1. Overview

We begin with a single, relatively simple, theoretical framework that augments the Solow model to include endogenous theories of saving, fertility, human capital, and policy formation. The analysis is then extended to include two sectors of production. We study the structural transformation of developing economies as they shift from traditional production in largely rural areas to modern production in largely urban areas during the early take-off period of modern growth. The two-sector growth model is used to explain the commonly observed differences in saving, worker productivity, and fertility across rural and urban sectors. We examine the effects of policies that reallocate resources across these sectors, such as taxation, migration restrictions, international trade, and an urban bias in the provision of public services. How policies affect the pace of the structural transformation is a critical feature of development as it plays an important causal role in determining an economy’s aggregate growth rate.