The document provides information about Naseem Shahzad and their educational qualifications. It then summarizes Lewis's two-sector model of economic development and Rostow's stages of economic growth model. The Lewis model explains how economic growth is initiated through a structural shift as the industrial sector grows relative to subsistence agriculture. It focuses on the transfer of surplus labor from the traditional to the industrial sector. Rostow identified five stages of economic growth: traditional society, preconditions for take-off, take-off, drive to maturity, and age of high mass consumption. Developing countries are typically in the early stages of traditional society or preconditions.

1. ECONOMICS DEVELOPMENT
NASEEM SHAHZAD
M.Sc. Economics (UAF)
B.Ed (science) (AIOU)
M.A History
(GCUF)
Cell; 03056355673
naseemshahzad473@gmail.com
Chak No 473 G/B Beeja SMD-
FSD

2. Lewis model
 Explains how economic growth gets started
through structural change – increase in size of
the industrial sector relative to subsistence
agricultural sector.
 Lewis concerned about labor shortages in
expanding industrial sector.
NASEEM SHAHZAD

3. Lewis Two-Sector Model
• i. It became the general theory of the
development process in surplus-labor Third
World nations during the 1960s and early 1970s.
• ii. It focuses on the process of labor transfer from
the traditional economy to the urbanized,
industrial sector and the growth of output and
employment in the high-productivity sector
NASEEM SHAHZAD

4. Lewis 2 Sector model
 Agriculture - low value added
 Industrial sector - higher productivity and wealth generation
 Incentives to encourage workers to migrate from rural economy to
urban
 Rural workers have very low if not zero marginal productivity
 Wage premiums in urban industry 30% above rural wages would
encourage migration from rural to urban whilst still allowing
profits to be made
 Re-investment of profits would lead to a self perpetuating
development
NASEEM SHAHZAD

5. Lewis Theory of Development
• The process of self-sustaining
growth and employment expansion
continues in the modern sector until
all of the surplus labor is absorbed
• Structural transformation of the
economy has taken place with the
growth of the modern industry
NASEEM SHAHZAD

6. Lewis Theory of Development
 Prof. Lewis Offers a model of growth
based on existence of disguised
unemployment in less developed
countries. It is propounded in his
work,”Economic development with
Unlimited Supply of Labour”.
 Also known as the two-sector surplus
labor model
NASEEM SHAHZAD

7. Lewis Theory of Development
• Also known as the two-sector surplus
labor model
• Features of the basic model:
– Economy consists of two sectors-
traditional and modern
– Traditional sector has surplus of labor
(MPL=0)
– Model focuses on the process of transfer
of surplus labor and the growth of output
in the modern sector
NASEEM SHAHZAD

8. Features of the basic model:
 Economy consists of two sectors-
traditional and modern
 Traditional sector has surplus of labor
(MPL=0)
 Model focuses on the process of transfer
of surplus labor and the growth of
output in the modern sector
NASEEM SHAHZAD

9. Assumptions
 i. Marginal product of labor is zero (surplus-
labor).
 This implies that labor can be removed from the
agricultural sector without any loss of output in
that sector.
 ii. Rural supply of labor to industrial sector is
perfectly elastic.
 iii. Full employment in the urban sector.
NASEEM SHAHZAD

10. More Assumptions
 iv. Constant urban wage- premium over a fixed
average subsistence wage.
 v. Capitalists reinvest all profits.
 vi. Rate of labor transfer and job creation is
proportional to the rate of capital accumulation.
NASEEM SHAHZAD

11. 2.1.The Lewis Model of Development: Key
Assumptions & Implications..
 Two sectors- traditional-labor surplus economy
that co-exists with modern/Industrial sector-
There is an “economic dualism”.
 Labor surplus in traditional/agricultural sector.
Much of this is unskilled.
 The Lewis model implies employment will expand
until surplus labor is absorbed in the modern or
industrial sector. (see figure 4.1)
NASEEM SHAHZAD

12. Assumptions
The main assumptions of this model:
 Because of the high density of population in less developed
countries, many people are disguisedly unemployed.
Marginal productivity of these people is zero.
 The supply of labour is perfectly elastic at the subsistence
rate of wages.
 Less developed economies are dual economies. There is
coexistence of capitalist sector and subsistance sector.
 Wage rate is higher in the capitalist sector compared to
subsistence sector, wage rate stagnates at the subsistence
level
NASEEM SHAHZAD

13. NASEEM SHAHZAD

14. Figure 3.2 The Lewis Model Modified by Laborsaving
Capital Accumulation: Employment Implications
NASEEM SHAHZAD

15. 2.2.Limitations of the Lewis Model
 Model roughly explains the historical growth
experience of today’s Industrial Nations.
 But, its key assumptions do not reflect the realities
of today’s LDCs. Why?
 Profits may not be re-invested domestically- in
LDCs especially in African economics i.e. there
may be “capital flight”
 Surplus labor may not exist in rural economy.
 Modern sector can be labor saving instead of labor
using or employment creating (fig 4.2)
NASEEM SHAHZAD

16. Criticisms:
 Labour re-allocation not always productive
 Wealth not re-invested locally
 Wealth goes abroad
 Imperfections in the labour market
 Importance of complementary policies
by all countries involved
NASEEM SHAHZAD

17. Criticisms- Lewis Model
 Rate of labor transfer and employment creation may
not be proportional to rate of modern-sector capital
accumulation
 Surplus labor in rural areas and full employment in
urban?
 Institutional factors?
 Assumption of diminishing returns in modern sector
NASEEM SHAHZAD

18. Lewis Theory of Development: Criticisms
• Four of the key assumptions do not fit the realities
of contemporary developing countries
• Reality is that:
– Capitalist profits are invested in labor saving
technology
– Existence of capital flight
– Little surplus labor in rural areas
– Growing prevalence of urban surplus labor
– Tendency for industrial sector wages to rise in the face
of open unemployment
NASEEM SHAHZAD

19. Conclusions for Lewis Model
 i. Employment growth and labor transfer is
induced by output expansion in which the speed
of expansion depends on the rate of industrial
investment and capital accumulation in the
industrial sector.
 ii. The self-sustaining growth and employment
expansion process continues until all surplus
labor is exhausted.
NASEEM SHAHZAD

20. Rostow’s Stages of Growth
 Rostow identified 5 stages of growth:
1. The traditional society
2. The pre-conditions for take-off
3. The take-off
4. The drive to maturity
5. The age of high mass consumption
 All advanced economies have passed the
stage of take-off into self sustaining growth
 Developing countries are still in the
traditional society or the pre-conditions
stage. Why?
NASEEM SHAHZAD

21. Rostow’s 5 Stages of Development
NASEEM SHAHZAD
Regardless of how the pump is primed, Rostow believes the long term
path is well documented.

22. Rostow - Stages of Growth
1. Traditional Society
 Characterised by
 subsistence economy –
output not traded or
recorded
 existence of barter
 high levels of
agriculture and labour
intensive agriculture
NASEEM SHAHZAD
Village in Lesotho. 86% of the resident workforce in
Lesotho is engaged in subsistence agriculture.
Copyright: Tracy Wade, http://www.sxc.hu/

23. Rostow - Stages of Growth
2. Pre-conditions:
 Development of
mining industries
 Increase in capital use
in agriculture
 Necessity of external
funding
 Some growth in
savings and
investment
NASEEM SHAHZAD
The use of some capital equipment can help increase
productivity and generate small surpluses which can be
traded.
Copyright: Tim & Annette, http://www.sxc.hu

24. Rostow - Stages of Growth
3. Take off:
 Increasing
industrialisation
 Further growth in
savings and
investment
 Some regional growth
 Number employed in
agriculture declines
NASEEM SHAHZAD
At this stage, industrial growth may be linked to
primary industries. The level of technology required
will be low.
Copyright: Ramon Venne, http://www.sxc.hu

25. Rostow - Stages of Growth
4. Drive to Maturity:
 Growth becomes self-
sustaining – wealth
generation enables further
investment in value adding
industry and development
 Industry more diversified
 Increase in levels of
technology utilised
NASEEM SHAHZAD
As the economy matures, technology plays an
increasing role in developing high value added
products.
Copyright: Joao de Freitas, http://www.sxc.hu

26. Rostow - Stages of Growth
5. High mass consumption
 High output levels
 Mass consumption of
consumer durables
 High proportion of
employment in service
sector
NASEEM SHAHZAD
Service industry dominates the economy – banking,
insurance, finance, marketing, entertainment, leisure
and so on.
Copyright: Elliott Tompkins, http://www.sxc.hu

27. ROSTOW, Walt W.(UT Austin: 1969-2003)This is a linear theory of development. Economies can be divided into primary
secondary and tertiary sectors. The history of developed countries suggests a common
pattern of structural change: The Stages of Economic Growth: An Anti-Communist
Manifesto (1960)
Stage 1: Traditional Society
Characterized by subsistence economic activity i.e. output is consumed by producers
rather than traded, but is consumed by those who produce it; trade by barter where
goods are exchanged they are 'swapped'; Agriculture is the most important industry
and production is labor intensive, using only limited quantities of capital.
Stage 2 :Transitional Stage
The precondition for takeoff. Surpluses for trading emerge supported by an emerging
transport infrastructure. Savings and investment grow. Entrepreneurs emerge (
how they emerge is not spelt out)
Stage 3 :Take Off
Industrialization increases, with workers switching from the land to manufacturing.
Growth is concentrated in a few regions of the country and in one or two industries.
New political and social institutions are evolving to support industrialization.
Stage 4 :Drive to Maturity: Growth is now diverse supported by technological
innovation.
Stage 5: High Mass Consumption
NASEEM SHAHZAD

28. Implications of Rostow's theoryDevelopment requires substantial investment in capital equipment (K) ; to
foster growth in developing nations, the right conditions for such investment
would have to be created i.e. the economy needs to have reached Stage 2.
For Rostow:
1. Savings and capital formation (accumulation) are central to the process
of growth, hence development
2. The key to development is to mobilize savings to generate the investment
to set in train self generating economic growth.
3. Development can stall at Stage 3 for lack of savings. Suppose the deficiency
in savings is on the order of 15-20% of GDP. If S = 5% then foreign aid/loans
of about 10-15% plugs this ‘savings gap’. Resultant investment means a
move to Stage 4-Drive to Maturity and self generating economic growth,
i.e. virtuous cycles (e.g. Botswana)and not vicious cycles (e.g. Argentina).
4. Once Stage 5(High Mass Consumption ) is achieved, this society
continues to have high consumption and maintains such by incentives to
savings plus additional key ingredients (good governance, property rights,
human capital and functioning institutions)
NASEEM SHAHZAD

29. Limitations of Rostow's Model
1.Rostow's model is limited. The determinants of a country's stage of
economic development are usually seen in broader terms i.e. dependent
on:
(a) the quality and quantity of resources
(b) a country's technologies
(c) a countries institutional structures e.g. law of contract
2. Rostow explains the development experience of Western countries,
well.
However, Rostow does not explain the experience of countries with
different
cultures and traditions e.g. Sub Sahara countries which have experienced
little economic development.
Comment: Rostow’s Stages of Economic Development was essentially a
statement repudiating The Communist Manifesto!NASEEM SHAHZAD

30. Criticisms:
 Too simplistic
 Necessity of a financial infrastructure to channel any savings that
are made into investment
 Will such investment yield growth? Not necessarily
 Need for other infrastructure – human resources (education),
roads, rail, communications networks
 Efficiency of use of investment – in palaces or productive
activities?
 Rostow argued economies would learn from one another and
reduce the time taken to develop – has this happened?
NASEEM SHAHZAD