Leadership
...s the labour market dualism. In the Lewis model, the underdeveloped economy consists of two sectors: one sector is the urban industrial sector and the other is the rural traditional agricultural sector. Lewis wanted to build a dualistic model that fit some economies but by no means all. The model was intended to be useful for economies such as those of Egypt, India and Jamaica. It was explicitly not intended to be applicable to the UK or Northwest Europe. The traditional agricultural sector was assumed to be of a subsistence nature characterized by low productivity, low incomes, low savings and considerable underemployment. The Lewis model starts with the assumption that there are unlimited supplies of labour in the subsistence sector meaning that supply of labour exceeds the demand for labour at the current subsistence wage. Thus the marginal product of labour in the subsistence sector is equal to or less than the subsistence wage; therefore a reduction in the number of workers would not lower average product of labour and might even raise it. Although the Lewis two-sector development model is simple and explains the economic growth in the West??, three of its assumptions do not fit in the institutional and economic realities of most Third World Countries. Firstly, the model assumes that the rate of labour transfer and employment creation in the modern sector is equal to the rate of modern sector capital accumulation. The faster the rate of capital accumulation, the higher the growth rates of the modern sector and the faster the rate of new job creation. But what if the capitalist profits are reinvested in labour saving technology rather than just duplicating the existing capital as assumed by the Lewis model. In many developing countries due to political instability, it can be seen that the profits are not reinvested rather they are sent abroad as a form of capital flight and then are added to the deposits of Western banks. The second questionable assumption of the model is that surplus labour exists in rural areas while there is full employment in urban areas. It is very hard for people coming from rural areas to find jobs in the urban sector. It can be argued that urban unemployment has replaced the rural unemployment. The main reason is that there are few schools/colleges in the rural sector and people who migrate from rural to urban areas are not well educated and they end up working as domestic servants or messengers in offices. There work does not get accounted for in the GDP. In many third world countries there is substantial unemployment in the urban sector but little general surplus in rural areas. The reason being that in large parts of Asia and in isolated regions of Latin America the land ownership is very unequal. Development economists today seem to agree that the assumption of urban surplus labour is empirically more valid than the opposite Lewis assumption of rural surplus labour. The reason being that in the rural sector there are no specific hours of work. One can do work whenever he/she wants to on the farms. So in a sense every person in the rural sector works, but this however is inefficient. That may be the reason why it was hard to see the surplus labour in rural areas. The third unrealistic assumption is that the competitive modern sector labour market that guarantees the continued existence of constant real urban wages till the point where the supply of rural surplus is exhausted. But however, it can be seen that in most developing countries there was a tendency of these urban wages to rise over time (both in absolute terms and relative to average rural incomes) even when there was rising levels of urban sector unemployment and low or zero marginal productivity in agriculture. This was due to the institutional factors such as union bargaining power and civil service wage scales. Other criticism of the Lewis model are that the process of absorption may end even before the surplus labour in the subsistence sector is fully exhausted, owing to the checks to the expansion of the capitalist surplus. Capital accumulation and labour absorption may be checked for reasons that are related to the expansion of capitalist sector itself. For example, as the capitalist sector expands, the terms of trade may turn against it. If the demand for food is more than the agriculture output, then the capitalist s...