Model Answer
0 min readIntroduction
The Lewis model, proposed by W. Arthur Lewis in 1954, provides a framework for understanding the economic development of countries transitioning from a traditional agricultural sector characterized by surplus labour to a modern industrial sector. It posits that development occurs through the transfer of labour from the low-productivity agricultural sector to the high-productivity industrial sector, fueled by capital accumulation. This process continues until labour surplus disappears, and wages begin to rise. However, the question of whether the Lewis model is fundamentally ‘capital-driven’ remains a subject of debate, prompting an examination of the model’s assumptions and empirical evidence.
The Lewis Model: A Detailed Explanation
The Lewis model is based on the existence of a ‘dual economy’ – a traditional, overpopulated rural subsistence sector and a modern, capitalistic urban industrial sector. Key assumptions include:
- Unlimited Labour Supply: The agricultural sector possesses a surplus of labour, meaning the marginal product of labour is close to zero. Removing labour from agriculture does not significantly reduce agricultural output.
- Capital Accumulation: Profits generated in the industrial sector are reinvested, leading to capital accumulation and expansion of the industrial sector.
- Wage Differential: A wage differential exists between the two sectors. The industrial sector offers a higher wage than the agricultural sector, incentivizing labour migration.
- Profit Reinvestment: Capitalists reinvest their profits, driving further industrial expansion and labour absorption.
The Capital-Driven Nature of the Model
The Lewis model is often considered capital-driven because capital accumulation is the central mechanism driving development. The model suggests that:
- Industrial expansion is limited by the availability of capital.
- Increased capital stock leads to increased demand for labour, drawing workers from the agricultural sector.
- The rate of capital accumulation determines the speed of development.
The initial phase of development, according to Lewis, is characterized by the absorption of surplus labour at a constant real wage. This constant wage allows capitalists to accumulate profits, which are then reinvested to expand production and absorb more labour. This process continues until the surplus labour in the agricultural sector is exhausted.
Critiques and Limitations: Is it *Really* Capital-Driven?
While capital accumulation is crucial, several critiques suggest the Lewis model is not solely capital-driven:
- Labour Productivity: The model underestimates the importance of increasing labour productivity in agriculture. Technological advancements in agriculture can reduce the surplus labour and increase rural incomes, potentially altering the migration patterns.
- Institutional Factors: The model largely ignores the role of institutions, such as land tenure systems, education, and political stability, which can significantly impact development. For example, insecure land rights can discourage agricultural investment and hinder productivity growth.
- Human Capital Formation: The model doesn’t adequately address the importance of human capital development. A skilled workforce is essential for absorbing and utilizing capital effectively.
- Demand Constraints: The model assumes that demand will always keep pace with increased production. However, if demand is insufficient, industrial expansion may be limited, even with ample capital.
- Wage Rigidity: The assumption of a constant real wage is often unrealistic. Labour unions and other factors can lead to wage increases, potentially slowing down capital accumulation.
Empirical Evidence and Modern Relevance
The experiences of East Asian economies (e.g., South Korea, Taiwan) in the 1960s and 70s initially seemed to support the Lewis model, with rapid industrialization driven by capital investment and labour transfer from agriculture. However, the experiences of many African countries, where capital accumulation has been limited and agricultural productivity has remained low, demonstrate the model’s limitations.
Furthermore, the rise of the service sector and the increasing importance of technology have challenged the model’s focus on manufacturing as the primary engine of growth. The model’s relevance today lies in its highlighting the importance of structural transformation – the shift from agriculture to industry and services – but it needs to be adapted to account for the complexities of modern economies.
| Feature | Lewis Model | Modern Economies |
|---|---|---|
| Dominant Sector | Manufacturing | Services & Technology |
| Labour Transfer | Agriculture to Industry | Agriculture/Industry to Services |
| Key Driver | Capital Accumulation | Innovation, Human Capital, Institutions |
Conclusion
The Lewis model provides a valuable, albeit simplified, framework for understanding the initial stages of economic development. While capital accumulation is undoubtedly a crucial component, it is not the sole driver of development. Factors such as labour productivity, institutional quality, human capital, and demand-side considerations play equally important roles. A more nuanced approach, incorporating these factors, is necessary to effectively address the challenges of development in the 21st century. The model remains a useful starting point for analyzing structural transformation, but its limitations must be acknowledged.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.