Dual Economy Research Articles

Regional Economic Growth in Hungary 1998-2005: What Does Really Matter in Clusters?

Although industry clusters are major targets of regional economic development in less developed regions as well, we still need a deeper understanding on how spatial clustering of firms generates dynamics in lagging regions. These latter environments may differ too much from those typical cluster policy examples that are usually very specialized global centres of dynamically growing industries. Using census-type data of Hungarian firms, we test the effect of major cluster indicators – regional specialization and spatial concentration of industries – and the effect of FDI on regional productivity and employment growth in Hungary. Our results suggest that regional specialization does not affect regional growth but spatial concentration of industries is found to influence productivity and employment growth with an overwhelmingly negative effect. Furthermore, regional employment growth is associated negatively with the initial level of regional specialization. We argue that Hungary has evolved into a dual economy; in which previously specialized regions and geographically concentrated industries have lost their pace. The main factor that favoured regional economic growth was the presence of large foreign companies. Therefore, economic policies fostering regional specialization and spatial concentration of industries – such as cluster policy – may have minor effects only if the interaction of foreign-owned and domestic companies is not fostered.

Industry–academic links: A new phase in Ireland’s FDI-led industrialisation strategy

We analyse industry–academic links in the context of a dual economy (or disarticulated industrial structure) in Ireland, as an example of a peripheral territory in the EU. The duality found in the Irish industrial structure is the result of a FDI-led industrialisation strategy which has resulted in two distinct economic sectors – foreign and indigenous, respectively – with weak interactions between the two. Through increased public funding of academic research, the Irish government aimed to attract and embed new waves of higher-value foreign direct investment and increase the dynamism of its indigenous enterprise base. Based on a combination of quantitative and qualitative data, the paper analyses a crucial aspect of Ireland’s recent emphasis on STI policy – industry-academic linkages – and finds that the measures introduced reproduce in the public research system the uneven development found in Ireland’s productive system between indigenous industry and the foreign-owned industrial base.

The dual policy in the dual economy—The political economy of urban bias in dictatorial regimes

In many developing countries, public resource allocation is often biased against the rural population. Since a vast majority of the poor live in rural areas, the bias is highlighted as one of the most important institutional factors contributing to poverty. This paper develops a political economy model of urban bias in a dictatorial regime. A novel result of the model is that urban bias can emerge in predominantly agrarian economies even if there is no bias in political power toward urban residents. The empirical evidence from a recently compiled country-level panel dataset on agricultural taxes/subsidies is consistent with the prediction of the model.

Transnational families in Cuba and Germany: on the intersection between isolation, restrictions, and agency

This article will analyze the formation of transnational family networks between Cuba and Germany in the context of late socialist Cuba. Drawing on multi-sited field research with a biographical theoretical approach, I will discuss whether Cuban migration is an exceptional case and demonstrate how it challenges key assumptions of transnationalism theory; that is, growing simultaneity through the development of communication technologies and a supposed blurring of nation-state boundaries and migrants’ agency. Furthermore, the two case studies discussed in this article demonstrate the fundamental impact of the migration of one family member on the relatives back in Cuba and the Cuban society as a whole. In the face of economic crisis, growing social inequalities resulting from the dual economy and increasing economic liberalization, transnational households emerge as new sustainability projects for the families and the system in Cuba. At the same time, they pose a potential challenge to the status quo. Thus, emigrants’ transnational involvement provides economic and development aid for Cuba and fills the gaps of the reduced Cuban social welfare system. Yet, migrants’ remittances also produce a social division in the neighborhood between those who have access to hard currency and those who are excluded from this possibility. Socialism is thus sustained and undermined by these transnational family networks.

Is China up to the Test? A Review of Theories and Priorities for Education Investment for a Modern China

AbstractThis paper reviews the key theories relating to the role of education in economic development and social change and how education, as a critical component of total factor productivity, contributes to sustained economic growth. It examines how China's education policy reflects the country's unique dual economy. Focusing on the post‐reform period, the paper contends that while progress has been made, there are risks to China's future growth prospects from failing to reap the benefits of sound education policy. It argues that if the Chinese education system is to continue to be a driver of rather than a drain on economic growth, and if China is to successfully manage its transition towards more inclusive, sustainable and equitable growth, reforms will be needed to improve the quality of education at all levels and to create an environment in which China's extensive human capital is duly recognized and respected. Crucially, the education system should be transformed to ensure it promotes a comprehensive range of human capabilities, including those that go beyond the part humans play in augmenting production possibilities.

Agriculture and small towns in Africa

AbstractAfrica is urbanizing rapidly. Yet most dual economy models focus on the sectoral rather than spatial dimensions of development. This article adopts a “dual–dual” approach to measuring rural/urban and farm/nonfarm linkages. We develop an economy‐wide model of Ethiopia that distinguishes between cities, towns, and rural areas. The model captures detailed sectoral and regional linkages, internal migration flows, and externalities from urban agglomeration. We find larger linkages between agricultural production and small towns and show that redirecting urban growth toward towns rather than cities leads to broader‐based economic growth and poverty reduction. In contrast, industry and services, particularly within cities, are far less effective in reaching rural areas and the poor. Africa's current urbanization pattern—toward major cities rather than towns—will weaken national growth–poverty linkages. Urbanization that takes advantage of the synergistic relationship between agriculture and small towns has the potential to result in a more inclusive growth trajectory.

Tourism, the environment, and welfare in a dual economy

Tourism promotion has greater significance for developing or emerging countries, which are experiencing extensive unemployment, than for developed countries. Therefore, the spread of tourism and the accompanying introduction of foreign tourists have been top priorities in some labor-surplus developing economies. On the other hand, the destruction of the environment due to tourism promotion has been a serious problem in those countries. Thus, this paper formulates a general equilibrium model with unemployment à la Harris–Todaro and a tourism sector that generates environmental pollution. The effects of tourism promotion and a pollution tax on pollution emission, unemployment, and welfare are examined.

Wage and Fertility Gaps in Dual Economies

Wage and Fertility Gaps in Dual Economies

Introduction: The Dual Economy Approach to Economic Growth and Development

This volume contains papers that use a two-sector approach to studying economic growth. Many economists believe taking such an approach is essential, especially for understanding the early stages of development. A two-sector model generates important insights about both the accumulation of physical and human capital (Mankiw et al. 1992) and improvements in total factor productivity (TFP) (Hall and Jones, 1999; Parente and Prescott, 2000). The main premise is that the structural transformation of an economy, as one sector expands and another contracts, is a fundamental cause, and not just a by-product, of aggregate growth.

Does Poor Mean Cheap? A Comparative Look at Africa's Industrial Labor Costs

Africa’s industrial progress has been disappointing. With the exception of South African auto components and garments, both of which have benefited from special incentives, Africa exports almost no manufactured goods that are not based on the processing of raw materials. Despite considerable rhetoric on the need to develop manufacturing as well as support by donors, what limited progress has been made has often been uneven and isolated. Much of Africa’s manufacturing sector is still characterized by a significant economic dualism between a large number of small-scale enterprises in the informal sector and a handful of more efficient large-scale operations in the formal sector.Following on from previous research on external costs, this paper compares labor costs and productivity in selected African countries relative to comparatives using data for 25 countries from the World Bank’s Enterprise Surveys. We conclude that industrial labor costs are far higher in Africa than one might expect, given levels of Gross Domestic Product (GDP) per capita. Part of this is an “enclave effect”. Both labor costs and labor productivity are far higher in Africa, relative to GDP per capita, than in comparable countries. Another part reflects a steeper labor cost curve. As firms are larger and more productive, their labor costs increase more in Africa than elsewhere. But there is still a sizable residual “Africa effect” after controlling such factors. We cannot test rigorously for the reasons behind these results, but can consider some plausible explanations. We also consider how Africa’s distinctive pattern, in terms of purchasing power parity exchange rates, could affect the results.The paper concludes with some implications for policy. Certainly there is an urgent need to reduce external costs through focused investments (power), as well as a general improvement in the business climate. However, with the exception of a few countries like Ethiopia, it is not clear that Africa’s low-income level automatically translates into a comparative advantage in low-wage basic manufacturing. The paper argues that it is more likely to reside in sectors closely linked with the rich and varied natural resource endowments of the countries, whether supplying or processing industries.

Diverse Effects of FDI in Regional Innovation Systems: Synergy Measurement, Complexity Theory, and Entropy Statistics

The aim of this study is to show regional differences as local effects of foreign investments in the dual economy of Hungary. We first introduce three knowledge functions (knowledge exploitation, knowledge exploration, and organizational control) of innovation systems. These functions are operationalized using entropy statistics. Regional innovation systems can then be expected to self-organize in terms of a synergy — that is, reduction of uncertainty — among these functions. Analyzing one-, two-, three-, and four-dimensional entropies of high-tech and medium-tech firms, and knowledge-intensive services, we measure the synergy among the distributions of geographical addresses, organizational size (number of employees), and technologies (NACE codes of the OECD). Synergy is defined as mutual information among these three dimensions; the fourth dimension is used to bring internationalization into the model. Our results show that regional innovation systems in Hungary are self-organized differently, in relation to a small set of foreign firms that have an overwhelming positive effect in regions between the Hungarian capital and the Austrian border. Foreign direct investment, however, has negative effects on local economies and disturbs the domestic synergy in the lagging Eastern and Southern provinces of the country.

The Political Economy of Rural Property Rights and the Persistence of the Dual Economy

If property rights in land are so beneficial, why are they not adopted more widely? I propose a theory based on the idea that limited property rights over peasants' plots may be supported by elite landowners (who depend on peasants for labour) to achieve two goals. First, like other distortions such as taxation, limited property rights reduce peasants' income from their own plots, generating a cheap labour force. Second, and unlike taxation, they force peasants to remain in the rural sector to protect their property, even if job opportunities appear in the urban sector. The theory identifies conditions under which weak property rights institutions emerge, providing a specific mechanism for the endogenous persistence of inefficient rural institutions as development unfolds. It also predicts a non-monotonic relationship between the quality of rural property rights and land in the hands of peasants.

The political economy of rural property rights and the persistence of the dual economy

Rural areas often have more than one regime of property rights and production. Large, private-property farms owned by powerful landowners coexist with subsistence peasants who farm small plots with limited property rights. At the same time, there is broad consensus that individual, well-specified and secure property rights over land improve economic outcomes. If property rights in land are so beneficial, why are they not adopted more widely? I put forward a theory according to which politically powerful landowners choose weak property rights to impoverish peasants and force them to work for low wages. Moreover, because weak property rights force peasants to stay in the rural sector protecting their property, the incentives to establish poor property rights are especially salient when peasants can migrate to an alternative sector, such as when urban wages increase with industrialization.

Fighting Discrimination: W. Arthur Lewis and the Dual Economy of Manchester in the 1950s

We document, for the first time, the institution-building activities of the development economist W. Arthur Lewis (1919-1991) as founder of Community House and the South Hulme Evening Centre, two further education centres which sought to fight discrimination among the Afro-Caribbean communities of Manchester in the 1950s. We depict the struggle by Afro-Caribbeans to achieve a decent standard of living (and to escape from the ‘subsistence economy’ which provides the basis for Lewis’ most famous model) as a game of snakes and ladders in which the two main potential ladders out of poverty are first, the ability to generate non-wage income through self-employment and second, ‘vertical social capital’, i.e. membership of social networks of a kind which gave the employee the ability to fight back against discrimination. The most imaginative aspect of Lewis’s design for his further education centres is his incorporation of activities which build vertical social capital alongside conventional vocational training. Using a bargaining model to understand the ability of Afro-Caribbeans to resist discrimination, we find that Lewis’ social centres had a significant positive impact on Afro-Caribbean income and poverty levels. Through a merger between Community House and the West Indian Sports and Social Club, Lewis helped to create an innovative institution which has endured through to the present.

Regional Growth in a Dual Economy: Marshall-Arrow-Romer Externalities and Firm-Ownership in Hungary

Using census-type data of Hungarian firms, we test the Marshall-Arrow-Romer (MAR) hypothesis on the impact of agglomeration economies on regional economic growth. The results suggest that MAR type of local knowledge externalities have a significant positive impact on TFP growth. However, initial and dynamic levels of foreign- and domestic capital had adverse effect on productivity growth. Moreover, slower employment growth was observed in locations with a higher level of initial regional specialization. We argue that regional growth was driven during the transition from the socialist structure into market economy by low-cost motivations of foreign-owned firms; but due to the gap between MNEs and domestic companies – the so-called dual economy – local knowledge externalities hardly exist between the two spheres.

Educational Investments in a Spatially Varied Economy

This paper presents a simple two-period, dual economy model in which migration options may affect the informal financing of educational investments. When credit contracts are universally available and perfectly enforceable, spatially varied returns to human capital have no effect on educational investment patterns. But when financial markets are incomplete and informal mechanisms subject to imperfect contract enforcement must fill the breach, spatial inequality in infrastructure or other attributes that affect the returns to education create spatial differentiation in educational lending and consequently, in educational attainment. Although migration options can increase the returns to education, they can also choke off the informal finance on which poorer rural households depend for long-term, lumpy investments like children's education.

Globalization and native internal mobility in a dualistic economy

The native migration flows from the Italian Mezzogiorno to Central and Northern Italy have recently begun to increase once more. The idea suggested in this paper is that the intensification of internal migration in Italy can be associated with a double dynamic : the significant upwards convergence between the Centre-North and the Mezzogiorno in education levels ; and the progressive divergence between the two areas in their productive structures. As shown by the factor content of trade, such output divergence has been sustained by recent internationalization processes that have had an asymmetric impact on the Italian regions.

Approaching a neoclassical scenario: the labor market in China after the Lewis turning point

As China passes through its Lewis turning point characterized first by the appearance of a labor shortage and a constant increase in wages, its labor market shows both features of the dual economy and neoclassical growth. This paper first depicts the trend of population as a root cause of the labor market transition from dual economy to neoclassical scenario. It then reveals the changed labor market profile - the labor shortage and wage increase. By examining three major groups of employment, namely, migrant workers, university graduates, and urban vulnerable workers, it tries to explore those unique characteristics of the labor market in such a transitional period and draws policy implications.

Hopf bifurcation in endogenous labor shift model under dual economy

Hopf bifurcation in endogenous labor shift model under dual economy

A Third Sector-Led Economic Model

Private (first sector) and public (second sector) sector economics, both individually and jointly, have failed to ensure the wellbeing of human societies on the national and global levels. In response, social enterprise (third sector) economics, which features cooperatives and not-for-profit social enterprises, foundations (awqOEf), and similar undertakings, has emerged as a make-up strategy in an attempt to counter the deficiencies of the market-state economic model. However, there is a strongly felt belief that the third sector needs to be broadened and mainstreamed in order to include both not-for-profit and for-profit businesses blended with social justice (via provision of such social welfare programs as corporate social responsibility) so that they can play a major role in poverty alleviation and economic growth. Islamic entrepreneurship, which is basically a community-centric mode of business initiative, is an antidote to the problem of intolerable economic and social dualism, a natural strategy against all forms of capitalist exploitation and attempts to control a nation’s resources. Moreover, it is the natural model for solving economic inequity, wealth concentration, and social divides. Based on its potential and using examples from Bangladesh and Malaysia, we present the Islamic style of entrepreneurship. We contend that this particular style is the most efficient and desirable one for effectively widening and mainstreaming community-centric third sector economics so that it can ensure development with equity and social justice especially in developing countries.