Application to Theory

Although Lewis’ structural change argument has limitations, it provides some insight into India’s development after independence from Britain. Between 1950 and 1970 India’s government pursued economic independence through investment in the traditional and industrial sectors in a series of five-year plans and perpetuated economic restriction between 1970 and 1990 (Kaushik, 1997). India’s values and deviations from the open economy Lewis two-sector model may explain the perpetuation of the relatively small manufacturing and relatively large agricultural shares of both its gross domestic product and labor force (Mukherjee, 2010a; Papola & Sahu, 2012). Figures 2a and 2b, respectively, provide India’s GDP and labor force shares by sector.

Figure 2a. GDP share by sector versus decade (Mukherjee, 2010a)

Figure 2a. GDP share by sector versus decade (Mukherjee, 2010a)

 

Figure 2b. Labor force share by sector versus date range (Papola & Sahu, 2012)

Figure 2b. Labor force share by sector versus date range (Papola & Sahu, 2012)

 

In the traditional sector, the government focused first on self-sufficiency and then improved total productivity through investments such as irrigation, knowledge sharing, and seed subsidies (Kaushik, 1997).

Government investments, applications of foreign aid, and restrictions on private investment (e.g. through licensing and regulations) in the industrial sector focused on developing government-controlled industries (Kaushik, 1997). The government was motivated by a closed two-sector economy (unlike the open two-sector economy for which Lewis advocated) to cultivate self-sufficiency and stability (Kaushik, 1997). The government justified its policy by a need to coordinate investment for successful development of the industrial sector. The absence of private investment, restrictions on international trade and its technology transfer benefits, and government coordination of industries for which India did not have comparative advantage failed to meet Lewis’ arguments for sustained modern-sector development (Kaushik, 1997). Human capital investments also favored higher rather than primary education (Kaushik, 1997; Lewis, 1965). Lewis argued that this was a misallocation of human capital investment, because the modern sector has a lower high-skill employment growth rate than its lower-skill employment growth rate (Lewis, 1965).

Low public industry contributions to GDP, high amounts of borrowing, and net imports (especially of oil and physical capital), partially explained by deviations from the open Lewis two-sector model, have motivated an opening and privatization of India’s economy since the 1990s (Kaushik, 1997). The agricultural share of labor remains high and the service sector has expanded (both in GDP share and employment) beyond the industrial share (Figures 2a and 2b) (Mukherjee, 2010a; Papola & Sahu, 2012). This suggests that less restricted private investment in the service sector might have better allocated resources to areas that had comparative advantage in the global economy.

Current investigations indicate that, although India’s industrial sector GDP share sustainably exceeded that of the agricultural sector in the 2010s, India continues to not meet the basic assumptions of the Lewis two-sector model, potentially to its detriment (Table 2) (The World Bank, 2014; Todaro & Smith, 2012). Wage data from India’s organized manufacturing sector indicate that labor supply in the modern sector is not elastic and producers do not face constant wages between periods (Figure 3) (Sincavage, Haub, & Sharma, 2010a; Sincavage, Haub, & Sharma, 2010b). Wage data from India’s agricultural sector indicate that although average productivity is increasing, wages are also increasing (Figure 3) (Amarender Reddy, 2013a; Amarender Reddy, 2013b).

Political and social institutions may explain the trend of increasing wages. The 1948 Minimum Wage Act set minimum wages in official sectors, with a separate minimum wage at or below the general minimum wage for unskilled agricultural workers, which restricts the ability of market forces to set wages (India Department of Electronics and Information Technology, 2012). Social norms have perpetuated wage disparities in both full-time and casual employment capacities by gender (favoring men over women) and ethnic group (favoring the former General Caste majority over the Scheduled Caste/Scheduled Tribe minority), which further restricts wage mobility by market forces (Karan & Selvaraj, 2008a; Karan & Selvaraj, 2008b; Karan & Selvaraj, 2008c). Figures 4a and 4b provide evidence for lower minority group wages than the dominant group wages in both regular and casual employment (Karan & Selvaraj, 2008a; Karan & Selvaraj, 2008b). This explanation highlights the limitations of structural models as predictors of long-term growth and holistic development, because they do not account for the social value or human capital implications of inequality by gender or ethnicity (Todaro & Smith, 2012).

Figure 3. Organized manufacturing sector and rural wages per day (2005 base year), 1999 to 2010 (Amarender Reddy, 2013a; Sincavage, Haub, & Sharma, 2010a)

Figure 3. Organized manufacturing sector and rural wages per day (2005 base year), 1999 to 2010 (Amarender Reddy, 2013a; Sincavage, Haub, & Sharma, 2010a)

 

Figure 4a. Regular wages among disadvantaged groups: female average daily wages as percentage of male average daily wages and minority group wages as a percentage of majority group wages by employment type and sector, 1983-2005 (Karan & Selvaraj, 2008a; Karan & Selvaraj, 2008b)

Figure 4a. Regular wages among disadvantaged groups: female average daily wages as percentage of male average daily wages and minority group wages as a percentage of majority group wages by employment type and sector, 1983-2005 (Karan & Selvaraj, 2008a; Karan & Selvaraj, 2008b)

 

Figure 4b. Casual wages among disadvantaged groups: female average daily wages as percentage of male average daily wages and minority group wages as a percentage of majority group wages by employment type and sector, 1983-2005 (Karan & Selvaraj, 2008a; Karan & Selvaraj, 2008b)

Figure 4b. Casual wages among disadvantaged groups: female average daily wages as percentage of male average daily wages and minority group wages as a percentage of majority group wages by employment type and sector, 1983-2005 (Karan & Selvaraj, 2008a; Karan & Selvaraj, 2008b)

 

Higher wages in the modern sectors may explain some of the net growth in the modern sector labor force and net decline in the traditional sector labor force (Figure 2b) (Amarender Reddy, 2013a; Papola & Sahu, 2012; Sincavage, Haub, & Sharma, 2010a). The service sector’s larger labor force and GDP shares suggest that the modern sector may need to be redefined to include services (Figures 2a and 2b) (Mukherjee, 2010b; Papola & Sahu, 2012). Unemployment has remained at similar levels in rural and urban sectors, which approximate the traditional and service/industry sectors, respectively (Figure 5) (Shaw, 2013). As previously described, Lewis explained the modern sector’s low share of total employment and high unemployment rate by insufficient job growth (Lewis, 1965). This may be in part due to increasing wages in the modern sector, urban migration due to higher expected rather than actual income, companies’ failure to reinvest profits due to dividend payments and other financial decisions, and restrictive government policies (Karan & Selevaraj, 2008; Siddharthan, Pandit, & Agarwal, 1994; Thirumalaisamy, 2013; Todaro & Smith, 2012). Additional solutions to those Lewis proposed, e.g. foreign investment, encouragement of domestic reinvestment of profits, and additional research into optimal education amount and distribution (in balance with India’s values), should be considered, because they are likely to be socially preferred over labor force movement restrictions (Lewis, 1965; Todaro & Smith, 2012).

Figure 5. Unemployment rates by gender and sector versus date range (Shaw, 2013)

Figure 5. Unemployment rates by gender and sector versus date range (Shaw, 2013)

 

Discussion

Lewis (1965) discussed how labor and capital investments, especially in the modern sector, may account for economic growth and development. His insights into incentives for labor transition between modern and traditional sectors due to wage differential and the expansion of the modern sector to accommodate an increasing percentage of the workforce help explain early post-colonial changes in India and other nations’ economic compositions (Kaushik, 1997; Lewis 1965; Todaro & Smith, 2012) . His structural model’s inability to account for the human capital-intensive service center and sociopolitical institutions limits its capacity to explain current economic structures and distributions, especially in India. Therefore, India’s deviations from the assumptions of the Lewis two-sector model and (therefore) its consequences help to explain India’s economic transitions in GDP dominance and maintenance of primary sector formal employment dominance.

Conclusion

India’s economy has faced a unique transition from agricultural sector to service sector GDP dominance before the industrial sector exceeded the agricultural sector’s share of GDP (Mukherjee, 2010a; The World Bank, 2014). The agricultural sector still provides the primary source of employment to India’s population (Papola & Sahu, 2012). This transition enlightens our understanding of India’s current economic development position relative to other nations and may be explained in part by India’s deviations from the Lewis two-sector model. If its sociopolitical values continue to change as its economic development continues, India’s economic structure may reduce its agricultural share and level of income equity may decrease, with significant consequences for its large future workforce.

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