Celebrating Sir Arthur Lewis’ Economic Work
It was great to see Google’s feature Sir Arthur Lewis as the Doodle on their home page on December 10th 2020. As St. Lucians, we should be very proud of the world-renowned work that Sir Arthur Lewis accomplished. “Arthur Lewis’s article entitled ‘Economic Development with Unlimited Supplies of Labour’, published in The Manchester School in May 1954, is widely regarded as the single most influential contribution to the establishment of development economics as an academic discipline.”
Let us take a look at some of the key points outlined in Sir Arthur’s Lewis work and how it may apply to St. Lucia.
Sir Arthur Lewis introduced the Dual Sector Model commonly known as the “Lewis Model”. In this model, when an economy first becomes industrialized it grows very fast by importing foreign technology and employing capital and plentiful, cheap, unskilled labor from the farm. But after a while the extra agricultural labor is put to work and wages start to rise. This makes firms less profitable and they have to come up with their own technology to keep growing. This shift is known as the Lewis Turning Point.
The important feature of the Lewis model is that the economy consists of two sectors ; an agricultural, rural and subsistence sector and an industrial, urban and capitalist sector. In the subsistence sector, population is so large relative to products and natural resources that the marginal productivity of labour in the subsistence sector is very low or zero resulting in a potential reservoir of labour supply to the capitalist sector. In the St. Lucian context, this means that there is a large pool of workers available for the tourism industry and can be clearly seen with our perpetually high unemployment rate.
Then, the labour market is in favour of capitalists, and capitalists can keep the wages constant. This is what is observed in St. Lucia with the “low” wages paid to hotel workers relative to the costs to the hotel guests. It is assumed that eventually surplus labor would be absorbed, and then wages would eventually rise though we are yet to see this in the St. Lucia case.
Profit minded capitalists are assumed to reinvest all profits to create new capital at a maximum rate. Then capital expansion leads to new employment. The capital accumulation becomes larger but the wage is still constant so that the surplus becomes greater. Full investment and an unlimited labour supply guarantee that both capital accumulation and employment expand at the maximum rate. However in the case of St. Lucia, given that the majority of the “capitalists” are foreigners they do not reinvest all profits into the St. Lucia and transfer these profits to their other projects or intiatives in foreign countries. Therefore, the capital expansion does not lead to the expected increase in employment.
The “Lewis Model” has been useful in explaining the growth paths observed within “the Asian economic miracle” such as Hong Kong, Singapore, Taiwan and South Korea resulted from a mobilization of resources consistent with the Lewis Model. In an initial stage, they took foreign technology and used cheap labor and capital. Eventually they ran out of cheap labor and reached a point of diminishing returns to adding more capital, and growth slowed. More recently, the “Lewis Model” has regained relevance in relation to China’s economy which was projected to reach the Lewis Turning Point between 2020 and 2025. Sadly, the “Lewis Model” has not been used effectively in the Caribbean including St. Lucia and while there has been a transition away from agriculture, we have not effectively added capital due to short-sightedness of our leaders. As a result, there has not been as significant increase of living standard that was expected resulting in higher poverty rates.
Since Sir Arthur Lewis’ death almost 30 years ago, our economy has transitioned from an agriculture- based economy to primarily a tourist-dominated economy where the major economic gains from our primarily foreign-owned hotels do NOT benefit the island. I wonder what Sir Arthur Lewis would think of this model of economic development and his recommendations.
Has our current Prime Minister who supposedly has a degree in Economics ever reviewed Sir Arthur Lewis’ economic papers including the proposed model for robust and sustainable economic growth within developing countries. Given the economic stagnation that is projected to occur due to COVID-19 (2016 GDP = 2022 GDP) we need to review our model and projections for economic growth. We cannot allow our standard of living to plummet and be saddled with high debt that becomes a significant burden for future generations.
Please reach out to stlucia.analyser@gmail.com with any suggested topics for future articles.
