Dual-sector model

The dual-sector model is a model in developmental economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.

Initially the dual-sector model as given by W. A. Lewis was enumerated in his article entitled "Economic Development with Unlimited Supplies of Labor" written in 1954, the model itself was named in Lewis's honor. First published in The Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of developmental economics. The article itself has been characterized by some as the most influential contribution to the establishment of the discipline.

W. A. Lewis divided the economy of an underdeveloped country into 2 sectors:

Lewis defined this sector as "that part of the economy which uses reproducible capital and pays capitalists thereof". The use of capital is controlled by the capitalists, who hire the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.

This sector was defined by him as "that part of the economy which is not using reproducible capital". It can also be adjusted as the indigenous traditional sector or the "self employed sector". The per head output is comparatively lower in this sector and this is because it is not fructified with capital. The "Dual Sector Model" is a theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labor, promotes industrialization and stimulates sustained development.

In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labour, and low productivity through a labour-intensive production process. In contrast, the capitalist manufacturing sector is defined by higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for more workers. Also, the capitalist sector is assumed to use a production process that is capital intensive, so investment and capital formation in the manufacturing sector are possible over time as capitalists' profits are reinvested in the capital stock. Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority as the hypothetical developing nation's investment is going towards the physical capital stock in the manufacturing sector.

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