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Lewis Model & The Dual Economies in Asia Lewis Model & The Dual Economies in Asia

Chirantan ChatterjeeChirantan Chatterjee

Lecture 6, 7, 8 – Rise of Asian EconomiesLecture 6, 7, 8 – Rise of Asian Economies

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Arthur Lewis making a come-back

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Lewis Model – Building Blocks

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Lewis Model – Building Blocks

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Lewis Model – Building Blocks

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Lewis Model Building Blocks

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Lewis Model – Messages?

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Lewis Model @ Utopia

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Lewis Model @ Utopia - Calculations

Lag Qag Lmfg Qmfg0 0 0 01 15.6 1 9.92 30.4 2 19.63 44.4 3 29.14 57.6 4 38.45 70 5 47.56 81.6 6 56.47 92.4 7 65.18 102.4 8 73.69 111.6 9 81.910 120 10 9011 127.6 11 97.912 134.4 12 105.613 140.4 13 113.114 145.6 14 120.415 150 15 127.516 153.6 16 134.417 156.4 17 141.118 158.4 18 147.619 159.6 19 153.920 160 20 160

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Lewis Model @ Utopia – Output Maximization Point

Lag Qag Lmfg Qmfg Sum0 0 0 0 1601 15.6 1 9.9 169.52 30.4 2 19.6 1783 44.4 3 29.1 185.54 57.6 4 38.4 1925 70 5 47.5 197.56 81.6 6 56.4 2027 92.4 7 65.1 205.58 102.4 8 73.6 2089 111.6 9 81.9 209.510 120 10 90 21011 127.6 11 97.9 209.512 134.4 12 105.6 20813 140.4 13 113.1 205.514 145.6 14 120.4 20215 150 15 127.5 197.516 153.6 16 134.4 19217 156.4 17 141.1 185.518 158.4 18 147.6 17819 159.6 19 153.9 169.520 160 20 160 160

Key point that can be shown:Output maximized at MP-equalization of both sectors

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Lewis Model – Graphical IntuitionAPLagMPLag

MPLag APLag

Lag

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Lewis’ Key Idea: Agriculture Interacts w/Manufacturing with different principles.

APLagMPLag

MPLmfg

MPLag APLag

Rural sector was allocating output equally, using AP Mfg. sector used the marginal-principle. MP-Lmfg vs. AP-Lag.

Lag Lmfg

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Lewis’ Key IdeaAPLagMPLag

MPLmfg

MPLag APLag

L1

Equilibrium if the Lewis principle is true is at L1.

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Comparative StaticsAPLagMPLag

MPLmfg

MPLag APLag

L1

Productivity in Mfg. > Productivity in Ag. Wage rate in Mfg. > Wage rate in Ag. “Even if I accept a lower than current Mgf. wage, I can migrate to

other sector and earn a higher than my current Ag. Wage.”

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Reassignment across sectorsAPLagMPLag

MPLmfg

MPLag APLag

L1

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Reassignment across sectors till wages equalizeAPLag

MPLag

MPLmfg

MPLag APLag

L1

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Highest Level of Output one can obtain?APLagMPLag

MPLmfg

APLag

L1

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Wage Rate is Lower @ Highest Output PointAPLagMPLag

MPLmfg

MPLag APLag

L L1

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Manufacturing Hires More Agriculture in EquilibriumAPLag

MPLag

MPLmfg

MPLag APLag

L L1Lag Lmfg

Rural workers now accept less than their previous wage rate. MP-Lag moves back up in the process of re-allocation. “Go to the city young person”!

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Has been happening in Much of Asia

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Wage Rate is Lower @ Highest Output PointAPLagMPLag

MPLmfg

MPLag APLag

L L1

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Lewis Turning Point APLagMPLag

MPLmfg

MPLag APLag

L L1

A Point Comes when Rural Workers are no longer going to work at Lower Wage Rates. Discontent!

No more labor forthcoming, wages start rising again. Output growth slows down Shades of Solowian Convergence (but with more than 1 sector in the

model) ?

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China is witnessing a Lewisian Turning Point?

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China is witnessing a Lewisian Turning Point?

Not Yet – But Maybe by 2020-2025 What About India/Japan? Great Research Project How to slow the reaching of a turning point? Rings a Bell with Asian Financial Crisis?

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Before we go ahead, assumptions made by Lewis?

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Before we go ahead, assumptions made by Lewis?

1) What about Lag+Lmfg=Population?

2) What about Agricultural shifting to MP from AP-paradigm?

3) How about Rural Employment Guarantee Schemes?

4) What about technology (from heaven or otherwise) in manufacturing?

5) What about interest rates?

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Lewis was not alone

Other Economists like Kaldor & Harrod-Domar model considered dual-sectors.

Ranis and Fai mathematically improved this model.

But Lewis’ work triggered lots of work in micro-development economics.

The basic question: How can you improve the lives of poor to prevent their migration? Structural Changes.

Peer-paper for example: https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2013&paper_id=444

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Did Japan ever reach a turning point?

1) Open Question.

2) But it certainly had a very robust and vibrant though protected non-export sector.

3) Dragging down overall productivity & growth of the economy.

4) Efforts are on to structurally address this dual-economy in Japan.

5) Let’s finish our round-up of Japan.