Dual Economy
A dual economy is an economy characterised by the coexistence of two distinct sectors with markedly different levels of productivity, technology, and organisation. The concept, developed by W. Arthur Lewis and refined by later scholars, provides a framework for understanding structural change and the process of economic development in low-income countries.
The Traditional and Modern Sectors
In the classic formulation, the traditional sector is characterised by low productivity, labour-intensive methods, and subsistence or near-subsistence activity, often agriculture. It is typically overpopulated relative to the resources available, so that the marginal product of labour is very low or even zero. The modern sector, by contrast, uses capital-intensive techniques, employs wage labour, and enjoys higher productivity.
The coexistence of the two sectors within a single economy is the defining feature of duality. Because productivity differs so greatly, the same economy can display modern enclaves alongside widespread poverty, generating significant inequality and heterogeneity.
The Lewis Model of Structural Change
The Lewis model posits that development proceeds by transferring labour from the traditional to the modern sector. Because the traditional sector has surplus labour whose marginal product is negligible, this transfer need not reduce traditional output. The modern sector can therefore expand by drawing on this labour reserve, reinvesting profits to accumulate capital and create further employment.
The process continues until the surplus labour is exhausted, at which point wages begin to rise and the economy approaches a turning point, sometimes called the Lewis turning point. Beyond this point, further growth requires raising productivity rather than merely reallocating labour.
Critiques and Extensions
The model has been criticised for its assumptions. The assumption of zero marginal product in agriculture has been challenged, as has the neglect of agriculture's contribution to growth. The model also underplays the role of institutions, the possibility of urban unemployment, and the importance of the informal sector, which in many economies absorbs labour not employed in formal modern activities.
Later work emphasises the heterogeneity of the modern sector itself, distinguishing between formal and informal activities, and recognises that structural change may be associated with persistent underemployment rather than full absorption of surplus labour. The migration decision is treated as depending on expected rather than actual wage differences, generating equilibrium urban unemployment.
Contemporary Relevance
The dual economy framework remains useful for analysing contemporary developing economies, where large informal sectors, rural-urban migration, and uneven technological adoption create persistent duality. It informs debates on industrialisation, agricultural transformation, migration policy, and the design of social protection in economies undergoing structural change.
The Turning Point
The Lewis turning point is the moment at which the supply of surplus labour is exhausted and wages begin to rise. Before the turning point, the modern sector can expand by drawing on unlimited supplies of labour at a roughly constant wage. After it, further expansion requires bidding for labour away from other uses, raising wages and potentially reducing profitability.
The concept has been applied to the experience of East Asian economies, where rapid industrialization absorbed surplus labour and generated rising wages, and to contemporary debates about whether large emerging economies have reached or are approaching their turning point, with implications for inflation, income distribution, and the sustainability of growth.
Formal Models
Formal dual economy models specify the technologies, preferences, and market structures of the two sectors and analyse the process of structural change. Early models assumed a fixed wage in the traditional sector, migration driven by expected wage differences, and reinvestment of profits in the modern sector. Later models incorporate human capital, credit constraints, and the possibility of multiple equilibria.
The Harris-Todaro model explains rural-urban migration as a response to expected income, equal to the urban wage multiplied by the probability of finding a job. It predicts that migration can continue even in the presence of substantial urban unemployment, because the expected urban wage exceeds the rural wage. This framework illuminates the coexistence of rural underemployment and urban joblessness.
Informal Sector and Contemporary Duality
Contemporary analyses of dualism emphasise the divide between formal and informal activity. Informal firms and workers operate outside the scope of regulation and social protection, with low productivity and limited access to finance. The informal sector absorbs labour not employed in formal activities, and its persistence reflects barriers to formalisation, the costs of compliance, and the structure of demand.
Policies to reduce duality include investment in education and infrastructure, the reduction of barriers to formalisation, the extension of social protection, and measures to improve productivity in small and informal enterprises. The challenge is to promote structural change without displacing the workers who depend on traditional activities.
Measurement
Measuring duality requires data on productivity, technology, and employment across sectors and activities. Indicators include the share of employment in agriculture and the informal sector, the dispersion of productivity across firms, and the coverage of social protection. These measures reveal the extent of duality and the pace of structural change.