Catching up and lagging behind in a balance-of-payments-constrained dual economy

A. Lavopa

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Abstract

The success of nations in the path towards economic development hinges
heavily on the emergence and dynamism of a modern sector capable of
simultaneously absorbing an increasing share of the labour force while
reducing the technological gap with the world's frontier. Failure to do
so would eventually lead the economy to low- or middle- income traps, in
which only a small fraction of the population would benefit from the
gains of economic growth and technological progress.
Building on previous contributions from Post-Keynesian,
Neo-Schumpeterian and Latin-American Structuralism literature, this
paper sets up a theoretical model of catching-up among nations aimed at
formalizing this idea by exploring the dynamic interactions between
structural change and technological upgrading in the process of economic
development. The focus of the model is on a "representative" nation of
the South that is characterized by having: i) a dual structure (i.e., a
large share of labour force working on low-productive-traditional
activities that coexists with a small fraction of workers employed in
modern activities); ii) a high degree of technological backwardness in
the modern activities; and iii) a binding restriction on the external
accounts. Under these circumstances, the dynamic behaviour of two key
variables will determine the success or failure of this economy over
time: the share of labour in the modern sector and the relative stock of
technological knowledge of the modern sector compared to that of the
world technological leader. Depending on initial conditions and
underlying parameters, the southern economy would be attracted towards
four different equilibrium points, each of them entailing extremely
different implications in terms of long-run development.
After analysing the dynamic properties of the model, simple simulations
are implemented in order to illustrate a number of structural
trajectories that might shed new light on the complex forces acting
behind the success or failure of economic development.
Original languageEnglish
Place of PublicationMaastricht
PublisherUNU-MERIT
Publication statusPublished - 1 Jan 2014

Publication series

SeriesUNU-MERIT Working Papers
Number042

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