economists John Fei and Gustav Ranis presented their dual
economy model. There was a flaw in Lewis model that it did
not pay enough attention to the importance of agri. sector
in promoting industrial growth. But Fei-Ranis (FR)
model of dual economy explains how the increased
productivity in agri. sector would become helpful in
promoting industrial sector. In this respect, it presents
three stages whereby a UDC moves from stagnation to
self-sustained economic growth. Thus, this model is treated
as an improvement over Lewis model of unlimited supply of
Basic Thesis of the Model:
This theory is
concerned with a poor economy which has following
(i) There is an
abundance of labor in such UDC and shortage of natural
population growth rate is very high which results in mass
unemployment in the economy.
(iii) The major
share of population is engaged in agriculture. But
agriculture sector is stagnant. Hence, the marginal
productivity of labor is zero and negative in agriculture
(iv) There are
certain non-agrarian sectors in the economy where there is
reduced use of capital.
(v) There is a
dynamic industrial sector in the economy.
Thus the model
development would be taking place if agricultural laborers
are transferred to industrial sector where their
productivity will increase".
As we told
earlier that it is a dual economy where there is a stagnant
agri. sector and dynamic industrial sector. The situation
where MPL - 0, labor can be transferred to industrial sector
without any loss in agricultural output. The real wages in
industrial sector remains fixed and it is equal to the
initial level of real income in agri. sector. Such wages are
given the name of institutional wages.
Stages of Fei-Ranis Model:
Fei and Ranis
develop their dual economy model with the help of three
stages of economic growth. They are presented as:
In the (a) part
of the Fig., the labor supply curve is perfectly elastic, as
between S and T. In phase (I) as shown in (c) part of Fig.,
the MPL = 0. In other words AL = MPL = 0. But here
APL = AB. Following Lewis the FR model
argues that AD
units of labor are the surplus amount of labor in agri.
sector which is prey to disguised unemployment. Therefore,
they can be withdrawn from agri. sector without changing
agri. output. In phase (II) APL > MPL, but after AD, MPL
begins to rise (c part of Fig). The growth of labor force in
industrial sector increases from zero to OG (a part of Fig).
The APL in agri. sector is shown by BYZ curve (c part of
After AD as
migration takes place from agri. sector to industrial sector
MP, > 0, but AP[_ falls. This shows a rise in real wages for
industrial labors because of shortage of food supply. An
increase in real wages will reduce profits and the size of
'surplus' which could have reploughed for further
The investment in
industrial sector (with the surplus earned) will shift the
MP curve outward right as from aa to bb and then to cc. In
this way agri. sector will be able to get rid of labor until
the MPL = real wages = AB =
institutional wage (CIW) which is obtained by dividing the
total agri. output ORX (b part of Fig) by AD amount of
labor. In other words, the slope of ORX curve represents
real wage rate. Thus the MPL = CIW where the tangent to the
total output line ORX at X is parallel to OX. In the second
phase DK amount of labor were employed. But still MPL < CIW
or CIW > MPL. It means that in this phase still a certain
amount of labor is surplus or they are prey to disguised
stage of FR model is very similar to Lewis.
Disguised unemployment comes into being because the supply
of labor is perfectly elastic and MPL = 0. Therefore, such
disguised unemployed are to be transferred to industrial
sector at the constant institutional wage.
second stage of FR model (phase) agri. workers add
to agri. output but they produce less than institutional
wage they get. In other words, in the second stage the labor
surplus exists where APL > MPL, but it is not equal to
subsistence (institutional) wages. Accordingly, such
disguised unemployed also have to be transferred to
industrial sector. If the migration to industrial sector
continues a situation is eventually reached where the farm
workers produce output equal to institutional wages. This
would mean that productivity in agri. sector has gone up.
With this the third phase (stage) starts.
third stage of FR model the take-off situation comes
to an end and there begins the era of self-sustained growth
where the farm workers produce more than the institutional
wage they get. In this stage of economic growth the surplus
labor comes to an end and the agri. sector becomes
commercialized sector. All such is explained with the Fig.
have to be shifted to industrial sector. As labor are
transferred to industrial sector a shortage of labor will
develop in agri. sector. In other words, it will be
difficult for the industrial sector to get the labor at same
prevailing constant wages. As a result, the wages in the
industrial sector will rise as from T to Q in (a) part of
After point T the
turn which occurs in the SZ curve is known as "Lewis Turning
Point". In the 3rd phase the agri. laborers produce more
than CIW. (As here MPL > CIW shown in (c) part of Fig). In
this phase the take off comes to an end and self-sustained
growth starts. This is also known as point of
commercialization (of agri.) in FR model. Here the
economy is fully commercialized in the absence of disguised
unemployment. Such commercialization took place at the cost
of absorption of disguised unemployment in industrial
The amount and
time to re-allocate labor will depend upon:
(i) The rate of
growth of industrial capital which depends upon the growth
of profits in industrial sector and growth of surplus
generated within the agri. sector.
(ii) The nature
and bias of technical progress in industry.
(iii) The rate of
growth of population. It means that the rate of labor
transfer must be in excess of the rate of growth of
The three phases
of labor transfer are summarized as:
In phase I:
MPL = 0 and there exists the surplus labor equal to AD.
In pnase II:
CIW > MPL > 0 and there exists the open and disguised
unemployment equal to AK.
In phase III:
MPL > CIW and the economy is fully commercialized and
disguised unemployment is exhausted. The supply of labor
curve becomes steeper and both agri. and industrial sector
compete with each other to get labor.
Thus we find that
whereas Lewis had failed to offer a satisfactory explanation
of this subsistence sector and ignored the real impact of
population growth on the choice of capital intensity on the
process of surplus labor absorption. Moreover, FR model
emphasized upon the simultaneous growth of agri. and
industrial sectors. Thus FR model believes in 'Balanced
Growth' in the take-off stage. It means that there should be
a simultaneous investment in both agri, sector and
industrial sector. According to FR model in the beginning
the surplus rises; such surplus will bo available as a
capital in the take-offstage. Some part of this surplus will
be used in agri. development, while some part will be
reploughed in industrial development. As a result, both agri.
and industrial sectors will grow under 'Balanced Growth'
Thus, three major
points are highlighted in the FR mode:
(i) Growth of
agri. is as important as the growth of industry.
(ii) There should
be a balanced growth of agri and industrial sectors.
(iii) The rate of
labor absorption must be higher than the rate of population
growth to get out of the "Malthusian Nightmare".
FR model argued
that surplus can be generated by the investment activities
of the land lords and by the fiscal measures of the govt.
However, leakages could exist because of the cost of
transferring the labor from agri. sector to industrial
sector in the form of transport cost and building of schools
and hospitals, etc. Moreover, the transference may lead to
increased per capita consumption of agri. output, and a gap
may also emerge in case of rural wages and urban wages.
Again, if the supply curve of- the labor is backward
bending, the peasants may reduce their work effort as their
The FR model is
considered to be an improvement over Lewis. This model
presents a balanced growth of both the sectors of the
economy, the most notable thing for the growth of UDCs.
Despite this fact, this model has following shortcomings:
Productivity of Labor in Phase I: The FR model is of the
view that MFL = 0 in the first phase of growth, and the
transfer of labor from agri. would not reduce output in the
agri. sector in phase I. But the economists like Berry and
Soligo are of the view that agri. output in phase I of FR
model will not remain constant and may fell under different
systems of land tenure, i.e., the peasant proprietorship and
share cropping etc.
Productivity of Labor is Not Zero: Prof. Jorgenson who
has also presented a model of 'dual economy' has object FR
model's contention of zero MP in phase I. He says whether
MPL will be zero is an empirical issue. During the seasons
of sowing and harvesting the MPL > 0. Jorgenson concluded on
the basis of Japanese data even for the pre I world war
period the supply of labor was not unlimited. Then how MPL
can be zero.
The Role of Capital: The FR model concentrated upon land
and labor as the determinants of output, ignoring the role
of capital. But Profs. Brown, Byres, Frankel, Griffen,
Ghatak and Ingersent are of the view that in the UDCs there
has occurred what is known as 'Green Revolution' in agri.
which has promoted the greater use of capital and technology
on lands. Consequently, there has been a greater increase in
the agri. productivity and agri. incomes.
Economy: FR model ignored the role of foreign trade as
it assumed a closed economy model. In the 2nd phase when
agri. product decreases the TOT goes against industrial
sector. This would occur in the presence of closed economy.
But if the model is made open such would not happen as the
goods could be imported in the presence of then-scarcity.
This was especially observed in case of Japan which imported
cheap farm products to improve her TOT (terms of trade).
(v) Supply of
Land in Long Run: FR model assumed that in the process
of economic development the supply of land remained fixed.
But it is not true. The supply of land can be increased in
case of long run.
Commercialization Of Agri. And Inflation: According to
FR model when 3rd phase starts the agri. sector becomes
commercialized. But it is criticized by saying that this
phase does not start so easily The shifting of labor to
industrial sector will create labor shortage in agri.
sector. This will create shortage of food stuff leading to
increase their prices. In this way, the inflation will
generate which may obstruct the process of development.
Productivity in Agri Sector: According to Jorgenson it
has been observed that there has been a very slow rise in
the productivity of agri. sector. Consequently, the surplus
will hardly be created in agri. sector. Accordingly, agri.
sector will not contribute to development Thus the growth
requires that the surplus must be generated and it should