Question

Arthur Lewis has a model in which the surplus labor is moved out of the backward agricultural sector and productively employed in the modern industrial sector. This process is known as modern sector enlargement. Do you think that this process is capable to deal with the problems of poverty and income inequality in all developing countries? You may argue for or against the Lewis Model

Answer 1

I feel Lewis model is not capable of solving the problems of developing countries. Surplus labor means disguised unemployment .So Lewis feels if surplus labour is transferred from agricultural sector to industrial sector , productivity will increase as the capitalists will get increased supply of labou, at the existing wage rate from the subsistence sector. They will not have to increase wage rate to bring in more labour.This notion about steady wage brings in initial development but when wages increase with increased capital formation,development will stop.Initial development is brought by increase in profit due to lower payment of wages.Lewis has ignored one fact that when labour is taken out from agriculture, productivity in agriculture increases with the use of machines and capital intensive methods. This increase in productivity in agricultural , interact with the increase in productivity of industrial sector. So Lewis ignored rural development.Lewis has made certain assumptions of development which are not correct. Firstly he said there will be no change in wage and wage will be constant.However in all developing countries ,wages increase even when there is open unemployment. Secondly , he assumes surplus labor in rural areas and full employment in urban areas which is not true. The truth is, there is open unemployment in urban areas and no labour surplus in rural areas.Thirdly his assumption is that the amount of capital accumulation is similar to the amount of transfer in labour and creation of employment.So according to him , capital accumulation is labour saving.But actually , there is no labour saving, no labor surplus in rural ares but labour surplus exist in urban areas,existence of open unemployment in urban areas suggests that Lewis model cannot solve the problem of developing economies.