Transitional Growth Paths in Developing Economies

This paper develops model of growth in an economy where the capital stock is rationed across labour inputs, as in the dual, or segmented, labour market literature on developing economies. In this economy, the increased use of labour in the formal sectors can sustain high marginal and average products of capital and high growth rates for periods of 15-30 years. This provides an interesting insight into the current growth and convergence debate. The model is shown to overcome the empirical problems of the standard Ramsey growth model and also avoids some recent criticisms of endogenous growth models.