Fei-Ranis Theory
FEI-RANIS THEORY
Introduction
Lewis wanted to model development in an economy with a large agricultural sector and a small "modern" sector (e.g., manufacturing). His model was subsequently formalized by John Fei and Gus Ranis, who ended up at Yale. John Fei Gustav Ranis in an article entitled “A Theory of Economic Development” analyze “the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self sustained growth.” This theory is an improvement over Lewis’s theory of Unlimited Supplies of Labor because Lewis failed to present a satisfactory analysis of the growth of the agricultural sector. The analysis that follows is based on the original article and the development of a dual economy.
Ranis also made the first formal empirical application, looking at Japan, which around 1960 was still a heavily agrarian developing economy. Below I develop this framework to apply to China. First, let's remind ourselves of our basic growth model, so that we have it always in the back of our mind.
One-Sector Model: Robert Solow, Nobel Laureate - our Cobb-Douglas version
[pic]
The two-sector model is an extension of the standard growth model with which we've worked.
To help understand its structure, think of the starting point as subsistence economy in which everyone is in agriculture, living a hand-to-mouth existence. For non-agricultural output to increase, then, there has to be a surplus of resources above subsistence, so that not all activity has to focus on agriculture.
For clarity, think of an economy where all manufacturing and commerce is located in a city.
Two-Sector Model: W. Arthur Lewis, Nobel Laureate
[pic]
In reality, during the last millennium agricultural by-employment was the norm. Farmers (and their wives) were also weavers or basket weavers or carpenters or raised silkworms. In the US they were shoemakers or clockmakers, while women canned food and sewed garments Indeed, in many places a "putting
Introduction
Lewis wanted to model development in an economy with a large agricultural sector and a small "modern" sector (e.g., manufacturing). His model was subsequently formalized by John Fei and Gus Ranis, who ended up at Yale. John Fei Gustav Ranis in an article entitled “A Theory of Economic Development” analyze “the transition process through which an underdeveloped economy hopes to move from a condition of stagnation to one of self sustained growth.” This theory is an improvement over Lewis’s theory of Unlimited Supplies of Labor because Lewis failed to present a satisfactory analysis of the growth of the agricultural sector. The analysis that follows is based on the original article and the development of a dual economy.
Ranis also made the first formal empirical application, looking at Japan, which around 1960 was still a heavily agrarian developing economy. Below I develop this framework to apply to China. First, let's remind ourselves of our basic growth model, so that we have it always in the back of our mind.
One-Sector Model: Robert Solow, Nobel Laureate - our Cobb-Douglas version
[pic]
The two-sector model is an extension of the standard growth model with which we've worked.
To help understand its structure, think of the starting point as subsistence economy in which everyone is in agriculture, living a hand-to-mouth existence. For non-agricultural output to increase, then, there has to be a surplus of resources above subsistence, so that not all activity has to focus on agriculture.
For clarity, think of an economy where all manufacturing and commerce is located in a city.
Two-Sector Model: W. Arthur Lewis, Nobel Laureate
[pic]
In reality, during the last millennium agricultural by-employment was the norm. Farmers (and their wives) were also weavers or basket weavers or carpenters or raised silkworms. In the US they were shoemakers or clockmakers, while women canned food and sewed garments Indeed, in many places a "putting