chapter  1
29 Pages

The empirical context and a theoretical framework

BySANTOSH MEHROTRA, MARIO BIGGERI

There are at least two major differences between the conditions under which developing countries are industrializing today, and the conditions faced by the now-industrialized countries over a century ago. First, there have been massive changes in technology. The techniques of industrial production in developing countries being used now, usually borrowed from industrialized countries with a rather different factor endowment, means that the employment elasticity of manufacturing output is much lower than it was over a century ago. The technologies imported by developing countries were the product of a second Industrial Revolution in the advanced capitalist countries. In most developing countries, in the phase of import-substituting industrialization, import and capital-intensive products and inappropriate technologies entrenched a situation wherein formal sector manufacturing output has grown, but manufacturing employment has not grown commensurately (Stewart, 1974). The employment growth in the formal sector is insufficient to absorb even the growth in the labour force. In fact, as population has grown and the agriculture sector sheds its surplus labour, the slow growth of manufacturing employment has contributed to a growth of employment in the informal economy in urban areas. The result is not what Lewis (1954) had anticipated: that the formal, modern, industrial economy will absorb the labour in the traditional, rural, agricultural economy (the ‘dual economy’), but there has been the emergence of a differentiated informal economy.1 This development is central to framing the argument in the rest of this book – and hence we devote some discussion in this chapter and elsewhere in the book to it.