Comments on "Problems of Economic Development"Author(s): Andrew Gunder FrankSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 21, No. 2 (May, 1955), pp. 237-241Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/138322 .

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NOTES AND MEMORANDA

COMMENTS ON "PROBLEMS OF ECONOMIC DEVELOPMENT"

ANDREW GCNDER FRANK

University of Chicago

THE treatment in a recent issue of this JOURNAL of some problems of economic development invites further comment on the issues raised.1 This is the case particularly as the discussion by S. G. Triantis in the review article in question is one, albeit a more ambitious one, of a host of reviews that have recently appeared in the literature of reports published by the International Bank for Reconstruction and Development on the economic development of a number of countries. These reviews, and especially the more extensive one in this JOURNAL, offer the reader an outline and evaluation of the treatment by the World Bank's missions of the problems of economic growth. I shall discuss in turn the issues raised by Mr. Triantis' evaluation of the reports. They concern matters of population growth, public finance, the capital supply, inflation, education, and allocation of resources. I conclude by raising some additional issues.

The questions raised by the rapid growth of population today are, in the opinion of Mr. Triantis, inadequately treated. Some reports do not correctly determine the rate of income growth required to keep pace with the growth of population. The reports on Turkey, Guatemala, and Nicaragua fail to discuss the question. Yet, it is precisely these three countries, among the seven that come under discussion, in which the Iabour:land ratio is the smallest. Indeed, in Nicaragua only a fraction of the arable land is under cultivation, and other resources are plentiful. In selecting these three reports for criticism, Mr. Triantis appears to share the assumption I find underlying the reports, even the Nicaragua report, that rapid population growth con- stitutes a handicap for an economy anxious to develop.

Instead of the criticism offered by Mr. Triantis, another may be suggested. The missions seem unable to divest themselves of the Malthusian assumption even where it is not applicable. Consequently they fail to ask some important questions. Under what circumstances will a growth in the population, and therewith an increase in the labour force, give increasing returns? How may these circumstances be fostered and the returns reaped by the community? These questions are not answered.

More attention and space in the reports is devoted to administrative and fiscal matters than to any other set of problems. For instance, 119 out of 415, or 28 per cent of the pages (pp. 77-99 and 318-415) in the Nicaragua report are concerned with "fiscal policy" and "the fiscal system." The emphasis devoted thereto, particularly in that study and in the one on Turkey, is

1S. G. Triantis, "Problems of Economic Development," this JOURNAL, XX, no. 1, Feb., 1954, 107-11. This is a review article of the United Nations report on Bolivia, and the reports of the International Bank for Reconstruction and Development on Ceylon, Cuba, Guatemala, Jamaica, Nicaragua, and Turkey.

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238 The Canadian Journal of Economics and Political Science

noteworthy because it is symptomatic of the singular importance attached by the missions generally to organizational and administrative changes. The establishment of institutions, already common in the West, for the improve- ment of the co-ordination of economic affairs, to use the words of the Turkish report, constitutes the principal, almost the exclusive, line of attack recom- mended by the missions to the various countries. Yet Mr. Triantis feels that the reports, particularly the one on Nicaragua, devote too little attention to monetary and fiscal matters. Contrary to this criticism, it may be suggested that the missions place too great reliance on programmes of public finance and improved administration to the exclusion of other matters to be suggested below. Moreover, in so doing, the missions consider their acquaintance with Western economies to be more useful for the interpretation of underdeveloped economies than is probably warranted by circumstances there.

Mr. Triantis, too, seems to succumb to this temptation when he suggests that greater reliance should be placed on the "medium and smaller incomes of consumers and enterprises" for their potential contribution to the supply of capital than is accorded them by the various missions. The larger standard deviation in the distribution of incomes in the less developed countries prob- ably prohibits such reliance. On the other hand, it may be suggested that the peasant population in many areas, which Mr. Triantis probably did not have in mind, already does considerable "saving," that is, allows others to save, because of its enforced low consumption.

Mr. Triantis next addresses himself to ways of mobilizing savings. I am in hearty agreement with him when he points out that, although the reports universally condemn inflation, they make almost no attempt to support their condemnation. Indeed, in the face of post-war inflations everywhere, they regard it as an already accepted assumption that inflation is detrimental to economic development. Except for brief discussions in the studies on Bolivia and Ceylon, no analytical treatment of the consequences of inflation is attempted. Although probably not fundamental to economic development, consideration by such bodies as the World Bank's missions of the questions posed by Triantis as well as of the following question may be very much worth while. What is the source, in the country under study, of inflation, the creation of commercial-bank credit, central-bank borrowing or issuing of currency, or a favourable shift in the terms of trade, etc.? What are the consequences of the various possible causes (and intensities) respectively of inflation on the incidence of inflation, on the distribution of command over resources, and on the change in these over time? Can the government of the country in question, for instance, gain command over resources for purposes of investment which it could not so gain by some other measure? What would be the cost of such a policy, particularly in less favourable terms of trade and balance of payments for a country in which foreign trade is important?

More significant than the assumption of the reports with regard to inflation are the assumptions which appear to underlie their recommendations on education specifically, and those reflected throughout in their discussion of social and cultural factors. We may or may not lament with Mr. Triantis

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the sacrifice of liberal to vocational education and the neglect, in some of the reports, of conditions peculiar to particular underdeveloped areas. But comment in this sphere ought not to be confined to that, lest the impression be left with the reader that many of the issues raised by the discussion of the reports are settled. Vocational education, whether in school or field, as under- stood in the reports, only serves to reinforce the already too prevalent reliance on demonstration or example and on expert advice, instead of on training by participation, by working with the teacher, foreign expert, or extension officer.

More important still, the recommendations designed to improve education and to increase agricultural and industrial production all appear to imply that the people in the underdeveloped countries must all be somehow re- educated before they can or will take part in the economic development of their countries. They must variously be made to reason, to be more enter- prising, to become freer in thought, to give up their superstitions, etc. In short, the people (peasants, business men, and all) must be taught to become (1) rational, (2) economically rational (3) individualistically economically rational (Talcott Parson's "universalistic" rather than "particularistic"). I do not believe, as the mission members and Mr. Triantis appear to feel, that it is already established either that people in underdeveloped countries are less rational than people elsewhere, or that they must be individualistic in making decisions before economic development can proceed.

The discussion of allocation of resources invites comment. Most of the countries under consideration have, compared to the West, relatively little capital and land. The recommendations of the missions are based, therefore, on the stated maxim that under those circumstances investment requiring relatively much labour and relatively few other resources should be given preference. Application of this criterion to the situation in Turkey leads, in the opinion of the mission, to the conclusion that investment in agriculture should be favoured over investment in industry. "Agricultural development will provide the greatest employment of manpower for the least capital investment" (p. 264). Both the conclusion and the criterion on which it is based draw sharp criticism from Mr. Triantis. He recommends instead that the criterion on which to base investment decisions should be the ratio of economic progress to the increase in capital employed. He suggests that the use of his criterion would not necessarily lead to the same investment (say agriculture instead of industry) as would use of the criterion of pro- viding "the greatest employment of manpower for a given increase in capital employed," that is, of maximizing the employment of labour. This is true. However, in attributing to the Turkish report the argument of mere maximiza- tion of employment, Mr. Triantis has, as can be seen by reading the passage, misinterpreted the mission's intent. The mission's recommendation is based on the originally stated criterion which appeals to the familiar law of variable proportions and which, re-phrased, merely states: maximize total product, keeping marginal product positive and average product falling for both factors. This is not the same as invoking the employment argument, for nothing at all is said about maximizing the quantity of labour used. Indeed, this, the criterion used by the Turkish report, states the general case which includes as

Notes and Memoranda 239

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The Canadian Journal of Economics and Political Science

a special case the maxim offered by Mr. Triantis. It would read: maximize income (progress) by maximizing the marginal product of capital, given the supply of labour (the complement of which is to maximize the marginal product of labour, given the supply of capital).

So far, then, the criterion used in the reports stands up under criticism. To take issue with the conclusions reached by the mission we would have to argue that the criterion has been misapplied to the circumstances in Turkey, or elsewhere. It may be that the mission has merely miscalculated the alter- native costs in concluding, as most advisers do, that emphasis should be given to agriculture and export industry. Unfortunately, the reports rarely give the reader sufficient information to enable him to check the calculations. An alternative possibility deserves a great deal of further investigation. It may be that the missions are using the wrong frame of reference; that what is at issue in economic development is really not so much maximizing the marginal product of an input or reaping comparative advantage as changing the cir- cumstances which determine the maximum and that comparative advantage. The latter is, in my opinion, the useful interpretation of the Marxian position with regard to industrialization.

The definition of economic development offered by Mr. Triantis may serve as introduction to my concluding remarks. "Economic growth," he says, "involves increases in the supply of productive resources or improvements in the productivity of the existing resources through better allocation and combination." It may be noted that he speaks only of increases and omits mention of such matters as continuous growth and self-sustaining cumulative increases, much less of changes in quality of resources. In imposing by ex- clusion such limits on what economic growth "involves," Mr. Triantis suggests that he shares the conception of economic development apparently held by the International Bank's missions whose critic he is.

The reports under review suggest throughout that in speaking of economic development the authors have in mind a snapshot of a developed economy (the United States) or at best a gap, or deficit, between developed and un(der)de- veloped economy. The task the missions set themselves is only to recommend how this gap may be bridged, or from the viewpoint of the underdeveloped country, the deficit removed. To this purpose they suggest principally that the institutions and organization along with a little capital be transplanted from the former to the latter countries.

No suggestion is made by the missions, nor by the reviewers, with the notable exception of Kindleberger,2 of economic development as a process of economic growth in a developing economy. Nor would the reader suspect that the United States also remains a developing economy, and that the adjust- ment of Europe's economy to post-war world conditions constitutes no less an economic development.

Such a narrow perspective leads to unfortunate consequences. No con- sideration is given to the many unanswered questions arising from the mutual

2C. P. Kindleberger, review of the reports of the International Bank for Reconstruction and Development on Cuba, Turkey, and Guatemala, Review of Econmics and Stztistics, XXXIV, Nov., 1952.

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Notes and Memoranda Notes and Memoranda

and dynamic relationship between the division of labour and the extent of the market; to the nature and relevance of increasing returns which may or may not lend support to the theory of balanced growth; to the relationship between the Keynesian argument for diversification of the economy and the classical argument of comparative advantage; or to their proper applicability to policy formation in a developing economy.

"PROBLEMS OF ECONOMIC DEVELOPMENT": A REPLY

S. G. TIANIS

University of Toronto

A NUMBER of points in Mr. Frank's "Comments on 'Problems of Economic De- velopment'" require closer examination.

In his comments on population Mr. Frank does not seem to distinguish the relation between certain flows from the relation between certain stocks. He notes that "it is precisely" in Turkey, Guatemala, and Nicaragua, "among the seven [countries] that come under discussion, in which the labour:land ratio is the smallest." But such snapshots of the economy are very incomplete, for there are many more than two types of productive resources. What is more important, they tell us no more about the problems of economic development than a snapshot of a living organism tells us about its prospects and problems of growth. For, in the discussion of economic development, it is chiefly the rates, timing, and interaction of various changes in the conditions of supply of productive factors, demand for goods and services, and so on, that are relevant. These changes constitute the composite process of economic de- velopment or growth. Much of the post-war economic literature on the problems of less developed countries has failed to take note of this point. Yet, the treatment "of economic development as a process of economic growth in a developing economy," which, in his concluding paragraphs, Mr. Frank finds lacking in the World Bank's reports, involves exactly a discussion in terms of such changes-less in terms of "labour:land ratios." The prospects of development might be better for a country which has a different rate of growth in population even though it had a higher 'labour:land ratio" than Nicaragua, just as they are probably better for a six-year old child who at present may be a few inches shorter than a twenty-five year old dwarf.

Mr. Frank notes that I appear "to share the assumption," which he finds underlying the reports, "that rapid population growth constitutes a handicap for an economy anxious to develop." But in this and one or two other parts of his "Comments" Mr. Frank seems to ascribe to me views which I did not ex- press, nor intend to imply. "Rapid population growth" may or may not "con- stitute a handicap." In the first place, it depends on the "definition" of growth itself, and in the second, it depends on the relation of the rate and timing of this flow to other changes. Therefore, the problem can be considered only with reference to particular countries, not to any "economy anxious to develop." Vol. XXI, no. 2, May, 1955

and dynamic relationship between the division of labour and the extent of the market; to the nature and relevance of increasing returns which may or may not lend support to the theory of balanced growth; to the relationship between the Keynesian argument for diversification of the economy and the classical argument of comparative advantage; or to their proper applicability to policy formation in a developing economy.

"PROBLEMS OF ECONOMIC DEVELOPMENT": A REPLY

S. G. TIANIS

University of Toronto

A NUMBER of points in Mr. Frank's "Comments on 'Problems of Economic De- velopment'" require closer examination.

In his comments on population Mr. Frank does not seem to distinguish the relation between certain flows from the relation between certain stocks. He notes that "it is precisely" in Turkey, Guatemala, and Nicaragua, "among the seven [countries] that come under discussion, in which the labour:land ratio is the smallest." But such snapshots of the economy are very incomplete, for there are many more than two types of productive resources. What is more important, they tell us no more about the problems of economic development than a snapshot of a living organism tells us about its prospects and problems of growth. For, in the discussion of economic development, it is chiefly the rates, timing, and interaction of various changes in the conditions of supply of productive factors, demand for goods and services, and so on, that are relevant. These changes constitute the composite process of economic de- velopment or growth. Much of the post-war economic literature on the problems of less developed countries has failed to take note of this point. Yet, the treatment "of economic development as a process of economic growth in a developing economy," which, in his concluding paragraphs, Mr. Frank finds lacking in the World Bank's reports, involves exactly a discussion in terms of such changes-less in terms of "labour:land ratios." The prospects of development might be better for a country which has a different rate of growth in population even though it had a higher 'labour:land ratio" than Nicaragua, just as they are probably better for a six-year old child who at present may be a few inches shorter than a twenty-five year old dwarf.

Mr. Frank notes that I appear "to share the assumption," which he finds underlying the reports, "that rapid population growth constitutes a handicap for an economy anxious to develop." But in this and one or two other parts of his "Comments" Mr. Frank seems to ascribe to me views which I did not ex- press, nor intend to imply. "Rapid population growth" may or may not "con- stitute a handicap." In the first place, it depends on the "definition" of growth itself, and in the second, it depends on the relation of the rate and timing of this flow to other changes. Therefore, the problem can be considered only with reference to particular countries, not to any "economy anxious to develop." Vol. XXI, no. 2, May, 1955

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