Economic Development

Economic development is a process which

entails a gradual transformation of basically a
subsistent agrarian economy into a highly
productive and self sustained industrial
economy.
Why Transformation

 Natural Limits of Land Fertility

 No prospects of increase in employment

level in agriculture
Lewis Model of Transformation

 Traditional subsistent agri sector has zero

marginal production of labor.

 Highly productive urban industrial sector with

high marginal production of labor.
Effects

 Industrial sector attracts labor from agri

sector.
 Profits generated by industrial sector results
in expansion of industry.
 Expansions ultimately absorb all of the
surplus agri labor.
 Agri sector wage rate start increasing.
Pitfalls

 Capitalist profits may not be re-invested.

 Capitalist profits may be re-invested in labor
saving and capital intensive technology.
 Constant wage rate in manufacturing sector
is questionable.
 Assumption of full employment in urban area.
 Application of diminishing returns.
Conclusion
 Dropping “the assumption that the supply of labor was fixed”
Lewis was able to solve two problems that had troubled him.
– First, “What determines the relative prices of steel and coffee?”
– What explained the rising share of profits in nineteenth century
Britain, for the first 50 years of the industrial revolution.
 An ‘unlimited supply of labor’ will keep wages down, producing cheap
coffee in the first case and high profits in the second case.
 It is the national economy model that leads to the Lewis
Model
– However, problems related to the world economy and hence to
the issue of why some nations became rich while others remained
poorer was more fundamental to Lewis’s life work.
 Misperception: Lewis saw industrialization as the key to
development and that he underplayed the role of agricultural.
Conclusion
 His main concern in the national economy model was not
industrialization.
– It was, to understand the process by which a community which
was previously saving and investing 4 - 5 % of its national income,
converts into an economy where voluntary saving is running at
12-15 % approx.
– ‘Why do they [backward countries] save so little’, the … answer is
not ‘because they are so poor’…. The answer is ‘because their
capitalist sector is so small’
 Overpopulation which at first appears to be a disadvantage can
become an advantage in the process of development
– It is possible to vitalize the capitalist sector however small it might
initially be, if unlimited labor is available at a constant real wage,
– The capitalist surplus will rise continuously, and annual investment
will be a rising proportion of the national income
Conclusion
 The theory proposes a division of the economy into
two sectors
– Capitalist and a non-capitalist sector
– The model is intended to work equally well whether the
capitalists are agriculturalists or industrialists.
– The non-capitalist sector serves for a time as a reservoir
from which the capitalist sector draws labor.
 In the world economy model, it shows how the
persistence of surplus labor on a world scale can
limit the possibilities for development in a particular
country
Lessons Learned
 A rise in productivity in the subsistence sector could tend to push up
wages in the capitalist sector but this would only happen if the
subsistence producers were allowed to keep the benefit of the
increased production
 It is not profitable to produce a growing volume of manufactures unless
agricultural production is growing simultaneously.
– This is also why industrial and agrarian revolutions always go together, and
why economies in which agriculture is stagnant do not show industrial
development
 Not that overpopulated underdeveloped countries needed to
industrialize.
– It was that a process of accumulation could start with capitalist enterprise,
be it in the agricultural, mining, manufacturing, tourist or other service
sector.
– Once initiated the productivity of the entire economy and notably the
agricultural sector could be transformed leading to self sustaining
development.