The research focuses on stage of Lewis Ranis-Fei model, role of capital accumulation in economic growth and role of labor reallocation in economic development. I use time series data from 1984 to 2013 and developed a cobb-Douglas production function of agriculture and non-agriculture sector. Sectoral boom decomposition approach become used to show the contribution of things of production in financial boom. Labor reallocation changed into envisioned through labor reallocation equation to analyze its effect on economic boom. In addition it additionally indicates the level of financial development. The observe observed that the role of capital accumulation in agriculture and non-agriculture region changed into quite huge wherein as the role of labor reallocation changed into very low in financial improvement. Further the look at exhibits that Pakistan stands on the first degree of Lewis ranis-Fei model in which MPL is decrease than APL.
Determinants of economic growth and development are one of the important area of development studies. Due to its importance , different learner have discussed different theories in order to find traffic pattern , structures, hurdle and road single-valued function to economic growth and development.
Firstly, the theory of Dual sector is presented by W.A.WALRUS and was entitled as “Economic Development with Unlimited Supplies of Labor” written in 1954, the model itself was named in Lewis’s honor. First published in The Manchester School in May 1954. According to his theory he said that there is an excess labor in agriculture sector and he want to draw those surplus labor with the help of capital formation to non-agriculture sector.
RANIS AND FEI(1961) make contributions in Lewis model, they divide the two stage model in three stages and which is explain by a diagram 1. The entry into each stage is called a turning point and stages are classified by the marginal productivity of agricultural labor.
Lewis Ranis – Fei model affords a sturdy, capable and reliable framework for information the increase course of labour surplus economies. The study uses the framework to research the procedure of financial increase in Pakistan.
Currently, 50% population of Pakistan is living in rural areas and the main source of their income is from agriculture sector. The wage rate is low in agriculture sector as compare to manufacturing sector. That’s the reason they shift surplus labor
Diagram 1: Agricultural Output, Agricultural Labor and Lewis Ranis Fei model stages of Economic growth great labor inflows are required in non-agricultural sector (Knight 2007).
Lewis (1954) presented dual economy model, in which there are two sectors:
The capitalistic sector
The subsistence sector
The capitalistic sector is defined as “that part of the economy, which uses reproducible capital and pays capitalists thereof”. Spell, the subsistence sector is where “that part of the economic system which is not using reproducible capital”. The relationship between these two sectors occur when the capital sector enhance and it extract labor from subsistence sector. It will increase output in capitalist sector. When a surplus labor is consumed the labor supply curve becomes upward sloping.
There was a flaw in Lewis model that it did not pay enough attention to the importance of agriculture sector in promoting industrial growth. But Fei-Ranis (FR) model of dual economy explains how the increased productivity in agri. sector would become helpful in promoting industrial sector. The three stages of Fei-Ranis model are as follows:
In phase I: MPL = 0 and there exists the surplus labor equal
In phase II: CIW > MPL > 0 and there exists the open and disguised unemployment.
In phase III: MPL > CIW and the economy is fully commercialized and disguised unemployment is exhausted. The supply of labor curve becomes steeper and both agri. and industrial sector compete with each other to get labor.
The results of empirical study are mixed regarding the issue of surplus labor. . Minami (1967 a) & Ohkawa (1965) analyses the labor reallocation in Japanese economy. Ranis and Fei (1973) analyzed the Lewis model for Korea and Taiwan by using descriptive statistics. Their work supports the Lewis theory. However, Ho (1972) tested Lewis’ theory for Taiwan 1951-1965. The outcome establishes that the technical advancement is more important for economic growth than sectorial labor migration.
Mianmi (1967 b) looks at the condition for commercialization of agri part of Japanese interests, money, goods. Cai (2007) argued that the slope down in group growth and country, not town ones country-changing has increased in rate farming commercialization of China but military horseman of old (2007) raises some doubts in Cai (2007) requests rights over. He makes the argument that the quick growth in true wages of farming part is not because of work little amount and there is still very great added amount giving birth in farming part. As an outcome of that, he argued that good plates and cups interests, money, goods has not made forward development to the second stage but moving in the direction of it. Ercolani Wei (2010) looks at good plates and cups interests, money, goods. They get out the Lewis stages of development and effect of giving birth giving again of in Chinese interests, money, goods.
The work-place get out that the Chinese interests, money, goods is moved from stage one to stage 2 and giving birth giving again of has an important force of meeting blow on Chinese of money and goods development. Islam; Yokota (2008) experience got at the details of Lewis Ranis-Fei design to be copied. The Author 1 estimated producing purpose, use of farming part using narrow and not up too much level facts and made a comparison of MPL and payment of this part. The outcome indicated that Chinese interests, money, goods is moving in the direction of Lewis turning point.
Huang (1971) worked apply Lewis model on Malaysia and shows that the marginal productivity of labor increased at a faster rate than wage in other regions of country. The study conjointly shows that the gap between the marginal product and wage decreased only if the country approached the Turning purpose (Fei and Ranis 1997, p. 156).
Another analysis by Fei and Ranis themselves was targeted on Taiwan, the results showing that whereas the Taiwanese agricultural real wage remained terribly stable for a long time (extending from 1958 to 1973), the marginal product enlarged steady (since 1963).The analysis conjointly showed that the Taiwanese industrial wage remained fairly stable for a protracted time, from 1957 till 1968, once it began to rise, and every one the whereas remained on top of the agricultural wage.
To show the empirical result of Lewis model on Pakistan I used cobb-Douglas production function and equations. I am using production function for agriculture and manufacturing sector, and equations for labor reallocation and growth decomposition.
The equation of production function for agriculture and manufacturing sector are given below:
QA = F (KA, LA, HA)………………. (1)
QN = F (KN, LN)……………………. (2)
A and N represents agriculture and non-agriculture sector. While, Q is the output produced by each sector, K is the capital and H is the amount of land cultivated.
Now, we convert the equation 1 and 2 into log-lin form and generate equation 3 and 4:
lnQA = ?1+?2lnKA+?3ln LA+?4lnHA +µA………………. (3)
lnQN = ?1 + ?2lnKN+ ?3lnLN+ µN……..……………….(4)
The study has developed the equation 3 and 4 for sectorial growth with the passage of time.
gQA = +?1g KA+ ?2g LA+ ?3g HA ……………….. (5)
GQN= + ?1g KN+ ?2g LN ……..…………………. (6)
LABOR REALLOCATION EFFECT:
To take a look at labor reallocation impact (LRE) faraway from agriculture region, the study makes use of APL and MPL approach (Ercolani ; Wei, 2010).in which APL method overestimates the LRE and MPL approach underestimates the LRE. Subsequently with the aid of taking averages of the values we are able to estimate the variety of LRE.
LREAPL = M/Y (APLN-APLA)
946150576897500LREMPL = M/Y (MPLN-MPLA)
PRODUCTION FUNCTION ESTIMATE;
The Production function in table 1 on represents agriculture sector of the economy. The variables in the model 2 are statistically significant at 1%.
Production function of agriculture sector
Dependent Variable Log QA (1) (2)
Estimation method OLS GLS
Log KA 9.435462* AR (1)
Log LA -11443.3 -1.85208*
Log HA 0.12212* 5.873929*
AR (1) -0.03216
Constant -1855676*** -86.8757*
Adjusted R-square 0.958457 0.98962
F-Statistics 231.7161 692.1882
Prob (F-Statistics) 0 0
Observation 30 30
Durban Watson stats 0.762377 1.948299
Model 1 is estimated through OLS while model 2 is estimated through GLS. The coefficients of capital and Land are positive, however the negative coefficient of Labor suggests the negative relationship between labor and farming production. The OLS estimates were found to be affected by autocorrelation and GLS estimation is applied in order to defeat the issue. The coefficients of capital and Land are positive all the same. Table 2 represents the production function of manufacturing sector. The coefficients are statistically significant at 1% and have positive signs.
Table:2Production function of manufacturing sector.
Variable Log QN (1) (2)
Estimation method OLS GLS
Log KN 6.764503* 0.846681*
Log LN 6361.362 0.4697*
Constant -378842 3.024564
Adjusted R-square 0.952515 0.997636
F-Statistics 301.8894 4081.047
Prob (F-Statistics) 0.000 0.000
Observation 30 30
Durban Watson stats 0.404186 1.858568
This graph is for the APL of agriculture and non-agriculture sector.
As we can see that the MPL as well APL of non-agriculture sector is higher than the agriculture sector.
This shows that Pakistan remains within the 1st stage of Lewis Ranis-Fei model wherever marginal productivity is under the institutional wage (average productivity). The insignificant improvement in Marginal productivity suggests that Pakistan remains on its 1st part of economic development.
The labor reallocation equation suggests that the contribution of labor reallocation from agriculture to non-agriculture sector solely attributes to zero.04% to 0.06% of the general economic process. This clearly indicates that the withdrawal of labor from agriculture to non-agriculture sector is short. This result reinstates our previous findings that the labor in agriculture is copious and there’s no improvement.
The sectorial growth decomposition shows that the labor in agriculture sector attributes negatively (18%) in growth of agriculture sector wherever as capital in agriculture sector has terribly vital role (114%) within the growth of agriculture sector. The role of labor in non-agriculture sector growth is seven.6% whereas capital contributes to ninety two within the growth of non-agriculture sector.
Parameter Estimates (1) Average Growth (2) Product of parameter and growth(3)
Contribution to sectoral growth (4)
Capital 0.769 32.015% 24.647 114.004%
Land 5.873 0.163% 0.960 4.442%
Non agriculture sector
3.29% 1.547 7.69%
Capital 0.846 21.91% 18.557 92.32%
Notes: Column (1) is the parameter estimates of GLS equation taken from Table 1 and 2
Column (2) is the average growth rates of the variables.
Column (3) is the product of column 1 and 2.
Column (4) parameter products are divided by total of respective sectors to find out the percentage contribution in growth.
The study reveals that the role of capital in economic growth of Pakistan is very significant. Capital plays an important role both in agriculture and non-agriculture sector. It contributes 92% and 114%. Although the research indicates that the capital of non-agriculture sector is the main factor of economic development but certainly it has a very crucial role to play. Labor reallocation is very low but it may improve by huge amount. The countries focusing on labor reallocation has a very rapid transition velocity beneath Lewis Ranis-Fei model (Ercolani & Wei, 2010). The research also identifies that Pakistan is at the first stage of economics development of two Lewis Ranis-Fei model and MPL is lower than institutional wage (APL).