Dual-sector Model - Criticism

Criticism

The Lewis model has attracted attention of underdeveloped countries because it brings out some basic relationships in dualistic development. However it has been criticized on the following grounds:

1. Economic development takes place via the absorption of labor from the subsistence sector where opportunity costs of labor are very low. However, if there are positive opportunity costs, e.g. loss of crops in times of peak harvesting season, labor transfer will reduce agricultural output.
2. Absorption of surplus labor itself may end prematurely because competitors may raise wage rates and lower the share of profit. It has been shown that rural-urban migration in the Egyptian economy was accompanied by an increase in wage rates of 15 per cent and a fall in profits of 12 per cent. Wages in the industrial sector were forced up directly by unions and indirectly through demands for increased wages in the subsistence sector, as payment for increased productivity. In fact, given the urban-rural wage differential in most poor countries, large scale unemployment is now seen in both the urban and rural sectors.
3. The Lewis model underestimates the full impact on the poor economy of a rapidly growing population, i.e. its effects on agriculture surplus, the capitalist profit share, wage rates and overall employment opportunities. Similarly, Lewis assumed that the rate of growth in manufacturing would be identical to that in agriculture, but if industrial development involves more intensive use of capital than labor, then the flow of labor from agriculture to industry will simply create more unemployment.
4. Lewis seems to have ignored the balanced growth between agriculture and industry. Given the linkages between agricultural growth and industrial expansion in poor countries,if a section of the profit made by the capitalists is not devoted to agricultural development, the process of industrialization would be jeopardized.
5. Possible leakages from the economy seem to have been ignored by Lewis. He assumes boldly that a capitalist's marginal propensity to save is close to one, but a certain increase in consumption always accompanies an increase in profits, so the total increment of savings will be somewhat less than increments in profit. Whether or not capitalist surplus will be used constructively will depend on the consumption- saving patterns of the top 10 percent of the population. But capitalists alone are not the only productive agents of society. Small farmers producing cash crops in Egypt have shown themselves to be quite capable of saving the required capital. The world's largest cocoa industry in Ghana is entirely the creation of small enterprise capital formation.
6. The transfer of unskilled workers from agriculture to industry is regarded as almost smooth and costless, but this does not occur in practice because industry requires different types of labor. The problem can be solved by investment in education and skill formation, but the process is neither smooth nor inexpensive.

The model assumes rationality, perfect information and unlimited capital formation in industry. These do not exist in practical situations and so the full extent of the model is rarely realised. However, the model does provide a good general theory on labour transitioning in developing economies.