SOCIAL DUALISM

J.H Boeke,1 a Dutch economist, has been one of the pioneers who developed a distinctive theoryapplicable only to underdeveloped countries. His theory of “social dualism” is a general theoryof economic and social development of underdeveloped economies based primarily on hisstudies of the Indonesian economy.Meaning. Dr. Boeke maintains that there are three characteristics of a society in the economicsense. They are the social spirit, the organizational forms and the technique dominating it.Their inter-dependence and interrelation are called the social system or social style. A society ishomogeneous where only one social system prevails. But a society may have two or more socialsystems simultaneously. It is then a dual or plural society. Boeke reserves the term “dual society”for “societies showing a distinct cleavage of two synchronic and full grown social styles whichin the normal, historical evolution of homogeneous societies are separated from each other bytransitional forms, as, for instance, precapitalism and high capitalism by early capitalism.”2

1. J.H., Boeke, Economics and Economic Policy of Dual Societies, 1953: ‘Three Forms of Disintegration inDual Societies,’ Indonesia. April 1954; and ‘Western Influence on the Growth of Eastern Population.’Economics Internationale, May 1954.

2. Ibid., p. 43.

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214 The Economics of Development and Planning

Such a dual society is characterized by the existence of an advanced imported western systemand an indigenous precapitalist agricultural system.The former is under western influence and supervision, which uses advanced techniques andwhere the average standard of living is high. The latter is native with low levels of techniqueeconomic and social welfare. Boeke calls it “social dualism” and defines it as “the clashing of animported social system with an indigenous social system of another style. Most frequently theimported social system is high capitalism. But it may be socialism or communism just as well,or a blending of them.“3

Characteristics of Dualistic Society. Boeke gives the economic theory of a dualistic society “todescribe and to explain the economic interactions of two clashing social systems,” which heterms ‘dualistic economies’ or ‘eastern economics.’ He bases his theory largely on the Indonesianexperience.There are certain characteristics of the eastern sector of a dualistic economy which distinguishesit from a western society. The needs of an eastern society are limited. People are satisfied whentheir immediate needs are met. “When the price of coconut is high the chances are that less ofthe commodities will be offered for sale; when wages are raised the manager of the estate risksthat less of the work will be done; if three acres are enough to supply the needs of the householda cultivator will not till six; when rubber prices fall the owner of a grove may decide to tap moreintensively, whereas high prices may mean that he leaves a larger or smaller portion of tapabletrees untapped.4 This is because people are influenced more by social rather than economicneeds. Goods are evaluated according to their prestige value rather than value-in-use. It is,therefore, not surprising that eastern economies are characterized by backward-sloping supplycurves of effort and risk-taking.Native industry has practically no organization, is without capital, technically helpless andignorant of the market. People indulge more in speculative activities rather than in regularprofit-giving enterprises. They do not believe in capital investments attended by risks. Theylack initiative and organizational skill characteristic of the western sector of a dual society.They are fatalists and hesitate to use modern technology. Labour is “unorganized, passive,silent, casual” and unskilled. People are reluctant to leave the village community. Migrationwithin the country and immigration take place through state intervention. Urban developmenttakes place at the cost of rural life. Export is the main objective of foreign trade in easternsociety as distinct from a western society where it is the only means which makes importspossible.Inapplicability of Western Economic Theory. These distinctive features of an eastern societymake western economic theory totally inapplicable to underdeveloped economies. Accordingto Boeke, western economic theory is meant to explain capitalistic society, whereas the easternsociety is pre-capitalistic. The former is based on unlimited wants, a money economy, anddifferent types of cooperative organisations. Moreover, it is wrong to apply the marginalproductivity theory of distribution to explain the allocation of resources or the distribution ofincome in an underdeveloped economy because of the immobility of resources in such a society.Boeke, therefore, warns that “we shall do well not to try to transplant the tender, delicate hot-house plants of western theory to tropical soil, where an early death awaits them.”5 Thus it is

3. Ibid., p. 144.4. Ibid., p. 405. Ibid., p. 143

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not possible to apply the same policy for the whole economy because what is beneficial for onesociety may be harmful for the other.Since eastern economies are dualistic in character, any effort to develop their pre-capitalisticagriculture along western lines will prove not only abortive but may also cause retrogression.Change in the mental attitudes of farmers is essential for the introduction of modern agriculturaltechniques, otherwise increase in wealth following them will result in further growth ofpopulation. If, however, western technology fails the result will be increased indebtedness.Therefore, their existing agricultural system should not be disturbed, for it could hardly beimproved upon.In the industrial field, the eastern producer cannot adapt himself to his western counterpart“technologically, economically or socially.” If the former tries to imitate the latter, he will sufferin doing so. In support of his argument, Boeke cites the Indonesian case where the adoption ofwestern technology to industrialize the Indonesian economy has moved the goal of self-sufficiency farther and ruined its small industry.Boeke refers to five kinds of unemployment in underdeveloped countries: seasonal, casual,unemployment of regular workers, unemployment of the white collared, and unemploymentof Eurasians. He believes that “it is not within the power of the government to remove them asit would entail a financial burden far beyond the government’s means.”In underdeveloped countries, limited wants and limited purchasing power hamper all economicdevelopment. Increase in food supply or industrial goods will bring a glut of commodities inthe markets with the consequent fall in prices and to depression. This does not mean that Boekeis averse to all industrialization and agricultural improvements. Rather, he is in favour of aslow process of industrializaion and agricultural development on a small scale, adapted to thedualistic structure of eastern society. The urge for development should come from the peoplethemselves. New leaders must emerge who should work towards the goal of economicdevelopment with faith, charity and patience.6

A Critical AppraisalBoeke’s theory of dualistic development has been severely criticised by Prof. Benjamin Higgins7

on the following grounds:1. Wants not Limited. Boeke’s contention that people in underdeveloped economies have limitedwants or backward-sloping supply curves of effort and risk-taking is not borne out by theexperience of Indonesia itself. Both the marginal propensity to consume and to import are highthere. People do not have limited needs, rather there is a great demand for both domestic andimported semi-luxuries. To restrict their demand the Indonesian Government have to imposeimport restrictions. This is not peculiar to Indonesia alone. Even the Indian authorities haveadopted rigorous import and exchange controls to restrict the illegal inflow of semi-luxuries. Agood harvest in India results in a spate of orders for radios, transistors, bicycles, watches, etc.2. Casual Labour not Unorganised. Boeke’s characterization of the eastern casual worker asunorganized, passive, and silent is “inconsistent with the growing strength of organised labourin Indonesia, India and elsewhere.” Casual labour may not be fully organised in agriculturebut in tea, coffee, and rubber plantations, the trade union movement is the strongest in sucheconomies.

6. Boeke, Western Influence on the Growth of Eastern Population, pp. 366-69.7. B. Higgins, “The Dualistic Theory of Underdeveloped Areas,” Economic Development and Cultural Change,

January, 1956.

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3. Eastern Labour not Immobile. It is not possible to accept Boeker’s view that people in easterneconomies are reluctant to leave their village communities. In fact, city life, with all its attractionslike cinemas, shops, cafes, and sports events, has always led to migrations from rural areas.Congestion, unemployment and inadequate basic amenities found in larger towns are in turnthe consequence of the latter. Further, income incentives also lead to the movement of labourfrom one plantation to the other and even of casual workers from factories to rural areas duringthe harvesting season. Higgins opines that “I see no evidence that Oriental labour is ‘intrinsically’more immobile than western labour.”4. Not Peculiar to Underdeveloped Economies. Boeke ascribes his dualistic theory only toeastern economies though he himself admits that social dualism also exists in underdevelopedeconomies of Africa and Latin America. But it is not peculiar to underdeveloped areas only. Itexists in Italy, Canada and even in the United States. Rather every economy “can be dividedinto distinct regions, with different degrees of technological advance.”5. Applicable to Western Societies. Many of the specific characteristics of the eastern societydescribed by Boeke, seem to Higgins to be attributable to western societies as well. Wheneverchronic inflation exists or threatens western economies, people prefer speculative profit to long-term investments. “Western economists,” according to Higgins, “have recently developed awhole field of analysis relating to ‘liquidity preference’ and ‘safety-preference’ to take accountof the reluctance of investors the world over to accent risk or illiquidity, and their strongpreference for keeping their capital in safe and liquid form.”Further, Boeke’s contention that people in eastern economies buy goods for prestige-value attachedto them rather than for use value is equally true in the case of western economies. Were it notso, the term “conspicuous consumption” would not have been coined by Veblen for the Americansociety.Even the backward-sloping supply curve of effort is not peculiar to eastern economies but wasexperienced by Australia during the post-war period and in the United States in the 1950’s.Prof. Higgins contends that “this backward-sloping supply curve... appears in any society whichstagnates (or slows down) long enough to weaken the “demonstration effect,” provided bypeople moving from one standard of living to another, as a result of their own extra effort,directed specifically towards earning additional income.”6. Not a Theory but Description. Dr. Boeke fails to provide a distinctive economic and socialtheory for underdeveloped economies. His dualistic theory is merely a description of easternsociety in which he tries to demonstrate the peculiar features of an eastern society that must notbe developed on western lines. Boeke’s contention that western economic theory is inapplicableto eastern societies is based on the neo-classical theory which has limited applicability even inthe western world.7. Tools of Western Economic Theory Used in Eastern Societies. Some of the tools of westerneconomic theory underlying monetary and fiscal policies and those aimed at removing balanceof payments disequilibrium are applicable to eastern societies with slight variations. Prof.Higgins believes that the solution to the problem of underdevelopment can be found ‘byapplying familiar tools of economic and social analysis, within a model defined by appropriateinstitutional assumptions.’8. Does not Provide Solution to the Problem of Unemployment. Boeke’s dualism centres moreon socio-cultural aspects rather than on economic. He regards unemployment of various typesas “beyond the reach of government help,” and makes no mention of underemployment whichis a dominant feature of densely populated underdeveloped economies. This is a big lacuna inBoeke’s dualistic theory.

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Conclusion. In fact, the important problem in dualistic economies is one of providing adequateemployment opportunities to the existing and perspective underemployed labour force. Thishas led to the development of the theory of technological dualism by Higgins which “looks toresource endowments and differences in the production functions in the two sectors as thebasis of a ‘technological dualism’ which in turn has resulted in an inadequate number of openingsfor productive employment.” This is a more realistic dualistic theory than Boeke’s, for it analysisthe effects of a dualistic society on the pattern of development.

TECHNOLOGICAL DUALISM

As an alternative to Boeke’s social dualism, Prof. Higgins8 has developed the theory oftechnological dualism. Technological dualism implies the use of different production functionsin the advanced sector and the traditional sector of an underdeveloped economy. The existenceof such dualism has accentuated the problem of structural or technological unemployment inthe industrial sector and disguised unemployment in the rural sector. Higgin’s theory oftechnological dualism incorporates the factor proportions problem9 as discussed by R.S. Eckausand is related to limited productive employment opportunities found in the two sectors of anunder developed economy because of market imperfections, different factor endowments andproduction functions.In fact underdeveloped countries are characterized by structural disequilibrium at the factor level.“Disequilibrium at the factor level may arise either because a single factor, receives differentreturns in different uses or because price relationships among factors are out of line with factoravailabilities.” Such disequilibrium leads to unemployment or underemployment in two waysin underdeveloped countries, according to Dr. Eckaus.One, imperfections in or malfunctioning of the price system.Two, limitations in the existing technology or the structure of demand leading to surplus labourin densely populated backward countries. Thus technological unemployment in anunderdeveloped country may refer to surplus labour arising from malallocation of resources,the structure of demand and technological restraints.Higgins builds his theory around two goods, two factors of production and two sectors withtheir factor endowments and production functions. Of the two sectors, the industrial sector isengaged in plantations, mines, oil fields, refineries, or large scale industry. It is capital-intensiveand is characterized by fixed technical coefficients. In other words, there is no technicalsubstitutability of factors which are combined in fixed proportions. The rural sector is engagedin producing foodstuffs and handicrafts or very small industries. It has variable technicalcoefficients of production so that it can produce the same output with a wide range of techniquesand alternative combinations of labour and capital (including improved land).The production function in the industrial sector is represented in Fig. 1. Units of labour aremeasured on the horizontal axis, and units of capital on the vertical axis.The curve Ql is an isoquant representing combination of OK of capital and OL of labour producinga certain level of output. The curves Q2, Q3 and Q4 represent higher levels of output which areonly possible by increasing the units of capital and labour in the same proportions. Thus pointsA, B, C and D show fixed combinations of capital and labour used to produce different levels of

8. B. Higgins, Economic Development, pp. 325-33.9. R..S. Eckaus, “The Factor Proportions Problem in Underdeveloped Areas,” in Aggarwal and Singh (ed.),

op. cit.

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output Q1, O2, O3, and Q4. The line OE joining these points is the expansion path of the industrialsector and its slope represents constant proportions of the two factors. The line K1L1 shows thatthe production process is capital-intensive, more capital isrequired to produce a given output relatively to labour. Toproduce Q1 output, OK units of capital and OL units of labourare used. If however, the actual factor endowment is at Sinstead of at A, it means that more labour units (OL1 ) areavailable to produce the same Q1 output, the units of availablecapital remaining the same (OK). Since there are fixedtechnical coefficients, the excess labour supply will not affectproduction techniques at all, LL1 units of labour will remainunemployed. It is only when capital stock increases to SF thatit is possible to absorb this excess labour supply in this sector,otherwise it will have to seek employment in the rural sector.In reality, however, technical coefficients are not so rigidlyfixed. Rather, they are somewhat flexible. The dottedcurvature of the isoquants indicates the possibilities of someflexibility in factor proportions. It shows very small changesin factor endownments for which entrepreneurs would not like to make drastic changes intechniques of production. Thus they would prefer to have fixed technical coefficients.The production function for the rural sector is shown in Fig. 2. The isoquant curves Q1, Q2, Q3and Q4 show variable coefficients of production. In order to produce more output, more labouris employed in relation to capital (improved land). Ultimately good land becomes scarce andall available land is cultivated by highly labour-intensivetechniques at point E where the maximum output level Qnis reached. Given the different production functions in thetwo sectors, Professor. Higgins analysis the processwhereby technological dualism has tended to increaseunemployment and disguised unemployment in the dualeconomies. Of the two sectors, the industrial sectordevelops and expands with the aid of foreign capital. Thusindustrialization leads to the growth of population muchin excess of the rate of capital accumulation in the industrialsector. Since this sector uses capital-intensive techniquesand fixed technical coefficients, it is not in a position tocreate employment opportunities at the same rate at whichpopulation grows. Rather industrialization may even bring,‘a relative decline in the proportion of total employmentin that sector.’ Thus the surplus labour has no other alternative except to seek employment inthe rural sector.Before the start of the expansion process, the rural sector has neither an abundance nor scarcityof factors of production. In the beginning, it may be possible to absorb the additional labourforce by bringing more land under cultivation. This leads to the optimal combination of labourand capital (improved land) as output increases. Eventually, good land becomes scarce. Theratio of labour to capital available in that sector rises steadily and since technical coefficientsare available, techniques become increasingly variable in this sector. For example, in many

O

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Asian countries, irrigated rice cultivation has been substituted for shifting dry rice cultivation.Ultimately, all available land is cultivated by highly labour-intensive techniques and the marginalproductivity of labour declines to zero or even below zero. Thus with continuing growth ofpopulation, disguised unemployment begins to appear. Under these circumstances, farmershave no incentive either to invest more capital or to introduce labour-saving technique. Besides,there is no available techniques to increase the output per man, and no incentive on the part oflabour to raise production by themselves. As a result, techniques of production, man-hourproductivity and socio-economic welfare remain at a low level in the rural sector.10

In the long run, technological progress does not help in removing disguised unemployment.Rather, it tends to augment it. Prof., Higgins contends that during the last two centuries little ortechnological progress has occurred in the rural sector while there has been rapid technologicalprogress in the industrial sector. This has tended to increase the number of the disguisedunemployed. The situation is further aggravated by keeping wage rates artificially high bytrade union activities or by government policy. For, high industrial wage rates relative toproductivity provide an incentive to entrepreneurs for introducing labour-saving techniquesand thereby diminish still further the capacity of the industrial sector to absorb surplus labour.Accordingly, these factors perpetuate the tendency towards technological dualism inunderdeveloped countries.11

A CRITICAL APPRAISAL

Prof. Higgins tries to present an historical evolution of the modern and traditional sectors leadingto a steady rise in underemployment in the latter sector. Technological dualism appears to besuperior to Boeke’s social dualism. It is realistic for it takes into account how disguisedunemployment gradually arises in the rural sector of the dualistic societies.Its Defects—But the theory is not without limitations.1. Coefficients not Fixed in Industrial Sector. Whereas production has taken place with variabletechnical coefficient in the rural sector, it is doubtful that production in the industrial sector hasbeen actually carried on with fixed coefficients. It is improper to assume fixed technicalcoefficients in the industrial sector without any empirical verification.2. Factor Prices do not Depend upon Factor Endowments. This theory indicates why factorendowments and different production functions have led to rise of disguised unemploymentin the rural sector. This is vitally connected with the pattern of factor prices. But factor prices donot solely depend on factor, endowments.3. Neglects Institutional Factors. Moreover, there are many institutional and psychologicalfactors that also influence factor proportions which have been neglected by Higgins.4. Neglects the Use of Labour Absorbing Techniques. Further, Higgins’ contention that highlycapital-intensive processes are imported for use in the industrial sector altogether neglects theuse of other techniques that are labour absorbing. All imported techniques are not labour-saving.For instance, the Japanese agricultural development cannot be attributed to the use of capital-intensive techniques. Rather, it was due to the application of better seeds, improved methods ofcultivation, increasing use of fertilizers, etc.5. Size and Nature of Disguised Unemployment not clarified. Higgins does not clarify thenature of disguised unemployment in the rural sector and excess labour supply in the industrial

10. B. Higgins, op. cit., p. 329.11. Ibid., p. 330.

220 The Economics of Development and Planning

sector. Nor does he refer to the actual extent of the disguised unemployed resulting fromtechnological dualism.

FINANCIAL DUALISM

Prof. Myint12 has developed the theory of financial dualism. Financial dualism refers to the co-existence of different interest rates between the organised and unorganised money markets inthe LDCs. The rate of interest in the unorganised money market in the traditional sector ismuch higher than the rate in the organised money market in the modern sector.The unorganised money market consists of the non-institutional lenders, such as the villagemoney-lenders, landlords, shopkeepers, traders or the combination of some of them. They chargevery high interest rates on loans. The main reason is that there is a real shortage of savings inthe traditional sector as substantial amount of savings is hoarded in gold and jewellery. Eventhough risks and costs of lending money to a large number of small borrowers are very high,yet there are other contributory factors arising from imperfections in this unorganised moneymarket. The village shopkeepers, landlords, money-lenders and traders occupy strategicpositions in the village economy and create monopoly powers over the peasants. These arisebecause of personal and informal dealings with borrowers, flexibility in loan transactions, andblending of money-lending with other types of activities such as selling of goods. “The highrates of interest which the peasants have to pay are not only formal interest charges but also anconsiderable part concealed charges obtained through manipulating the prices of thecommodities which the peasants buy or sell. Concealed charges may take the form of very highprices for goods on credit terms at the local shop or the obligation to repay the landlord theloans advanced with a specified amount of the crop at harvest.”On the other hand, in the organised money market of the LDCs, the interest rates are low andcredit facilities are abundant. The organised money market consists of the commercial banksand other financial ‘ institutions which lend short-term credit at low interest rates to the modernbusiness sector consisting of the big foreign-owned enterprises in the export industries, thegovernment and the large-scale modern manufacturing enterprises. Myint points towards twodifferences between the old financial dualism which existed in the open economy of the colonialperiod and the new financial dualism which now exists in the closed economy of the LDCsfollowing domestic industrialisation policies.First, under the colonial system, the currency system was automatic and ensured freeconvertibility at fixed exchange rates. Consequently, there was no shortage of foreign exchangeand no balance of payments problem. But the present LDCs are faced with chronic domesticinflation and balance of payments difficulties. As a result, small business units such as peasants,small traders, handicraft producers, etc. in the traditional sector have to face not only highinterest rates but also inaccessibility to foreign exchange and imports.Second, under the colonial system, the organised money market of the LDCs consisted of thebranches of western commercial banks which were linked with the international financial market.The modern sector in the colonial system consisting of the mines, plantations and foreign tradingenterprises could borrow at low interest rates both from the commercial banks and from theworld capital markets. But the present LDCs have attained monetary independence with the

12. H. Myint, Economic Theory and the Underdeveloped Countries, 1971 and The Economics of the DevelopingCountries, 5/e, 1980.

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establishment of their own central banks. They have introduced foreign exchange controls andhave restricted profit remittances and transfer of funds by foreign commercial banks. As aresult, the organised money market of the LDCs has been separated from the world capitalmarket. Coupled with this, they have been following cheap money policy. This has led to theparadoxical situation in which the central banks in the capital-scarce LDCs are maintaining lowinterest rates than those prevailing in the capital-rich developed countries thereby overvaluingtheir exchange rates. They fear that devaluation will lead to repeated devaluation of theircurrencies and to inflationary pressures.Further, the LDCs are faced with inflationary pressures, declining foreign exchange reservesand balance of payments pressures. Thus there is a chronic excess demand for foreign exchangeat the overvalued exchange rates. To overcome this, they have concentrated on foreign exchangeand import control and on monetary and fiscal measures and direct controls.This had led to aggravation of the economic dualism between the traditional sector and themodern industrial sector. These fiscal and monetary policies have tended to favour the modernindustrial sector as against the traditional sector. The cheap money policy by maintaining anartificially low interest rates has made credit available to large indiistrial concerns at favourableterms. The low interest rates have discouraged the flow of capital funds from abroad and savingsfrom within the country, but have created an excess demand for loans. Thus the bulk of domesticsavings at low interest rates have flowed to the modern industrial sector. This has reduced thesupply of capital to the traditional small industries and the agricultural sector which have toget it at higher interest rates.Further, the imposition of controls on foreign exchange and imports to correct the adversebalance of payments have benefitted the modern industrial sector as against the traditionalsector. The modern sector is usually allocated the major portion of the available foreign exchangeand the manufacturing industries are encouraged to adopt highly capital-intensive methods ofproduction because the imported capital goods are obtained cheaply at the overvalued exchangerates. Thus there is a strong incentive to substitute cheaper imported capital goods for domesticlabour.The agricultural and small-scale sectors suffer from foreign exchange and import controls ontwo counts: first, they get imported consumer goods at high prices, and second, they fail toobtain the foreign exchange and import permits easily because of red-tapism and corruptionprevailing in the LDCs.The traditional sector also suffers because the government expenditure on public services favoursthe urban centres as against the rival areas. Public services like transport, communications andelectric power are available more readily and at favourable terms to the modern industrialsector than to the traditional sector.The governments in some of the LDCs have tried to improve credit facilities in the traditionalsector by establishing agricultural banks and cooperative credit societies and by passing usuarylaws. But these tend to take the form of supplying a limited percentage of subsidised loansthrough the cooperative societies to some highly favoured ‘model villages’. These seeminglyimpressive ‘show pieces’ however have no effect on lowering the high rates of interest whichprevail in the rest of the traditional sector.”All this has led to malallocation of resources between the modern and the traditional sectorsand to obstruction of the development of an integrated domestic capital market in the LDCs.With the multiplicity of government controls, the free market for credit has developed into theblack market. Domestic inflation alongwith overvalued exchange rates have led to speculative

222 The Economics of Development and Planning

flight of capital abroad. In countries which have tried to stop this, the capital funds have beenchannelised into the purchase of gold, jewellery, real estate and into speculative activities. Thisis because of the cheap money policy which offers low interest rates to the holders of funds forinvestment purposes. This stands in the way of the growth of an effective capital market.Government controls over the scarce supply of capital have also retarded the growth of financialintermediaries in the LDCs. These controls favour the large manufacturing units and banks.They discriminate against the small borrowers and the money-lenders who provide credit tothe small borrowers. The government believes that capital funds invested only in durable capitalgoods and modern machinery are productive, while those invested in financing agricultureand trading activities are unproductive.According to Myint, the efforts made to control the activities of the money-lenders and toprovide cheap and easy credit in the traditional sector through commercial banks and cooperativecredit societies have failed due to(a) the high overhead costs and salaries of the officials of the commercial banks in rural areas;(b) the red-tapism in dealing with small borrowers according to the rigid rules of creditworthiness;(c) the lack of coordination between the head office and branches; and(d) the supply of limited amounts of subsidised loans through cooperative credit societies tosome favoured parts of the rural sector.Further, credit discrimination against trading activities also stands in the way of the developmentof an integrated capital market in the LDCs. Due to the non-availability of sufficient capitalfunds and high costs of holding stocks, the traders have to hold a much lower level of stocks ofcommodities and circulating capital. As a result, the wholesale and retail prices are widened.Prof. Myint suggests two types of policies to reduce financial dualism in the LDCs.First, such countries should raise the official interest rates in their organised credit marketshigh enough to reflect their existing shortage of capital funds. This would encourage the growthof an integrated domestic capital market which can effectively attract savings from within thecountry and from abroad. It would also help to equate the available supply of savings to thedemand for loans including the demand for funds by the money-lenders to be re-lent to theunorganised credit market.Second, to create a more integrated domestic capital market, free access on equal terms to capitalfunds should be provided both to the modern and traditional sectors. This would also reducethe malallocation of resources between the two sectors. The interest rates in the traditionalsector should be reduced by providing unlimited access to credit funds on equal terms both tothe cooperatives and the money-lenders so that they can compete to lower the interest rates forthe small borrowers.