development models - lewis

Lewis Model - An Overview

The Lewis model is structural change model that explains how labour transfers in a dual economy. For Lewis growth of the industrial sector drives economic growth. The Lewis Model argues economic growth requires structural change in the economy whereby surplus labour in traditional agricultural sector with low or zero marginal product, migrate to the modern industrial sector where high rising marginal product.

Transferring surplus labour from rural to urban areas has no effect on agricultural productivity as MP of rural workers = 0.

Firm’s profits are reinvested. Growth means jobs for surplus rural labour. Additional workers in urban areas increase output hence incomes and profits. Extra incomes increase demand for domestic products while increased profits fund increased investment. Hence rural urban migration offers self-generating growth.

The ability of the modern sector to absorb surplus works depends on the speed of investment and accumulation of capital. Where firms invest in new labour saving capital equipment, surplus workers are not taken on by the formal sector. Recently arrived rural migrants join the informal economy and live in shantytowns

Given urban growth drives economic growth it can lead to the neglect of agriculture by government

Neglect of Agriculture – yet most people live in rural areas where incomes are relatively low

Increased profits may be invested in labour saving capital rather than taking on newly arrived workers

For many LDC's, rural urban migration levels have been far greater than the formal industrial sector’s ability to provide jobs. Urban poverty has replaced rural poverty.

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