BICOL UNIVERSITY

GRADUATE SCHOOL
LEGAZPI CITY

Name: GRACE R. CAMPOS Year & Course: 2ND YR EDD ELM

Course Code and Description: PhDPA 311 Financial Management in Government
Professor: DR. RAMESIS LORINO

MODULE 3 – 1
THE SETTING OF UNDERDEVELOPMENT
THE ARGUMENTS OF THE LEWIS MODEL: IMPLICATIONS AND LIMITATIONS OF
THE MODEL
Surplus labor is the central element in Lewis’s model which is based on a
“capitalist and a “subsistence” sector which are called later a modern and a traditional
sector in his revisited work on the dual economy in 1979. Labor force, capital
accumulation, and integration into the global economy are the three instruments that
makeup Lewis' model. In Lewis's model, the emphasis was on the reallocation of labor
up until the turning point, or the point at which labor reallocation has outpaced population
growth for long enough for dualism to wither and the economy to fully commercialize.
Lewis implied that because the traditional sector is so small and underdeveloped, no
capital accumulation occurs there. The value of the marginal output of labor in agriculture
increases because of trade between farm and industry as the quantity of food on the
market declines, demand increases, or both.
Lewis used a supply-oriented model, which does not account for transactions
between the capital and other sectors. It disregarded farmers and supporting industry.
There is covert unemployment in the agricultural sector. In particular, the agricultural
sector should be considered both during and after harvest. The Lewis doctrine might
accept the agricultural surplus if it is only considered for the regions with severe winters
or frequented by calamities like in the Philippines, otherwise, it is meaningless to claim
that there is zero marginal productivity for agricultural laborers. Positive opportunity costs
include the loss of crops during the height of the harvest season and the reduction in
agricultural output caused by labor transfers.
He provided relatively little information on open economies and used his model
mostly for closed economies. He used a supply-oriented model, which does not account
for transactions between the capital and other sectors. It can also be accused of
disregarding farmers and supporting industry. The process of industrialization would be
compromised if the capitalists did not dedicate a portion of their profits to agricultural
development. Lewis also held the view that the economy grows, and the more jobs are
produced the more the labor pool is transferred to urban employment. However, this is
rarely the case since if industrial expansion requires a greater proportion of capital than
labor, the migration of labor from agriculture to the industry will only increase
unemployment.
Lewis’s approach suggests that until surplus labor is removed, overall living
standards should not increase as quickly as productivity. Evidence regarding Latin
America's living standards during the 20th century, however, suggests that these have
increased in tandem with productivity and that the "indirect" components of the real wage
(health and education) have increased faster than average salaries. He also said that
before a labor surplus is absorbed, wages in the industrial sector do not rise. However,
this never occurs since the growth of the urban, industrial, or formal sectors can
themselves trigger the formation of pressure groups and tip the scales in favor of those
who are already a part of them at the expense of those who are still outside of it. The
industrial sector's wages grow noticeably before the labor shortage is filled. The Lewis
model also understates the entire impacts of a rapidly expanding population on the weak
economy, including those effects on the surplus in agriculture, the capitalist profit share,
wage rates, and general job chances. Although it is thought that the transition of unskilled
labor from agriculture to industry would be almost effortless and inexpensive, this does
not happen since other forms of skilled labor are needed in the industry.
Although it is outdated, the model is nonetheless useful as an "ideal type" or
heuristic tool for the study of economic development since it allows for an examination of
current patterns of structural change and their effects on inclusive growth, wages, profits,
employment, and productivity.

THE ARGUMENTS OF CHENERY’S PATTERN OF DEVELOPMENT: IMPLICATIONS

AND LIMITATIONS OF THE MODEL

According to Chenery's model, economic development is a series of

interconnected changes to an underdeveloped economy's structure that are necessary
for that economy to transition from an agricultural to an industrial one to continue growing
as well as the accumulation of both human and physical capital (Chenery, 1960).
According to Chenery's concept, a developing economy must change its current
structures to make room for the entry of new industries and modern structures to become
an industrial nation (Chenery, 1960). Lewis' model is close to this one, however,
according to this one, saving and investing alone will not provide the requisite level of
development.

According to Chenery, changes in the economic structure are required for

continued economic growth and consist of several mutually reinforcing changes. The two
fundamental drivers of the new era's economic growth, worker productivity, and
technological advancement are widely discussed in structural changes. The significant
fact that has attracted attention over the past few decades is the connection between a
country's economic structure and its rise in productivity. As old as the economy itself is
the notion that changes in economic structure impact growth. Therefore, a flexible
production structure is a crucial component of high productivity rates, allowing the
economy to quickly redistribute resources to take full advantage of changes in the scheme
of technical progress.

Analysis of structural changes helps us understand their practical impact as

well as how they conceptually explain economic development and progress. Furthermore,
all the ideas were developed to produce various economic strategies that would sustain
progress. Structural changes have a significant impact on how economic policy is created
in the future as a deliberate state effect on the achievement of specific development goals.
Economic policy can also have an impact on changes in the economic structure, either
favorably or negatively, pushing it closer or farther from its "optimum." The Chenery model
is effective for developing countries. This model will give practical ideas on how to solve
the economic problem of the growth and development of a country.
REJOINDER

Both the linear stages of the growth model and the structural change model
are not without limitations. Regarding the linear stages of the growth model, the tricks of
development embodied in the linear stages model are not always effective. And the basic
reason for their ineffectiveness is not because more saving and investment is not a
necessary condition for accelerated rates of economic growth, rather it is because it is
not a sufficient condition. For instance, the Economic Marshal Plan, which was
implemented in Europe after the Second World War, was successful because most of the
European nations receiving aid met the necessary structural, institutional, and attitude
requirements (such as well-developed infrastructure, integrated financial and commodity
markets, and a skilled labor force) to efficiently transform new capital into above-average
levels of output. The desired outcomes of donor aid or assistance have not resulted in
significant improvements in the welfare of beneficiaries due to the inadequate institutional
and structural frameworks in developing nations like Nigeria.

The structural change model, on the other hand, is founded on the idea that
development is a recognizable process of growth and change whose key characteristics
are shared by all nations. It disregards the possibility that, based on a country's particular
circumstances, changes in growth pace and pattern may exist. According to the structural
change model, the following variables influence how quickly a country develops: the
terminology used to describe government policies; the accessibility of outside capital and
technology; the availability of human and natural resources; and the characteristics of the
international trading environment.

The structural change model outperforms the linear growth models from the
perspective of globalization, especially when considering the special circumstances of
developing nations. According to the structural change concept, governments can control
the rate of growth by employing legislative tools like tariffs to safeguard specific local
sectors. The structural change model's applicability in the context of globalization is
another factor that makes it superior to the growth model's linear stages. The use of policy
instruments gives developing country governments a way to shield their economy from
the negative consequences of globalization.