This paper discusses the welfare and one time growth effects from the intersectoral labour transfers that typically accompany early industrialization in the developing countries, suggesting that endogenous determination of effort is key to evaluating their significance. The significance of these transfers for growth performance has been discussed in recent literature, which focuses on capital accumulation as the engine of growth. We begin with traditional Lewis models, where an efficiency gain results from transferring labour from the traditional (family based) agricultural sector, in which labour receives its average product, to the modern (industrial) sector in which labourers are paid their marginal product. We show that as one moves closer to Pareto Optimality in this system (say by taxing the traditional sector's output), there is a gain but this is typically small. We then formulate Lewis type models in which the product of effort and labour enters each sector's production functi..
