Development Strategy, Technology Choice and Inequality

Transcription

1 Dvlopmn Sragy, Tchnology Choic and Inqualiy Absrac Jusin Yifu Lin China Cnr for Economic Rsarch, Ping Univrsiy Binai Chn China Cnr for Economic Rsarch, Ping Univrsiy This papr invsigas h ffcs of a govrnmn s dvlopmn sragy on inqualiy hrough chnology choic. A comparaiv advanag-folloing (CAF) sragy ncourags firms o adop chnologis hich ar consisn ih h counry s comparaiv advanag. In conras, a comparaiv advanag-dfying () sragy amps o acclra h dvlopmn of capial-innsiv chnology in a capial-scarc conomy. This papr rvals ha a sragy rducs labor dmand, and hrby rsuls in a lor quilibrium ag, hich lads o highr inqualiy bn h nrprnurs and h orrs/farmrs. A highr dgr of sragy ill lad o grar inqualiy. Th orrs/farmrs ill b ors off undr a sragy hil h nrprnurs may b br off as h quilibrium ag is lor. From a dynamic poin of vi, h lss-dvlopd counris ill xprinc four sandard phass during hir dvlopmn procss undr a CAF sragy: urbanizaion, capial-dpning, ransiion and advancd conomy. Inqualiy bn h nrprnurs and h orrs/farmrs ill dcras bcaus h poor ill bnfi from h rising ag ra during h dvlopmn procss. Undr a sragy, hovr, h conomy may b rappd in h urbanizaion, capial-dpning or ransiion phass hn h dgr of sragy is high nough. A highr dgr of sragy ill lad o grar long-run inqualiy bcaus h orrs/farmrs suffr mor undr his sragy. Inqualiy may ris during h urbanizaion, capial-dpning or ransiion phass, and Kuzns invrs U curv appars during h dvlopmn procss hn h dgr of sragy is high nough. Th rsuls ar consisn ih h mpirical vidncs abou h rlaionship bn dvlopmn sragy and boh conomic prformanc and inqualiy. Kyords: dvlopmn sragy, chnology choic, occupaional choic, inqualiy JEL classificaion: D3, O33, D8, D30.

2 . Inroducion This papr xplors h ffcs of a govrnmn s dvlopmn sragy on inqualiy hrough chnology choic. From h prspciv of facor ndomns, a govrnmn s dvlopmn sragy can b classifid ino o disinc yps: h comparaiv advanag-folloing (CAF) sragy and h comparaiv advanag-dfying () sragy (Lin, 003). A CAF sragy mans ha h govrnmn adops a s of rquird policis/insiuions o ncourag firms o adop chnology hich is consisn ih h counry s comparaiv advanag and mas hm profiabl in an opn, fr and compiiv mar. A sragy mans ha h govrnmn adops a diffrn s of policis/insiuions o facilia firms o adop capial-innsiv chnologis, vn hough hos chnologis viola h opimal chnology choics drmind by h conomy s ndomn srucur. If h govrnmn follos a CAF sragy, h poor bnfis from h rising ag during h dvlopmn procss. If h govrnmn adops a sragy, i nds o collc ax from h conomy in ordr o subsidiz firms ho choos h capial-innsiv chnology, hich hur boh h poor and rich dircly. Hovr, a sragy rducs labor dmand, and hrby rsuls in lor quilibrium ag, hich hurs h poor bu bnfis h rich indircly. Th poor suffrs mor undr a sragy hich lads o highr inqualiy. For givn iniial alh disribuion, chnology choic dpnds on h phas of dvlopmn undr a CAF sragy. Lss-dvlopd counris dvloping counris ih rlaivly scarc capial ill choos h labor-innsiv chnology. Dvloping counris ih rlaivly abundan capial ill adop boh h labor-innsiv and capial-innsiv chnologis. Dvlopd counris ill choos h capial-innsiv chnology. For h lss-dvlopd counris, a CAF sragy is suprior o a sragy in a Paro dominan prspciv: all h popl ar ors off undr a sragy. For h dvloping counris, h orrs ar sricly ors off undr a sragy; h nrprnurs, hovr, may b br off if hir alh is larg nough.

3 A sragy ill lad o highr inqualiy bn h nrprnurs and h orrs/farmrs, and h highr h dgr of sragy, h grar h inqualiy ill b. From a dynamic poin of vi, lss-dvlopd counris (LDCs) ill xprinc four sandard phass during hir dvlopmn procss undr a CAF sragy. In h firs phas, popl migra from h agriculural scor o h urban labor-innsiv scor hich is dsignad as an urbanizaion sag by classic auhors (Lis, 954; Ranis and Fi, 96). In h scond phas, only labor-innsiv chnology is adopd and h ag riss monoonically ih accumulaion of capial. This sag is dsignad as a capial-dpning sag, hich is a sandard procss characrizd by no-classic groh hory (Slo, 956). In h hird phas, boh labor-innsiv and capial-innsiv chnologis ar adopd. Th raio of capial-innsiv chnology monoonically incrass from 0 o. This phas is characrizd by srucural chang ha mor and mor rsourcs ar allocad o h capial-innsiv scor (Acmoglu and Gurriri, 007), and dsigna i as a ransiion sag. In h final phas, only capial-innsiv chnology is usd and h counry achivs an advancd conomy hich is similar o ha dfind in Brnhard and Lloyd-Ellis (000). Through h dvlopmn procss, inqualiy bn h nrprnurs and h orrs/farmrs dcrass monoonically bcaus h poor bnfi from h rising ag ra. Undr a sragy, hovr, h conomy may b rappd in h urbanizaion capial-dpning or ransiion phass hn h dgr of sragy is high nough. Th long-run inqualiy undr a sragy is grar han ha undr a CAF sragy, and a highr dgr of sragy ill lad o highr long-run inqualiy. I as a longr im for h conomy o b urbanizd undr a sragy han ha undr a CAF sragy, and h highr h dgr of sragy, h longr h im ill b. Inqualiy may ris during h urbanizaion capial-dpning or ransiion phass, and Kuzns invrs U curv appars during h dvlopmn procss hn h dgr of sragy is high nough. This bnchmar modl machs svral mpirical findings associad ih 3

4 conomic dvlopmn:. A highr dgr of sragy lads o highr incom dispariy (Lin and Liu, 003).. A highr dgr of sragy lads o highr rural-urban inqualiy (Lin and Liu, 003). 3. A highr dgr of sragy lads o poor conomic prformanc (Lin and Liu, 003; Lin, 003). 4. A highr dgr of sragy lads o lor urbanizaion ra in lss-dvlopd counris (Lin and Chn, 007). 5. Thr is a coninuous rural-urban migraion and incrasing paricipaion in manufacuring in h lss-dvlopd counris. 6. Labor-innsiv chnology is alays chosn by h dvloping counris hn capial is rlaivly scarc. 7. Mor and mor rsourcs ar allocad o h capial-innsiv scor ih accumulaion of capial. 8. Mar-claring ag rmains lo iniially, and hn riss monoonically. Th modl in our papr is closly rlad o ha of Banrj and Nman (993), Brnhard and Lloyd-Ellis (000), Ghaa and Nin-Hui Jiang (00). Occupaional choic is mphasizd in hs modls as a y nxus of alh disribuion voluion. Banrj and Nman (993), Ghaa and Nin-Hui Jiang (00) highligh h rol of crdi mar imprfcion hich may impd h poor o choos mor produciv occupaions. Thir analysis focuss on ho h long-run inqualiy is rlad o iniial alh disribuion and chnology paramrs. In conras, our papr shos ha h long-run inqualiy is drmind prdominanly by h govrnmn s dvlopmn sragy alhough h saving ra, produciviy diffrnc and iniial alh disribuion could play a rol in som insancs. Brnhard and Lloyd-Ellis (000) characriz diffrn phass during h dvlopmn procss of lss-dvlopd 4

5 counris. Thir papr focuss on h inracion bn alh disribuion and nrprnur sill disribuion during h dvlopmn procss. This papr, nvrhlss, xplors h rol of chnology choic on inqualiy during h dvlopmn procss of lss-dvlopd counris. Our papr is also closly rlad o h liraur of appropria chnology, hich as firs inroducd by Ainson and Sigliz (969), and has bn rvivd rcnly by Basu and Wil (998) and Acmoglu and Ziliboi (00). Basu and Wil (998) is h firs papr ha provids h formal modl o discuss appropria chnology in h conomic groh framor, and hy argu ha h chnologis ar spcific o paricular combinaions of inpus, i.., capial-labor raio. Tchnology progrss in hir papr, hovr, is an uninnional byproduc of producion. Basd on h ndognous groh modl ih xpanding variis, Acmoglu and Ziliboi (00) modl chnology progrss as innionally dircd innovaions oard diffrn chnologis basd on hir rlaiv profiabiliy. Thy argu ha h mismach bn h ndomn srucur and chnology in h LDCs lads o lor produciviy. Th ndomn srucur in Acmoglu and Ziliboi (00), nvrhlss, is sill lvl, rahr han h capial-labor raio, hich is blivd o b mor imporan in h LDCs. Lin and Zhang (007b) invsigas h rol of capial-labor raio on appropria chnology ih rprsnaiv agn and compl crdi mar. In hir papr, ndomn srucur affcs h opimal chnology choic hrough rlaiv pric of h inpus (i.. capial and labor), rahr han h mar ffc, hich is mphasizd in Acmoglu and Ziliboi (00). Our papr is complmnary o Lin and Zhang (007b) in ha xplor h ida of appropria chnology undr an nvironmn ih hrognous agns and incompl crdi mar, hich implis ha alh disribuion plays an imporan rol in chnology choic. This papr offrs a n prspciv on h drminans of inqualiy, spcially in h LDCs. Our papr diffrs from h xising liraur in hr main aspcs: firs and formos, mphasiz h rol of a govrnmn s dvlopmn sragy on 5

6 inqualiy, rahr han h iniial condiions and chnology paramrs (Banrj and Nman, 993; Aghion and Bolon, 997). Scond, opimal chnology choic is affcd by ndomn srucur hrough rlaiv pric of h inpus, rahr han h mar ffc (Acmoglu and Ziliboi, 00), and d faco chnology choic is impacd by h govrnmn s dvlopmn sragy. Third, h xising liraur mphasizs h ffcs of a govrnmn s rdisribuion policy on h dynamics and sady sa of alh disribuion (Banrj and Nman, 993; Aghion and Bolon, 997), hras our papr focuss on h ffcs of a govrnmn s dvlopmn sragy. Th rs of his papr is organizd as follos: Scion givs a brif discussion of diffrn dvlopmn sragis. Scion 3 prsns h basic modl. Scion 4 dscribs h saic quilibrium in h labor mar for givn alh disribuion, and hn characrizs chnology choic and inqualiy undr diffrn dvlopmn sragis. Scion 5 xplors h dynamic pah and sady sa of alh disribuion undr diffrn circumsancs, and also invsigas h rlaionship bn dvlopmn sragy and inqualiy. Scion 6 offrs som concluding rmars.. Dvlopmn sragy and inqualiy: an ovrvi I is ll non ha a counry s comparaiv advanag is drmind by is facor ndomn srucurs (Ohlin, 967; Hcschr and Ohlin, 99; Lin, 003; Lin and Zhang, 007b). Basd on hhr or no h argd indusrial srucur machs h naur of h facor ndomn srucur, Lin (003) classifis h dvlopmn sragy ino a CAF or a sragy, and dfins a CAF sragy as h govrnmn s amp o ncourag firms o nr indusris for hich h counry has comparaiv advanags and o adop h chnology in producion ha is appropria for h indusrial producion. To raliz his goal, h govrnmn nds o mainain compiiv produc and facor mars so ha h rlaiv facor prics ill rflc Rodri (005) rfrs o h dvlopmn sragy as a s of conomic policis and insiuional arrangmns aimd a achiving conomic convrgnc ih h living sandards prvailing in advancd counris. 6

7 accuraly h rlaiv facor scarciis in h ndomn srucur and induc firms o adop h chnology ha uilizs innsivly h abundan facor in h conomy in hir producion (Lin, 003). In raliy, hovr, poliical ladrs and social lis in LDCs ofn qua indusrializaion spcially h xisnc of capial-innsiv havy indusris ih modrnizaion and push hir counris o dvlop havy indusris and adop h mos advancd chnologis in hir producion a h arly phas of hir counry s dvlopmn. Th advancd capial-innsiv indusris promod by a sragy in an LDC ar no, hovr, consisn ih h comparaiv advanag drmind by h counry s facor ndomn srucur, hich is characrizd by a rlaiv scarciy of capial and rlaiv abundanc of labor or naural rsourcs (Lin, 003). Obviously, in a fr, opn and compiiv mar, a firm folloing is govrnmn s sragy ill no b viabl (Lin and Tan, 999; Lin, 003; Lin and Zhang, 007b). Th govrnmn is, hovr, rsponsibl for h firm s nry ino or adopion of h indusry/chnology in h prioriy scor and is accounabl for h firm s losss. Thrfor, in implmning a sragy, h govrnmn mus giv h firm a policy subsidy or procion o compnsa for is losss (Lin, 003; Lin al., 994). Ho larg h subsidy/procion is dpnds on ho far aay h promod indusry/chnology is from h conomy s comparaiv advanags (Lin, 003). In a nushll, a sragy has o y faurs: Firs, h argd capial-innsiv indusry and producion chnology ar no consisn ih h spcific faurs of h ndomn srucur in h LDC, hich ar characrizd by a rlaiv abundanc of labor or naural rsourcs and a rlaiv scarciy of capial. Scond, h firm folloing is govrnmn s sragy ill no b viabl in a fr, opn and compiiv mar and rquirs govrnmn suppor or procion for is survival. Ths o faurs of h sragy hav imporan implicaions on inqualiy. Lin and Chn(007) invsigas h ffcs of a sragy on inqualiy hrough crdi mar. Thy find ha a sragy may rsul in prsisn inqualiy by 7

8 blocing h ricl-don procss hich is mphasizd in Aghion and Bolon (997). As complmnary o ha papr, his papr focuss on h ffcs of a sragy on conomic prformanc and inqualiy hrough labor mar. Th y ida is ha a sragy rducs labor dmand, and hrby rsuls in lor quilibrium ag, hich lads o highr inqualiy bn h nrprnurs and h orrs/farmrs. This ida ill b xplord xplicily in h folloing scions. 3. Th basic modl 3. Dmographics and prfrncs To xplor h ffcs of a govrnmn s dvlopmn sragis on inqualiy in an LDC, ill considr a simpl conomy inhabid by infinily livd dynasis, rprsnd by succssiv gnraions of agns ho liv for on priod. Thr is a coninuum of individuals and is siz is normalizd o (hich implis ha avrag alh is qual o oal alh). Thr is no populaion groh. All agns ar born ih h sam ponial abiliis and ih h sam prfrncs; hy diffr only in h amoun of alh, hich is usd as capial in producion, inhrid as a bqus from h prvious gnraion. Thr is only on goods in h conomy, hich can b srvd as consumpion goods or capial goods and is usd as h numrair for his conomy. In priod, a dynasy is ndod ih on uni of labor and iniial alh,. i, I arns incom by supplying labor and capial and h rsuling incom, y i,, is c i, b i, dividd a h nd of h priod bn consumpion,, and saving,, hich is h bqus o h nx gnraion. Thrfor, hav = + b. i, i, Th chronology of h main vns and dcisions in an agn s lif is shon in Figur. Figur Chronology of h main vns and dcisions in an agn s lif 8

9 - + Occupaion/Tchnology choic Rurn Consumpion/bqus dcisions Folloing h sandard assumpion in h liraur daling ih alh disribuion (Galor and Zira, 993; Banrj and Nman,993; Aghion and Bolon, 997), assum ha h agns hav idnical Cobb-Douglas uiliy funcions ovr consumpion and bquss ha isu i ( c, b ) = c α b α, hr α (0, ) and h i, i, i, i, budg consrain is y = c + b i, i, i,. This mans all h agns ar ris nural and h currn gnraion savs a consan fracion, α, of is incom and lavs i as a bqus o h nx gnraion: = i, + α yi,. In priod, i is assumd ha h alh ond by ach agn in h conomy is disribud according o a probabiliy masur λ. W dfin G ()=λ ((, ]) for convninc, and h funcion G is h cumulaiv disribuion funcion. 3. Producion chnologis A h bginning of priod, h agns hav h folloing chnology choics: a Th agn can adop a radiional chnology ha rquirs only h agn s on labor bu no capial in producion hich producs. This ill b dscribd as agriculural chnology. b Th agn can choos a labor-innsiv modrn chnology. This chnology has a Lonif form hich rquirs a uni of capial and o uni of labor o produc q uni oupu. Th agn ho chooss his chnology ill us hr/his on labor o suprvis h mploy, hich is This quaion implis ha an agn s alh inhrid in priod + is a fixd fracion of h incom of h agn in priod from hom h inhrid h alh. Thrfor, h alh disribuion in h conomy in priod + is xacly h sam as h incom disribuion in h conomy in priod. 9

10 assumd o b prfcly monioring. c Th agn can also choos a capial-innsiv modrn chnology. This chnology has a Lonif form hich rquirs a uni of capial and a uni of labor o produc q uni oupu. Th agn ho chooss his chnology ill us hr on labor o suprvis h mploy, hich is also assumd o b prfcly monioring. Boh of h modrn chnologis hav a maximum invs scal, hich can b vid as a gnralizaion of h chnology mployd in Aghion and Bolon(997), Banrj and Nman (993). Suppos is larg nough. Assumpion: W assum ha h modrn chnology is mor produciv han h agriculural chnology: q r > q r > () Whr r 0 is xognously givn gross inrs ra. Assumpion : Labor-innsiv chnology is consisn ih h comparaiv advanag of h LDCs a hir iniial phas of dvlopmn, ha is: q q > () Assumpion and Assumpion ill b raind hroughou his papr. 3.3 Occupaional Choic Thr ar hr occupaions opn o h agn ho has inhrid alh i. a. Farmr: h agn can or in h agriculural scor, and dposi hr /his alh in h ban. Thrfor, hr/his incom is : F y r i i = + (3) 0

11 b. Worr: h agn can supply hr/his labor o h nrprnur and arn ag incom (hich is ndognously drmind by labor mar quilibrium), and dposi hr/his alh in h ban. Thrfor, hr /his incom is : W y i r = + i (4) c. Enrprnur: h agn can choos o b an nrprnur, and adop h labor-innsiv or/and capial-innsiv chnology in producion. Suppos h agn is consraind o us hr/his on capial in invsmn du o crdi mar imprfcion similar o Ghaa and Nin-Hui Jiang (00). Thrfor, hr/his incom is : E l c l c y = ( q )* ( )* ( i + q i + r i i i i ) (5) l c hr and rprsn capial invsd o h labor-innsiv i i chnology and capial-innsiv chnology, rspcivly 3. Whhr h labor-innsiv or h capial-innsiv chnology ill b chosn is drmind by hir gross rurn, hich in urn drmind by h rlaiv produciviy of h o chnology and h quilibrium ag ra. From no on, ill omi noaion i for simpliciy hn his dos no caus confusion. 4. Saic quilibrium undr diffrn dvlopmn sragis Dfiniion (Dvlopmn Sragy): Th govrnmn follos a CAF sragy hn i ncourags h firms o adop chnology hich is consisn ih h counry s comparaiv advanag. In conras, h govrnmn follos a sragy if i 3 l To b concr, = i hn only labor-innsiv chnology is chosn by h nrprnur; i l = 0 i l hn only capial-innsiv chnology is chosn by h nrprnur; 0 < < i hn boh i chnologis ar chosn by h nrprnur.

12 inducs som firms o adop h capial-innsiv chnology hich violas h comparaiv advanag of h conomy. Th saic quilibrium in his modl is characrizd by h ag choic (farmr/orr/nrprnur) and chnology choic a givn h labor mar clar condiion. For givn, suppos j,, h occupaion, hich saisfis is h alh lvl of an agn ho is indiffrn bn bing a orr or an nrprnur; j =, rprsns labor-innsiv chnology and capial-innsiv chnology, rspcivly. No ha h agn ill invs as much as possibl in h modrn chnologis if sh/h chooss o b an nrprnur 4. Thrfor, j, is givn by h folloing quaion 5 : y = ( q )* + ( q )*( ) = y = + r E l l W j, j, q r if j = j, = = q r if j (6) Tchnology choic is basd on h govrnmn s dvlopmn sragy and h rurn of diffrn chnologis. W no urn o characriz h quilibrium xplicily undr diffrn dvlopmn sragis. 4. Th cas of a CAF sragy If h govrnmn follos a CAF sragy, h nrprnur chooss h 4 Th ncssary condiions for h agn choosing o b an nrprnur ar q > r or/and q > r h ban., hich implis ha invsmn in modrn chnology is mor profiabl han dposi in 5 Suppos is larg nough ha > j, for any possibl quilibrium ag ra.

13 chnology ha gnras highr rurn, hich in urn dpnds on > q q, = q q or < q q. Th quilibrium ag is drmind by h labor mar clar condiion: G ( j, ) = γ[ d ( ) ( )] if G + dg j, > G ( j, ) γ[ d ( ) + ( )] if G dg = j, (7) Th xisnc of agriculural chnology pu a lor bound o h quilibrium ag. γ [, ] is an indx of chnology choic: hn only h capial-innsiv chnology is adopd, γ = ; hn only h labor-innsiv chnology is adopd, γ = ; hn boh chnologis ar adopd in h conomy, γ (, ). Th analysis of saic quilibrium undr a CAF sragy can b dividd ino four cass: i) G ( ) [ d + d G ], hr,, G( ) ( ), = q r Th abov condiion implis ha hr ar a larg amoun of poor popl rappd in h agriculural scor, hich is a y characrisic of h lss-dvlopd counris. Ths counris ar dsignad as dual conomis by classic auhors (Lis, 954; Ranis and Fi, 96). Similar o h liraur, surplus labor supply in h dual conomy drivs h ag don o subsisnc lvl. No nrprnur chooss capial-innsiv chnology as h labor-innsiv chnology is mor profiabl. ii) ] G ( ) < [ d + d ]& G ( ) [ d + d, G( ) ( ), ( ) ( ), G q q G G, q q q q q q hr = = = q ( q q ) r q ( q q ) r, q q, q q Undr h abov condiion, all h popl in h agriculural scor hav migrad o h urban scor. Nvrhlss, capial is sill rlaivly scarc in h conomy and 3

14 ag is sill lo, so ha only labor-innsiv chnology is chosn by h nrprnurs. This is a sandard no-classic conomy hich is characrizd by a singl producion chnology (Solo, 956). Th quilibrium ag ra is drmind by h labor mar clar condiion ha saisfis (, q q). iii) ] [ d + d ] < G ( ) = G ( ) < [ d + d G( ) ( ),, ( ) ( ), q q G q q q q G G, q q Th capial-innsiv chnology is as profiabl as labor-innsiv chnology in his cas, and boh capial-innsiv and labor-innsiv chnology ar adopd. Th conomy is characrizd by a o-facor, o-chnology srucur, hich can b vid as a small, opn counry in h familiar rad modls (Ohlin, 967; Hcschr and Ohlin, 99). Th sandard facor pric qualizaion horm (FPE) and Rybczynsi Thorm can b applid o h conomy ih simpl modificaions. Tha is, h quilibrium ag ra is consan a = q q, and h shar of capial-innsiv chnology is drmind by h aggrga alh lvl of h nrprnurs: a highr aggrga nrprnur alh lvl ill rsul in a largr shar of capial-innsiv chnology for givn alh disribuion. iv) G ( ) [ d + d, q q G( ) G( ), q q ] Th labor supply is so scarc ha all h nrprnurs prfr o choos h capial-innsiv chnology hn h abov condiion is saisfid. Similar o cas ii, his is a sandard no-classic conomy, and h quilibrium ag ra is drmind by h labor mar clar condiion ha saisfis > q q. I is orh noing ha h labor supply and dmand in our modl dpnds on alh disribuion. Thrfor, similar o Banrj and Nman (993), h quilibrium ag ra is a funcion of alh disribuion, rahr han aggrga alh in h modls ih a rprsnaiv agn and prfc crdi mar. This implis ha chnology choic and occupaion choic also dpnd on h alh 4

15 disribuion. Th discussion abov is summarizd in proposiion : Proposiion (Dvlopmn Phas, Tchnology Choic and Inqualiy): Undr a CAF sragy, chnology choic dpnds on h phas of dvlopmn. Lss-dvlopd counris ih lil capial ill choos h labor-innsiv chnology a subsisnc ag ra =. Dvloping counris ih rlaivly scarc capial ill also choos h labor-innsiv chnology a ag ra (, q q). Dvloping counris ih rlaivly abundan capial ill adop boh h labor-innsiv and capial-innsiv chnologis a ag ra q q =. Dvlopd counris ih abundan capial ill choos h capial-innsiv chnology a ag ra > q q. Tchnology choic also dpnds on h disribuion of alh, as h quilibrium ag ra is a funcion of alh disribuion. S h Appndix for h proof. 4. Th cas of a sragy Th govrnmn follos a sragy if i inducs som firms o adop h chnology hich is no consisn ih h comparaiv advanag of h conomy. W focus on h cas hr capial-innsiv chnology is non-viabl hich is familiar in h LDCs, ha is < q q 6. As h labor-innsiv chnology is accssibl o h nrprnurs, h govrnmn nds o subsidiz h nrprnurs ho adop capial-innsiv chnology. In ordr o suppor h non-viabl capial-innsiv chnology hich is prfrrd by h govrnmn, many policy ools ar adopd, such as financial rprssion, xchang ra ovrvaluaion, plannd rsourc allocaion and firm auonomy dprivaion, c (Lin al.,994; Lin and Chn, 007; Lin and Zhang, 6 Capial-innsiv chnology is consisn h comparaiv advanag of dvlopd counris, and hy may pursu a sragy by adoping labor-innsiv chnology (for xampl, procion of xil indusry in advancd counris), hich is lss rmarabl and is omid in our papr. 5

16 007a; Lin and Li 007). For simpliciy, assum ha h govrnmn imposs a lump sum ax T on all h agns in h conomy, and T can by vid as an indx of h dgr of sragy. Th subsidy o h nrprnur is basd on hr/his invsmn in capial-innsiv chnology. W assum ha h subsidy mas h nrprnur indiffrn abou choosing bn labor-innsiv chnology and capial-innsiv chnology. Tha is, h nrprnur ill rciv a subsidy of s = q q by invsing on uni of capial in h capial-innsiv chnology. Th amoun of invsmn in capial-innsiv chnology is drmind by h budg consrain of h govrnmn: T* = s* s T s = (8) s hr s is h amoun of invsmn in capial-innsiv chnology. I is obvious ha is an incrasing funcion of T and s. Highr T mans ha a larg amoun of capial ill b invsd in h non-viabl chnology. Highr ag implis ha h promod capial-innsiv chnology is lss dviad from h conomy s comparaiv advanag and fr subsidis s ar ndd for on uni invsmn in non-viabl capial-innsiv chnology (Lin, 003). Th quilibrium ag ra is givn by h labor mar clar condiion: G(, ) = [ d ( ) + ( ) ] + =[ ( ) + ( )] if G dg s s dg dg s,, > (9) G(, ) [ dg( ) + dg( ) s] + s [ dg( ) + dg( ) ] s if =,, = Th propry of quilibrium ag ra is summarizd in Lmma : Lmma : For any givn alh disribuion in h LDCs, h quilibrium ag ra undr a sragy is nvr mor han ha undr a CAF sragy. A highr dgr of sragy ill rsul in a lor quilibrium ag ra. 6

17 S h Appndix for h proof. Th analysis of chnology choic undr a sragy is qui similar o ha undr CAF sragy, ih a simpl modificaion in labor dmand. In ordr o xplor h ffcs of dvlopmn sragy on inqualiy, ill compar h inqualiy undr diffrn dvlopmn sragis in h nx scion. 4.3 Inqualiy and lfar undr diffrn dvlopmn sragis This par ill giv a comparison of boh h lfar and h inqualiy undr diffrn dvlopmn sragis, hn h dvlopmn phas and alh disribuion is givn. In ordr o compar h lfar undr diffrn dvlopmn sragis, dfin h lfar loss funcion undr as 7 : i i CAF L INC INC i (0) hr INC i CAF is h incom of agn i undr a CAF sragy, and INC i is h incom of agn i undr a sragy. L >=< 0 mans ha h agn is ors off/ indiffrn/ br off undr a sragy. Inqualiy in his papr is dfind upon classs (Romr, 98). Tha is, focus on h inqualiy bn h nrprnur and h orr/farmr. Our discussion is dividd ino o cass: i i) ] G ( ) [ d + d, G( ) ( ), G Undr his condiion, h ag ra is drivn don o subsisnc lvl undr boh dvlopmn sragis. Hovr, h nrprnurs choos h labor-innsiv chnology undr a CAF sragy, hil som of hm adop capial-innsiv chnology undr a sragy. Dvlopmn sragis hav similar lfar impacs on h agns ih diffrn alh lvls: h orr/farmr s incom is + r undr a CAF sragy and + r T undr a sragy; h 7 Th incom can b usd o masur lfar as h agns ar ris nural. 7

18 nrprnur s incom is ( q ) or ( q ) + r( ) undr a CAF sragy and ( q ) T or ( q ) + r( ) T undr a sragy. Tha is, boh h orrs/farmrs and h nrprnurs ar sricly ors off undr a sragy as hy fac a lump sum ax T from h govrnmn. Inqualiy bn h nrprnur ih alh lvl and h orr/farmr ih alh lvl undr diffrn dvlopmn sragis is givn by: I CAF, ( q ) + r or I, CAF ( ) ( q + r ) + r I, ( ) q T + r T or I, ( q ) + r( ) T + r T () CAF hr I, and I, ar h inqualiy undr a CAF sragy and h inqualiy CAF undr a sragy, rspcivly. I is asy o sho ha I, < I,, hich implis ha h bn-group inqualiy is highr undr a sragy. I, incrasing int, hich implis ha h highr h dgr of sragy, h grar h inqualiy. Morovr, h quaniy of orrs and farmrs undr diffrn dvlopmn sragis is no h sam. Undr a CAF sragy, h quaniy of orrs is givn by [ d + d ] by, hil undr a sragy, h quaniy of orrs is givn, G( ) G( ) [ d + d ]. Tha is, hr ar mor orrs undr a CAF sragy, G( ) G( ) s hich can b vid as a highr urbanizaion ra (Harris and Todaro, 970). is ii) G ( ) < [ d + d ]& G ( ) > [ d + d ], G( ) ( ), ( ) ( ), G q q G G, q q Capial-innsiv chnology is sill non-viabl undr h abov condiion 8. From 8 Boh cas ii and cas iii in par 4. saisfy his condiion. In cas ii, som agns adop 8

19 lmma, h ag ra undr sragy is sricly lss han ha undr CAF sragy. Dvlopmn sragis hav disproporional lfar impacs on h agns ih diffrn alh lvls. For h agn ih alh lvl [0, ], sh/h, ill choos o b a orr/farmr undr diffrn dvlopmn sragis, and hr/his incom is CAF + r undr a CAF sragy, + r T undr a sragy. For h agn ih alh lvl (, ), sh/h ill choos o b a CAF,, orr/farmr undr a CAF sragy and choos o b an nrprnur undr a sragy. Hr/his incom is CAF r + undr a CAF sragy, and ( q ) T undr a sragy. For h agn ih alh lvl [, + ], sh/h ill CAF, choos o b an nrprnur undr diffrn dvlopmn sragis, and hr/his incom is ( q ) undr a CAF sragy, CAF ( q ) T undr a sragy. Th lfar of h agn ih alh lvl [0, ] is sricly ors off, undr a sragy for o rasons: sh/h facs a lump sum ax T and a lor ag < CAF undr a sragy. For h agn ih alh lvl (, + ), hr/his lfar dpnds on o counr-forcs: a lump sum ax, rducs hr/his incom, a lor ag ra incrass hr/his incom. Th lfar of h agn ih alh lvl (, + ) is summarizd in Lmma :, Lmma : Th lfar loss undr a sragy sricly dcrass on [, ), and rmains consan on [, + ). Thr xiss a uniqu alh, capial-innsiv chnology undr a sragy hil all agns choos labor-innsiv chnology undr a CAF sragy. Undr cas iii, h proporion of agns ho adop capial-innsiv chnology is highr undr a sragy han ha undr a CAF sragy. Th disorion undr a sragy lads o a lor labor dmand, hich rsuls in an quilibrium ag ra lss han q q, and hrfor h capial-innsiv chnology is non-viabl undr boh cass. 9

20 * * lvl such ha: ) h agn ih alh lvl (, ] is ors off undr a sragy; ) h agn ih alh lvl, * (, + ) is sricly br off undr a sragy. S h Appndix for h proof. Lmma sas ha h poor suffr mor undr sragy, and h rich may bnfi from sragy as h quilibrium ag ra is lor. Th richr h agn, h mor sh/h can bnfi from sragy, hich has srong implicaions on inqualiy ha ill b xplord as follos. Inqualiy bn h nrprnur ih alh lvl and h orr/farmr ih alh lvl undr diffrn dvlopmn sragis is givn by: I CAF, CAF CAF ( q ) ( q ) + r( ) CAF or I CAF + r, CAF + r I, ( q ) T + r T or I, ( q ) + r( ) T + r T () CAF hr I, and I, ar h inqualiy undr a CAF sragy and h inqualiy undr a sragy, rspcivly. Basd on lmma, i is asy o sho ha I < I, hich implis ha h bn-group inqualiy is highr undr CAF,, sragy. Basd on lmma, i is asy o sho ha I, is incrasing in T as is dcrasing int, hich implis ha h highr h dgr of sragy, h grar h inqualiy. Th abov discussion is summarizd in h folloing proposiion: Proposiion (Dvlopmn Sragy, Wlfar and Inqualiy): For h lss-dvlopd counris, a CAF sragy is suprior o a sragy in a Paro dominan prspciv: all h popl ar ors off undr a sragy. A sragy also lads o lor urbanizaion ras in h lss-dvlopd counris. For h 0

21 dvloping counris, h orrs ar sricly ors off undr a sragy; h nrprnurs, hovr, may b br off if hir alh is larg nough. A sragy ill lad o highr inqualiy bn h nrprnurs and h orrs/farmrs, and h highr h dgr of sragy, h grar h inqualiy. S h Appndix for h proof. 5. Sady Sa and Dynamics undr diffrn dvlopmn sragis W hav xamind h impacs of dvlopmn sragy for givn alh disribuion. This scion ill xplor h dynamic ffcs of dvlopmn sragy on inqualiy. As discussd in h prvious scion, individual alh dynamics dpnd on hir occupaion choic. Givn chnology choic and ag ra, individuals ih alh lvl (0, j, ] choos o b orrs or farmrs. Thir alh dynamics ar givn by: r ) = α( + + (3) Popl ih alh lvl (,, ) choos o b nrprnurs and dvo hir oal alh o h firms. Thir alh dynamics ar dscribd by: j + = α[( q ) ] if labor innsiv chnology is adopd + = α[( q ) ] if capial innsiv chnology is adopd (4) Popl ih alh lvl (, + ] also choos o b nrprnurs. Thy invs o hir firms, and dposi ( ) o h ban. Thir alh dynamics ar givn by: + = α[( q ) + r( )] if labor innsiv chnology is adopd + = α[( q ) + r( )] if capial innsiv chnology is adopd (5) To ma our analysis mor inrsing, hav h folloing assumpion:

22 Assumpion 3: α r < ; α( q q) > Assumpionα r < ruls ou h possibiliy ha a dynasy s alh can gro infinily jus by dposiing capial o h ban, hich is common in h liraur (Galor and Zira, 993; Ghaa and Nin-Hui Jiang, 00, c). As ill sho lar, α( q q) > nsurs ha h modrn chnology can ponially urn h conomy ino a alhy on. Bfor can xplor h imporan implicaions of h modl, nd o giv a formal dfiniion of h sady sa and h dynamic pah in h prsn sysm. Dfiniion : Th quilibrium ag ra schdul givn by Equaion (7) or (9) and h individual s alh dynamics givn by Equaions(3)-(5) dfin a non-linar aggrga ransiion funcion, G ( ) + G, and an quilibrium ag ra, = ( G), a im. Th sady sa of h abov sysm could b characrizd as { G} { G } lim, =, such ha G ( ) G = G and = ( G ) Sady Sa and Dynamics undr a CAF sragy In his scion, ill characriz h disinc dvlopmn phass and sady sa of h lss-dvlopd counris undr a CAF sragy. Phas (Urbanizaion/a-off): G ( ) [ d + d ], G( ) ( ), G Whn h modrn labor-innsiv chnology is inroducd o h lss-dvlopd counris, h urbanizaion/a-off procss bgins, and dno his im o b. In his phas, farmrs in h agriculural scor p moving o h urban scor. Mor and mor popl migra o h urban ara bcaus labor dmand in h modrn scor incrass during his phas. This is a procss of urbanizaion/a-off dsignad by classic auhors (Lis,954; Ranis and Fi,976). This procss ill p on unilg (, ) = [ dg( ) ], and dno his im o b., 0

23 Phas (Capial-dpning): ] G ( ) < [ d + d ]& G ( ) [ d + d, G( ) ( ), ( ) ( ), G q q G G, q q In his phas, all h farmrs hav migrad o h urban scor, and h nrprnurs adop labor-innsiv chnology in hir producion. Th nrprnurs alh incrass during his sag, hich lads o a rising dmand for labor. Th ag ra incrass monoonically from o q q as hr is no xcss labor supply in h rural scor, hich implis ha h orrs ar br off during his phas. Th procss ill p on unil = q q, and dno his im o b. Phas 3 (Transiion): ] [ d + d ] < G ( ) = G ( ) < [ d + d G( ) ( ),, ( ) ( ), q q G q q q q G G, q q As is shon in h prvious scion, h ag ra in his phas is = q q, and boh labor-innsiv and capial-innsiv chnologis ar adopd. Capial accumulaion in his sag inducs h nrprnurs o choos h capial-innsiv chnology. Th raio of capial-innsiv chnology in his phas monoonically incrass from 0 o, hich implis ha mor and mor nrprnurs ill choos capial-innsiv chnology. This procss ill p on unilγ =, and dno his im o b 3. Phas 4 (Advancd Economy): G ( ) [ d + Kd, q q G( ) G( ), q q ] In his phas, only capial-innsiv chnology is chosn. Similar o Phas, h conomy is characrizd by capial accumulaion and h ag ill incras afr 3 unil q. α W no bgin o characriz h dynamics of inqualiy bn h 3

24 nrprnur and h orrs/farmr. For h nrprnur ih alh lvl (, ], inqualiy bn hr/him and h orr/farmr a im and + is, givn by givn by: I ( q ) / α ( q ) / α CAF CAF CAF + CAF + or, = = I, = = CAF CAF + r α + r + + / / α I ( q ) ( q ) + (6) CAF CAF CAF + + CAF + or, = I, = CAF CAF r r For h nrprnur ih alh lvl (, + ], inqualiy bn hr/him and h orr/farmr a im and + is givn by: I CAF, = + + / α / α I ( q ) + r( ) ( q ) + r( ) CAF CAF CAF + + CAF + + or, = I, = CAF CAF r r (7) CAF CAF I is asy o sho ha I for any, < I, < CAF + j. Tha is, inqualiy + + bn h nrprnur and orr/farmr ill dcras during h dvlopmn procss. In sum, h lss-dvlopd counris ill xprinc four sandard phass during hir dvlopmn procss: urbanizaion, capial-dpning, ransiion and advancd conomy. Inqualiy bn h nrprnur and h orr/farmr dcrass monoonically during h dvlopmn procss. Th sady sa of h conomy undr a CAF sragy ill b characrizd as follos. Similar o Ghaa and Nin-Hui Jiang(00), h individual dynamics in our modl ar drminisic and ordr-prsrving. Thrfor, h sady sa undr a CAF sragy is rachd if and only if h folloing condiions ar saisfid, + 4

25 simulanously 9 : ss ss ss = α( q ) for any nrprnur i i i ih alh lvl (,, ] = α ( q ) + r( ) for any nrprnur ss ss ss i i i ih alh lvl (, + ] ss ss ss = α( + r ) G ss ( ) d + d ss + G (8) G( ) ( ) hr ss i is h sady sa alh lvl of nrprnur i ; ss is h sady sa alh lvl of h orrs, ss is h sady sa ag ra. Th abov condiions ss ss ss α imply ha = ( q ), = =, α αr ss and ss i. Th forh a inqualiy in (8) holds bcaus h agn ih alh lvl ss is indiffrn abou choosing bn an nrprnur and a orr. Th sady sa inqualiy can b masurd by: I ss ( αr) =. ss αq ss I is incrasing in, and dcrasing inα, and r. This implis ha long-run inqualiy q is an incrasing funcion of, a dcrasing funcion of h saving ra, h produciviy of capial-innsiv chnology and h rurn of sorag capial. Th inuiion is sraighforard: highr saving ra, produciviy of capial-innsiv chnology and rurn of sorag capial ill bnfi h poor in long-run bcaus h rich fac a dcrasing rurn o scal chnology. Th abov discussions ar summarizd in h folloing proposiion: Proposiion 3: Undr a CAF sragy, h lss-dvlopd counris ill xprinc four sandard phass during hir dvlopmn procss. In h firs phas, popl migra from h agriculural scor o h urban labor-innsiv scor hich is 9 Similar o Brnhard and Lloyd-Ellis (000), cycls also may xis in our modl. 5

26 non as an urbanizaion sag. In h scond phas, only labor-innsiv chnology is adopd and h ag riss monoonically ih capial accumulaion, hich is dsignad as a capial-dpning sag. In h hird phas, boh labor-innsiv and capial-innsiv chnologis ar adopd. Th raio of capial-innsiv chnology monoonically incrass from 0 o in his phas and dsigna i as a ransiion sag. In h final phas, only capial-innsiv chnology is usd and h counry achivs an advancd conomy. During h dvlopmn procss, inqualiy bn h nrprnur and h orr/farmr dcrass monoonically bcaus h poor bnfi from h rising ag ra. Long-run inqualiy is an incrasing funcion of, a dcrasing funcion of h saving ra, h produciviy of capial-innsiv chnology and h rurn of sorag capial. S h Appndix for h proof. 5. Sady Sa and Dynamics undr a sragy As in h prvious scion, focus on h phass hr capial-innsiv chnology is non-viabl, ha is < q q. In ohr ords, if h conomy has nrd h phas ih q q, hr is no axt afrards as h govrnmn dos no nd o subsidiz h capial-innsiv chnology. Thrfor, afr h counry achivs an advancd conomy, h dynamics and sady sa is h sam as ha undr a CAF sragy. Hovr, hhr h conomy can achivs an advancd conomy or no dpnds on h dgr of sragy. I is shon ha h conomy may b rappd in h urbanizaion, capial-dpning or ransiion phas hn h dgr of sragy is high nough, and inqualiy is grar han ha undr a CAF sragy. Formally, hav lmma 3: Lmma 3: Whn T ( αr) > α( q r) for som [, q q), h conomy may b rappd in h phas of urbanizaion ( = ) or capial-dpning and 6

27 ransiion ( > ), ih =. G dgnras o a o-poin disribuion ih α( T) α[( q r) T] suppor =, = αr αr. Th labor mar clar condiion should b saisfid ha N γ *( N) (hn = ) or N = γ *( N ) (hn > ). Long-run inqualiy is givn by I = /, hich is incrasing ih h dgr of sragy, dcrasing ih long-run ag ra inqualiy undr a sragy is grar han ha undr a CAF sragy.. Long-run hr and ar h alh lvl of orrs and nrprnurs a sady sa. N and N ar h quaniy of orrs and nrprnurs a sady sa. γ [, ) is an indx of h shar of capial-innsiv chnology. S h Appndix for h proof. Th dynamic pah undr a sragy is much hardr o characriz. For comparison, focus on h cas ha h conomy is no rappd in h urbanizaion, capial-dpning and ransiion phas. In ohr ords, ill characriz h shor-run ffcs of a sragy hn h long-run dvlopmn prformanc and inqualiy ar h sam undr diffrn dvlopmn sragis. Th propry of h dynamic pah undr a sragy is summarizd in lmma4: Lmma 4: Undr a sragy, i as a longr im for h conomy o b urbanizd han undr a CAF sragy. Th highr h dgr of sragy, h longr h im ill b. Inqualiy ill ris during h urbanizaion, capial-dpning or ransiion phass hn h dgr of sragy is high nough. S h Appndix for h proof. In fac, h spd of urbanizaion dpnds on h alh accumulaion spd of h nrprnurs and h labor absorpion for ach uni of capial. Th alh accumulaion spd of h nrprnurs undr a sragy is slor han ha undr a CAF sragy, as h nrprnurs fac a ax from h govrnmn. Th 7

28 capial-innsiv chnology also absorbs lss labor for ach uni of capial. Boh ffcs rap h conomy in h urbanizaion phas for a much longr im undr a sragy. Th abov discussion is summarizd in proposiion 4: Proposiion 4: Undr a sragy, h conomy may b rappd in h urbanizaion, capial-dpning or ransiion phass hn h dgr of sragy is high nough. Th long-run inqualiy undr a sragy is grar han ha undr a CAF sragy, and a highr dgr of sragy ill lad o grar long-run inqualiy. I as a longr im for h conomy o b urbanizd undr a sragy han ha undr a CAF sragy. Th highr h dgr of sragy, h longr h im ill b. Inqualiy may ris during h phas urbanizaion, capial-dpning or ransiion phass, and Kuzns invrs U curv appars during h dvlopmn procss hn h dgr of sragy is high nough. 6. Concluding rmars This papr xplors h rol of dvlopmn sragy on inqualiy hrough is ffc on h labor mar. If h govrnmn follos a CAF sragy, h orrs/farmrs ill bnfi from h rising ag ra during h dvlopmn procss. If h govrnmn adops a sragy, i nds o collc ax from h conomy in ordr o subsidiz firms ho choos h capial-innsiv chnology, hich hur boh h poor and h rich dircly. Hovr, a sragy rducs labor dmand, and hrby rsuls in lor quilibrium ag, hich hurs h poor bu bnfis h rich indircly. Thrfor, h orrs/farmrs ill b sricly ors off undr sragy hil h nrprnurs may b br off. As h modrn chnology has h propry of dcrasing rurn o scal, poor conomic prformanc and highr inqualiy ill aris undr a sragy bcaus h poor suffrs much mor han h rich. Th mos imporan implicaion of his papr is ha h govrnmn of an LDC plays an spcially imporan rol, for good or bad, in h counry s conomic 8

29 prformanc and inqualiy. As Lis (955, p. 376) has nod, No counry has mad conomic progrss ihou posiiv simulus from inllign govrnmns, On h ohr hand, hr ar so many xampls of h mischif don o conomic lif by govrnmns Hr ould li o propos ha, for h govrnmn in an LDC o b an inllign on, is mos imporan as is o g h dvlopmn sragy righ! In his papr, highligh h ffc of chnology choic, hich is drmind by a govrnmn s dvlopmn sragy, on inqualiy. Th dvlopmn sragy pursud by h govrnmn also shaps h qualiy of ohr insiuions and h incniv srucur in h conomy (Lin, 007). Th rdisribuion policy anohr imporan funcion of govrnmn, hich is discussd in h prvious paprs (Aghion and Bolon997, Banrj and Nman993) can also hav an imporan ffc on conomic prformanc and inqualiy. Rfrncs: Aghion Philipp and Bolon Paric, (997), "A Thory of Tricl-Don Groh and Dvlopmn", Rvi of Economic Sudis, 64: 5-7 Banrj V. Abhiji and Nman F. Andr, (993), "Occupaional Choic and h Procss of Dvlopmn ", Journal of Poliical Economy, 0:74-98 Basu Susano and Wil N. David, (998), "Appropria Tchnology and Groh" Quarrly Journal of Economics, 3: Brnhard, D., Lloyd-Ellis, H., (000), "Enrpris, Inqualiy and conomic dvlopmn". Rvi of Economic Sudis, 67(), Galor Odd and Zira Josph, (993), "Incom Disribuion and Macroconomics", Rvi of Economic Sudis, 60:35-5 Ghaa,M. and N. Nin-Hui Jiang, (00), "A simpl modl of Inqualiy, Occupaional Choic and Dvlopmn," Journal of Dvlopmn Economics, 69:05-6 Harris, John and Michal Todaro, (970), "Migraion, Unmploymn and Dvlopmn", Amrican Economic Rvi, 60: 6-4 Kuzns, S., (955), "Economic Groh and incom inqualiy", Amrican Economic 9

30 Rvi, 45, -8. Lis, W.A., (954), "Economic Dvlopmn ih Limid Supplis of Labor", Manchsr Schools, : 43-7 Lin Jusin Yifu and Guofu Tan, (999),"Policy Burdns, Accounabiliy, and h Sof Budg Consrain", Amrican Economic Rvi, Vol. 89, No., Paprs and Procdings of h On Hundrd Elvnh Annual Ming of h Amrican Economic Associaion, pp Lin Jusin Yifu, Fang Cai and Zhou Li, (998), "Compiion, Policy Burdns, and Sa-Ond Enrpris Rform", Th Amrican Economic Rvi, Vol. 88, No., Paprs and Procdings of h Hundrd and Tnh Annual Ming of h Amrican Economic Associaion, pp Lin Jusin Yifu, (003),"Dvlopmn Sragy, Viabiliy, and Economic Convrgnc", Economic Dvlopmn and Culural Chang, 5: 77 Lin, J. Y. and Chn, B., (007a), Dvlopmn Sragy, Financial Rprssion and Inqualiy. Woring papr Lin, J. Y. and Chn, B., (007b), Dvlopmn Sragy, Urbanizaion and Rural-Urban Inqualiy in China. Woring papr Lin, J. Y. and Li, F., (003), "Dvlopmn Sragy and Insiuions in h Lss-dvlopd Counris". Woring Papr Lin, J. Y. and Liu, M. (003), "Economic convrgnc and incom disribuion in China". World Economy (China),6(8),3-3 Lin, J. Y. and Liu, M.(004). "Dvlopmn Sragy, Transiion and Challngs of Dvlopmn in Lagging Rgions". In F. Bourguignon and B. Plsovic (ds), Annual World Ban Confrnc on Dvlopmn Economics 004: Acclraing Dvlopmn (Bangalor confrnc procdings), Washingon DC: World Ban. Lin, J. Y. and Liu, P., (003), "Dvlopmn Sragy, Equiy and Efficincy". Quarrly Journal of Economics (China),,(), January, Lin, J. Y. and Xu, Z., (007), "Dvlopmn Sragy and Economic Groh". Woring Papr Lin, J. Y. and Zhang, P., (007a), "Dvlopmn Sragy and Economic Insiuions in 30

31 Lss-dvlopd Counris". CID Gradua Sudn and Posdocoral Fllo Woring Papr, (7), March. Harvard Univrsiy. Availabl from CID Harvard Univrsiy: hp://.cid.harvard.du/cidp/grad/07.hm Lin, J. Y. and Zhang, P., (007b), "Dvlopmn Sragy, Opimal Indusrial Srucur and Economic Groh in Lss-dvlopd Counris". CID Gradua Sudn and Posdocoral Fllo Woring Papr, (7), Jun. Harvard Univrsiy. Lin, Jusin Yifu, Fang Cai, and Zhou Li., "China s Miracl: Dvlopmn Sragy and Economic Rform", Shanghai. Shanghai Sanlian Prss, 994 (Chins diion) and 999 (Rvisd Chins diion); and h Chins Univrsiy of Hong Kong Prss, 996 (English diion) and 003(Rvisd English diion). Rodri Dani, (005), Groh Sragis, in Philipp Aghion and Svn N. Durlauf ds., Handboo of Economic Groh, vol., chapr 4, Amsrdam: Elsvir Scinc Publishrs (Norh-Holland), pp Romr, J.E., (98), "A Gnral Thory of Exploiaion and Class". Havard Univrsiy Prss, Cambridg, MA. Appndix Proof of Proposiion Undr CAF sragy, h uniqunss of is nsurd as i, is monoonically dcrasing ih for i =,. i) G ( ) [ d + d G ], hr,, G( ) ( ), = q r Suppos som agn choos capial-innsiv chnology, hich implis q q. W hav, >, q q and,,, q q >,,, >, hn, G ( ) > G ( ) [ d + d ] >[ d + d ],, G( ) ( ) ( ) ( ), G G G, G ( ) > G ( ) > G ( ) [ d + d ] >[ d + d ] >[ d + d ],,, G( ) G( ) G( ) G( ) G( ) G( ),,, K 3

32 This implis ha hr is xcss labor supply, hich is conradicing ih q q. Thn only h labor-innsiv chnology is chosn by h nrprnur, and h xcss labor supply drivn h ag o subsisnc lvl. ii) ] G ( ) < [ d + d ]& G ( ) [ d + d, G( ) ( ), ( ) ( ), G q q G G, q q q q q q hr = = = q ( q q ) r q ( q q ) r, q q, q q Suppos som agn choos capial-innsiv chnology, hich implis q q. W hav, >, q q and,,, q q >,,, >, hn, G ( ) > G ( ) [ d + d ] >[ d + d ],, q q G( ) G( ) G( ) G( ), q q, G( ) > G( ) [ d + d ] >[ d + d ] >[ d + d,, q q G( ) G( ) G( ) G( ), q q, q q, G( ) G( ) ] This implis ha hr is xcss labor supply; ha is, suppord as quilibrium ag. q q can no b Thn only h labor-innsiv chnology is chosn by h nrprnur, and h quilibrium ag is drmind by h labor mar claning condiion: G ( ) [ d + d = ], G( ) ( ), G iii) ] [ d + d ] < G ( ) = G ( ) < [ d + d G( ) ( ),, ( ) ( ), q q G q q q q G G, q q Suppos > q q, hn all h agn ill choos h capial-innsiv chnology,, = G( ) ( ), G ]. hich implisg ( ) [ d + d Hovr, G ( ) G ( ) [ d + d ]<[ d + d, q - q, G( ) ( ) ( ) ( ), G G G, q - q < = ] 3

33 Conradic ih G ( ) [ d + d > ], q - q G( ) ( ), q - q G. Suppos < q q, hn all h agn ill choos h labor-innsiv chnology,, = G( ) ( ), G ]. hich implisg ( ) [ d + d Hovr, G ( ) G ( ) [ d + d ]>[ d + d, q - q, G( ) ( ) ( ) ( ), G G G, q - q > = ] Conradic ihg ( ) [ d + d < ], q - q G( ) ( ), q - q G. Tha is, = q q. W no sho ha boh h capial-innsiv and h labor-innsiv chnology ar adopd. If only h capial-innsiv chnology is mployd, Thn, G ( )=[ d + d, q q G( ) G( ), q q ], conradicion. If only h labor-innsiv chnology is mployd, Thn, G ( ) [ d + d, q q G( ) G( ), q q < ], conradicion. iv) G ( ) [ d + d, q q G( ) G( ), q q ] ( q r) W dno as h ag ra ha mas h individuals ih alh lvl + [, + ) o b indiffrn bn bing an nrprnur and a orr; suppos h maximum invsmn scal is larg nough ha > q q. W can sho ha ( q q, ], and all h nrprnurs ill choos capial-innsiv chnology undr his cas: 33

34 Suppos som agn choos labor-innsiv chnology, hich implis q q. W hav, >, q q and,,, q q >,,, >, hn, G( ) G( ) [ d + d ] [ d + d ]<*[ d + d,, q q G( ) G( ) G( ) G( ), q q,, G( ) G( ) G ( ) G ( ) [ d + d ] [ d + d ],, q q G( ) G( ), q q, G( ) G( ) ] This implis ha hr is xcss labor dmand if labor-innsiv chnology is adopd, ha is, q q can no b suppord as quilibrium ag. Hovr, h ag ra canno gro ihou bound. Th maximum invsmn scal pu a naural uppr ( q r) bound for h ag: ( q r )* = =. A ag ra lagr han + ill ma all h popl prfr o b orrs, hich canno xis in quilibrium. Thn only h capial-innsiv chnology is chosn by h nrprnur, and h quilibrium ag ( q q, ], hich is drmind by h labor mar claning condiion: G ( ) = [ d + dg ] QED, G( ) ( ), Proof of Lmma: For h lss-dvlopd counris ih scarc capial, sh/h ill choos labor-innsiv chnology undr CAF sragy, and h quilibrium ag ra is drmind by: G (, ) = [ d ( ) + ( )] if G dg >, G (, ) [ dg( ) + dg( ) ] if =, If sh/h chooss sragy, h quilibrium ag ra is drmind by: 34

35 G(, ) = [ d ( ) + ( ) ] + =[ ( ) + ( )] if G dg s s dg dg s,, > G(, ) [ dg( ) + dg( ) s] + s [ dg( ) + dg( ) ] s if =,, = Uniqunss of is nsurd as, and s is monoonically dcrasing ih. Obviously, labor dmand undr sragy is lss han ha undr ha undr CAF sragy, hich implis h ag ra undr sragy is no mor han ha undr CAF sragy. Morovr, a highr dgr of sragy implis a lor labor dmand, hich rsuls in a lor ag ra. QED Proof of Lmma: W ill prov ha h lfar loss is sricly dcrasing ih alh lvl firs. For h agn ih alh lvl (, CAF ), hr/his lfar loss is,, L = [ + r ] [( q ) T] = ( q r) +T CAF CAF L is sricly dcrasing as ( q r) >0. For h agn ih alh lvl ( CAF, ), hr/his lfar loss is, L = [( q ) ] [( q ) T] = ( ) +T CAF CAF CAF L is sricly dcrasing as ( ) < 0. For h agn ih alh lvl (, + ), hr/his lfar loss is L= [( q ) + r ( )] [( q ) + r ( ) T] = ( ) + T CAF CAF L is consan. CAF L is coninuous a CAF as ( CAF + r ) CAF = q, CAF.,, L is sricly dcrasing on [, ), and p consan on [, + ), 35

36 For h agn ih alh lvl =, L = [ + r ] [( q ) T ] = + T >0 CAF CAF,, For h agn ih alh lvl = L= [( q ) ] [( q ) T] = ( ) + T < 0 CAF CAF as is larg nough. * Th xisnc and uniqunss of is provd. QED Proof of proposiion3: )Four Phass of Dvlopmn Phas: G ( ) [ d + d ], G( ) ( ), G For h orrs: α, < q r αr Assumpionα( q q) > α( q ) > is usd o driv h scond inqualiy. I is asy o sho ha = α( r + + ) >. For h nrprnurs ih alh lvl (,, ]: = α[( q ) ] > as α( q + ) > For h nrprnurs ih alh lvl (, + ], hir labor dmand dos no chang in his phas. This implis + + [ d + d ]>[ d + d ] G+ ( ) G ( ) G( ) G ( ), +, 36

37 G ( ) G ( ) +,, This implis mor and mor popl ill migra o h urban ara du o capial accumulaion in h urban ara. Phas : ] G ( ) < [ d + d ]& G ( ) [ d + d, G( ) ( ), ( ) ( ), G q q G, q q G A any givn da >, h ag, ill sho ha > + : For h orrs: From assumpion3, hav: α( q ( q q)) > α( q ) > for (, q q ),hn hav: α, < q r αr I is asy o sho ha = α( r + + ) >. For h nrprnurs ih alh lvl (,, ]: α q α q = [( ) ] > as ( + ) > For h nrprnurs ih alh lvl (, + ], hir labor dmand dos no chang in his phas. This implis + + [ d + d ]>[ d + d ] G+ ( ) ( ) ( ) ( ), G + G G, G ( ) G ( ) +,, [ d ]> G ( ) G+ ( ) +,, 37

38 > + Phas3: ] [ d + d ] < G ( ) = G ( ) < [ d + d G( ) ( ),, ( ) ( ), q q G q q q q G G, q q For h orrs: From assumpion3, hav: α( q ( q q)) >, hn hav: q q α( q q), q q < q ( q q ) r αr I is asy o sho ha = α( r + + ) >. For h nrprnurs ih alh lvl (,, q- q ]: = α[( q ( q q)) ] > as α( q ( q + q)) > For h nrprnurs ih alh lvl (, + ], hir labor dmand dos no chang in his phas. This implis + + ] γ [ d + d ]> γ [ d + d G+ ( ) ( ) ( ) ( ), q q G + G, q q G G ( ) G ( ) +, q q, q q [ + γ ]> dg ( ) dg ( ) G +, q, q q + + q + ( ) γ < γ + 38

39 Phas4: G ( ) [ d + d, q q G( ) G( ), q q ] W ill sho ha + >, hn < q : α For h orrs: W hav: α( q ) > as < q,hn hav: α α q r αr, < I is asy o sho ha = α( r + + ) >. For h nrprnurs ih alh lvl (,, ]: α q α q = [( + ) ] > as ( ) > For h nrprnurs ih alh lvl (, + ], hir labor dmand dos no chang in his phas. This implis + + [ d + d ]>[ d + d ] G+ ( ) ( ) ( ) ( ), G + G G, G ( ) G ( ) +,, [ d ]> G ( ) G+ ( ) +,, + > ) Dynamics of Inqualiy For h nrprnurs ih alh lvl (,, ]: 39

40 ( q ) ( q ) I / I < or I / I < CAF CAF CAF CAF + + CAF CAF + +,, =,, = CAF CAF r r For h nrprnurs ih alh lvl (, + ]: I CAF CAF [( q ) + r( )]/ [( q ) ]/ / I = < < CAF CAF ( + r )/ ( + r )/ CAF CAF,, [( q ) + r( )]/ [( q ) ]/ < CAF CAF CAF CAF or I / <, I, = CAF CAF + + ( + r )/ ( + r )/ CAF CAF Tha is, I for any, < I, < CAF + j. QED + +, + Proof of Lmma3: i) W nd o sho ha {, G } can b suppord as a sady sa. Whn = T ( αr) α( T) > < α( q r) αr ( q r) This implis ha h poor ill choos o b orr/farmr. α( T) = αr α[( q r) T] and = αr implis h orrs and nrprnurs alh is saionary as = α( r + ) and T = α[( q ) + r( ) T ] If N N * is saisfid, h labor mar claring condiion is nsurd and his cas can b suppord as a sady sa. Whn (, q q) T ( αr) α( T) > < α( q r) αr ( q r) 40

41 This implis ha h poor ill choos o b orr/farmr. α( T) = αr α[( q r) T] and = αr implis h orrs and nrprnurs alh is saionary as = α( r + ) and T = α[( q ) + r( K) T ] If N = N * is saisfid, h labor mar claring condiion is nsurd and his cas can b suppord as a sady sa. ii) Long-run inqualiy undr diffrn dvlopmn sragis ( q r) T I = / = T Obviously, I is incrasing int,and dcrasing in, hn: ( q r ) T ( q r ) ( q ( q q) r ) I = > > T ( q q ) ( q r) ( αr ) α ss > = ss ss = I ss Th firs and scond inqualiis us h facs ha I is incrasing in T,and dcrasing in ; h hird inqualiy us h fac ha ss ss q ( q q) = q ( q q) > q and > q q. Th nx qualiy uss h fac ha QED ss = q. α Proof of Lmma 4: i) Th im for urbanizaion Th phas of urbanizaion is finishd hn G ( ) = [ d + Kd G ] undr, G( ) ( ), CAF sragy, and G ( ) [ d + d ] undr sragy. This = s, G( ) G( ), 4

42 implis ha larg oal nrprnur alh is ndd for h conomy o b urbanizd. For givn iniial alh disribuion, i is sufficin o prov ha h oal alh lvl of nrprnurs is larg undr CAF sragy han ha undr sragy a any im. Th oal alh of nrprnurs dpnds on h alh of ach nrprnur and h quaniy of nrprnurs. Th alh of any nrprnur is drmind by h alh accumulaion funcion of h nrprnurs; h quaniy of nrprnurs a is drmind by h amoun of orrs a ho choos o b nrprnurs a, hich in urn drmind by h alh accumulaion funcion of h orrs. Thrfor, i is sufficin o sho ha alh accumulaion spd of h nrprnurs and orrs ar highr undr CAF han hos undr. Undr CAF sragy, alh accumulaion spd of h nrprnurs is = α[( q ) ] ; ha of + orrs is = α( r + ). Undr sragy, alh accumulaion spd of h + nrprnurs is = α[( q ) + T] ; ha of orrs is = α( r + + T). Obviously, alh accumulaion spd of h nrprnurs and orrs ar highr undr CAF han hos undr. Th largr T is, h lor h alh accumulaion spd, h longr h im i as for urbanizaion. ii) Dynamics of inqualiy Undr sragy, a h urbanizaion and capial-dpning phas, h dynamics of inqualiy is givn by: I ( q ) T CAF CAF CAF + + /, I, = CAF r T I / I,, + + [( q ) + r( ) T]/ + + = CAF ( + r T)/ CAF CAF Obviously, I / I,, CAF + + is incrasing int, hich implis ha inqualiy may ris hnt is larg nough. Tha is, inqualiy may ris a h phas of urbanizaion and capial-dpning hil drop a h phas of ransiion and advancd, hich is a sandard Kuzns invrs U curv. QED 4