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Lewis model

What Is the Lewis Model?

The Lewis Model, also known as the Dual-Sector Model, is a foundational theory in Development Economics that explains how developing economies transition from a traditional, agrarian structure to a modern, industrialized one. Developed by Nobel laureate Sir Arthur Lewis, the model posits that economic progress occurs through the reallocation of Surplus Labor from a low-productivity, Subsistence Economy to a higher-productivity Capitalist Sector. This structural shift drives Economic Growth by utilizing previously underemployed resources. The Lewis Model highlights the crucial role of Capital Accumulation and reinvestment of profits in the modern sector to sustain this transition and foster Industrialization.

History and Origin

The Lewis Model was first articulated by Sir W. Arthur Lewis in his seminal 1954 paper, "Economic Development with Unlimited Supplies of Labour," published in The Manchester School.19 This groundbreaking work laid a significant portion of the foundation for the academic discipline of development economics. Lewis, a Saint Lucian economist, was later awarded the Nobel Memorial Prize in Economic Sciences in 1979 for his pioneering research into the problems of developing countries.18 His model synthesized observations from historical economic development, particularly during the Industrial Revolution, with classical economic thought, to explain how a developing nation could achieve sustained growth by moving labor from less productive areas to more productive industrial activities.17

Key Takeaways

  • The Lewis Model describes economic development as a process of labor transfer from a low-productivity subsistence sector to a high-productivity capitalist sector.
  • It assumes an initial surplus of labor in the traditional sector, allowing the modern sector to expand without immediate wage increases.
  • Reinvestment of profits in the capitalist sector is crucial for sustained capital accumulation and the absorption of more labor.
  • The "Lewis turning point" is reached when the surplus labor is fully absorbed, leading to rising wages in both sectors.
  • The model has been influential in shaping industrialization policies and strategies in many developing nations.

Interpreting the Lewis Model

Interpreting the Lewis Model involves understanding the dynamic interplay between the two sectors. In the traditional, agricultural sector, the marginal productivity of labor is often assumed to be negligible or even zero due to overpopulation relative to available land and capital. This implies that workers can be moved from this sector without reducing total agricultural output.16 The modern, industrial sector, in contrast, offers higher Wages and greater Productivity because it utilizes reproducible capital. As labor migrates, the capitalist sector expands, generating profits that are then reinvested, leading to further job creation and economic expansion. This process continues until the surplus labor pool is exhausted, marking the "Lewis turning point." At this point, the supply of labor to the modern sector is no longer perfectly elastic, and further industrial growth will necessitate rising real wages as labor becomes scarcer.

Hypothetical Example

Consider a hypothetical developing country, "Agriland," with a vast rural population engaged in subsistence farming. Many families have more members working on small plots of land than are truly needed to produce the current output. This represents the Surplus Labor described by the Lewis Model.

A new government in Agriland decides to promote Industrialization by offering incentives for factories to be built in urban areas. These factories represent the capitalist sector. Initially, these factories offer wages that are slightly higher than what individuals could earn in the subsistence agricultural sector. Drawn by the prospect of improved income, rural workers begin to migrate to the cities to take up jobs in these new industries.

As factory profits are generated, they are reinvested into expanding existing factories or building new ones. This ongoing Investment creates even more jobs, continuing to absorb labor from the rural areas without significantly increasing wages in the industrial sector, as there is still a large pool of readily available workers. This process drives rapid economic expansion and Urbanization in Agriland.

Practical Applications

The principles of the Lewis Model have influenced economic policy and development strategies across many emerging economies, particularly in the mid-20th century. Countries aiming for rapid Industrialization often adopted policies designed to facilitate the transfer of labor from agricultural areas to nascent manufacturing hubs. This often involved developing industrial parks, enhancing urban Infrastructure, and promoting Labor Mobility through various means.15

For instance, nations like South Korea experienced significant economic growth in the latter half of the 20th century, consistent with the Lewis Model's predictions. Their economies underwent a profound Structural Transformation as a large percentage of their population shifted from agriculture to the industrial sector.14 Even today, international organizations like the World Bank continue to focus on economic growth and job creation, which are central themes within the Lewis Model's framework for long-term development.13

Limitations and Criticisms

Despite its foundational importance in Development Economics, the Lewis Model faces several criticisms. One primary critique challenges the assumption of unlimited Surplus Labor with zero marginal productivity in the agricultural sector. Critics argue that even in traditional farming, all labor typically contributes to output, and its withdrawal can negatively impact agricultural production, especially during peak seasons.12 Furthermore, the model may underestimate the full impact of rapid population growth on the economy, affecting agricultural surplus, wage rates, and overall employment opportunities.11

Another point of contention is the assumption of fixed real Wages in the modern sector until the Lewis turning point is reached. In reality, factors such as trade unions, minimum wage laws, or institutional rigidities in the Labor Market can cause urban wages to rise prematurely, reducing the "capitalist surplus" available for Investment and slowing the rate of capital accumulation.10 Additionally, the model has been criticized for overemphasizing industrial growth while potentially undervaluing the role of the service sector and failing to fully account for institutional and structural variations across diverse economies.8, 9 The model, initially conceptualized as an "open system" by Lewis, was sometimes misinterpreted as a "closed system" in subsequent neoclassical interpretations, limiting its perceived applicability to real-world complexities.7

Lewis Model vs. Dual Economy

The Lewis Model is often used interchangeably with the term "dual economy," but it's more precise to understand their relationship as one of theory explaining a characteristic. A Dual Economy describes an economic structure where two distinct sectors, typically a traditional, low-productivity rural sector and a modern, high-productivity urban-industrial sector, coexist within a single country.6 The Lewis Model, on the other hand, is a theory that explains the process of economic development within a dual economy.

While the dual economy is a descriptive observation of many developing nations, the Lewis Model provides a dynamic framework for how labor and capital interact to facilitate structural transformation between these two sectors. It outlines the mechanisms—namely, the transfer of surplus labor and the reinvestment of profits—that drive growth from the traditional to the modern sector. The core distinction is that "dual economy" is a characteristic, while the Lewis Model is a conceptual explanation of how that characteristic can be leveraged for economic advancement.

FAQs

What are the two sectors in the Lewis Model?

The Lewis Model divides an economy into two main sectors: the traditional agricultural sector and the modern industrial (or capitalist) sector. The traditional sector is characterized by low Productivity and an abundance of Surplus Labor, while the modern sector is defined by higher wages and greater output due to the use of reproducible capital.

##5# What is the "Lewis turning point"?
The "Lewis turning point" refers to the stage in economic development where the surplus labor in the traditional agricultural sector is fully absorbed by the modern industrial sector. After this point, the supply of labor is no longer unlimited, and further expansion of the modern sector will lead to rising real Wages across the economy as labor becomes scarce.

How does the Lewis Model explain economic growth?

The Lewis Model explains economic growth as a process driven by the reallocation of underemployed Human Capital from the low-productivity traditional sector to the high-productivity modern sector. The profits generated in the modern sector are reinvested, leading to Capital Accumulation, which in turn creates more jobs and continues the process of Industrialization and growth.

##4# Is the Lewis Model still relevant today?
While developed in the mid-20th century, the Lewis Model's core insights into Structural Transformation and the movement of labor from agriculture to industry remain relevant for understanding economic changes in many emerging markets. Alt3hough some of its assumptions have been challenged, the model provides a valuable conceptual framework for policymakers designing strategies for Poverty Reduction and productive employment.

##2# What are the main assumptions of the Lewis Model?
Key assumptions of the Lewis Model include the existence of Surplus Labor in the traditional sector, often with zero or negligible marginal productivity; that wages in the modern sector remain fixed at a level slightly above subsistence until all surplus labor is absorbed; and that capitalists in the modern sector reinvest all their profits for Capital Accumulation.1