ECON 4170: Lewis Two Sector Model Of Economic Development

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Course: ECON 4170
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Lewis two-sector model of economic development
Overview Assumptions of the model
In the Lewis two-sector model of economic development, Arthur Lewis proposed that there are two main sectors in underdeveloped countries consisting of the agricultural and industrial sectors (Todaro and Smith 115). In the labor intensive agricultural sector, there are low wages, abundant labor, but also low productivity. This contrasts with the industrial sector where there are higher wages in the manufacturing industrial while there is higher marginal productivity (Todaro and Smith 115). The unlimited labor supply in the agricultural sector, which is a traditional sector, necessitates labor to move to the industrial sector because of the higher wages (Todaro and Smith 115).
Outline of model
Lewis argued that in agriculture there are only few workers contributing towards the output because of the low marginal productivity while there is surplus labor (Todaro and Smith 116). As such, people can move out of this sector without affecting agricultural productivity. In the industrial sector, the availability of technology and capital improves productivity as capital accumulation drives growth. When there is exhaustion of the surplus labor there tends to be structural shifts in the economy when there is capital accumulation and investments. This is possible as there are excess profits over the wages that necessitate investments in the modern sector (Todaro and Smith 116). Capital is assumed to be reinvested to improve output assumption, and over time there is structural transformation that results in growth in the self-sustaining industry and moving away from substance farming
Criticism leveled at model
In the two-sector model, there is a closed economy where there are only agricultural and industrial sectors. Lewis assumed that as the capitalist industrial sector expands, there is growth when there are higher profits, which are reinvested in the modern sector. However, Lewis oversimplifies the explanation by assuming that the entire industrial sector output would be automatically resold. The employment creation and labor transfer is proportional to the capital accumulation rate as assumed in the model since capital accumulation spurs growth in the modern sector and faster job creation (Todaro and Smith 117).
Lewis assumed that agricultural productivity is always low, and that the migration of people from rural areas is unlikely to decrease agricultural production. However, workers do not readily transition from agriculture to the industrial sectors where some skills are not easily transferable. The industrial sector increasingly relies on technology as there is lower demand for labor, indicating that the surplus labor from the rural economy cannot be readily absorbed in the modern industry sector. With the growing mechanization of the agriculture sector, fewer agricultural workers are required. The model further treats the marginal productivity of labor in the agricultural sector to be almost z...