There are different theories which are of the view
that the poverty and underdevelopment of poor countries is attributed to their
(1) Social Dualism, (2) Technological
Dualism and (3) Financial Dualism.
(1) Social Dualism or
J.H. Boeke is a Dutch Economist who studied Indonesian Economy and presented
his theory of social dualism. He maintains that there are three characteristics
of a society in the economic sense. They are as:
(i) Social Spirit (ii) Organizational
Form (iii) Techniques Dominating Them.
Their inter-relationship and interdependence is called the
social system or
social style. A society is homogeneous if there is only one social system in the
society. But the society which has two or more social systems is known as dual
or plural society.
Dr. Boeke says that the dual society is a society which has
two full grown social styles which represent pre-capitalism and post-capitalism.
Such a dual society is furnished with the existence of an advanced imported
western system on the one side and endogenous pre capitalistic agricultural
system on the other side. The former is under the western influence which uses
the advance techniques and where standard of living is high. The later is native
and it is furnished with the outdated techniques and low social and economic
life. This is called social or sociological dualism and these two systems are
clashing. The imported social system is highly capitalistic and it may be
socialistic as well as communistic system.
On economic basis the dualistic
society is classified as by giving the names:
(i) Eastern Sector and (ii) Western
There are certain characteristics of eastern sector of a dualistic economy
which distinguishes it from western sector. They are as:
(i) The needs of eastern sector are limited. People pass a contented life.
(ii) People work for social needs rather for economic needs. For example, if a
three acres are enough to supply the needs of a household he will not cultivate
(iii) Goods are cultivated according to their prestige value rather on their
(iv) As a result of all above, the eastern economies are
characterized with backward bending supply curves of effort and the risk taking.
(v) The native industries have neither organization nor capital and they are
ignorant of modern technology and market conditions.
(vi) People are indulged in speculative activities rather in business
(vii) They do not take risk by making productive investment.
(viii) They lack the initiative and organizational skill which is a feature of
western sector of dual economy.
(ix) Labor is unorganized, passive and unskilled. They are reluctant to leave
their village and community. They are fatalist.
(x) The urban development takes place at the cost of rural life.
(xi) Exportation is the main objective of foreign trade in the eastern sector
while the western sector believes in imports.
Due to these features of eastern society the western economic theory is not
applicable as far as UDCs arc concerned.
The western economic theory is meant to
explain capitalistic society whereas eastern sector is pre capitalistic. The
western sector or society is based upon unlimited wants and money economy etc.
Moreover. The MP theory cannot be applied in UDCs for resource allocation and
distribution of income because of immobility of resources. Thus Boeke says:
should not try to transplant the delicate houseplant of western theory to
tropical soils where an early death awaits for it. If the pre-capitalistic
agricultural sector of eastern sector is attempted to develop along western
lines it will create retrogression. The modern agricultural techniques can not
be applied how-long the mental attitudes of the farmers are not changed,
otherwise the increase in wealth following modern technology will result in
further growth of population. Moreover, in case of failure of modern technology,
the indebtedness of the country will increase. Therefore it is better that these
existing agricultural systems should not be disturbed.
As far as industrial field is concerned the eastern producers cannot follow
the western technology on the basis of economic and social reasons. He says that
the adoption of western technology to industrialize Indonesian economy has moved
the goal of self sufficiency farther and ruined its small industry.
Boeke refers to five kinds of unemployment in UDCs:
(i) Seasonal, (ii) Casual, (iii) Unemployment of regular workers, (iv) Unemployment of white collard class, (v) Unemployment of
According to Boeke the govt., is unable to remove such unemployment because of
the reason that it will require the funds which the govt. cannot avail. Booke
says that limited wants and limited purchasing power in eastern sector hamper
economic development. If the food supply is increased or industrial goods are
increased, it will bring a glut of commodities in the market. The prices will
fall and economy will face depression.
But this does not mean that Boeke is against industrialization, and
agricultural improvement. Rather he is in favor of slow process of
industrialization and agricultural development on small scale which could have
an adaptability with the dualistic structure of eastern society. The urge for
development should come from the people themselves. New leaders must emerge who
should work for the goal of development with faith, charity and patience.
Professor Bengmin Higgins has
criticized the social dualistic theory on the following grounds:
(i) Wants are not Limited: If
we analyze "Indonesia's life" we do not find that the desires of the
people are limited because here the values of MFC and MPM are higher. This is
the reason that the govt. has to impose import restrictions. Moreover, whenever
the harvest is good the farmers become prosperous and the demand for luxurious
(ii) Casual Labor are not Unorganized:
Boeke presented the version that casual workers are unorganized and passive.
But this may be true as far as agricultural sector is concerned but they are not
unorganized in coffee, tea, rubber and plantation etc.
(iii) Eastern Labor is not Immobile: Boeke thought that eastern labor is immobile. It is not so because of
attraction of modern facilities of life in the urban areas. Moreover the high
income incentives force the labor to move from rural areas to urban areas.
(iv) Dualistic Theory is not Particular To UDCs Only:
The eastern society, according to Boeke, only exists in UDCs. It is not true.
It does exist in Canada, Italy and even in the United States.
(v) Applicability to Western Society:
According to Professor Higgins most of the characteristics of eastern society
given by Boeke are present even in the western societies. For example, during
hyper inflation, speculation is preferred to investment. This means, the people
in the western countries also have a strong desire to keep their capital safe
and in liquid form, The western society also believes in conspicuous consumption
as discussed by Veblin and Snob effects. The backward bending supply curve of
efforts has been experienced by Australia during post war period and by US in
(vi) Not a Theory But a Description: It is objected that the Boeke's dualistic theory is merely a description
rather than a theory. His findings are based upon neo-classical theory which has
the limited applicability in the western world.
(vii) Does not Provide Solution to the Problem
Boeke's dualism centers more on socio-cultural aspects rather on economic. He
only says that govt. is not in a position to remove unemployment. Moreover, he
does not mention the situation of under employment. Therefore his theory is full
The main problem of dualistic economies is to provide employment
opportunities and Boeke theory fails to do it. Therefore, Prof. Higgins has
developed the theory of technological dualism.
Professor Higgins has developed the theory of
Technological Dualism. By
this we mean:
"The use of different production functions in the advance sector
and in the traditional sectors of UDCs".
The existence of such dualism has
increased the problem of structural or technological unemployment in the
industrial sector and disguised unemployment in the rural sector. Higgins theory of technological dualism incorporates the factor
proportion problem as discussed by K.S. Eckaus, which is related to limited
productive employment opportunities found in the two sectors of a UDCs because
of market imperfections, different factor endowments and different production
The UDCs are characterized with structural disequilibrium at the factor
level. This arises, because a single factor gets different returns in different
uses or because price relationship among factors are out of line with factor
availabilities. Such disequilibrium leads to unemployment or underemployment in
two ways. It is as:
(i) Imperfection of price system.
(ii) Structure of demand which results in surplus labor in overpopulated
Thus the technological unemployment in UDCs is because of surplus labor which
results from misallocation of resources and structure of demand.
Higgins constructed his theory by assuming two goods; two factors and two
sectors and their factor endowments and production functions. Of these two
sectors the industrial sector is engaged in plantation, mines, oil field and
large scale industry. It is capital intensive and characterized by fixed
technical coefficients that is, the factors have to be combined in a fixed
While the rural sector is engaged in
producing food stuffs, handicrafts and very small industries. It has changeable
technical coefficients of production. Hence it has different alternative
combinations of labor and capital. The production functions in the industrial
sector are represented as in figure:
Here the IQ1, represents the combination of OL1, of labor (L) and OK1, of
capital (K) which produces a certain level of output. While IQ2, IQ3 and
IQ4 represent higher level of output which arc only possible if K and L are increased in the same
proportion. Thus the points; A, B, C and D show fixed combinations of capital
and labor which are used to produce different levels of output.
The line OE represents expansion path in the industrial sector and its slope
represents constant factor proportions. The line K2L2 shows that the
production process is capital intensive. To produce Q1, output OK1, of K and OL1
of L are used. If the actual factor endowment is at S rather A. It means that
more labor are available to produce same amount of output. While here units of K
are OK1. Since there are fixed technical coefficients, the excess labor supply
will not affect the production techniques at all. The L1L2
units of labor will remain unemployed. It is only when capital stock increases
to SF, then it will be possible to absorb this excess labor supply in this
sector. Otherwise it has to seek employment in rural sector.
The production functions for rural
sector are shown in the figure:
The isoquants, Q1, Q2, Q3 and Q4 show variable coefficients of
production. In order to produce more output more labor is employed as compared
with the capital. As a result the good land (capital) becomes scarce and all
available land is cultivated by high labor intensive techniques. At point E
where maximum output level is reached as shown by Qn.
Thus, according to Higgins, because of different production functions the
unemployment and underemployment comes into being in UDCs. According to Higgins
the industrial sector uses capital intensive techniques and fixed technical
coefficients and it is not in a position to create employment opportunities at
the same rate at which population grows. Rather, the industrialization reduces the employment in this sector.
Therefore, the rural sector is an alternative for the surplus labor.
In the beginning it is possible to absorb the additional labor by bringing
more lands under cultivation. This leads to optimal combination of labor and
capital. Eventually good lands become scarce. The ratio of labor to capital in
that sector rises and the techniques become increasingly variable in this
sector. Ultimately all available lands is cultivated by high labor intensive
techniques and MP of labor becomes zero and negative. Thus with the growth of
population disguised unemployment begins to appear. Under these circumstances
farmers have no incentives either to invest more capital or to introduce labor
saving techniques. As a result the techniques of production, the productivity of
labor and socio-economic life is remained at low level in the rural sector.
the long run the technological progress does not help in removing the disguised
unemployment. Rather it tends to increase the number of disguised unemployed.
The situation is further aggravated by keeping wage rates artificially high by
trade unions or by govt. policies. For high industrial wages relative to the
productivity provide an incentive to the producers for introducing labor saving
techniques and thereby it diminishes the further capacity of the industrial
sector to absorb surplus labor. Accordingly these factors increase the
technological dualism in UDCs.
Professor Higgins has attempted to
present how disguised unemployment gradually rises in the rural sector of
dualistic society. But the theory has following defects:
(i) Assumption of Fixed Technical Coefficient:
Higgins wrongly assumes fixed technical coefficient in the industrial sector
without any empirical verification.
(ii) Factor Prices do not Entirely Depend Upon Factor Endowment: This theory indicates how the factor endowment and different production
functions result in disguised unemployment. So disguised unemployment is
connected with the factor prices. But it has been found out that the factor
endowments do not entirely determine the factor prices.
(iii) Ignoring The Institutional Factors: There are many institutional and psychological factors which have been
ignored by Higgins in connection with their effect on factor proportion.
(iv) Ignoring the Use of Labor Absorbing Techniques:
According to Higgins that industrial sector employs highly capital intensive
techniques which are imported. But practically we find that all imported
techniques are not labor saving. For example, Japan's agricultural development
is not due to capital intensive techniques.
(v) Size and Nature of Disguised Unemployment
is not Assessed: Higgins does not clarify the nature of disguised unemployment in the rural
sector and excess labor supply in the industrial sector. Moreover, he does not
tell about the extent of disguised unemployed due to technological dualism.
Professor Hala Myint has developed the
theory of financial dualism. Such
dualism rises because of division of money markets in unorganized and organized
money markets in LDCs. The rate of interest in unorganized market is higher than
the rate of interest in organized money market which is concerned with modern
sector. The unorganized money market consists of village money lenders,
landlords, arties. They charge the high interest because of the following
(i) The lenders have monopoly and
position of the borrowers is very weak.
(ii) There is a shortage of savings in the traditional sector because most of
the savings are made in terms of land or gold.
(iii) Due to natural calamities etc. the risk attached with such
Thus we find that the high interest rate which the farmers have to pay not
only consists of formal interest charges but also the concealed charges obtained
through under pricing the grains purchased by the farmers.
On the other hand, in the organized markets of LDCs the interest rates are
low and credit facilities are abundant. The loans are advanced to manufactured
sector, export industry and modern commerce sector.
Professor Myint says that there was an old financial dualism which used to
exist in the open economy of colonial period and the financial dualism
which now exists.
Under colonial system there was perfect convertibility at fixed exchange
rate. Consequently there was no shortage of foreign exchange and there were no
BOP problems. But now a days the LDC's have to face internal as well as external
balance. Thus the poor traders and small peasants not only have to face high
interest rates, but also the shortage of foreign exchange. Then they are not in
a position to get advanced machinery etc.
Under colonial system organized money market of LDCs is consisted of the
branches of western commercial banks which were linked with international
financial market. In colonial system the modern sector consisting of mines,
plantation and foreign trade borrowed at low interest rates both from western
banks and the world capital markets. But the present LDCs have attained monetary
independence by establishing their own central banks. They have introduced the
As a result, the organized money market of the LDCs have been
separated from the world capital market. Hence, their central banks are
following the cheap monetary policy even when they are having shortage of funds.
They are maintaining over-valued exchange rate on the ground that devaluation
will create inflation. On the other hand there is chronic excess demand for
foreign exchange in these poor countries. To meet this situation, these
countries depend upon exchange controls, direct controls, monetary and fiscal
policies. This has led to enhance the economic dualism between the traditional
sector and modern industrial sector. The cheap monetary policy by maintaining
artificial low interest rates has become helpful for the large industrial
sector. The low interest rates have discouraged the flow of funds from abroad
and savings from within the country. But it has created an excess demand for
loans. Thus the major part of domestic savings are flowing towards industrial
sector. This has reduced the capital to traditional and agriculture sector which
have to get at higher interest rate.
The foreign exchange control to correct deficit in BOP has also benefited the
modern industrial sector against the traditional sector. It is because that the
major share of available foreign exchange is allocated to the industrial sector to import
capital intensive goods. On the other hand, the agricultural and small scale
sector fail to get foreign exchange and import permits because of red-tapism and
corruption in the LDCs.
The most of the UDC's have established agricultural banks and cooperative
societies. But these institutions have been found providing loans to the
influential people and to the model villages.
All this has led to misallocation of resources between the modern and
traditional sector. So money markets in the LDCs remain backward. Domestic
inflation along with over-valued exchange rate have encouraged flight of
capital. The countries where this is checked, the capital moved in the purchase
of gold, jewellery, real estates and other speculative activities. This is
because of low rate of interest against investment. Hence the money market
Govt. controls over the scarce supply of capital have also retarded the
growth of financial intermediaries in the LDCs. These controls favor the large
manufacturing units and the banks. They discriminate against the small borrowers
and the money lenders who provide credit to the small borrowers. In the LDCs
govts. believe that capital funds invested in durable capital goods are
productive while those invested in financing agriculture and trading activities
According to Myint the cheap and easy credit to the traditional sector is not
provided because of following:
(i) The high over head costs and salaries of officials of commercial banks in
the rural areas.
(ii) The red-tapism in dealing with small borrowers according to the rigid
(iii) The lack of coordination between the head office and the branches.
(iv) Lack of subsidized loans supplied by the agricultural banks etc.
Professor Myint suggest two types of policies to reduce financial dualism in LDCs:
(i) The official interest rate in the
organized capital market be increased.
This will attract the savings both from the country and out of the country. It
will also create an equilibrium between the demand for loan able funds and supply
of loan able funds.
(ii) There should be free access on
equal terms to capital funds by modern and traditional sector. This will reduce
misallocation of resources between the two sectors.