Académique Documents
Professionnel Documents
Culture Documents
GROWTH AND
DEVELOPMENT
with special reference to
developing economies
A. P. THIRLWALL
Reader in Economics, University of Kent at Canterbury
Macmillan Education
ISBN 978-0-333-12207-5 ISBN 978-1-349-15472-2 (eBook)
DOI 10.1007/978-1-349-15472-2
© A. P. Thirlwall 1972
Reprint of the original edition 1972
All rights reserved. No part of this publication
may be reproduced or transmitted, in any form
or by any means, without permission.
INDEX 317
Preface
This book is offered as an introduction to certain topics in develop-
ment economics, with particular emphasis on the economic obstacles
to development and the economic means by which less developed
countries may raise their rate of growth of output and living
standards. This does not mean that it provides a recipe or blueprint
for development in the present less developed countries -far from it.
There can be no general recipes of this nature, and even if there were
there would have to be more than economic ingredients. It is
possible, however, to highlight certain fundamental principles and
economic truths common to all countries which have set themselves
the objective of development, and this is the purpose here. The text
is primarily theoretical, and the discussion ranges from the mundane
to the technical. This may be offputting, but is virtually inevitable
with a subject like development which draws on all branches of
economics, and which applies a large chunk of economic analysis
to one particular country or set of countries. Certain obvious things
need saying about the development process, while the analysis of
particular development difficulties and their solution can become
quite complex. The most technical aspects of the book on planning
techniques are relegated to appendices in Chapter 7.
Despite its theoretical emphasis, no more than an elementary
knowledge of economics is required, such as a student may receive
in a first-year economics principles course. Indeed, the course on
which this book is built was originally designed to provide a balanced
diet for students studying the sociology and politics of development
with no more than one year's elementary exposure to macro- and
micro-economic theory. Mathematics is kept to a minimum and
there is no recourse to sophisticated growth models.
Some readers may be worried by the neglect of non-economic
factors in the growth process. The emphasis on the economics of
development is not to deny or demote the importance of non-
economic factors; rather it is a reflection of my interest and com-
petence. Having said this, however, I think the importance of
xii PREFACE
institutional barriers to development is often exaggerated. As
Maddison 1 and others have remarked, the desire for material
improvement in less developed countries is very strong - certainly
strong enough to counter any institutional barriers that may exist-
and the evidence is not very convincing that basic institutional
reform is a necessary precondition of accelerated growth. But, in
any case, it is my firm belief that the economist has something
positive to offer by way of analysis unadulterated by sociological,
political and other non-economic variables. It is a favourite pastime
of other social scientists to criticise economists for ignoring institu-
tional considerations. We now seem to me to be in the opposite
danger of a great deal of woolly thinking about what raising living
standards is all about. In the final analysis, growth must be con-
sidered as an economic process in the important practical sense
that it is unlikely to proceed very far in the absence of an increase
in the quantity and quality of the resources available for production.
Even if we concede that the availability of resources may depend
on non-economic factors such as attitudes towards effort, saving,
risk-taking, and 'maximising' in general, this does not make non-
economic factors prime determinants of development. Their impact
is indirect. This is how economists tend to view the relation between
development and the institutional environment, and this will be the
implicit assumption throughout the present volume.
In preparing this book I have been haunted by that celebrated
review which began: 'There is much in this book which is new
and true; unfortunately that which is new is not true and that
which is true is not new!' There is nothing in this present volume
which is new either of a theoretical or an empirical nature. I hope,
however, that what is not new does not deviate too radically from
'truth' or relevance, and that what is 'true' provides a useful
synthesis for an introduction to a course in development
economics.
Finally, I should make the point that in studying development and
the economic difficulties ofless developed countries one would have
to be extremely insensitive not to form fairly strong views on the
way development problems ought to be tackled. Economists, except
perhaps those who return from less developed countries and become
anecdotal, have tended in the past to be a trifle detached and rather
1 A. Maddison, Economic Progress and Policy in Developing Countries (London:
Development
and Underdevelopment
TABLE 1.1
The World Distribution of Income
and Peacock concluded that the relative position of the less de-
veloped countries must have worsened considerably because of the
much faster growth of countries in the upper quintile of the income
distribution than in the lower quintile. This is certainly true of the
IOOr---------------------------------------------------------------------~
"'E
0
u
c:
...
-"'
0
c:
u
...
a.."' ................ \
...-~
1957~ ...
,•':;:/
;7
;:.:::----1962
100
Per cent of population
FIG.l.l
countries of Western Europe compared to the less developed coun-
tries, which is illustrated in Table 1.2 (p. 12 below).
Turning to the spread of per capita income between countries,
this is also colossal, ranging in 1963 from a recorded $35 per annum
in Malawi to $4,902 per annum in Kuwait. We may also note the
dispersion of the average per capita income figure for the different
continents around the average per capita income for the world,
which was $590 in 1963. The continents are listed in ascending order
of 'richness' : Asia (excluding Japan), $100; Africa, $110 ( 1958) ;
Middle East, $230 (1958); Latin America, $330; Europe, $1,080;
and North America, $2,770 (dates in parentheses refer to the latest
available figures published by the United Nations).
It is easily forgotten that the rich-poor country divide is a
relatively recent phenomenon. All countries were once at subsistence
DEVELOPMENT AND UNDERDEVELOPMENT 9
level, and as recently as two hundred years ago, at the advent of the
British industrial revolution, absolute differences in living standards
between countries on average cannot have been as great as all that.
The average per capita income of the less developed countries today
is approximately $150 per annum, and as far as we know this was
about the average level of real per capita income in Western Europe
in the mid-nineteenth century. If we regard $150 as only barely
above subsistence, the major part of present income disparities
between developed and less developed countries must have arisen
over the last century. Some countries, through a combination of
fortune and design, have managed to grow much faster than others.
The overriding influence has been industrialisation and the tech-
nological progress entailed. The concentrated impact of indus-
trialisation on living standards in the Western world is dramatically
emphasised by Patel's illustration that if six thousand years of man's
'civilised' existence prior to 1850 is viewed as a day, the last century
or so represents less than half an hour; yet in this 'half-hour' more
real output has been produced in the developed countries than in
the preceding period.l It is true that living standards in the less
developed countries are currently rising faster than at any time in the
past; but so, too, are living standards in the developed countries,
and the gap between rich and poor countries continues to widen.
Although development consists of more than a rise in per capita
incomes, income disparities are the essence of the so-called develop-
ment 'gap'. Let us examine the nature and magnitude of the gap
more closely.
TABLE 1.2
Rates of Growth qf Gross Domestic Product,
Population and Per Capita Income, 1950-60 and 1960-6
1950-60 1960-6
(% p.a.) (% p.a.)
('poor' countries)
Africa
G.D.P. 4·4 3·3
Population 2·2 2·3
P.C.Y. 2·2 1·0
South Asia
G.D.P. 3·6 3-4
Population 1·9 2·5
P.C.Y. 1·7 0·5
East Asia
G.D.P. 5·1 4·9
Population 2·5 2·7
P.C.Y. 2·5 2·1
Southern Europe
G. D.P. 5·6 7·7
Population 1·4 1·4
P.C.Y. 4·1 6·2
Latin America
G.D.P. 4·9 4·7
Population 2·9 2·9
P.C.Y. 1·9 1·7
Middle East
G.D.P. 5·6 7·2
Population 3·1 2·9
P.C.Y. 2-4 4·2
('rich' countries)
North America
G.D.P. 3·3 5·0
Population 1-8 1·5
P.C.Y. 1·5 3·4
Western Europe
G.D.P. 4·7 4-4
Population 0·7 1·0
P.C.Y. 4·0 3·4
r = (~Xt{To) - 1 X 100;
the solution to question 2 is given by
r = (~[Xt - (Xo - To)/To]) - 1 X 100;
and the solution to question 3 is given by
loge Xo{To
t= X 100
r11 - r.,
where Xt is per capita income in the E.E.C. and America in the year 2000
Xo is base-period per capita income in the E.E.C. and America
To is base-period per capita income of the less developed country
n is the number of years between the base period and the year 2000
r11 is the rate of growth of per capita income in the less developed
country
r., is the rate of growth of per capita income in the E.E.C. and
America.
14 GROWTH AND DEVELOPMENT
TABLE 1.3
The Development 'Gap'
(I) (2) (3) (4) (5)
Per Recent Per capita Per capita No. of years
capita annual income growth income growth required to
gross growth required in required to close gap
domestic of less developed prevent from between less
product G.D.P. country to ·widening the developed
atfactor per reach P.C.Y. absolute gap country and
cost in capita of between less E.E.C./U .S.A.
$U.S. (%) E.E.C./U.S.A. developed
(1965) (by year 2000) country and
E.E.C./U.S.A.
(by year 2000)
Latin America
Argentina 783 2·9 4·7 7·3 4·3 6·8 n.s. n.s.
Barbados 377 6·1* 7·0 9·5 6·1 8·3 43 69
Bolivia !53 4·8 9·7 12-4 8·6 IJ.l 124 169
Brazil 232 -1·6 8·5 11·0 7-4 9·8 n.s. n.s.
Chile 579 6·0 5·7 8·1 5·0 7-1 30 57
Colombia 267 2·8 8·0 10·6 7·0 9·3 n.s. n.s.
Costa Rica 382 Q.7 6·9 9·4 6·0 8·3 n.s. n.s.
Dominican Republic 231 0·8 8·5 11·0 7·4 9·8 n.s. n.s.
Ecuador 200 1·6 8·9 11·5 7·8 10·2 n.s. n.s.
El Salvador 252 1·9 8·2 10·8 7-1 9·5 n.s. n.s.
Guatemala 298 2·5 7·7 10·3 6·6 9·1 n.s. n.s.
Guyana 296 4·9 7-7 10·3 6·7 9·1 83 125
Haiti 86 0·1 1J.6 14·2 10·3 12·9 n.s. n.s.
Honduras 207 1·9 8·8 11-4 7·7 10·1 n.s. n.s.
Jamaica 453 3·5 6·4 8·9 5·6 7·8 230 392
Mexico 443 6·2 6·5 9·0 5·7 7·9 37 62
Nicaragua 325 3·4 7-4 10·0 6·4 8·8 370 573
Panama 474 4·3* 6·3 8·7 5·5 7·7 85 147
Paraguay 200 5·8* 8·9 11·5 7·8 10·2 70 99
Peru 238 3·5 8·4 10·9 7-4 9·7 359 520
Puerto Rico 1089 9·4 3·8 6·2 3·5 5·5 4 17
Trinidad and Tobago 661 3·0 5·3 7·9 4·7 6·8 n.s. n.s.
Uruguay 562 2·9 5·8 8·2 5·0 7-1 n.s. n.s.
Venezuela 916 10·9*' 4·3 6·8 3·9 7·8 6 16
Latin America 380 1·8 1 7·0 9·5 6·1 8·3 n.s. n.s.
Africa
Algeria 206• 5·0' 8·6 11·0 7-6 9·9 71 122
Ethiopia 47 2·3 13·5 16·2 12·2 15·0 n.s. n.s.
Gabon 369 6·4 6·9 9·5 6·1 8·4 40 64
Gambia 85 3·0 IJ.6 14-2 lo-7 12·9 n.s. n.s.
Ghana 265 7·8 8·0 10·6 7-1 9·4 35 52
Kenya 86 1·8 11·6 14·2 10·3 12·8 n.s. n.s.
Liberia 251• 7·6' 8·0 IO.S 7·0 9·3 36 54
Libya 707 29·2 5·1 7·8 4·5 6·5 3 7
Malawi 41 3·6 14·0 16·6 12·6 15·2 592 727
Mauritius 228 0·6 8·5 IJ.l 7-4 9·7 n.s. n.s.
Morocco 180 1·8 9·2 11·8 8·1 10·5 n.s. n.s.
Nigeria 68 5·1 12-4 15·0 11·0 13·6 145 184
Sierra Leone 136 1·5*' 10·1 12·7 8·9 11·3 n.s. n.s.
Somalia 5\b 11·0 13-1 10·4 12·3 n.s. n.s.
Sudan 96 2·3 11·2 13·9 10·0 12·5 n.s. n.s.
Tanzania 69 3·0* 12·3 14·9 10·8 13·5 n.s. n.s.
Tunisia 188 3·9 9·1 11·7 7·9 10·4 225 315
Uganda 83 3·8 11·8 14·4 10·4 12·9 356 457
Zambia 206 6·8 8·8 11-4 7-7 10·1 51 73
Africa 110b 1·0' 8·9 IJ.l 8·4 10·3 n.s. n.s.
DEVELOPMENT AND UNDERDEVELOPMENT 15
TABLE I .3-continued
Middle East
Aden 53b n.a. 10·9 13·0 10·3 12·2 n.a. n.a.
Iraq 242d 2·3' 8·4 10·9 7·3 9·6 n.s. n.s.
Jordan 198o 6·3' 8·7 11·2 7-7 10·3 58 83
Lebanon 218b n.a. 7·2 9·3 6·9 8·6 n.a. n.a.
Syria 162• 6·4' 9·1 11·5 8·2 10·4 64 88
Yemen SOb n.a. 11·0 13·2 10·4 12·4 n.a. n.a.
Middle East 230b n.a. H 9·1 6·6 8·4 n.a. n.a.
(including Kuwait)
Key:
Col. (1): a refers to 1964; b refers to 1958; c refers to 1963; d refers to 1965. Source: United Nations,
rearbook of NatioMI Accounts Statistics, 1966, Table 7A, pp. 725-9.
Col. (2): Figures refer to the period 1958-65 unless otherwise stated.
1 refers to 1950-66
1 refers to 1950-8
' refers to 1958-64
• refers to 1963-5
• refers to 1960-6
1 refers to 1958-63
7 refers to 1960-3
8 refers to 1960-5
n.a. = not available.
• denotes figures not comparable from year to year. The growth figures in col. (2), therefore,
are highly unreliable and no importance should be attached to the calculations in col, (5).
Col. (5): n.s. =no solution.
16 GROWTH AND DEVELOPMENT
the base-year level of per capita income in the less developed coun-
tries given in the first column of Table 1.3. To the extent that
income statistics invariably understate the value of production in
less developed countries, the calculations in cols (3) and (4) are
overestimates of the magnitude of the growth task. The degree of
overestimation is not likely to be so great, however, as to invalidate
the conclusion that the growth rates required are not feasible given
the past experience of most of the countries and knowledge of their
future prospects.
The second obvious caution is that the recent per capita income
growth of a country may not be a reliable guide to its future per-
formance. The assumed 3 per cent growth of per capita income for
the E.E.C. and America, based on long-run trends, may not be too
unrealistic, but for most of the less developed countries under review
it has only been possible to take the period 1958-65 as a guide to the
future, and growth rates over such a short period, whether high or
low, may obviously have been subject to special factors. In general,
however, the rate of growth of per capita income may be expected
to decelerate with development. Admittedly, population growth
(the denominator in the calculation) is likely to decelerate, but so
too may income growth (the numerator) as the scope for absorbing
the subsistence sector into the money economy diminishes. Growth
rates, as opposed to statistics of the absolute level of income, do
tend to be biased upwards in less developed countries for this
reason and others. The meaningfulness of the calculations in col. (5),
therefore, in answer to question 3, depends on the reasonableness
of the growth rates shown in col. (2). The calculations are highly
sensitive to the growth rates taken, but unless the figures are gross
underestimates, the message of the calculations is likely to be the
same, and it is this in which we are primarily interested rather than
precise calculations for individual countries.
Thirdly, as far as the comparison of living standards between
countries is concerned, there are the exchange problems associated
with the conversion of per capita incomes valued in national
currencies into U.S. dollars. As we shall see later in this chapter,
exchange rates are generally a very poor reflection of relative
prices and purchasing power in different countries. Foreign ex-
change rates basically reflect the relative prices of goods and ser-
vices which enter international trade. Typically, goods and services
produced and used within low-income countries are cheaper, relative
DEVELOPMENT AND UNDERDEVELOPMENT 17
to the same goods in developed countries, than those that enter into
foreign trade, so that the conversion of less developed countries'
national incomes into dollars by the use of the foreign exchange
rate understates their true income. Moreover, the mix of goods
bought and sold in one country may be radically different from the
mix bought and sold in another, so that the equivalent of a dollar's
expenditure in, say, India, at the current rate of exchange, may
'buy' a very different standard ofliving from a dollar in America.
This difficulty must be lived with, but should not preclude analysis
or seriously affect the conclusions.
With the above qualifications in mind, what are the main con-
clusions that emerge from Table 1.3? First, it is clear that the growth
rates that would be necessary in the less developed countries to raise
per capita income to the level in the E.E.C. and America by the
year 2000 are, for most of the countries, considerably in excess of the
past rates of growth achieved. Take, for example, the countries of
Latin America. Excluding Venezuela (for reasons given in the
table), none of the countries examined has experienced growth in
the recent past which would be sufficient for per capita income to
match living standards in either the E.E.C. or America by the year
2000 (except for Puerto Rico, which is virtually a state of the
U.S.A.). For the vast majority of countries an annual rate of growth
of per capita income of 8 per cent would be required to match the
E.E.C. countries, and a corresponding rate of 10 per cent to match
America, compared with actual per capita income growth of between
2 and 4 per cent. The picture is broadly the same for Africa, Asia
and the Middle East. On the continent of Africa, Ghana and Liberia
would just about match the E.E.C. in the year 2000 if the current
high rates of per capita income growth could be maintained. Libya's
recorded growth rate is hard to believe, but if it is correct and was
maintained, living standards there would surpass those in America
within seven years! For most Mrican countries, however, the out-
look is bleak. The scene in East and South-east Asia (excluding
Japan) appears even more depressing, where there is no country
with a recent per capita income growth that would raise the level
of per capita income close to that of the E.E.C. during the next
thirty years. And the story is the same for the Middle Eastern
countries considered.
In answer to the second question the same conclusion emerges as
in answer to the first, because the growth of per capita income
18 GROWTH AND DEVELOPMENT
why great care must be taken in using per capita income figures as
a criterion of development (unless underdevelopment is defined as
poverty and development as riches, which is not uncommon).
Apart from the difficulties of measuring national income in many
countries, together with the misleading nature of the figures and the
difficulties of making inter-country comparisons, which will be
considered later, a single per capita income figure to divide de-
veloped from less developed countries is somewhat arbitrary, ig-
noring such factors as the distribution of income within countries
and differences in development potential. It is not so much a question
of whether or not low-income countries should be labelled 'under-
developed' but what income level should be used as the criterion for
separating the developed from the less developed countries, and
whether all high-income countries should be labelled 'developed'.
To give just one example of the problems that might arise if the
figures are not used with discretion, suppose $300 annual per capita
income was taken as the dividing line between developed and less
developed countries. If this was done, much of South America
would be classified as developed, which would be absurd. Equally
absurd would be to classify Kuwait as highly developed simply
because it has the highest per capita income in the world.
Furtado! has attempted a structural definition of underdevelop-
ment which has a sufficient degree of generality to cope with cases
which do not accord with definitions of development and under-
development using per capita income as a criterion: 'Underdevelop-
ment is a state of factor imbalance reflecting a lack of adjustment
between the availability of factors and the technology of their use,
so that it is impossible to achieve full utilisation of both capital and
labour simultaneously.' An underdeveloped structure is therefore
a situation in which 'full utilisation of available capital is not a
sufficient condition for complete absorption of the working force at
a level of productivity corresponding to the technology prevailing
in the dynamic sector of the system'. By this criterion, Kuwait is
obviously not a developed country, and Australia and Canada may
be classified as totally developed even though they have under-
utilised natural resources and great development potential. But
bearing in mind the arbitrariness of per capita income, it is still very
convenient to have one readily available, and easily understandable,
1 C. Furtado, Development and Underdevelopment (Berkeley: University of
(Sep 1960).
a Maizels, Industrial Growth and World Trade.
DEVELOPMENT AND UNDERDEVELOPMENT 31
scale greater, the practical importance of which is enhanced by the
higher income elasticity of demand for industrial goods both
domestically and internationally. The scope for productivity in-
crease in industry appears greater overall. In fact, the greater the
proportion of a country's workers in manufacturing, the higher
tends to be the level of manufacturing productivity.
In view of these empirical findings on the pattern of industrial
growth, some would argue that structural transformation in the
present less developed countries ought to be induced rather than
left to take its natural course. Certainly, if the international income
elasticity of demand for agricultural products is less than unity,
there will be growing industrial imports if indigenous industry does
not expand. On the other hand, if there is an extreme comparative
disadvantage in industrial products, real income may rise faster
through the concentration on, and export of, agricultural goods in
exchange for industrial commodities. The problem must still be
faced, though, of the slow growth of demand for agricultural goods
and the possibility that the terms of trade may offset any resource
advantages from specialisation. This is a dilemma in which the
less developed countries find themselves at present, and is a topic
we take up later.
Press, 1960).
32 GROWTH AND DEVELOPMENT
All we need say about traditional societies is that for Rostow the
whole of the pre-Newtonian world consisted of such societies; for
example, the dynasties of China, the civilisations of the Middle
East, the Mediterranean and medieval Europe, etc. Traditional
societies are characterised by a ceiling on productivity imposed by
the limitations of science. Traditional societies are thus recognisable
by a very high proportion of the work-force in agriculture (greater
than 75 per cent), coupled with very little mobility or social
change, great divisions of wealth and decentralised political power.
Today there are very few, if any, societies that one would class as
traditional. Most societies emerged from the traditional stage, as
described by Rostow, some time ago, mainly under the impact of
external challenge and aggression or nationalism. The exceptions to
the pattern of emergence from the traditional state are those coun-
tries which Rostow describes as having been 'born free', such as the
United States and certain British dominions. Here the preconditions
of' take-off' were laid in a more simple fashion by the construction
of social overhead capital and the introduction of industry from
abroad. But for the rest of the world change was much more basic
and fundamental, consisting not only of economic transformation
but also a political and social transition from feudalism.
The stage between feudalism and take-off Rostow calls the transi-
tional stage. The main economic requirement in the transition
phase is that the level of investment should be raised to at least 10
per cent of national income to ensure self-sustaining growth. (On
this particular point, as we shall see, there seems to be very little
difference between the transition stage and the later stage of take-
off.) The main direction ofinvestment must be in transport and other
social overhead capital to build up society's infrastructure. The pre-
conditions of a rise in the investment ratio consist of a willingness
of people to lend risk capital, the availability of men willing and
able to be entrepreneurs and to innovate, and the willingness of
society at large to operate an economic system geared to the factory
and the principle of the division of labour.
On the social front a new elite must emerge to fabric the industrial
society and it must supersede in authority the land-based elite of
the traditional society. Surplus product must be channelled by the
new elite from agriculture to industry, and men must be willing to
take risks and to respond to material incentives. And because of the
enormity of the task of transition, the establishment of an effective
DEVELOPMENT AND UNDERDEVELOPMENT 33
modern government is vital. The length of the transition phase
depends on the speed with which local talent, energy and resources
are devoted to modernisation and the overthrow of the old order, and
in this respect political leadership will have an important part to
play.
Then there is the stage of take-off. The characteristics of take-off
are sometimes difficult to distinguish from the characteristics of the
transition stage, and this has been one bone of contention between
Rostow and his critics. None the less, let us describe the take-off
stage as Rostow sees it - a 'stage' to which reference is constantly
made in the development literature. Since the preconditions of
take-off have been met in the transitional stage, the take-off stage
is a short stage of development during which growth becomes self-
sustaining. Investment must rise to a level in excess of 10 per cent of
national income in order for per capita income to rise sufficiently
to guarantee adequate future levels of saving and investment. Also
important is the establishment of what Rostow calls' leading growth
sectors'. Historically, domestic finance for take-off seems to have
come from two main sources. The first has been from a diversion of
part of the product of agriculture by land reform and other means.
The examples ofTsarist Russia and Meijijapan are quoted, where
government bonds were substituted for the landowner's claim to the
flow of rent payments. A second source has been from enterprising
landlords voluntarily ploughing back rents into commerce and
industry.
In practice the development of major export industries has some-
times led to take-off permitting substantial capital imports. Grain in
the United States, Russia and Canada, timber in Sweden and, to a
lesser extent, textiles in Great Britain are cited as examples. Coun-
tries such as the United States, Russia, Sweden and Canada also
benefited during take-off from substantial inflows offoreign capital.
The sector or sectors which led to the take-off seem to have varied
from country to country, but in many countries railway building
seems to have been prominent. Certainly improvement of the in-
ternal means of communication is crucial for an expansion of mar-
kets and to facilitate exports, apart from any direct impact on such
industries as coal, iron and engineering. But Rostow argues that any
industry can play the role of leading sector in the take-off stage
provided four conditions are met: firstly, that the market for the
product should be expanding fast to provide a firm basis for the
34 GROWTH AND DEVELOPMENT
0~----------------L·
FIG. 2.1
the greater the level of output per unit of total inputs and the closer
will a production function of a given value lie to the origin.
From the simple production function diagram it is easy to see
how output may increase. First, there may be a physical increase in
factor inputs, L and K, permitting a higher level of production.
Either or both factors may increase. If only one factor increases,
the movement to a higher production function will involve a change
in the combination offactors and output will not be able to increase
for ever because ultimately the marginal product of the variable
factor will fall to zero. This is illustrated in Fig. 2.2 where, with a
given stock of capital OK1, output cannot increase beyond 300
with increases in the supply of labour ( OL1, OL2, etc.) beyond the
limit indicated. The diminishing productivity of the variable factor,
labour, with capital fixed, is shown by the flatter and flatter slope
of the production functions at successive points, Lt, L2, until at the
limit the production function is horizontal and the marginal product
of labour is zero.
If both factors increase in supply, however, there is no reason why
output should not go on increasing indefinitely. In fact, if both
factors increase in supply there is the possibility that production
may be subject to increasing returns such that output rises more than
proportionately to the increase in combined inputs. If this is the
42 GROWTH AND DEVELOPMENT
case, output per unit of total inputs will increase and the pro-
duction functions representing equal additional amounts of pro-
duction, e.g. 100, 200, 300, etc., must be drawn closer and closer
together as in Fig. 2.3.
Kll-;~\c-_;:,,_ _ _ _ 300
--+----200
----~----100
o~-L~,--L~2--,L~im~it~-------,L
FIG. 2.2
0 L
FIG. 2.3
the aggregation of capital, none the less capital and labour aggre-
gates seem to perform well in production function studies as measured
by the correct picture they convey of relative factor shares.
What have been the results of applying the Cobb-Douglas func-
tion to empirical data? First, let us consider its application in de-
veloped countries and consider the conclusions that emerge. We can
start with the pioneer work of Cobb and Douglas themselves. Ironic-
ally, the Cobb-Douglas function as first conceived was not intended
as a device for distinguishing the sources of growth but as a test of
neo-classical marginal productivity theory; that is, to see whether
marginal products corresponded to factor shares. Douglas had
observed that the product curve for American manufacturing in-
dustry for the period 1899-1922 lay consistently between the two
curves for the factors of production, and he suggested to his mathe-
matician friend, Cobb, that they should seek to develop a formula
which could measure the relative effect oflabour and capital on the
growth of output over the period in question. This story is described
by Douglas in his fascinating review article 'Are There Laws of
Production?' ,1 and as an insight into inductive method the relevant
passage is worth quoting in full:
The actual function derived was 0' = 1·01 K0·25 L0·75 which con-
firmed neo-classical predictions, but there was no discussion of the
relative importance of factors of production and the T parameter in
accounting for measured growth. It was not until Abramovitz in
19562 and Solow in 19573 showed that between 80 and 90 per cent
of the growth of output per head in the American economy over the
century could not be accounted for by increases in capital per head
that the production function started to be used in earnest as a tech-
nique in the applied economics of growth. Abramovitz remarked:
1 Ibid., p. 20.
2M. Abramovitz, 'Resource and Output Trends in the United States
since 1870', American Economic Review, Papers and Proceedings (May 1956).
a R. Solow, 'Technical Change and the Aggregate Production Function',
RB11iew of Economics and Statistics (Aug 1957).
4 Abramovitz, op. cit., p. 11.
50 GROWTH AND DEVELOPMENT
(2.9)
Tt = ~ Kvt (1
0
+ AK) 11 (2.10)
If the rate of growth of capital changes, this will alter the age dis-
tribution of capital and this, too, will affect the productivity of
capital in that the gap between the average technology and the
best-practice techniques will be changing. A decrease in the average
age of capital will improve the productivity of capital by an amount
equal to -'AK8A, where a.A is the change in the average age of
capital (8A is negative if the capital stock is getting younger owing to
a faster accumulation of capital).
The rate of growth of the 'effective' capital stock may therefore
be written as
(2.11)
(2.12)
(2.14)
56 GROWTH AND DEVELOPMENT
The residual term, rp•, is now the rate ofgrowth of total productivity
or technical progress independent of increases in factor inputs. The
effect of making allowance for improvements in the quality oflabour
and changes in its average age is exactly the same as in the case of
capital- to increase the sensitivity of output growth to the growth
of the labour force and to reduce the size ofthe residual factor. The
two most important factors affecting the quality of labour in any
economy are work experience (or learning), which primarily im-
proves the average quality of labour, and formal education and
training which may exert their effect both through changes in the
average quality of labour and its 'age' distribution if education and
training expand, and primarily affect new workers. We shall dis-
cuss education and learning more fully when we consider again
capital and technical progress in Chapter 4.
Resource Shifts
In addition to improvements in the quality of inputs, an important
source of productivity growth may be resource shifts from less pro-
ductive to more productive activities. Unless the weights for aggre-
gating capital and labour are continually revised to reflect their
changing productivities in different occupations, the effects of
resource reallocation will appear independent of the factors of pro-
duction whereas, in practice, growth from this source is intimately
bound up with factor endowments. One measure of the importance
of resource shifts is to take a weighted average of the rates of' tech-
nical progress' within different individual industries and to subtract
this from the aggregate measure of technifal advance, leaving the
difference as a measure of productivity advance due to shifts of
resources between industries. This is not an ideal measure because the
difference is bound to contain the effects of other 'errors' and
omissions, but it does give some idea of the effects of aggregation.
PRODUCTION FUNCTION STUDY OF CAUSES OF GROWTH 57
When Massell adopted this procedure in a study of nineteen
American manufacturing industries over the post-war years, he
found that approximately 30 per cent of the aggregate rate of
technical advance was the result of aggregation. Approximately 0·1
percentage point of growth was due to labour shifts and 0·8 per-
centage points to capital shifts.l Denison has made estimates of a
similar order of magnitude for some countries of Western Europe
considering just shifts of resources from agriculture to industry.2
From 1950 to 1962 resource shifts from agriculture to industry con-
tributed 1·04 percentage points per annum to the growth rate of
Italy, 0·76 percentage points in Germany and 0·65 percentage points
in France. Indeed, it is these shifts which account in large part for the
difference in the post-war growth performance of continental
Europe on the one hand and the United States and Great Britain on
the other. The potential scope for growth from this source in less
developed countries must be enormous.
Empirical Evidence
Since Abramovitz and Solow reported their findings in 1956 and
195 7, a fairly substantial body of empirical evidence relating to the
sources of growth has accumulated experimenting with different
specifications of the aggregate production function. Unfortunately,
it is not systematic. The time periods taken, the data used, the
sectors of the economy examined, and the methodology employed,
all vary within and between countries. All that can be done here is
to draw attention to some of the major findings and let the reader
check for himself the nature of the work.3 Until recently most of the
evidence available pertained to fairly advanced economies and it is
largely from this evidence, wisely or not, that conclusions have been
drawn on development strategy for less developed countries. Re-
search in developing countries has been hampered by a lack of
researchers, a shortage of reliable empirical data, and perhaps an
even greater suspicion of the aggregate production function, and its
implicit assumptions, than in developed countries. The assumption
1 B. Massell, 'A Disaggregated View of Technical Change', Journal of
Political Economy (Dec 1961).
2 E. Denison, Why Growth Rates Differ: Postwar Experience in Nine Western
Countries (Washington: Brookings Institution, 1967).
3 For a comprehensive survey, see C. Kennedy and A. P. Thirlwall,
'Surveys in Applied Economics: Technical Progress', Economic Journal
(Mar 1972).
58 GROWTH AND DEVELOPMENT
1 E. Denison, The Sources of Economic Growth in the U.S. and the Alternatives
before Us (New York: Committee for Economic Development, Library of
Congress, 1962).
2 A. Maddison, Economic Progress and Policy in Developing Countries (London:
Allen & Unwin, 1970).
PRODUCTION FUNCTION STUDY OF CAUSES OF GROWTH 61
small residual factor for many of the less developed countries studied
by Maddison. Those who stress the importance of social and insti-
tutional change as a prerequisite to growth in less developed coun-
tries must look at the residual in relation to other countries in support
of their argument.
Appendix 2. I
TABLE A2.1
The table largely speaks for itself, but two points are worth
emphasis. The first is the uniformity of levels of income per person
employed in Europe (except Italy), and the wide gap that exists
between Europe and America. According to these estimates, North-
west Europe in 1960 was at the level attained by America in 1925,
and the absolute gap in levels of income per person employed con-
tinues to widen. The second point is that when the income growth
figures (col. (I)) are adjusted for increases in the numbers employed,
some of the inter-country differences narrow or disappear (col. (2)).
Labour-force growth is a direct and fairly painless source of
national income growth, and this is why Denison is as much con-
cerned with the growth of income per person employed as with the
growth of income itself.
PRODUCTION FUNCTION STUDY OF CAUSES OF GROWTH 63
To separate the contribution to growth of factor inputs and the
growth of total productivity, Denison uses the constrained form of
the Cobb-Douglas function, taking factor shares of the national
income as the partial elasticities of output with respect to the factor
inputs. Excluding property income from abroad and imputed
earnings from residences, the average factor shares of national in-
come in North-west Europe and America for the period 1950-62
were as follows:
North-west Europe United States
(%) (%)
Land 4·0 3·0
Labour 77-6 82·0
Reproducible capital 18·4 15·0
In all countries, except America, Denison finds that a higher
proportion of growth is attributable to increases in output per unit
of total input than to increases in inputs themselves. This is despite
the fact that one of the distinctive features of the analysis is that he
attempts to take account of certain changes in the quality of capital
and labour in estimating the 'effective' growth of factor inputs.
Without these adjustments the 'total' productivity term would
appear even larger. We shall not quibble here with Denison's basic
methodological approach. It will be necessary later, however, to
question some of the assumptions that Denison makes in arriving at
quantitative estimates of the various factors influencing the 'effective'
growth oflabour and capital, as well as the importance of the com-
ponents contributing to the large residual item found for most
countries.
Labour Input
Labour input is measured as the growth of employment adjusted for
three main 'quality' changes: firstly, changes in the distribution
of employed persons between full-time and part-time work together
with the number of hours worked by each group; secondly, dif-
ferences in the distribution of total hours worked among seven
categories of workers classified by sex, age and civilian and military
status; and thirdly, changes in the educational stock. The final
index of labour input for each country can be thought of as one in
which all types of labour are related to the work done by an adult
male with eight years' schooling, working the hours prevailing in the
64 GROWTH AND DEVELOPMENT
base year 1950. The index excludes from consideration such factors
as the experience, effort and health of labour; and the stock of
knowledge (e.g. changes in the quali~ of education) is assumed con-
stant. These factors are left to contribute to 'total' productivity.
Separate indexes are computed for the three qualitative changes
mentioned, and a I per cent increase or decrease in the quality
index is treated as equivalent to a I per cent change in the quantity
of labour. In calculating the separate contribution of the quality
changes to growth, changes in the quality indexes are weighted by
labour's share of total income in the same way as the growth of
employment itself. No attempt is made to weight employment (or
man-hours) in separate industries by their own hourly earnings in
order to allow for the effect of shifts in the labour force between
low-productivity and high-productivity sectors. This is perhaps a
strange omission, unless the task proved impossible, in view of
Denison's general desire to adjust labour input for changes in its
quality and, by doing so, to assign to labour sources of growth
traditionally left in the residual item. When he finally comes to dis-
aggregate the residual factor, the only resource shift taken account
of is that from agriculture to industry.
The effect of hours worked appears as a negative item under
labour input since in most countries hours worked have decreased
since 1950. But since a negative causal relationship is assumed
between hours worked and labour's efficiency, labour input is
assumed not to be affected by the full amount of the reduction in
hours. The percentage offset that Denison applies, however, is
somewhat arbitrary.
Education, on the other hand, appears as a positive contributor to
growth. There has been an expansion of the number of years'
schooling per man in all countries, and Denison has done a useful
job in comparing the growth of the stock of education between
countries. To calculate the contribution of the expansion of educa-
tion to growth, earnings weights are applied to the distribution of
the labour force (males and females separately) by amounts of
schooling, making the assumption that 60 per cent of earnings
differentials between people of the same age are due to differences
in the number of years' schooling they have received. His conclusions
about the contribution of education to growth, therefore, hinge
crucially on the admittedly bold assumption that 40 per cent of
differences in earnings between workers of the same age are due to
PRODUCTION FUNCTION STUDY OF CAUSES OF GROWTH 65
factors other than differences in the stock of education embodied in
them, e.g. native ability, parental background, etc. Given the present
state ofour knowledge of the causes ofincome differentials, Denison's
opinion can perhaps be allowed to go unchallenged. On the other
hand, it seems a little unlikely that the percentage of earnings dif-
ferentials due to differences in education will be the same in every
country when different attitudes prevail in different countries
towards the reward of ability and educational attainment.
Having adjusted the employment figures.for 'quality' changes,
Denison's conclusion is that labour input as a whole contributed
1·12 percentage points (33 per cent) to the growth of income in the
United States, 0·83 percentage points (18 per cent) in North-west
Europe and 0·60 percentage points (25 per cent) )n the United
Kingdom. The unadjusted growth of employment and education
were of major importance in all countries. Education by itself
contributed 0·49 percentage points (15 per cent) to growth in the
United States, 0·23 percentage points (5 per cent) in North-west
Europe and 0·29 percentage points (12 per cent) in the United
Kingdom; and in the case of income growth per person employed
the relative contribution of education was 22, 6 and 17 per cent
respectively.
Denison estimates the 'educational stock' per person in Europe to
be approximately 50 per cent lower than in America, and this goes
some way to account for differences in the level of income per per-
son employed between Europe and America. It is clear, moreover,
that the growth of education in America has been a much greater
stimulus to growth than in Europe, and faster growth in Europe
than in America cannot be explained by a faster rate of expansion
of education. Education appears to be a relatively untapped source
of growth in Europe.
Capital Input
Four main types of capital input are distinguished: dwellings; inter-
national assets; non-residential structures and equipment; and
inventories. Each is weighted by its own base-year returns in
estimating its contribution to growth. As with employment, no
attempt is made to distinguish classes of capital stock by industry
and to weight the capital stock in each industry by its own earnings,
thus excluding the effect on growth of shifts in the distribution of
66 GROWTH AND DEVELOPMENT
Conclusion
It emerges from Denison's study, therefore, that 'residual produc-
tivity' is the biggest source of difference in levels of income per
person employed between America and Europe, and between
America and the United Kingdom, while advances in knowledge
have been the largest single source of growth in income per person
employed in the United Kingdom and the second largest source,
following economies of scale, in North-west Europe. It must be
remembered, though, that the conclusion about advances in know-
FIG. 3.1
marginal product of successive units of labour added to the land.
After the employment of OX units of labour the marginal product
of labour begins to fall owing to diminishing returns; after oxl
units of labour, labour's marginal contribution to output falls
below the subsistence wage; and after ox2 units oflabour, labour's
contribution to output becomes negative and total product will
decline with successive additions of labour beyond ox2.
The same tendencies can also be represented using the type of
production function diagram introduced in Chapter 2, which is
reproduced in Fig. 3.2. With more than OX2 labour employed with
a fixed amount ofland, OK, the marginal product oflabour becomes
negative, and further additions to the labour supply, without
corresponding increases in the amount ofland, will push the economy
on to a lower production function, i.e. total output will fall from
100 units to, say, 50 units with OXs units of labour.
82 GROWTH AND DEVELOPMENT
There are three main means of escape from the tendency towards
diminishing returns and zero marginal product in agriculture:
firstly, by productivity increasing faster than population through
the absorption of more and more ofthe agricultural population into
Labour
FIG. 3.2
......
Q) ' ..................
~
~
'
p ', ~
> W 1-------""'o;:,-----'T.,t------Jndustrial wage
~ I '
o I ',
c
·~
.g ~~1--------f---i---."l~--'>.-----Subsistence
'
',
"' , wage
\
0'---------:':--~--~---:\::---Units
M M
of labour
1
FIG. 3.3
-
( .)
:::l
~a.
Q)
.,:::lc> w2
~
0c
.E
0
::!; Units of labour
FIG. 3.4
down the expansion of the industrial sector in most of the less de-
veloped countries. If this is so, the growth of non-farm employment
depends not so much on the reinvestment of the capitalist surplus as
on the growth of the agricultural surplus. This, in fact, is the starting
point of neo-classical models of development.! In practice, both a
lack offood and lack of capital can limit the growth of the industrial
sector, and it is impossible to say a priori which will be the limiting
factor.
The question is not so much whether the marginal product of
labour is positive or zero, because unlimited supplies oflabour in the
Lewis sense is consistent with both, but whether there are unlimited
supplies of labour at a constant real wage rate in the agricultural
sector. This is undoubtedly the most important assumption under-
lying the classical approach to the theory of development, and Jor-
genson argues that the classical approach stands or falls by this
hypothesis.2 Historically, of course, the agricultural real wage has
risen but the capitalist sector has also expanded rapidly, which lends
support to a middle view between the classical and neo-classical
approaches. Lewis himself recognises the importance of both capital
and food, and it is this consideration which forms the basis of his
argument for the balanced growth of the agricultural and industrial
sectors.
What has happened in recent years, however, does not fit neatly
into either model. The rural-urban wage differential has widened
considerably, the agricultural surplus has increased, and there has
been rural-urban migration on an unprecedented scale, but the
expansion of the capitalist sector has generated very little extra
employment. Instead, migration has simply transferred unemploy-
ment from rural to urban areas. The only conclusion to be drawn is
that the expected value of the urban wage, even in conditions of
unemployment, still exceeds the wage in the rural sector, and given
an institutionally determined urban minimum wage which is above
the free market rate a high-level unemployment equilibrium is quite
possible. Development theory must now concentrate on urban
unemployment as well as rural unemployment.
The higher the marginal product of labour in agriculture, the
1 See D. Jorgenson, 'Testing Alternative Theories of the Development of
Disguised Unemployment
Let us redraw Fig. 3.1 from the point of diminishing returns and
describe more formally three possible interpretations of the concept
of disguised unemployment which are commonly found in the
literature. Let OA in Fig. 3.5 below be the actual number of workers
employable. One possible measure of disguised unemployment is the
difference between OA and OS, or the gap between the number of
workers available for work and the amount of employment which
equates the marginal product of labour and the subsistence wage.
This is the definition of unlimited supplies of labour in Lewis's
model where, if the marginal product of labour is below the insti-
tutional or subsistence wage, landowners have no interest in retain-
ing these workers and therefore do not compete for them with
the industrial sector. The extent of disguised unemployment on this
definition will differ from a second possible measure of disguised
unemployment which is the difference between OA and OD, or the
gap between the actual number of workers available for employ-
ment and the level of employment at which the marginal product of
88 GROWTH AND DEVELOPMENT
....
"
0
.c
.2
-"e
M.P.
0
()
"0
l
0.
Wt---------'""'------Subsistence wage
0
:e
FIG. 3.5
and health levels of the labour force; secondly, low levels of output
per labour input due to inadequate motivation for the cultivators to
pursue maximisation; thirdly, low average product due to low
aspirations for material income as compared to leisure; fourthly,
unemployment due to the lack of co-operating factors ('tech-
nological' unemployment); and lastly, seasonal unemployment.
Even with a logically distinct classification of the causes of dis-
guised unemployment, however, measurement will still be arbitrary
depending on the investigator's judgement of the potential level of
output if the causes of low output were to be removed. Ideally,
studies of disguised unemployment must be micro-oriented, based
on detailed information of actual and potential labour utilisation,
and with the assumptions of the analysis explicitly stated.
A reconciliation between those who argue that there is such a
phenomenon of disguised unemployment, in the sense of a very
low marginal product of labour in agriculture, and those who dis-
agree, is provided by the distinction between the amount of labour
time employed and the number of men employed. In a wage-pay-
ment system it is, indeed, extremely unlikely that labour would be
used up to the point where its marginal product is zero. If the wage is
positive, so will be the marginal product. But profit-maximising
behaviour is quite consistent with redundant labour. Labour is
employed up to the point where the marginal product of a unit of
labour time is equal to the wage, and disguised unemployment takes
the form of a small number of hours worked per person. It is not that
there is too much labour time but too many labourers spending it.
Total output would fall if men were drawn from the land unless
those remaining worked longer hours to compensate. How much
disguised unemployment is estimated to exist depends on what is
regarded as a normal working day. Estimates may be subjective, as
with the dynamic surplus, but unlimited supplies of labour exist in
the classical sense provided those remaining on the land work
harder or longer. Let us illustrate these points diagrammatically.
In Fig. 3.6 total output is measured on the vertical axis above the
origin, and the amount of labour time on the horizontal axis. Let
£ 1 be the point where the marginal product of labour time is equal
to the subsistence wage corresponding to total output OQ.. The
number of workers is measured on the vertical axis below the origin,
so that the tangent of the angle OT£1 (tan a) gives the average
number of hours worked by each unit oflabour. If the tangent of the
LAND, LABOUR AND AGRICULTURE 91
angle OXL1 is regarded as the normal length of a working day so
that the same output, OQ, could be produced by OX labour instead
of 0 r, the amount of disguised unemployment would be equal to
XT. It can easily be seen that if there was a reduction in the labour
force from 0 r to Ot and the number of hours worked per man
remained the same (i.e. tan OtS =tan OTLt), total output would
0
Total
.... p
output
"'
.E-
"'0
0
;e Subsistence wage
Labour time
(hours)
.,l.'!
""'
~
....0
...., f
.c
E
:::1
z
Fr.G. 3.6
fall from OQ to OP. If the normal working day is considered to
be greater or less than the hours given by tan b, the amount of
disguised unemployment will be greater or less than XT. Let us now
give a practical example. Suppose a producer employs 10 men
cor= 10), each doing five hours' work a day (tan a= 5), and that
the marginal product of the 50th hour is equal to the subsistence
wage (L1 = 50). If one man leaves (say Tt), total output will fall
from OQ to OP unless the 9 workers now do the 50 hours' work
previously done by 10 workers, i.e. the working day must be
increased by I of an hour. The amount of disguised unemployment
depends on what is considered to be a full day's work. Ifeight hours is
considered normal, then only 6t workers would be required to do
50 hours' work and 3f could be regarded as disguisedly unemployed.
The amount ofunderutilised labour is likely to be greater, the less
capitalistic is the organisation of agriculture. In fact, in the extreme
situation of no wage-payment system, no competitive pressure, and
92 GROWTH AND DEVELOPMENT
p Subsistence wage
Labour time
0
Number of
workers
FIG. 3.7
It is the average product that matters for the group as a whole,
not the product of the last man or hour, and the average product
may still be above the subsistence level when the marginal product
of labour and labour time is below. It is difficult to represent both
cases on the same diagram, but if the marginal product of labour is
zero, the marginal product oflabour time is bound to be zero (and
probably negative), so we may continue to illustrate the argument
in terms oflabour time, as in Fig. 3.7.
The basis of Fig. 3.7 is the same as Fig. 3.6. When the marginal
product of labour time is zero at £2 the average product of labour
time is OP1. or PP1 in excess of the subsistence wage OP. The amount
oflabour time could be extended to OLs without the average product
of labour time falling below subsistence, and the amount of labour
LAND, LABOUR AND AGRICULTURE 93
time could be made up of any combination of workers and hours
worked. If the number of workers was 0 Y1 they could work hours
equal to the tangent of 0 Y1L3 without the average product of
labour time falling below subsistence. Even though the marginal
product of labour time, L 2Ls, is negative, all workers can subsist
if the total product is equally shared. A zero or negative marginal
product of labour time is not inconsistent with rational worker be-
haviour if positive utility is attached to work regardless of the effect
on output. Suppose, as in Fig. 3.8 below,l that the marginal product
w Subsistence level
Marginal utility
of leisure
24 hours -"7:::-t-~:7"::~-----~0
leisure
Fro. 3.8
of a unit oflabour time is zero after four hours' work but the mar-
ginal disutility of leisure is still negative at this point. The worker
may substitute work for leisure, working, say, six hours, despite the
fact that the marginal product of labour time is negative after the
fourth hour. If such behaviour is observed, the presumption must be
that the marginal utility attached to working exceeds the loss of
utility resulting from a lower average product. The fact that people
receive positive utility from work may partly explain why work
habits in poor countries seem more leisurely than in advanced coun-
tries. What could be done in X hours is done in X + Y hours.
1 Adapted from J. Uppal, 'Work Habits and Disguised 'Unemployment
in Underdeveloped Countries: A Theoretical Analysis', Oxford Economic
Papers (Nov 1969).
94 GROWTH AND DEVELOPMENT
G> Wl-------f
"'
~
FIG. 3.9
expand the industrial sector, in a 'costless' way. Not only may the
opportunity cost of agricultural labour not be zero but resource
costs will also be involved in providing incentives to increased effort
and productivity in order for resources to be released from agri-
culture in the first place. The resource costs will include the pro-
vision of investment goods in agriculture, consumer goods for
peasant producers to buy and social capital in the industrial sector
to cater for migrants.
All this has an important bearing on the question of the valuation
of labour in surplus-labour economies, when planning the social
optimum allocation of resources and deciding on the degree to
which activities in the industrial sector should be labour-intensive.
Even if labour's opportunity cost is negligible, the resource costs
oflabour transference must be considered as a cost to the community
in expanding the industrial sector.
There is also the question of increased consumption to consider.
If the objective of a surplus-labour economy is to maximise growth,
as opposed to the level of immediate output, the transference
of labour will also involve a further ' cost' in terms of increased
consumption because there will be a reduction in the size of the
1 The evidence largely relates to the goods market, but since rising
productivity (at constant prices) has the same effect on total income as rising
prices, it may be taken as indirect evidence for the labour market. See R.
Krishna, 'Agricultural Price Policy and Economic Development', in H.
Southworth and B. Johnston (eds), Agricultural Development and Economic
Growth (Ithaca, N.Y.: Cornell University Press, 1967).
96 GROWTH AND DEVELOPMENT
M.arginal
·revenue
product
FIG. 3.10
Technical Progress
The term 'technical progress' is used in several different senses to
describe a variety of phenomena; but three, especially, can be
singled out. Firstly, it is a term used by economists to refer to the
effects of changes in technology, or more specifically the role of
technical change in the growth process. It is in this sense that we
used the term in Chapter 2; that is, as an umbrella head to cover all
those factors which contribute to the growth of' total' productivity.
Secondly, technical progress is used by economists in a narrow
specialist sense to describe the character of technical improvements,
and is often prefaced for this purpose by the adjectives 'labour-
saving', 'capital-saving' or 'neutral'. Thirdly, technical progress
is used more literally to refer to changes in technology itself, defining
technology as useful knowledge pertaining to the art of production.
Used in this sense, the emphasis is on describing improvements in
the design, sophistication and performance of plant and machinery,
and the economic activities through which improvements come
about - research, invention, development and innovation.
Having already discussed technical progress in the first sense, we
shall concentrate here on the narrow specialist descriptions of tech-
nical progress, and on how societies progress technologically.
Kl
2
·a.
0
<.) K2 CAPITAL-SAVING
K3
L2 L
Labour
FIG. 4.1
It will be recalled from Chapter 2 that technical progress on a
production function map is represented by shifts in the function
towards the origin showing that the same output can be produced
with fewer inputs, or that the same volume of inputs can produce
a greater output. According to the shape of the new production
function, either fewer of one or both factors will be required to pro-
duce the same output. In the case of neutral technical progress some
of both factors can be dispensed with. In the case of non-neutral
technical progress, if only one factor is saved technical progress is
said to be absolutely labour- or capital-saving. Iffewer of both factors
are required, technical progress is said to be relatively labour- or
capital-saving.
Consider first neutral technical progress (Fig. 4.3). The ray from
the origin, or expansion path, OZ, goes through the minimum-cost
point of tangency between the production function rr and the
factor-price ratio line, KL. With neutral technical progress the pro-
duction function shifts such that the new point of tangency at the
same factor-price ratio lies on the same expansion path. This means
that the ratio of marginal products is the same at the same capital
to labour ratio, and equal proportionate amounts of the two factors
108 GROWTH AND DEVELOPMENT
LABOUR- SAVING
y
NEUTRAL
OL-------~~~----~----~---
L3 L 2 L1 L
Labour
FIG. 4.3
point Q, substituting capital for labour. The ratio of marginal pro-
ducts has not remained unchanged at a constant labour to capital
ratio, and L2La labour is saved. The isoquants have been so
dra'Yn as to keep the volume of capital the same, but this is purely
incidental.
Capital-saving technical progress (Fig. 4.1) may be described
in ~ctly analogous fashion. In this case the ratio of the marginal
CAPITAL AND TECHNICAL PROGRESS 109
product of labour to the marginal product of capital rises and the
shift in the production function is such that the minimum-cost point
of tangency now lies to the right of the old expansion path. At P1,
where the new production function cuts the old expansion path,
the ratio of the marginal product of labour to capital is higher than
at P. Again, P1 is not an equilibrium point and it will pay producers
to move to point Q, substituting labour for capital. The ratio of
marginal products has not remained unchanged at a constant
labour to capital ratio, and in this case K2Ks capital is saved.
As with Harrod technical progress, it is difficult to know what form
Hicks technical progress takes in practice, largely because of identi-
fication problems. While the classification is analytically distinct,
how does one distinguish empirically between a change in factor
proportions due to a shift in the production function and a change in
factor proportions due to a change in relative prices? Hicks himself
seemed to be of the view that technical progress is relatively labour-
saving, but the indirect evidence we have for this is slight. For
example, given the magnitude of the rise in the price of labour
relative to capital and an elasticity of substitution of close to unity,
labour could not have maintained or increased its share of the
national income (as it has done slightly in some advanced countries)
if technical progress was markedly biased in the labour-saving
direction. If technical progress is biased in one direction or another,
its major impact will probably be on factor utilisation. The type of
technology employed, and the factor proportions it entails, must bear
a major responsibility for the present level of unemployment in less
developed countries.
Learning
A third means by which societies progress technologically, gradually
raising their efficiency and productivity, is through the process of
'learning by doing', which refers to the accumulation of experience
by workers, managers and owners of capital in the course of pro-
duction which enables productive efficiency to be improved in the
future. It is a learning process that Adam Smith referred to in
discussing the division of labour. Smith stressed the importance of
112 GROWTH AND DEVELOPMENT
Education
Finally, we come to the relation between technological progress
and improvements in the health, education and skills of the labour
force, or what is commonly called investment in human capital.
Investment in human capital takes many different forms, including
expenditure on health facilities, on-the-job and institutional training
and re-training, formally organised education, study programmes
and adult education, etc. Investment in human capital can over-
come many of the characteristics of the labour force that act as
impediments to greater productivity, such as poor health, illiteracy,
unreceptiveness to new knowledge, fear of change, a lack of in-
centive and immobility. Improvements in the health, education and
skill of labour can increase considerably the productivity and
earnings oflabour and may be preconditions for the introduction of
more sophisticated, advanced technology applied to production.
The capacity to absorb physical capital may be limited, among
other things, by investment in human capital. It is in this respect
that there is likely to be a close interrelationship between the main-
springs of technological progress.
Detailed empirical work on the relation between education and
growth relates largely to advanced countries. We gave some of the
results of such studies in Chapter 2. Now let us elaborate in a little
more detail. Professor Schultz, in his Presidential Address to the
American Economic Association in 1961,1 was one of the first to
suggest that growth in America 'unexplained' by conventional
factor inputs might be due to the rapid increase in the quality of
labour through education. Similarly, it may be the increase in
education in the twentieth century that accounts for the substantial
rise in earnings per worker. According to Schultz the stock of edu-
cation in America rose by approximately 850 per cent between
1900 and 1956 compared with an increase in reproducible capital
of450 per cent (at constant 1956 prices). Schultz acknowledged the
difficulties in estimating the return to education, but argued that
even when every conceivable cost is considered, and all expenditure
1 T. Schultz, 'Investment in Human Capital', American Economic Review
(Mar 1961).
114 GROWTH AND DEVELOPMENT
Dualism
Dualism is a description of a state of affairs in which less developed
countries may find themselves in the early stages of development,
and which may have significant implications for their future course
of development. There are a number of possible definitions and
interpretations of the term 'dualism', but in the main it refers to
economic and social divisions in an economy, such as differences in
the level of technology between sectors or regions, differences in the
degree of geographic development, and differences in social customs
and attitudes between an indigenous and imported social system.
Dualism in all its aspects is a concomitant ofthe growth of a money
economy which, as we saw in Chapter 3, may either arise naturally
as a result of specialisation or be imposed from outside by the im-
portation of an alien economic system - typically capitalism. Basic-
ally, therefore, a dual economy is one characterised by a difference
in social customs between the subsistence and exchange sectors of an
economy, a gap in the level of technology between the rural sub-
sistence sector and the industrial monetised sector, and possibly a
gap in the level of per capita income between regions of a country
if the money economy and industrial development are geographically
concentrated. In fact, it is not unusual for geographic, social and
technological dualism to occur together, with each type of dualism
tending to reinforce the other. Also, the more 'progressive' sectors
typically have favourable access to scarce factors of production,
which is a major cause of the persistence of dualism.
If the basic origin of dualism is the introduction of money into a
subsistence barter economy, and development depends on the ex-
tension of the money economy, development must contend with the
existence of dualism in all its aspects. We shall consider here social
and technological dualism, leaving geographic dualism until
later when we consider Myrdal's hypothesis of cumulative causation.
The first question is, what development problems does the exis-
tence of dualism pose for an economy, and how can dualism im-
pede and retard development? As far as social dualism is concerned,
THE PERSISTENCE OF UNDERDEVELOPMENT 119
the obstacles appear to be similar to those presented by a traditional
society with no modern exchange sector at all. The task is one of
providing incentives in the subsistence sector and drawing the
subsistence sector into the money economy. The fact that the
indigenous subsistence sector may be reluctant to alter its traditional
way of life and to respond to incentives is not peculiar to a dual
economy. It is true, therefore, that underdevelopment tends to be
associated with social dualism, but it is perhaps a little misleading to
regard social dualism as an underlying cause of backwardness and
poverty. It would be difficult to argue that development would be
more rapid in the absence of a monetary sector, from which the
existence of dualism stems. Even if the growth of the exchange
sector makes little impact on attitudes in the indigenous sector, it is
bound to make some contribution to development by employing
labour from the subsistence sector and disseminating knowledge.
Without the growth of the money economy it is difficult to en-
visage much progress at all. In short, it seems more realistic to
regard social dualism as an inevitable consequence of development
rather than as a basic cause of underdevelopment.
This is not to say that social dualism does not create problems
of its own. For example, different development strategies will be
required to cope with dissimilar conditions in the two sectors, and
this may involve real resource costs not encountered by the developed
economy. It is in this sense that the dual economy is at a compara-
tive disadvantage.
Similar reservations can be raised over whether it is accurate to
describe technological dualism as a cause of underdevelopment. As
with social dualism, it is probably more realistic to regard it as an
inevitable feature of the development process. Again, though, the
difficulties that may ensue from gaps in technology between the
rural and industrial sectors of the economy must be recognised. Two
disadvantages are commonly associated with technological dualism.
The first we mentioned earlier: where technological dualism
is the result of a foreign enclave a proportion of the profits
generated in the industrial sector will be remitted to the home
country, reducing the level of saving and investment below what it
might have been. The second disadvantage is more fundamental,
but difficult to avoid. If in the rural, or non-monetised, sector of the
economy production processes are characterised by labour-intensive
techniques and variable technical coefficients of production, while
120 GROWTH AND DEVELOPMENT
REGION A
FIG. 5.1
0
s
:fl w~
~"' Ws REGION B
s;
Supply and
0 demand for
labour
FIG. 5.2
Suppose to start with that wage levels are identical in the two
regions, WA = WB. Then assume that a stimulus of some sort
causes the demand for labour, and therefore wages, to rise in region
A relative to region B; that is, the demand curve for labour in region
A shifts to D1D1, causing wages to rise to OWA 1 • Since labour tends
to respond to differences in economic opportunities of this sort,
the wage discrepancy may be assumed to induce labour migration
THE PERSISTENCE OF UNDERDEVELOPMENT 123
from region B to region A. Equilibrium theory then predicts that
there will be a tendency for wage levels to be equalised once more
through a reduction in labour supply in region B from SS to S1S1 and
an increase in labour supply in region A from SS to S1S1, giving a wage
in region A of WAs equal to a wage in region B of WB 1 • According
to the hypothesis of cumulative causation, however, changes in supply
may be expected to repercuss on demand in such a way as to counter-
act the tendency towards equilibrium. Migration from region B
denudes the area of human capital and entrepreneurs, and de-
presses the demand for goods and services and factors of production,
while movements into region A, on the other hand, will tend to
stimulate enterprise and the demand for products, adding to the
demand for factors of production. In short, migration from region B
will cause the demand curve for labour to shift to the left, say to
D1D1, and migration into region A will cause the demand curve for
labour to shift further to the right, say to D2D2, causing the initial
wage discrepancy at least to persist, if not widen (if the shifts in
demand are greater than those assumed). Thus once development
differences appear, there is set in motion a chain of cumulative
expansion in the favoured region which has what Myrdal calls
'backwash' effects on other regions, causing development differences
in general to persist or even diverge.
Capital movements and trade also play a part in the process of
cumulative causation. In a free market, capital, like labour, will
tend to move where the return is highest and this will be to the
region where demand is buoyant. Capital, labour and entre-
preneurship will tend to migrate together. The benefits of trade will
also accrue to the host region. Regions within a nation using a com-
mon currency cannot have balance of payments difficulties, but the
ability to import depends on the ability to export. If production is
subject to increasing returns, the region experiencing the rapid
growth of factor supplies will be able to increase its competitive
advantage over the relatively lagging regions containing smaller-
scale industries, and increase its real income accordingly. In the
same way the general freeing and widening of international markets
and the expansion of world trade will tend to favour the more rapidly
growing regions within nation•states.
The impact of immigration into the expanding region is also
likely to induce improvements in transport and communications,
education and health facilities, etc., improving efficiency and
124 GROWTH AND DEVELOPMENT
(5.3)
Holding the rate of growth of capital constant (drK = 0), the re-
quired change in the rate of growth of' total' productivity to com-
pensate for a reduction in the rate of growth of labour would be
drp
or -d = -~. (5.4)
T£
TABLE 5.1
Population Growth and Increases in Real Pn(Jduct per Head, 1950-65,
in Asia, Africa and Latin America
(all countries included for which information available)
have progressed very quickly while other countries with low popu-
lation growth rates have stagnated, relatively speaking. Clark goes
as far as to call the so-called population 'problem' a development
'myth'.
This is not to deny, of course, that population growth may present
a problem in other respects- in particular the ability to feed itself.
And presumably no one would dispute a population 'problem' if
population growth actually exceeded income growth. In this case
living standards would fall to subsistence level; the economy would
THE PERSISTENCE OF UNDERDEVELOPMENT 133
regress and be forced to live off its capital. This state of affairs is
referred to by development economists as a 'low-level equilibrium
trap' situation. We shall later consider a model formalising this
possibility, but first let us lay out briefly some of the facts about
world population.
.
J!?
...
c
.,c
~
"C
"C
c
c
m
~ 0
X y
Time
FIG. 5.3
and the birth rate is falling. In the case of country X, however,
which has the same current population growth, the population
growth rate can be expected to accelerate in the future as the gap
between the birth rate and the death rate widens. The death rate is
falling but the birth rate remains constant to the point V; only
after this point will population growth decelerate. Here, then, are
two countries with the same observed population growth in the
present but with radically different future prospects. In comparing
countries, and their population 'problems', the time profile of
countries must be borne in mind. But the crucial question, as we
suggested earlier, is, what is the length of the time lag between
the death rate falling and the downturn of the birth rate? It is the
length of this lag which determines the short-run prospects of
countries emerging from a transitional state and attempting to
'take off' into self-sustaining growth.
The experience of the less developed countries today has no
historical parallel, at least in Western Europe. In nineteenth-
century Europe birth and death rates tended to fall together and a
situation never arose of population growth in excess of 2 per cent
per annum. It could almost be argued that the 'balance of nature'
has been upset in the present less developed countries. The intro-
duction of public health measures and medical attention has
136 GROWTH AND DEVELOPMENT
reduced death rates suddenly and dramatically, but the means and
know-how to effect an equally dramatic fall in the birth rate have
not been provided. Modern science and methods of public ad-
ministration have contributed to the ending of premature death,
but have yet to exert a significant impact on births.
FIG. 5.4
Average product
Marginal product
FIG. 5.5
-
g
l
g
-~
0
E
Total product
1-------,~~--\--+!o,:,...----- Subsistence lev...
product
FIG. 5.6
population and resources, and, in particular, land. Since resources,
such as land, vary considerably in quality, however, inter-country
comparisons of ratios of population to resources are virtually mean-
ingless. A country may be regarded as 'underpopulated' in relation
to another even though it has a higher population-resource ratio,
simply because its technology to exploit resources is superior. Tech-
nology will influence the position and shape of the total product
curve, and hence the optimum population, for any given ratio of
population to resources. In view of the variety of interpretations of
the concept of optimum population, the claim that country X, Y
or Z is 'overpopulated' or 'underpopulated' needs to be viewed
with some scepticism unless a precise definition of terms is given.
p = b
dk' p - X J, where p0 > (0)'
[(0) p (5.6)
Per capita income is so low up to the level (~)' that there is dis-
investment (dissaving), assumed to be at a constant rate, C. Beyond
(~)' the rate of savings per capita rises linearly with per capita
Income.
dk'
p
FIG. 5.7
=~*,where(~)~ (~r
S is the subsistence level of per capita income. At per capita income
levels below S, ~ is negative since the death rate would exceed the
birth rate.
dP
p
FIG. 5.8
FIG. 5.9
dO dP
o'?
FIG. 5.10
The equilibrium level of per capita income will be where the popu-
lation growth curve cuts the income curve from below. One such
point is to the left of Oa where S = X, and this point represents the
low-level equilibrium trap. Any level of per capita income below
144 GROWTH AND DEVELOPMENT
Oa will force per capita income down to this subsistence level. Con-
trariwise, any per capita income level beyond Oa will mean a sus-
tained rise in per capita income until the two curves cross again at
Oq. This would be a new stable equilibrium with the population
growth curve again cutting the income growth curve from below.
To escape from the low-level equilibrium trap, per capita income
must either be raised to Oa, or the dg and f; curves must be shifted
favourably. The origin of 'big push' theories of development (see
Chapter 6 and below), and the concept of a 'critical minimum
effort', was the belief that to escape from the 'trap' it would be
necessary to raise per capita income to Oa in one go. If countries are
in a trap situation, however, much greater hope probably lies in the
dO curve d n·11·
tmg upward s over time,
. . to teeh mea
owmg . l progress,
0
or in a sudden drop in the f; curve from a reduction in the birth rate.
Capital from abroad, raising the dg curve, and emigration, lowering
dP
the p curve, could also free an economy from such a trap.
To take account of factors other than population growth which
may depress per capita income, and factors other than increases
in capital per head that may raise per capita income, the low-level
equilibrium trap model can be extended and generalised by adopting
Leibenstein'sl terminology of income-depressing forces and income-
raising forces. Leibenstein's approach is illustrated in Fig. 5.11.
The curve representing income-depressing forces, Zt, is measured
horizontally from the 45° line, and the curve representing income-
raising forces, Xt, is measured vertically from the 45° line. Per capita
income level Oa is the only point of stable equilibrium. Between Oa
and Oq income-depressing forces are greater than income-raising
forces and per capita income will slip back to Oa. Only beyond Oq
are income-raising forces greater than income-depressing forces
such that a sustained increase in per capita income becomes pos-
sible. Oq is the critical per capita income level necessary to escape
the low-level equilibrium trap.
1 H. Leibenstein, Economic Backwardness and Economic Growth (New York:
Wiley, 1957).
THE PERSISTENCE OF UNDERDEVELOPMENT 145
X,
FIG. 5.11
was not until population started to grow rapidly that per capita
income started to rise, and that population growth preceded income
growth rather than the other way round. We hinted earlier that
one of the most likely escapes from a Malthusian situation is a per-
manent fall in the birth rate due to a standard of living effect. It is
to this effect that Hagen attributes the prevention of a Malthusian
situation in nineteenth-century Europe. Birth rates followed death
rates downwards long before the maximum possible population
growth rate had been reached.
What happened in Europe has not been the experience of the
present less developed countries over the last three decades, but
there are other potent forces at work which offer a similar escape
from Malthusianism. The most significant of these forces are tech-
nical progress and 'irreversible' additions to the capital stock (es-
pecially in the form of social and human capital), the consequence of
which is to shift the income growth curve upwards over time so that
the level of per capita income representing stable equilibrium is
continually rising over time. Technical progress was an important
source of economic progress in nineteenth-century Europe; it is,
potentially, an even greater force in the present developing nations,
given their ready access to modern technology from countries already
developed.
The way in which rising living standards may be regarded as a
natural phenomenon, obviating the need for a critical minimum
effort, is shown diagrammatically in Fig. 5.12. Consider a small rise
in the per capita income level from OX (the subsistence level) to
OX1. The traditional argument is that this will be accompanied by
population growth in excess of income growth, causing per capita
income to fall back to the subsistence level. If time is not abstracted
from the analysis, however, it is possible to argue that the increase
in per capita income from ox to oxl will be accompanied by per-
manent changes in the quality of the capital stock and skills, etc.,
such that per capita income will not fall back to OX but to some
higher level, say OX2. Income growth in the range of per capita
income ox to ox2 is now permanently higher, represented by the
curve dg'. If ox2 becomes the new stable equilibrium, and the
sequence of events is repeated, per capita income will reach the
level Oa in a series of steps. No critical minimum effort will be needed.
With continuous productivity growth due to all forms of technical
THE PERSISTENCE OF UNDERDEVELOPMENT 147
progress, a 'ratchet' mechanism of the type described is quite
feasible, and it is probably by this mechanism that, in practice,
countries typically 'take off'.
Most developing countries in the world today are experiencing
dO,JlE.
7) p
f1Q
0
FIG. 5.12
Total
output
FIG. 6.1
Unbalanced Growth
The major overriding general criticism of the balanced growth
doctrine is that it fails to come to grips with the fundamental ob-
stacle to development in less developed countries, namely a shortage
1 Nurkse, Problems of Capital Formation.
1 A. Lewis, The Theory ofEconomic Growth (London: Allen & Unwin, 1955).
THE ALLOCATION OF RESOURCES 159
of resources of all kinds. Critics of balanced growth do not deny the
importance of a large-scale investment programme and the ex-
pansion of complementary activities. Their argument is simply that
in the absence of sufficient resources, especially capital, entre-
preneurs and decision-makers, the striving for balanced growth may
not provide a sufficient stimulus to the spontaneous mobilisation of
resources or the inducement to invest, and will certainly not econo-
mise on decision-taking if planning is required.
One of the most provocative books on development strategy in
recent years is by Professor Hirschman,! whose argument is along
these lines. Hirschman is probably the foremost exponent of the
doctrine of unbalanced growth and we must briefly consider his
views. The question he attempts to answer is this: given a limited
amount of investment resources, and a series of proposed investment
projects whose total cost exceeds the available resources, how do we
pick out the projects that will make the greatest contribution to
development relative to their cost? And how should 'contribution'
be measured? First of all, he distinguishes two types of investment
choices - substitution choices and postponement choices. Substi-
tution choices are those which involve a decision as to whether
project A or B should be undertaken. Postponement choices are
those which involve a decision as to the sequence of projects A and
B, i.e. which should precede the other. Hirschman is mainly con-
cerned with postponement choices and how they are made. His
fundamental thesis is that the question of priority must be resolved
on the basis of a comparative appraisal of the strength with which
progress in one area will induce progress in another. The efficient
sequence of projects will necessarily vary from region to region and
from country to country depending on the nature of the obstacles to
development, but the basic case for the approach remains the same;
that is, to economise on decision-making. In Hirschman's view, the
real scarcity in less developed countries is not the resources them-
selves but the means and ability to bring them into play. Preference
should be given to that sequence of projects which maximises 'in-
duced' decision-making.
He illustrates his argument by considering the relation between
social capital (S.C.) and directly productive activities (D.P.A.).
The case in which S.C. precedes D.P.A. he calls 'development via
1 A. Hirschman, Strategy of Economic Development (New Haven: Yale
-: :J
a.
!:i
0 X
<i
a:
-
c::i
0
t;
0
(.)
FIG. 6.2
If the total cost ofD.P.A. output is measured on the vertical axis,
and the availability and cost of S.C. is measured on the horizontal
axis, curves can be drawn (a, b, c) showing the cost of producing a
given full-capacity output ofD.P.A., from a given amount of invest-
ment in D.P.A., as a function of the availability of S.C. Successive
curves, a, b, c, represent different levels of D.P.A. output from
successively higher investment in D.P.A. The curves are negatively
sloped and convex to the origin because D.P.A. costs will decrease
the greater the availability of social capital, but there is a minimum
amount of S.C. necessary for any level of D.P.A. output (e.g. OS1
corresponding to curve a), and as S.C. increases its impact on the
costs of D.P.A. output becomes less and less.
Now assume that the objective of the economy is to obtain
increasing outputs of D.P.A. with the minimum use of resources
devoted to both D.P.A. and S.C. On each curve, a, b, c, the point
where the sum of the co-ordinates is smallest will represent the most
desirable combination ofD.P.A. and S.C. on this criterion. The line
OX connects the optimal points on the different curves and this
represents the most 'efficient' expansion path, or 'balanced' growth
path, between S.C. and D.P.A.
But suppose that 'optimal' amounts of S.C. and D.P.A. cannot
be expanded simultaneously to keep in balance with one another.
THE ALLOCATION OF RESOURCES 161
On what criteria is the postponement choice made? One possibility
is the sequence AA1BB2C where the initial expansionary step is
always taken by social capital. This is the sequence that is called
'development via excess capacity'. The other (opposite) possibility
is the sequence AB1BC1C where the initial expansionary step is
taken by D.P.A. This is the sequence that is called 'development via
shortages'. According to Hirschman, the preference should go to
that sequence of expansion that maximises 'induced' decision-
making. It is difficult to tell a priori which sequence this is likely to
be. If S.C. is expanded, existing D.P.A. becomes less costly, en-
couraging further D.P.A. If D.P.A. are expanded first, costs will
rise but pressures will arise for S.C. facilities to be provided. Both
sequences set up incentives and pressures and ultimately, in Hirsch-
man's view, the sequence chosen must depend on the relative
strength of entrepreneurial motivations on the one hand and on the
response to public pressure of the authorities responsible for social
capital on the other.
In general, however, Hirschman has some harsh things to say
about the traditional view that S.C. must precede, or even be kept
in balance with, D.P.A. if development is to progress smoothly.
While he admits that a certain minimum of social capital is a pre-
requisite. to the establishment of D.P.A., he argues that develop-
ment via excess capacity is purely permissive, and that to strive for
balance is equally dangerous because there will be no incentive to
induced investment (or induced decision-making). On the other
hand, development via shortages will compel further investment, and
hence the most 'efficient' sequence as far as 'induced' decision-
making is concerned is likely to be that where D.P.A. precedes
S.C.
It is true that where there is strong social and economic resistance
to change, 'permissive' acts, such as the construction of social over-
head capital, are not likely to provide much impetus to develop-
ment. Italy has recently discovered this in its attempt to develop the
Mezzogiorno, and policy has been changed as a result. On the other
hand, Hirschman's analysis leaves several questions unanswered.
He concedes that the objective must be to obtain increasing out-
puts of directly productive activities at minimum cost in terms of
resources devoted to both D.P.A. and S.C., and that the cost of
producing any given output from D.P.A. will be higher the more
inadequate is S.C., but what is the minimum amount of S.C. required
162 GROWTH AND DEVELOPMENT
Investment Criteria
Traditional micro-theory teaches that under perfect competition
resources will be optimally allocated when each factor of production
is employed up to the point where its marginal product is equal to its
price, and that society's output (welfare) will be maximised when the
marginal products offactors are equated in all their uses. This is the
so-called 'marginal rule' for resource allocation, and implies
'efficiency' in the sense that a society's total output of goods and
services could not be increased by any redistribution of resources
between activities because each factor of production is equally
productive in existing activities. In static analysis, therefore, 'effi-
ciency' in resource allocation implies maximising the national
product, and this is achieved when the marginal products of factors
are equated in their different uses.
If the application of the marginal rule leads to an efficient alloca-
tion of resources, what is the allocation 'problem' in less developed
countries? Why seek for other criteria to decide on the allocation
of resources? One good reason is that the assumptions of traditional
micro-theory accord neither with the realities nor with the aspirations
ofless developed countries. Two major drawbacks of the application
of the marginal rule may be cited. One is that the marginal rule is a
static criterion, and as we have said before it is by no means certain
that the aim of less developed countries is, or ought to be, the
maximisation of the present level of output, consumption or welfare.
THE ALLOCATION OF RESOURCES 167
Secondly, traditional static theory ignores a host of factors which
may have a bearing on the social optimum allocation of resources. In
countries characterised by fundamental structural disequilibria and
extreme imperfections in the market, it cannot be assumed that the
market prices of goods and factors of production reflect the social
costs and benefits of production. The application of the marginal
rule will only lead to a socially optimal allocation of resources in the
absence of divergences between market prices and social costs
and benefits, or if market prices are corrected to reflect social
values.
Several factors may lead to divergences between market prices
and the social valuation of goods and factors of production. If
external economies and increasing returns are attached to some
projects their social value will exceed their private value, and the
application of the marginal rule must make allowances for this if
output is to be maximised from a given endowment of factors.
Secondly, if perfect competition does not prevail in the product
market, product prices will not reflect society's valuation of those
products, and market prices must somehow be adjusted to achieve
a social optimum. Similarly, if perfect competition does not prevail
in the factor market, the price of factors will not reflect their oppor-
tunity cost to society so that employing factors up to the point where
their marginal product equals price will not produce a social opti-
mum. Idle resources, such as labour, may be overvalued, and scarce
resources, such as capital and foreign exchange, may be undervalued,
and market prices must therefore be corrected to reflect the value
of these resources to society. Thirdly, static analysis ignores the
future structure of product and factor prices arising from the choice
of projects in the present. An optimum resource allocation in the
present may produce a non-optimal allocation in the future and
vice versa. The only way of coping with this difficulty is through
what is called the programming approach to resource allocation,
by which the repercussions of one activity on others is explicitly
considered and by making due allowance for time. Lastly, the appli-
cation of the marginal rule can only lead to optimal resource
allocation on the assumption that the income distribution is
'optimal', and remains unaffected by whatever programme is
decided on. If a new pattern ofresource allocation alters the income
distribution, output may be maximised but welfare diminished
because of' undesirable' changes in the distribution of income gains.
168 GROWTH AND DEVELOPMENT
I IS
oO . th e mcrementa
. 1 capita
. l-output ratio oO . t h e prod uctlvity
. an d TIS . .
social product; hence the social marginal product criterion for the
allocation of investment resources.
are, of course, production costs other than labour costs, but these
would have to be incurred whether labour was employed or not.
On the extreme assumption that the social cost of labour is zero,
therefore, the application of the capital-output ratio criterion and
the S.M.P. criterion amount to the same thing. The general con-
THE ALLOCATION OF RESOURCES 171
elusion is also reached that if the opportunity cost of labour is zero
and labour can do the job of capital equally well, certain investments
may be highly profitable to capitalists but very unprofitable to the
community - the opportunity cost of capital being very high.
In reality, the social cost of employing labour is not likely to be
zero. As we have already seen, it is only legitimate to regard the
marginal product of labour as zero in surplus-labour economies
under special assumptions concerning the organisation of agriculture
and the length of the working day, and whether workers on pro-
jects from which others are drawn away work harder. But even if
the opportunity cost in terms of lost production was zero, there are
bound to be other social costs involved in the case oflabour migrating
from the agricultural to the industrial sector. Social capital in the
towns will have to be provided, and the migrants may impose
various social costs on the community by adding to congestion.
Also, if consumption increases in the process of transference, the
size of the investible surplus will fall and this can be regarded as a
social cost if the objective is to accumulate capital to maximise
output, consumption and welfare in the future.
But supposing for the sake of argument that C is zero, the equiv-
alence of the capital-output criterion and the S.M.P. criterion would
still require that V, the annual value of output to society, was the
same as the private product, implying no supplementary benefits
attached to projects. This state of affairs is hard to envisage in an
underdeveloped country. Investment in the infrastructure and social
capital of a backward economy can be expected to have wide-
ranging effects on the profitability of other activities. In countries
lacking infrastructure and social capital, the gap between the private
return on these types of projects and the social return is likely to be
enormous. These sorts of divergence remain the classic justification
for state provision of transport and communications, health and
educational facilities in any society. In less developed countries
there is likely to be a wide range of projects where the social return
far exceeds the private return, and if these projects are not to be
neglected in an investment programme the social product criterion
must be applied. The difficulty is measuring social return over the
life of the investments. Apart from the fact that many investments
of the social capital type do not yield marketable outputs, it is
virtually impossible in many cases to estimate the impact that one
project has on the functioning and efficiency of others. Apart from
172 GROWTH AND DEVELOPMENT
On the assumption that all profits are reinvested, and all wages are
consumed, the reinvestment quotient is equal to the rate of profit.
r is also the growth rate because on the assumption that all wages are
174 GROWTH AND DEVELOPMENT
r
=p-ew_
k -
(P)(l
k
_pew) -c
_ §_ (6.2)
where S =p-ew
p
and
-
::>
0.
'5
0
0
;§ y'
FIG. 6.3
the highest output for any amount of labour employed, but can
employ only OA labour up to the point where its marginal product
becomes negative. Project r yields a lower output but uses more
labour, OB. Using the employment absorption criterion, project
r should be chosen in preference to project X. Unless the mini-
misation of unemployment at all costs is the primary goal of
development policy, there can be little justification for the use of this
criterion. The more rational policy would be to choose the project
with the higher output per head and compensate any resulting
unemployment through the fiscal process.
V-C
S.M.P. = - k - + TwB (6.3)
Development Plans
Whatever a country's political ideology, a development plan is an
ideal way for a government to set out its development objectives and
to demonstrate initiative in tackling the country's development
problems. A development plan can serve as a stimulant to effort
throughout the country, and also act as a catalyst for foreign
investment and agency capital from international institutions.
Depending on the politics of a country, and its available expertise,
a development plan will vary in its ambitiousness from a mere
statement of aixns and pious hopes to detailed calculations (and
proposals for action) of the resources needed, and the amount of
output that each sector of the economy must generate, in order to
achieve a stipulated rate of growth of output or per capita income.
Anything more than a statement of aixns inevitably involves some
form of model-building, if only to delineate the relationships between
184 GROWTH AND DEVELOPMENT
sectors of the economy and between the key variables in the growth
process.
Three basic types of model are typically used in development
planning. Firstly, there are macro- or aggregate models of the economy
which may either be of the simple Harrod-Damar type, or of a more
econometric nature, consisting of a series of n equations inn variables
which represent the basic structural relations in an economy between,
say, factor inputs and product outputs, saving and income, imports
and expenditure, etc. Secondly, there are sector models which isolate
the major sectors of an economy and give the structural relations
within each sector, and perhaps also specify the interrelationships
between sectors, e.g. between agriculture and industry, between capi-
tal- and consumer-goods industries, and between the government and
the rest of the economy. Thirdly, there are inter-industry models
which show transactions and interrelationships between producing
sectors of an economy normally in the form of an input-output
matrix.
Models of these types serve a twofold purpose. In the first place
they enable planners to reach decisions on how to achieve specified
goals. They highlight the strategic choices open to the policy-maker
in the knowledge that not all desirable goals are achievable simul-
taneously. Only with an understanding of the interrelationships
between different parts of the economy, and a knowledge of the
parameters of the economic system, is it possible for meaningful
and consistent policy decisions to be reached. Without detailed
information on which to base planning (or what has been called
'planning without facts'), the case for decentralised decision-making
becomes overwhelming. Secondly, models of the type described
above can perform an equally valuable function from the point of
view of enabling the future to be projected with a greater degree of
certainty than would otherwise be possible, thereby providing some
knowledge of what resources are likely to be available in relation to
requirements within a stipulated planning period. Various types of
model may be classified, therefore, according to whether they are
required for policy or decision purposes or for the purpose of pro-
jection and forecasting. The necessary constituents of a plan con-
taining both types of model are a statement of economic goals; the
specification of policy instruments or instrumental variables; the
estimation of structural relationships; the availability of historical
data; the recognition of exogenous variables; and last, but not least,
PLANNING ECONOMIC DEVELOPMENT 185
a set of national accounts for national income and expenditure,
foreign trade and even manpower to ensure consistency between
demand and the supply of resources available.
Policy Models
The essence of a policy model is that a certain set of objectives is
specified and the model is then used to determine the most appro-
priate measures to achieve those objectives within certain constraints.
In most development plans the primary objective is the achievement
of a target rate of growth of output or per capita income within
the planning period, or some terminal level of consumption, subject
to constraints on the composition of output, the distribution of
income and the availability of factor supplies. Given the time
horizon of the plan, and the objective function, the optimum strategy
can be worked out from the initial conditions. One of the big dangers
of planning in less developed countries is that planners and policy-
makers are prone to choose targets based on needs and aspirations
rather than on the basis of available resources, with the inevitable
consequence that the targets are not achieved. It is incumbent on
the planner to specify the constraints as accurately and honestly as
possible to avoid disillusion with the planning process.
The solution to a policy model of this kind is somewhat different
from one designed to find the value of certain instrumental variables
that will achieve a particular target rate of growth. The difference
can be illustrated with reference to the simple Harrod model of
growth which gives the level of savings necessary to achieve a par-
ticular growth rate assuming some value of the capital-output
ratio. The level of savings required to achieve a target rate of growth
may be very different from the level of savings available when the
problem is posed as one of maximising growth subject to constraints.
The level of savings necessary to achieve the target rate of growth
may conflict with society's wish for present rather than future con-
sumption; it may be incompatible with the supplies of skilled labour
necessary to work with capital, and the level of savings may not
even be achievable because of a limit to the capacity to tax or to
'force' saving through inflation.
It is clear from what we have said so far that the first step in the
formulation of a policy model must be the construction of an aggre-
gate model of the economy (incorporating, if need be, a sector
186 GROWTH AND DEVELOPMENT
Projection Models
Any one, or all three, of the basic types of model mentioned at the
outset may be used for projection or forecasting purposes. Typically,
aggregate models for projection are of the Harrod-Domar type and
are used to indicate the amount of capital required in the future,
either to achieve a particular target rate of growth or to keep the
labour force fully employed (or both), assuming the labour force is
exogenously determined. Sector models, on the other hand, are
designed to project the output of various sectors and, if balanced
growth is required, to allocate resources accordingly. Lastly, inter-
industry models are designed to estimate the intermediate demands
for products as a result of a projection of expansion of the final
demand for goods and services over a future period of time (see
Appendix 7.1).
It would be wrong, of course, to think of forecasting models as
entirely distinct and divorced from decision models. Forecasting
models, especially of the econometric type, are often used, and
designed to be used, as decision models, with current choices and de-
cisions depending on the future the models portray. Indeed, there is
little use for pure forecasting models as such, except for esoteric
purposes.
PLANNING ECONOMIC DEVELOPMENT 189
Appendix 7.1
Input-Output Analysis
Input-output analysis is a particular planning and forecasting tech-
nique with a wide variety of applications. The purpose here is
simply to present the basic elements of the technique without going
into its refinements. If the reader's appetite is whetted, references
for further reading are given in the bibliography.
An input-output table provides a descriptive set of social ac-
counts, recording purchases by, and sales from, the different sectors
of the economy distinguished. Tables may be constructed for a whole
economy, for a region within an economy, or to show flows between
regions. They may vary in size and ambitiousness according to the
number of sectors identified and the purposes for which they are
constructed. The most common type of input-output table at the
national and regional level is that recording inter-industry trans-
actions showing, in Hirschman's terms, the backward and forward
linkages in an economy.
Input-output analysis has two major uses which must be clearly
distinguished. Firstly, input-output analysis may be used for pro-
jection and forecasting purposes. After some manipulation (which
we shall consider shortly), an inter-industry transactions matrix
can provide information to the planner on how much of commodi-
ties x~, x2, x3, etc., will be required at some future date assuming a
certain growth rate of national income or final demand. Information
of this nature is important if planning is to achieve consistency and
if future bottlenecks in the productive process are to be avoided.
Secondly, input-output analysis can be used for simulation pur-
poses. The simulation of development is concerned with what is
economically feasible, as opposed to forecasting which is concerned
with what one expects to happen on the basis of a certain set of
assumptions. In the case of simulation there is no presumption that
the simulated changes in the economy are actually going to occur.
If they are economically feasible the changes could occur, but
190 GROWTH AND DEVELOPMENT
TABLE A7.1
Input-Output Table
192 GROWTH AND DEVELOPMENT
But the (domestic) output of coal must also equal the value of
inputs into the coal industry plus the value added to those inputs
by employing factors of production to work on them. We thus have
a column for the coal industry of the form
n
X1 = ~ Xu
i=l
+ W1 + R1 + D1 + P1. (A7.2)
PLANNING ECONOMIC DEVELOPMENT 193
Input Coeificients
The second stage in the practical use of input-output analysis is
to derive input coefficients from the inter-industry section of the
transactions table. This is done very simply by dividing each column
entry in the matrix by the sum of the column. If we denote the input
coefficient atJ, then ati = ~;1 . The input coefficient a11 thus gives
the amount of purchases from each industry to support one unit of
output of industry j. If output was measured in pounds sterling
and aii equalled 0·1, this would mean that every pound's worth of
output of industry j would require lOp worth of input from in-
dustry i.
Xti = aii XJ, and our equation (A7.1) in general form can now
be written
X~, = zn
j= I
ati X1 + Xw + Xw + Xu + XtE - XtM· (A7.3)
j= I
(i = 1, ... , n) (A7.4)
j= I
and mtXt is imports.
194 GROWTH AND DEVELOPMENT
The solution to the problem of finding the values of all Xts which
satisfy all the final demands may be written in the form
X, = bu1i + bi2 1"2 + ... + btn Tn (i = 1, ... , n). (A7.5)
The coefficients bu, ... , n give, per pound of delivery to final
demand made by the industries listed along the top of the inter-
industry matrix, the total input directly and indirectly required
from industries listed at the left of the matrix. Equation (A7.5),
therefore, gives the total output (X) of industry (i) consistent with
the final demands for all other industries' products (1"1, ... , Tn)·
These equations for each industry represent a transformation of
the original equation (A7.4) in which a new set of constants, biJs,
is derived from the original parameters (aiJ and mi)· The new equa-
tions are referred to as the general solution and can be found, in diffi-
cult cases involving more than two or three equations with two or
three unknowns, by the technique of inversion of the matrix, i.e. the
inversion of equation (A7.4) in matrix form.
Let us now express, therefore, our input-output problem in
matrix form and, using a little elementary matrix algebra, show
how a general solution is arrived at by matrix inversion. For ease
of exposition, and also to compare our results using a simple iterative
procedure, we shall take two sectors and two outputs only.l
With two industries, and ignoring imports, the equations of type
(A7.4) become
(A7.6)
or in matrix form:
(A7.7)2
[
an a12l X [bn b12] = [l ~]
a21 a2J b21 b22 0
This gives four equations in four unknowns, and it is then possible
to solve for the elements in the inverse matrix bu, b12, b21, b22· By
simple arithmetic:
bt2 = ____a=12=---
an a22 - a12 a21
-a21
au a22 - a12 a21
au
we see later in the text, the importance of this matrix is that it plays a
similar role to the number 1 in ordinary algebra, i.e. 1 X a = a X 1 = a.
Similarly, in matrix algebra IA = AI= A. In short, an identity matrix
is a matrix which when multiplied by A yields A as the product. In the
M- -~
a21 a22 0 1 a21 azz
196 GROWTH AND DEVELOPMENT
In the simple2 X 2 case these are the formulae for working out the
elements of the inverse from the elements of the original matrix.
Notice that the denominator is the same in all cases, namely the
product of the elements of the principal diagonal in the original
matrix minus the product of the other diagonal (or what is called
the determinant of the matrix).l
(/- A)-1 is therefore some matrix which we can call B, which
when multiplied by (/-A) gives the identity matrix I. We now
haveX=BY.
In other words, each industry's output is equal to the sum of the
elements of the final demand matrix (Y) (which is a column vector
n X 1) times coefficients of the inverse matrix of I - A.
~~ s
Coal
Coal
0·1
Steel
0·4
Steel 0·3 0·2
1 A knowledge of determinants is necessary for the inversion of larger
matrices unless iterative techniques are used (see references cited earlier).
PLANNING ECONOMIC DEVELOPMENT 197
Y= c:J
and the output of the two industries consistent with this new demand
vector is
X= [
1-!
t 1!
i] X
[15] [30]
15 = 30
coal output must rise by 3-l from 26f to 30
and steel output must rise by 7! from 22! to 30.
198 GROWTH AND DEVELOPMENT
Appendix 7. 2
The Programming Approach
to Development
The main task of development strategy is to ensure that resources
will be forthcoming to meet the goals of a development pro-
gramme, and that the resources are allocated efficiently subject to
certain constraints. In our earlier discussion of resource allocation
we were more concerned with the investment criteria that should be
applied in the light of particular goals than with the efficiency with
which resources were to be used, or whether the application of the
1 For Zambia, for example, Seers has used the inter-industry matrix in a
social accounting framework for the wider purpose of balance in sectors of
the economy other than the production sector. See D. Seers, 'The Use of a
Modified Input-Output System for an Economic Program in Zambia', in
I. Adelman and E. Thorbecke (eds), The Theory and Design of Economic
Development (Baltimore: Johns Hopkins Press, 1966).
202 GROWTH AND DEVELOPMENT
LINEAR PROGRAMMING
Fw. B7.1
surpluses. Let us label the slack variables S1 and S2, and now refer
to the variables X1 and X 2 as structural, or ordinary, variables. With
the use of slack variables, the constraint equations become equalities
and the programming problem becomes
Maximise P1X1 + P2X2
subject to anX1 + a12X2 + S1 = Y1
a2lxl + a22x2 + s2 = r2
and the non-negativity conditions
x1 ~ o; x2 ~ o; s1 ~ o; s2 ~ o.
As before, any values of the variables (X1, X2, S1 and S2) which
satisfy both the constraints and the non-negativity conditions are
said to represent a feasible solution. Any set of values of the variables
in which the number of non-zero-valued variables (either ordinary
or slack) is equal to the number of constraints is called a 'basic
solution'. All basic solutions are feasible, and what we want to show
is that in any linear programming problem an optimal solution can
be found by considering only the basic solutions. As we shall come
to see, this reduces the task of the allocation problem enormously.
In our example, an optimal solution is that which maximises the
national income, i.e. the sum of the quantities of xl and x2 each
multiplied by their respective prices. The respective prices of X1
and X 2 can be represented by parallel price lines as in Fig. B7.2.
206 GROWTH AND DEVELOPMENT
Given that prices are fixed and do not vary with output, it follows
that the optimal point of a linear programme must always lie on the
boundary of the feasible region since, if a commodity has a positive
price, income can always be increased by expanding production
to capacity until one or both capacity limits are reached. Given the
FIG. B7.2
feasible region T2PT1 in Fig. B7.1, there will always be at least one
optimal solution which occurs at one of the corners r2, P or r1 of
the feasible region. The optimal point will either be a tangency
point, P, or, if the price lines are parallel to one of the segments of
the feasible region, say Prb then the entire segment, including P
and rb will be optimal.
We can now show that all basic feasible solutions are represented
by corners of the feasible region. Take for example the labour
constraint T12Tn, as in Fig. B7.3.
X
l
FIG. B7.3
At 0, X2 = 0, X1 = O, and S1 > 0.
PLANNING ECONOMIC DEVELOPMENT 207
Therefore, at all these corner points the number of non-zero
values of the variables is equal to the number of constraints (i.e.
one), and this is the condition for a basic solution. It can easily be
seen that no other point represents a basic solution since on the
line xl > 0, x2 > 0 and sl = 0, and inside the line all variables
are positive; that is, in all other cases the number of non-zero
values of the variables will be greater than the number of con-
straints.
We conclude, therefore, that in any linear programming problem
an optimal solution can be found by considering only the basic
solutions. There will always exist an optimal solution in which the
number of non-zero-valued variables (both ordinary and slack) is
exactly equal to the number of constraints in the problem. The
problem of resource allocation would seem to be greatly simplified
by this conclusion, for the implication is that if an economy has
only n constraints but n + m activities to choose from (m > 0),
national income can be maximised by cutting its range of activities
to n (i.e. to the number of constraints). The logic of this implication
is easy to understand. Take our previous example of one constraint.
If there is linearity (i.e. constant returns to scale), it would pay to
produce the commodity with the highest price up to capacity. It
will only pay to introduce additional commodities if the number of
constraints is increased. It is equally clear, however, that the validity
of the conclusion reached hinges crucially on the assumption of
linearity.
The Dual
The solution to a linear programming problem yields, in fact, two
sets of solutions. One solution, which we have been considering up to
now, is the 'best' combination of outputs, i.e. the values for X1 and
x2 which maximise the national income given the prices of products.
This is called the 'primal'. The second solution is known as the
'dual', or the prices of the resources that minimise the costs of
producing a combination of outputs. The prices are those that would
prevail if the investment pattern to maximise national income was
undertaken. Let us first write out the dual of the maximising prob-
lem (the primal), and then outline the symmetry between the
maximising and minimising problems, followed by an economic
208 GROWTH AND DEVELOPMENT
Primal
Maximise P1X1 + P2X2
subject to auX1 + a12X2 ~ Y1
a21x1 + a22x2 ~ r2
If we now put the primal and the dual in matrix form, the symmetry
between the two problems becomes apparent immediately.
Primal matrix Dual matrix
x1 x2 71 72
p1 p2 r1 r2
s1 r1 au a12 Z1 p1 au a21
s2 r2 a21 a22 Z2 p2 a12 a22
PLANNING ECONOMIC DEVELOPMENT 209
If we look at the primal and dual in equation and matrix form we
observe the following: if the primal involves ?= signs the dual in-
volves :::::;; signs; the price constants, P1 and P 2 , in the primal,
become constraints in the dual- replacing the capacity constraints
Y1 and Y2; the coefficients in the constraint inequalities, au, a12,
which go from left to right in the primal, go from top to bottom in
the dual. And as far as the two matrices are concerned, the dual
matrix is merely the primal matrix with the positions of the bottom
left-hand corner and the top right-hand corner reversed.
Let us now give a numerical example of the primal and dual and
use this example to give an economic interpretation of the dual.
Maximise 2X1 + 6X2
subject to 4XI + X2 ::S; 5
3X1 + 2X2 ~ 7.
Minimise 571 + 772
subject to 471 + 372 ?= 2
71 + 272 ?= 6.
To produce one unit of commodity X 1 the total value of inputs is
471 + 372. This may exceed or equal, but not be less than, 2, which
is the price per unit of output X1 . The inequality sign tells us that we
must assign values to each of the inputs sufficient to account for the
price of the commodity in question. An analogy with a business
enterprise will be useful here. A firm must choose values for its
scarce inputs (Y1 and Y2 ) that will account for all its profits. Values
of 71 and 72 must be chosen so that the net profit from production is
accounted for. If the accounting values are such that profits are not
completely imputed to the factors, then the accounting values must
be raised until the unimputed profit has been eliminated. Thus the
variables 71 and 7 2 in the dual problem can be interpreted as the
required accounting values of the scarce inputs. If, of course, factors
are not scarce, their accounting values must be zero because if their
supply increased profits could not be increased because of other
constraints, and if their supply was reduced profits would not fall
because output would not be affected. Thus the aim of the dual is to
minimise the total cost of providing the inputs in question. At the
minimum the total cost of providing the inputs will be exactly equal
to the total profit derived for their use. If an input is in excess
supply, an additional unit will add nothing to profit and therefore
its opportunity cost is zero.
210 GROWTH AND DEVELOPMENT
Appendix 7. 3
The Planning W agel
The two extreme views on the valuation oflabour in surplus-labour
economies have already been touched on previously. On the one
hand there is the 'traditional' view that if the marginal product of
labour in agriculture is zero, labour ought to be considered 'cost-
less' in the planning process in order for current total output to be
maximised (see Chapter 3). This is also the programming solution
where the objective function is to maximise current income subject
to resource constraints, but where labour is not a scarce resource and
capital- and consumption-good prices are not adjusted to reflect
the social valuation of them (see Appendix 7.2). On the other hand,
there is the opposite 'modern' view that if the wage in industry is
higher than the wage in agriculture, and the propensity to consume
is unity, labour transference will involve an increase in consumption,
so that to maximise growth and output in the future labour ought to
be valued at the industrial wage to maximise the investible surplus
(see Chapter 3).
Both views, representing distinct development o~jectives, can be
summed up in one diagram depicting the industrial sector of the
economy. If, in Fig. C7.1, the marginal product of labour in agri-
culture is zero, maximisation of the total product, L1P, requires that
labour be given a shadow wage of zero so that OL1 workers are
employed. If the propensity to consume out of the industrial wage,
OW, is unity, however, maximisation of the investible surplus,
WRS, requires that labour should be given a shadow wage equal to
the industrial wage. To value labour less than 0 W would encourage
the employment of labour beyond OL and involve consumption
in excess of production which would reduce the size of the investible
surplus and impair future growth. But if there is a trade-off between
present and future welfare, neither solution can be optimal.
1 This appendix is a revised and condensed version of my paper 'The
Valuation of Labour in Surplus Labour Economies: A Synoptic View',
Scottish Journal of Political Economy (Nov. 1971).
PLANNING :&CONOMIC DEVELOPMENT 213
Apart from this, there are also other reasons for taking an inter-
mediate position between these two extreme views on the valuation
of labour. These, too, need consideration in formulating the plan-
ning wage. Some of these considerations have already been men-
tioned earlier in the book. For one thing it is by no means certain
Marginal revenue
product
FIG. C7.1
1 Before reading this section, readers are advised to look first at the section
on dual-gap analysis in Chapter 8.
2 Little and Mirrlees, Manual of Industrial Project Anarysis, vol. u.
PLANNING ECONOMIC DEVELOPMENT 221
foreign resources comparable by valuing all inputs and outputs at
world prices.
A further way to economise on the use of foreign exchange would
be to encourage the use of'cheaper' domestic resources by reducing
the planning wage. Before recommending this as a policy measure,
however, let us follow through its implications. The first reper-
cussion will be to cheapen domestic resources relative to resources
from abroad, thereby releasing foreign exchange. On the other hand,
a lower planning wage will increase the level of employment, which
will increase consumption and reduce the level of domestic saving
if the planning wage was previously fixed to maximise the investible
surplus consistent with time preference. The case for lowering the
planning wage when foreign exchange is the dominant restraint
must therefore rest on the assumption that additional increments of
foreign exchange are more useful than the domestic saving sacrificed;
that is, that either some domestic saving would be redundant if the
foreign exchange bottleneck is not overcome, or that more resources
are released for investment purposes through the release of foreign
exchange than are used up in consumption through reducing the
planning wage. A further repercussion of reducing the planning
wage and increasing the labour intensity of investment projects
is that imports of consumption goods may be expected to rise, which
will absorb foreign exchange and offset some of the savings offoreign
exchange owing to the switch in demand from foreign to domestic
resources.
In considering a policy of reducing the planning wage to equate,
ex ante, the savings-investment gap and the foreign exchange gap,
two considerations must therefore be borne in mind. The first is
whether the foreign exchange gap is truly the dominant restraint,
and the second is the net saving of foreign exchange that can be
expected from the policy.
As we show in Chapter 8, the theory of the dominant restraint
has recently been called into question by many economists. On the
one hand it has been argued that if capital and imports are sub-
stitutable for one another there can only be one gap, not two, and
on the other hand it has been argued that if the capital inflow
required to fill the foreign exchange gap is larger than the savings-
investment gap, this need not imply, as traditional theory argues,
that savings will fall below the saving potential of the community
or that less productive investment will take place. On the second
222 GROWTH AND DEVELOPMENT
The term ( C - F . ::) gives the scope for changing the planning
wage to equate the savings-investment and foreign exchange gaps
ex ante. For a reduction in the planning wage the term must be
F.::) =
negative, and it would pay to reduce the planning wage until
( C- 0. The expression will approach zero as Crises
Voluntary Saving
The level of voluntary saving, and the ratio ofvoluntary saving to
national income, will depend on a variety of economic and non-
economic factors. Economic factors largely determine the ability to
save, but the willingness to save may depend on non-economic
factors as well. The main determinants of the ability to save will be
the average level of per capita disposable income, the distribution of
per capita disposable income and the size of the capitalist surplus.
The willingness to save, in turn, will depend on such monetary
factors as the existence of acceptable and reliable institutions in
which to deposit savings; the interest rate in relation to risk and time
preference; and, in addition, societal attitudes towards the accumu-
lation of capital. Saving in a form which contributes to productivity
growth is not simply a function of the level of income. Countries at
the same stage of development, measured by per capita income, or
some alternative index, may have very different levels of saving
relative to national income because of important differences in these
other determinants of voluntary saving. In Lewis's model of develop-
ment with unlimited supplies oflabour, it is not the absolute level of
per capita income in a country that determines the savings ratio but
the size of the capitalist surplus, and the distribution of income
between entrepreneurial profits and other incomes. This view is
typical of classical models of development and underlies those invest-
FINANCING DEVELOPMENT 227
ment criteria which imply the choice of capital-intensive technology
in less developed countries. Saving depends on the size of the capital-
ist class, and the share of profits in national income. Lewis himself
believes that in practice no nation is so poor that it could not save
and invest at least 12 per cent of its national income if it so wished.
Investment as a percentage of national income is not small because
of an incapacity to save but because the surplus generated in less
developed countries is used to maintain 'unproductive hoards of
retainers' and to build pyramids, temples, etc. As long as a significant
share of income accrues to landlords, traders and other conspicuous
consumers, there is little chance of providing significant amounts of
voluntary saving. Lewis's view is very much in line with our earlier
remark that in the early stages of development there may be no
savings-investment gap in the sense of an incapacity to save; merely
an unwillingness or inability to use savings for 'productive'l capital
formation.
Other economists have also taken this view by pointing to the
extreme income inequalities within less developed countries. It is a
well-documented fact that for most less developed countries, coupled
with overall poverty, the distribution of income tends to be more
unequal than in developed countries. In the case of India, for
example, where approximately 20 per cent of the population is in
receipt of 60 per cent of the national income, it should not be
difficult to raise saving and investment to 20 per cent of the national
income. The problem is to get those with the capacity to save to
channel their savings into 'productive' investment. If the rich do not
save and invest voluntarily, this adds an economic justification to the
egalitarian argument for heavy taxation of the upper income groups,
forcibly extracting the surplus and achieving a more equal distribu-
tion of income simultaneously.
The fact remains, however, that the ability to save of the vast
majority of people in less developed countries is limited by the
desperately low level of per capita income. The task of financing
capital formation through domestic voluntary means is essentially
twofold, therefore. The first task is to encourage the production of a
1 By 'productive' is meant activities which yield a high stream of measur-
able income in the future. On this definition, temples, pyramids, etc., are
excluded as well as real estate and many types of service activities where the
scope for productivity growth is low compared with investment in manu-
facturing industry.
228 GROWTH AND DEVELOPMENT
Involuntary Saving
Involuntary saving is saving undertaken by the government on
society's behalf, largely through taxation, deficit finance, and
induced inflation. Let us consider these three policy instruments in
turn.
FINANCING DEVELOPMENT 229
Taxation
The ratio of total tax receipts to national income is typically low in
less developed countries, ranging from 5 to 20 per cent - compared
with 25 per cent and over in most advanced countries. On the sur-
face there would seem to be plenty of scope for increasing taxation to
raise the level ofsaving. How much additional real investment can be
financed by taxation, however, depends on the type of taxation im-
posed and on whom. If additional taxation taps funds which would
either have been consumed or gone into 'non-productive' channels,
then government taxation can certainly finance a greater volume of
real investment. If the additional tax burden is imposed on the rich,
however, they may decide to cut their voluntary saving to meet the tax
demands rather than cut down conspicuous consumption or specula-
tive activities, in which case the increase in real investment may be
minimal. In these circumstances the finance of investment through
taxation is likely to be inflationary through the redistribution of in-
come between those with very low propensities to consume and those
with a very high propensity to consume for the nation as a whole.
The most effective tax policy to finance real investment would be to
impose all taxes on those with high marginal propensities to con-
sume, i.e. the poor. But there are obvious difficulties and objections
in carrying this policy to the extreme, not the least of which might be
a reduction in work effort and output due to disincentive and mal-
nutrition. In the last resort, a balance must be struck between the
efficiency and equity of a tax system in achieving its objectives.
Having said this, however, it is in practice the poorer sections of the
community in less developed countries that do bear the brunt of the
tax burden owing to the heavy emphasis on indirect taxation and
taxes on the agricultural sector. Indirect taxation, as opposed to
direct taxes on income, is preferred in less developed countries for
many reasons. For one thing it is virtually impossible to assess the
incomes of the vast majority of people in a typical underdeveloped
country; but even if it were possible, a degree of literacy would be
required for simple form-filling which cannot yet be guaranteed.
Moreover, in countries lacking good communications, and honest
and efficient local administrators, the scope for evading income
taxation is so enormous as to make it impracticable, and certainly
unfair, to collect. The beauty of indirect taxation, such as taxes on
commodities and on exports and imports, is that they are difficult to
230 GROWTH AND DEVELOPMENT
evade and relatively easy to collect. On the other hand most indirect
taxes are regressive, hitting hardest those who can least afford to pay.
Taxes impinge predominantly on the agricultural sector simply
because this sector happens to be the largest in less developed
countries, and more often than not contributes the most to export
earnings. The ideal tax system for the agricultural sector is one that
will not only extract any surplus that is available but which will also
act as an incentive for producers to produce and to export more. But
again the clash between equity and efficiency arises. One obvious
tax, for instance, is a poll tax or land tax which would compel in-
creases in output to meet the tax bill. Lump-sum taxes are extremely
inequitable, however, ignoring the capacity to pay and such welfare
principles as equimarginal sacrifice. Another interesting possibility
(which has been experimented with in some parts of Latin America)
is a tax on the productive potential ofland to deter the waste of good
land and to encourage improved methods ofcultivation. Since the tax
would have to be paid whether production took place or not, or
whatever the level of efficiency, it must pay to cultivate the land as
productively as possible. The major drawback of the tax is the
difficulty of estimating productive potential.
The alternative to taxing the land, or those who work on it, is to
tax the produce of the land With a system of marketing boards for
the distribution of agricultural produce, this type of taxation is
extremely common on goods marketed both domestically and for
export. As far as exports are concerned two main systems are nor-
mally adopted. Either the state-controlled marketing board pays
the producer a price less than the international price received, or
alternatively the government requires that all foreign exchange
receipts be surrendered, with compensation given in local currency
at a rate which overvalues the local currency. The two methods are
virtually identical in effect, differing only in administrative detail.
They both provide an easy and convenient means of taxing the
agricultural sector.
In formulating the tax system, however, the policy-maker must
bear in mind the income and substitution effects of taxation. The
production of goods for export will be curtailed if the substitution
effects of the taxes outweigh the income effects. The income effects
of taxation are to encourage production, in the same way that a poll
tax or any tax which reduces income encourages production and
effort. But the substitution effect operates to discourage production,
FINANCING DEVELOPMENT 231
or at least to switch production to the home market unless produc-
tion for the home market is taxed at the same rate.
Types of taxation, other than commodity taxation, are largely in-
appropriate for the agricultural sector in the early stages of develop-
ment. There seems no reason, however, why experiments should not
be made with a whole range of tax instruments in the industrial,
modern sector, e.g. income taxes, consumption taxes, wealth taxes,
etc., where the level ofliteracy and administrative efficiency is higher,
and where the assessment of income, expenditure and wealth is
relatively easier, given the existence of wage-payment systems and
the rudiments of a banking system. And, of course, in most less
developed countries there do exist taxes on the incomes of certain
groups: taxes on business enterprises including foreign companies,
and also a wide range of consumption taxes sometimes steeply and
increasingly progressive on luxury items.
With the desire of the rich for conspicuous consumption and the
government's desire to increase its tax revenue as a percentage of
national income, progressive consumption taxes can perform the
valuable dual role of discouraging the consumption ofluxury goods
(often with a high import content) and increasing the elasticity of
tax revenue with respect to national income. A tax on any com-
modity with an income elasticity of demand greater than unity will
ensure that tax revenue from the commodity as a percentage of
national income will rise whether the tax is progressive or not. This
is highly desirable if a government wants to undertake an increasing
proportion of total capital formation itself. Even if the imposition of
consumption taxes leads only to a small increase in real resources for
investment owing to the low propensity to consume of those who
consume the goods that are taxed, the government can at least gain
greater control over the total amount of investible resources and
perhaps divert resources into more socially useful channels than
would otherwise be the case. This must be the main justification for
mass commodity taxation in less developed countries - not so much
to raise the rate of investment in the short run as to prevent con-
sumption rising as fast as income over the long run. This is a par-
ticularly important consideration if there is migration from the rural
to the industrial sector, when consumption might be expected to rise
proportionately with increases in income. In general, direct taxes
should be levied on commodities that have at least one of the
following characteristics: a low price elasticity of demand; a high
232 GROWTH AND DEVELOPMENT
Deficit Finance
The main justification for deficit finance in less developed countries,
as in any other country, must be the existence of unemployed re-
sources due to deficient demand. If resources are unemployed or
underutilised, real output and real savings can be increased by
governments running budget deficits financed either by printing
money or issuing government bonds to the banking system and the
public. Although deficit finance is likely to be inflationary in the
short run, there is an important analytical distinction between the
means by which additional resources are made available for invest-
ment through deficit finance and the means by which savings are
generated by inflation. In the former case savings are generated from
the increase in real output; in the latter case, by a reduction in real
consumption which may result from a combination of three factors:
money illusion, the inability to maintain real expenditure, and in-
come redistribution from low savers to high savers.
In a situation of genuine 'Keynesian' unemployment, any ten-
dency towards inflation, whatever method of deficit finance is used,
should burn itself out as the supply of goods rises to meet the addi-
tional purchasing power created. Some economists have questioned,
however, whether the observed unemployment of labour in less
developed countries is strictly of the Keynesian variety, and whether
the supply of output would respond very much to increased demand.
An early exponent of this view was Professor Rao, who disputes the
secondary repercussions on output as visualised by the multiplier
process:' ... the secondary, tertiary and other increases in income,
output and employment visualised by the multiplier principle do not
follow, even though the marginal propensity to consume is very high.
This is because the consumption goods industries to which the in-
creased demand is directed are not in a position to expand output
and offer effective additional employment.'! Professor Reddaway
1 V. K. Rao, 'Investment, Income and the Multiplier in an Under-
developed Economy', in A. N. Agarwala and S. P. Singh (eds), The Economics
of Underdevelopment (Oxford University Press, 1958) p. 208, first published in
the Indian Economic Review (Feb 1952).
234 GROWTH AND DEVELOPMENT
Inflation
An increase in the volume of real saving brought about by rising
prices is often referred to as 'forced' saving. The significance of the
term 'forced' is that if consumers cannot maintain their level of real
expenditure because of rising prices, real consumption must go down
and resources are 'forcibly' released for investment purposes. In
practice, though, it may be possible for consumers to draw on savings
to maintain their real standard of living and at the same time to
bargain for higher money wages to match price increases. There
is little evidence that people in less developed countries, in their
capacity as consumers or workers, suffer from money illusion. Thus
whether rising prices can and do increase the volume of real saving
significantly, and release resources for investment, in the way
suggested by the term 'forced', is very much an open, empirical
question.
In the absence of unemployed resources and money illusion, the
only way that savings can be increased through rising prices is by re-
distributing income from groups with high propensities to consume
(low propensities to save) to groups with lower propensities to con-
sume (higher propensities to save). In short, if increases in real output
and income are impossible because the economy is operating at full
employment, and people are able to compensate fully for reductions
in living standards by drawing on voluntary savings, the importance
of inflation for capital formation rests on its ability to shift real in-
come from the poor to the rich or from wage-earners to profit-
earners. Capital formation may be at a high social cost.
We can illustrate these propositions using Maynard's! model of
the 'efficiency' of inflation- the 'efficiency' of inflation being the
amount of inflation necessary to raise saving as a proportion of
national income by a given amount. The efficiency of inflation is
.
g1ven by (e) = 3PJP where p.1s pnces,
'aSJO' . S.1s savmgs
. an d 0 1s
. mcome,
.
1962).
FINANCING DEVELOPMENT 237
propensity to consume (so that a = l - b), and b' be the marginal
propensity to consume, a formula for the rise in money national in-
come (or prices) may then be derived:
w = u + ac (8.1)
W = O(x- a) + i30x + i30b' (8.2)1
W _ O(x- a)
- I - b'- x· (8.3)
e-
_(t ~ {; ~ x) -_ I
' . (8.5)
(x- a) I - b - x
raising the rate of return on capital and reducing the real rate of
interest on borrowed money; but inflation, especially rapid and
persistent inflation, can also lead to less socially desirable types of
investment than in periods of relative price stability, or if savings are
in the hands of the government. Much depends on the degree of
inflation and whether it is expected to last. For the purposes of the
argument, socially desirable investment is defined as those types of
investment which raise productivity, increase the demand for labour
and increase the supply of goods to the community at large. Con-
tinuous inflation may instead induce investment in inventories, real
estate, foreign assets and speculative activities in general, where
capital gains and profits are high but from which the social benefits
are minimal because productivity is not increased, real wages remain
depressed, and the supply of goods to the mass of consumers is in-
creased very little, if at all. In contrast, investment in physical capital
becomes relatively unattractive under severe inflationary conditions
compared with these other outlets for saving because there is little
prospect of short-term gains and the replacement cost of plant and
equipment becomes higher and higher.
In conclusion, there is plenty of room for disagreement over
whether inflation is a help or a hindrance to development. Some
argue that it can help to raise the level of real saving and encourage
investment, while others maintain that it is liable to stimulate the
'wrong' type of investment and that inflation may become endemic
and impair development, especially through its adverse repercussions
on the balance of payments. What is badly needed is a substantial
body of empirical evidence (both cross-section and time-series) of the
relation between inflation and some of the key variables in the
development process, especially savings, as well as between inflation
and development itself. Until more positive evidence is forthcoming,
any conclusions about the role of inflation in the development pro-
cess must necessarily be tentative and speculative.!
The Causes of Inflation in Less Developed Countries
Whether or not inflation provides an additional source of real sav-
ings, it is a fact oflife in most less developed countries, especially in
Latin America. A certain amount of inflation is perhaps inevitable
in any country, if only for institutional reasons such as the existence
1 For some preliminary results, see A. P. Thirlwall and C. Barton,
'Inflation and Growth: The International Evidence', Banca Nazionale del
Lavoro Quarterly Review, (Sep 1971).
FINANCING DEVELOPMENT 241
of national or local monopolistic organisations in the factor and
product markets, but more especially in less developed countries
undergoing rapid structural change. The fact that growth tends to be
unbalanced (which is how the price mechanism works), and supply
inelastic, means that bottlenecks are bound to arise in the process of
rapid transformation, causing prices to rise in the sectors affected.
As price increases in the shortage sectors transmit themselves to other
sectors, the economy becomes caught in a price-price spiral. And the
faster the less developed country attempts to grow to achieve a target
rate of growth of per capita income, the more severe the inflation is
likely to become. Apart from the existence ofinternal bottlenecks, and
supply inelasticities, import bottlenecks are also likely to arise owing
to the incapacity to expand exports fast enough to pay for imports.
The consequence will be one of two things, both of which are in-
flationary. Either the country will be compelled to develop high-cost
import-substitute activities, or the value of its currency will be
forced down, adding a twist to the price-price spiral by raising im-
port prices. But are these factors the main initiating causes of infla-
tion in rapidly developing economies?
In Latin America, which has experienced the most serious infla-
tion in recent decades, a heated debate developed in the early post-
war years, which still smoulders today, over the primary impetus
behind rapid price increases. Participants in the debate polarised into
two schools, frequently referred to as the 'structuralists' and the
'monetarists'. Although the debate is set in the Latin American
context, it is none the less of general interest and in many ways has
been analogous to the cost-push/demand-pull debate over the causes
of inflation in developed countries. We should also add that the two
debates have been equally sterile and inconclusive.
The essence of the structuralist argument is that price stability can
only be attained through selective and managed policies for economic
growth. It is claimed that the basic forces of inflation are structural
in nature; that inflation is a supply phenomenon and, 3.l! such, can
only be remedied by monetary and fiscal means at the expense of
intolerable underutilisation of resources. Structuralists do not deny
that inflation could not persist for long without monetary expansion,
but they regard this as irrelevant because price stability could only
be achieved by monetary means at the cost of stagnation and under-
employed resources. Thus the role of financial factors in propagating
inflations is not denied; what is disputed is that inflation has its
242 GROWTH AND DEVELOPMENT
Chile. Some recent evidence for the modern sector of Chile suggests,
for example, that while wage-rate increases and prices are responsive
to variations in the pressure of demand, complete wage and price
stability would require unemployment rates of between 15 and 20
per cent. 1 This is prima facie evidence of extreme structural dis-
equilibrium in the economy, and although demand management
could be used to control inflation, the extent of unemployment im-
plied would apparently be colossal. In situations like this, what is
clearly required are policies on the supply side to bring about a
greater degree of balance between sub-markets so as to shift inwards
the 'trade-off' curve (as conventionally drawn) between inflation
and the pressure of demand for the total economy.
What, then, are we to make of these two schools of thought on
inflation in Latin America, and the relatively scanty evidence on
which to make a judgement? The best solution is undoubtedly to
play safe and steer a middle course. Indeed, it would not be difficult
to defend the view, even without much knowledge of individual
situations, that inflation has probably been a combination of both
demand and supply factors; all inflations, other than hyper-infla-
tions, usually are!
1967).
FINANCING DEVELOPMENT 247
r= c1((Sa - , Yo
s ) Yt + s + Ft)
Yt . (8.15)
r = _1 (Xt
m,c 'Yt
+ Ft)
'Yt ·
(8.27)
The export-import gap will become less and less restrictive as time
goes on, provided exports increase at a faster rate than national in-
come (i.e. if:;:> 0 or x' > xa), and/or if mt falls, which is likely as
more and more capital goods are produced domestically.
With respect to policy, the analysis highlights the importance of a
greater proportion of resources devoted to exports. The X-M gap
will only disappear, and trade-limited growth come to an end, when
exports rise to a level sufficient to meet the import requirements of
the target rate of growth set. One of the preconditions of an end to
reliance on foreign borrowing to finance development, and to pay
off past debts, is that a balance of payments deficit be turned into a
healthy continuing surplus through price and income adjustment
mechanisms internally.
The second point is that since the two gaps are not additive, the
criticisms of dual-gap analysis do not seriously affect calculations of
international assistance necessary for growth targets to be achieved,
except where the foreign exchange gap substantially exceeds the
savings gap and no allowance has been made for the possibility of
substituting domestic resources for imports. Taking the less developed
countries as a whole there is, in fact, no tendency for one gap to pre-
dominate as the major constraint; but, in any case, certain types of
foreign assistance can themselves help the substitution of domestic
resources for imports. The fact that domestic resources can be sub-
stituted for imports should not be allowed to demote the role of
imports and foreign exchange in the development process and the
possibility that imports may increase the level of domestic saving
without any specific act of thrift on the part of the country con-
cerned.
A recent study of forty developing market economies by
the United Nations Commission for Trade and Development
(UNCTAD) found no significant difference between the savings-
investment gap and the export-import gap for countries overall, and
puts the foreign exchange gap at $24,000 million in 1975 on the
assumption of 6 per cent growth.l This compares with the present
flow of assistance to less developed countries of approximately
$12,000 million, with no allowance for the outflow of interest and
profits.
TABLE 8.1
Debt Service Payments, 1961-8
($U.S. million)
TABLE 8.2
z. = _,r(....::so~_s..t..')
- (8.28)1
so- cr
where i is the critical rate of interest
r is the growth of national income
so is the initial savings ratio
s' is the marginal savings ratio
and c is the incremental capital-output ratio.
1 SeeJ. P. Hayes, 'Long Run Growth and Debt Servicing Problems', in
D. Avramovic and Associates, Economic Growth and External Debt (Baltimore:
Johns Hopkins Press, 1964).
FINANCING DEVELOPMENT 255
To give an example, if r = 4 per cent, so = 12 per cent, s' = 15
per cent and c = 4, then i = 3 per cent. If the interest charge on
foreign loans was greater than 3 per cent it would not pay to borrow.
The higher the marginal savings rate, other things remaining the
same, the higher is the critical rate of interest. The concept of the
critical rate of interest is important because if interest payments do
start to rise faster than national income, further borrowing must take
place simply to maintain the present level of saving and cannot fulfil
its true role as a supplement to domestic saving.
As far as the ratio of outflows to new investment is concerned, pay-
ments out on old loans will not exceed new investment coming in as
long as the growth rate of new investment is greater than the rate of
interest. If the interest rate does exceed the growth rate, the ratio
will rise but not indefinitely.! To illustrate, let R be the ratio of pay-
ments out to new investment coming in, let A be the annual amortisa-
tion charge, let I be the annual interest charge, and G be the annual
new investment. We then have
R =A+l
G . (8.29)
the one hand a larger rate of amortisation increases A and therefore RL; on
the other hand, it reduces the outstanding debt and hence both A and I.
256 GROWTH AND DEVELOPMENT
for donors to dispense with loans and substitute aid, in which case
the debt-servicing obligation could be dispensed with entirely in a
matter ofyears.
The debt-servicing implications of borrowing can be integrated
nicely with dual-gap analysis by means of a simple diagram showing
the time sequence of the savings-investment, or export-import, gap
against net resource flows, net borrowing and net indebtedness. An
understanding of the interrelationships can be obtained from Fig.
8.1, without a numerical example. We shall illustrate with reference
Investment (j)
Savings (S)
Net resource
flow (BR) I
Net borrowing (BB)
Net debt (80)
0
FIG. 8.1
to the S-1 gap, but the analysis is exactly analogous in the case of
the X-M gap. The savings-investment gap is given by the relation
between the curves SS and II. The net resource flow (BR) required
to bridge the savings-investment gap to maintain a target rate of
growth declines steadily, becoming a net resource outflow after OX
years. Net borrowing goes on a little longer in order to cover interest
charges on accumulated indebtedness. Net borrowing (BB) is zero
after Or years and at this point net indebtedness (BD) starts to
decline. Debt repayments, in theory, take place by converting the
excess of savings over investment into a balance of payments surplus
FINANCING DEVELOPMENT 257
until all indebtedness is repaid by the year ,Z, after whic;:h the country
becomes a net creditor.
This is a model sequence of events which has been approximated
to by many of the now developed countries. In the case of many less
developed countries today, however, there is little evidence that they
have the ability to pay off their past indebtedness and cut down on
net resource inflows. The need for resources is as acute as ever and
their indebtedness is mounting because an export-import gap has
replaced the savings-investment gap. The countries find it difficult
to translate domestic savings into activities which ease the shortage
of foreign exchange because exports are price and income inelastic
and imports are income elastic. The cry 'Trade, not aid' is a plea for
more liberal trading policies to solve at one and the same time the
foreign exchange gap and the debt-servicing problem. Unless some-
thing is done, the debt-servicing problem arising from mounting
resource flows may well become unmanageable in the not too distant
future. It will certainly be a long time before these countries become
net exporters of capital even in the absence of a savings-investment
gap. In the case of India, Little and Clifford remark that
India's foreign exchange earnings are so low as to be barely
sufficient to pay for the materials needed to keep in full operation
the already established capacity to produce plus a very small
element of consumption good imports .... Thus she could buy
virtually no foreign machinery, nor pay for foreign exports, if it
were not for aid. At the same time her own capital goods industries
are quite inadequate to make the equipment needed.l
For countries like India there can be no question of cutting down on
the annual resource inflow, provided the critical rate of interest is
not exceeded.
An ingenious proposal for mitigating the debt-servicing problem
has recently been put forward by Khatkchate.2 The proposal in
brief is that the less developed countries should be allowed to dis-
charge their repayment commitments to the creditor-developed
countries not through export surpluses with themselves, which
implies the relinquishing of valuable foreign exchange, but through
1 I. Little and J. Clifford, International Aid (London: Allen & Unwin,
1965) p. 144.
2 D. R. Khatkchate, 'Debt-Servicing as an Aid to Promotion of Trade
International Assistance
The main forms of international assistance to less developed coun-
tries consist of private foreign investment, bilateral grants, loans and
technical assistance, and multilateral assistance of various types
channelled through international institutions such as the United
Nations, and the World Bank plus its two affiliates, the International
Development Association (I.D.A.) and the International Finance
Corporation (I.F.C.).
Before going on to consider the magnitude of different types of
assistance, and the criteria by which it is allocated, a clear distinction
needs to be made between the nominal and real value of assistance
from the donor's point of view, and between assistance and aid from
the recipient's point of view. Unconditional grants, where the
nominal cost equals the real cost, are the purest form of aid, but only
a very small percentage of total resource flows consists of assistance
of this type. The major part of international assistance consists of
loan facilities with a small subsidy element, and what is required is
a standard means of converting loan figures into a figure for aid and
to distinguish the nominal cost of assistance from the real cost.
Pincusl suggests expressing the value of aid as the combined nominal
(or market) value of all forms of assistance less the present value of
loan repayments discounted at a rate of interest reflecting the
1 J. A. Pincus, 'The Cost of Foreign Aid', Review of Economics and Statistics
(Nov 1963).
260 GROWTH AND DEVELOPMENT
Total 1,527
Source: Pearson Report, p. 390.
1 The figures for 1969 show an increase of nearly 100 per cent, and there
is every hope that the contribution of the World Bank will increase further
in the coming years.
FINANCING DEVELOPMENT 263
Total 5,876
Source: \Vorld Bank, Annual Report, p. 47.
The total for 1968 compares with figures for previous years of:
$m.
1961 3,097
1962 2,497
1963 2,512
1964 3,192
1965 4,172
1966 3,849
1967 4,182
It can be seen that there is some tendency for this type of assistance
to fluctuate from year to year. This is mainly due to the 'lumpiness'
of certain types of investment, especially in oil. Much of the recorded
increase between 1963 and 1965 is attributable to a sharp expansion
of United States direct investment in the oil sheikhdoms of the
Middle East.
FINANCING DEVELOPMENT 265
Of the total flow of private investment to less developed countries
in 1968, over one-third came from the United States. The other
major sources were Germany, France, Japan and the United King-
dom. As to the type of investment, nearly $3,000 million was direct
investment including reinvested earnings, nearly $1,000 million was
bilateral portfolio investment, and the remainder export credits.
Private foreign investment in less developed countries represents,
of course, only a small proportion of private foreign investment in the
world as a whole. The major part of overseas investment takes place
within the developed world itself. Canada and Europe, for example,
absorb between 50 and 60 per cent of American private overseas
investment, and private overseas investment from Britain to less
developed countries is less than 50 per cent of the total. With the
increased political instability in less developed countries in the early
1960s, from coups d'etat to civil strife, private foreign investment as a
source of capital formation in less developed countries declined in
relative importance compared with official assistance. The level of
private investment picked up again in the latter half of the 1960s, but
the threat of political turmoil in less developed countries still remains
the most formidable barrier to an increased flow of private capital
which, economically speaking, the less developed countries can ill
afford to forgo.
Technical Assistance
In the case of most developing countries, with a limited capacity
to absorb financial assistance because of other constraints, the real
need is to combine assistance with advice, expertise and technology
to help remove the constraints at the same time that the assistance is
given. In this way financial assistance can be fully exploited. Of
course, advice, expertise and technology are themselves forms of
assistance, and they are playing an increasingly important part in
multilateral and bilateral aid programmes. In 1968, total technical
assistance amounted to $1,481 million, or 21 per cent of official
development assistance, compared to 13 per cent in 1962. The
World Bank links the distribution of assistance with forms of techni-
cal advice, including the efforts of countries to curb their population
growth so that the benefits of assistance are not eroded by there
being more people to support. The World Bank, and individual
donor countries as well, also have a preference for supporting projects
as part of a development programme rather than distributing assist-
ance for unspecified purposes. Technical assistance can be more
easily lent for specific projects, and the benefits and return from the
assistance can be more clearly discerned. From both the donor's and
the recipient's point of view, project assistance has certain advan-
tages, I although the disbursement of assistance tends to be a more
lengthy process than in the case of non-project assistance.
Tied Assistance
Another characteristic of international assistance is that a great
deal of it is tied to the purchase of donors' goods (single tying) or
specific donors' commodities (double tying). Thus, even the aid
element of international assistance may not be without some costs to
the recipient country which reduce the value of aid. In the case of
assistance on commercial terms, these costs of tying are in addition
1 A. Carlin, 'Project v. Programme Aid', Economic Journal (Mar 1967).
270 GROWTH AND DEVELOPMENT
TABLE 8.3
ratios for less developed countries together still fall some way behind
the levels for industrialised countries, although the degree of diver-
gence varies considerably from country to country.
While higher savings rates are required to achieve' tolerable' rates
of growth of per capita incomes, recent experience suggests that such
an increase can only be effective if it is complemented by an adequate
supply of external purchasing power. If export structures cannot
guarantee this, there will be a continual dependence on foreign
borrowing, and the debt-servicing burdens that this implies.
Experience also suggests that the effectiveness of savings mobilisa-
tion depends on three main factors: (a) fiscal management; (b) the
growth of the business sector; and (c) the elaboration of mechanisms
enabling individuals to contribute to the functioning of a capital
market. We discussed earlier the role of the budget and taxation in
the financing of development, but the United Nations points to the
fact that a number of governments have been net dissavers in the
1960s. Moreover, attempts to widen the tax base have met with
resistance. Taxation through marketing boards has affected incen-
tives, and public enterprises' attempts to transfer resources from
consumption to investment have in fact supported consumption by
running at a loss. The experience of fiscal policy has not been
uniformly successful.
On the monetary front, the primary need is for institutions to
channel savings from the small saver to the potential entrepreneur.
Where institutions have developed, there seems to have been a
positive response among small savers to changes in interest rates.
The view of the United Nations on inflation, however, is that it has
been inimical to savings. The capital market is still rudimentary in
most less developed countries. Banks give mainly short-term credit,
and many of the newer institutions to finance activities in specific
sectors seem to be more concerned with lending money provided by
the government than with attracting savings. Experience points to
the need for at least one investment or lending agency from which
small and medium-sized enterprises can seek finance. The establish-
ment of such institutions would seem to be an essential step in the
evolution of local capital markets and could play a key role in
implementing development plans.
9
Trade and Development
In the previous chapter we attempted to establish the role of foreign
borrowing in the development process. Using dual-gap analysis, it
was shown that foreign borrowing can be used to bridge either a
domestic savings-investment gap or a foreign exchange gap, which-
ever is the larger. We saw that the policy issue is the decision on how
far foreign borrowing should go. How large can the import surplus be
without leading to severe future balance of payments difficulties in
the form of large outflows of debt repayments, and without generat-
ing inflation due to currency depreciation and the necessity to
develop high-cost import-substitute activities? The empirical evi-
dence is overwhelming that the conflict is very real between main-
taining an adequate growth rate and preserving a reasonable balance
on international payments. The ultimate solution must lie in improv-
ing the balance of payments through trade. The growth rates of
individual developing countries since 1950 correlate better with their
export performance than with almost any other single economic
indicator. The export performance of the less developed countries,
however, has continued to lag behind that of developed, industrial-
ised countries. Throughout the 1950s and 1960s the volume of
exports from less developed countries grew at a rate ofapproximately
5 per cent per annum compared with 8 per cent for developed
countries. The discrepancy in rates of growth was even wider in
value terms, causing the developing countries' share of the total
value of world trade to fall from 28 per cent in 1950 to 18 per cent
in 1968.
Although the export trade ofless developed countries is dominated
by primary products, the conception must be dispelled that the
world is neatly polarised into two camps: the underdeveloped world
producing and exporting solely primary products in exchange for
manufactures from developed countries, and the developed world
278 GROWTH AND DEVELOPMENT
X
lj \
\
\
\
\
Q \
\
\
\
"'
country of free trade for protection would move the terms of trade
against the country. But most 'free-traders' ignored the subject. In
general, the implicit assumption was that movement from protection
to free trade would not alter the commodity terms of trade, or if it
did that the gains from trade would more than offset any unfavour-
able terms of trade effect. If the terms of trade effect does offset the
gains from trade, this would appear to provide a valid argument for
protection. This is one of the lines that modern protectionists take.
The case for protection of manufactured goods produced by less
developed countries is greater: the less the demand for existing
primary products is expected to grow and the lower the price elas-
ticity, the higher the internal elasticity of demand for manufactured
products from the outside world, and the less the likelihood of
retaliation by other countries.
A second factor which the free-trade doctrine tends to overlook is
that some activities are subject to increasing returns while others are
subject to diminishing returns. The commodities most susceptible
to diminishing returns are primary products, where the scope for
technical progress is also probably less than in the case of manu-
factured goods. This being so, one might expect a rise in the ratio of
primary to manufactured good prices, and diminishing returns
would not matter so much if the goods were price inelastic. In
practice, however, there has been a substitution of synthetic sub-
stitutes for primary products, and the terms of trade have deteriorated
partly because of substitution and partly because of the fact that
demand for primary commodities in general, in relation to supply,
has expanded much less than in the case of manufactured com-
modities. But whatever the movement in the terms of trade, it is
somehow perverse to recommend a trade and development policy
based on activities subject to diminishing returns, in the light of the
theory of cumulative causation that we discussed in Chapter 5.
A third disadvantage of adherence to the comparative advantage
doctrine is that it could lead to excessive specialisation on a narrow
range of products, putting the economy at the mercy of outside
influences. The possibility of severe balance of payments instability
resulting from specialisation may be damaging to development.
Fourthly, comparative cost analysis glosses over the fact that
comparative advantage may change over time, or that it could be
changed by deliberate policies for the protection of certain activities.
There is no reason why countries should be condemned to the pro-
TRADE AND DEVELOPMENT 287
duction and export of the same commodities for ever. If comparative
advantage is not given by nature, as the doctrine of free trade
seems to suggest, but can be altered, the case for protection is
strengthened.
It should also be remembered that the concept of comparative
advantage is based on calculations of private cost. But we have seen
that in less developed countries social costs may diverge markedly
from private costs, and that social benefit may exceed the private
benefit because of externalities. If private costs exceed social costs in
industry (because wage rates are artificially high, for example), and
social benefits from industrial projects exceed private benefits, there
is a strong argument for protecting industry in order to encourage
the transfer oflabour from agriculture into industry to equate private
and social cost and private and social benefit.
Lastly, it may be mentioned that the export growth of some
activities has relatively little seconda'ry impact on other activities.
Primary commodities fall into this category. The evidence is abund-
ant that the export growth of primary commodities has not had the
development impact that might be expected from the expansion of
industrial exports. The reasons are not hard to seek. Primary produc-
tion has very few backward or forward linkages; it is labour-intensive
and, historically, has tended to be undertaken by colonial powers
with a consequent outflow of profits. The secondary repercussions of
trade also tend to be overlooked by the free-trade doctrine.
1 The Economic Development of Latin America and its Principal Problems (New
Primary product
prices ( P. P.)
Time
Fw. 9.2
Furthermore, according to Prebisch, not only do the terms of trade
deteriorate, but if prices must be reduced to clear the market, export
earnings will fall if the demand for primary commodities is price
inelastic. This is a related sense in which technical progress is
'transferred' from the less developed countries to the industrial
'centres'.
Trade Policies
Prebisch and Linder both provide powerful critiques of neo-classical
trade theory, but attack from different angles. While Linder argues
the case for protection for the full utilisation of domestic resources,
Prebisch argues the case for protection on the more 'orthodox'
grounds of improving the terms of trade, and as a substitute for
exchange depreciation to preserve simultaneous internal and
external equilibrium. Moreover, while Linder argues explicitly for
import substitution because of the existence of an export maximum,
Prebisch seems to be more optimistic about· growth through trade
and against 'inward-looking' development policies. New export
activities may, of course, require protection or subsidisation in the
early stages of their establish~ent, but there is a distinct difference
between identifying lines of activity in which to promote exports and
identifying lines of activity in which to develop import substitutes,
and we must briefly examine these different strategies. In the former
case, one is seeking out lines of comparative advantage; in the latter
case, one is attempting to reverse the pattern of trade by altering
comparative advantage.
If we accept the possibility of an export-import gap, because of
a lack of substitutability in the short run between imports and
domestic resources, Linder's argument for import substitution
basically reduces to pessimism over the chances of promoting exports
as an alternative means of fully utilising domestic resources. He
admits that import-substitute activities will themselves require
296 GROWTH AND DEVELOPMENT
P _ V'x- Vv
x- Vx
where V' x is domestic value-added under protection and Vx is
value-added under free market conditions. Domestic value-added is
equal to the sales of the industry's product minus the sum of inter-
mediate inputs valued at domestic market prices. The free market
value-added can be defined identically, but with final product and
input prices valued at world prices. The less the degree of protection
of inputs, the higher the domestic value-added (V'x) and the higher
the effective rate of protection. In short, tariffs, like taxes, lower
domestic value-added. At the other extreme, if a country taxes
raw material imports but imposes no tariff to protect finished
products, the effective rate of protection is negative because the
domestic value-added will be less than the free market value-
added.
Let us now give a practical example. Suppose Indian textiles have
a world price of $5, of which $3 represents raw material costs and
$2 represents value-added. Now let us suppose that imports of
TRADE AND DEVELOPMENT 299
Indian textiles into a developed country are subject to a tariff of 20
per cent while domestic producers must pay a tariff of I 0 per cent on
textile raw materials. To remain competitive, the domestic producer
must produce the commodity for not more than $6. The value-
added can be $6 minus the cost of raw materials plus the tariff on
raw materials, i.e. $6- $3 - $0.30 = $2.70. The effective rate of
protection is the difference between the domestic value~added and
value-added in the less developed country expressed as a percentage
ofvalue-added in the less developed country, i.e. $ 2 · 7 ~;- $2 = 35
per cent. This is the effective rate of protection equal to the differ-
ence between the gross subsidy on value-added provided by the
tariff on the final product (;~ = 50 per cent) and the implicit
Restriction Schemes
As opposed to buffer stock schemes, which are concerned with
stabilising prices, restriction schemes are more concerned with
maintaining the purchasing power of commodity prices in relation to
industrial goods; that is, in preventing a deterioration in the terms
of trade of primary commodities. The essence of a restriction scheme
is that major producers or nations (on behalf of producers) get
together and agree to restrict the production and export of a good
whose price is falling, thus maintaining or increasing (if demand is
inelastic) revenue from a smaller volume of output. In practice, it is
very difficult to maintain and supervise a scheme of this nature,
TRADE AND DEVELOPMENT 303
largely because it becomes extremely attractive for any one producer
or nation to break away from, or refuse to join, the scheme. This is
something Prebisch overlooks in his recommendation for monopoly
exporting pricing. It is very convenient to conduct theoretical
analysis in terms of two countries and two commodities, but when
it comes to practical policies the reality of the existence of many
countries must be contended with. The disadvantages of restriction
schemes are firstly that it is by no means certain that demand is not
elastic in the long run, so that raising price by restricting supply may
reduce export earnings in the long run. Restriction schemes may
ultimately lead to substitution for the product, and falling sales.
Secondly, restriction schemes can lead to substantial resource alloca-
tion inefficiencies stemming from the arbitrary allocation of export
quotas between countries, and production quotas between producers
within countries, unless the quotas are revised regularly to take
account of changes in the efficiency of production between producers
and between regions of the world. There is also a danger with any
form of price support scheme of a multilateral nature, where both
developed and less developed countries produce the good in question,
that 'assistance' does not all go where it is most needed. In this event
there is a greater case for bilateral arrangements over commodities
between developed and less developed countries, rather than schemes
which embrace developed countries which subsequently reap the
benefit.
c ' ,cl
-------,--
p2
' \XI
Dl
0 sl s2
Quantity supplied and demanded
FIG. 9.3
Chapter 1
S. ANDIC and A. PEACOCK, 'The International Distribution of Income,
1949 and 1957', Journal of the Royal Statistical Society, part 2 (1961).
P. BAUER and B. YAMEY, 'Economic Progress and Occupational Distribu-
bution ', Economic Journal (Dec 1951).
W. BECKERMAN and R. BAcON, 'International Comparisons of Income
Levels: A Suggested New Measure', Economic Journal (Sep 1966).
A. K. CAIRNCRoss, 'Essays in Bibliography and Criticism, XLV: The
Stages of Economic Growth', Economic History Review (Apr 1961).
H. CHENERY, 'Patterns of Industrial Growth', American Economic Review
(Sep 1960).
--and L. TAYLOR, 'Development Patterns: Among Countries and Over
Time', Review of Economics and Statistics (Nov 1968).
C. CLARK, The Conditions of Economic Progress (London: Macmillan, 1940).
E. DOMAR, 'Expansion and Employment', American Economic Review,
(Mar 1947).
A. G. B. FISHER, 'Capital and the Growth of Knowledge', Economic
Journal (Sep 1933).
- - , 'Production: Primary, Secondary and Tertiary', Economic Record
(June 1939).
C. FuRTADO, Development and Underdevelopment (Berkeley: University of
California Press, 1964).
E. HAGEN, 'Some Facts about Income Levels and Economic Growth',
Review of Economics and Statistics (Feb 1960).
R. HARROD, 'An Essay in Dynamic Theory', Economic Journal (Mar 1939).
- - , Towards a Dynamic Economics (London: Macmillan, 1948).
J. HICKS, 'Growth and Anti-Growth', Oxford Economic Papers (Nov 1966).
M. A. KATOUZIAN, 'The Development of the Service Sector: A New
Approach', Oxford Economic Papers (Nov 1970).
S. KuzNETS, 'Notes on the Take-off', in W. W. Rostow (ed.), The Economics
of Take-off into Sustained Growth (London: Macmillan, 1963).
--,Economic Growth and Structure (London: Heinemann, 1965).
- - , 'International Differences in Income Levels', in B. Okun and R.
Richardson (eds), Studies in Economic Development (New York: Holt, Rine-
hart & Winston, 1961).
308 REFERENCES AND FURTHER READING
Chapter 2
M. ABRAMOVITZ, 'Resource and Output Trends in the United States
since 1870', American Economic Review, Papers and Proceedings (May 1956).
M. BROWN, On the Theory and Measurement of Technical Change (Cambridge
University Press, 1966).
--and J. DE CANI, 'Technological Change in the U.S., 1950-1960',
Productivity Measurement Review (May 1962).
C. CoBB and P. DoUGLAs, 'A Theory of Production', American Economic
Review, supplement (Mar 1928).
E. DENISON, The Sources of Economic Growth in the U.S. and the Alternatives
bifore Us (New York: Committee for Economic Development, Library of
Congress, 1962).
- - , 'The Unimportance of the Embodied Question', American Economic
Review (Mar 1964).
- - , Why Growth Rates Differ: Postwar Experience in Nine Western Countries
(Washington: Brookings Institution, 1967).
P. DouGLAS, 'Are There Laws of Production?', American Economic Review
(Mar 1948).
A. GAATHON, Capital Stock, Employment and Output in Israel, 1950-1959
(Jerusalem: Bank oflsrael, 1961).
J. HicKs, Capital and Growth (Oxford University Press, 1965).
C. KENNEDY and A. P. THIRLWALL, 'Surveys in Applied Economics:
Technical Progress', Economic Journal (Mar 1972).
A. MADDISON, Economic Progress and Policy in Developing Countries (London:
Allen & Unwin, 1970).
B. MASSELL, 'A Disaggregated View of Technical Change', Journal oj
Political Economy (Dec 1961).
REFERENCES AND FURTHER READING 309
R. NELSON, 'Aggregate Production Functions and Medium Range Growth
Projections', American Economic Review (Sep 1964).
R. SoLow, 'Technical Change and the Aggregate Production Function',
Review of Economics and Statistics (Aug 1957).
- - , 'Investment and Technical Progress', inK. Arrow, S. Karlin and
P. Suppes (eds), Mathematical Methods in the Social Sciences (Stanford
University Press, 1960).
- - , 'Technical Progress, Capital Formation and Economic Growth',
American Economic Review, Papers and Proceedings (May 1962).
A. P. THIRLWALL, 'Denison on "Why Growth Rates Differ"', Moneta e
Credito (Banca Nazionale del Lavoro, July 1969).
J. G. WILLIAMSON, 'Production Functions, Technological Change and the
Developing Economies: A Review Article', Malayan Economic Review
(Oct 1968).
Chapter 3
T. BALOGH, 'Agriculture and Economic Development', Oxford Economic
Papers (Feb 1961).
R. A. BERRY and R. SoLioo, 'Rural-Urban Migration, Agricultural
Output and the Supply Price of Labour in a Labour-Surplus Economy',
Oxford Economic Papers (July 1968).
S. ENKE, 'Economic Development with Unlimited and Limited Supplies of
Labour', Oxford Economic Papers (June 1962).
J. HARRIS and M. ToDARO, 'Migration, Unemployment and Develop-
ment: A Two-Sector Analysis', American Economic Review (Mar 1970).
B. joHNSTON and J. MELLOR, 'The Role of Agriculture in Economic
Development', American Economic Review (Sep 1961).
B. F. JOHNSTON, 'Agriculture and Structural Transformation in Develop-
ing Countries: A Survey of Research', Journal of Economic Literature (June
1970).
D. JORGENSON, 'Testing Alternative Theories of the Development of a
Dual Economy', in I. Adelman and E. Thorbecke (eds), The Theory and
Design of Economic Development (Baltimore: Johns Hopkins Press, 1966).
H. LEIBENSTEIN, Economic Backwardness and Economic Growth (New York!
Wiley, 1957).
A. LEWIS, 'Economic Development with Unlimited Supplies of Labour',
Manchester School (May 1954).
- - , 'Unlimited Supplies of Labour: Further Notes', Manchester School
(Jan 1958).
W. E. MooRE, 'Labour Attitudes towards Industrialisation in Under-
developed Countries', American Economic Review, Papers and Proceedings
(May 1955).
M. PAGLIN, '"Surplus" Agricultural Labour and Development', American
Economic Review (Sep 1965).
G. RANIS and J. FEI, 'A Theory of Economic Development', American
Economic Review (Sep 1961).
310 REFERENCES AND FURTHER READING
W. RoBINSON, 'Types of Disguised Rural Unemployment and Some
Policy Implications', Oxford Economic Papers (Nov 1969).
T. ScHULTz, Transforming Traditional Agriculture (New Haven: Yale
University Press, 1964).
--,Economic Growth and Agriculture (New York: McGraw-Hill, 1968).
A. S.HONFIELD, Attack on World Poverty (New York: Random House, 1960).
H. SouTHWORTH and B. joHNSTON (eds), Agricultural Development and
Economic Growth (Ithaca, N.Y.: Cornell University Press, 1967).
M. ToDARO, 'A Model of Labour Migration and Urban Unemployment in
Less Developed Countries', American Economic Review (Mar 1969).
J. UPPAL, 'WorkHabitsandDisguised Unemployment in Underdeveloped
Countries: A Theoretical Analysis', Oxford Economic Papers (Nov 1969).
Chapter 4
K. ARROW, 'The Economic Implications of Learning by Doing', Review of
Economic Studies (June 1962).
T. BALOGH and P. STREETEN, 'The Coefficient of Ignorance', Bulletin of
the Oxford Institute of Statistics (May 1963).
G. BECKER, Human Capital (New York: Columbia University Press, 1964).
M. BLAUG, 'The Rate of Return on Investment in Education in Great
Britain', Manchester School (Sep 1965).
M. BowMAN, 'Schultz, Denison and the Contribution of Education to
National Income Growth', Journal of Political Economy (Oct 1964).
F. HARBISON and C. MYERS, Education, Manpower and Economic Growth
(New York: McGraw-Hill, 1964).
R. HARROD, Towards a Dynamic Economics (London: Macmillan, 1948).
J. HicKs, The Theory of Wages (London: Macmillan, 1932).
H. G. JOHNSON, 'Comparative Cost and Commercial Policy Theory for a
Developing World Economy', Pakistan Development Review, supplement
(spring 1969).
H. LEIBENSTEIN, 'Incremental Capital-Output Ratios and Growth Rates
in the Short-Run', Review of Economics and Statistics (Feb 1966).
A. LEwis, The Theory of Economic Growth (London: Allen & Unwin, 1955).
--,Development Planning (London: Allen & Unwin, 1966).
W. MILLER, 'Education as a Source of Economic Growth', Journal of
Economic Issues (Dec 1967).
W. REDDAWAY, The Development of the Indian Economy (London: Allen &
Unwin, 1962).
W. W. RosTow, The Stages ofEconomic Growth (Cambridge University Press,
1960).
T. ScHULTz, 'Investment in Human Capital', American Economic Review
(Mar 1961).
J. ScHUMPETER, The Theory of Economic Development (Cambridge, Mass.:
Harvard University Press, 1934).
--,Capitalism, Socialism and Democracy (London: Allen & Unwin, 1943).
J. VANEK and A. STUDENMUND, 'Towards a Better Understanding of the
REFERENCES AND FURTHER READING 311
Incremental Capital-Output Ratio', Q.uarterry Journal of Economics (Aug
1968).
Chapter 5
C. CLARK, 'The "Population Explosion" Myth', Bulletin of the Institute of
Development Studies (University of Sussex, May 1969).
M. DIAMOND, 'Trends in the Flow oflnternational Private Capital, 1957-
1965', I.M.F. Staff Papers (Mar 1967).
S. ENKE, 'The Economic Aspects of Slowing Population Growth', Economic
Journal (Mar 1966).
E. HAGEN, 'Population and Economic Growth', American Economic Review
(June 1959).
B. HIGGINS, 'The "Dualistic Theory" ofUnderdeveloped Areas', Economic
Development and Cultural Change (Jan 1956).
A. HIRSCHMAN, Strategy Q/ Economic Development (New Haven: Yale
University Press, 1958).
N. KALDOR, 'The Case for Regional Policies', Scottish Journal of Political
Economy (Nov 1970).
H. LEIBENSTEIN, Economic Backwardness and Economic Growth (New York:
Wiley, 1957).
J. MEADE, 'Population Explosion, Standard of Living and Social Conflict',
Economic Journal (june 1967).
G. MYRDAL, Economic Theory and Underdeveloped Regions (London: Duck-
worth, 1957; paperback ed., Methuen, 1963).
R. NELSON, 'A Theory of the Low Level Equilibrium Trap in Under-
developed Economies', American Economic Review (Dec 1956).
G. OHLIN, Population Control and Economic Development (Paris: O.E.C.D.,
1967).
J. G. WILLIAMSON, 'Regional Inequality and the Process of National
Development: A Description of Patterns', Economic Development and
Cultural Change (July 1965).
Chapter 6
V. V. BHATT, 'Theories ofBalanced and Unbalanced Growth: A Critical
Appraisal', Kyklos ( 1964).
R. EcKAus, 'The Factor Proportions Problem in Underdeve1opedAreas',
American Economic Review (Sep 1955).
0. EcKSTEIN, 'Investment Criteria for Economic Development and the
Theory of Intertemporal Welfare Economics', Q.uarterry Journal ofEconomics
(Feb 1957).
M. FLEMING, 'External Economies and the Doctrine ofBalanced Growth',
Economic Journal (june 1955).
W. GALENSON and H. LEIBENSTEIN, 'Investment Criteria, Productivity
and Economic Development', Q.uarterry Journal of Economics (Aug 1955).
A. HIRSCHMAN, Strategy Q/ Economic Development (New Haven: Yale
University Press, 1958).
312 REFERENCES AND FURTHER READING
A. KAHN, 'Investment Criteria in Development Programmes', Quarterly
Journal of Economics (Feb 1951).
T. KING, 'Development Strategy and Investment Criteria: Complementary
or Competitive? ', Quarterly Journal of Economics (Feb 1966).
A. LEWIS, The Theory of Economic Growth (London: Allen & Unwin, 1955).
M. LIPTON, 'Balanced and Unbalanced Growth in Underdeveloped
Countries', Economic Journal (Sep 1962).
A. MATHUR, 'Balanced v. Unbalanced Growth: A Reconciliatory View',
Oxford Economic Papers (July 1966).
S. K. NATH, 'The Theory of Balanced Growth', Oxford Economic Papers
(July 1962).
R. NuRKSE, Problems of Capital Formation in Underdeveloped Countries
(Oxford University Press, 1953).
P. RosENSTEIN-RODAN, 'Problems oflndustrialisation ofEast and South-
East Europe', Economic Journal (June-Sep 1943).
T. SciTOVSKY, 'Two Concepts of External Economies', Journal of Political
Economy (Apr 1954).
A. K. SEN,' Some Notes on the Choice of Capital Intensity in Development
Planning', Quarterly Journal of Economics (Nov 1957).
- - , Choice of Techniques, 3rd ed. (Oxford: Basil Blackwell, 1968).
P. STREETEN, 'Unbalanced Growth', Oxford Economic Papers (June 1959).
R. SuTCLIFFE, 'Balanced and Unbalanced Growth', Quarterly Journal of
Economics (Nov 1964).
Chapter 7
K. GRIFFIN andJ. ENos, Planning Development (Reading, Mass.: Addis on-
Wesley, 1970).
E. HAGEN, Planning Economic Development (Homewood, Ill.: Irwin, 1963).
W. LEWIS, Development Planning (London: Allen & Unwin, 1966).
R. MEIER, Developmental Planning (New York: McGraw-Hill, 1965).
UNITED NATIONS, Programming Techniques for Economic Development (New
York, 1960).
--,Formulating Industrial Development Programmes (New York, 1961).
A. WATERsoN, Development Planning: Lessons ofExperience (Oxford University
Press, 1966).
Appendix 7.1
T. BARNA (ed.), Structural Interdependence and Economic Development (New
York: StMartin's Press, 1963).
H. B. CHENERY and P. G. CLARK, Interindustry Economics (New York:
Wiley, 1959),
W. LEONTIEF et al., Studies in the Structure of the American Economy (Oxford
University Press, 1953).
A. LEWIS, Development Planning (London: Allen & Unwin, 1966).
W. MIERNYK, The Elements of Input-Output Analysis (New York: Random
House, 1965).
REFERENCES AND FURTHER READING 313
G. MILLS, Introduction to Linear Algebra (London: Allen & Unwin, 1969).
A. PEACOCK and D. DossER, 'Input-Output Analysis in an Under-
developed Country: A Case Study', Review of Economic Studies (Oct 1957).
M. PES TON, Elementary Matricesfor Economics (London: Routledge & Kegan
Paul, 1969).
D. SEERS, 'The Use of a Modified Input-Output System for an Economic
Program in Zambia', in I. Adelman and E. Thorbecke (eds), The Theory
and Design of Economic Development (Baltimore: Johns Hopkins Press, 1966).
Appendix 7.2
I. ADELMAN and E. THORBECKE (eds), The Theory and Design of Economic
Development (Baltimore: Johns Hopkins Press, 1966).
W. ]. BAUMOL, Economic Theory and Operations Anafysis (Englewood Cliffs,
N.J.: Prentice-Hall, 1961).
H. CHENERY, 'Comparative Advantage and Development Policy',
American Economic Review (Mar 1961).
A. LEWIS, Development Planning (London: Allen & Unwin, 1966).
P. N. RosENSTEIN-RODAN (ed.), Capital Formation and Economic Develop-
ment (London: Allen & Unwin, 1964).
]. TINBERGEN, The Design of Development (Baltimore:Johns Hopkins Press,
1958).
Appendix 7.3
H. BRuTON, 'The Two Gap Approach to Aid and Development: Com-
ment', American Economic Review (June 1969).
C. KENNEDY, 'Restraints and the Allocation of Resources', Oxford
Economic Papers (July 1968).
L. LEFEBER, 'Planning in a Surplus Labour Economy', American Economic
Review (] une 1968).
I. M. D. LITTLE, 'The Real Cost of Labour and the Choice between
Consumption and Investment', Quarterfy Journal of Economics (Feb 1961).
- - and J. MIRRLEES, Manual of Industrial Project Anafysis in Developing
Countries, vol. n: Social Cost-Benefit Anafysis (Paris: O.E.C.D., 1969).
G. MEIER, 'Development without Employment', Banca Nazionale del
Lavoro Quarterfy Review (Sep 1969).
A. K. SEN, Choice of Techniques, 1st ed. (Oxford: Basil Blackwell, 1960).
A. P. THIRLWALL, 'An Extension of Sen's Model of the Valuation of
Labour in Surplus Labour Economies', Pakistan Development Review
(autumn 1970).
--,'The Valuation of Labour in Surplus Labour Economies: A Synoptic
View', Scottish Journal of Political Economy (Nov 1971).
Chapter 8
W. BAER, 'Inflation and Economic Growth', Economic Development and
Cultural Change (Oct 1962).
314 REFERENCES AND FURTHER READING
Chapter 9
J. BHAGWATI, 'Immiserising Growth: A Geometrical Note', Review of
Economic Studies (June 1958).
- - , 'The Theory of Comparative Advantage in the Context of Under-
development and Growth', Pakistan Development Review (autumn 1962).
C. CLARK, 'Too Much Food?', Lloyds Bank Review (Jan 1970).
M. J. FLANDERs, 'Prebisch on Protectionism: An Evaluation', Economic
Journal (June 1964).
R. GEMMILL, 'Prebisch on Commercial Policy for Less-Developed Coun-
tries', Review of Economics and Statistics (May 1962).
316 REFERENCES AND FURTHER READING
J. HicKs, Essays in World Economics (Oxford: Clarendon Press, 1959).
A. HIRSCHMAN, 'The Political Economyoflmport Substituting Industriali-
sation in Latin America', Quarterry Journal of Economics (Feb 1968).
H. JoHNSON, Economic Policies towards Less Developed Countries (London:
Allen & Unwin, 1967).
S. LINDER, Trade and Trade Policy for Development (New York: Praeger,
1967).
A. MACBEAN, Export Instability and Economic Development (London: Allen &
Unwin, 1966).
J. MEADE, 'International Commodity Agreements', Lloyds Bank Review
(July 1964).
G. MEIER, International Trade and Development (New York: Harper & Row,
1963).
H. MYINT, 'The "Classical" Theory of International Trade and Under-
developed Countries', Economic Journal (June 1958).
G. PATTERSON, 'Would Tariff Preference Help Economic Development?',
Lloyds Bank Review (Apr 1965).
R. PREBISCH, The Economic Development of Latin America and its Principal
Problems (New York: Economic Commission for Latin America, U.N.
Dept of Economic Affairs, 1950).
- - , 'Commercial Policy in the Underdeveloped Countries', American
Economic Review, Papers and Proceedings (May 1959).
T. SciTOVSKY, 'A Reconsideration of the Theory of Tariffs', Review of
Economic Studies (summer 1942).
J. VINER, International Trade and Economic Development (Oxford: Clarendon
Press, 1953).
T. WILSON, R. P. SINHA and J. R. CASTREE, 'The Income Terms of
Trade of Developed and Developing Countries', Economic Journal (Dec
1969).
Deficit finance, 225, 233-5 Europe, 133, 146, 265; growth rate, 71
Deflation, 164 European Economic Community, 11
Denison, E., 54, 57, 58, 60, 114; Why Exchange rates, 16, 26, 27. See also
Growth Rates Differ, 61-71 Foreign exchange
Development, 1-3 7; agriculture in, Export-import gap, 224, 245, 248-52,
73-6; and growth, 22-3; index of, 256, 257, 268, 294
per capita income as, 19-24; neo- Exports and imports, 76-9, 126, 163,
classical models of, 86; programming 164, 242, 245, 250, 277, 287, 290-6,
approach to, 201-11; role of capital 298, 300, 301, 303, 304
in, 97-100; simulation of, 189; stages
of, 27-31 Farmers, tenant, 75
Development Decade, 5, 11, 274 Finance, 224-76; deficit, 225, 233-5
Development economics, current Fiscal policy, 228
interest in, 1-5 Fisher-Clark prediction, 29, 30
Development gap, 9-19, 117, 127,291; Flanders, M. J., 288
assessment of, 10 Food production, 76, 133
Development plans, 183 Food supplies, 128
Development strategy, 201; choice of, Forecasting, 189; models, 188. See also
149; self-help, 267 Input-output analysis
Diminishing returns, 2, 286 Foreign aid. See Aid
Directly productive activities, 159-62 Foreign assistance. See Assistance
Disguised unemployment, 87-94 Foreign exchange and foreign exchange
Division of labour, 111-12 gap,220-3,245-6,248-52,267,279,
Domar, E., 4, 102 280, 300
Domestic value-added, 298 Foreign exchange rates, 16
Douglas, P., 43, 48 France, 265
Dual, 207-11 Free trade, 285-7, 294
Dual-gap analysis, 244-6, 252, 256, Furtado, C., 20
293
Dualism, 77, 118-20; geographic, 121 ; Gaathon, A., 58
social, 118-19; technological, 119 Galenson, W., 172, 174
Duality of price determination and Galenson-Leibenstein investment cri-
allocation, 203 terion, 172
General Agreement on Tariffs and
Earnings, fluctuations in, 301 Trade (GATT), 297
Eastern European Industrial Trust, Germany, 35, 265
157 Ghana, 17
Economic development, path of, 154; Great Britain. See United Kingdom
with unlimited supplies of labour, 'Green revolution', 75
80-7 Gross domestic product, II
Economic divisions, 5 Growth, analysis of, 38; production
Economies of scale, 68, 156. See also function approach to, 98, 129;
Increasing returns balanced, 154-8, 165, 166; balanced
Economy, models of, 184 versus unbalanced, 153; capital con-
Ecuador, 243 tribution to, 58; causes of, 38-71 ;
Education, 113; and growth, relation contribution of education, 64; and
between, 113; contribution to development, 22-3; and education,
growth, 64 relation between, 113; expression of,
Effective capital stock, 52, 53 38; Harrod model of, 4, 102, 245;
Effective protection, 297 influence of economies of scale, 68;
Elasticity of substitution, 46 labour contribution to, 58; measure-
Embodied technical progress, 51 ment of, production function ap-
Emerging countries, 1 proach to, 39; of money economy,
Emigration, 127 76-80; potential obstacles to, 117;
Empirical evidence and production process of, 39; rates of, 277; Rostow's
function, 57 stages of, 31-7; unbalanced, 153,
Engel's Law, 289 158-66
Enke, S., 83 Growth equation, 102
Entrepreneur, Ill Growth performance, comparative, 12,
Eshag, E., 270 14-15, 62
INDEX 319
Growth rates, Denison on, 61-71; International Development Associa-
Europe, 71 tion, 259, 260, 270, 274
Guinea, 134 International Finance Corp.oration,
259,260
Hagen, E., 145 International Monetary Fund, 306
Haq, M., 270 International price ratio, 282
Harrod, R., 4, 102, 105-9, 245 International transmission, 124
Harrod-Domar model, 4 Inter-regional differences, 124
Health, 113 Invention, 110-11
Heckscher-Ohlin theory, 152 Investment, 32, 33, 37, 222, 224, 225,
Hicks, J., 58, 105-9, 283 226, 240, 255; domestic resources
Higgins, B., 232 for, 226-44; foreign resources for,
Hirschman, A., 124, 159, 161, 162, 163, 244--76; pattern of, 154; private
165 foreign, 263-5; productivity of, 38;
Hopkin, B., 273 through taxation, 229; trends in,
275
Immigration, 123, 127 Investment criteria, 148, 151, 166-79
Import-export gap, 224, 245, 248-52, Investment decisions, 149
256,257,268,294 Investment-output ratio, 38
Imports and exports, 76-9, 126, 163, Investment planning, 103-4
164, 242, 245, 250, 277, 287, 290-6, Investment ratios, 18
298,300-4 Investment requirements, 2, 4
Incentives, 94 Iran, 270
Income: compensation schemes, 305; Israel, 58-9
elasticity of demand for products, Iterative procedure for input-output
289-92; equality, 5; expression of, analysis, 198-9
38; growth, 146-7: equation, 142;
national, conversion of, 25; per Jamaica, 284
capita, see Per capita income; Japan, 33, 75, 80, 134, 265
world distribution, 6-9 Johnson, H. G., 98
Increasing returns, 44, 286. See also Jorgenson, D., 86
Economies of scale
Incremental capital-output ratio Kaldor, N., 232
(I.C.O.R.), 99 Kennedy, C., 57
Index of development, per capita Keynesian unemployment, 233
income as, 19-24 Khatkchate, D. R., 257
India, 133, 227, 232, 257, 274, 285 Knowledge, advances in, 69, 71
Industrial structure, 34 Kuznets, S., 6, 21, 35-6
Industrialisation, 30-1, 77, 80, 242,
279-80 Labour, 72-96, 129; contribution to
Industry: overmanning of, 70; versus growth, 58; costless, 212, 214; divi-
agriculture, 150 sion of, 111-12; dynamic surplus, 89;
Inflation, 164, 225, 235-40, 276; economic development with un-
efficiency of, 236-9; in less developed limited supplies of, 80-7; improved
countries, 240-4 quality of, 55; international division,
Innovation, 110 282; marginal product of, 86, 87,
Input-output analysis, 2, 3, 189-201; 137; migration of, 126-7; paradox
assumptions of, 199; criticism of, 200; of, 129; real cost of, 214--20; static
iterative procedure for, 198-9; mat- surplus, 88; successive units added
rix methods, 194-8; uses, 189 to land, 81; unlimited supplies of,
Input-output coefficients, 190, 193 79, 80, 84, 85, 87; unskilled, 127;
Input-output models, 199 valuation of, 95-6, 212-13: in open
Input-output table, 189, 190-1 economy, 220-3
Inter-American Development Bank, Labour absorption, 85
5 Labour absorption investment cri-
Inter-country comparisons, 25 terion, 175
Interest rates, 254, 255, 266 Labour-force growth, 59, 62, 130,
International assistance. See Assistance 131
International commodity agreements, Labour input: index of, 63; measure-
300-2 ment of, 63
320 INDEX
Labo1,1.1'-intensive technology versus Market mechanism, 163, 164, 180-2;
capital-intensive technology, 151 replacement of, 4
Labour productivity, 94; growth of, 39 Market prices, 180
Labourtransference,94-6,212-15 Massell, B., 57
Laissez-:faire, doctrine of, 166 Mathematical programming, 3
Land, 72-96; in relation to agriculture, Mathur, A., 164
73 Matrix methods of input-output prob-
Land reform, 75-6, 228 lem, 194-8
Latin America, 5, 17, 133, 218, 240-2, Maynard, G., 236
244 Meade,J., 303
Learning, 111-13 Meier, G., 218
Leibenstein, H., 144, 172, 174 Mexico, 243
Less developed countries: British assis- Middle East, 17
tance to, 272-5; definition, 21 ; Migration, 123, 125-7
dualism, 118; emigration effect, 127; Mill, J. S., 2
finance, 80; fiscal and monetary Millikan, M. F., 26
policy, 225; foreign borrowing, 252, Minimum capital-output ratio in-
25 7; future comparative position of, vestment criterion, 168
11 ; income distribution, 227; income Mirrlees, J., 216, 220
growth, 146; industrialisation, 30, Model-building, 4
78, 80; inflation in, 240-4; inter- Models: decision, 187-8; of economy,
national trading and payments posi- 184; forecasting, 188; input-output,
tion, 128; model-building, 4; per 199; policy, 185; projection, 188
capita income, 9; politics, 5; popula- Monetary policy, 228, 242
tion growth rate, 5, 133, 134, 135; Money economy: emergence of, 80;
progress, 3; regional imbalances, growth of, 76-80
125; relative contribution of labour Money illusion, 219
and capital to growth, 60; resource Myrdal, G., 117, 121-6
allocation, 148; trade, 126, 277-8.
See also under specific subjects and National incomes, conversion of, 25
countries Nelson, R., 52, 140
Lewis, A., 80, 83, 84, 85, 98, 116, 158, Non-residential structures and equip-
226-7 ment, 66
Liberia, 17 North America, 133
Linder, S., 293-6 Nurkse, R., 155, 158, 165
Linear programming, 2, 203-11
Litde, I. M.D., 216, 220, 257 Ohlin, G., 265
Living standards, 5, 9, 10, 13, 18-19, Olive oil, 300
25, 26, 140, 146; comparison of, 16; Output: expression of, 38; per unit of
tolerable, 19 input, 67-70
Loans, 266; interest-bearing, 252; soft, Overmanning of industry, 70
260 Overpopulation, 127
Lorenz curves, 6-7, 10
Low-income countries, 21-2 Pakistan, 18, 19, 270
Low-level equilibrium trap, 133, 139- Patel, S. J ., 9
45, 153 Peacock, A., 7
Pearson Commission, 260
Macbean, A., 301 Per capita incomes, 6, 11, 12, 14-15,
Maddison, A., xii, 60 140, 143--6; of America, 11; ofE.E.C.
Maizels, A., 30 countries, 11; growth and growth
Malawi, 18 rate, 10, 12, 13, 14-15, 290; as index
Malthus, T. R., 2 of development, 19-24; of less de-
Malthusian situation, 146 veloped countries, 9; measurement
Marginal per capita reinvestment and comparability of, 24-7; spread
quotient investment criterion, 172 between countries, 8
Marginal rate of substitution between Peru, 18
labour and capital (M.R.S.), 46 Pincus, J. A., 259
Marginal rule for resource allocation, Planning, 3, 4, 165, 180-223; argu-
166 ments for and against, 180; flexibility
Marglin, s., 89 in, 187; form of, 181; horizons, 187;
INDEX 321
instrumental variables in, 186; wage, Residual factor, 67
212-23. See also Input-output analy- Residual productivity, 70, 71
sis; Linear Programming Resource allocation, 148-80, 201, 207,
Policy models, 185 303; balance of payments considera-
Political recognition, 4 tions, 176; broad policy choices,
Politics, 35, 149 148-9; choice of, 159; criteria, 168-
Poor countries, 1, 5, 6, 8, 9, 10, 13, 125. 79: labour absorption, 175, marginal
See also Poverty per capita reinvestment quotient,
Population, 11; optimum, 136-9; 172, minimum capital-output ratio,
world, 133-6 168, social product, 170-2, 177;
Population growth, 2, 16, 128-33, 135, efficiency in, 166; marginal rule for,
139, 140, 146; equation, 141; rate, 166; prices for, 182; social optimum,
134 167; social welfare function, 178;
Population problem, 128-33 and use, 68
Poverty, 5, 19,21-2, 117; vicious circle Resource shifts, 28, 46, 56
of, 99. See also Poor countries Restriction schemes, 302
Prebisch, R., 287-91, 295, 303 Ricardo, D., 2
Prebisch doctrine, 287 Rich countries, 5, 6, 8, 9, 10, 13
Prest, A., 235 Road building, 234
Price compensation agreements, 303-5 Rolling plan, 187
Price fluctuations, 304 Roman Catholic Church, 5
Price index, 24 Rosenstein-Rodan, P., 155, 157, 267
Price stability, 241, 243, 300-2 Rostow, W. W., 31-7, 98
Price weights, 68 Russia, 4, 33, 35, 80, 133
Prices, 24, 27, 239-40, 288; primary
product, 301; for resource allocation, Saving(s), 224, 225, 254; generated
182. See also Inflation through policies, 225; involuntary,
Primal, 207-11 225, 228; trends in, 275; voluntary,
Production function, 40-3, 107, 108, 225,226
109; aggregate, 40; Cobb-Douglas, Savings-investment gap, 221-4, 245,
43-51, 63, 101, 130: empirical 247-8,250-2,256,257,297
evidence, 57, limitations of, 46, Savings-investment ratio, 236
modifications, 51, for embodied tech- Schultz, T., 74-5, 113, 114, 115
nical progress, 51, for improvements Schumpeter, J ., 110
in quality of labour, 55, for resource Scitovsky, T., 291
shifts, 56, results of applying, 48-51 ; Self-help development strategies, 267
properties of, 40; vintage, 52 Sen, A. K., 214
Production function approach to analy- Service activities, 29
sis of growth, 39, 98, 129 Shonfield, A., 78
Production function diagram, 41, 81 Simulation of development, 189
Productivity, 31, 99-100; in agricul- Smith, Adam, 111, 155, 182
ture, 73-6, 85, 158, 228; as aid cri- Social marginal productivity (S.M.P.),
terion, 266, 267; of capital, 102-3; 170-2, 177
growth of total, 131; of investment, Social product investment criterion,
38; labour, 94: growth of 39; measure 170-2, 177
of, 266; residual, 70, 71 Social welfare function, 178
Productivity growth, 131 Solow, R., 49, 52, 58
Products, income elasticity of demand Sovereignty, 124
for, 289-92 Streeten, P., 115, 154
Programming: approach to develop- Subsistence level, 137, 138
ment, 201-11; linear, 203-11
Projection planning models, 188 Taiwan, 75
Protection. See Tariffs; Trade Tariffs, 291, 297-300
Taxation and taxation policy, 217,218,
Railways, 34 219, 228-33
Rao, V. K., 233 Technical assistance, 269
Reddaway, W., 104, 233-4 Technical progress, 30, 105, 130, 146;
Regional Development Banks, 258, 259 and capital, 97-116; capital- and
Representative demand, theory of, labour-saving, 105; and education,
294 113; and invention, 110; and learn-
322 INDEX
ing, Ill ; neutral, 46, 107; of a 291, 300: and technical progress,
society, 109; sources of, 110; and 288, trends in, 292-3; theory and
terms of trade, 288 dual-gap analysis, 293; world, pat-
Technological economies of scale, tern of, 126
42 Traditional societies, 32
Technology, 3; capital-intensive,
versus labour-intensive technology, Underdeveloped countries, 1
151 ; changes in, 105; level of, 41 Underdevelopment, 1-37; definition
Tenant farmers, 75 of, 20; and dualism, 119; persistence
Thailand, 27 of, 117-47
Third World, 5; development of, 1 Underemployment, 127
Thirlwall, A. P., 57, 240 Undeveloped countries, use of term, 1
Tied assistance, 269-72 Unemployment: disguised, 87-94, 215,
Tin, 300 218; Keynesian, 233
Trade, 3, 277-306; and balance of United Kingdom, 27, 28, 70,265, 271;
payments, 279; barriers to, 300; financial assistance by, 272-5; slow
barter terms of, 288, 292-3; between growth, 60
less developed countries, 258; buffer United Nations, 259, 276; Conference
stock schemes, 302; comparative on Trade and Development
cost doctrine, 150, 284-7; compari- (UNCTAD), 297; Report on Measures
son of less developed and developed for International Economic Stability, 300
countries, 277-8; dynamic gains, United States, 265
280, 283-4; free, 285-7, 294; gains
from, 280-7; income compensation Venezuela, 243
schemes, 305; income terms of, 292, Viner, J., 275
293; international commodity agree-
ments, 300-2; new theories for Wages, 83, 85, 126; planning, 212-23
developing countries, 287; policies, Welfare, 137-8, 178
295; preferences and effective pro- Wheat, 300
tection, 297; price compensation Williamson, J. G., 125
agreements, 303-5; protection, 291- World Bank, 78,258,259,260,266,267,
2, 294-5, 297-300; restriction 269,270,274
schemes, 302; static gains, 280-3;
tariffs, 291, 297-300; terms of, 290, Yamey, B., 29