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Overview of the Lewis Model

The economic growth in the Asian countries, particularly in developing countries, has been phenomenal in the recent years. The developing countries namely India, China and Indonesia have shown rapid growth in the recent past few years. The analysis of growth in the economy is essential to get insight into the crucial factors that affect the economic development (Bigman. 2002). For this purpose, the Lewis model and growth productivity model are considered to be highly useable. In this context, the essay presented here provides an analysis of the Lewis model and the growth productivity model.     

The Lewis Model was developed by W. Arthur Lewis for the purpose of measuring the economic growth in the developing countries. This model is based on the analysis two sectors such as capitalist sector and subsistence sector and it is also known as two sector model (Nafziger, 2012). The capitalist sector comprises private capital owners, which means that the economy having capitalist sector would have people (apart from government) possessing resources of production. Further, the subsistence sector comprises an economy with non-monetary resources. The model provides for measurement of the economic growth through analysis of the labor resource. The model links the economic development to labor productivity.

The Lewis model prescribes that the labor intensive industries can be grown by increasing the supply of labor. The model further states that the surplus supply of labor could be used as an alternative to capital to create more industries and trade and hence achieving the economic growth (Tsegai, 2005). However, achieving the economic development by increasing labor supply can be up to certain limit because after a point, the industries would need capital to make use of surplus labor. Further, increasing the labor supply would also reduce the unemployment rate which is necessary for economic development particularly in the countries undergoing development phase like India and Indonesia.      

There are two sectors of economy as prescribed in the Lewis model such as capitalist sector and the subsistence sector. The subsistence sector is also characterized as the agriculture sector and the capitalist sector is characterized as industrial sector (Ros, 2011). The subsistence sector has high labor supply and low demand but the wages rate remain static due to lower opportunities to grow and capitalize. On the other hand, the capitalist sector is considered to be more productive than the subsistence sector. The labor productivity increases in the capitalist sector because the use of labor is made as per needs of the industry. The situations of labor idleness are rare to observe in the capitalist sector, however, the same are frequent in the subsistence sector. The unskilled labor supply increases rapidly in the subsistence sector.

Labor Supply and Optimal Utilization

The productivity of the subsistence sector depends upon the enhancement in the capitalist sector. This is because the capitalist sector observes all of the excessive labor of subsistence sector, which is necessary for the overall economic development (Qin, 2015). Thus, for the overall economic development, it is crucial to have balanced growth in both the sectors. It is necessary to grow the capitalist sector along with the subsistence sector to achieve overall economic growth. The countries under development experience huge supply of unskilled labor in the agriculture sector, which has limited resource to provide employment. Thus, this excessive unskilled labor could be used in the industrial sector to enhancement the gross domestic output of the country.       

As discussed above, the subsistence sector (agriculture sector) has surplus labor supply, which lowers its productivity. It is necessary to transfer the labor from the subsistence sector to the capitalist sector to improve its productivity (Lall and Selod, 2006). The Lewis model states that when the capitalist sector expands, it absorbs the idle labor of subsistence sector. The subsistence sector comprises the agriculture business which has limited resources to employ the labor. The land is limited and it can not be increased through capital investment, thus, the increase in labor supply is bound to happen with the increase in population. In the developing countries, the increase in population at a rapid pace has been observed to be the normal phenomena. The developing Asian countries namely India and China could be seen to be experiencing high population growth in the recent years.

The Lewis model further states that if the capitalist sector to achieve growth it has two alternatives. Under one alternative, the capitalist sector can use capital intensive technology and under another alternative it can use labor retrenched from the subsistence sector. Thus, the capitalist sector can use the surplus labor of subsistence sector which results in optimal utilization of the economy resources leading to overall economic growth.         

The transfer of labor from the surplus available in the subsistence sector to the capitalist sector is essential for the optimal utilization of the resources and overall economic growth at the maximum possible pace (Routh, 2014). The migration of labor from subsistence sector to capitalist sector would increase the productivity of subsistence sector on the one hand and it would also result in cheaper wages labor being available for capitalist sector. Thus, the migration of labor from one sector to another creates dual economic benefits. The capitalist sector gets labor at cheaper rates, which increases its profitability. Further, business expansion in the capitalist sector becomes easier with low capital outlay in the labor cost.

Balance Growth in Both Sectors

The expansion in the capitalist sector increases employment opportunities, which helps in reducing the employment rate, which is critical for the overall economic development (Petras, Veltmeyer, and Humberto, 2016). Further, this migration of labor from subsistence sector to the capitalist sector also leaves positive impact on the gross domestic product. With the effective and optimal utilization of the labor resources, it is quite obvious that the gross domestic product of the country will increase. The increase in the gross domestic product of the country signifies the economic growth. With the migration of labor from subsistence sector to the capitalist sector, the marginal productivity of both the sector reaches equal level which is necessary for the balanced economic growth.        

Apart from the above, the income of the people also increases which improves the living standard of people. With the improved living standards, the purchasing power of people increases which pushes the demand of goods and services upside. The increase in demand creates more opportunities for expansion in the capitalist sector with the improved profitability (Arnold, 2008). The increase in the production of goods and services results in increase in the gross domestic product which signifies that growth of the economy. Therefore, transfer of labor from subsistence sector to the capitalist sector is beneficial for the overall economy as it results in better and optimal utilization of the idle labor resource.  

The total factor productivity is also known as multi-factor productivity. It refers to the portion of total output (GDP) which is not explained by the amount of input infused in the production. In other words, the total factor productivity is the excess of output over the normal expected output (Comin, 2017). The factor productivity also signifies that the economy has been efficient in utilizing the input resources such as labor and capital. This is because the output is increased beyond the estimations. The expected output is estimated taking regard of the labor and capital inputs. However, when this expected output is increased beyond the estimated level, it is assumed that the economy has utilized the resources more effectively and efficiently.

The total factor productivity is calculated as the residual remaining after deducting the input factor growth from the total income growth. The total income growth is reduced by the growth in labor and capital input factors and the remaining portion of the income growth is called factor productivity (Nachega and Fontaine, 2006). The studies has revealed that the possible determinant of the total factor productivity are government’s fiscal policies, monetary policies, openness to international trade, financial sector development, political stability, and capital base of the country. Among these factors, the most crucial are three namely fiscal policy, monetary policy, and international trade. Further, the effectiveness of the fiscal and monetary policies of a country is the most crucial factor for the overall economic growth.        

Transfer of Labor from Subsistence Sector to Capitalist Sector

The total factor productivity plays a critical role in analyzing the economic fluctuations and setting the future directions for the economic developments. It has been established that the growth in per capital income of the country is signaled by the total factor productivity. The countries having higher total factor productivity signifies availability of the opportunity for growth and economic development (Fuss and Waverman, 2006). The opportunity for growth leads to innovations in the economy. However, the economies having higher factor productivity have already exhausted the labor and capital resources, thus, the incentives for innovation are lost. In order to save the incentives of innovations, the patent policy is adopted. The firms get the innovations patented for exclusive use in the future period which gives them the monopolistic advantages.

It has been observed that higher consumption of resources could the result of increase in efficiency as represented by improvement in the total factor productivity. The innovations and technology are crucial for the economic development for every country either it’s developed or developing. The Asian countries such as China and India are under development phase and these countries require the advancement in the technology at a rapid pace. The total factor productivity is playing a central role in the economic development in these countries. China’s productivity has been observed to be declining due to inefficient use of labor and capital. Now, it is crucial for China to focus on the innovations and technology to improve the productivity. The improvement in the technology through innovations would lead to efficiency which will have positive impact on the output growth. Thus, for the developing countries like China and India, it is important to enhance their technological reach to improve the economic conditions. 

Conclusion

This essay presents concise discussion on two important economic concepts such as Lewis model, which provides understanding of the growth in the labor surplus economy and total factor productivity. The Lewis model states that the entire economy is divided in two sectors such as subsistence and capitalist. Further, the model provides knowledge on the optimal utilization of labor by transferring the excessive labor of one sector to another. As per Lewis model, the subsistence sector experiences oversupply of labor which needs to transferred to capitalist sector. Further, the essay also puts light on the concept of total factor productivity, which provides knowledge on the efficiency of the economy. The growth in the total factor productivity is an indicator of effective utilization of inputs such as labor and capital to produce output. Further, the high factor productivity also signifies that the economy is experiencing technological development and reaping out the advantages of innovations.  

References

Qin, B. 2015. Sustainable Development in Rural China: Field Survey and Sino-Japan Comparative Analysis. Shanghai: Springer.

Bigman, D. 2002. Globalization and the Developing Countries: Emerging Strategies for Rural. Development and Poverty Alleviation. London: CABI.  

D., Comin. 2017. Total factor productivity. Last modified 30. https://www.people.hbs.edu/dcomin/def.pdf

Tsegai, D. 2005. The Economics of Migration in the Volta Basin of Ghana: Household and District-level Analysis. Cuvillier Verlag.

Nafziger, E.W. 2012. Economic Development. New York: Cambridge University Press.    

J., Petras, H., Veltmeyer, and M., Humberto. Imperialism and Capitalism in the Twenty-First Century: A System in Crisis. Routledge, 2016.

Ros, J. 2001. Development Theory and the Economics of Growth. University of Michigan Press.

Nachega, J.C. and Fontaine T. 2006. Economic Growth and total Factor Productivity in Niger. International Monetary Fund.

Fuss, M.A., and Waverman, L. 2006. Costs and Productivity in Automobile Production: The Challenge of Japanese Efficiency. Toronto: Cambridge University Press.

Arnold, R.A. 2008. Macroeconomics. Mason: Cengage Learning.  

Routh, S. 2014. Enhancing Capabilities through Labour Law: Informal Workers in India. New York: Routledge.  

Lall, S.V. and Selod, H. 2006. Rural-urban Migration in Developing Countries: A Survey of Theoretical Predictions and Empirical Findings. Washington DC: World Bank Publications. 

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