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Question

:
Examine Lewis Dual Sector Model of Development.
Answer:
The Lewis Dual Sector Model of Development
Lewis theory of economic development is a structural- change theory. This theory
explains the mechanism of changing structure of underdeveloped economics from
subsistence agriculture to more modern and more urbanized. This model became the
general theory of the development process for surplus labor nation during 1960s and
early 1970s.
Basis model
Lewis model consists of two sectors in the economy. They are
i) Traditional Sector: This sector is overpopulated subsistence sector where
marginal productivity of labor is zero. Due to zero marginal productivity of
labor it is possible to withdraw labor from this sector without affecting the
level of output. This is why Lewis classified this sector as surplus labor sector.
ii) Modern sector: This sector is urban industrial sector. Productivity is high in
this sector. Labor is gradually transferred into this sector from traditional
sector. Movement of labor from traditional to modern sector brings the
expansion in both out put and employment. The speed of this expansion
depends on
a) Rate of industrial investment and capital accumulation which ultimately
depends on the level of profit. Lewis assumes that all profits are
reinvested.

b) Wage of difference between rural sector and urban sector. According to
Lewis there should be at least 30 present higher wage rates in urban sector
than rural sector in order to transfer labor automatically from rural to
urban sector. Lewis assumed that perfectly competition labor market in
modern sector giving fix wage rate and horizontal supply curve of labor.
On the other hand wage rate in the traditional sector is given average
productivity of labor( w= APPL= TP/L)

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We can explain Lewis model in two sector economy with the help of following diagram.
Right panel of the fig. represent traditional sector. Upper right fig. is production function.
The production function is typical with horizontal segment beyond maximum total
product. Traditional sector production depends on labor (Variable factor) and capital and
technology (fixed factor). The corresponding marginal and average productivity of labor
are shown in lower right fig. wage in traditional WA, sector is equal to average
productivity of labor with the assumption that total product is equally distributed among
all employed labor. With the wage rate WA, the equilibrium amount of labor is LA. Labor
more than LA is excess labor. These excess labors are responsible for horizontal section
of the production function. Hence they can be transferred to modern sector without
reducing output in traditional sector.

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In the modern sector, represented by left panel diagram, production is the function of
labor. Capital and technology is fixed in this sector as well. In the beginning this sector is
producing with total product curve TPM(KM1). The corresponding marginal product curve
is MPL1. Since labor market is perfectly competitive, marginal productivity curve is
demand for labor curve as well. Similarly supply curve is horizontal straight line
represented by fixed wage WM. demand and supply curves interacts at point S giving
equilibrium quantity of labor L1. With this quantity of labor and given production
function, total output is given by area under curve PS. Similarly total cost of production
is given by under WMS. Hence profit is area PSWM. This accrued profit is reinvested.
With the new investment, production function shift upward to TPM(KM2). With this new
margin product curve both employment (L2) and output (area under QT) along with profit
increases. The requirement labor is brought from traditional sector. Hence both
employment and output increase in the economy. The increased profit is again reinvested.
This process continues giving self sustained growth until the surplus labor is absorbed in
the new industrial sector.

Criticism of the model

Although this model got very warm welcome during 1960s and 1970s, it is criticized for
its assumptions. Following are the major points of criticism.

i) Capital accumulation: this model assumes that the rate of the labor transfer,
employment creation and output expansion depends on the rate of capital
accumulated in modern sector. Rate of capital accumulation depends on the
level of profit. Higher the profit higher will be the rate of capital
accumulation. But there are two major problems with this process. First what
will happen in profit is reinvested in laborsaving capital equipment? In this
case output and profit will expand but employment will not expand. Hence
owners of capital will be richer and richer leaving rural people poor. GNP will
increase but aggregate social welfare will not improve. The second problem is
that this model assumes all profit is reinvested. But there is possibility that if
business environment is not optimistic within the economy, there may be

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capital flight. Entrepreneur may deposit accrued profit in western banks. In
this situation there is no chance of expansion of output and employment
according to the prediction of model.

ii) Surplus Labor: Lewis assumed that there is surplus labor in the rural
economy and full employment in the urban sector. But many researches have
shown that there is little general surplus labor in rural locations.

iii) Competitive labor market in modern sector: Lewis model assumes
competitive labor market in modern sector. The implication of this assumption
is that supply of labor is perfectly elastic. But historically it has been observed
that there is tendency continuous rising wages level in almost all developing
countries due to the institutional factors such as union bargaining power, civil
services wage scales, multinational companies hiring practices etc.

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