wages. While this was consistent with what Lewis called intersectoral hill, Harris and Todaro emphasized it in terms of a competitive neoclassical agricultural wage. On the basis of Lewis’s 1954 model, and its extensions in the hands of Fei and Ranis (1964) and others, one would have expected the realization of the Lewisian turning point in the less developed countries, thus the absorption of their traditional agricultural workers (moving to the urban centers) into their modern capitalist sectors, in other words, implying the relevance of the model to those LDCs. As stated in the Introduction, Gustav Ranis, in his 2003 paper, argued that the model did fit the historical experience of countries like England, Japan, and Taiwan. And, more importantly, it will also be applicable to the experience of many developing countries in the future (2003, p.17). However, Charles Kindleberger casted doubt even in terms of its exact fit during the (European) industrial revolution (in the sense that its true fit needs some adjustments): “The Lewis model fit the
Review of European Studies Vol. 4, No. 4; 2012 135 industrial revolution insofar as the wave of inventions between 1766 and 1775 raised marginal returns to labor in industry and let loose a flood of workers moving off the farm. One might want to adjust the model to allow for three sectors, two in industry, one monopolized by guilds (which were not affected), and the other outside of the range of the guilds. Innovations underway in agriculture spread, and especially profits in industry were reinvested” (1988, p. 18). In terms of its relevance to the developing economies, according to Chen, Jhabvala, and Lund, its policy prescriptions “did not create modern jobs to reduce unemployment or erode the traditional sector” (2002, p.1). How do we explain this lack of fit (thus not giving rise to the Lewisian turning point)? In Section III, I will present two arguments. One, that its assumptions about the LDCs were not terribly realistic. Second, that the Lewis model did not anticipate the substantial increase in and the significance of the informal economy in those countries. (Although Lewis assumed a dualistic model, he was also aware of the elements of informality. In the 1954 paper, he made a reference to the formal-informal dichotomy on pages 141 and 142). 3. Arthur Lewis’ Assumptions and Contemporary LDCs: Are they Realistic? As many writers have argued, the classical-based two-sector Lewis model reflects the economic growth of various European countries of the past few centuries. As a result, some of the assumptions of this dualism model do not seem to capture the realities of at least most contemporary LDCs, explaining why the Lewisian turning point did not occur in those countries, and why the afore-mentioned dichotomy of formal versus informal economies has become so significant. According to Chen, Jhabvala, and Lund, Lewis’ classically-based model failed to predict the persistence of many traditional forms of employment, or the emergence of new forms of non-standard types of employment. In other words, the Lewis model failed to predict that the formal-informal dichotomy is paramount in the present day LDCs, and that it will not disappear for years to come (2002). It is for this reason that for writers such as Centeno and Portes, the application of this model to the LDCs is inappropriate (2003, p. 3). As we are reminded by M. Todaro and S. Smith, the Lewis model implicitly assumes that the rate of labor transfer and employment creation in the modern capitalist sector is proportional to the rate of capital accumulation in this modern sector.(2003, p. 120). As a result of this assumption, then, the faster the rate of capital accumulation, the higher the growth rate of the modern sector and the faster will be the rate of job creation. But, what if capitalist profits are reinvested in more sophisticated labor saving capital equipment rather than just duplicating the existing capital as is implicitly assumed in the Lewis model? The model also assumes that capitalist profits are in fact reinvested in the local economy and are not sent abroad as a form of capital flight – as has often been the case – to be invested in more advanced economies, or even be kept and deposited in Swiss or other Western banks (Besides, as post 1954 research has demonstrated, in addition to physical capital, development also requires human and social capital which have been inadequate in most of LDCs).
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