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Fei–Ranis model of economic growth


The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor 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 of resources into account, unlike many other growth models 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 crux 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. Like in the Harrod–Domar model, saving and investment become the driving forces when it comes to economic development of underdeveloped countries.

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. In addition to that, he did not acknowledge that the increase in productivity of labor should take place prior to the labor shift between the two sectors. However, these two ideas were taken into account in the Fei–Ranis dual economy model of three growth stages. They further argue that the model lacks in the proper application of concentrated analysis to the change that takes place with agricultural development 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. Also, the marginal product of labor is zero. This phase is similar to the Lewis model.In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared. In Phase 2, agricultural surplus may exist as the increasing average product (AP), higher than the marginal product (MP) and not equal to the subsistence level of wages.


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