‘Describing the “ turning points ” of the “ Lewis-Ranis-Fei theoretical account ” of labour migration and their effects on the rate of industrialisation, show the importance of investings in both agribusiness and industry to keep the rate of industrialisation. ‘

William Arthur Lewis, with his most celebrated published work, “ Economic Development with Unlimited Supplies of Labour ” ( Manchester School, May 1954 ) and “ The Theory of Economic Growth ” ( Allen and Unwin, 1955 ) , made a great part to the theories of economic development. Based on his findings, Ranis and Fei succeeded to widen the initial Lewis ‘ theoretical account and assessed the alterations in the agricultural and industrial labor in more item. I will get down this paper by presenting the foundations of the theoretical account before following with the deductions, establishing the bulk of my statements on the analysis by Ranis and Fei in “ A Theory of Economic Development ” ( 1961 ) .

The cardinal thought behind the Lewis theoretical account is reasonably simple. Lewis divided labour force into two differentiated groups – “ subsistence sector ” and “ capitalist sector ” where the former is assumed to incorporate limitless supply and accordingly, a pool of excess labor[ 1 ]that sets labour-supply conditions for the latter. The construct of a double economic system is to a great extent criticised. As Leeson ( 1982 ) pointed out, “ double economic system ” theoretical accounts are “ held to connote a false image of the nature of the historical procedure of alteration in developing states ” . In this paper, I will non measure the strengths or failings of the theoretical account, but alternatively, for the interest of simpleness and lucidity, assume that the sectors are agricultural and industrial, severally.

Figure 1 captures the Lewis-Ranis-Fei theoretical account. First, Lewis theoretical account in Figure 1.3. can be considered and it is to be read from right to go forth. Because the land is fixed, the production map in the diagram outputs diminishing returns to scale, hence the concave form. I measure the figure of people in the labour force on the horizontal axis ( agricultural labor is measured from right to left ) and the measure of end product on the perpendicular axis. After point B ( towards A ) , there is no farther consequence of an excess unit of labor because the land is restricted and accordingly, the production map is level and the fringy merchandise of labor is zero. Reducing labor after the point B will hold no consequence on end product, because of the excess of labor. In other words, the ensuing agricultural excess from an limitless supply in the Lewis theoretical account can be removed at a really small or no cost. The mean pay is merely tungsten, which is relative to the angle shown in this figure. A point to observe is that the “ excess labor is a supply of labor that, given the preponderance of agricultural sector in less developed economic systems, is likely to be of major quantitative importance in the development procedure of less developed economic systems ” ( Ray, 1998, p. 358 ) .

Industrial Labour

Industrial Labour

Agricultural Labour

Agricultural

End product

Average

Agricultural

Excess

Industrial

Wage

Disguised

unemployment

Excess

Labor

Commercialization

Tungsten

Changeless

Excess

Worsening

Excess

Worsening

Excess

Z Z ‘

Ten Yttrium

W*

Demand Curves

Supply curve

PHASE 1

PHASE 2

PHASE 3

A

Bacillus

C

FIGURE 1

FIGURE 1.2

FIGURE 1.3

FIGURE 1.1

Wage

Bill

Oxygen

Ten

Subsequently, Ranis ‘ and Fei ‘s extension to Lewis ‘ theoretical account can be analysed. They observed the theoretical account by reading it from left to compensate and assessed the alterations in the end product and pay as more and more people moved from agribusiness to the industry. A new construct was added – viz. , cloaked unemployment, which appears in the traditional subsistence sector. The fringy merchandise of labor, which is observed as the incline of the production map, in agricultural sector is lower than in industry – in fact, it is zero before point B on Figure 1.3. Under competitory premises, the existent pay rate would fall to zero, but due to the presence of institutional or non-market forces, the institutional pay is sustained. Therefore, there are additions to be had by exchanging resources off to the industrial sector. However, it is by and large non likely to go on because the market, left on its ain, does non alter. If the industrial sector does pay harmonizing to fringy merchandise, so, as noted by Ray ( 1998 ) , there would be efficiency additions available every bit long as the fringy merchandise of the agricultural labor is less than the pay, whether it is zero or non. By diminishing the labour force in agribusiness by a little sum ( whilst still staying in the excess labour country ) , the entire pay measure in agribusiness falls along the diagonal consecutive line in Figure 1.3, provided that the pay in agribusiness does non lift. Since end product does non fall, the decrease in the entire pay measure gives an economic system an agricultural excess. Merely at point C will this procedure come to an terminal because there is no more cloaked unemployment – it merely appears at points at which the fringy merchandise of labor is less than the institutional pay. Hence, status for the being of cloaked unemployment is:

W & gt ; MPL

Ranis and Fei later claimed that the mean pay measure in agricultural sector is no longer measured as a consecutive line. At point C, the incline of the production map is parallel to the pay measure line, giving that the cloaked unemployment is no longer observed. Furthermore, beyond point C ( when the disguisedly unemployed have been absorbed ) the fringy merchandise of labour exceeds the traditionally given pay rate ( Ranis and Fei, 1961 ) . The pay in agribusiness begins to lift, because it becomes profitable to offer for labor[ 2 ]. As a consequence, pay measure falls more easy.

This brings me to the cardinal point of the paper – capturing the “ turning points ” in the Lewis-Ranis-Fei theoretical account. Ranis and Fei divided the theoretical account into three stages[ 3 ]. I have used Figure 1.1. to exemplify this issue. This figure contains the demand curves for labor by industry ( downward sloping ) . The supply curve is ab initio a perpendicular line, because of excess labor. Hence, the intersection of the labor and demand curves gives the tantamount measure of labor and pay rate – ten and w* , severally. Since the economic system is in the excess stage, there will be a certain measure of labour reassigning from agricultural to industrial sector, which explains the addition of the labor in industry from ten to y whilst maintaining the pay rate invariable. The pay rate remains changeless every bit long as there is excess labor in the agribusiness that can be employed more fruitfully in the industry at a changeless subsistence pay rate ( Berry, 1970 ) . It must be noted though that for any farther investing, the demand curve for labor is traveling to switch to a point where the compensatory pay must lift. The stage where the supply pay of labor jousts upwards is referred to as the “ first turning point ” . At this point, redundant labour disappears wholly ( Jorgenson, 1967 ) . Employment in the industry would hold risen every bit far as point omega ‘ had the turning point non occurred. However, since it did and since the pay rate began to lift as demand was pushed upwards, employment can merely lift up to z where demand meets supply.

As I briefly mentioned earlier, it is apparent that as more and more agricultural workers are withdrawn and no longer demand a part of the agricultural goods, the excess of agricultural goods begins to look. It must be noted that each person that moves from agricultural sector to the industry carries their ain subsistence package together with them, intending that they must be compensated for the transportation. Ranis and Fei named the part of entire agricultural end product in surplus of the ingestion demands of the agricultural labor force at the institutional pay as the entire agricultural excess – TAS ( Ranis and Fei, 1961 ) . They described the TAS ( captured in Figure 1.3 ) as the perpendicular distance between the consecutive line OX and the entire physical productiveness curve ( with the exclusion of stage 3 where the distance will be reduced ) .

In order to happen out the needed minimal industrial pay, the mean pay must be multiplied by the comparative monetary value between agribusiness and industry. In the excess stage, it remains changeless, because the mean agricultural excess is non altering ( captured in Figure 1.2. ) . At this point, an enlargement in the industrial sector would non drive up the pay rate. If an person that moves from agribusiness to the industry when labor in agribusiness is at the excess stage, there will be no compensation needed for that peculiar person, as he carries his ain nutrient basket to the industry. In fact, industrial pay is changeless and this person is non worse off as a consequence. At the 2nd stage, nevertheless, the mean agricultural excess begins to worsen, because there will non be sufficient agricultural end product to feed all the new industrial reachings at the institutional pay degree ( Ranis and Fei, 1961 ) . In other words, the same pay would non counterbalance them for the move any longer, because the agricultural excess has fallen below the mean pay ( A.W. ) and it is non possible for them to purchase A.W. units of nutrient. As a consequence, the supply curve tilts up. There appears to be a deterioration of the footings of trade. The comparative monetary values begin to increase and in order to counterbalance for this monetary value consequence and ease the move, the industrial pay must lift. The pay must besides counterbalance for the worsening agricultural excess and a motion of the footings of trade against industry. Put otherwise, the deficit of agricultural goods measured in agricultural excess lead to a rise in the industrial pay measured in footings of industrial goods.

Simultaneously, the agribusiness additions some excess resources, because the agricultural end product is divided between less people as more and more people move off from agribusiness. If it happened that the persons at the excess zone wanted to devour more than the norm, the authorities could step in and revenue enhancement them to curtail their ingestion. That excess could so be used up in the investing to feed those persons that move to the industry. In add-on, it could besides be used to back up the new industrial reachings as the pay rate in industry is set to increase. During stage three, this procedure becomes even more evident as the now commercialized pay in agribusiness becomes operative. Hence, there is an even sharper lessening in the agricultural excess. What is more, beyond the “ commercialisation ” point, the part from a worker is greater than the pay ( as MPL & gt ; W ) . This, on the other manus, increases agricultural pay rate as was seen in Figure 1.3. From the old consequences, it is clear that after a 2nd turning point the industry would hold to counterbalance even more to acquire the workers. As a consequence, it gives an inducement to dicker for a worker. Harmonizing to Chen ( 2005 ) , Lewis-Ranis-Fei theoretical account should be considered a classical theoretical account because of the use of industrial pay. However, Jorgenson claims that one time the commercialisation point is reached, alternatively of the classical attack, the neo-classical theory of growing for an advanced economic system is to be observed ( Jorgenson, 1967 ) .

Agricultural Labour

Agricultural

End product

Disguised

unemployment

Excess

Labor

Commercialization

A

Bacillus

C

FIGURE 2

Wage

Bill

Oxygen

Ten

Industrial Labour

Industrial Wage

D1

D2

D3

Second

A.W.

Oxygen

Bacillus

B0

Berry came to a important decision of the Lewis-Ranis-Fei theoretical account. In consequence, a displacement in the footings of trade has a negative consequence on the industry, coercing capitalist employers to pay a higher pay and therefore bring forthing less net incomes and less investing ( Berry, 1970 ) . However, there is a function of mutuality between the two sectors ( Ranis and Fei ) . In fact, raising the monetary value of goods in agribusiness would give an agricultural sector an inducement to raise the end product, therefore promoting investings in agribusiness, taking to a diminution in the footings of trade, which in bend lowers rewards, increases net incomes and generates more investing in the industry. Consequently, there will be a balanced enlargement in both, agribusiness and industry. In other words, what Ranis and Fei observed was that the allotment of investing financess must be such that as to “ continuously sustain investing inducements in both sectors of the economic system ” . The footings of trade should non deteriorate well against either sector. I have illustrated this in Figure 2. The lower diagram in Figure 2 contains a supply curve S and a demand curve D1. Initially, the size of industrial labor force is OB and the industrial sector is doing a net income equal to the country B0. This net income can be considered as an investing fund and could be allocated in portion to both sectors. Consequently, the demand curve shifts up and at that place will be a new intersection point which lies on the balanced-growth way and this new equilibrium allows the economic system to bask even farther net incomes. After the first turning point, there will be a little proportion of net income that will be forgone because the first turning point occurs, yet the overall sum of net income additions. However, it becomes clear that it is sensible to hold a policy to put in both sectors as the economic system will so keep the balanced growing way.

To reason, I have shown the chief thoughts behind the Lewis-Ranis-Fei theoretical account and used the back-to-back analysis of the theoretical account to explicate why it is of import to put in both sectors in order to stay on the balanced growing way and keep the rate of industrialisation. The being of excess labor in agribusiness allows the industry to go on to pay the institutional pay and hence bask farther net incomes and continued investing. At the same clip, as more and more people are traveling off from agribusiness, there will be some sum of agricultural excess that can be used up to fuel farther development. This procedure continues until the excess labor is absorbed. Hence, salvaging and investing are a important portion in the Lewis-Ranis-Fei to back up economic development.