The main drawbacks of Lewis’ model

The main drawbacks of Lewis’ model (summing up)

• In spite of the above analyzed drawbacks the Lewis’ model manifested another and very imported step in creation of theory of economic development.

• Lewis in 1979 was awarded by Nobel price in economics

• His ideas were used for elaboration of different economic and mathematical models of modernization of dual economies.

Neoclassical Models of Economic Development
II. Models of dualistic economy

• In models elaborated by J. Fei and G. Ranis, dualism is understood deeper and wider comparing with Lewis’ model.

• The authors analyze three variants of dualism:

Ø Dual commodity market;

Ø  Dual labor market;

Ø  Dual financial market.

· Economic modernization passes three stages: natural, intermediate and market:

Ø Natural: reduction of rural population and production of agricultural surplus;

Ø Intermediate: rural exodus causes the foodstuff shortage and increase of foodstuff prices.

Increase of labor marginal productivity in industry leads to wage level increase.

Ø Market: both in agriculture and in industry wages are determined by the law of marginal productivity.

§ In so doing, the dualism is overcome, because both in agriculture and industry the labor productivity growth and wages are determined by the same market laws.

§ It means that the economy has entered the self-sustained growth.

· The respective mathematical model (Fei-Ranis model) that characterizes this stage of development may be represented under the following form:

 ,

 if = 0, than means the rates of growth respectively: P- population; L – industrial employment, K- industrial capital; I - technological progress intensity;  - the degree of labor intensity of technological progress: if > 1 – capital saving, if  1 – labor saving, if  1 – neutral,  - index of labor production decrease under condition of constant per capita capital.

• The present day stage of the world economic development characterized by ever bigger openness of national economies.

• Under these conditions the economic modernization ever less depends on the volume of agricultural surplus but ever more depends on the level of national competitiveness in exterior markets (it presupposes low wages in export oriented branches).

• This analysis was based on the experience of the so called “new industrial countries” (South Korea and Taiwan).

• All the models underestimated the real difficulties in the way of transformation of traditional into modern economies.

• It turned out that the economic measures should be supplemented by non-economic measures (such as non-economic enforcement)

• Non-synchronized rates of labor productivity growth in different branches of national economies:

Ø as far as the GDP structure is concerned, the developing countries are lagging behind developed countries by 50 years, but in labor productivity the lag is more than 125 years and in agriculture – more than 200 years.

Ø The specific features of civilization development of institutional character (religion, national mentality, cultural traditions), distinguishing non-European civilization from European-type civilization.

· Taking together, all these factors determined ever growing interest in institutional theoriesof economic modernization (that will be the theme of our next lecture).

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