Regime Change in the Global Economy by Michael Spence

Having helped drive decades of development and modernization in emerging economies, the growth model of 20th century economist W. Arthur Lewis, Nobel laureate, can now be applied globally. Unfortunately, this shows that we are heading into a period of deep uncertainty and supply-constrained growth.

MILAN – In 1979, W. Arthur Lewis received the Nobel Prize in Economics for his analysis of the dynamics of growth in developing countries. With good reason: his conceptual framework has proven invaluable in understanding and guiding structural change in a range of emerging economies.

The basic idea Lewis emphasized is that developing countries grow initially by expanding their export sectors, which absorb surplus labor in traditional sectors like agriculture. As incomes and purchasing power increase, domestic sectors develop alongside market sectors. Productivity and earnings in predominantly urban and labour-intensive manufacturing sectors tend to be 3-4 times higher than in traditional sectors. medium incomes rise as more people go to work in the expanding export sector. But, as Lewis noted, it also means that wage growth in the export sector will remain depressed as long as there is a labor surplus elsewhere.

As the availability of labor is not a constraint, the key factor for growth is the level of capital investment, which is necessary even in labor intensive sectors. The returns from these investments depend on the conditions of competition in the global economy.

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