The Indicator from Planet Money - Unsung Economists: Arthur Lewis

Arthur Lewis changed our understanding of how poor countries can improve their economies — and became the first Black economist to win the Economics Nobel

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Content Keywords: W. Arthur Lewis money economy Peter Blair Henry

Cardiff and Stacy here. This is the indicator from Planet Money. The lead Economist Arthur Lewis had a reputation as a very kind principled and contemplative thinker and in August of 1952 P was strolling down a road in Bangkok Thailand as you do when suddenly he had the flash of insight about a problem that had been baffling him Lewis observed that when the economy of a poor country starts growing really fast the new businesses in that country do make a lot of money and they do hire a lot of workers, but it takes a long time before the wages that those businesses pay to the workers also start going up. That was the puzzle that Arthur Lewis would go on to solve Peter Blair Henry is an economist researches followed in the footsteps of Louis's work. And Peter says Louis has Insight changed our understanding of the ways that pork.

Please can raise living standards for their citizens ended up turning that Eureka insight into an economic model a model for which he would become the first black Economist to ever win the Nobel prize in economics one of many achievements in a truly path-breaking career that range from academic research to advising governments all around the world.

Gem Show in the third installment of our series about the contributions of unsung Economist from the past week's plane Arthur Lewis has dual sector model of development and how this model should flight on the enormous challenges that poor countries are facing in the decades ahead.

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Peter Blair Henry is an economist and the Dean Emeritus at the Leonard n Stern School of Business at New York University dual sector model because they're two sectors imagine a poor country with just two economic sectors one sector is the subsistence sector which is just forming basically producing food. This sector does not have sophisticated technology or good equipment until the work can be routine and menial the subsistence sector is also not very efficient and it pays really badly but most workers in this hypothetical developing country are in this subsistence sector in most developing countries. There are four more people doing that kind of activities that are needed to detect activity to generate a given level of output in that sector and that's why there's Surplus labor it is this people are basically underemployed.

For example manufacturing working in a factory making toys or clothes or cars or things like that. This sector is smaller, but it has better technology for its workers to use and that makes it possible for the businesses in the sector to pay higher wages to workers. Then the workers who work in the farming sector, which means all those Surplus workers in the farming sector would have an incentive to take new jobs in the manufacturing sector with the wage that manufactures are paying it's just that, you know, even a little bit above what does workers can get in the subsistence doctor sensitive because they want to have a higher income chance to buy shoes for their kids and so forth. They'll move from the subsistence sector into the modern sector and work in the factory. Here is Arthur Lewis is key inside because there are so many available workers from the farming sector that can be hired into the manufacturing sector. The manufacturing sector would not have to raise.

Wages for a very long time those wages only have to be slightly higher than the wages in the farming sector and the outcome then would be good for the workers who get paid more money than they would get paid as Farmers & the outcome would also be profitable for the factories in the manufacturing sector because they can keep making money without paying higher wages over time until those profits would also incentivize manufacturing businesses to keep expanding to build a new factories. And so you get the symbiotic relationship where output increases soccer players make profits and because they're making profits they build more factories and they hire more workers eventually know all those extra workers from the farming sector will be hired by the modern manufacturing sector and at that point factories will actually have to compete with each other to start hiring more of the workers. So they'll finally finally start raising wages and the point at which that happened.

When wages finally start rising in the modern sector of the economy is called the Louis Tipping Point and that is how a low-income country modernizes its economy and improve living standards for its workers Louis formally wrote down his model in the mid-1950s computer says it turned out to be really accurate way to understand the poor countries that successfully developed in the decades that came after Louis invented this model. But the point is that Louis's model that he came up with the 1950s walking down the streets of Bangkok foreshadow. Absolutely foreshadowed the turnaround from what we would call third world countries. Is it winter now or merging markets China India South Korea Taiwan Singapore. These are all examples of the Lewis dual sector model at work in one form or another and crucially Peter explains their do have to be some conditions in place for the model to work they can

Is it a lot of people struggle with is it modern businesses in these poor countries? Do you have to be able to make a profit in the early stages of a country's development because those profits or what incentivizes those businesses to keep hiring workers out of the less-developed sectors of the economy for a young idealist be possible possible and be good for society. Those two things are not don't have to be at odds with one another studied what happens when developing countries put in place policies that generally made it easier for businesses to thrive things like reducing inflation or opening their conures up to free trade and foreign investment starting around the mid-1990s post 1994 on number of emerging economies of increase their average growth rates from three and a half percent. A 5 + a + 8 per year.

Who is this model are especially important for developing countries in the decades ahead exactly because their populations are expected to grow much faster than the populations of rich countries between 1978 and 2014 when China was going through the most miraculous. We got a growth in history.

Was adding 1.1 million workers a month to the labor force and precisely through the channels that the Lewis model articulated Peter is looked at the demographic trends for a group of the world's poorest developing countries, like the countries in sub-Saharan Africa and Pakistan and also Egypt in the Philippines countries like that in according to his estimates in the coming decades. Those countries will be adding about 1.7 million workers per month to the labor force such a one and a half times as many jobs per month is China generated through the miraculous miraculous. Economic growth in world history.

These country should invest in the right infrastructure for businesses to thrive in and more generally to put in place sound macroeconomic policies because the stakes of getting these policies right are incredibly High when things get out of balance in the developing country where the average income is something like $5,000 per year when people can't work because governments are pursue policies that make it inimical for factories to expand it hard workers people starve people don't understand the kids at school don't have shoes except it's a matter of life and death.

There is so much more to the life and career of Arthur Lewis than just the Dual sector model that we presented today. So if you want to read more where to link to a whole bunch of stuff at NPR. Org money, and also we want to give an extra special things to Bob ticknor a retired Princeton historian wrote a great biography about Arthur Lewis and disgusted with us. It's called W. Arthur Lewis in the birth of developing economic indicator was produced by Britney Cronin with help from Gili Moon. It was fact-checked by SanSai. The indicator is edited by Patty Hearst and it is a production of NPR.
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