Economy, Dual

BIBLIOGRAPHY

About the turn of the century, Dutch politicians and scholars interested in the economic condition of the East Indian colony—now called Indonesia— were confronted with a baffling situation. According to the economic views generally held by Dutch economists in the last decades of the nineteenth century, the unhampered development of free enterprise should have favored not only the European plantation owners but eventually the Javanese peasantry as well. The establishment of Western-style, rationally operated plantations should have had a stimulating effect on the peasants, encouraging them to cultivate crops for the world market after the example of the European planters.

About 1900, however, it was clear that the liberal policy had failed, and it was officially recognized that a state of “diminishing welfare” prevailed in the East Indies. Dutch economists started to investigate the causes of the failure, and they asked themselves to what extent the main theses of classical economics were valid for the economic situation in tropical colonies.

In 1910, the young Dutch economist J. H. Boeke, in his doctoral dissertation, denied that the tenets of the classical school were at all applicable to tropical colonial conditions and posited the need for a separate theoretical approach to the specific problems of what today would be called the under-developed territories (Koninklijk Instituut 1961, pp. 8 ff.).

In so doing, Boeke inaugurated a prolonged discussion on the fundamentals of economic dualism in underdeveloped territories, a discussion that has continued until the present day.

Boeke’s theory. On closer investigation of Boeke’s argument, the basis for his dualistic theory (not only in his dissertation, but in his later work as well) proves to be a distinction between “economic” and “social” needs. While economic activity in the West, according to prevailing economic theory, was based on the all-powerful stimulus of economic needs, the Indonesian peasant, according to Boeke, was guided fundamentally by social needs. On this basis, Boeke has evolved a dualistic theory, the core of which is that the economic laws that were found valid for capitalistic society are not applicable to societies in which capitalism lives side by side with a peasant economy still largely ruled by precapitalistic relationships. It was Boeke’s view that the introduction of mature capitalism into a precapitalist peasant economy not only disturbed the equilibrium of the latter economic system, but obstructed the gradual development of capitalistic forms comparable to those in the evolution of the Western economy.

In Boeke’s view, this type of dualism prevailed in politically independent countries outside the Western world as well as in colonial territories. He included southeastern Europe and the whole of Asia, Africa, and Latin America in this dualistic world, not even excepting Japan. Therefore, even if, in a specific region, an end were put to colonial rule and political independence were achieved, this would not put an end to economic dualism: indigenous capitalists are as far removed from the precapitalist peasant society as foreign ones.

Today, hardly any scholar acquainted with the evolution of theoretical economics during the past decades will find the theoretical formulation of Boeke’s views acceptable. The Dutch economist P. Hennipman, for example, sharply attacked the distinction between economic and noneconomic needs, which indeed he pronounced untenable (Koninklijk Instituut 1961, pp. 21–24). Boeke’s comparison between Western and non-Western society was not based on a profound intrinsic knowledge of the former; he compared Indonesian society, which he really knew, with a picture of Western society based on the assumption of an all-pervading dominance of a fictitious homo economicus. Scholars better acquainted with Western society, among them agronomists who knew the Dutch countryside well, argued that many phenomena considered by Boeke to be typical of “dualistic” societies could be found in rural areas of western Europe as well.

Still, the lack of validity of Boeke’s theoretical assumptions hardly detracts from the significance of many of his factual observations, if these are stripped of their too absolute formulation. As a general typology of most nonindustrial societies, Boeke’s analysis remains fully relevant. One of his main arguments against the application of Western economic theory to phenomena in the rural sphere of tropical dependencies is the inefficacy there of all kinds of economic incentives. Although the “inverse elasticity of supply” (the decrease of economic effort in the face of higher profits or higher wages), considered by Boeke to be typically dualistic, may be well known in Western societies as the “backward-sloping supply curve,” still the general lack of response in non-Western rural societies to all kinds of economic stimuli, official pressures, and expert advice remains one of the crucial problems in the modern world.

There exists a sharp cleavage between those countries that have been able to achieve economic maturity in the past and those that are still in a preindustrial stage. Notwithstanding its theoretical weaknesses, Boeke’s analysis of actual conditions in those nonindustrial countries still contains a valid challenge for the present time.

Boeke’s views on policy. As far as practical policy is concerned, Boeke’s dualism, in the more extreme formulation presented in his later works, comes down to the thesis that in nonindustrial countries, because of the unbridgeable gulf between those elements actively engaged in capitalistic enterprise and the rural masses still living in a precapitalistic economy, the road toward gradual development is blocked (Boeke 1946).The latecomers in the race for economic advancement play against odds that exceed by far the obstacles overcome by the Western world in the past. According to Boeke, the historical processes of the past century, which amounted to a subservience and subordination of the precapitalistic countryside to the interests of an energetic and expansive capitalism, have obstructed a spontaneous growth of capitalistic forms in those areas. In essence, Boeke’s argument is directed against any cheap belief in a smooth evolution. His works were an antidote to the rosy optimism prevailing in United Nations circles and elsewhere in the late 1940s.

The core of Boeke’s factual analysis is formed by his view that in densely populated areas like the island of Java no actual economic development occurs. At best, one could speak of “static expansion”—a spread of existing patterns of land use and economic relationships over an ever-widening territory (Boeke 1953, p. 174). The increase in aggregate production is fully drained off by a congruent increase in population, thus preventing any attempt to raise per capita production.

At present, the vicious circle characteristic of the actual state of the rural economy in underdeveloped countries is being more generally recognized. It becomes increasingly clear that any assumption that a rise in production will automatically result in saving and investment is unrealistic and that still less realistic would be an assumption that investment will automatically involve a rise in production. Any planning that starts from a preconception about valid input-output ratios in under-developed areas misreads the actual conditions in the countryside. What is needed is not a purely economic approach based on some arbitrary mathematical model; one should first acquire an insight into the sociological preconditions for economic development. Boeke’s dualistic approach essentially forms a first attempt in this direction, although he wrongly expressed his theory in economic instead of sociological terms. Only very recently have sociologists started to provide economists with the background information needed to build a relevant model.

Geertz’s agricultural involution. The idea that Boeke launched as the concept of “static expansion” has been elaborated by the American cultural anthropologist Clifford Geertz in much greater detail, and in a somewhat different sense, as the phenomenon of “agricultural involution.” Geertz holds that actual developments in the countryside of Java were contrary to what should be considered an evolutionary pattern. There was increasing tenacity and internal elaboration of basic social patterns; tenure systems grew more intricate; tenancy relationships more complicated; cooperative labor arrangements more complex—all in an effort to provide everyone a basis, however small, for living in the over-all system (Geertz 1963, p. 82). The size of the individual farm remained Lilliputian.

A social system that Geertz calls “shared poverty” developed, stressing social justice and obstructing efficiency and economic progress. The way the Javanese peasantry manage to keep alive and abreast of the population increase in a process of steady intensification of traditional farming and a progressive elaboration of repetitive basic patterns amounts, according to Geertz, to “treading water.”

There are some differences between Boeke’s and Geertz’s analyses. Although both of them view the outcome—the existing impasse—as a consequence of a historical process, Geertz stresses the colonial factor more than Boeke did. Accordingly, his interpretation of the Japanese case is different from Boeke’s: in his view, the Japanese economy is no longer dualistic, since a dynamic interaction between the agrarian and the industrial sectors “kept Japan moving and ultimately pushed her over the hump to sustained growth” (1963, p. 135).

The greatest difference between Java and Japan, according to Geertz, is that in Java the increase in output was soon swamped by the attendant spurt in population; in Japan the population relegated to farming remained virtually constant (1963, p. 137).

The difference in approach between Geertz and Boeke also leads to a somewhat different outlook on the future. Boeke’s view of an inherent dualism gradually developed into an extreme pessimism. On the basis of the economic theories considered by him to be valid for dualistic societies, Boeke declared the poverty of the masses of Asia unchangeable—at least as far as the densely populated areas are concerned. Instead of aiming at economic development for the rural masses, which is anyhow unattainable, the authorities should put stress on spiritual values. Boeke thus adopted, for the rural masses in these areas, the Gandhian philosophy of “plain living and high thinking” ([1946] 1948, pp. 88–89).

Although Geertz is not less gloomy about the present state and actual trends, he does not endorse this pessimistic conclusion. He once caustically dismissed Boeke’s formula as a “combination of plain living and high thinking on the part of the mass and high living and plain thinking on the part of the elite” (1956, p. 160). Although he is not able to show a clear way out of the impasse either, he does not pronounce that all the roads to material progress are blocked forever.

“Betting on the strong. ” What both Boeke’s and Geertz’s analyses should make fully clear is that the situation, as it has developed in areas such as Java, precludes any solution that takes for granted that “development” can only be slow and gradual. Yet actual policies are still largely dominated by the philosophy of gradualism. Those who are aware that poverty and ignorance are severe impediments to introducing technical innovations tend to look for specific agents for introducing the innovations needed to increase agricultural per capita production. It is always the more advanced farmers who are almost automatically selected as such agents. It is they who show a greater responsiveness to all kinds of innovations and technical improvements and who are much easier to approach by government agencies or special services. Such a method starts implicitly from the assumption that the advanced farmers will set an example for the backward ones, who are expected to follow the model that they are able to observe from close by. The innovation is intended to spread, like an oil stain, to other layers of rural society. It is this approach that could be called “betting on the strong.”

Boeke’s view regarding this “betting on the strong” approach has not been too consistent. In 1910, writing on the basis of literature and without personal experience in the colony, he had expressed a distrust of the “well-to-do Natives,” among whom were many hadjis (the affluent and prestigeful pilgrims to Mecca), as agents for economic development. Their progress would only amount to a situation in which “the rich grow richer and the poor grow poorer” (Koninklijk Instituut 1961, p. 33).

Paradoxically enough, in 1927, Boeke himself, after a prolonged stay in Indonesia, reversed his stand. At that time, he did not see any possibility of promoting native welfare except through the intermediary of a small elite, consisting of “the vigorous, energetic, advanced elements” in Indonesian rural society. Boeke said that these wealthier landowners, working their way upward, should not be blackened and branded as usurers and blood-suckers (see Koninklijk Instituut 1961, p. 293).

These elements of rural society should be approached, by the specialized welfare agencies, in a way that Boeke called “person-centered.” Not compulsion, but patient persuasion should be the method used by the welfare agencies. The effort should not be directed toward the poor masses, in order to achieve specific objectives, but toward individuals differentiating themselves from the mass by certain personal qualities. The basic assumption is, evidently, that the improvement of native welfare can only be a slow, gradual process. The person-centered welfare policy should be guided, above all, by “faith and patience” (Koninklijk Instituut 1961, p. 298).

In his later publications, when Boeke had lost faith even in a slow process of spreading development, the wealthy “progressive” farmers more or less disappear from the center of his attention. His approach to problems of economic policy becomes truly dualistic, insofar as he has no faith any more in the possibility that the advance of the progressive farmers will slowly extend to the rural masses. A new policy has to be conceived for the latter group; as we have observed, it is the spiritual values that, according to Boeke’s teachings in his later years, should be stressed in an approach that he called one of “village reconstruction.”

The Indonesian experience. It is interesting to know how the oil-stain approach, actually applied by the agricultural extension service in postwar Indonesia, worked out in practice. As recorded by the capable Dutch rural sociologist H. ten Dam in an article based on a study of the western Java village of Tjibodas in the early 1950s, the fruits of such a policy are far from promising (Koninklijk Instituut 1961, pp. 347–382). In this village, the representatives of the government agencies came into personal contact only with the large landowners, who constitute roughly 11/2 per cent of the total village population. It was they who profited most from all the facilities provided by the agricultural extension services. It was they who, through a cooperative society in which they had the largest stake, got, at prices set by the extension service, artificial fertilizers and chemical preparations needed for the cultivation of profitable commercial crops. There was a group of smaller independent farmers with economic holdings, a number of whom attempted to follow the example of large landowners. But even if taken together, the large landowners and the independent farmers do not exceed 10 per cent of the total village population. The great majority, the farm hands and the part-time farmers with uneconomic holdings who have to work for the larger landowners as wage laborers or sharecroppers, do not profit at all from all the innovations introduced in local agriculture.

Boeke’s early prophecy appears to have come true: as a consequence of a policy of “betting on the strong,” the rich grew richer and the poor grew, if not poorer, then at least more numerous—and more restive.

The Indian experience. In India, whenever the “betting on the strong” approach was attempted, the results were exactly the same as in Java. Dube, in the villages investigated by him, assesses the results of the community development project, as far as the agricultural extension work is concerned, as follows:

A closer analysis of the agricultural extension work itself reveals that nearly 70 per cent of its benefits went to the élite group and to the more affluent and influential agriculturists. The gains to poorer agriculturists were considerably smaller. Being suspicious of government officials they did not seek help from the Project as often. … For the economic development of this group, as well as for that of the artisans and agricultural labourers, no programmes were initiated by the Project. (Dube 1958, pp. 82–83)

The main obstacle to the oil-stain effect can be reduced to the obvious cause that following the example of the “progressive farmers” presupposes the possession of sufficient land and capital, besides the required “progressive” outlook and a mental preparedness to follow the example of the “strong” (India [Republic] 1957, vol. 1, p. 81; vol. 3, part 1, pp. 254–255). The small peasants in India are no more able to follow the example of the progressive farmers than their counterparts in Java had been able to follow, in the past, the example of the European planters. Those possessing uneconomic holdings are more likely to be forced, in the long run, to sell their holdings in order to pay off debts. The larger landowners, profiting from technical innovations, may be tempted to extend their holdings; a progressive outlook as far as farming technique is concerned is by no means a guarantee for a progressive outlook concerning principles of social justice.

The prospect is complicated still more by the existence of a large category of landless farm hands. Can they be expected to profit from the improvements in farming techniques, even if they are introduced by a wealthier master-landowner? There is a wealth of evidence indicating that, on the average, real wages in rural India have not appreciably increased since the country gained its independence. Against certain local increases of rural employment opportunities, largely as a consequence of the introduction of irrigation works, we have to take into account not only the strong social, political, and economic position of the landowning castes in the countryside, but also the rapid natural increase of the population in the rural areas.

Only if most of the natural increase of the rural population is absorbed into nonagricultural occupations could a slowly mounting productivity per unit of land be turned, in the long run, into higher real wages for agricultural labor, through a raising of per capita production. In order to make mechanization of agriculture profitable, the absolute number of people dependent on agriculture would even have to be reduced, except insofar as a reclamation of wastelands could increase the total cultivated area. But even the former condition—an approximately stationary population engaged in farming—is far from being realized in most parts of India, since urbanization and industrialization are developing much too slowly to be able to reduce considerably the percentage of the total population employed in agriculture, let alone to absorb the natural increase.

The conclusion to be drawn from this constellation is obvious. Modern farm techniques are not likely to spread in a situation in which cheap agricultural labor is abundant. The gains to be derived from “community development” largely aimed at the “progressive farmers” will predominantly accrue to a restricted landowning group. A “betting on the strong” policy is likely to amount to a policy of “the devil take the hindmost.”

In countries where the hindmost are restricted in numbers, a large proportion of them may be driven away from the countryside to seek employment in an urban area; the remaining ones may, if they are not too numerous in comparison with the land surface available for cultivation, profit in the long run from the increased productivity per surface area and eventually learn improved farming techniques from the more prosperous farmers.

But in countries where the hindmost form a large majority, either as peasants with uneconomic holdings or as landless laborers, the “betting on the strong” policy cannot work. The large masses of the rural population are, for the time being, tied to their traditional rural occupations as farm hands or sharecroppers, which means that a gradual oilstainlike spread of modern farming techniques to them is out of the question. These poor masses form a drag upon any attempt to solve the rural problem in a gradual way.

Involution, evolution, and revolution. From the foregoing, it appears that sociology has not yet been able to establish a way to break through the rural impasse. It is important, however, that some scholars have been able to analyze its main causes. Their analyses may provide a more consistent and more refined way of defining the pre-take-off situation with which both economists and politicians are concerned. Rather than Boeke’s concept of dualism, Geertz’s concept of “involution” appears to be the crucial one. But, at the same time, this concept may point the way toward a solution of what seemed to Boeke to be an inherent and permanent dualism. If the prevailing process is one of involution, it is clear why a gradual evolution is out of the question. Sociologists and political scientists should investigate if the only response to the challenge of involution should not be “revolution”—in the sense of a thorough reversal of the prevailing trends. Some thought should be given as to what extent such a revolution would use the substitution for the “betting on the strong” approach of one of “betting on the many,” who, mainly through organization and intensive education toward efficiency and self-reliance, will be made strong.

Boeke held that any innovations brought about by pressure were of no avail and that the only viable approach could be a personal one, based on persuasion and directed to the “happy few.” But if persuasion and education could be combined with activating the masses, which was never seriously attempted in a colonial setting, the outcome of such an approach might prove much more promising, even though a certain amount of pressure would be needed.

Therefore the problems, if not the theoretical cadre and the solutions forwarded by Boeke in connection with the dualism prevailing in many parts of the world, are still as topical as they were fifty years ago.

W. F. Wertheim

[See alsoAsian Society, article onsoutheast asia; diffusion, articles onthe diffusion of innovationsandinterpersonal influence; Economic Anthropology; Economic Growth, article OUnon-economic aspects.]

BIBLIOGRAPHY

Boeke, Julius H. (1946) 1948 The Interests of the Voiceless Far East: Introduction to Oriental Economics. Rev. & enl. ed. Leiden (Netherlands): Universitaire Pers Leiden. → First published as Oosterse economic.

Boeke, Julius H. 1953 Economics and Economic Policy of Dual Societies as Exemplified by Indonesia. New York: Institute of Pacific Relations. → Revised and enlarged version of the author’s two earlier studies: The Structure of the Netherlands Indian Economy (1942) and The Evolution of the Netherlands Indies Economy (1946).

Dube, S. C. 1958 India’s Changing Villages: Human Factors in Community Development. London: Routledge.

Geertz, Clifford 1956 The Social Context of Economic Change: An Indonesian Case Study. Unpublished manuscript, M.I.T., Center for International Studies.

Geertz, Clifford 1963 Agricultural Involution: The Process of Ecological Change in Indonesia. Association of Asian Studies, Monographs and Papers, No. 11. Berkeley: Univ. of California Press.

Higgins, Benjamin H. (1955) 1956 The “Dualistic Theory” of Underdeveloped Areas. Economic Development and Cultural Change 4:99–115. → A revised and condensed version of an article first published in Volume 8 of Economics and Finance in Indonesia.

India (Republic), Committee On Plan Projects 1957 Report of the Team for the Study of Community Projects and National Extension Service. 3 vols. New Delhi: Manager of Publications.

Koninklijk Instituut voor de Tropen 1961 Indonesian Economics: The Concept of Dualism in Theory and Policy. The Hague: van Hoeve. → A collection of essays and addresses by Dutch authors, including J. H. Boeke, on economic dualism, with an extensive editorial introduction.

Sadli, Mohamad 1957 Some Reflections on Prof. Boeke’s Theory of Dualistic Economics. Economics and Finance in Indonesia 10:363–384.

Wertheim, W. F. (1964) 1965 East-West Parallels: Sociological Approaches to Modern Asia. Chicago: Quadrangle Books. → A collection of essays, the final one dealing in detail with the “betting on the strong” approach.

Dual Economy

BIBLIOGRAPHY

In the mid-twentieth century, theoretical modeling of economic growth was dominated by single-sector models, such as that of the Nobel Prize winner Robert Solow. Other analysts, however, felt that economies should be characterized as having multiple sectors, which they stylized into dual-economy models. Foremost among the early dual-economy modelers were two other Nobel Prize winners, W. Arthur Lewis and Simon Kuznets. The dual economy models posited an economically “advanced” sector and an economically “backward” sector. These have alternatively been called capitalist and subsistence, formal and informal, modern and traditional, industry and agriculture, urban and rural, primary and secondary, and good-jobs and bad-jobs sectors.

For both Lewis and Kuznets, the two sectors differed in terms of the goods produced, the nature of the growth process, and conditions in labor markets. Lewis specified a capitalist sector that produced industrial goods and a subsistence sector that produced agricultural goods, services, and commercial activities. Kuznets distinguished an agricultural sector from all others, primarily the industrial sector. For Lewis, capital accumulation took place in the capitalist sector only, and he viewed this sector as the engine of growth. For Kuznets, the essence of modern economic growth was the gradual shift of production from lower-income to higher-income sectors. For both Lewis and Kuznets, the advanced sector offered higher real wages than the backward sector did.

This coexistence of high-wage and low-wage sectors is the defining feature of labor-market dualism, the generalization of which is labor market segmentation. Besides real wages being higher in the good–jobs sector, dualism and segmentation require that access to this sector be restricted, in the sense that not all who want to work there are able to do so. As summarized by Michael Wachter, the dual labor-market model advances four hypotheses:

First, it is useful to dichotomize the economy into a primary and a secondary sector. Second, the wage and employment mechanisms in the secondary sector are distinct from those in the primary sector. Third, economic mobility between these two sectors is sharply limited, and hence workers in the secondary sector are essentially trapped there. Finally, the secondary sector is marked by pervasive underemployment because workers who could be trained for skilled jobs at no more than the usual cost are confined to unskilled jobs. (1974, p. 639)

Some of the subsequent writings on labor-market dualism adopted human capital theory, as developed in the Nobel Prize–winning work of T. W. Schultz and Gary Becker and the work of Jacob Mincer. Human capital theory maintains that workers with more education and training have higher skills, which the labor market rewards. Thus, it is not enough for labor-market dualism that workers in one sector earn systematically more than those in another; it must also be true that workers with the same skills do better in one sector than in another. Ample research has demonstrated empirical evidence that wages are systematically higher for observationally equivalent workers in some economic sectors than in others: non-agriculture versus agriculture, urban versus rural, formal versus informal, and so on. Many observers take this as evidence of labor-market dualism, though some dismiss it as merely indicating the existence of unmeasured skills and abilities.

What the works reviewed thus far have in common is that all available workers are employed either in the advanced sector or in the backward sector. Thus, unemployment is absent in these models. Later models, such as that of John Harris and Michael Todaro, specified two types of employment (industrial and agricultural) plus unemployment.

One feature that could not be ignored by labor market modelers was the duality within the urban economy, with some jobs being desirable and others being deemed quite miserable to have. This observation led to the development of a model with three types of employment: an urban formal sector, an urban informal sector, and a rural agricultural sector—plus unemployment (Fields 1975).

More recently, one more need has become apparent. This is to give due recognition to the fundamental duality to be found within the informal sector. On the one hand, the informal sector has free-entry activities such as street vending and small-scale services that enable those who do such work to eke out a meager existence. Individuals who engage in such enterprises do so because it is better for them than being unemployed. On the other hand, the informal sector also has restricted-entry activities that people who could be working formally choose to take up instead, such as leaving a formal sector auto repair shop to set up one’s own backyard operation or moving from a formal sector restaurant to operate one’s own noodle stand. Some current segmented labor-market models include both the “free entry” part of the informal sector and the “upper tier” of the informal sector.

In the 2000s, dual-economy and multisector models dominate both academic research and applied policy work. Analysts routinely utilize models with many economic sectors and many labor markets. The sectors, at a minimum, include industry and agriculture, while other sectors, such as commerce and services, may also play a role. As for the labor market, workers might be employed (be it in wage employment or self-employment) in one of four sectors: the formal sector, the free-entry part of the urban informal sector, the upper tier of the urban informal sector, and rural agriculture. They might also be unemployed. Models assuming that the economy has only a single sector or that all employed workers earn the same amount seem hopelessly unrealistic.

SEE ALSO Harris-Todaro Model; Labor Market Segmentation

BIBLIOGRAPHY

Becker, Gary S. 1964. Human Capital: A Theoretical and Empirical Analysis. New York: Columbia University Press for the National Bureau of Economic Research.

Fields, Gary S. 1975. Rural-Urban Migration, Urban Unemployment and Underemployment, and Job Search Activity in LDC’s. Journal of Development Economics 2 (2): 165–188.

Harris, John, and Michael Todaro. 1970. Migration, Unemployment, and Development: A Two Sector Analysis. American Economic Review 60 (1): 126–142.

Kuznets, Simon. 1955. Economic Growth and Income Inequality. American Economic Review 45 (1): 1–28.

Lewis, W. Arthur. 1954. Economic Development with Unlimited Supplies of Labour. Manchester School 22: 139–191.

Schultz, T. W. 1961. Investment in Human Capital. American Economic Review 1 (2): 1–17.

Wachter, Michael. 1974. Primary and Secondary Labor Markets: A Critique of the Dual Approach. Brookings Papers on Economic Activity 3: 637–680.

Gary S. Fields

dual economy See ECONOMIC DUALISM; INTERNAL COLONIALISM; LABOUR-MARKET; LABOUR-MARKET SEGMENTATION.