Chapter 2: The development of a dual economy
[U]nto a land flowing with milk and honey. (Old Testament, Exodus) The possible slowdown facing China has to do with changes in the stages of economic development undergone by the country. In order to understand such developmental changes, we must first enumerate the unique characteristics that have distinguished economic growth in China since the 1980s, when economic reform was initiated. The Chinese story, however, cannot be told within the framework of the mainstream theory of growth, which considers economic growth to be a unitary, homogeneous process in which wealth slowly—but linearly—expands. The homogeneity assumption might be applied to countries in the early stages of industrialization, perhaps, but it does not hold explanatory power over existing developing economies. Until the dual economy development theory (coined by Arthur Lewis, a Nobel laureate in economics) came to prevail, conventional wisdom concerning the neoclassical theory of growth had failed to capture the characteristics distinguishing developing countries from developed countries and thus to identify the factors that prevent developing countries from catching up with their developed counterparts. The Lewisian theory has made at least two important contributions to development economics. One, it has built a bridge between two well-recognized phases of economic development, that is, the Malthusian poverty trap and neoclassical growth (Hansen and Prescott, 2002). Two, it provides a tool for understanding a unique phase of development—dual economy development—which many early industrialized economies have gone through and through which currently developing countries are still going.
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