IB Economics www.tutor2u

IB Economics

www.tutor2u.com The Lewis Dual Sector Model

As with the Harrod-Domar model the Lewis model is a development model not a strategy. W. Arthur Lewis put forward the model in the 1950s and there have been variations since. It tries to explain how a developing economy moves from a traditional agricultural base to a modern manufacturing led economy. The model assumes that a developing economy has a surplus of unproductive labour in the agricultural sector. These workers are attracted to the growing manufacturing sector where higher wages are on offer. It is also assumed that the wage on offer in the manufacturing sector is fixed. Entrepreneurs in the manufacturing sector will make a profit because they charge a price above the fixed wage rate. The model then assumes that these profits will be reinvested in the business in the form of more fixed capital. Firms productive capacity is thus increased and entrepreneurs will demand a greater amount of labour. More workers will be employed from the surplus found in the agricultural sector. The process continues until all surplus labour from the agricultural sector has been employed. The manufacturing sector has grown and the economy has moved from a traditional to industrialized one. Criticisms of the Model •

Model assumes that all profits made by the entrepreneurs will be reinvested, this may not always be the case

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Reinvestment may take place in the form of fixed capital but it may be capital that is labour saving and thus demand for labour may in fact fall.

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The model also assumes that there is a surplus of labour in the agricultural sector that can easily move to the manufacturing sector.

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Wage levels may not always be fixed. There may be upward pressure on wages for example through trade union activity and profits may therefore fall.

Further Reading http://en.wikipedia.org/wiki/Dual_Sector_Model http://tutor2u.net/economics/content/topics/development/development_models_lewis.ht m