Question

3. Although the Lewis model is simple and roughly reflects the historical experience of economic growth in the West, FOUR of its key assumptions do not fit the institutional and economic realities of most contemporary developing countries. What are these assumptions and why are they wrong?

Economic Development (12th Edition)

Answer 1

Lewis Model also known as ' dual-sector model' is among one of the theories of developmental economics which believes transition of rural agricultural workers to industrial sector as the key to sustained development.Its assumptions,criticisms and drawbacks are discussed below:-

a)In  this theory "capital" is very crucial for expansion of industrial sector.It believes that the overtime growth of modern industrial sector absorbs the surplus rural labour supply ,promotes industrialization and stimulates growth.But the problem lies in capital,as most of the developing nations lacks capital without which the theory seems to be illogical.The rate of transfer of labour and employment creation may not be proportional to modern sector capital formation rate.Also,technological access is not easy in developing nations.

b)This theory assumes unlimited unskilled labour supply,unlimited capital formation,full employment in urban areas,rationality and perfect informations.These all are not practical in economies of developing nations as capital formation is limited,underemployment of resources still exist in urban areas.

c)The transfer of surplus rural unskilled workers from agriculture sector to industrial sector is assumed to be easy,smooth,inexpensiveness which is not true.We know that most of agriculture workers are unskilled or semi-skilled which are not suitable to be absorbed in capital intensive modern industrial sector as they involve use of technology and requires differently skilled labours with atleast some basic qualification.so it would be better to invest in education and skill development first.

d)As per its assumtion,the Marginal propensity to save is not always near to 1 i.e.all the profits are not saved or invested.A certain increase in profit always leads to some consumption and vice-versa.So the total increment in saving would be somewhat lesser than the increment in profit.