Question

Lewis Model: Within the Asian Economic Model, considerable emphasis is given to the Lewis two-sector model as an approach or framework to understand industrialization in Asia. What is the essence of this model, and why is it of relevance to understanding economic growth in Asia?

Answer 1

Lewis model was developed in an attempt to show the 2 sectors of an economy. its main focus was on the developing nations though it was believed that even developed nations had faced it at one point of time.

in a developing economy , it is assumed that there are 2 sectors : agriculture or the traditional sector and industrial or the modern sector .

it is assumed that the agriculture or the traditional sector is in rural areas of the economy and tends to have unlimited labour supply ( though not all developing economies ahve unlimited supply of labour )and live on minimum wage subsistence.

whereas in the modern sector which is usually in the urban sector, it is assumed that the labour is limited and the wages are higher than those in traditional sector ,  

then comes the part where we look at the change over the time in these sectors.

accroding to lewis, the capitalists in the urban sector tend to save the hwole of the profit earned and reinvest it the next year, but such a tendency is not seen in the tarditional sector because it is assumed that the workers in poor sector are too poor to save and the landowners believe in not saving and spending more.

so when the capita;lists reinvest the capital stock increases which would ultimatley increase the marginal product of labour of urban workers and so there will be more labour in modern sector than in period 1 and this leads to shift in labour from rural to urban sector. this continues and we reach a point where the wage in agricultural sector is also increasing, which is the turning point in the traditional sector .

all of this leads to more and more shift of labour in the urban or modern sector and a time comes when the traditional sector comes to an end or is too small.

then the developing economy is said to have become an industrialised economy.

this model is of relevance to understand economic growth in Asia because Asia seems to fit the surplus labour economy model, both in terms of its structures and development patterns of Lewis model. also due to the reason that a major part of Asian population was a rural populatioin , the interest or relevance becomes even more profound.

in the mid-1960s Asian countries were on average more industrialized than sub-Saharan Africa, as indicated by their respective shares of employment in the industrial and services sectors. However, in both regions over 80 per cent of the population in the mid-1960s were still in the rural sector, mostly engaged in agricultural activities.but the pressure on land was much hgher in Asia which made the main constraints to growth and so it is more important to focus on the supply of unlimited labour in Asia .

in Asis , agriculture, given its high population density,consisted of highly differentiated peasant ownership structures, with a large part of the agricultural labour force taking the form of landless labourers or poor peasant farmers with the major part of their livelihood taking the form of wage income. Rural wages in these economies are well below the average product of labour ie just for minimum subsistence.

Though initially the modern sector in Asia was slower than it should have been , rapid growth of an industrial capitalist sector in Asia,which resulted in an increase in the share of profits in national income,came from savings in the modern sector Assaid by Lewis ‘the major source of savings are profits, and if we find that savings are increasing as a proportion of national income, we may take it for granted that this is because the share of profits in the national income is increasing’.

Surplus agricultural labour allowed the rapid expansion of the capitalist sector which increased the share of profits in national income in Asia as we have seen in the Lewis model .

so both savings in modern sector and surplus labour in agriculture which later moved to modern sector helped Asia to grow fatser and so Lewis model is relevant to some extent in Asia.