How does Low Level Equilibrium Trap theory differ from Boeke’s theory of dualism?

How does Low Level Equilibrium Trap theory differ from Boeke’s theory of dualism?

Lewis proposed his dual sector development model in 1954. It was based on the assumption that many LDCs had dual economies with both a traditional agricultural sector and a modern industrial sector.

The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment. The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment.

Lewis suggested that the modern industrial sector would attract workers from the rural areas. Industrial firms, whether private or publicly owned could offer wages that would guarantee a higher quality of life than remaining in the rural areas could provide.

Furthermore, as the level of labour productivity was so low in traditional agricultural areas people leaving the rural areas would have virtually no impact on output. Indeed, the amount of food available to the remaining villagers would increase as the same amount of food could be shared amongst fewer people.

This might generate a surplus which could them be sold generating income. Those people that moved away from the villages to the towns would earn increased incomes and this crucially according to Lewis generates more savings. The lack of development was due to a lack of savings and investment.

The key to development was to increase savings and investment. Lewis saw the existence of the modern industrial sector as essential if this was to happen. Urban migration from the poor rural areas to the relatively richer industrial urban areas gave workers the opportunities to earn higher incomes and crucially save more providing funds for entrepreneurs to investment.

A growing industrial sector requiring labour provided the incomes that could be spent and saved. This would in itself generate demand and also provide funds for investment. Income generated by the industrial sector was trickling down throughout the economy.

Problems of the Lewis Model: The idea that the productivity of labour in rural areas is almost zero may be true for certain times of the year however during planting and harvesting the need for labour are critical to the needs of the village.

The assumption of a constant demand for labour from the industrial sector is questionable. Increasing technology may be labour saving reducing the need for labour. In addition if the industry concerned declines again the demand for labour will fall.

The idea of trickle down has been criticised. Will higher incomes earned in the industrial sector be saved? If the entrepreneurs and labour spend their new found gains rather than save it, funds for investment and growth will not be made available.

The rural urban migration has for many LDCs been far larger that the industrial sector can provide jobs for. Urban poverty has replaced rural poverty. The two-sector model of economic growth developed by William Arthur Lewis is a classical economic model, as opposed to a neoclassical one.

Lewis believed that neoclassical economics does not accurately describe the condition of economically less-developed ‘ countries (LDCs) because it assumes that labor is in short supply.

Lewis’s model posited two sectors in the economy of an LDC: the modern and the traditional. The modern sector is small and uses considerable amounts of capital, whereas the traditional sector is large and not capital-intensive; very little, if any, capital accumulation occurs in the traditional sector, while a large amount of excess labor exists there which Lewis termed the “reserve army of labourers.

“Diminishing marginal product exists in both sectors, and the marginal product of labor in the traditional sector is zero. Wages in the traditional sector are equal to the total product of labor in the traditional sector divided by the total amount of labor in that sector:

An increase in the amount of capital in the modern sector would increase the marginal product of labor in the modern sector and thereby increase total output there whereas it would not affect the traditional sector at all.

Thus, for Lewis, capital accumulation in the modern sector is the method for growing a less developed economy without doing any real damage to the traditional sector. According to Lewis’s model, capital accumulation in the modern sector will lead to rising incomes as well as rising income inequality signs of economic growth and development.

At some point in time, there will be enough capital accumulation that the marginal product of labour in the modern sector will equal the marginal product of labour in the traditional sector at the traditional-sector wage rate.

From that point on, the two sectors become integrated, marginal product of labour begins to determine the wage rate as in neoclassical economic theory and the LDC becomes a more economically developed country.

Based on the Lewis model, if a country shows a lack of economic growth and development, it means that the country needs to modernise its traditional sector by industrialising; investment of additional capital can help it do so.

The World Bank attempted to implement this principle by determining a given LDCs “financing gap” the amount by which the country’s domestic investment did not suffice to bring about the desired levels of economic growth. This amount would then be provided to the country via foreign aid.

The Discrediting of the Lewis Model:

Today, the Lewis two-sector model has largely been rejected by academic economists. Applications of the Lewis model in the form of giving foreign aid to LDCs in an attempt to develop their modern’ sectors failed to bring about desired growth targets; in fact, many Sub-Saharan African countries are now economically worse off today than they were when the giving of foreign aid began.

Of all the countries where the Lewis model was implemented, it achieved the predicted results only in Tunisia. This success could have occurred by sheer coincidence even if the Lewis model were absolutely wrong.

The Lewis mode! fails to address institutional problems in LDCs that prevent the use of foreign investment to stimulate economic growth. The research of Peter Bauer has shown that the economic problems of LDCs are not natural to them, but are rather a result of deeply flawed institutions including enormous bureaucracies and highly interventionist, states, a legacy of big colonial administrations.

Governments of LDCs tend to crack down on private entrepreneurship and economic initiative and use foreign aid to enrich government officials and empower the state. In this sense, foreign aid can actually restrain and cripple economic growth rather than encourage it.

Lewis’s model was largely a formalisation of Soviet development economics; the breakdown of the Soviet Union provided an empirical example of the failure of this approach to economic development and further discredited the Lewis model.

By 1990, “almost everyone… had belatedly realised that the Soviet Union was still a poor country, not ‘an industrial power of the first order'”. Thus, the country whose policies inspired the Lewis model was shown to have been harmed by those very policies.

J. H. Boeke developed a general theory of economic and social development of underdeveloped economies, and called it the theory of social dualism. Boeke maintained that there are three characteristics of a society in the economic sense. These are (i) the social spirit, (ii) the organisational forms, and (iii) the technique dominating it.

A society is homogeneous where only one social system prevails. But a society may have two or more social systems simultaneously. It is then a dual or plural society.

The term ‘dual society’ refers to societies showing a distinct cleavage of tow synchronic and full grown social styles which in the normal, historical evolution of homogenous societies are separated for each other by transitional forms, as, for instance, per-capitalism and high capitalism by early capitalism.

Such a dual society is characterised by the existence of an advanced imported western system and an indigenous pre-capitalist agriculture system.

The former is under western influence and supervision, which used advanced techniques and where the average standard of living is high. The latter is native with low levels of technique, economic and social welfare.

There are certain characteristics of the eastern sector of a dualistic society which distinguish it from a western society.

The needs of an eastern society are limited. People are satisfied when their immediate needs are met.

This is because people are influenced more by social rather than economic goods.

Goods are evaluated according to their prestige value rather value-in-use. It is, therefore, not •surprising that eastern economies are characterised by backward-sloping curve of effort and risk- taking.

Native industry has practically no organisation, is without capital, technically helpless and ignorant of the market.’

People indulge more in speculative activities rather than in regular profit-giving enterprises. They do not believe in capital investments attended by risks. They lack initiate and organisational skill characteristic of the western sector of the society.

People are reluctant to leave the village community. Migration within the country and immigration take place through state intervention. Urban development takes place at the cost of rural life.

Export is the main objective of foreign trade in eastern society as distinct from a western society where it is only the means which makes imports possible.

Boeke has suggested that because of the differences between the eastern and the western economies, the western economic theories are not applicable in underdeveloped countries. In view of this, he explained that economic development is generally hampered by the limited wants of the eastern society.

The increased supply of goods creates glut of commodities in the market. This results in fall in prices, which consequently leads to recession and fall in investment. His suggestion was that industrialisation process or agricultural improvement should be a gradual and steady and that could suit the framework of a dualistic economy.

The rapid or radical changes in the structure of dualistic economy for the purpose of economic development might prove counter­productive. He, therefore, advised for gradual approach to economic development of dualistic economies.

Boeke’s theory has been criticised on the following grounds. One, the assumption of limited wants is neither consistent with the human nature nor relevant in the context of economic development.

Two, it ignores the role of trade unions. The trade unions fight for labour’s rights and participate actively in the development activities and welfare programmes.

Three, it is difficult to agree with Boeke’s view that rural workers are immobile and always stick to the agricultural occupations and they have no desire to migrate to urban areas.

Four, the phenomenon of social dualism is not only peculiar to underdeveloped countries; it is found in developed countries also.

The important problems faced by an underdeveloped country are that of unemployment and scarcity of capital. The solution of these problems has been sought by Higgins through his theory of technological dualism, which is considered an improved version of Boeke’s theory.