Approvals & Criticisms of the Lewis Model of Industrialization

The Lewis model of industrialization, or the Dual-Sector model as some call it, is one which
emphasizes the importance of capital formation/ accumulation in the process of industrialization 1. The
Lewis model of industrialization has been applied in various countries and has since not only inspired
other nations but has also served as a basis for many other versions of the model as well as other models.
The Lewis model has various assumptions attached to it and it does not survive without these
being established. It firstly assumes that there are two sectors of the economy: The Traditional and the
Modern sectors. In this section of the essay, we will be discussing the advantages and the criticisms
(disadvantages) of the Lewis model. Granted that the assumptions of the model are essentially the pillars
of its advantages, these two would be grouped together and the criticisms of the model will be considered
as (and grouped with) the disadvantages.
Approvals:
The traditional sector, which is the old-fashioned segment of an economy, is mainly agrarian.
Agrarian meaning that its foremost means of production is plantation based and does not depend on
manufacturing2. This assumption goes on to say that this sector has low productivity and is wage-based,
meaning workers here sell their labor through any formal or informal contract. The reason for it being this
way is due to the fact that the requirements for these types of jobs are not extremely high and are easily
met.
Another assumption is that the modern sector (or the urban sector) is more advanced in its
methods of production, is heavily mechanized and highly industrialized. Because of this, it is somewhat

1 Chalungumana, E. B. M., The Lewis Model of Industrialization, Aug 30 th 2011. The author also
states that the essence of the model is to demonstrate the process of movement of an economy which is
basically subsistent to a stage of economic development.
2 Chalungumana, E. B. M., The Lewis Model of Industrialization, Aug 30 th 2011.

safe to assume that this sector is much more productive than the agrarian sector, due to the fact that
methods of output are not fixed and profits are easily made and reinvested.
Another assumption is that there is a high level of unemployment in the traditional sector. This is
due to the fact that traditional workers are leaving their agrarian methods of production and are becoming
more attracted to the increasingly growing opportunities in the manufacturing sector. Many are attracted,
not to the quality of the jobs offered, but to the promise of higher wages in this sector but normally are not
properly experienced to qualify. In addition to this, a sectors average level of productivity is measured by
its Marginal Productivity of Labor (MPL) and it is said to be possible to withdraw labor from the
traditional sector and still improve the overall stock of the economy.
Criticisms:
The Lewis model was well received upon its inception and was met with critical acclaim. More
than anything it garnered the attention of LDCs (Lesser Developed Countries) due to its dualistic
approach. But as much as it gained popularity, it became the subject of scrutiny by other major economic
camps and intellectuals.
One of the criticisms of the Lewis model is that labor transfer from the traditional sector will
result in a reduction of agricultural output if there are positive opportunity costs (for example, loss of
crops during the peak of the season). That being said in relation to labor absorption, the elasticity of
industrial employment with respect to output has not only been low but has apparently been falling over
time and we can see that in LDCs around the world there seems to be some combined index of
unemployment or underemployment on the rise.3 In addition to this, another criticism is that people in
LDCs seem to be more concerned with unemployment in the urban sector rather than in the agricultural
sector.
3 Werner Baer and Michel E. A. Herv, Unemployment and Industrialization in Developing
Economies, Quarterly Journal of Economics, Vol. LXXX, No. 1, February 1966. Cited by Gustav Ranis,
Industrial Sector Labor Absorption Center Discussion Paper No. 116, Economic Growth Center of Yale
University, July 1971

Lewis model assumes that the rate of the transfer of labor, job formation and output development
hinges on the rate of capital that is gathered in the urban sector. The rate of capital accumulation depends
on the level of profit. The greater the profit earned mean an even greater rate of capital accumulation. But
even in this process there are two evident anomalies. Firstly, what will be the result if all of profits are
reinvested into capital equipment that would save labor? In this instance only profit will expand but
employment will either stay stagnant or decrease. Hence owners of capital will be richer and richer
leaving rural people poor. Gross National Product will increase but total social welfare will not improve.
The second issue is that this model assumes all profit is reinvested.
The model states that if unlimited supplies of labor are available at a constant real wage, and if
any part of profits is reinvested in productive capacity profits will grow continuously relatively to national
income. The only thing is that with wages at subsistence, workers consume all their wages, so savings
only come from capitalists. Profits can only be reinvested based on the distribution of surplus and the
behavior of capitalists who are assumed to save and invest rather than personally consume 4. There is
possibility that if business environment is not optimistic within the economy, there may be capital flight.
Entrepreneur may deposit accrued profit in western banks. In this situation there is no chance of
expansion of output and employment according to the prediction of model 5.
The Lewis model purports a competitive labor market in the modern sector. The implication of
this assumption is that supply of labor is perfectly elastic. But historically it has been observed that there
is tendency continuous rising wages level in almost all developing countries due to the institutional
factors such as union bargaining power, civil services wage scales, multinational companies hiring
practices etc.

4 Geoffrey Harcourt and Peter Kriesler, The Oxford Handbook of Post-Keynesian Economics, Vol. 1:
Theory and Origins. Oxford Handbooks in Economics, Oxford University Press, September 2013.
5 Bharat Poudel, The Lewis Theory of Development An Important note for development theories.
Published on www.scribd.com , June 2010

Some other criticisms of the model are that it fails to state and recognize where the industrial sector sells
its products6. A country can invest heavily into its industrial sector but if there is no demand for products
or if there is no market for it outside of the home country it is virtually doomed and will result in market
failure. One simple yet strong criticism against the Lewis model is that it will fail to exist and would be
deemed base-less if anything is discovered that would render the agricultural sector more productive.

6 Chalungumana, E. B. M., The Lewis Model of Industrialization, Aug 30th 2011.