Towards Understanding Economic Growth in Africa: A Reinterpretation of the Lewis Model

56 Pages Posted: 7 Jan 2015

See all articles by Xinshen Diao

Xinshen Diao

International Food Policy Research Institute (IFPRI)

Margaret McMillan

Tufts University - Department of Economics; International Food Policy Research Institute (IFPRI); National Bureau of Economic Research (NBER)

Date Written: November 6, 2014

Abstract

Africa’s recent economic growth is at a historical high, the patterns associated with this growth appear to be quite different from the Asian experiences where rapid growth was fueled by labor intensive, export-oriented manufacturing. Because this pattern differs with our typical view of structural transformation, a heated debate has begun over the sustainability of Africa’s growth. In our view, Africa’s recent growth is still not well understood and thus it is difficult to say much that is meaningful about future prospects for growth on the continent. Against this background, we adapt Lewis’s (1954) dual-economy model to the economies of Africa to better understand the role that the “in-between” sector as defined by Lewis (1979) has played in Africa’s recent growth. Our framework incorporates the coexistence of a closed and an open modern economy and takes into account the diversity and heterogeneity of the activities that characterize modern African economies. We apply this framework to the economy of Rwanda to assess Rwanda’s future growth prospects based on different levels of foreign capital inflows. We find that the composition of growth and patterns of structural change are different depending on the assumptions about foreign inflows. Higher foreign inflows lead to significantly more growth in the closed modern economy and stagnant growth in the open modern economy, a phenomenon consistent with recently observed patterns of growth across several African countries.

Keywords: Rwanda, Central Africa, Africa south of Sahara, Africa, Economic Growth, Economic Development, Mathematical Models, Structural Change, Economic Models

Suggested Citation

Diao, Xinshen and McMillan, Margaret, Towards Understanding Economic Growth in Africa: A Reinterpretation of the Lewis Model (November 6, 2014). IFPRI Discussion Paper 01380, Available at SSRN: https://ssrn.com/abstract=2523577

Xinshen Diao (Contact Author)

International Food Policy Research Institute (IFPRI) ( email )

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Margaret McMillan

Tufts University - Department of Economics ( email )

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International Food Policy Research Institute (IFPRI) ( email )

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National Bureau of Economic Research (NBER) ( email )

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