Dualism and Growth in Transition Economies: A Two-Sector Model with Efficient and Subsidized Enterprises

We develop a growth model distinguishing between a private sector that generates learning-by-doing and technological spillovers and a sector of technologically obsolete and subsidised state-owned enterprises. This distinction allows us to trace the inescapable dual-economy stage of development observed in transition economies. While in some of them this stage was rather brief, laggard reformers continue to display this pattern. The model predicts that the larger the initial fraction of the workforce employed in the obsolete sector and the stronger the politico-ideological hostility towards reform, the lower will be the speed of convergence to the income level of the most advanced countries.