Question

Use the Lewis two sector model. Assume a country is in early stages of development and the you want to help develop the country using the Lewis two sector model. What would you predict about the production function before and after development of the country?

Answer 1

In 1954 Sir Arthur Lewis published a paper, ‘Economic Development with unlimited supplies of labour’ 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.

Due to the reference of the two economic sectors in the economy, this model is popularly known as - 'Lewis two sector model.' This model shows how a country develops mainly during the early stages of development, when the country is underdeveloped and just starting the process of development.

According to this model the development takes place by transferring of labour from the surplus sector to the deficit or scarce sector.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.

The production function of the economy before the economic development is a labour intensive production function. This means that most of the goods and services in the economy is produced by using labour as a major factor of production, this is because labour is relatively cheaper because of the presence of unemployed labours in the subsistence sector, which means that capital labour ratio is very low during early stages.

But the production function of the country changes after the country develops to a certain level. At this stage now the country starts substituting labour with the capital because the labour becomes more costly as compared with capital. This is because the extra labour in the substitance sector is now fully employed. So now the country adopts a capital intensive production function.