Sir Arthur Lewis on economic growth and global poverty alleviation
Arthur Lewis was never concerned with poverty in the developed countries. His life work was concentrated on ‘global poverty’, that is to say the problem of raising the standard of living in the less developed countries or ‘Third World’, as they were often referred to. The poverty problem for him was never redistribution from rich to poor at either the national or individual level but that of economic growth, the raising of per capita national incomes through capital accumulation, and technical progress over the long run. His profound originality lay in the two major analytical models he conceived to deal with this problem.
Like other pioneers of development economics Lewis was born in the ‘periphery’ as opposed to the ‘center’ of the expanding world economy of the early twentieth century, in his case the British West Indies, compared with the Estonia of Ragnar Nurkse, the Poland of Paul Rosenstein-Rodan, the Argentina of Raul Prebisch, and the Burma of Hla Myint.
For all of these economists the inspiration must have been the same. How had their native countries fallen so behind the ‘West’? How could the process of catching up begin and be successful? For Lewis, we have valuable information on the early years of his career provided in the volume Sir Arthur Lewis: Ari Economic and Political Portrait, edited by Ralph Premdas and Eric St Cyr (1991).
In 1938, the British government appointed the Moyne Commission to evaluate the economic and social conditions and prospects of its Caribbean colonies. While the commission made many useful recommendations, it, not surprisingly, failed to consider any substantial structural changes for any of the islands. Lewis was by then engaged in first getting his degree and then in research for his PhD under Sir Arnold Plant on topics in industrial organization. He nevertheless did write a memorandum on the work of the commission that has been examined by John La Guerre (1991) on ‘Arthur Lewis and the Moyne Commission’. Lewis called for preferential access to the British market for Caribbean sugar but mainly for a sustained policy of industrialization as the only sustainable long-run solution, drawing on the plentiful supplies of labor from the disadvantaged peasantry in the agricultural sector. It is easy to see here the origins of the celebrated 1954 model of ‘Economic Development with Unlimited Supplies of Labour’.
The unlimited supplies model
We will now examine the structure of this model a little more closely for insights into the nature of the relationship between the rural poverty and the rate of economic growth. It is a two-sector closed economy model in which a ‘modern’ industrial sector uses capital and labor in perfectly elastic supply drawn from a ‘traditional’ agricultural sector to generate profits that are devoted to capital formation, laying the basis for further growth until the labor supply curve turns upward and real wages start to rise as in the conventional neoclassical growth model. The model fits the circumstances of the Soviet economy from the 1920s to the 1930s and of China under Mao Zedong particularly well. The modern industrial sector in the cities was under state ownership and devoted to rapid expansion while in the countryside large landowners had been expropriated and the land allocated to small-scale peasant production.
A crucial variable in all of these situations was the relative price of food in terms of manufactures or the ‘internal terms of trade’ between the agricultural and industrial sectors. This central feature of the model is completely ignored by Lewis. The industrial real wage is kept constant regardless of the pace at which the modern sector expands. To fix ideas, let us suppose that the average product of labor in the agricultural sector in terms of food is constant and the supply of labor to the modern sector is perfectly elastic at this real wage in terms of food. To get the industrial real wage, however, we must multiply this quantity by the relative price of food in terms of manufactures. Under the circumstances assumed there must be a market in which this relative price is determined. There is no such market in the model, which implicitly assumes that the relative price is a constant. In what follows we will consider the implications of a number of alternative outcomes when such a market is explicitly introduced into the model.
The demand for food comes from all the people employed in the industrial sector. The industrial workers spend all of their wages on either food or manufactured consumer goods, depending on the relative price. Investment, all in the form of industrial goods, is equal to the propensity to save out of profits. The remaining profit is used to pay the salaries of all the state and party apparatus, who provide the essential public goods and services, and of the managerial staff of the industrial enterprises. All of these incomes are spent on either food or industrial consumer goods, just like the wages of the industrial workers. Given consumer preferences we can thus determine the demand curve for food. The supply curve of food comes from the peasant producers in the agricultural sector. Equality of supply and demand determines the relative price of food in terms of manufactures and thus the industrial real wage along with employment, output, and capital formation in the industrial sector at this initial point in time. The familiar Lewis diagram with the marginal productivity curve of labor shifting successively to the right over time now comes into play.
The crucial difference with the original model is that now the industrial real wage is endogenously determined by the relative price of food. A very likely outcome would be that the relative price of food and hence the industrial real wage will rise gradually over time, reducing the pace of capital accumulation and the rate of economic growth but raising the welfare of both peasants and workers long before the original perfectly elastic Lewis supply curve turns vertical. The per capita standard of living remains constant for the entire duration of the ‘unlimited supplies’ process, whereas it can rise gradually from the outset if the market for food is explicitly introduced as it is here. In other words, poverty can start to be reduced right away while maintaining a reasonably rapid rate of growth instead of only after the labor supply curve turns vertical.
The model as now specified provides a framework within which to examine the famous ‘Soviet Industrial Debate’ of the 1920s, the subject of a classic study by Alexander Erlich (1960) in a book with the same title. The main protagonists were Nikolai Bukharin and Yevgeni Preobrazhensky who were on opposite sides despite their previous friendship and co-authorship of The ABC of Communism in 1922 (Bukharin and Preobrazhensky 1969). Bukharin believed that too ambitious a rate of capital accumulation in the state industrial sector would be choked off by the resulting rise in the relative price of food if the supply from the peasant agricultural sector could not keep up. His solution was to accept a less ambitious target for the growth of industry in step with the rate at which the supply of food from the peasant sector was increasing, what Preobrazhensky caustically termed ‘advancing to socialism at the pace of a peasant nag’. His alternative was a program of ‘socialist primitive accumulation’ harking back to the harsh process of driving the peasantry off the land in Britain before the Industrial Revolution as described by Karl Marx.
The Preobrazhensky policy of ‘socialist primitive accumulation’ can be implemented in our model by replacing the competitive market for food with a state-imposed monopoly. The supply curve of food from the agricultural sector is the marginal cost of food to the monopoly. The marginal revenue curve of the monopoly can be readily derived from the demand curve for food already specified. The price and quantity levels of the monopoly solution are determined by the intersection of the marginal revenue and marginal cost curves. Less food is purchased at a lower relative price paid to the peasant sector than under the perfectly competitive solution. The market price would be higher than the competitive price giving the profit margin above the price paid to the agricultural sector. The state, however, will return the monopoly profit to the workers by a subsidy on food that makes the price paid by the workers equal to the marginal cost, i.e., the same lower price as received by the peasant sector. The lower price of food results in a lower industrial real wage for any given initial stock of capital in the modern sector, and hence in a larger increase in employment, output, profit, and capital accumulation in the industrial sector than under perfect competition.
The great debate on Soviet industrialization was eventually rendered moot by the rise of Joseph Stalin. The staggeringly ambitious targets for the First Five Year Plan could obviously not be achieved with the agricultural sector still in private hands, whatever the policy. Stalin’s solution was collectivization of the peasant farms by a ruthless application of mass violence, especially in the fertile regions of the Ukraine. Both Bukharin and Preobrazhensky died by firing squad in the great Moscow purges of 1937 and 1938. Agriculture continued to be a major unsolved problem for the Soviet Union long after the death of Stalin and was undoubtedly an important factor in its eventual collapse. China wisely refrained from the drastic collectivization option, preferring instead to continue to rely on market incentives despite an abundance of controls imposed on the rural sector. It might even be said that despite perishing in his native Russia the spirit of Bukharin lived on to see the survival of peasant agriculture in China.
The terms of trade
Lewis never explicitly introduced foreign trade into the 1954 model. He did put forward, however, in that paper and his 1969 Wicksell Lectures on Aspects of Tropical Trade 1883—1965 (Lewis 1969) a simple but very ingenious Ricardo-Graham model with two regions and three goods that he deployed very successfully on various problems related to foreign trade and economic development. One region, the North, uses one unit of labor to produce 5 Food or 10 Steel while the other region, the South, uses one unit of labor to produce 1 Food or 1 Coffee. Relative prices are 2 Steel for 1 Food in the North and 1 Coffee for 1 Food in the South. The commodity terms of trade between the two regions must therefore be 2 Steel for 1 Coffee. Since 2 Steel requires one-fifth units of North labor and 1 Coffee one unit of South labor, the double-factorial terms of trade are 5 units of South labor for one unit of North labor, reflecting the difference between the two regions in labor productivity in Food.2 This is a good example of what Arghiri Emmanuel (1972) calls ‘unequal exchange’.
In this model, both relative prices are determined from the supply or cost side, independently of demand. Lewis implicitly rules out the case in which the South completely specializes in producing Coffee, importing both Steel and Food from the North. This case would arise if demand for Coffee from the North was so high that the South devotes all of its labor force to Coffee, with the commodity terms of trade between Coffee and Steel (or Food), determined by the reciprocal demand patterns of the two regions. This is quite a realistic possibility since there have been many small primary product exporting countries importing both food and manufactures in return. There is no problem, however, with ruling out this case and assuming that Food is produced in both countries as Lewis does.
We now do some simple comparative statics on the model as specified above, with both regions producing Food. Suppose that the South doubles its
Lewis on economic growth and poverty 93 productivity in Coffee from 1 unit per labor to 2. Since 1 Food is now worth 2 Steel in the North and 2 Coffee in the South, the commodity terms of trade are 1 Steel for 1 Coffee, i.e., they are cut in half for the South because of the doubling of its productivity in Coffee. The double-factorial terms of trade are unchanged at 5 units of South labor for 1 unit of the North’s. Now suppose instead that the South doubles its productivity in Food rather than in Coffee. Since 1 Food is worth 2 Steel and half a unit of Coffee, the commodity terms of trade are now 4 Steel for 1 Coffee, doubling in favor of the South. The double-factorial terms of trade are now 2.5 units of South labor for 1 unit of the North’s, also doubling in favor of the South. If the effort required to double productivity in either sector is the same, it is clear that Food is by far a better option than Coffee for the South.
Agriculture, industry, and balanced growth
The implication of this model is therefore that expanding agriculture for the home market is preferable to a strategy of concentrating on export of primary products. But what about the possibility of exporting labor-intensive manufactures like the fabled ‘Asian Tigers’ so successfully pursued since the early 1960s? Nothing is changed if we replace ‘Coffee’ in the example with ‘Textiles’. As it were, this simply substitutes one dependency for another. But raising labor productivity in agriculture, as we have seen, raises the industrial real wage and so puts a brake on industrialization in the modern sector of the original 1954 model. How can the conflict between the two models be resolved? For this we have to turn to the extended treatment in the comprehensive treatise on economic growth by Lewis (1955). Here he advocates the doctrine of‘balanced growth’ with a broad advance on all fronts, each sector expanding in proportion to the income elasticity of demand for its product to prevent gaps from emerging between demand and supply, requiring sharp changes in relative prices that could be disruptive of the development process (see Lewis 1955, p. 278).
Observations on the relative growth of agriculture and industry, and the connections between them, are scattered throughout the pages of Lewis (1955). He always adheres to the view that development requires resource extraction in one form or the other from agriculture to finance industrialization but notes that this is more easily accomplished when agriculture itself is expanding at a sufficiently rapid rate. Here the star performer is undoubtedly Japan, from the Meiji Restoration of the 1860s to the beginning of World War II. Lewis notes that agricultural development in Japan was achieved by small-scale peasant farms, with the government providing support with infrastructure but taxing heavily. He could have noted, but did not, that the taxation was a direct tax on land rather than on produce, so there was always the incentive to increase output at the margin. He contrasts this with the squeeze on stagnant agricultural production by the state in the USSR that financed the early five-year plans that was not only more brutal but far lesssuccessful in the long run. He also contrasts France unfavorably with Britain in the nineteenth century.
In contrast to the balanced growth approach, other pioneers on development have stressed the fact that growth is often associated with different sectors forging ahead and leading the way for the rest of the economy to follow in their wake. Thus, Walt Rostow (1960) associated each of the ‘takeoffs’ he identified in his The Stages of Economic Growth with the role of a particular ‘leading sector’. Albert Hirschman (1958) in his The Strategy of Economic Development explicitly argued against the concept of balance in favor of relying on whatever sector could get ahead by seizing the best opportunities open to them at any particular juncture. In retrospect it appears that the debate was perhaps overdrawn, since successful long run growth cannot afford any laggards for too long and is usually associated with all sectors advancing, though not necessarily at the same rate or in relation to the income elasticity of demand. Lewis (1955) in fact favorably notes many instances of what might be called ‘unbalanced growth’ in the historical record.
Internalizing the engine of growth
In his Adam Smith Bicentenary essay on ‘The Diffusion of Development’, Lewis (1976) famously said that the British Industrial Revolution presented the rest of the world with only two options. The first was to accept Britain as the ‘engine of growth’ of the world economy, supplying manufactured goods in exchange for exports of their primary products. The other was to ‘internalize the engine of growth’ by undergoing their own industrial revolution, continuing to trade but assuring autonomy instead of dependence by producing their own manufactures, including capital goods. Historically, the first option was pursued by Asia, Africa, and Latin America as well as Poland and other countries in Eastern Europe, while France and, especially Germany, followed by Japan and the United States after the turn of the twentieth century, followed the second. Lewis clearly regarded the second option as the far more desirable one, at least in the long run. It is important to realize that the second option requires producing heavy machinery and other capital goods and not just labor-intensive light manufactures.
The second option clearly requires time before it can be implemented fully and thus the first option was essentially the only possible one at the outset. Thus, Japan at the time of the Meiji Restoration exported raw silk to pay for manufactured imports, moving into the export of labor-intensive manufactures up to World War II. During that war, however, she surprised the world with launching several aircraft carriers, the massive battleships ‘Musashi’ and ‘Yamato’, and the remarkably efficient Mitsubishi ‘Zero’ fighter plane, all tributes to the strides made in the capital goods sector of the economy. The United States in the late nineteenth century was an exporter of primary products like wheat, beef, sugar, and cotton. By the turn of the century, however, she began exporting manufactured goods and innovated the automobile by
Henry Ford and the airplane by the Wright brothers. Similarly, Germany initially protected her nascent industrial production but then made technological breakthroughs in iron and steel and most notably in the new science-based chemical industry, overtaking Britain as the world’s major industrial power by 1914.
The choice between investing in the capital and consumer goods branches of the industrial sector goes back to Karl Marx but was revived during the Soviet industrialization debate by the mathematician Grigory Feldman. His work was unknown in the West until revived by Evsey Domar (1957) in the chapter titled ‘A Soviet Model of Growth’ in his Essays on the Theory of Economic Growth. Essentially, the same model was presented by the distinguished Indian statistician P.C. Mahalanobis (1953). This ‘Feldman-Domar-Mahalanobis’ model was expanded upon and linked to the Lewis (1954) model in Findlay (1966). In this model as in all of the previous contributions, capital once invested in either the capital goods or consumer goods sectors is non-shiftable. The key issue is thus the fraction ‘x’ of investment devoted to capital goods, leaving ‘(1—x)’ to the consumer goods sector. A higher x implies initially lower consumption but more and more the longer the time horizon. Thus, the problem becomes one of choosing the x that yields the optimal path of consumption given the social welfare function to be maximized and the discount rate, as in the seminal contribution by Frank Ramsey (1928).
As Lewis points out, the trade relationship between Britain and the industrialized center of the world economy, on the one hand, and the primary goods exporters, on the other, differed fundamentally between those in the temperate and those in the tropical zones of the globe. In terms of the simple model, it made all the difference in the world if it was Food and Beef, Mutton, or Wool in the temperate zone, or Food and Coffee, Tea, Cocoa, or Sugar, as in the tropical zone. Land-labor ratios were very high in the former, with immigration restricted to Europeans, resulting in high productivity and real wages in the Food sector and therefore favorable terms of trade with Steel from the center, while the labor-abundant tropics suffered with low productivity and real wages in the Food sector with consequently unfavorable terms of trade for the tropical products relative to Steel. Thus, North America, Australia, and other ‘Regions of Recent Settlement’, as the League of Nations called them, enjoyed standards of living comparable if not even superior to the center, while Asia and Africa struggled with poverty that was persistent over decades or even centuries.
The giant economy of China, with the largest population and one of the lowest per capita incomes in the world until very recently, received remarkably little attention from Lewis. In Lewis (1955), it is described as being an overpopulated economy with substantial ‘disguised unemployment’ without any observations on its history, future prospects, or form of government. This is surprising, since the circumstances of China conformed so closely to the model of Lewis (1954), as noted by many Chinese economists themselves. They conducted an active debate on when China would reach the
‘Lewis turning point’ at which the flat supply curve of labor became vertical. The consensus was that the double-digit growth rates of the Deng Xiaoping era would slow down after the early years of the twenty-first century when this point was reached and this view seems to have been correct, with growth at the lower but still impressive rate of about 6 percent per annum. Hundreds of millions have been brought out of poverty and China is successfully challenging the United States for the leadership of the world economy despite the still very substantial gap in per capita incomes between the two superpowers.
The Republic of Korea and Taiwan were Japanese colonies from the 1890s to World War II. Since then they have been remarkable success stories of export-led manufacturing development in which agriculture lagged but was never a brake on rapid industrialization. Real wage growth in both of them has long passed any ‘Lewis turning point’ and their manufactured exports have steadily risen in quality and technical sophistication. Proximity to China and Japan and their huge markets have benefited both of them, as has the support they have received from the United States. The city-states of Hong Kong and Singapore have also both been spectacular performers over the same time period. In Southeast Asia, Malaysia and Thailand have both continued to prosper as primary exporters but have also built up substantial manufacturing sectors for the home market and even for export. Indonesia, Sri Lanka, and the Philippines have been moderately successful but Burma, Cambodia, and Laos are still lagging relative to the rest of Asia.
Tropical growth during 1870—1914
How surprised would Lewis be had he lived for another 30 years and seen all these changes? Perhaps not as much as we might think. The scholarship boy from Saint Lucia who calmly walked into the greatest universities of the Western world and won every prize they had to offer never doubted the possibility of the developing world eventually catching up. Thus, states Lewis (1978, pp. 223-224):
In the thirty years since the Second World War we have become accustomed to seeing some tropical countries growing by 2 or 3 per cent per head, thus matching European and North American performance. This took the world by surprise, and was therefore assumed to be quite new. But it was only the resumption of a phenomenon which had already begun in the 1880s, and had lasted until the outbreak of war in 1914. With that war the tropics went into hibernation. The terms of trade moved against them in the twenties, the Great Depression impoverished them, and in the forties they were isolated by the Second World War. Thirty-five years of slow or zero growth is long enough for the world to forget what has happened before, and to take it for granted that nothing has happened before.
Lewis (1978, p. 216) notes that in some tropical countries during the 1870— 1914 period real incomes per head were growing at 1.0—1.5 percent per year, as fast as in Britain or France, powered by exports growing at 3.5—4.0 percent per year. He cites in particular Ceylon, Burma, Thailand, Malaya, the Gold Coast (now Ghana), and Brazil at the top of the list. He also says that ‘even India’ grew at about 1 percent per capita from 1900 to 1914. In what follows, we will provide a little more detail on each of these cases drawing on Findlay and Lundahl (2017, Chapter 10). Coffee was initially the main export crop for Ceylon from the 1840s to the 1880s, when it was ruined beyond recovery by a fungus disease. It was replaced over the next three decades by tea, rubber, and coconut products, which grew in total from 1880 to 1913 at the rate of 5.4 percent per annum. Much of the labor force for these plantation crops was provided by an influx of Tamils from India, laying the seeds of future conflicts between this Hindu minority and the Buddhist Sinhalese.
Burma was occupied by Britain during the three Anglo-Burmese Wars of the 1820s, 1850s, and 1880s. After the British took Lower Burma in 1852 and opened it to the expanding world economy, Burmese cultivators from Upper Burma moved south to the Irrawaddy Delta, clearing the swamps and jungles to plant paddy. The area under rice cultivation grew eightfold between 1852 and 1915 and Burma became the leading rice exporter in the world. Per capita real income is estimated to have grown by 0.8 percent per annum over the period from 1900 to 1930. A very similar path to Burma was followed by Thailand, or Siam as it was then called, with a sovereign monarchy as opposed to British colonial rule in Burma. Rice exports rose fifteen-fold from the 1850s to 1914, stimulated as in Burma by the opening of the Suez Canal in 1869.
Malaya was ruled by a number of native sultans before British occupation in the early nineteenth century. Rubber and tin were the main export products that brought prosperity to the colony, even though most of the gains went to European firms and immigrant Chinese and Indian labor. The tin industry had long been dominated by Chinese entrepreneurs and workers, while rubber production was undertaken by European plantations and native, Chinese and Indian smallholders. Manufacturing never took any hold with the availability of cheap imports and only 7 percent of the population as late as 1947 was engaged in ‘industry’, merely handicrafts and small-scale workshops. Malaya was thus a classic ‘enclave economy’ where the primary export sectors never succeeded in establishing any forward or backward linkages with manufacturing production.
Unlike Burma and Siam where the main crop exported by the peasant producers was the traditional food crop rice, the Gold Coast specialized on an entirely new cash crop, cocoa. Cocoa was introduced in the 1860s and grew so rapidly that the country was the world’s leading exporter by 1913. Real income per head is estimated to have risen by almost 2 percent per annum from 1891 to 1913. The land best suited to cocoa was in the south that was initially covered by forests. The enterprising Akwapim people from the north emigrated to clear the forests and plant cocoa, interspersed with traditional food crops for their own sustenance. Elaborate infrastructure was not necessary since the plant was cultivated close to the coast. Needless to say, there was no linkage to any manufacturing industry as in all the cases we have considered so far.
Brazil was called an underpopulated economy by Lewis (1955, p. 351), implying that his 1954 model did not apply to it because of the relatively high land-labor ratio and therefore agricultural productivity and industrial real wage, without any ‘surplus labor’. Coffee was the main export crop from the 1830s, with export volumes almost tripling from 1880 to 1923 and 1.5 million immigrants migrating to the coffee-producing region of Sao Paulo. By that time, Brazil was supplying more than half the world market and exercise considerable monopoly power. The government supported the coffee sector with a railway network connecting the area to the ports and in various other ways. Another export crop was rubber from the Amazonas region, but prices fell after Malaya, Ceylon, and other countries entered the world market. Unlike the other tropical primary exporters, the home market was large enough to sustain substantial growth of a manufacturing sector, particularly textiles, meeting 75 percent of the country’s consumption. Despite all these developments the growth of GDP per capita did not exceed 1 percent per annum, though it did grow at about 1.5 percent in the coffee-producing region.
All the tropical countries we have considered over the 1870—1914 period, with the exception of Brazil and Thailand, were colonies of Britain while others like Indonesia were under the Dutch or like Vietnam the French. In the 1945—1975 period, however, almost all the developing countries became politically independent. This has immeasurably widened the range of economic measures they are able to undertake with respect to imposing taxes and subsidies, controlling interest rates and foreign exchange rates and incurring domestic and foreign debt. They were also able to adopt economic planning to achieve various objectives regarding the growth and distribution of national income. Although there was a wide range in the extent to which they succeeded or failed in these endeavors, there is no doubt that the average performance was well above that of the colonial era as a whole and even of the ‘golden age’ from 1870 to 1914 that we examined briefly above.
Lewis believed in economic planning since his early years as a Fabian socialist. He wrote two books on the subject: The Principles of Economic Planning (1949) and Development Planning (1966). The 1950s and 1960s saw considerable enthusiasm for the adoption of five-year and other long-term plans by India and many other countries that set growth targets and worked out the implications for domestic saving, foreign aid, and the budget and balance of payments. Outcomes were mixed, without any strong correlation between the quality of the plans as economic literature and the extent to which goals were achieved. Planning fell out of favor in the 1980s during the Reagan-Thatcher era and especially after the fall of the Berlin Wall and the end of Communism. India gave up planning after the Rajiv Gandhi reform era. China
Lewis on economic growth and poverty 99 still continues to launch a sequence of five-year plans despite the opening to market forces under Deng Xiaoping. Some form of economic coordination on a national or even global scale is clearly increasingly necessary as we face the challenges of pandemics and climate change in a shrinking planet.
Poverty and inequality: empirical evidence
Up to now we have been concentrating our attention on growth, trusting that it will be accompanied by substantial poverty alleviation. It is now time to consider poverty alleviation explicitly. To begin we present some data reported in tables from Deepak Nayyar (2016) drawing on work by Chen and Ravallion (2012). He states that two billion people or just over 50 percent of the population of the developing world fell under the poverty line of 1.25 dollars a day in 1981. This fell to 1.2 billion people or just under 20 percent of the population in 2008, which is clearly a remarkable performance by any standard. Another estimate is that poverty fell by a similar standard from 1.9 billion people in 1990 to 650 million in 2018, an even more remarkable achievement of bringing 1.25 billion people out of poverty within a generation.
As usual a big part of any global story is China and India. China had 835 million or 84 percent of the population under the poverty line in 1981, falling to 173 million or 13 percent of the population in 2008. For India the comparable numbers were 421 million or 60 percent of the population in 1981 and 415 million or 35 percent in 2008. Another estimate is that 82 million people were brought out of poverty in China from 2012 to 2018, from 10.2 percent in 2012 to just 1.7 percent or virtual elimination by 2018. According to Kaushik Basu (2019, p. 413) in 1977, 60 percent of the people in India fell under the poverty line of 1.90 dollars a day, falling to about 20 percent at the time of writing in 2019. Enormous strides have clearly been made but much of course remains to be done with respect to poverty alleviation. It cannot be argued however in the light of these results that sustained economic growth does not result in significant poverty alleviation.
More up-to-date data are provided by Goldin (2018, Table 6 and Figure 12). In the world as a whole, the number living in extreme poverty fell from 1,867 million or 61 percent of the population in 1990 to 702 million, less than 4 percent, in 2015, i.e., over 1.1 billion people. The reductions in East Asia, South Asia, and Latin America were 901, 264, and 40 million people respectively while in sub-Saharan Africa 69 million more people became poor between 1990 and 2015. Once again, the huge reduction was mainly due to China and India, contributing 726 million and 261 million people respectively. Economic growth is thus not just the means for raising the general standard of living but a powerful engine of poverty alleviation and reduction as well.
In terms of equity, we are also deeply concerned with the effect of growth on the degree of inequality in the distribution of income. As the readerwould have noted, the Lewis (1954) development process of an initially relatively small modern sector expanding more rapidly than the traditional agricultural sector by itself raises the share of profits and skilled labor in the national income as a whole and thus increases income inequality. Lewis (1955, p. 182) plainly says that this price in terms of equity should not be bewailed but accepted as ‘part of the cost of development’. As growth proceeds, unskilled wages will eventually start to rise, skill differentials and profit margins will narrow, governments will redistribute income to lower income groups, and so the inequality of income will reach a turning point and begin to be reduced. Independently of Lewis and in the very same year, Simon Kuznets (1955) noted that inequality rose and then fell over time in the United States, with the results plotted as the famous inversely U-shaped ‘Kuznets curve’.
The most comprehensive way to look at income inequality is to treat the world as a single economy. François Bourguignon (2015, Figure 1, p. 27) presents a graph showing that the ratio of the richest to the poorest 10 percent of people in the world was 30 to 1 in 1820, doubling to 60 to 1 in 1990. This reflected the faster growth of the already rich countries for most of this period as well as the ‘climbing of the Kuznets curve’ in most countries, irrespective of their stage of development. Since then inequality at the world level has fallen both because of‘catching up’ by the developing countries and descending the Kuznets curve in some of the major developed countries. We also have Gini coefficient data for many of the major developing countries, provided in Nayyar (2016, Table 8.4, p. 167). In China, the Gini rose from 29.5 to 46.9 from 1980 to 2005, from 31.4 to 36.8 in India, and from 34.2 to 39.4 in Indonesia over the same period. These countries have shown no signs of passing a Kuznets turning point any time soon. Latin America, in particular Brazil, saw sharp increases in inequality before reducing it to some extent in the last few years. Thus, Lewis’ expectations on this subject have been well borne out.
The Lewis (1954) model clearly predicts a rise in the share of industry or manufacturing within the developing world. To what extent is there empirical evidence in support of this prediction? Nayyar (2016, Table 6.4, p. 109) indicates that the developing countries increased their share of world manufacturing value added from 13 percent in 1970 to 41 percent in 2010, more than trebling in 40 years. Not surprisingly, this result is almost solely due to Asia, where the increase was from 7 to 32 percent, more than quadrupling in the four decades. The share of Africa remained constant at about 1.5 percent, while that of Latin America rose slightly from 4.5 to 7.2 percent. The respective roles of China and India in this spectacular achievement can be gleaned from Chang and Zach (2019, Figure 8.1, p. 194). This shows that while India’s MVA (manufacturing value added) approximately doubled from 1970 to 2010, that of China increased almost ten times as much over the same period. China tore past the ‘Lewis turning point’ around the turn of the century but still shows no sign of passing the peak of its Kuznets curve.
For Lewis it was not trade but industrialization that would be the true ‘engine of growth’ for the developing countries. If that engine beat so strongly that it would result in developing countries obtaining a rising share of world manufactured exports, so much the better. First, we see from Nayyar (2016, Table 5.1) that the share of developing countries in world merchandise exports increased more than twice from 20 percent in 1985 to 42 percent in 2010, with Asia going from 15 percent to 33 percent. Their share of world manufactured exports rose from 18 percent in 1990 to 40 percent in 2010 (Table 6.5), largely due to Asia rising from 15 percent to 35 percent over the same period. Manufactures have been dominating the exports from developing countries, 82 percent in 2010, particularly Asia at 94 percent in the same year (Table 6.7). Lewis could not have a better vindication for his industrialization strategy despite his worries about the vagaries of international trade than the results revealed by these numbers.
Lewis (1955) ends his magnificent treatise with a brief but penetrating appendix on ‘Is Economic Growth Desirable?’ in which he conducts a sort of Platonic dialogue on the benefits and costs of economic growth. The clinching argument in favor (Lewis 1955, p. 422) is:
It is open to men to debate whether economic progress is good for men or not, but for women to debate the desirability of economic growth is to debate whether women should have the chance to cease to be beasts of burden, and to join the human race.
- 1 The generous assistance of Mats Lundahl has been indispensable and is deeply appreciated.
- 2 The double-factorial terms of trade are obtained by adjusting the commodity terms of trade Px/Pm with the relative productivity of labor in the exports of the North and the imports from the South, Zx/Z,„: fPx/Pf)(Zx/Z„f where Zx = Qx/Lx and Z,„ = Q,„/L„„ so the expression for the double factorial-terms of trade becomes (f>.v/f>M)/[(Q.v/i-.v)/(QM/i-,u)l or (Pa/P,„)[(L„i/Q,„)/(L.v/Q.v)], the commodity terms of trade multiplied with the ratio of labor contents of the two goods.
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The economics of being poor
The gospel according to Theodore