By Andy Sumner
Seventy years ago, Arthur Lewis wrote a seminal paper on economic development in the Global South. At a workshop at the Global Development Institute, University of Manchester, convened by the EADI Working Group on the Politics and Political Economy of Economic Transformation, co-convenor Pritish Behuria and GDI’s Adam Aboobaker, it was clear Lewis’ relevance is as significant today as ever. This blog reflects on Lewis’ contributions to the study of global inequality.
The Lewis model 70-year anniversary
Lewis remains one of the most influential figures in Development Studies and development Economics.
His dual-economy model published in 1954 provides a theory of economic development or ‘structural transformation’, meaning the shift of workers from the low-productivity, ‘non-capitalist’ ‘sector’ to the high-productivity, capitalist ‘sector’, hence the ‘dual’ in ‘dual economy’. The theory is a cornerstone in the field of classical development economics. In contrast, to explain the difference, neo-classical economics is based on a single sector model theory of economic growth.
The Lewis model also explains how countries in the Global South have different kinds of economy (dual economies) in contrast to the unified or single sector economies of the Global North.
Inequality was not Lewis primary focus. Economic development was. However, Lewis’ work provides valuable insights into the dynamics of global inequality, composed as it is of both within-country and between-country income disparities. Lewis’ ideas remain relevant in the contemporary global economy, particularly in an era dominated by global production fragmented in value chains where manufactured goods, such the iPhone, have components from multiple countries.
So, what did Lewis say about global inequality?
Lewis and Within-Country Inequality: Development as an Unequal Process
First, Lewis argued that income inequality within countries has a tendency to rise during the early stages of economic transformation. Why? There are several reasons:
- Capital Accumulation: Lewis emphasized that economic development is driven by the movement of labour from the non-capitalist sector to the capitalist sector as productivity is higher in the latter; and that the reinvestment of profits is crucial, as is the productive use of savings in this process. However, the process tends to benefit the ‘savings class’ (i.e. the rich) disproportionately and in Lewis’ words “development must be inegalitarian” during its initial stages because those who control capital and possess education are better positioned to reap the initial gains of economic transformation.
- Sectoral Income Gaps: Wages differ significantly between sectors, with labour in the non-capitalist sector earning less than those in the capitalist sector. As economies transition, these disparities can widen given unlimited supplies of labour which keep real wages in the capitalist sector steady until the economy reaches a turning point (when surplus labour is exhausted). And in an open economy, the ‘unlimited’ supply of labour extends beyond national boundaries, thus it may take longer to reach Lewis’ turning point at which real wages rise and inequality declines.
- Spatial Inequalities: Lewis noted growth often begins in specific regions or sectors, creating enclaves of progress while leaving others behind. In his words, lots of ‘tiny islands’. Without proactive policies, these disparities can persist or deepen spatially.
Today, these dynamics remain important to countries in the Global South because economic development and its relationship with within-country income inequality continues to be an important issue.
Between-Country Inequality: Structural Legacies and Global Power
Second, Lewis also highlighted the structural constraints that perpetuate inequality between nations.
His analysis remains relevant for understanding how colonial legacies, the contemporary global economic system, and demographic pressures shape inequality dynamics between countries. Why? Again, there are several reasons:
- Colonial Legacies: Lewis noted the extraction of resources and suppression of local industries during colonial rule left many Global South countries dependent on primary commodities, locking them into disadvantageous positions in the global economy.
- Global Trade and Finance Systems: Lewis critiqued the global institutions and trade systems that privilege the Global North, limiting the policy autonomy of Global South countries and exacerbating dependence.
- Knowledge and Technology Gaps: The lack of investment in education, research, and technology continues to hinder many Global South countries’ ability to transition to high-value economic activities.
These insights resonate with contemporary concerns about development in the Global South. While integration into value-chains offers opportunities for export-led growth, especially at low income, it also may lead to value extraction by transnational corporations (through profit shifting) rather than fully reinvested profits. Further, the benefits of value chain participation may follow an inverted-U curve in the sense that the benefits may diminish as countries income rise and eventually plateau or even turn negative. Finally, competition among developing countries to win contracts as suppliers to TNCs leads to intense price pressure and may lead to economic activity spread thinner and thinner, making it harder for countries to capture enough activity to achieve economic development.
Policy Lessons from Lewis
So, what would Lewis say? Lewis’ work offers some clear policy prescriptions to address global inequality:
- Redistributive or ‘trickle along’ policies and investments: Taxing profits from high-productivity sectors and reinvesting in infrastructure, education, and technology for underdeveloped sectors (‘trickle along’ in the words of Lewis) is critical for spreading the benefits of growth from the dynamic, capitalist sector to the subsistence, non-capitalist sector.
- Proactive Industrial Policies: Infant industry protection and industrial policy are essential to ensure economic development is sustained in the Global South.
- Mediating the interests of capital and labour: Policies that manage wage growth and ensure profits are reinvested within the country are essential to sustain economic development.
The cases of Indonesia and Thailand during their respective growth periods from the mid-1970s to the mid-1990s demonstrate the potential of such strategies. However, in today’s economy, these policies must contend with the complexities of value-chains, where value may not be fully captured inside the Global South due to profit shifting, and global competition between Global South countries may limit the gains through intense price pressure.
Lewis and his enduring relevance
As global inequality persists, Lewis’ insights remain essential for understanding its structural underpinnings. His emphasis on sectoral transitions, capital-labour dynamics, and global power asymmetries provides a framework for addressing disparities. However, today’s challenges—such as the dominance of value chains introduce new complexities that require revisiting and extending Lewis’ ideas.
In sum, Lewis’ enduring relevance is as clear as ever.
Andy Sumner is Professor of International Development at King’s College, London, and President of EADI.
Image: Antonio Ross @ The Mancunion