Model Answer
0 min readIntroduction
Arthur Lewis’s model, presented in his seminal work “Economic Development with Unlimited Supplies of Labour” (1954), provides a framework for understanding the development process in less developed countries (LDCs). The model posits that LDCs are characterized by a dual economy – a traditional, subsistence agricultural sector and a modern, capitalist industrial sector. A key assumption is the existence of a surplus labour force in the agricultural sector, meaning that labour can be withdrawn without affecting agricultural output. This unlimited supply of labour is the engine driving industrial growth and overall economic development. This answer will briefly state the sources of this unlimited supply and explain the mechanism of development within this dual economy.
Sources of Unlimited Supply of Labour
According to Lewis, the unlimited supply of labour arises from several factors inherent in the traditional agricultural sector of LDCs:
- Disguised Unemployment: This is the most crucial factor. It refers to a situation where the marginal productivity of labour in agriculture is zero or very low. Removing labourers from agricultural work does not significantly reduce output because of redundant workforce.
- Subsistence Farming: The agricultural sector operates at a subsistence level, with farmers primarily focused on meeting their own consumption needs rather than maximizing profits. This leads to inefficient resource allocation and underemployment.
- Social Norms & Family Labour: Traditional agricultural systems often rely heavily on family labour, where individuals work on the farm even if their marginal productivity is low, due to social obligations and lack of alternative employment opportunities.
- Low Capital-Labour Ratio: The agricultural sector typically has a low capital-labour ratio, meaning there is limited investment in tools and technology to enhance labour productivity.
Characteristics of the Dual Economy
Lewis’s dual economy is characterized by distinct differences between the two sectors:
- Traditional Sector (Agriculture): Low productivity, surplus labour, subsistence wages (often in-kind), limited capital accumulation, and traditional technologies.
- Modern Sector (Industry): High productivity, capital intensive, wage employment, profit-driven, and adoption of modern technologies.
The initial gap in productivity between the two sectors is significant. This productivity differential is the driving force behind the development process.
The Mechanism of Development
The development process unfolds through the following mechanism:
- Labour Transfer: The modern industrial sector, driven by the pursuit of profit, begins to absorb labour from the traditional agricultural sector. This is facilitated by the availability of a surplus labour force at a fixed wage (the average product of labour in the agricultural sector).
- Wage Dynamics: Initially, wages in the modern sector remain constant as the supply of labour is virtually unlimited. This allows capitalists to accumulate profits.
- Capital Accumulation & Reinvestment: The profits generated in the modern sector are reinvested to expand industrial capacity, creating further demand for labour.
- Continued Labour Transfer & Rising Wages: As the surplus labour in agriculture diminishes, the modern sector must offer higher wages to attract workers. This marks the turning point in the development process.
- Equilibrium & Development: The process continues until the surplus labour in agriculture is exhausted, and wages in both sectors converge. At this point, the economy transitions to a more balanced and developed state.
Table: Comparison of Sectors in Lewis Model
| Sector | Productivity | Wages | Capital Intensity | Labour Supply |
|---|---|---|---|---|
| Traditional (Agriculture) | Low | Subsistence/Fixed | Low | Unlimited/Surplus |
| Modern (Industry) | High | Initially Fixed, then Rising | High | Limited, Increasing Demand |
Example: Post-War Japan & South Korea – Both countries initially had large agricultural sectors with disguised unemployment. Industrialization, fueled by capital accumulation and labour transfer, led to rapid economic growth. Initially, wages in the industrial sector remained relatively low, but increased as the surplus labour diminished.
Limitations: The Lewis model has been criticized for its simplifying assumptions, such as the homogeneity of labour and the absence of institutional constraints. It also doesn’t fully account for the potential for technological advancements in agriculture to absorb surplus labour. Furthermore, the model assumes reinvestment of profits, which may not always occur.
Conclusion
Arthur Lewis’s model provides a valuable framework for understanding the initial stages of economic development in LDCs. The concept of unlimited supply of labour and the mechanism of labour transfer from agriculture to industry remain relevant, although the model’s assumptions require careful consideration in the context of contemporary economic realities. While the model has limitations, it highlights the importance of capital accumulation, technological progress, and structural transformation in achieving sustained economic growth. The success of East Asian economies demonstrates the potential of this model, albeit with necessary adaptations and policy interventions.
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.