Optimal Development Strategies in a Labor-Surplus Economy with Increasing Returns: Is Industrialization Desirable at All?

Abstract

The authors analyze the problem of optimal development strategies in a labor-surplus economy, where manufacturing production is subject to a convex-concave production function. Our contribution is to provide a rigorous proof of the existence of a critical value of capital such that industrialization is optimal if the initial stock of capital is above the critical value, whereas nonindustrialization is optimal if the initial capital stock is below the critical value.