Lewis and Rostow

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Outline the theories of Lewis and Rostow and discuss their relevance in analysing the problems of development in LDC’s

In the 1950’s, the two most prominent economists of the Western school were Arthur Lewis and Walt W. Rostow. Their theories had a significant impact on the policies of Western governments regarding development in LDC’s. Arthur Lewis claimed he was a classical economist because he disagreed with the neo-classical school. He argued that the neo-classical assumption of full employment is incorrect in the long-run, and that they therefore had no long-term perspective on development. However, Lewis has been categorised by other economists such as Hollis B. Chenery, as a Structuralist. This is because his famous ‘two-sector model’ focuses in the mechanisms through which LDC’s can change their economic infrastructure from an agricultural to a more modern industrial one.1 The emphasise on internal modes of production and reform of domestic infrastructure is a distinguishing feature of the Structuralists. In the mid 1950’s Lewis, in his essay ‘Economic Development with unlimited supply of Labour’ put forward his theory of underdevelopment. He begins with the assumption that the economy of the LDC’s could be split into two sectors; the traditional sector, which is agrarian, and characterised by subsistence wages and a surplus of labour. Lewis referred to this as ‘disguised unemployment’. Because of the large labour force in the traditional sector, much of it unused, this results in zero marginal labour productivity. Wages are therefore kept at subsistence levels, which causes wages in the modern sector to be set at subsistence level. The modern sector is characterised as a highly productive, urban, industrial sector. Lewis argues that surplus labour in the traditional sector can be gradually transferred to the modern sector with no loss to productivity because of the zero marginal productivity of labour in agriculture. To encourage the flow of labour from the traditional to the modern sector Lewis allows for a 30% differential in income. Once the modern sector reaches full employment output is increased. The increase is determined by the rate of investment and capital accumulation (this is assuming that excess profits are re-invested). Thus the demand for labour will once again increase and with the 30% premium over traditional sector wages, supply curve of labour from the traditional to modern sector is perfectly elastic. The ‘two-sector’ model of development demonstrates the process of labour transfer and the growth of employment and production in the modern sector. The top right diagram represents production in the traditional sector. Total product (TPA) is the function of variable labour (LA), fixed capital (KA) and traditional technology (tA): TPA = f (LA, KA, tA). In the bottom right diagram we have the average and marginal product of labour curves, which are derived from the total product curve in the diagram directly above it. There are two assumptions made; firstly, the marginal product of labour is zero (MpLA at LA), hence there is surplus labour. Secondly, wages are divided equally in the traditional sector so it is the average, and not the marginal product of labour determines the real wage.2

The diagram on the top left represents production in the modern sector. Again, the total product (TPM) in this sector is a function of the variable input labour (LM), a given capital input (KM), and modern technology (tM): TPM = f (LM, KM, tM). The model demonstrates that at if labour is at L1, and capital stock at KM1, then output will be TPM1. Lewis allows for the re-investment of excess profits in the modern sector, which will increase capital stock from KM1 to KM2 and then to KM3. This results in an increase in the demand for labour (from L1, to L2, then L3), and an increase in output for the sector (from TPM1, to TPM2, and then TPM3). We can see also that the total product curves rise in...
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