The Lewis Model of Economic Development

The Lewis Model of Economic Development
In this article we will discuss about the Lewis model of economic development.
A number of economists attempted to analyse development in the context of a

‘labour-surplus economy’. These theories owe their origin to the celebrated work of
Nobel Laureate Sir W. Arthur Lewis in 1954. An elaborate discussion of the labour-
surplus economy is given by G. Ranis and John Fei in 1961.
In 1954 Sir Arthur Lewis published a paper, ‘Economic Development with unlimited
supplies of labour’ (The Manchester School), which has since become one of the most
frequently cited publications by any modern economist: its focus was a ‘dual
economics’ —small, urban, industrialised sectors of economic activity surrounded by
a large, rural, traditional sector, like minute is largely in a vast ocean.
A central theme of that article was that, labour in dual economies is available to the
urban, industrialised sector at a constant wage determined by minimum levels of
existence in traditional family farming because of ‘disguised unemployment in
agriculture, there is practically unlimited supply of labour and available of
industrialisation, at least in the early stages of development. At some later point in
the history of dual economics, the supply of labour is exhausted then only a rising
wage rate will draw more labour out of agriculture.
With their acute material poverty, it is difficult at first sight to imagine how the
overpopulated countries can increase their savings without great hardships. On the
contrary, their surplus population on the land seems to offer a major unused
potential for growth, waiting only for the ‘missing component’ of outside capital to
assist them in the process.
Moreover, their rapid rates of population growth lend themselves to calculations of

aggregate capital requirements which must be made available if their per capita
incomes are to be maintained or raised.
“All in all, the drama of the poor countries struggling at the minimum
subsistence level and the need for a massive dose of outside capital to
break the interlocking vicious circles which hold them down to that level
does not attain its full tragic grandeur unless viewed against the
background of overpopulation.”
An LDC is conceived to operate in two sectors:

(1) A traditional agricultural sector, and
(2) A much smaller and also more modern industrial sector.
“Surplus labour” (or disguised unemployment) means the existence of such a

huge population in the agricultural sector that the marginal product of labour is zero.
So, if a few workers are removed from land, the total product remains unchanged.
The essence of the development process in such an economy is “the transfer of

labour resources from the agricultural sector, where they add nothing to
production, to the more modern industrial sector, where they create a
surplus that may be used for further growth and development.”
In Lewis model the transformation process or the process of structural change starts
by an autonomous expansion in demand in industry as a result of changes in
domestic consumer tastes, in government purchases, or in international markets.
The central point is that labour (here considered homogeneous and unskilled) shifts
from agriculture into industry. The supply of labour from agriculture to industry is
“unlimited” (i.e., completely elastic) at the given urban wage (about 30 to 50% higher
than the rural wage), owing to the relative sire of the agricultural labour forces at the
margin.
The phenomenon is frequently labelled “disguised unemployment in

agriculture”. Redundant supplies of unskilled labour to industry at existing wages
hold down industrial labour costs. But higher demand and higher prices in industry
result in higher profits.
When these profits are ploughed back into industrial capital formation, demand for
industrial output (both for consumption goods by newly employed workers and
investment by capitalists) rises, causing further shifts of labour out of agriculture
into industry.
The process comes to a halt when agricultural productivity rises to a point where the
supply price of labour to industry increases, i.e., a point at which agricultural
alternatives of output and income are sufficiently attractive to the would-be
industrial workers to keep them in farming. In the absence of rural-urban differences
in the cost of living, this occurs when the marginal product of labour in the two
sectors are equal.
Lewis postulates the existence of a subsistence sector with surplus labour and he sees
in this the seed for the subsistence sector. One major characteristic of the capitalist
sector is that it uses reproducible capital and that it produces profit.
Since there is surplus labour from the subsistence sector, the capitalist sector draws
its labour from the subsistence sector and it is assumed that as a result of rapid
increases in population in already densely populated countries the supply of
unskilled labour is unlimited.
So capitalists can obtain even increasing supplies of such labour at the existing wage
rate, i.e., they will not have to raise wages to attract more labour. So, the capitalist
sector can expand indefinitely at a constant wage rate for the unskilled labour.
The actual (market) wage rate will be determined by earnings in the subsistence
sector. But ‘earnings’ here means the average product and not the marginal one, in
subsistence sector receives an equal share of what is produced.
Lewis has assumed and made the point that capitalists will have to pay a margin of
about 30% above average subsistence pay, because the surplus workers need some
incentive to move and in any case part of the difference is needed to compensate
them for the higher cost of living in urban areas.

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The Lewis Model of Economic Development

A number of economists attempted to analyse development in the context of a

Moreover, their rapid rates of population growth lend themselves to calculations of

An LDC is conceived to operate in two sectors:

(2) A much smaller and also more modern industrial sector.

“Surplus labour” (or disguised unemployment) means the existence of such a

The essence of the development process in such an economy is “the transfer of

The phenomenon is frequently labelled “disguised unemployment in

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