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Sir William Arthur Lewis (1915-1990) wrote that the economies of less-developed nations contained two sectors of the economy, which he termed a "traditional" and a "modern" part. The traditional sector is labor intensive, and does not require vast capital, while the modern sector is capital intensive but small. Very little capital accumulates in the traditional sector, while there is an excess of laborers. Wages are higher in the modern sector, to encourage movement of labor to that group. He set forth this model in his 1954 article, Economic Development with Unlimited Supplies of Labor.
According to Lewis more capital in the modern sector would increase production, thereby raising the total productivity of the economy. This would not have the same effect in the traditional sector, so this model was intended to increase total productivity and modernize the economy of a less developed nation without damaging the traditional sector. There are complex mathematical formulas for determining wages and labor product. Theoretically, at some point the increasing wage (and wage inequality) reaches a point where productivity in the modern sector equals the traditional, and then the two integrate and the country becomes a more developed nation.
There is a Sir Arthur Lewis Institute of Social and Economic Studies at the University of the West Indies, in Barbados, but the Lewis model has been largely abandoned by economists. The main problem is that the model does not address institutional problems in Third World countries which tend to prevent investment, such as governmental corruption and overgrown bureaucracies, which were definite problems in Haiti under the Duvalier regimes. Foreign aid tended to line the pockets of the Duvaliers and their cronies instead of being used to promote economic growth. The security concerns of the regime also created high tax rates to support an expanding military and secret police. Therefore the foreign aid and foreign investment actually restrained economic growth in Haiti, instead of stimulating it.
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