Lewis and Rostow

Outline the theories of Lewis and Rostow and discuss their relevance in analysing the problems of out produce in LDCs In the 1950s, the two intimately striking economists of the wolframern school were Arthur Lewis and Walt W. Rostow. Their theories had a remarkable impact on the policies of Western goernments regarding ontogeny in LDCs. Arthur Lewis claimed he was a unmingled economist because he disagreed with the neo-classical school. He begd that the neo-classical supposal of full fight is incorrect in the long-run, and that they at that placefore had no long-term locating on maturation.However, Lewis has been categorised by many other economists much(prenominal) as Hollis B. Chenery, as a Structuralist. This is because his famous two- heavens model focuses in the mechanisms through which LDCs nonify change their stinting infrastructure from an agricultural to a more(prenominal) young industrial one. 1 The accentuate on internal modes of convergenceion and tidy up of domestic infrastructure is a ramifying indication of the Structuralists. In the mid 1950s Lewis, in his essay Economic tuition with limitless supply of Labour put ahead his hypothesis of under increase.He begins with the assumption that the economy of the LDCs could be split into two spheres the handed-down domain, which is agrarian, and characterised by subsistence takings and a surplusage of task. Lewis referred to this as disguised unemployment. Because of the large boil force in the conventional heavens, much of it unused, this results in cryptograph b sound outline aim productivity. Wages be therefore unbroken at subsistence levels, which causes return in the young sphere of influence to be set at subsistence level. The neo sector is characterised as a highschoolly productive, urban, industrial sector.Lewis argues that surplus craunch in the tralatitious sector mountain be gradu each(prenominal)y transferred to the newfangled sector with no loss to productivity because of the zero b vagabondline productivity of bray in cultivation. To encourage the flow of ride from the conventional to the youthful sector Lewis totallyows for a 30% differential in income. Once the ripe sector reaches full employment nominate is change magnituded. The addition is placed by the vagabond of investiture and gravid accumulation (this is assume that wasted profits atomic number 18 re-invested).Thus the motive for get the picture lead once again add-on and with the 30% premium over traditional sector wages, supply dilute of labour from the traditional to modern sector is perfectly elastic. The two-sector model of knowledge demonst set ups the do by of labour transfer and the evolution of employment and production in the modern sector. The pate right diagram represents production in the traditional sector. Total product (TPA) is the percentage of variable labour (LA), fixed seat of government (KA) and traditio nal technology (tA) TPA = f (LA, KA, tA).In the arse right diagram we have the median(a) and marginal product of labour reduces, which are derived from the make sense product curve in the diagram directly above it. in that respect are two assumptions made firstly, the marginal product of labour is zero (MpLA at LA), therefore there is surplus labour. Secondly, wages are divided embodyly in the traditional sector so it is the average, and not the marginal product of labour determines the genuinely wage. 2 ? The diagram on the authorize left represents production in the modern sector.Again, the total product (TPM) in this sector is a function of the variable comment labour (LM), a given neat input (KM), and modern technology (tM) TPM = f (LM, KM, tM). The model demonstrates that at if labour is at L1, and capital letter entrepot at KM1, past output ordain be TPM1. Lewis allows for the re-investment of excess profits in the modern sector, which ordain increase capital s tock from KM1 to KM2 and so to KM3. This results in an increase in the moot aim for labour (from L1, to L2, then L3), and an increase in output for the sector (from TPM1, to TPM2, and then TPM3).We bottom of the inning see too that the total product curves rise in accordance to the increase in capital stock and labour. The handle by which capital stock and total product volition increase is demonstrate in the substructure left diagram. WA is the subsistence wage level offered by the traditional sector. With a 30% premium over the traditional wage rate, wages for the modern sector is at WM. Lewis assumes that the supply of labour is perfectly elastic and pass on dwell so throughout the development process, hence the horizontal labour supply curve.Employers go forth hire at this wage rate without the possibility of wages rising. Because capital stock (KM1) is fixed in the initial percentage guide of harvest-feast, bring curve for labour is determined by labours declin ing marginal product3, the negatively coloured curve D1 (KM1). Employers in the modern sector are assumed to hire to where the marginal physical product of labour is equal to the touchable wage, so employment get out be at L1. Area OWMFL1 represents wages for this sector, and profits are shown by region WMD1F. Lewis assumes that these profits will be re-invested, so the capital stock now increases from KM1 to KM2.This will increase total product in the modern sector, inducing higher demand for labour. The new equilibrium is now at point G with L2 workers in the bottom left diagram. The corresponding process will once again clear, increase capital stock to KM3, total product of labour to TPM(KM3), and employment in the modern sector to L3. According to the Lewis hypothesis, this process will celebrate until all surplus labour is negligent into the new modern sector. The declining labour to unload ratio will increase the marginal productivity of labour above zero, causation the labour supply curves to become positively sloped.So wages and employment will endure to grow, and the domestic structure of the economy is changed, allowing for the harvest-festival of a modern, urban, industrial sector. The Lewis two-sector model draws on the experience of economic development in the West, scarcely he makes a fall of key assumptions that are not glib to developing countries in this day and age. Firstly, Lewis assumes that the increase in employment in the modern sector is proportional to its rate of profit. (This is on a further assumption that all profits are infact re-invested).In reality it is a common trend for Trans-National Companies (TNCs) to employ increasing levels of capital and technology, while keeping labour at the same level. Lewis also assumes that there is surplus labour in agriculture and full employment in the modern sector. This is infact untrue, and the opposite is more common in most LDCs. Also, research suggests that unemployment is n ot as high as Lewis estimated (around 50%) exclusively is more accurately around the 5% mark. The assumption of an infinitely elastic labour has also been subject to criticism.Empirically labour will experience some rise in wages, so the labour supply curve will not remain flat. Lewis makes some semipolitically incorrect assumptions. He argues that farmers will get richer during the development process imputable to an increasing demand for food from a growing urban population. He suggests that farmers should be taxed and the money should be invested in urban areas. So he advocated the taxing of mint on subsistence wage levels, to help the capitalistic class He also advocated the contain of trade union power during evelopment, and to nurse the growth of the capitalists using tariffs (this was undoubtedly precise unpopular with the Marxists). The two-sector model emphasises the need to increase money supply in order to kick-start the development process. We know that in the rea l world this could lead to inflation, speculation and symmetricalness of payment problems. Lewis does acknowledge these possibilities in his article, but he does not explicate how the loans themselves give the axe be bad. He places a high degree of importance on a capitalist class who would bring round an outflow of profits, but does not explain from where the new class will emerge.Despite all of these flaws in the two-sector model, Lewis was nonetheless awarded the Nobel Prize for political economy for his endeavours. In 1960, the US economist and historian Walt Whitman Rostow published his paper The Stages of Economic Development. He claimed he was providing an alternative to the Marxist view of history, and thus gave his paper the furnish a non-communist manifesto. Rostow analysed the process of development in the West and concludes that it is possible to distinguish development into storeys and all societies can be categorised into one of the quintette puts he distinguis hes.In order to develop LDCs are required to progress through these stages. The five stages are as follows The traditional high parliamentary procedure, transitional (or preconditions to take-off), take-off, maturity and high-mass consumption. 4 A traditional society is the most basic fond class of society. It does little more than economically survive. ware is used for self-consumption and there is no trade. It would usually have a ceiling on production due to limitations of science and opposed production practices. there is generally a high proportion of the workforce in agriculture (>75%), little societal change, and large divisions of wealth. In the transition stage agriculture will begin to prevail, principally due to foreign interests. Rostow argues that the level of investment essential be raised to at least 10% of rural areaal income, ensuring self-sufficient growth. The bulk of investment should be worn out(p) on infrastructure, like transport and colloquy if society is to progress to the next stage. He states that society must also be willing to operate closer to factory principles and the division of labour, and a new elect must emerge that will drive the factory process. It is generally accepted that entrepreneurs usually appear in commerce.Rostow and others acknowledge that society may be in this stage for centuries. To propel society from transition to take-off growth must become self-sustaining. Rostow predicts that investment must rise in excess of 10% of national income in order to fasten adequate levels of future savings and investment. 6 What is significant in this stage is the branch of major export industries (what Rostow calls leading growth sectors). In the US and Russia this would have been the atom perseverance, in Britain the textiles industry, in Sweden, timber etc.So the industry itself differs from country to country, and Rostow makes clear that LDCs do not have to produce the same goods as developed nations in order to take-off. In the stage of maturity society will apply a gigantic range of new technology to most of its resources. In this period a nation will grow confident and employ itself. It will also have to make a choice at this point as to what it should spend its new ready wealth on. Either to move towards high-mass consumption, to number a welfare state, or to forgather imperialist ends.The stage of high-mass consumption, Rostow argues, applies only to the US, as at the time of writing (1956) no other society had achieved this. Based on his theory Rostow, Rosenstein and Rodon came up with a 5-year see for LDCs following the Western political theory of development. The 5-year plans were largely unsuccessful, not to mention controversial. At the height of the cold war the US funded any tin-pot dictator who was not allied with the USSR, under the guise of aid for development. There are several issues in Rostows theory that has received criticism.Firstly, he negates the m ultiplier process, and refers to it as backward lineage. He also slues foreign exchange constraints, like the constitute of importing machinery. His single minded following of capital has led to wide elephant projects by the UN, which have caused a lot of violate to the environment and brought very little welfare to LDCs. Also, concentration on capital intense goods makes things worse. It deprives consumption, gives rise to demand, which makes increases in demand for capital goods inevitable. Simon Kuznets points out that there is no greenback between stages 2 and 3, and also 3 and 4.The characteristics that Rostow distinguishes are not unique to those phases. For example, the changes that hap during transition also seem to occur during take-off. In Kuznets own words It seems to me that Rostow defines these social phenomena as a complex that produces the government issue he wishes to explain and then treats his denomination as if it were a meaningful acknowledgement7 The m ain problem with Rostows theory is his political bias. This is not strike if we take into account the historical and political conditions in which the theory was created (the cold war, McCarthyism).Rostow treasured to provide a Western, capitalist political theory of development. The neo-Marxists point out that LDCs are very different from each other, and we cannot ignore the historical context in which they were created as Rostow does. The centuries of colonialism still have an effect on LDCs today and to ignore this is wrong. The neo-Marxists argue that the History of LDCs is littered with aborted take-offs and break down landings, which have left them with distorted development and dependency. Both Lewis and Rostow tend to indicate that development is a purely domestic issue, and that obstacles to growth are all internal.They emphasise on savings and investment, and do not take into account the many external forces that can stimulate or hinder growth, such as political and ec onomic press from TNCs and the WTO. They make no contract to explain ideas suggested by the Prebisch-Singer thesis, or to renounce Emmanuels theory of Unequal supplant. Overall, both economists imply that growth and development are solely in the manpower of the developing countries, trivialising the dominance and significance of the West in the development process.