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Lewis's Dual Sector Model and Challenges of Economic Development in Contemporary AfricaBy: Wolassa L. Kumo

[ Posted On: 2011-11-03 ]
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Dr. Wolassa Kumo Dr. Wolassa Kumo.

Introduction

My 40th article with Afroarticles is devoted to the seminal work in development economics of Sir Arthur Lewis (January 23, 1915- June 15, 1991), the first and the only black person to win the Nobel Memorial Prize in Economic Science. Professor Lewis won the 1979 Nobel Prize in economics for his seminal contribution in dual sector theory or the theory of economic development with unlimited supply of labour published in 1954. Lewis's dual sector model was the most influential contribution to the establishment of the field of development economics. In fact, many economists agree that it was Sir Lewis who virtually founded the entire discipline of development economics, and therefore regard him as the father of the discipline.

Born in a Caribbean island of Saint Lucia, to parents who were both school teachers and who immigrated from Antigua a dozen years back, Lewis excelled in his early studies and won scholarship to London School of Economics (LSE) in 1933 where he graduated with first class honors in 1937. The same year, the LSE, where he also lectured, granted him scholarship to pursue his PhD in industrial economics, which he successfully completed in 1940, at the age of 25. In 1948, at the age of 33, he became a full professor of economics at the University of Manchester.

He had written extensively on industrial economics, which he dropped in 1948, history of world economy since 1870 and development economics.

His 1954 seminal article on Theory of Development with Unlimited Supply of Labour departs from the neoclassical tradition by throwing away the neoclassical assumption that the quantity of labour in productive process is fixed. He instead assumed that underdeveloped countries were endowed with unlimited supply of labour in rural agricultural sector due to population pressure, which keeps wages down and allows the capitalist sector in urban areas to tape into the excess labour supply to increase its production and profit without causing decline in output in traditional sector. The result is a dual national or world economy where one part is a reservoir of cheap labour for the other. His paper is written in a classical tradition.

The publication of Lewis's 1954 article ignited a wide spread research in the area and led to the publication of numerous articles and books which latter constituted the various theories of development economics. In this brief article we revisit the salient features of the Lewis Dual Sector Model and assess its relevance to the development challenges in contemporary Africa.

The Salient Features of the Lewis Dual Sector Model of Economic Development

The Lewis dual sector model of economic development is a structural-change theory based on two sectors of an economy: (a) the traditional subsistence sector, and (b) the modern industrial sector. The traditional subsistence sector is overpopulated and characterized by zero marginal productivity of labour. Lewis argued that due to zero marginal productivity of labour, it is possible to relocate unlimited number of workers from the traditional sector without causing decline in its output. Lewis regards this traditional sector as a sector with surplus labour which could be effectively absorbed in other more productive sectors of the economy to spearhead economic development. When describing this sector Lewis (1954) stated: "The subsistence sector is by difference all that part of the economy which is not using reproducible capital. Output per head is lower in this sector than in the capitalist sector, because it is not fructified by capital (this is why it was called "unproductive"; the distinction between productive and unproductive had nothing to do with whether the work yielded utility, as some neo-classicists have scornfully but erroneously asserted)." He also maintains that in the neo-classical model an increase in capital formation has to be accompanied by a corresponding fall in the output of consumer goods, since scarce resources can do one or the other, but not both while in the Keynesian model an increase in capital formation also increases the output of consumer goods, and if the multiplier exceeds 2, the output of consumer goods increases even more than capital formation. In Lewis's model, however, capital formation goes up, but the output of consumer goods is not immediately affected.

The second sector is the modern urban industrial sector, characterized by high level of productivity. Economic development involves the gradual transfer of labour from the traditional subsistence sector to the modern, urban sector leading to more output and employment. This process leads to structural transformation of an economy from the one dominated by traditional subsistence to the one predominantly modern and industrialized.

According to Lewis the speed of this expansion depends on two factors:

a) Rate of industrial investment and capital accumulation, and

b) Wage differentials between the rural sector and the urban sector.

Lewis argues that the rate of industrial investment depends on level of profit by the capitalist sector and that all profits is reinvested. He argues that the central problem in the theory of economic development is to understand the process by which a community which was previously saving and investing small percentage of its national income converts itself into an economy where voluntary saving is running at a substantially higher level. For him this is the central economic problem because the central fact of economic development is rapid capital accumulation, including knowledge and skills with capital. He stresses that industrial revolution cannot be explained fully until we explain why saving increased relatively to national income. He reiterates that the central fact of economic development is that the distribution of incomes is altered in favour of the saving class and that poor countries save little because their state capitalist and private capitalist sector is small.

He argues further that as more capital becomes available through increased profit more workers can be draw into the capitalist sector from the subsistence sector, leading to higher output per head. This will lead to more surplus, greater capital formation, and so the process continues until the labour surplus disappears. In Lewis's model, the capitalist sector did not refer only to private entrepreneurship. By the capitalist sector he referred both to state capitalist and private capitalist, that spearheads economic development.

On wage differentials, the model assumes that there should be at least 30% higher wage rates in urban sector than the rural sector in order to ensure an automatic transfer of labour from the latter to the former. He also assumes that due to perfect competition and the objective of profit maximization in modern capitalist sector, labour is employed only up to a point where wages are equal to the marginal productivity of labour. On the other hand, the wage in rural sector is determined by "the average product of the farmer since men will not leave the family farm to seek employment if the wage is worth less than they would be able to consume if they remained at home."

In effect the Lewis model hypothesizes that if unlimited supplies of labour are available at a constant real wage, and if any part of profits is reinvested in productive capacity, profits will grow continuously relative to the national income, and capital formation will also grow relative to the national income leading to rapid industrialization and economic transformation.

He, however, cautioned about the possibility of rising real wages, leading to lower profit and lower capital accumulation if, first, capital accumulation is proceeding faster than population growth, secondly, the increase in the size of the capitalist sector relatively to the subsistence sector may turn the terms of trade against the capitalist sector, force the capitalists to pay workers a higher percentage of their product, in order to keep their real income constant, thirdly the subsistence sector may also become more productive in the technical sense through investments in irrigation works, in transport facilities, or in electricity, and finally trade union actions may lead to more wages diminishing the capitalist surplus and hence economic growth. He argues further that in such circumstances, due to globalization, the capitalists can avoid the decline in his surplus and capital accumulation in one of two ways, by encouraging immigration or by exporting their capital to countries where there is still abundant labour at a subsistence wage.

Lewis also noted that there might at any time be a shortage of skilled workers of any grade-ranging from masons, electricians or welders to engineers, biologists or administrators. But he considered skilled labour only as a very temporary bottleneck, in the sense that if the capital is available for development, the capitalists or their government will soon provide the facilities for training more skilled people. For him the real bottlenecks to expansion are therefore capital and natural resources, where he treats the growth of the supply of skilled labour and the growth of capital as a single phenomenon in long run analysis.

The Lewis model became the general theory of the development process for developing countries with surplus labour during the 1960s and early 1970s also its relevance goes beyond the confines of the direct policy applications of his theory during this period.

Lewisian Turning Point

Lewisian turning point refers to a point where, according to Lewis, developing countries' industrial wages begin to rise quickly when the supply of surplus labor from the countryside tapers off. The point, named after him, has recently gained wide circulation in the context of economic development in China, since the Lewis Model has explained the Chinese economic transformation very well. Chinese migrant workers' wages increased by about 17% in real terms in 2009 and by about 20% in the first half of 2010 indicating that according to the Lewis Model, China might have exhausted its surplus rural labour and on the Lewisian turning point. However, some analysts dispute this and argue that China is still far away from the Lewisian Turing Point as nearly 45% of its labour force is still in rural areas while the agriculture sector contributes only 11% of the GDP and that rises in real wages may be only cyclical.

Relevance of the Lewis model to the current Development Challenge in Africa

Nowhere is the Lewis model more relevant today than in Africa. Today agriculture provides 70% of employment but only 30% of Sub-Saharan Africa's gross domestic product. This implies that the productivity of the workers in rural, predominantly subsistence sector in sub Saharan Africa is 0.42 units compared to about 2.33 units in the modern sector, implying a huge productivity gap Lewis predicted nearly six decades ago. After six decades, the predictions of the Lewis dual sector model remain robust and that African countries plagued with soaring unemployment, rural poverty and massive labour surplus could heed his advice and devise appropriate industrialization strategy to transfer the bulk of rural labour to alternative productive sectors. According to the above simple calculation, at least 40% of the labor force employed in rural agriculture is redundant today and can be productively employed in modern sectors if governments and private sectors able to rise their savings and investments in industrial sector.

Africa's natural resource endowment provides sufficient funds to increase voluntary savings and spread head industrialization and reverse the current trend of massive deindustrialization. However, poor governance and corruption hampers the development of viable state capitalist or private capitalist sector Lewis envisioned six decades ago and left the continent at the vagaries of nature until today.

In addition to measures aimed at shifting the surplus rural labour, governments should increase investments to directly increase the productivity of the traditional agriculture as well as create enabling environments to local entrepreneurs to develop large scale commercial agriculture which could absorb much of the surplus subsistence labour. Leasing large chunks of fertile land to foreign companies or governments to produce food for their own citizens back home would not provide a sustainable solution to poverty and unemployment in Africa. More than 239 million people in Sub-Saharan Africa live in hunger today unable to produce sufficient food. Subsistence agriculture in sub-Saharan Africa is entirely dependent on nature. Frequent drought triggered by global warming wipes out the entire live stock of nomads or food crops leading to frequent food insecurity and famine as we currently witness in Horn of Africa.

Finally, it is high time that African countries considered building a Lewis Academy of Economic Development in Africa in Honour of this great Economist of all time and the father of Development Economics, who also happens to be an African.

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About The Author: Dr. Wolassa L. Kumo -- is a development practitioner and researcher. His research interests include risk and uncertainty, productivity and efficiency, finance and investment, currency substitution and development problems of Africa. Currently, he is working as a researcher in a public institution with a primary responsibility in econometric modelling. Previously, he taught Principles of Economics in an academic institution. FaceBook: www.facebook.com/people/Wolassa-Kumo/100000140891395 before and after the --> | View Profile & All Articles By: Wolassa L. Kumo |

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