Lewis through a looking glass : public sector employment, rent - seeking and economic growth

In the initial period, the economy possesses characteristics of a representative developing country and generates growth of output per worker of some 2.5% per annum. The model studies the consequences, over 13 time periods, of alternative government responses to the urban-based lobbying pressure for more jobs. The policy regime which emerges, on the basis of plausible assumptions about government response, can almost eliminate improvements in living standards within 13 periods. Employment maximization becomes a substitute for sustained increases in real per capita income. The government"s preferential access to financial resources is passed on to the large enterprises which dominate the public sector, allowing them to crowd out the more efficient small- and medium private sector enterprises. Labor absorption through expansion of the public sector is shown to result not only in a slower rate of GNP growth, but also in an industrial structure skewed toward large firms. (Author abstract, modified)