Saturday, 21 April 2012

Lewis' turning point

Arthur Lewis, an economist, developed a model (called the Lewis Model) to analyse the developmental process of an economy with respect to labour availability. 

"In his story a "capitalist" sector develops by taking labour from a non-capitalist backward "subsistence" sector. At an early stage of development, there would be available an "unlimited" supply of labour from the subsistence economy which means that the capitalist sector can expand without the need to raise wages. This results in higher returns to capital which are then reinvested in further capital accumulation. In turn, the increase in the capital stock leads the "capitalists" to expand employment by drawing further labor from the subsistence sector. Given the assumptions of the model (for example, that the profits are reinvested and that capital accumulation does not substitute for skilled labor in production), the process becomes self-sustaining and leads to modernization and economic development.

"The point at which the excess labor in the subsistence sector is fully absorbed into the modern sector, and where further capital accumulation begins to increase wages, is sometimes called the "Lewisian turning point" (or "Lewis turning point") and has recently gained wide circulation in the context of economic development in China." 1

China is said to be at this "Lewis Turning Point" where surplus labor is evaporating, pushing up wages, consumption and inflation. The 'turning point' marks the point where manufacturing competitiveness and the pace of growth begin to turn down as labor costs rise.The result may prompt manufacturers to switch to cheaper countries such as India and Vietnam. 2

FYI: Arthur Lewis was the first person of African origin to be given a Nobel Prize for a category other than 'peace'. 


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