A MULTI‐SECTOR MODEL OF LDC

AuthorPrabir C. Bhattacharya
Date01 August 1994
DOIhttp://doi.org/10.1111/j.1467-9485.1994.tb01123.x
Published date01 August 1994
Srorrrrh
Journal
01
Poliricd
Economy.
Vol.
41.
No.
3.
August 1994
.D
Scoitish Economic
Society
1994.
Published
by
Blackwell Publishers.
108
Cowley
Road, Oxford OX4
IJF,
UK
and
238
Main Sireei. Cambridge, MA 02142. USA
A
MULTI-SECTOR MODEL
OF
LDC
Prabir
C.
Bhattacharya
*
I
INTRODUCTION
The purpose of this paper is to develop and analyse
a
model
of
LDC which
systematically incorporates an Informal sector. The Informal sector has, of
course, been extensively discussed in the Development literature over the past
20
years
or
so.
This discussion, however, has been overwhelmingly empirical
and descriptive,
with
very little theoretical underpinning. In most theoretical
works, the Informal sector is viewed primarily as an absorber of surplus
labour, rather than also as
a
producer of output at the same time; it is modelled
as an unproductive and stagnant sector. ' In sharp contrast
to
this view, how-
ever, the empirical literature increasingly sees the Informal sector as dynamic,
efficient, and full of hidden but creative entrepreneurial talents,2 and
it
is in
keeping
with
this literature that we construct a three-sector general equilibrium
model of LDC, where an Informal sector with its own dynamics is explicitly
introduced. Our model enables
us
to derive a number
of
policy relevant com-
parative static results and these are seen to offer interesting insights into the
workings
of
the Informal sector. Additionally, the model presented
in
this
paper
is
also seen to contain implications which differ from some
of
the major
implications of the dual economy models.
As is well known, Lewis
(1954, 1958)
presents a two-sector model and inves-
tigates the expansion of the capitalistic
or
industrial sector as it is nourished by
supplies of cheap labour from the subsistence
or
agricultural sector. The
central theme of the Lewis story is that the capitalist sector can develop with
a
low
fixed real wage which is assumed
to
be determined in some relation
to
the wage that workers can earn in the agricultural sector. The model then says
in effect that if unlimited supplies of labour are available at this constant real
wage, and
if
any part
of
profits
is
reinvested in productive capacity, profits
will
grow continuously relatively
to
the national income, and capital formation will
also grow relatively to the national income. Lewis in his classic article stressed
a labour surplus rather than an agricultural surplus. It would appear, however,
that agricultural output also has
to
increase
if
the mechanism that he describes
is
not
to grind to a halt.
As
he wrote,
...
if we postulate that the capitalist sector is not producing food, we must
either postulate that the subsistence sector is increasing its output,
or
else
'See, for example. the works of Todaro (1969). Fields (1975), Mazumdar (1976, 1977). and
'See, for example,
ILO
(1972), Bhattacharya
(1985.
1993b), Sethuraman (1981).
La1 (1973). among others. See also Bhattacharya (1993a) for a review of this literature.
Department
of
Economics, Heriot-Watt University, Edinburgh.
225
226
PRABlR
C.
BHATTACHARYA
TABLE
1
Summary
of
notation
F
f
h
i
L
I*
the number
of
firms/owners
of
firms in the Formal sector
the number
of
workers employed in the Formal sector
the number
of
rural hirers
the number
of
firms in the Imsector
the total labour in the urban area
the maximum permissible size
of
firms beyond which the ‘minimum’wage comes
into operation
manual labourer
the number
of
manual labourers
the price
of
the Imsector output
the price
of
the R-sector good
rural hirer
the wage in the Informal sector
the ‘minimum’ wage in the Formal sector
the wage in the Rural sector
the R-sector output
the F-sector output
the IM-sector output
the ‘reward demanded’
by
the entrepreneurs for the setting up
of
I,u
firms
the profit
of
an RH
the profit
of
an F-sector employer
conclude that the expansion
of
the capitalist sector will be brought to an end
through adverse terms
of
trade eating into profits (1954).
It was, however, Ranis and Fei (1961), in their subsequent elaboration and
extension
of
the Lewis model, who brought out the importance
of
the agricul-
tural surplus in initiating and sustaining the process
of
capital accumulation in
the industrial sector in the context
of
the dual economy models.
This view that agricultural development is in some sense a pre-requisite to
industrial development and that it is agriculture which must necessarily provide
resources
for
industrialisation is
a
view which is also generally thought to be
supported by the history
of
the today’s industrialised countries, the prime
examples cited being that
of
England and
of
Japan. These historical ideas,
however, have undergone considerable revision in recent years and on the basis
of
recent researches it would appear that, if anything, it is more appropriate
to say that it was in fact industrial development which contributed to substan-
tial agricultural development in today’s industrialised countries rather than the
other way around. It would thus appear that there may be room
for
alterna-
tive ways
of
looking at the industry-agriculture relationship and some
of
the
results
of
the model presented below can be interpreted to support the view that
not only is agricultural development not
a
pre-requisite to industrial develop-
ment, but that
for
substantial agricultural development to take place, industrial
development itself may be
a
pre-requisite.
The plan of the paper is as follows.
In
Sections
I1
and
111
we develop our
model. The full model is then presented in Section
IV.
Section
V
sets out the
’See, in particular, Sinha
(1984)
for
a
succinct evaluation
of
recent researches on the role
of
agriculture in both the English and the Japanese industrialisation.
0
Scottish
Economic
Society
1994

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