Question

1.Explain Arthur Lewis's thereof surplus labor and economic development and critically examine and evaluate this theory.

2. Explain very briefly and precisely the significance of Harrod-Domar model of economic growth.

Answer 1

1. According to Lewis in a less developed countries economy operate in two sectors one is a traditional agricultural sectors andanother is modern industrial sector. Now we can understand surplus labour concept easily.

Surplus labour (or disguised unemployment) implies the presence of such an enormous population in the agricultural sector that the total labor output is null. So if a couple of jobs are eliminated from the field, the overall product stays the same. So Agricultural sector also called subsistence sector and in this sector they uses non-reproductive land on a self-employed basis and produces mainly for self-consumption with inferior production techniques. Thats why Surplus Labour is there.

Now i can show you how this surplus labour will help in economic development of the country. Lewis assumes that all wages are used up and that all income are saved and invested. When the capitalists reinvest their profits to set up new factories or expand the old ones, the stock of modern-sector capital assets will grow. As a result of an rise in the stock of industrial resources, labor demand or a marginal curve of labor productivity will change outwards.

As you can see from MP1 to MP2. MP2 is the new demand curve of the labour but labour wage rate remains constant at OW. The income or surplus accruing to the capitalist class in this new equilibrium situation will be equal to the WQ2E which is larger than the previous WQ1D. WQ2E's new surplus or income will be further invested, resulting in an increase in capital stock and a further upward change in demand or marginal labor productivity curve, say, to MP3 place. If the demand curve for labour is MP3 labor jobs will rise to OL3. This will continue to reinvest the profits earned and the growth of the industrial economy will continue to absorb surplus labor from the subsistence sector until all the labor surplus is fully absorbed into productive employment. The larger the share of the national income, the higher the rate of savings and capital accumulation. Thus the rate of savings and investment as a percentage of national income will continue to rise with the growth of the industrial or capitalist economy. As a result, the rate of capital accumulation will rise relative to national income as well. It is believed, of course, that all profits, or a greater part of income, are saved and invested automatically.

This is economic development takes place in Lewis model.

and second part answer:

In my opinion, the basic premise of these models is incorrect, making it impractical and irrelevant to designing an effective development strategy to solve the surplus labor and unemployment problem. The model's basic premise is that industrial growth will generate sufficient employment opportunities in order to remove all the surplus labor from agriculture in an overpopulated developing country such as India, where population is currently growing at an annual rate of about 2%. This premise has been proved to be a myth in the light of generation of little employment opportunities in the organised industrial sector during over fifty years of economic development in India, Latin American and African countries. For example, in the 30 years (1951-81) of industrial development in India during which fairly good industrial production levels were achieved, organized industrial jobs increased by only 3 million, which is too meager to have any meaningful impact on the situation of urban unemployment, far from providing a solution to the problem of labor surplus in the agricultural sector. Therefore, in the growing industrial sector, the generation of adequate employment opportunities and consequently the absorption of surplus labor from agriculture has not proceeded as expected by the Lewis model. One major drawback of the Lewis model is that he has neglected successful jobs generation in agriculture

2. Significance of Harrod-Domar Model of economic growth:

Initially the Harrod– Domar model was created to help understand the business cycle, later it was modified to describe economic growth. The model has consequences for less economically developed countries, where labor in those countries is in plentiful supply but physical capital is not, slowing down economic progress. The model implies that economic growth depends on policies to increase investment, to increase savings and to make more efficient use of that investment through technological advances. So this model assumes growth is equal with development. Development is an increase in factors such as health, education, rates of literacy and a decrease in levels of poverty. Growth alleviates people from low living standards with sufficient shelter to proper employment. So it is argued that low rates of economic growth and development are linked to low savings rates in developing countries. It brings about a vicious cycle of low investment, low output and low savings. To raise the level of economic growth, savings must be raised either domestically or from abroad. Higher savings build a virtuous circle of economic growth that can sustain itself.