Lewis and Rostow

2297 Words Dec 1st, 2012 10 Pages
Outline the theories of Lewis and Rostow and discuss their relevance in analysing the problems of development in LDC’s

In the 1950’s, the two most prominent economists of the Western school were Arthur Lewis and Walt W. Rostow. Their theories had a significant impact on the policies of Western governments regarding development in LDC’s. Arthur Lewis claimed he was a classical economist because he disagreed with the neo-classical school. He argued that the neo-classical assumption of full employment is incorrect in the long-run, and that they therefore had no long-term perspective on development. However, Lewis has been categorised by other economists such as Hollis B. Chenery, as a Structuralist. This is because his famous ‘two-sector
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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 will remain so throughout the development process, hence the horizontal labour supply curve. Employers will hire at this wage rate without the possibility of wages rising. Because capital stock (KM1) is fixed in the initial stage of growth, demand curve for labour is determined by labours declining marginal product3, the negatively sloped curve D1 (KM1). Employers in the modern sector are assumed to hire to where the marginal physical product of labour is equal to the real wage, so employment will be at L1.
Area OWMFL1 represents wages for this sector, and profits are shown by area 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 same process will once again occur, increasing 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 continue until all surplus labour is absorbed into the new modern sector. The declining labour to land ratio will increase the

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