Fei ranis theory

For example, if 90 per cent of the entire population of the concerned economy is involved in agriculture, that leaves just 10 per cent of the population in the industrial sector; as the productivity of agriculture increases, it becomes possible for just 35 per cent of population to maintain a satisfactory food supply for the rest of the population.

While mentioning the important role of high agricultural productivity and the creation of surplus for economic development, they have failed to mention the need for capital as well.

fei ranis theory of agricultural development

This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. Hence, it represents surplus labor. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits; 2.

Fei ranis theory

In other words, the slope of ORX curve represents real wage rate. This allows the agricultural sector to give up a part of its labor-force until Phase 3 begins from the point of commercialization which is at K in the Figure.

However, investment in capital goods comes with a long gestation period, which drives the private entrepreneurs away. There is complete negligence of terms of trade between agriculture and industry, foreign exchange, money and price. Only if the rate at which labor is shifted from the agricultural to the industrial sector is greater than the rate of growth of population will the economy be able to lift itself up from the Malthusian population trap.

fei ranis model diagram explanation
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Lewis Model and Ranis