Stagnation or transformation of a dual economy through endogenous productivity growth

A growth model is developed for an open dual economy. The economyexpands owing to a higher growth rate of labour productivityin the modern sector through the Kaldor–Verdoorn channeland higher effective demand through a Keynesian channel. Themodel incorporates a retardation mechanism affecting the slopesof productivity and output growth schedules as labour surplusand economies of scale diminish. A wage-led or profit-led regimeand initial conditions may give rise to: de-industrializationin terms of both output and employment; a growth trap sustaininga situation of structural heterogeneity; or sustainable employmentand adequate output and productivity growth.