Endogenous Growth in the Dual Economy

In this section the baseline model is extended to endogenous technical progress in agriculture. Technical progress in manufacturing remains exogenous. While it would, in principle, be possible to introduce some research or human capital accumulation decision also in the second sector, this study focuses on agriculture as set out in chapter 2. Extending the model towards endogenous development allows us to discuss determinants of productivity improvements in agriculture as well as their macroeconomic effects. Within the set-up chosen here, this discussion is not confined to growth effects but includes also the economy’s structure. The focus is in this chapter on technology creation as well as on human capital investment. Both issues have been discussed intensively in empirical and theoretical studies alike, although mostly from a microeconomic perspective. Most macroeconomic studies have taken productivity improvements in agriculture as exogenous and have considered only their consequences. Here both issues are discussed together. Using tools from the NGT, determinants of productivity improvements as well as their effects will be analyzed within a single macroeconomic model. As in the last chapter, the model allows us to distinguish between growth and level effects as well as between influences on an economy’s structure and on its growth performance. Like above, we will confront the model with the stylized facts set out at the beginning of chapter 3.