Dual Economy

A Dual Economy refers to an economic system in which two distinct sectors or segments with differing levels of development, technology, and productivity function effectively alongside each other in a given country. Typically, one sector is characterized by modernization, advanced technology, and high productivity, and the other sector is often less developed and more labor-intensive.

Such an economy usually signifies a transitional phase in economic development. It can represent a period of change, where countries transition from agriculture-based economies to more industrialized and modern economies. The modern sector can drive economic growth and innovation, while the traditional sector produces basic goods and provides stability.

• In a dual economy, two distinct sectors or segments with varying characteristics, development levels & statistics, and overall economic dynamics exist within the same country or region.
• Modernization, advanced technology, and high productivity steer contemporary businesses, while the other sector is relatively underdeveloped and focused more on labor-driven jobs.
• Dual economies are commonly observed in developing countries where there is a divide between urban, industrialized areas and rural, agriculture-driven regions.

Dual Economy, a paper published by W. Arthur Lewis in 1954, strengthened the general understanding of economic development in many former colonies (now considered developing countries). Lewis highlighted that these economies were divided into two segments, and the difference between their operations was evident. The majority of the economy comprised labor-intensive agricultural endeavors, with people mainly producing primary goods.

Given how this sector only covered basic needs, productivity was low. The incentive for profit-making and innovation, typical of free-market economies, was missing. Agriculture in these economies focused on meeting basic local needs. Thus, the economy operated in a constricted manner, making growth challenging.

On the other hand, the manufacturing sector that operated in the region saw higher productivity levels. Lewis highlighted that this sector demonstrated focused activity, encouraged expansion, and supported profit maximization initiatives. The growth in this sector was also attributed to global competition.

The paper propagated that economic dualism in these regions improved prospects and accelerated growth. It further outlined the following: if labor migrated from the unproductive agricultural sector to the manufacturing sector, it could result in speedier economic growth. As the gap between how these sectors operated was wide, labor shifts could increase overall productivity and income levels.

He also observed that such economies attempted to earn their gains mainly from agricultural exports when it was possible to make more money via sophisticated industries and services. He pointed out that agricultural goods brought relatively lower profits or revenue than manufacturing goods or products. As price inelasticity is a feature of agricultural goods, increasing agricultural output does not guarantee higher export revenues. Hence, industrialization is considered important in every economy for sustainable development.

W. Arthur Lewis's insights into the dual economy shed light on the structural challenges many developing countries face. His work has influenced development strategies worldwide, underlining the importance of addressing productivity disparities, investing in education and technology, and promoting economic diversification to achieve inclusive and sustainable growth.

A dual economy exhibits several distinctive characteristics that distinguish it from a homogeneous or single-sector economy. They have been discussed below:

• Two Distinct Sectors: The key characteristic of this economy is the presence of two separate economic sectors with differing levels of development, productivity, and economic dynamics. Typically, one sector is modern and industrialized, while the other is traditional and often agrarian.
• Low Productivity in the Traditional or Agricultural Sector: The traditional sector, often agriculture-based, tends to have lower productivity levels. This can be attributed to factors like limited access to capital, outdated technology, and a lack of education and skills among workers.
• Higher Productivity in Modern Sector (with contemporary businesses): The modern sector, which may include manufacturing, services, or technology-driven industries, exhibits higher levels of productivity. This is often driven by technological advancements, better access to resources, and competitive market forces.
• Labor Migration: Labor migration from the traditional to the modern sector is a common feature of a dual economy. Workers from the less productive traditional sector often seek employment opportunities in the modern sector.
• Income Disparities: A significant income disparity between the two sectors is observed. Workers in the modern sector usually earn higher wages and have better job prospects than those in the traditional sector, resulting in income inequality.

Let us look at some examples to understand the concept better.

Example #1

In the fictional country of Veridia, a dual economy is evident, as a clear divide exists between its two economic sectors. The majority of the population in rural areas is engaged in traditional, labor-intensive agriculture, characterized by small family farms that primarily serve local markets. Productivity remains low due to limited access to modern farming techniques and resources.

In contrast, the urban parts of Veridia boast a thriving modern manufacturing sector driven by foreign investments and advanced technology. These industries are export-oriented, competing in global markets and offering high-paying employment opportunities. The stark income gap between the prosperous urban manufacturing hubs and the struggling rural agricultural communities shows the dual nature of Veridia's economy, prompting discussions on policies to bridge this divide and promote balanced development.

Example #2

Dual economies are more common in developing countries than in developed nations. India follows a dual economy structure. It has a well-established modern sector, which includes industries like information technology, manufacturing, and services. This sector is characterized by high productivity, global competitiveness, and significant contributions to the gross domestic product (GDP). It attracts a skilled workforce and foreign investment, particularly in cities like Bengaluru and Hyderabad.

However, alongside this modern sector, India also has a substantial traditional sector. A significant portion of the population in rural areas relies on subsistence farming or small-scale agriculture. This traditional sector faces challenges related to access to modern technology, education, and infrastructure.

The coexistence of these sectors causes income disparities, with those in the modern sector earning significantly higher wages than those in the traditional sector. India's dual economy highlights the complexities and challenges faced by many developing countries in balancing economic development across different sectors.

Example #3

In 2016, Peter Temin, an MIT-trained economic historian, published a dual economy study relevant to the US. These observations were later incorporated in his book “The Vanishing Middle Class”. Peter Temin noted that a dual economy was gradually becoming visible in the US at the time.

He observed that the most lucrative jobs were concentrated in areas like the Silicon Valley and Wall Street, while many others worked in industries that paid much lower wages and had relatively fewer advancement opportunities. He based his observations on W. Arthur Lewis’ original theory. Peter categorized the US sectors into two divisions: Capitalist and Subsistence.

The advantages and disadvantages of such an economy have been discussed in this section.

Advantages

• Economic Growth Potential: A dual economy facilitates economic growth. The modern sector, with its higher productivity and competition, can drive overall economic development.
• Labor Mobility: It encourages labor mobility from the less productive traditional sector to the more productive modern sector. It can lead to increased income levels and improved living standards for workers and their families.
• Diversification: Such an economy can promote economic diversification by reducing overreliance on a single sector, which can be vulnerable to external shocks or price fluctuations.
• Social Stability: The traditional sector serves as a safety net during economic downturns, reducing extreme poverty in times of crisis and contributing to social stability.

Disadvantages

• Income Inequality: A significant drawback of dual economies is income inequality. Workers in the modern sector usually earn much higher wages than those in the traditional sector, leading to disparities in wealth and living standards.
• Resource Allocation: These economies may misallocate resources, with an overemphasis on the modern sector at the expense of agriculture and rural development. This can result in neglect of crucial sectors and regions.
• Rural-Urban Divide: The rural-urban divide is often exacerbated in dual economies, with urban areas experiencing more development and opportunities while rural areas fall behind in terms of infrastructure and economic prospects.
• Social Tension: Income disparities and unequal access to resources can lead to social unrest. Bridging the gap between the two sectors is a challenge.

This has been a guide to what is Dual Economy. We explain the concept along with its examples, advantages, disadvantages, and characteristics. You can learn more about it from the following articles –

• Informal Economy
• Paper Economy
• Developed Economy