Low Level Equilibria, Dualism and Sectoral Interaction

The first phase, from 1945 to the mid-1950s, emphasized a number of major (and more or less related) themes. First, underdevelopment was characterized as a low-level equi­librium caused by factors such as low savings, high rates of population growth, and low investment incentives due to market failures arising from indivisibilities in investment and externalities, ideas that were explored in classic early works by Rosenstein-Rodan (1943) and Nurkse (1953), among others.

Second, the economy was characterized as a dual economy with a backward sector, predominantly agricultural, and a modern industrial sector. The classic formulation was that of Lewis (1954), who analysed how the backward sector, characterized by surplus labour which was disguisedly employed in family farms and enterprises, provided labour to the modern capitalist sector at a fixed real wage and allowed the expansion of the latter through the investment of saving from the profits made in it. The product wage in this modern sector was held down both by the existence of surplus labour in the backward sector, and by the absence of an upward pressure in the price of agricultural goods, which could squeeze modern sector profits by requiring higher industrial wages, because the existence of disguised unemployment implied that the withdrawal of labour from agriculture did not reduce agricultural output.

Third, intersectoral interactions and changes in sectoral composition, related to this agriculture-industry distinction, and to the distinction between consumption and capital goods sectors were emphasized. For instance, the need for increasing the share of total investment allocated to the capital goods sector to make saving and investment physi­cally possible (with limited access to imported capital goods, given foreign exchange constraints) was stressed; see Mahalanobis (1953). Arguments were made in favour of balanced growth to prevent the growth process faltering due to the stagnation of some sectors, and to increase the demand for other sectors, as noted by Rosenstein-Rodan. However, given the shortage of resources, some authors also made the case for unbal­anced growth - concentrating energies on some key sectors to stimulate other sectors through backward linkages, by creating a demand for inputs for them, and forward linkages, by supplying inputs to them (see Hirschman 1958).