The Lewis Two Sector Model of Development

This is one of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy.

In 1954, Sir Arthur Lewis wrote a paper entitled “Economic Development with Unlimited Supplies of Labour”, which has had a lasting influence on the way we understand economic development. He wrote this paper while he was at Manchester, but subsequently moved to the West Indies, where he was born, and was later awarded the Nobel Prize in 1979.

The Lewis model of economic development postulates two sectors, the subsistence and the modern. This has often been interpreted as agriculture and industry, although Lewis himself meant a broader class of subsistence, which included agricultural labour, the urban poor, domestic servants and so on.

The subsistence is a reservoir of surplus labour whose low wage prevails across the economy and in the industrial sector as well. The capitalist industrial sector develops rapidly by drawing on this infinite supply of very cheap labour.

There is continuous labour migration from the traditional to the modern sector (read “rural to urban”). Wages remain constant and low for long periods of time, and economic growth occurs as the rising share of profits gets reinvested.

In the Lewis model, eventually the reservoir of cheap labour gets exhausted, capital accumulation slows down and wages get determined by marginal productivity as in standard economic textbooks.

The Lewis model is more than 50 years old, but it has been eminently validated by the experience of development of many countries in Asia and Africa. Even though abstract and skeletal, the model seems to be an accurate description of China’s growth experience of the past two decades, including the last bit about eventually declining labour supply.

Summary of Lewis Model

In the Lewis model, the underdeveloped economy consists of two sectors:

A rural subsistence sector characterized by zero marginal labor productivity—in the sense that surplus labour can be withdrawn from the agricultural sector without any loss of output.

A high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred.

In simple words, when the surplus labourers are withdrawn from the farm sector, it will not affect the output. This surplus labour is when involved in industrial sector, it will improve productivity. Thus, the surplus labor, which was not generating any marginal productivity, will generate profits when they are shifted to the industrial sector. When the profit is reinvested in innovative machines and tools, the per labour productivity will increase and profits will boost. Thus, a cycle of re-investments and profit increments is created which results in self- sustainable growth process.