STRUCTURAL CHANGE THEORY

The Lewis Model

□ Presented in 1955
□ Dominated development theory between the 1960s and 1970s
□ Also known as the two sector model and the surplus labour model
□ It focused on the need for countries to transform their structures, away from agriculture, with low
productivity of labour, towards industrial activity, with a high productivity of labour.

In the Lewis model the line of argument runs:

An economy starts with two sectors; a rural agricultural sector and an urban industrial sector.
Agriculture generally under-employs workers and the marginal productivity of agricultural labour is
virtually zero.
□ Therefore, transferring workers out of agriculture does not reduce productivity in the whole
economy.
□ Labour is then released for work in the more productive, urban, industrial sector.
□ Industrialisation is now possible, given the increase in the supply of workers who have moved
from the land.
□ Industrial firms start to make profits, which can be re-invested into even more industrialisation,
and capital starts to accumulate.
□ As soon a capital accumulates, further economic development can sustain itself.

Evaluation of the Lewis model

Though highly influential at the time, and despite the considerable logic of the Lewis approach, the
benefits of industrialisation may be limited because:
□ Profits may leak out of the developing economy and find their way to developed economies
through a process called capital flight.
□ Capital accumulation may reduce the need for labour in the urban industrial sector.
□ The model assumes competitive labour and product markets, which may not exist in reality.
□ Urbanisation may create problems, such as poverty, squalor and shanty-towns, with
unemployment replacing underemployment.
□ The financial benefits from industrialisation might not trickle down to the majority of the
population.