lewis model & rastow stages

ECONOMICS DEVELOPMENT

ECONOMICS DEVELOPMENT

NASEEM SHAHZADM.Sc. Economics (UAF)B.Ed (science) (AIOU)M.A History (GCUF)Cell; [email protected] No 473 G/B Beeja SMD-FSD

Lewis model Explains how economic growth gets started through structural change increase in size of the industrial sector relative to subsistence agricultural sector.Lewis concerned about labor shortages in expanding industrial sector.NASEEM SHAHZAD

Lewis Two-Sector Model i. It became the general theory of the development process in surplus-labor Third World nations during the 1960s and early 1970s.ii. It focuses on the process of labor transfer from the traditional economy to the urbanized, industrial sector and the growth of output and employment in the high-productivity sectorNASEEM SHAHZAD

Lewis 2 Sector modelAgriculture - low value addedIndustrial sector - higher productivity and wealth generationIncentives to encourage workers to migrate from rural economy to urbanRural workers have very low if not zero marginal productivityWage premiums in urban industry 30% above rural wages would encourage migration from rural to urban whilst still allowing profits to be madeRe-investment of profits would lead to a self perpetuating developmentNASEEM SHAHZAD

Lewis Theory of DevelopmentThe process of self-sustaining growth and employment expansion continues in the modern sector until all of the surplus labor is absorbed

Structural transformation of the economy has taken place with the growth of the modern industry

NASEEM SHAHZAD

Lewis Theory of DevelopmentProf. Lewis Offers a model of growth based on existence of disguised unemployment in less developed countries. It is propounded in his work,Economic development with Unlimited Supply of Labour.Also known as the two-sector surplus labor model NASEEM SHAHZAD

Lewis Theory of DevelopmentAlso known as the two-sector surplus labor model Features of the basic model: Economy consists of two sectors- traditional and modernTraditional sector has surplus of labor (MPL=0)Model focuses on the process of transfer of surplus labor and the growth of output in the modern sector

NASEEM SHAHZAD

Features of the basic model: Economy consists of two sectors- traditional and modernTraditional sector has surplus of labor (MPL=0)Model focuses on the process of transfer of surplus labor and the growth of output in the modern sector

NASEEM SHAHZAD

Assumptionsi. Marginal product of labor is zero (surplus-labor). This implies that labor can be removed from the agricultural sector without any loss of output in that sector.ii. Rural supply of labor to industrial sector is perfectly elastic. iii. Full employment in the urban sector.

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More Assumptionsiv. Constant urban wage- premium over a fixed average subsistence wage.v. Capitalists reinvest all profits. vi. Rate of labor transfer and job creation is proportional to the rate of capital accumulation.

NASEEM SHAHZAD

2.1.The Lewis Model of Development: Key Assumptions & Implications..Two sectors- traditional-labor surplus economy that co-exists with modern/Industrial sector- There is an economic dualism.

Labor surplus in traditional/agricultural sector. Much of this is unskilled.

The Lewis model implies employment will expand until surplus labor is absorbed in the modern or industrial sector. (see figure 4.1)NASEEM SHAHZAD

AssumptionsThe main assumptions of this model:Because of the high density of population in less developed countries, many people are disguisedly unemployed. Marginal productivity of these people is zero.The supply of labour is perfectly elastic at the subsistence rate of wages. Less developed economies are dual economies. There is coexistence of capitalist sector and subsistance sector.Wage rate is higher in the capitalist sector compared to subsistence sector, wage rate stagnates at the subsistence levelNASEEM SHAHZAD

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Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications

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2.2.Limitations of the Lewis ModelModel roughly explains the historical growth experience of todays Industrial Nations.But, its key assumptions do not reflect the realities of todays LDCs. Why?Profits may not be re-invested domestically- in LDCs especially in African economics i.e. there may be capital flightSurplus labor may not exist in rural economy.Modern sector can be labor saving instead of labor using or employment creating (fig 4.2)

NASEEM SHAHZAD

Criticisms:Labour re-allocation not always productiveWealth not re-invested locallyWealth goes abroadImperfections in the labour marketImportance of complementary policies by all countries involvedNASEEM SHAHZAD

Criticisms- Lewis ModelRate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulationSurplus labor in rural areas and full employment in urban?Institutional factors?Assumption of diminishing returns in modern sector

NASEEM SHAHZAD

Lewis Theory of Development: CriticismsFour of the key assumptions do not fit the realities of contemporary developing countries Reality is that: Capitalist profits are invested in labor saving technology Existence of capital flightLittle surplus labor in rural areasGrowing prevalence of urban surplus labor Tendency for industrial sector wages to rise in the face of open unemployment

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Conclusions for Lewis Modeli. Employment growth and labor transfer is induced by output expansion in which the speed of expansion depends on the rate of industrial investment and capital accumulation in the industrial sector. ii. The self-sustaining growth and employment expansion process continues until all surplus labor is exhausted.

NASEEM SHAHZAD

Rostows Stages of GrowthRostow identified 5 stages of growth: The traditional societyThe pre-conditions for take-offThe take-offThe drive to maturityThe age of high mass consumptionAll advanced economies have passed the stage of take-off into self sustaining growthDeveloping countries are still in the traditional society or the pre-conditions stage. Why?

NASEEM SHAHZAD

Rostows 5 Stages of DevelopmentNASEEM SHAHZAD

Regardless of how the pump is primed, Rostow believes the long term path is well documented.

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Rostow - Stages of Growth

Traditional SocietyCharacterised bysubsistence economy output not traded or recorded existence of barter high levels of agriculture and labour intensive agricultureNASEEM SHAHZADVillage in Lesotho. 86% of the resident workforce in Lesotho is engaged in subsistence agriculture.Copyright: Tracy Wade, http://www.sxc.hu/


2. Pre-conditions:Development of mining industriesIncrease in capital use in agricultureNecessity of external fundingSome growth in savings and investmentNASEEM SHAHZADThe use of some capital equipment can help increase productivity and generate small surpluses which can be traded.Copyright: Tim & Annette, http://www.sxc.hu


3. Take off:Increasing industrialisationFurther growth in savings and investmentSome regional growthNumber employed in agriculture declinesNASEEM SHAHZAD

At this stage, industrial growth may be linked to primary industries. The level of technology required will be low.Copyright: Ramon Venne, http://www.sxc.hu


4. Drive to Maturity:Growth becomes self-sustaining wealth generation enables further investment in value adding industry and developmentIndustry more diversifiedIncrease in levels of technology utilised

NASEEM SHAHZADAs the economy matures, technology plays an increasing role in developing high value added products.Copyright: Joao de Freitas, http://www.sxc.hu


5. High mass consumptionHigh output levelsMass consumption of consumer durablesHigh proportion of employment in service sectorNASEEM SHAHZADService industry dominates the economy banking, insurance, finance, marketing, entertainment, leisure and so on. Copyright: Elliott Tompkins, http://www.sxc.hu

ROSTOW, Walt W.(UT Austin: 1969-2003)This is a linear theory of development. Economies can be divided into primary secondary and tertiary sectors. The history of developed countries suggests a common pattern of structural change: The Stages of Economic Growth: An Anti-Communist Manifesto (1960)Stage 1: Traditional SocietyCharacterized by subsistence economic activity i.e. output is consumed by producers rather than traded, but is consumed by those who produce it; trade by barter where goods are exchanged they are 'swapped'; Agriculture is the most important industry and production is labor intensive, using only limited quantities of capital. Stage 2 :Transitional StageThe precondition for takeoff. Surpluses for trading emerge supported by an emerging transport infrastructure. Savings and investment grow. Entrepreneurs emerge ( how they emerge is not spelt out) Stage 3 :Take OffIndustrialization increases, with workers switching from the land to manufacturing. Growth is concentrated in a few regions of the country and in one or two industries. New political and social institutions are evolving to support industrialization. Stage 4 :Drive to Maturity: Growth is now diverse supported by technological innovation. Stage 5: High Mass Consumption NASEEM SHAHZAD

Implications of Rostow's theory

Development requires substantial investment in capital equipment (K) ; to foster growth in developing nations, the right conditions for such investment would have to be created i.e. the economy needs to have reached Stage 2.For Rostow:Savings and capital formation (accumulation) are central to the process of growth, hence development 2. The key to development is to mobilize savings to generate the investment to set in train self generating economic growth. 3. Development can stall at Stage 3 for lack of savings. Suppose the deficiency in savings is on the order of 15-20% of GDP. If S = 5% then foreign aid/loans of about 10-15% plugs this savings gap. Resultant investment means a move to Stage 4-Drive to Maturity and self generating economic growth, i.e. virtuous cycles (e.g. Botswana)and not vicious cycles (e.g. Argentina).4. Once Stage 5(High Mass Consumption ) is achieved, this society continues to have high consumption and maintains such by incentives to savings plus additional key ingredients (good governance, property rights, human capital and functioning institutions)NASEEM SHAHZAD

Limitations of Rostow's Model1.Rostow's model is limited. The determinants of a country's stage of economic development are usually seen in broader terms i.e. dependent on: the quality and quantity of resources a country's technologies a countries institutional structures e.g. law of contract 2. Rostow explains the development experience of Western countries, well. However, Rostow does not explain the experience of countries with different cultures and traditions e.g. Sub Sahara countries which have experienced little economic development.Comment: Rostows Stages of Economic Development was essentially a statement repudiating The Communist Manifesto!NASEEM SHAHZAD

Criticisms:Too simplisticNecessity of a financial infrastructure to channel any savings that are made into investmentWill such investment yield growth? Not necessarilyNeed for other infrastructure human resources (education), roads, rail, communications networksEfficiency of use of investment in palaces or productive activities?Rostow argued economies would learn from one another and reduce the time taken to develop has this happened?NASEEM SHAHZAD

lewis model & rastow stages

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