Fei-Ranis (FR) Model of Dual Economy

Was developed by John Fei and Gustav Ranis and can be understood as an extension of the
Lewis model. 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
(disguised unemployment) of resources into account , unlike many the Lewis that consider
underdeveloped countries to be homogenous in nature.

According to this theory, the primitive sector consists of the existing agricultural sector in the
economy, and the modern sector is the rapidly emerging but small industrial sector. Both the
sectors co-exist in the economy, wherein lies the core of the development problem.
Development can be brought about only by a complete shift in the focal point of progress from
the agricultural to the industrial economy, such that there is augmentation of industrial output.

This is done by transfer of labor from the agricultural sector to the industrial one, showing that
underdeveloped countries do not suffer from constraints of labor supply. 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.

Assumptions

In presenting the theory of economic development, Fei and Ranis make the following
assumptions.

(i) There is a dual economy divided into a traditional and stagnant agriculture and
active industrial sector.

(ii) Output of the agricultural sector is a func

(iii) tion of land and labor a lone

(iv) There is no capital accumulation in agriculture except inform of land reclamation

(v) Land is fixed in supply

(vi) An agricultural activity is characterized by constant returns to scale with labour as

a variable factor.

(vii) MPL becomes 0 at some point if population exceeds the quantity at which MPL
becomes 0, labour can be transferred to the agricultural sector without loss in
agricultural output.
(viii) The output of sector is a function of K and L alone and Land has no role as a factor
of production.

(ix) The population growth rate is very high which results in mass unemployment in the
economy

(x) The real wage in the industrial sector remains fixed and is equal to the initial level
of real income in the agricultural sector which is referred as the institutional wage

FR model depicts three phases: Phase1, Phase2 and Phase3 of the dual economy model
using average output.

 Lewis model undermined the role of agriculture in boosting the growth of the
industrial sector.
 Lewis did not acknowledge that the increase in productivity of labor should take
place prior to the labor shift between the two sectors.
Phases in the Fei-Ranis Model