Development economics is based on the idea of "productivity dualism". Economists who laid the foundations of development economics, such as the Caribbean economist and Nobel laureate W. Arthur Lewis, observed that the economies of poor countries are usually divided into a narrower "modern" sector that applies advanced technologies, and a much broader "traditional" sector for which characteristic very low productivity.
It has long been believed that such a division is a distinctive feature of developing countries, in contrast to developed countries where advanced technologies and high productivity dominate in all segments. That is why development economics is a separate discipline, different from conventional neoclassical economics.
Development policies are traditionally aimed at overcoming disparities in income, education, health and life prospects. Their goal is to overcome the dualism of productivity by introducing new institutional arrangements that change the way the market works and open access to more productive workplaces.
Such a distinction made sense in the 50s and 60s, but seems to have lost its relevance today. First of all, the methods for studying developed and developing countries are now practically unified: development economics is reduced to setting the usual frameworks for public finance, labor economics, industry and macroeconomics in low-income environments. What is even more important (and interesting), in the meantime the dualism of productivity has become a critically important and clearly observable phenomenon in many developed countries as well, which points these countries to the application of measures that belonged to the repertoire of development economics.
In the 2017 book The Disappearance of the Middle Class, economic historian Peter Temin shows that Lewis' dual economy model is becoming increasingly relevant to the United States as well. Due to the action of factors such as deindustrialization, globalization and the introduction of new technologies, factors that mainly favored the highly educated workforce and capitalists, and the further weakening of labor positions, the gap between economic winners and losers has deepened. The convergence of poor and rich parts of the economy has stopped, differences in education levels have polarized the labor market, and regional disparities have deepened.
In Europe, the growth of inequality was less pronounced thanks to a stronger welfare state, but the same trends are noticeable there as well. The gap between the leading companies and regions and the laggards is widening, while the middle class is falling away.
Policymakers in developed countries are now grappling with problems that have long been confined to developing economies: how to attract investment, how to create new jobs, raise education levels, encourage entrepreneurship and facilitate access to credit and technology - in short, how to reduce the gap to more advanced and productive parts of the national economy.
The starting positions may differ, but the problem of regions where good jobs are disappearing is disturbingly similar to the problems that development economists have dealt with: the disappearance of productive jobs, the rise of social problems such as crime, drug abuse and loss of trust in government. The obstacles faced by members of ethnic minorities, immigrants and the less educated workforce in such environments are among the main themes of development economics.
Of course, neglected regions in advanced economies have access to incomparably greater financial resources. State and local governments in the United States spend tens of thousands of dollars on incentives and subsidies to try to attract large businesses. But representatives of those regions face similar structural and bureaucratic obstacles as their counterparts in poorer countries. An American official with a lot of experience recently described it at a meeting held at Harvard with the words: "We are in the center of events, but we are not managing anything."
The measures available to them are also limited. The main way to overcome dualism in the economy has traditionally been industrialization. As the labor force shifted to more productive production activities, wages rose and general productivity increased. But due to automation and other labor-reducing innovations, manufacturing today cannot provide enough jobs in either advanced or developing economies. Manufacturing employment is declining (as a share of total employment) even in countries that have maintained strong industrial sectors, such as South Korea and Germany.
That is why economic development in the future will have to rely more on the services of small and medium-sized enterprises - equally in high- and low-income countries. Both types of economy must develop a new type of coordinated policies focused on supply and demand in labor markets, which will combine training and support programs for employers. Without good companies, there are no good jobs. And reverse.
State policy frameworks must support such local experiments with appropriate financial resources and macroeconomic measures. This implies a review of the accepted policies in the field of innovation, which encourage technological changes that primarily favor capital and a highly educated workforce. A new approach to directing innovation, while encouraging technological development that complements rather than replaces the work skills of the existing workforce, would greatly contribute to solving labor market problems faced by rich and poor countries alike.
When they talk about global convergence, economists usually repeat that underdeveloped economies always develop faster than advanced ones, as a result of which the income of the poor over time approaches the income of rich economies. But today their point of convergence is moving downwards. The problems of the developed world are increasingly similar to the problems of poor countries, and the models and frameworks used to study developing economies are becoming more relevant to the problems of rich countries.
(Project Syndicate; Peščanik.net; translated by: Đ. Tomić)
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