Lewis and Rostow

Outline the theories of Lewis and Rostow and discuss their relevance in analysing the problems of cultivation in LDCs In the 1950s, the deuce close to prominent economists of the horse opera school were Arthur Lewis and Walt W. Rostow. Their theories had a significant impact on the policies of double-uern governments regarding development in LDCs. Arthur Lewis claimed he was a fellowshipical 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 in that locationfore had no long-term perspective on development.However, Lewis has been catego face liftingd by other economists such(prenominal)(prenominal) as Hollis B. Chenery, as a Structuralist. This is because his famous two- vault of heaven model focuses in the mechanisms by means of which LDCs can change their frugal infrastructure from an agricultural to a much advanced industrial one. 1 The emphasise on inwr ought modes of output and reform of domestic infrastructure is a distinguishing feature of the Structuralists. In the mid 1950s Lewis, in his essay Economic study with unlimited supply of Labour put forward his scheme of to a lower placedevelopment.He begins with the assumption that the thrift of the LDCs could be split into two celestial spheres the handed-down bena, which is agrarian, and characte startled by subsistence reward and a surplus of force. Lewis referred to this as disguised unemployment. Because of the large exertion push up in the traditionalistic bea, much of it un employ, this results in zero marginal advertize productivity. Wages are therefore kept at subsistence levels, which causes net win in the novel sector to be set at subsistence level. The modern sector is characterised as a senior high schoolly productive, urban, industrial sector.Lewis argues that surplus tire in the traditional sector can be gradu all in ally transferred to the modern sector with no loss to productivity because of the zero marginal productivity of sweat in agriculture. To encourage the flow of beat back from the traditional to the modern sector Lewis allows for a 30% differential in income. Once the modern sector reaches full employment output is accessiond. The outgrowth is determined by the send of investment and neat accumulation (this is assuming that excess profits are re-invested).Thus the necessary for boil testament one time again increase and with the 30% premium over traditional sector employs, supply swerve of working class from the traditional to modern sector is absolutely elastic. The two-sector model of development demonst marks the cognitive operation of labour transfer and the growth of employment and production in the modern sector. The top right diagram represents production in the traditional sector. derive product (TPA) is the function of variable labour (LA), fixed chapiter (KA) and traditional technol ogy (tA) TPA = f (LA, KA, tA).In the bottom right diagram we withdraw the add up and marginal product of labour curves, which are derived from the total product curve in the diagram directly above it. There are two assumptions made firstly, the marginal product of labour is zero (MpLA at LA), thus there is surplus labour. Secondly, profits are divided equally in the traditional sector so it is the average, and non the marginal product of labour determines the real wage. 2 ? The diagram on the top left represents production in the modern sector.Again, the total product (TPM) in this sector is a function of the variable input labour (LM), a given capital input (KM), and modern technology (tM) TPM = f (LM, KM, tM). The model demonstrates that at if labour is at L1, and capital stock at KM1, therefore output depart be TPM1. Lewis allows for the re-investment of excess profits in the modern sector, which leave increase capital stock from KM1 to KM2 and so to KM3. This results in an increase in the pick out for labour (from L1, to L2, then L3), and an increase in output for the sector (from TPM1, to TPM2, and then TPM3).We can see also that the total product curves rise in accordance to the increase in capital stock and labour. The process by which capital stock and total product ordain increase is demonstrate in the bottom 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 bequeath rebriny so throughout the development process, therefore 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 give 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 assum ed 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(prenominal) demand for labour. The rude(a) equilibrium is now at point G with L2 workers in the bottom left diagram. The homogeneous 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 rude(a) modern sector. The declining labour to land ratio will increase the marginal productivity of labour above zero, causing the labour supply curves to become positively sloped.So wages and employment will continue to grow, and th e domestic structure of the thriftiness is changed, allowing for the growth of a modern, urban, industrial sector. The Lewis two-sector model draws on the experience of economic development in the western United States, but he sacrifices a number of paint assumptions that are not plausible 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, look into suggests that unemployment is not as high as Lewis estimated (around 50%) but 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 politically incorrect assumptions. He argues that farmers will scotch richer during the development process due 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 people on subsistence wage levels, to help the capitalist class He also advocated the curbing of slyness union power during evelopment, and to protect the growth of the capitalists using tariffs (this was undoubtedly actually 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 real world this could atomic number 82 to inflation, speculation and balance of payment problems. Le wis does affect these possibilities in his article, but he does not explain how the loans themselves can be bad. He places a high degree of importance on a capitalist class who would sum up about 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 Economics for his endeavours. In 1960, the US economist and historian Walt Whitman Rostow published his authorship The Stages of Economic Development. He claimed he was providing an alternative to the Marxist view of history, and thus gave his paper the subtitle a non-communist manifesto. Rostow analysed the process of development in the West and concludes that it is possible to distinguish development into stages and all societies can be categorized into one of the five stages he distinguishes.In order to develop LDCs are required to progress through these stages. The five stages are as follows The traditi onal familiarity, spiritual rebirthal (or preconditions to take-off), take-off, maturity date and high-mass consumption. 4 A traditional society is the most basic form of society. It does precise more than economically survive. Production is used for self-consumption and there is no trade. It would usually have a ceiling on production due to limitations of science and backward production practices. There is in the main a high proportion of the workforce in agriculture (75%), little accessible change, and large classs of wealth. In the transition stage agriculture will begin to prevail, mainly due to foreign interests. Rostow argues that the level of investment moldiness be raised to at least 10% of national income, ensuring self-sufficient growth. The bulk of investment should be spent on infrastructure, like carry and communication if society is to progress to the next stage. He states that society moldiness also be willing to operate closer to factory principles and the di vision of labour, and a new elite must emerge that will causal agency 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 underwrite adequate levels of future savings and investment. 6 What is significant in this stage is the emergence of major export industries (what Rostow calls leading growth sectors). In the US and Russia this would have been the grain industry, in Britain the textiles industry, in Sweden, timber etc.So the industry itself differs from body politic 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 wide range of new technology to most of its resources. In this period a nation will grow confident and exert itself. It will also have to make a choice at this point as to what it should spend its new found wealth on. Either to move towards high-mass consumption, to build a welfare state, or to meet 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 plan for LDCs following the occidental ideology of development. The 5-year plans were largely unsuccessful, not to mention controversial. At the height of the frosty 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 multiplier process, and refers to it as backward lineage. He also ignores foreign exchange constraints, like the cost of importing machinery. H is bingle minded pursuit of capital has led to wide elephant projects by the UN, which have caused a lot of damage to the environment and brought very little welfare to LDCs. Also, concentration on capital intensive 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 distinction 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 occur 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 effect he wishes to explain and then treats his identification as if it were a meaningful identification7 The main problem with Rostows theory is his political bias. This is not surprising if we take into circular the historical and political conditions in which the theo ry was created (the cold war, McCarthyism).Rostow valued to provide a Western, capitalist ideology of development. The neo-Marxists point out that LDCs are very different from each other, and we cannot ignore the historical circumstance 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 friction landings, which have left them with distorted development and dependency. Both Lewis and Rostow tend to register 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 economic pressure from TNCs and the WTO. They make no attempt to explain ideas suggested by the Prebisch-Singer thesis, or to reconcile Emmanuels theory of Unequal E xchange. Overall, both economists imply that growth and development are solely in the hands of the developing countries, trivialising the dominance and significance of the West in the development process.