Question

1- Lewis's two-sector model is said to be a good description of industrialization in East Asia. What is the essence of this model? Use the graphs to represent the two sectors and explain in detail the dynamics of the labor movement between the two sectors. What is the model’s relevance to understanding economic growth in Asia? Discuss the long-term implications of economic growth in East Asian economics systems.

2- According to Hayek’s article “The Use of Knowledge in Society,” what is the fundamental role of prices in the economy? Why does Hayek use the word marvel when he describes the price mechanism? What happens when prices are determined by the state rather than by the interaction of many buyers and many sellers in the marketplace? Discuss the differences in allocative efficiency between a capitalist and a socialist economic system as they relate to the price mechanism in each system.

Answer 1

1. Essence of Lewis Model: The model focussed and emphasised on the need of countries to transform their structures from primarily agricultural with low productivity of labour to industrial activity with high productivity of labour.

The agriculture sector employs a lot of people and their marginal productivity is very less. Moving some people out of it will not reduce the overall productivity of the sector. This labour can be transferred to the industrial sector or the modern sector. With adequate labour supply, these industries start making profits which can then be reinvested into more industrialisation which results in capital accumulation and thus economic development.

As we can see in the diagram above, there is excess of non productive labour in the traditional economy . This excess labour can be easily transferred to the modern industrial sector where the marginal productivity is not zero. Please not that WLm( wage of labour in modern sector) > WLt (wage of labour in traditional sector) which is one of the main reasons for labour to shift the sectors as well. Now the production from this labour in modern sector reaps profits which can be reinvested and capital can be accumulated. This will keep happening and can stop only when WLt comes to the level of WLm becuase then the labour have less incentive to migrate.

Model's relevance and implications to economic growth in East Asia:

1. In India: More than half of the total workforce of India was employed in the agriculture sector. Despite that in the recent years, agriculture failed to cope up with the manufacturing and industrial sector and there was a huge transition of workforce from primary to the other sectors. Between 2009-10 and 2011-12, the employment in the industrial sector grew by approximately 16 million. Employment rate was the highest i.e around 8.5% per annum. During 2013-14 and 2015-16, the largest decline in employment was in the primary sector.. Yet, however the GDP of the primary sector was not falling rather rising, thus justifying the Lewis model. The number of absolute poors in the country fell and expenditure on durable and non durable goods also increased.

2. In China: China has been growing constantly for a few decades now. This growth is because of the modern sector which has been getting unlimited supply of labour force from primary sector. The labours migrate from the agricultural sector due to low wages and low standard of living. This helps the modern industrialised sector to earn profits and convert them into capital. However, recently, there has been an unrest in the labour market in China and it seems that it is on the verge of LewisTurning Point. It means that cheap labour is no more avialable which reduces the production in the industrialised sector and thus slows down the economy.