Subject Development Economics

Theory & Application

Course Code ECON-3117

Topics Fei-Ranis Model

Submitted To Ma’am Maryam Batool

Muhammad Hasan BSF-2207720

Submitted By Naseeb Ullah BSF-2207725
Shoail Ijaz BSF-2207681

SEMESTER-V
Discipline: BS Economic and Finance
Department of Economics

University of Education
Lower Mall Campus
 Fei–Ranis Model of Economic Growth
Introduction:
The Fei-Ranis model, developed by Gustav Fei and Ganesh Ranis in the 1960s, offers a dual-
sector framework for understanding economic growth in developing countries. It divides the
economy into a low-productivity agricultural sector and a high-productivity industrial sector,
illustrating how labor transfer from agriculture to industry can enhance growth. By
emphasizing the roles of savings, investment, and demand, the model highlights that
economic development relies not just on capital accumulation but also on labor dynamics and
sectoral shifts. This framework remains relevant for contemporary discussions on policy
aimed at fostering industrialization and reducing poverty in developing economies.

Definition:
The Fei–Ranis model of economic growth, also known as the dual economy model, is an
economic theory developed by economists John C. H. Fei and Gustav Ranis. It is based on
the earlier work of W. Arthur Lewis and seeks to explain the transition process of a
developing economy from a primarily agrarian sector to a more industrialized sector. The
theory posits that surplus labor from the traditional agricultural sector can be utilized in the
modern industrial sector without affecting agricultural output, thus facilitating economic
growth.

Overview of the Fei–Ranis Model

Background:
Developed by economists John Fei and Gustav Ranis in the early 1960s, the model provides
insights into how economies transition from agriculture-based to industrialized systems.

Key Components:
 Dual Economy: The model characterizes an economy with two distinct sectors: the
traditional agricultural sector and the modern industrial sector.
 Labor Transfer: The movement of labor from the agricultural sector to the industrial
sector is a central theme, which affects productivity and economic growth.
 Investment and Savings: The model highlights the role of savings and investment in
fostering industrial growth.

Process Of Transition

Industrial Sector:
The diagram below depicts the process of transitionin both the industrial and
agriculturalsectors. The topfigure shows the marginal product and demandcurves of the
industrial sector.As in the Lewis Model,the marginal product of labour in the industrial
sectoris also the demand curve for labour, shown by D1 andD2. The supply of labour is
shown by the curve SL,which is horizontal up to point G because of surpluslabour in the
agriculture sector. The wages andemployment are determined by the intersection ofdemand
and supply of labour.
The supply curve SL starts sloping upwards after pointG because surplus labour from
theagriculture sectoris absorbed by the industrial sector. Therefore, morelabour is supplied
only at higher wages. As a result,wages will rise and the supply curve will be upwardsloping
after the surplus labour is depleted from theagricultural sector. With an increase in capital,
themarginal product and the demand curve will shift upward from D, to D2 as development
occurs. This will also expand the industrial sector and its employment.

Agriculture Sector:
The bottom two figures of the diagram show theprocess of transition in the agricultural sector.
Initially, the economy is operating at point Y in the last figure.The amount of surplus labour
is equal to SY at thispoint. With development, this surplus labour shiftsfrom agriculture to the
industrial sector.Because of the existence of surplus labour, the total product doesnotfall in
the agriculture sector. The OS curve showsthe total product, which reaches the maximum
atpoint S and does not increase beyond that pointbecause of surplus labour.The wages in the
agricultural sector are notdetermined by itsmarginal product. Wages are equalto the slope of
OY (which is Zy/OY). These realwages are fixed due to institutional factors becausethe
wages will fall to if determined by marginalproduct because the marginal product is 0 due
toredundant labour. Hence, institutional wages are fixedat WA shown in thesecond figure.

The rise in wages:

The wages in the agricultural sector Will start rising aslabors reduced beyondpoint C. At this
point C, theinstitutional wages WA will be equal to thecompetitivewage level as shown by
point 7. Point T is tangent tothe total product curve. Beyond this point, wages willbe
determined by market forces asthey rise aboveinstitutional wages.The quantity of labour YC
is referred to as disguisedunemployment in the agricultural sector. This isbecause the
marginal product of labour Is below theinstitutional wages (WMt > MPy) asmore labour
isemployed. This is evident in the second part of thediagram. Themarginal product curve falls
below thewage level when labour is greater than point C and the
MPy curve reaches zero at point S (total productreaches the maximum in the third diagram).
 Applications & Examples

The Fei–Ranis model of economic growth has been applied in various contexts around the
world to understand and analyze the transition from agricultural to industrial economies. Here
are some notable applications:

1. East Asian Economies

Countries like South Korea and Taiwan exemplify the Fei–Ranis model. These nations
transitioned from agrarian societies in the mid-20th century to highly industrialized
economies through significant labor shifts from agriculture to manufacturing. Government
policies that promoted industrialization, education, and technological advancement facilitated
this transition, leading to rapid economic growth and urbanization.

2. China’s Economic Reform

China’s economic transformation since the late 1970s reflects the principles of the Fei–Ranis
model. The shift from a centrally planned agricultural economy to a more market-oriented
system involved moving millions of workers from rural agriculture to urban industrial jobs.
This labor transfer, alongside significant foreign investment and technological progress, has
driven substantial economic growth.

3. African Nations
In many African countries, the Fei–Ranis model can be used to analyze ongoing economic
transitions. Countries like Ethiopia and Rwanda are focusing on industrialization and
agricultural modernization to spur growth. Efforts to enhance productivity in agriculture and
create jobs in manufacturing highlight the model's application in facilitating development.

4. Policy Formulation
The Fei–Ranis model provides insights for policymakers worldwide. By understanding the
importance of labor mobility and sectoral productivity, governments can design strategies that
promote industrial growth, enhance agricultural efficiency, and support education and skills
development to prepare the workforce for emerging sectors.

Role in Pakistan
The Fei–Ranis model plays a significant role in understanding Pakistan's economic
development, particularly in the context of its transition from an agrarian economy to one that
emphasizes industrial growth. Historically, Pakistan has relied heavily on agriculture,
employing a substantial portion of its workforce in this sector. However, the country has been
striving to enhance its industrial base through policies aimed at promotingmanufacturing and
urbanization. The model highlights the importance of labor transfer from agriculture to
industry, which is crucial for increasing productivity and driving economic growth. In recent
years, initiatives to modernize agriculture, coupled with investment in industrial sectors,
reflect the dynamics outlined in the Fei–Ranis model. By facilitating this labor movement and
fostering industrial development, Pakistan can address challenges such as unemployment and
poverty, ultimately leading to a more diversified and resilient economy.

Criticism on Fei–Ranis Model

Institutional Factors:
Surplus labour is not the only reason that explains the underdevelopment of the
agriculture sector in certain economies. In many cases, it has been observed that
underdeveloped economies do not have surplus labour in the agriculture sector. Some
institutional factors, such as feudal structure, prevailing within these economies are the major
reason behind their underdeveloped agriculture sector.

Zero Marginal Product:

The assumption of zero marginal product of labour in phase 1 has been heavily
criticized. When labour shifts to the industrial sector initially, the Total product does not fall
in the agriculture sector. For MPL to be zero, the agricultural labour has to be very large.
Various studies have shown that this assumption does not hold in reality.

Capital-Intensive Technology:
As seen in the Lewis Model, the growth in the industrial sector may not necessarily
lead to a shift of labour from agriculture to the industrial sector. With technological progress,
the industrial sector may witness the development of capital-intensive technology. In this case,
the industrial sector will grow but without any additional employment of labour.

Frequently Asked Questions (FAQ)

⊙How does the Fei–Ranis model differ from Lewis’s model of economic development?
While both the Fei–Ranis model and the Lewis model focus on the transfer of labor from the
agrarian sector to the industrial sector as a key engine of growth, the Fei–Ranis model
provides a more detailed analysis of this transfer process. It introduces the concept of a
dualistic economy more explicitly and examines the reinvestment of industrial sector profits
back into the economy, which was less emphasized in Lewis’s model.

⊙What role does government policy play in the Fei–Ranis model?

Government policy plays a critical role in the Fei–Ranis model by facilitating the transfer of
labor from agriculture to the industrial sector. This can be achieved through investments in
infrastructure, education, and training programs that increase labor mobility and productivity.
Additionally, policies that encourage industrial investment and development can expedite
economic growth by creating more opportunities for labor absorption in the industrial sector.
⊙Can the Fei–Ranis model be applied to modern economies?
The Fei–Ranis model, while initially developed to explain economic growth in the mid-20th
century, still offers valuable insights into the development process of modern economies,
especially those with significant agricultural sectors. It underscores the importance of
structural transformation and diversification in achieving sustainable economic growth.
However, the model must be adapted to consider the role of services and technology sectors
in contemporary economic development.

⊙Are there any limitations to the Fei–Ranis model?

The Fei–Ranis model, like all economic models, has its limitations. It assumes that there is a
clear distinction between the agricultural and industrial sectors and that labor can be easily
transferred between them. This overlooks the complexities of labor markets, the skills
mismatch, and the role of education and training in facilitating such transfers. Additionally,
the model does not fully account for the potential environmental impacts of rapid
industrialization.

Conclusion
The Fei–Ranis model of economic growth offers a vital framework for understanding the
transition from agrarian to industrialized economies in developing countries. It emphasizes
the importance of labor transfer from low-productivity agriculture to high-productivity
industry, highlighting that economic growth relies not only on capital accumulation but also
on labor dynamics and sectoral shifts. This model is particularly relevant for policymakers in
countries like Pakistan, as they seek to modernize their economies and reduce poverty. By
guiding strategies for industrialization and enhancing agricultural productivity, the Fei–Ranis
model remains an essential tool for fostering sustainable economic development and
resilience in a changing global landscape.
The Fei–Ranis model of economic growth offers a foundational framework for understanding
the dynamics of economic development in dual economies. Its emphasis on the structural
transformation through labor reallocation and industrialization provides crucial insights for
policymakers aiming to foster economic growth and development.

References
 Fei, J. C. H., & Ranis, G. (1964).Development of the Labor Surplus Economy: Theory and Policy.
Homewood, IL: Richard D. Irwin.
 Todaro, M. P., & Smith, S. C. (2020).Economic Development. Pearson.
 Lin, J. Y. (2012).New Structural Economics: A Framework for Re-Think Development. World Bank.
 Ranis, G., & Stewart, F. (1993).Vocational Education and Training: A Development Perspective.
International Labour Review, 132(3), 295-312.
 Chen, Y., & McGowan, M. (2010).The Impacts of Labor Market Institutions on Growth in China: A
Perspective from the Fei-Ranis Model. China Economic Review, 21(2), 284-299.
 Kuznets, S. (1966).Modern Economic Growth: Rate, Structure, and Spread. New Haven, CT: Yale
University Press.
 World Bank (2020).World Development Report 2020: Trading for Development in the Age of Global
Value Chains. Washington, DC: World Bank.