structural change theory specifically and to development economics in general. In order to understand his Model more clearly, the second section of this paper will apply the Model in a comparative study to the countries of Moldova and Romania. These countries have a lot of shared background culturally and historically with Romania actually ruling the land now known as Moldova long before the Soviet Union claimed Moldova as part of its territory.

This study will focus on the development of each country through the lens of the Dual Sector Model, and will explain how each country is at a different point in development according to the Model. Both Moldova and Romania have a strong history of agricultural production and pastoralism, but Romania has moved through the process of urbanization and development much quicker than Moldova. In the following sections, we will explore possibilities as to why that may be in relation to Lewis's Dual Sector Model, as well as look at different obstacles to development which Lewis did not consider.

II. LEWIS'S STRUCTURAL CHANGE MODEL

W. Arthur Lewis was a very influential economist in the field of development economics. In one of his most famous articles entitled "Economic Development with Unlimited Supplies of Labor," published in 1954, he proposed the Dual Sector Model in regards to developing countries. This model postulates that there are two sectors in a developing economy: the agricultural or rural sector and the industrial sector. He suggests that there must be a change in the structure of the economy for economic development to occur.

In the agricultural sector, there is a surplus of labor. That surplus makes the wage rate stay very low and near to subsistence level, thereby having a marginal productivity of zero. Marginal productivity is defined as the increase in total product due to the employment of one more unit of labor. Therefore, as there is a surplus of labor in the agricultural sector, labor can be added or removed from the workforce with no effect on the output of productivity. The Law of Diminishing Marginal Productivity asserts that as the labor employment increases, the additional unit of labor employed starts producing less. This law is irrelevant since there is a marginal productivity of zero in this sector. It does not matter if a significant amount of the labor employment leave as it will not affect total productivity because there is a surplus of labor, and there will always be enough people there to meet the demand of the work.

Lewis argues that the phenomenon of zero marginal productivity is not only found in the country-side, but is found in urban areas as well in the form of "casual jobs" such as gardeners, doormen, dock workers, messengers, domestic service, petty retailers, etc. (Lewis 1954, 141). In fact, he expanded that list by asking "from what sectors would additional labor be available if new industries were created offering employment at subsistence wages" (Lewis 1954, 142)? …

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