Tiêu đề 04 Development Economics - I: Applicability of Theory of growth with unlimited supply of labour.pdf ✅

APPLICABILITY OF THEORY OF GROWTH WITH UNLIMITED SUPPLY OF LABOUR A TERM PAPER Submitted by: ROHAN BYANJANKAR MA First Semeseter Roll: 12 Submitted To: Professor Dr Sohan Kumar Karn Faculty of Economics Tribhuvan University Kirtipur, Kathmandu July 2018
Lewis Theory of development or Theory of growth with unlimited supply of labour The Lewis theory of development is one of the best-known early theoretical model of development that focused on the structural transformation of subsistence sector into the industrialized sector. The Lewis theory of development is also popularly known as Dual sector model as the theory discusses the prospect of growth and development of an economy through the structural transformation between the rural sectors and the urban sector. The theory deals with the problem in underdeveloped nations and explains how unlimited supply of labour can be used as an instrument of development or engine of growth. The theory is based on the notion that all the poor nations of the world are rich in population resulting to mass unemployment mostly in the form of disguised unemployment; consequently, those unemployed labour force are ready to work at cheap wage rate. Hence, those cheap labour forces must be utilized to expedite the growth of an economy. Characteristics of Subsistence and Modern Sectors Subsistence sector  Subsistence sector is rich in population. The rural sector is indeed the most populated sector in the underdeveloped nations.  Rural people are mostly illiterate, ignorant, conservative, innocent, submissive, and shy.  Agriculture is the major occupation of the people residing in the rural sector. Moreover, they adhere to the traditional and obsolete methods of cultivation.  Disguised unemployment prevails in the subsistence sector. Hence, the marginal productivity of labour is zero.  The wage rate in the subsistence sector is lower than in the urban sector. Further, there exists the unlimited supply of labour.
2 Modern Sector  Modern sector is characterized by highly developed infrastructures, rich in human capital, and industrialization.  Urban people are mostly educated, skilled, healthy, bold, and adaptive to changes.  Urban people basically work at industries or service sectors. Moreover, they are familiar to new technologies and use advance technology.  Full employment prevails in the urban sector with no zero marginal productivity of labour. The deficiency of labour force exists in the urban sector.  The wage rate in the industrial sector is about 30 percent higher than the wage rate at subsistence sector. Assumptions of Lewis model  The underdeveloped economy consist of two sectors: a traditional and overpopulated rural subsistence sector, and the urban – industrialized sector.  The rural sector is characterized by surplus labour with zero marginal labour productivity. This implies that disguised unemployment prevails in the subsistence sector so that the labour forces can be withdrawn from the traditional agricultural sector without any loss of output.  The wage rate in the urban – industrial sector is 30 percent higher than the rural agricultural sector.  The rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern – sector capital accumulation.  The process of modern-sector self- sustaining growth and employment expansion is assumed to continue until all surplus rural labour is absorbed in the new industrial sector.  The modern sector labour market guarantees the prevalence of constant real urban wage up to the point where the supply of rural surplus labour is exhausted.  The profit earned from the surplus labour utilization is reinvested till surplus labour force is available in rural sector.
3 Logic behind Lewis Model Some of the basic logic behind the Lewis model are as follows:  The labour force in the rural sector is much cheaper; the industrialist is in profit even after the cost of acquiring the labour from the rural sector is deducted.  The industrialist is in better – off condition as acquiring the labour from the agricultural sector is cheaper than outsourcing.  The long run cost is very cheap, and the long run return is far greater than the long run cost. L1 L2 L3 N1 N2 N3 Wage/Profit P1 P2 P3 Quantity of labour X Y W Q1 Q2 Q3 Figure 1: Lewis theory of development