Dual Sector Development Model

Or
Lewis Model

Rp Pradhan
BITS Goa

BITS Pilani, K K Birla Goa Campus

Sir William Arthur Lewis,
Nobel for Economics-1979

Dualistic Development Approach

or
Lewis Model

It explains the growth of a developing economy in terms of a

labour transition between two sectors, the capitalist sector and
the subsistence sector.
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BITS Pilani, K K Birla Goa Campus
Objective!

1. Development of Underdeveloped Economies or

Depressed Economies
2. Achieving Productivity & Growth
3. Achieving Employment

Majority Developing Economies have adopted the Model.

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Assumptions

1. The model assumes that a developing economy has a surplus of unproductive labor
in the agricultural sector.

2. These workers are attracted to the growing manufacturing sector where higher
wages are offered.

3. It also assumes that the wages in the manufacturing sector are more or less fixed.

4. Entrepreneurs in the manufacturing sector make profit because they charge a price
above the fixed wage rate for profit.

5. The model assumes that these profits will be reinvested in the business in the form
of fixed capital.

6. An advanced manufacturing sector means an economy has moved from a

traditional to an industrialized one.

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Dual Sector Model:
The case of Chinese Economic Miracle

China has a long history of dualistic economic development.

Prior to the 1978 economic reforms led by Deng Xiaoping, China was a
very poor and largely peasant agrarian economy.

80% of the labor force was engaged in the rural agricultural sector.

Agricultural labor productivity was extremely low due to the presence

of surplus labor relative to other scarce resources.

The economic reforms initiated in 1978 propelled the Chinese

economy into a new phase of development.
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 Rural liberalization led to development in the agricultural sector and to the
establishment of township and village enterprises (TVEs).

It also helped release surplus labor from agricultural production. The steady
marketization of economic activities and the integration of China into the
international economy generated a large demand for labor.

As a result, there was a great increase in labor migration, albeit on a

temporary basis due to the restriction on labor mobility by the household
registration system

(the Hukou system / called "huji / or family register. From around 1953 to 1976, Police
would periodically round up those who were without valid residence permit, place
them in detention centres and expel them from cities).

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 In 1978, 4.38 million laborers migrated to the non-agricultural sector (Zhang
and Song 2003);

By 2009, the number of ruralurban migrants rose to over 145 million (Yao
2011).

Labor in the nonagricultural sector increased from 29.5% of total

employment in 1978 to 61.9% in 2009.

Over the same period, the contribution of non-agricultural production to the

value-added GDP increased from approximately 62% to 89%.

Rapid development of the non-agricultural sector, fuelled by great inflows of

rural labor, has driven the Chinese economy to grow at an average rate of
8% per annum for more than three decades since the 1978 economic
reforms. BITS Pilani, K K Birla Goa Campus
 China has been characterized as a dualistic economy with so-called
backward advantages, namely, the presence of surplus agricultural
labor.

The rapid development of Chinas economy is in fact largely

attributable to its dualistic nature and the flows of surplus labor
between the two sectors.

Though Chinas economic reforms are undoubtedly important, it

facilitated rather than caused the process of economic transition.

Hence, it is more appropriate to interpret Chinas remarkable

economic growth as a consequence of the development of a dualistic
economy with surplus labor.
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 The most well-known theory of dualistic development was
proposed by Lewis (1954) and formalized by Ranis and Fei (1961).

The Lewis-Ranis-Fei theory of dualistic economic development

describes the development paradigm of an over-populated and
underdeveloped economy with vast amounts of surplus agricultural
labor.

Economic growth in such an economy can be achieved by rapid

development of the non-agricultural (industrial and service) sector,
facilitated by capital accumulation and the drawing of surplus labor
from the agricultural sector.

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 Sectoral reallocation of surplus labor, changes the
productivity of labor and thereby drives the economy to
transit from a labor-surplus stage to a labor-scarce stage of
development.

The Lewis-Ranis-Fei theory of dualistic economic

development therefore provides a suitable theoretical
framework for studying the growth path of labor-surplus
developing economies such as China.

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BITS Pilani, K K Birla Goa Campus
Criticism-
Empirical tests and practical application of the Lewis model

Empirical evidence does not always provide much support for the Lewis
model.

Theodore Schultz in an empirical study of a village in India during the

influenza epidemic of 191819 showed that agricultural output declined,
although his study does not prove whether output would have declined had a
comparable proportion of the agricultural population left for other
occupations in response to economic incentive.

Again disguised unemployment may be present in one sector of the economy

but not in others.

Further, empirically it is important to know not only whether the marginal

productivity is equal to zero, but also the amount of surplus labor and the
effect of its withdrawal on output.
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 The Lewis model was applied to the Egyptian economy by Mabro
in 1967 & despite the proximity of Lewis's assumptions to the
realities in the Egyptian situation during the period of study, the
model failed firstly because Lewis seriously underestimated the
rate of population growth.

Secondly because the choice of capital intensiveness in Egyptian

industries did not show much labor using bias and as such, the
level of unemployment did not show any tendency to register
significant decline.

The validity of the Lewis model was again called into question
when it was applied to Taiwan.
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 It was observed that, despite the impressive rate of growth of the
economy of Taiwan, unemployment did not fall appreciably and this
is explained again in reference to the choice of capital intensity in
industries in Taiwan.

This raised the important issue whether surplus labor is a necessary

condition for growth.

This model has been employed quite successfully in Singapore.

Ironically however it has not been employed in Sir Arthur Lewis'

home country of St. Lucia.

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Thanks

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