Problems in Economic Development

This paper will attempt to make some assessment of our continuing effort to understand better the growth process in both the mature and so-called less-developed economy contexts. In view of the massive nature of that effort and the necessarily superficial and hurried nature of these comments it should be remarked at the outset that the task has been approached with considerable trepidation, and that apologies are due both to those who may be misinterpreted and to those who may be neglected, due either to a lack of time or a lack of courage.

From the many issues which could form the subject of a paper bearing the above title, we have chosen especially those which are, in our opinion, related to the experience of Polish economic development. We think that at least some elements of the theoretical examination of this experience may be of a more general importance.

The national economies of the countries of the world socialist system develop with a high rate of growth and continuously on an upward trend. These high growth rates of productive forces under socialism represent a natural phenomenon. They are due to the new and fundamentally different character of the productive relations which have been successfully created in the countries of the world socialist system.

Once basic infrastructures have been created in a developing country, the first thing to encourage in the resulting more favourable economic climate should be an increase in the production of goods to meet the elementary human needs for food, clothes and dwellings. Before anything else, the living conditions of the people must be improved and, barring exceptional cases, economic development should therefore begin with raising the production of foodstuffs, agricultural raw materials, clothing and housing, and should then lead up to producing industrial equipment requiring low capital investment.

The assumption: ceteris paribus is, indeed, a necessary prerequisite for any theory that aims at explaining certain specific characteristics of an economic system. Without this assumption the theoretical tools cannot be sharpened. Without it, economics deteriorates to a descriptive or institutional science incapable of explaining economic development.

History contains a large number of case studies of successful and of frustrated economic development. From the detailed study of these it is possible to gain a general sense of the combinations of circumstances which in the past have been favourable to development. But it is not feasible to concentrate this experience into anything which can be dignified with the name of lessons of history. All I have attempted to do in the present paper is first to consider an hypothesis about the form which economic development has taken, and secondly to examine four out of the many relevant influences on that development.

Being an introduction to a general discussion, this paper obviously cannot, and is not meant to, exhaust the problems of which it treats. There exists a considerable body of literature on the subject, even though it did not begin to engage the attention of economists more than fifteen years ago. The author cannot be absolutely certain that he has not missed one or the other of the studies recently published on this question; in any case, quotations will be limited to just a few which have a direct bearing on the discussion below.2

1. Problems of taxation, in connection with economic development, are generally discussed from two different points of view, which involve very different, and often conflicting, considerations: the point of view of incentives and the point of view of resources. Those who believe that it is the lack of adequate incentives which is mainly responsible for insufficient growth and investment are mainly concerned with improving the tax system from an incentive point of view through the granting of additional concessions of various kinds, with less regard to the unfavourable effects on the public revenue. Those who believe that insufficient growth and investment is mainly a consequence of a lack of resources, are chiefly concerned with increasing the resources available for investment through additional taxation even at the cost of worsening its disincentive effects.

In their search for new capital, the developing countries frequently turn to inflationary methods. The temptation to finance development by inflationary means is greatest in developing countries, which strive to achieve forced savings by deficit financing of government budgets and thus to acquire resources needed for investment. The conception that resources for development can be appropriated bygovernments through inflationary savings is frequently promoted by the consideration that if a country refrains from ambitious development ventures it chooses ipso facto stagnation, dependence on foreign assistance for its balance of payments and substandards of living.

For the analysis of economic development, the principal question concerning savings is whether or not savings increase more than proportionately to income. In virtually all theories of growth, capital formation plays some part, and it is therefore important to know how it can be financed. The question is crucial for those theories — now somewhat discredited — which regard capital formation as the primary means of raising income levels, because suitable variations in the savings-income ratio are then needed to explain why some countries stay poor in the absence of foreign investment. Theories of the latter variety would be left hanging in mid-air if the savings-income ratio did not vary significantly among countries or in the long run.

1. Post-war rates of productivity growth in Western Europe and Japan have everywhere been above their long-term trend. In several countries growth has been faster than nearly all recorded historical experience. This is true of Japan, Germany, Austria, Italy, France and the Netherlands, where output per man increased at 6.7 per cent, 5.2 per cent, 5 per cent, 4.3 per cent, 3.9 per cent and 3.7 per cent respectively in the 1950s. Even in the U.K., Denmark and Belgium, where growth was much slower, the growth rates of 2 to 2.5 per cent were much better than they had achieved over any sustained period in the past. Amongst the industrial countries, it is only the U.S. and Canada which have shown no acceleration in growth.

The purpose of this paper is a limited one: to present the available data on trends in labour productivity for all countries except the United States, Japan and the nations of Western Europe (the latter are covered in a separate paper by Angus Maddison). In the course of our research, we discovered quickly that pre-World War II data are to be found for only a handful of the countries with which we are concerned, so that we were obliged to take the year 1945 as the inception of the period with which we deal — and even then, we have not always been able to go back that far. We have generally eschewed attempts at analysis of the underlying factors which produced the observed trends. Presumably, that is the function of the rest of the papers submitted to this section.

The purpose of this paper is to analyse the factors determining labour productivity in the various stages of economic development, and particularly during the initial phases of accelerated industrialization in the developing countries.

This paper belongs as much to the field of growth-model theory as productivity analysis. My first excuse is that the objectives are similar: Productivity analysis seeks to understand the reasons for divergent rates of growth between inputs and outputs; and growth-model theory seeks to define the relationships between the rates of growth of output, labour, capital and technical knowledge. My second excuse is that the particular problem in growth-model theory that I propose to examine is how the capital stock an economy inherits from the past influences its present rate of growth. This is a question that has some relevance to the effect of different stages of industrialization on productivity — although in this paper I am concerned only with theory and have resolved to eschew all practical implications.

1. THE central theme of this paper is a renewed plea for careful distinction between the real aspect and the value aspect in economic theorizing; and for this purpose it might be better to start the discussion with an example which appears to reflect insufficient awareness of the need for such a distinction.

This discussion is oriented toward an economy in which economic growth is accelerating significantly. In particular, there is a rapid growth of manufacturing, power, transportation and other modern industries. The agricultural sector, still dominant, is beginning to shrink in relative terms. The economy is creeping over the threshold of economic development.

Despite the early proliferation of industrial institutions, laissez-faire has — paradoxically — been dying harder in Great Britain than in many other places and, while the gearing of wages to productivity is evidently of central importance, it is hard to find any appreciable ‘effects of wage policies on productivity’ or statistical relationship between the two. Thus the OEEC concluded that ‘given the antiquated nature of the institutional arrangements in a number of [British] industries, the weakness of the central bodies on both sides, and the lack of any clearly defined norm for arbitrators to take as a guide when making awards, there can be no assurance that wage increases will in future be kept in line with the growth potential of the economy’.1

What contribution can the management of the individual industrial firms make to the industrialization process, what particular managerial skills need to be developed and what policies should be pursued ? These are our problems. The setting is the following: 1.We shall limit our analysis to the under-developed countries, i.e. to the management problems of the pre-industrialized milieu.2.We shall examine these problems from the point of view of management itself, and by management we here mean top management. That is, we shall mainly be concerned with the growth problems of the individual firm, and with the management policies related to these growth problems.3.Furthermore, we shall mainly consider the indigenous industrial firms. Subsidiaries of foreign companies and joint foreign and local ventures will only be brought into the picture with reference to their general influence on management practices. In spite of the fact that they may be of considerable importance for the industrialization process, under certain circumstances, we shall not be able to go into their special problems.

This topic can be discussed at at least three levels. The individual’s attitude to the factors on which productivity growth depends — his response to material incentives, his willingness and ability to adapt, innovate and co-operate — is largely determined by a complex of social and cultural pressures and conditions, some of which may be specific to employed people, or even to particular sections or communities of employees. It is secondly well recognized that any continuing workplace group tends to establish its own internal structure of relationships (which may little coincide with that designed by the management concerned) and, particularly, that such ‘informal’ groups often evolve and enforce their own standards and methodology of productive performance.

Productivity is the end result of a complex social process including: science, research and development, education, technology, management, production facilities, workers and labour organizations. These factors may be under private or public direction, or they may reflect varying combinations of private and public activity. Productivity cannot be increased in any country or under any social system by simple decree. An increase in output per man-hour or output per capita for a country reflects the energy and ingenuity of its whole people. A century of increasing productivity involves contributions from all industrializing mankind.

Professor Elliot Berg opened the discussion with a general summary of the situation in Africa. On the aggregate level, the importance of structural changes in early industrialization mentioned by several speakers is particularly great. Until recently, concern with the efficient use of labour resources was secondary ; the major problem was to find the man-power required by the expanding money economy. To induce men to enter wage employment, it was often necessary to permit partial commitment: e.g. the ‘task work’ system in agriculture and construction, under which men could quit after fixed daily tasks were completed, and the ‘ticket system’, under which a worker received a month’s pay when he had had his ticket punched thirty times. Both methods were in a sense wasteful and chaotic, but they did encourage men to enter wage employment.

In this paper we propose to list a number of devices for the construction of a development plan. Together they are a complete set of activities to arrive at such a plan. They do not represent the most sophisticated methods known to the author but rather the most practical ones. Their selection necessarily remains somewhat arbitrary and depends on the author’s taste. The resulting method of planning is one of successive approximations and not a simultaneous solution of the complete set of interrelated problems which a plan must solve. Each of the following sections may be considered a phase or a stage of the process. It is in the nature of successive approximations that some of the phases must be repeated if the assumptions used are disqualified by later findings. Some of the data to be used may themselves be the outcome of pieces of ‘partial research’ which can be undertaken independently from the succession of phases.

A development programme serves a variety of purposes. It is at once a political symbol of a government’s commitment to economic and social progress, a general strategy for remodelling the economy and its institutions, a basis for decisions on individual investment projects and a standard against which to measure results.

In formalized programming a distinction is made when pro-gramme is being set up between the arbitrary and automatic parts. The arbitrary part is localized at the beginning of the process of resolution and consists of the choice of a model and the discussion of assumptions. The automatic part comprises the rest of the process, i.e. data processing with a view to calculating the unknowns.

Techniques of sector planning is a large subject on which it would be difficult to get beyond generalities in a short paper. Our work on this subject is at the model-building stage and we have recently described its general lines in [1].2 Here we shall select one aspect to write about: the problem of freeing economic models from their dependence on parameters appropriate to the past. We all know that tastes and techniques change, that new commodities and processes are introduced, but too often we continue to view the future through the spectacles of the past as if none of these things ever happened. These problems become all the more insistent in disaggregated, sectoral models. What, then, are we to do about them ?

Public ownership on the means of production predetermines the unity of a national economy, and makes imperative its co-ordinated and planned development. The plan for the development of a national economy sets the all-important ratios of public production: between accumulation and consumption, between manufacture of the means of production and consumption articles, between production and circulation, industry and agriculture, between production and labour resources, etc. This is the national economy development aspect of planning.

From the standpoint of the economist, the region has three facets.

The preparation of the fourth French plan (1962–65) was the occasion for an important effort to programme the residential and collective equipment of large cities over the next fifteen years. Urbanization of the population is one of the dominant characteristics of our time.1 It is legitimate therefore to approach the problem of regional planning through the programming of urban equipment.

During the nineteenth century economic development overflowed from Europe and North America into Asia and Africa and Latin America by means of international trade. There were the usual substantial benefits. The trader brings new ideas: new tastes, which stimulate effort, and new techniques, which stimulate innovation. Additional income was generated, and though much was taken as profit, much remained behind not merely to add to local consumption, but also to finance ports, railways, electric power, water and other public utilities, and also indirectly through taxation to pay for schools, hospitals, a framework of law and public administration, and other public services. Some local industries were destroyed by imports, and others, such as human porterage, gave way to new techniques, but the net effect was undoubtedly a great increase in the capacity to produce real income.

The significance of the movement of the (commodity) terms of trade to the primary producing countries arises from two distinct phenomena: (1) the short-term fluctuations in the terms of trade and their destabilizing effect on the economies of the primary producing countries; and (2) the possibility of a secular trend which may have certain implications for their economic policies. The prevalence of short-term fluctuations in the terms of trade of primary products is an accepted fact and remedies have been suggested for their elimination, though the effectiveness with which each one of these would operate is subject to some doubt.

My terms of reference call for ‘a review of what is known historically of long-term movements in the terms of trade plus a discussion of factors relevant to speculations about future trends’. This is a large and controversial subject, and the literature is quite extensive. In this brief survey, I cannot hope to explore the subject fully in all its aspects. What I propose to do is to draw attention to the main issues, particularly as they bear on the problems of economic development. Before turning to this task, however, a few remarks about the uses and limitations of the terms of trade in the sphere of development may provide a useful background to the discussion. Since controversy has raged as much on the accuracy of the statistical estimates of the terms of trade as on the economic and welfare interpretations to be placed upon them, one does not need to be apologetic about treading again a time-worn path. I propose, then, to divide the discussion into three parts. The first part will consider the usefulness of various measures of the terms of trade in the analysis of development problems; the second will examine the historical movement; and the third will discuss the future prospects.

It was my intention, at first, to present here a brief survey of historical and theoretical work on the long cycles1 which we call Kondratieff. This would have included an analysis of the problem indicated in the title; but on reflection, I preferred to limit myself to that problem alone, for various reasons.

1. The main purpose of this paper is to consider the scope and limitations of international commodity arrangements as instruments for promoting economic stability and growth, particularly from the point of view of the less developed countries. In the closing years of the war and in the immediate post-war years very high hopes were entertained of the creation of a widespread network of individual commodity agreements as part of a new international economic order. The paucity of concrete results achieved so far stands in striking contrast to this. There have been a large number of resolutions by the United Nations and Specialized Agencies and other inter-governmental organs urging the negotiation of commodity agreements; there has also been a great deal of preparatory work and discussion concerning individual commodities. Yet, in the seventeen years since the end of the war, international agreements have been concluded for only five commodities — wheat, sugar, coffee, tin and olive oil. Of these, the only two presently functioning as agreements which qualify as producer-consumer agreements and contain some operative provisions designed to influence world trade, are those for wheat and tin.1 The total value of world trade in the five commodities for which agreements have been concluded in one form or another, accounts for about 10 per cent of world trade in primary products.

It is proposed to use a good deal of the space that is available to discuss some stabilization aspects of the operation of Marketing Boards in Uganda. An attempt will be made, however, to draw some general conclusions from these experiences and also to touch on some of the other aspects of the working of such Boards.

In his letter, earlier this year, inviting me to prepare this paper, the President of the International Economic Association, after referring to the more general subjects covered by Gerda Blau and David Walker, wrote: ‘ Professor Arthur Lewis is anxious that there should also be a paper on one of the more interesting actual commodity schemes and has suggested the tin scheme.’ With the stress of Section 4 of this Congress on economic growth and the instability of primary producing economies as a rule connected with their output of specific industrial raw materials or basic foodstuffs outpacing the growth in demand, this choice might, at first sight, appear surprising. After all, tin is the only major primary commodity, current production of which is unable to meet demand, although consumption in the free world is still limping behind the level it had reached as long ago as the end of the ’twenties.