Abstract: This analysis updates the dual-economy model of economic development suggested by W. Arthur Lewis in 1954. The updated aggregate model incorporates advances since then in modern labor economics and the findings of empirical studies of LDC economies and it removes Lewis’ implicit assumption that capital-formation is costless to the host LDC country. Specifying investment in human capital for both sectors refocuses attention on workers’ well-being as the ultimate measure of development. Specifying the cost of capital formation permits the distinction between earnings that recover investment costs and the “surplus” available to workers for consumption. Policy implications include resolution of tradeoffs between “trickle-down” vs. “grass roots” development policies.
Keywords: Economic development, growth, human capital, dual-economy model