MILAN – In 1979, W. Arthur Lewis received the Nobel Prize in economics for his analysis of growth dynamics in developing countries. Deservedly so: His conceptual framework has proved invaluable in understanding and guiding structural change across a range of emerging economies.
The basic idea that Lewis emphasized is that developing countries initially grow by expanding their export sectors, which absorb the surplus labor in traditional sectors like agriculture. As incomes and purchasing power rise, domestic sectors expand along with the tradable sectors. Productivity and incomes in the largely urban, labor-intensive manufacturing sectors tend to be 3-4 times higher than in the traditional sectors, so average incomes rise as more people go to work in the expanding export sector. But, as Lewis noted, this also means that wage growth in the export sector will remain depressed as long as there is surplus labor elsewhere.
Because labor availability is not a constraint, the key factor with respect to growth is the level of capital investment, which is needed even in labor-intensive sectors. The returns on such investment depend on competitive conditions in the global economy.
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