Lewis model

Question 1

What is Lewis’s model?

Answer 1

The Lewis two-sector model describes the transition of labour from a traditional (overpopulated) agricultural sector to a modern (more productive) industrial sector within developing economies.

Question 2

Key Assumptions of the Lewis Model

Answer 2

1. Dual Sector Setup: The economy is distinctly divided into the traditional, agrarian sector with surplus labour and a modern, industrial sector that drives economic growth.
2. Surplus Labor: The agricultural sector possesses surplus labour, which has minimal to zero marginal productivity, thus not contributing to agricultural output.
3. Wage Differential: The industrial sector offers wages that are not only consistently higher than those in the agricultural sector but are also rigid and do not decrease.
4. Capital Accumulation: Profits from the industrial sector are presumed to be reinvested into expanding production, leading to further economic growth and labour demand.

Question 3

Critical Analysis of the Assumptions

Answer 3

While useful for theoretical modeling, may not align perfectly with real-world scenarios:

1. Reality of Surplus Labor: The assumption that agricultural labour has zero marginal productivity overlooks the potential [underutilisation or inefficiency] in farming techniques. In many developing economies, improvements in agricultural practices could lead to significant productivity gains, reducing the perceived surplus.
2. Wage Rigidity: The model assumes industrial wages are higher and fixed, which might not hold in the face of economic downturns or competitive pressures from other sectors or countries. Wage flexibility could lead to different labour migration patterns than those predicted by the model.
3. Capital Reinvestment: Assuming that all profits are automatically reinvested in the industrial sector is overly optimistic. Factors such as political instability, poor economic governance, and external shocks can redirect funds away from productive investment.
4. Labour Mobility: The model simplifies the migration process between sectors by not accounting for barriers such as skill mismatches, geographic relocation costs, and social ties that may hinder the movement of labour.

Question 4

Implications When Assumptions Do Not Hold

Answer 4

Labour Shortages: If agricultural labour is not as surplus as assumed, or if industrial wages do not significantly exceed agricultural wages, the pull to the industrial sector may be weaker, leading to labour shortages and stunted growth in the industrial sector.

Slower Capital Accumulation: Capital leakage or inefficient reinvestment can slow the growth of the industrial sector, prolonging the economic transition and keeping the economy reliant on traditional sectors longer than expected.

Reduced Migration Incentives: The lack of significant wage differentials or the presence of migration barriers can reduce the rate of labour migration, thus slowing the structural transformation of the economy.

Question 5

b) Describe one important criticism of Rostow’s stages of economic growth theory.

Answer 5

it oversimplifies the complex process of economic development, assumes universality in development paths, and overlooks critical socio-political and structural factors that play a vital role in the economic development of different countries

Rostow’s theory suggests that all economies go through the same stages of development in a linear and uniform manner, progressing from traditional society to take-off, maturity, and mass consumption. Critics argue that this linearity does not accurately capture the diverse and complex paths that different countries take in their development. It fails to consider the influence of historical, cultural, and geographical factors on the development process.
(not taking into consideration socio-political dynamics or cultural - environmental concerns)
Therefore assumption that all countries will eventually converge and achieve the same level of development as Western countries is incorrect. As it also ignores the fact that the global economic system often perpetuates inequalities, leading to divergence rather than convergence. Some countries remain trapped in poverty due to structural disadvantages and global economic disparities.