Some Problems in the Analysis of the Dual Economy

There is a good deal of confusion in the literature on the dual economy stemming from i) the frequent failure to specify assumptions made about the level and characteristics of unemployment and underemployment, and ii) the difficulties of building institutional rigidities into neoclassical allocation-models without producing results which are indeterminate or lacking in generality. This paper sets out some of the major assumptions made in various discussions of the dual economy, examines the effects of these assumptions on production and factor-use decisions in each sector and on the product-transformation locus for the economy, and suggests some related problems of policy analysis in the dual economy. The aim is to develop an analytical framework that approximates economic conditions in underdeveloped countries by examining some of the niceties of the traditional analysis in light of certain institutional rigidities that seem to exist in most underdeveloped countries.