The Race between Lewis and Malthus
Is a delayed fertility transition an obstacle to structural change? This paper explores a mechanism based on differential demographic behavior across sectors. If the fertility transition is less advanced among households in the traditional sector and there are frictions in intersectoral mobility, then the traditional sector has a “demographic advantage” over the modern sector. In particular, if there are spillovers from income in the modern sector to households in the traditional sector, which occurs especially when the rise of the modern sector occurs through temporary migration, then the rise of urban productivity fuels rural demographic growth. The early development process is thus the result of two contradictory forces: the Lewisian absorption of surplus rural labor in productive industries and its Malthusian regeneration. Based on this intuition, this paper develops a novel model of “structural stationarity” that explains the slow pace of structural change observed in a variety of contemporary and historical contexts in countries at an early stage of development. In particular, the model parameters are estimated on a new panel of wage, employment, and demographic data for colonial India.