Pursued Economy

CHAPTER 4Macroeconomic Policy during the Three Stages of Economic Development

Labor's Progression during the Three Stages of Economic Development

In order to understand the unique policy challenge faced by pursued economies, it is useful to see how various sectors of the economy change as they pass through the different stages of economic development. It was already noted that when an economy is in the pre–Lewis Turning Point (LTP) urbanizing phase, capitalists can take advantage of workers because there are so many of them in rural areas who are willing to work for the going wage D in Figure 3.1 in urban factories. Workers also have no bargaining power prior to reaching the LTP. During this phase, the limited opportunities for education and vocational training in rural areas mean most workers are neither well educated nor highly skilled when they migrate to the cities. And with so many of them competing for a limited number of urban jobs, there is little job security.

Once the economy passes the LTP and enters the golden era, however, the tables are turned completely in favor of the workers. The supply of surplus workers in rural areas is exhausted, and the labor supply curve slopes upward from points K to P in Figure 3.1. As long as some businesses seek to increase their workforce, all businesses will be forced to pay ever-higher wages. At this stage, businesses also have many reasons to expand because workers' purchasing power is growing rapidly. Expansion here means domestic ...