Essay Title: The Lewis Model and its limitations: the critical assessment of its assumptions, logic and implications.
- Boms Onukwuru Rosytha
This essay will discuss and critically assess the Lewis Model and its limitations, as well as its assumptions, logic and implications. This essay will start by defining economic growth and the purpose of development, and then a brief history of the Lewis Model will follow. Further, Lewis’ impact on the theory of development will be analysed before the conclusion.
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The Lewis model is also known as the Dual–Sector model, the traditional and modern sector. In this essay, I will argue that the concept of surplus labour, wage determination and the mechanism of labour mobility are unclear. As a result of the model being unclear, its development could not move further, and this has prevented its use in empirical research. I will further argue that the Lewis model, despite its shortcomings, with respect to it being unclear still importantly informs our understanding of the development process because its emergence helped move the neglected sub-field of development economics far from price neglect (Ranis, 2004).
The strengths of this model far outweigh its weaknesses. However, it was important, despite it being unclear, as it was the first work ever on economic development, and other works have built on its existence.
Economic growth and the purpose of development
A few decades ago, economic development meant any planned alteration of economic activity and employment structure. As a result of this, agricultural production and employment declines, while services and manufacturing industries rise (Todaro and Smith, 2009). However, all development implies change. In this essay, development will describe the process of transformation, economically and socially, within countries. This process is a well organised sequence, and usually exhibits common characteristics (Thirlwall and Thirlwall, 2011). The purpose of development is to bring about an advanced positive change in an economy. Lewis contributed majorly to the advancement of growth theory to the development sub-phase and phases and through to the modern economic growth (RANIS, 2004).
Brief history of the Lewis model
The Lewis model of economic growth was developed by Sir W. Arthur Lewis in 1954. He was born in 1915 on the Island of St Lucia in the West Indies. He became a political economics tutor in different universities and in the 1950s he worked with the United Nations before pursuing his career at Princeton. He was awarded a Nobel Prize for Economics in 1979, together with T.W. Schultz, for their work on development economics (Lewis, 1954).
Lewis’ most famous and influential contribution to economics is undoubtedly the 1954 paper on “development with unlimited supplies of labour”. One amongst many of the universities where he tutored was the University of Manchester. It was at Manchester where his path-breaking work on economic development emerged (Kirkpatrick and Barrientos, 2004). He called it a Dual-Sector model by categorizing an economy into a traditional and a modern sector. The traditional sector provided surplus labour to the modern sector and this process led to development stability and capital accumulation (Clunnies-Ross, 2009 pp 449). He focused mainly on labour reallocation and an organizational dualism, but less on product dualism (Hunt, 1989).
The first assumption of the model was that the modern sector employment creation and labour transfer rate is proportional to the rate of capital accumulation in the modern sector. Marginal productivity of labour, henceforth MPL, is positive in the modern sector. Labour could be transferred from the agricultural sector to the modern sector at zero cost, yielding net profits in the industry leading to a higher rate of investment: countries can thus develop rapidly (Todaro and Smith, 2009 pp 118).
The second was the notion that surplus labour exists in the rural areas, while the urban areas were said to have full employment. This, Todaro said, was because there was over-population in the rural area where MPL is zero. Actual output of labour was used to determine their wages (Todaro and Smith, 2009, pp 118).
A popular economist Ishikawa (1975) approves the theory of minimum subsistence level of existence. This is one of the institutional real wages and he defined it as income distribution and principle of employment which says that every family is entitled to at least a minimum wage (Ranis, 2004). Hayami and Kikuchi (1982), using a Neo-Classical approach, found that, in Indonesia, wages will never adjust based on labour marginal product but through social conventions.
There is another assumption which however is debatable namely that of the reinvestment of local economy capitalist profits instead of the profit being sent abroad and deposited in the Western banks as capital flight (Todaro and Smith, 2009 pp 118).
There was an assumption of diminishing returns in the modern sector, mostly in the industrial areas. But, there is evidence that there is a prevalent increase in returns (Todaro and Smith, 2009 pp 120).
Finally, there was an unreal assumption that if a modern labour sector was competitive, it guaranteed a continuous existence of real urban wages to a point that surplus labour is exhausted in the rural sector (Todaro and Smith, 2009, pp 119).
Using “comparative advantage” as a reference, Lewis argued that a country ‘densely populated’ like Jamaica should focus on importing and manufacturing food from countries which have comparative advantage in agriculture, like the USA or Canada. He further encouraged foreign investors to set up modern technology and make provision for external markets. This modern technology Lewis called “tricks of the trade”(Kari, 2008).
Looking at the model from the Classical point of view, it was claimed that the simple model of Lewis had its foundation on the classical school. For example, its two sector of non-agriculture and agriculture that had different asymmetric behaviour each. This notion is generally accepted, but, if a closer look is taken, little traces of substantial deviation will be discovered. Furthermore, the Classicalists describe agriculture as a capitalist sector (Ranis, 2004).
This is quiet contrast to the model because it depicts the two sector world and also has a physiocratic foundation alongside Classical antecedents making agriculture a subsistent sector or a dominant non-capitalist sector. This is so because of two major factors, workers and landlords, and bargaining context of wage set (Ranis, 2004).
Lewis’ central problem was identifying the major causes of growth and their constraints. According to Lewis, the most important growth constraint in output was the lack of productive capital accumulation. The existing dominant constraint to capital accumulation foe Lewis was the savings rate as, seen by the classical economists (Hunt, 1989, pp 89). If the savings rate is so small, then enough capital is not saved.
A major criticism of the Lewis model concerns his notion of “surplus labour”. It was interpreted often as zero marginal productivity of agricultural labour. This situation is highly unlikely and was prone to vigorous attack by T. Schultz (1964). He did this by making available; evidence introduced from India which showed that withdrawal of large agricultural population did not result to agricultural output declining (Ranis, 2004).
According to Lewis, surplus labour was thought of in terms of human beings rather than man-hours, thereby defining his surplus labour happening at the given wage rate. This idea was consistent with what Fei-Ranis emphasize; that there might be a low or even a zero MPL, when marginal product does not exceed the agriculture wage (Ranis, 2004). There is surplus labour except in certain times of the year. For example, Nigerians are doing nothing now because it is not harvest or planting season.
Lewis further rejects the possibility of increased savings occurring due to the population becoming more careful with their income. This is not possible, because 90 percent of a poor country’s population with surplus labour never saves a significant proportion of its available income. Another reason for his rejection is because land owners are more dominant in an underdeveloped country (Hunt, 1989, pp 89). As a result of this, it constrains the poor from being able to accumulate savings.
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Another limitation, for Todaro, was that the theory emphasized on patterns more rather than the theory itself. This approach has the tendency of making practitioners come to wrong conclusions (Todaro and Smith, 2009 pp 121).
Implications of the Lewis model
For Lewis, the major focus was on the labour transfer process and the level of employment and output growth in the modern sector (Todaro and Smith, 2009 pp 121). One of Lewis’ implications was that of income distribution. This was also one of Kuznets’ (1955) contributions. Kuznets had a structural analysis adopted from a dualistic model, saying that an economy moves from agriculture to manufacturing and then services.
However, Ranis, (2004), said that neither Kuznets nor Lewis took into account the possibility that one of the effects employment has on wages in early reallocation could lead to increased wage bills, and a functional distribution that favours labour. This situation could then lead to an improved income distribution, for example the Taiwan experience. However, it is clear that the Lewis model had an important influence on the relationship between equity and growth (Ranis, 2004).
In the Classical view, from Smith to Max, they argued that unlimited labour supply at subsistent wage was available. This led to an enquiry on how production through time grows. Their conclusion was in capital accumulation, this they explained as it relates to their analysis of income distribution. Interest in income distribution and prices existed into the Neo-Classical era, but the result was a limited supply of labour. This situation made it difficult for economic analysis to explain any expansion of the system through time (Lewis, 1954).
Finally, the Lewis Model was applied to the movement of labour across different countries, and also the movement among two sectors within the closed economy. For example, Kindleberger (1967) used the model in describing the movement of surplus labour from Turkey and Maghreb countries in the Northern Africa to Europe when the European community’s had the post-war boom. However, the impact of remittances along with surplus labour flow across the borders remains one amongst the controversial issues in policy and theory development to this day (Ranis, 2004).
Lewis’s impact on the theory of development.
The fundamental labour surplus model was elegant, very simple and straight to the point. Lewis did not see the need for mathematical models or complicated diagrams; he better excelled in history and his institutional strength. As a result of him being straight to the point, he was successful in making development economics in a number of ways respectable. He helped move the neglected sub-field of development economics far from price neglect. He also rejected the assumptions of the Neo-Classical on market clearance, full employment and perfect competition because he saw it as a distant goal (Ranis, 2004).
The Lewis model, though widely accepted and praised, has been attacked severely after its emergence in 1954. Yet it is hard to conceive development without growth, though there can be growth without development. The model is unclear, and it could not move further, as a result of this. This has prevented its use in empirical research. However, it was important despite it being unclear, as it was the first work ever on economic development, and other works have built on its existence. It was the first time labour in an economy was looked into. It is further accepted generally as ‘the’ contribution for which Lewis was awarded a Noble prize and with this award, he successfully revolutionized the contemporary development thinking (Ranis, 2004).
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