The Dual Economy Revisited

In this chapter we introduce the baseline model for our analysis of growth and development in a dual economy. It is descendant from the dual economy models developed around 1960. However, while the latter are mostly descriptive, the model presented here is a social planning exercise describing the optimal behavior of an economy. Although most economies in reality are probably not always on their optimal growth paths, it is also discussed whether the model is able to replicate important stylized facts of economic development. These stylized facts are: (i) a decline in the proportion of agricultural labor from 70% to less than 20% as quantified by Dixit (1973, 328), (ii) a duration of this process of roughly 100 years as observed by Kuznets (1966) for the United States and Japan, and (iii) an increase in labor productivity in both sectors.1