Fei–Ranis model of economic growth

[1] It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature.

At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials.

Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.

[2] One of the biggest drawbacks of the Lewis model was the undermining of the role of agriculture in boosting the growth of the industrial sector.

[4] They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development[5] In Phase 1 of the Fei–Ranis model, the elasticity of the agricultural labor work-force is infinite and as a result, suffers from disguised unemployment.

AP of agricultural labor is shown by BYZ and we see that this curve falls downward after AD.

[4] This allows the agricultural sector to give up a part of its labor-force until Phase 3 begins from the point of commercialization which is at K in the Figure.

In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people.

In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed.

[4] Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development.

Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized.

According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and consumer goods for agricultural practices.

In the left-side figure, labor utilization ratio which is graphically equal to the inverted slope of the ridge line Ov.

Fei and Ranis also built the concept of endowment ratio, which is a measure of the relative availability of the two factors of production.

The curve increases at a decreasing rate, as more units of labor are added to a fixed amount of land.

Due to the redundant agricultural labor force, the real wages remain constant but once the curve starts sloping upwards from point P2, the upward sloping indicates that additional labor would be supplied only with a corresponding rise in the real wages level.

At this point, the total real wage income is Wo and is represented by the shaded area POLoPo.

The figure on the left is a reproduced version of a section of the previous graph, with certain additions to better explain the concept of agricultural surplus.

We first derive the average physical productivity of the total agricultural labor force (APPL).

When the demand for labor is df, the intersection of the demand-supply curves gives the equilibrium employment point G'.

The agricultural surplus JF created is needed for consumption by the same workers who left for the industrial sector.

Hence, agriculture successfully provides not only the manpower for production activities elsewhere, but also the wage fund required for the process.

Fei–Ranis model goes a step beyond and states that agriculture has a very major role to play in the expansion of the industrial sector.

This implies that demand for industrial goods will not rise at a rate as suggested by the use of Engel's Law.

Since the growth process will observes a slow-paced increase in the consumer purchasing power, the dualistic economies follow the path of natural austerity, which is characterized by more demand and hence importance of capital good industries as compared to consumer good ones.

However, investment in capital goods comes with a long gestation period, which drives the private entrepreneurs away.

Additionally, the government also works on the social and economic overheads by the construction of roads, railways, bridges, educational institutions, health care facilities and so on.

The line WW' running parallel to the X-axis is considered to be infinitely elastics since supply of labor is assumed to be unlimited at the subsistence-wage level.

[4] Fei–Ranis model of economic growth has been criticized on multiple grounds, although if the model is accepted, then it will have a significant theoretical and policy implications on the underdeveloped countries' efforts towards development and on the persisting controversial statements regarding the balanced vs. unbalanced growth debate.

In that case, the land left behind would be divided between the remaining laborers and as a result, the transformation curve would shift from SAG to RTG.