The Difference of Ranis Feis and Lewis Model - Case Study Example

The Ranis-Fei Model The study of development especially by the underdeveloped countries is one of the most interesting studies so that quite a numberof Economists have attempted to explain the pre-requisites of growth and development. This paper has its focus on the Ranis-Fei model of development, with particular association to the Lewis model. We therefore compare and contrast the two studies, examine its model and diagrams and analyze it well enough so as there is a critique at the end of the paper. Comparison and Contrast The Ranis-Fei model was built from the Lewis model, with reformulations on its underlying assumptions on the unlimited supply curve of labour (Gustav Ranis). Lewis viewed the expansion of the capitalistic or industrial sector as nourished by supplies of cheap labour from the subsistence or agricultural sector (Gustav Ranis). Development then “consists of the re-allocation of surplus agricultural workers, whose contribution to output may have been zero or negligible, to industry where they become productive members of the labour force at a wage equal (or tied to) the institutional wage in agriculture”. This is the very heart of the Lewis model where the study of Ranis and Fei also took off. A consideration that the two authors have pointed out in the Lewis model is the failure to include the necessary growth in the agricultural sector so as to continuously provide for the growing industrial sector. It is the essential balance in growth between the two industries which defines the end of the take-off process. This balance between the two sectors is what contrasts the work of Lewis to that of Ranis and Fei. Lewis “explains the turning point rather loosely as occurring when one of the following events puts an end to the horizontal supply curve of labour: (a) the worsening of the terms of trade for the industrial sector, and (b) the exhaustion of the labour surplus in the agricultural sector” (Gustav Ranis). In Lewis’ model, the “exhaustion of surplus” should be interpreted primarily as a market phenomenon rather than as physical shortage of manpower; what it means is an increase in the real wage at the source of supply (Gustav Ranis). This turning point in the model of Lewis was modified by Ranis and Fei. Ranis and Fei believe that “there are two factors which may lead to a postponement of the Lewis turning point: (1) increases in agricultural productivity, and (2) population growth” (Gustav Ranis). These two things are obviously not discussed in the Lewis model. The Models and Diagrams 1.1 The Lewis Model In Diagrams 1.1, 1.2 and 1.3 we depict the different phases in the re-allocation process. We have diagram 1.1 to depict the industrial sector and diagrams 1.2 and 1.3 to showcase the agricultural sector. “The first is the familiar Lewis diagram measuring industrial labour on the horizontal axis OW and its marginal physical productivity (MPP) on the vertical axis OP. The demand curve for labour (i.e., the MPP curve dtf), together with the supply curve of labour (SttS), determines the employment of the industrial labor force (St)” (Gustav Ranis). AN increase in the capital stock will be shown by the shift of the supply curve to the right producing d’t’f’ from dtf. The depiction of the unlimited supply curve of labour is the horizontal line St. It is the upward movement of the supply curve that represents the end of the “unlimitedness”; at this point we perceive that every unit of labour taken away from the agricultural sector to the industrial sector will mean reduction in the productivity in the former. Industrial Sector 1.1 Lewis perceive the “unlimitedness” of the supply of labour to exist as long as the supply of labor exceeds the demand at the current price and with this unlimitedness comes the opportunity to create new industries (Lewis). “In Diagram 1.3 let the agricultural labor force be measured on the horizontal axis OA (reading from right to left), and let agricultural out- put be measured on the vertical axis OB (downward from 0). The curve ORCX describes the total physical productivity of labor (TPP) in the agricultural sector. This curve is assumed to have a concave portion ORC showing a gradually diminishing marginal productivity of agricultural labor and a horizontal portion XC where marginal product vanishes. The portion of any labor force in excess of OD may be considered redundant in that its withdrawal from agriculture would not affect agricultural output” (Gustav Ranis). “Let point R on the total output curve be the point at which the MPP equals the institutional wage, i.e. the dotted tangential line at R is parallel to OX. We can then define AP as the disguisedly unemployed agricultural labor force since, beyond P, MPP is less than the institutional wage.3 Note that Diagrams 1.1, 1.2, and 1.3 are "lined up." Any point on the horizontal axis of Diagrams 1.1 to 1.3 represents a particular way in which the total population or labor force OA is distributed between the two sectors; for example, at point P (Diagrams 1.2 and 1.3) the agricultural labor force is OP and the (already allocated) industrial labor force is AP. If, at the break-out point, the entire population, OA, is engaged in the agricultural sector, the allocation process during take-off can be represented by a series of points, A, G, D, I, P, etc., on OA, gradually moving towards” (Gustav Ranis). Obviously, we see the transition in Phase 1 where there is unlimited supply of labor in the industrial sector because of the surplus of labor in the agricultural sector. Practically these are the labourers in the agricultural sector which do not in any way add to the total productivity of the entire sector, thus their marginal productivity is equal to zero. When they are transferred to the industrial sector, their absence does not in any way diminish the total productivity of the agricultural sector. “The important concepts of disguised unemployment, redundant labor force and institutional wage can be more clearly depicted with the aid of Diagram 1.2, in which agricultural output per worker is measured on the vertical axis AN. Let ADUV be the marginal physical productivity (MPP) curve of labor in the agricultural sector. Let the vertical distance AS equal the institutional wage (shown also as PU, equal to MPP of agricultural labor at U, lined up with P and R in Diagram 1.3). Three phases in the re-allocation process may now be distinguished: (1) Phase 1 is the range for which MPP=0, i.e., the total productivity curve in Diagram 1.3 is horizontal. This phase marks off the redundant labour force, AD. (2) Phase 2 is the range for which a positive MPP is less than the institutional wage. Phases 1 and 2 together mark off the existence of the disguisedly unemployed labour force, AP. (3) Phase 3 is the range for which MPP is greater than the institutional wage rate assumed to prevail at the break-out point” (Gustav Ranis). “We assume that the institutional wage AS prevails during phases 1 and 2 and a wage rate equal to MPP prevails in phase 3. Only when the disguisedly unemployed have been absorbed, i.e. in phase 3, does the marginal contribution of labour to output become as great as or greater than the institutional real wage. As a result, it is then to the advantage of the landlord to bid actively for labour; the agricultural sector can be said to have become commercialized as the institutional wage is abandoned and competitive market forces yield the commonly accepted equilibrium conditions. Under these assumptions the agricultural real wage in terms of agricultural goods is defined by the curve SUV in Diagram 1.2, consisting of a horizontal portion SU and a rising portion; UV. This curve may be called the supply-price curve of agricultural labour. It indicates for each level of real wage the amount of labour that may be released from the agricultural sector. The transition into phase 3 constitutes a major landmark in the developmental process. With the completion of the transfer of the disguisedly unemployed, there will occur a switch, forced by circumstance, in employer behaviour, i.e. the advent of a fully commercialized agricultural sector. This landmark may be defined as the end of the take-off process. We know no other way to establish a non-arbitrary criterion for an economy reaching the threshold of so-called self-sustaining growth” (Gustav Ranis). As stated, the model practically suggests that the achievement of two events signifies the end of the turning point: (a) the worsening of the terms of trade in the industrial sector and (b) the exhaustion of the labour surplus in the agricultural sector. Ranis and Fei deviated from the Lewis model with the introduction of two events which will postpone the reaching of Lewis turning point or end of the take-off process. These are (a) the increase in agricultural productivity and (b) population growth. “An increase in labour productivity in the agricultural sector can be described by an "upward" shift of the entire total physical productivity (TPP) curve of Diagram 1.3 and it also shifts the marginal physical productivity curve upward.” (Gustav Ranis). Sooner or later, the shortage point and the commercialization point coincide and we shall call this point the turning point. The upward shift of the MPP curve which is accompanied by a higher real wage in the agricultural sector after the turning point raises the industrial supply curve after that point. Examining the situation in the industrial sector, we see that before the turning point, the industrial labour supply curve lies above (below) the balanced growth path. “The economic significance of the equality between our turning point and the (final ) shortage point is that, before the turning point, the economy moves along its balanced-growth path while exploiting (or making the best of) its under-employed agricultural labour force by means of increases in agricultural productivity. The economic significance of the equality between our turning point and the commercialization point is that, after the turning point, the industrial supply curve of labour finally rises as we enter a world in which the agricultural sector is no longer dominated by nonmarket institutional forces but assumes the characteristics of a commercialized capitalistic system” (Gustav Ranis). The Inter-Sectoral Terms of Trade “From the output side, the two sectors must provide the marketing outlets for each others products; and, from the input side, the industrial sector must provide the employment opportunities for the absorption of workers released by the agricultural sector” (Gustav Ranis). The interdependence between the two sectors will have to give way to the balance growth between the agricultural and industrial sectors. This is actually the focal point of this study. The accumulation of capital will give way to the transfer of labour to the other sector. As the accumulated capital increases, the demand for labour in the industrial sector increases while investment of this kind in the agricultural sector increases its supply of labour, overflowing to the industrial sector. This then matches labour demand and labour supply between the industrial and agricultural sectors respectively. These movements are both beneficial although it leaves at least two considerations in the process, (a) the synchronization through time of the shifts of the two sequences of curves and (b) how should the total investment fund be allocated to the two sectors to ensure that they are "harmonious" from the point of view of both the input and the output criteria. An answer to the second consideration is that “the allocation of investment funds must be such as to continuously sustain investment incentives in both sectors of the economy” (Gustav Ranis). The Criticisms and Enhancements One of the criticisms and enhancement of the Ranis-Fei model is the model of the dual economy created by Jorgenson. The model developed by Jorgenson is similar to the Ranis-Fei model as it described a dual economy composed of an advanced manufacturing sector and a backward or traditional sector, the agriculture. The deviation or the addition in the Jorgenson model however, is construction of an output relating to the three factors of production: land, labour and capital. The Jorgenson model assumes symmetry in the productive relation in these two sectors (Jorgenson). Finally, it suggests that “if the two production functions were essentially symmetric, that is, if each function included all three productive factors, the resulting model would be suited to the problems of industrial balance in an advanced economy or to dynamic problems in the theory of international trade” (Jorgenson). A study of Schultz in 1964 based on the impact of influenza epidemic in India, however revealed that “surplus labor” is a false doctrine as the agricultural output declined with the deline in labor force (Schultz). In another stusy by Sen in 1966, 1967 it was revealed that it matters which worker you take out of the agricultural labor force, suggesting that there are just some workers who can be withdrawn at no cost and not just any worker (Sen). Works Cited Gustav Ranis, John C. H. Fei. "A Theory of Economic Development." The American Economic Review 51 (1961): 534-565. Jorgenson, Dale W. "The Development of a Dual Economy ." The Economic Journal (1961): 309-334. Lewis, W. Arthur. "Economic Development with Unlimited Supply of Labor." (n.d.). Schultz, T. W. (1964): Transforming Traditional Agriculture. Yale University Press. Sen, A. K. (1966): “Peasants and Dualism with or without Surplus Labor,” The Journal of Political Economy, 74(5), 425–450. Read More