The Theory of Economic Growth

"He was the first Nobel Prize-winner in the subject of development economics. He was also very much rooted in classical economics of the political-economy tradition as well as the classical economist’s concern with structural transformation of a developing economy. In the early days economies are primarily agriculture-based and then at some stage the transition takes place to go from agriculture to other, more productive, sectors of the economy, primarily to industrialisation. The book emphasises the specific problems of this process as people get more and more absorbed in the industrial sector. But he doesn’t just point to the historical pattern, he also suggests some advantages arising out of the agrarian origins of industrialisation. “China is a good example of what Arthur Lewis was writing about – the advantages of low wages in the early stages of development.” For example, on the basis of a relatively low wage, which is the case in the low-productivity agricultural sector, you can get a lot of people to work in industries, keeping unit labour costs down and thus raising profits from industrial investment. Yes, particularly in China. Their success from the 1980s until very recently has been in labour-intensive industrialisation, in products like garments, shoes, toys and wigs. China is now widely regarded as the manufacturing workshop of the world. Over time they graduated into the labour-intensive part of the production of otherwise technical products like mobile phones, laptops and digital cameras. China is a good example of what Arthur Lewis was writing about – the advantages of low wages in the early stages of development. But the wages in China are now increasing and that’s what Lewis expected to happen in the transition process of development; after what he called the surplus labour in the agricultural sectors gets relatively exhausted wages rise and there are demands for improving the work conditions. Get the weekly Five Books newsletter He was describing this process as it historically happened and he was observing it happening in developing countries as we see it happening in China today. To some extent this is happening in India as well but less so than China because India’s success stories are more in skill-intensive industries like software and pharmaceuticals. That is one of the reasons why Indian poverty is now higher than China’s because labour-intensive industries create jobs for poor people but the skill-intensive ones don’t."