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This book should be returned on or before the date last marked below. 



THE TRUSTEES of the Fund choose subjects for Fund studies and underwrite 
the expenses of each project. The authors, however, assume full responsi- 
bility for the findings and opinions in each report. 












ADOLF A. BERLE, JR., Chairman of the Board 
FRANCIS BIDDLE, Vice Chairman of the Board 

H. CHR. SONNE, Treasurer 
J. FREDERIC DEWHURST, Executive Director 




NEW YORK - The Twentieth Century Fund 1955 

Library of Congress Catalog Card Number: 54-12726 



WHAT ACCOUNTS for the fact that two thirds of the world's people still 
work and live much as their ancestors did while the other third have forged 
ahead to ever higher levels of productivity and well-being? In other 
words, why has economic and technological progress since the Industrial 
Revolution been limited to such a small fraction of the world's area and 

Why, and how, does economic development take place? What are the 
factors social, political and cultural, as well as economic that promote, 
or inhibit, a nation's capacity to achieve a better life for its citizens? Are 
there any common factors that can be identified as essential to the process 
of economic growth, wherever it takes place? To what extent can the 
economic development of the underdeveloped regions be accelerated by 
"importing" techniques and capital from the developed countries? What 
are some of the implications of our present knowledge of this subject for 
American and world policy with regard to economic development? 

These were some of the questions that the trustees of the Twentieth 
Century Fund had in mind in asking Norman S. Buchanan andjloward 
S. Ellis to undertake the present study. Both authors are piTOessors of 
economics at the University of California, Berkeley, and* both have par- 
ticipated in earlier Fund studies Norman Buchanan as co-author of 
Rebuilding the World Economy, issued in 1947, and Howard Ellis as one of 
the six contributors to the symposium Financing American Prosperity, 
brought out in 1945. 

Professors Buchanan and Ellis have made a perceptive and thoughtful 
appraisal of their subject. Readers, both lay and professional, may well feel 
grateful for their skill as writers, since their text attains interest and clarity 
to a degree not often encountered in scholarly treatises. 

Their conclusions, in the main, are soberly hopeful but at no point do 
they attempt to minimize difficulties, or turn away from realities. They are 
well aware of the insistent pressures that surround us today. They see the 
vast stirring of underprivileged peoples. They recognize that unless the free 
nations of the world can offer some sympathetic help and guidance, large 
and critical segments of mankind may succumb to the false and facile 
lures of the Marxist conspiracy and thus participate in their own betrayal 
and add to the free world's peril. 

The authors also see that economic development is by no means a matter 
of economics alone. Throughout this study they show a notable grasp of 
personal, social, cultural and political factors that always influence, and 
frequently determine, the course that economic events will take. 

vi Foreword 

As for the division of labor in writing the book, Norman Buchanan 
assumed primary responsibility for Chapters 1 and 2, part of Chapter 3, 
Chapters 4 through 11 and Chapter 19, and Howard Ellis for the others. 
The final product, of course, necessarily was a joint effort. The Fund wishes 
to express its appreciation to both authors, and to all who assisted them 
in any way, for what we believe will prove to be a significant contribu- 
tion to the understanding of a major problem of our time. 

J. FREDERIC DEWHURST, Executive Director 
The Twentieth Century Fund 

330 WEST 42o STREET 
NEW YORK 36, N. Y. 
JANUARY 3, 1955 


THIS BOOK undertakes a general analysis of the problem of the economic 
development of the underdeveloped areas. As economists we have, natu- 
rally, given rather more attention to the economic aspects of the devel- 
opment problem than to others perhaps equally important. However, 
economic analysis, being itself general in character, is not ill-suited to the 
study of economic development. Capital accumulation and saving, mon- 
etary policy and inflation, tax systems and fiscal policy, balance-of-payments 
problems and foreign borrowing, specialization and trade, scarcity and 
economy, resource allocation and productive efficiency, population and 
income these and related matters are topics on which economists have 
long dwelt. Presumably, this body of analysis has relevance to the develop- 
ment problems of the underdeveloped areas. To the best of our ability, 
however, we have also drawn upon other disciplines when we felt that eco- 
nomic analysis alone did not suffice. The problem of the sustained accu- 
mulation of productive capital in underdeveloped areas, for example, is 
scarcely comprehended by reference to liquidity preference schedules in 
relation to the quantity of money and the marginal efficiency of investment. 
Thus the study attempts to be general in the sense that it is not exclusively 
economic. Similarly, it is not focused on particular geographical areas; so 
far as possible, it is intended to apply to those problems that appear to be 
common, in greater or smaller degree, to nearly all the so-called under- 
developed areas. 

From one point of view, economic development can be said to be a new 
term for a process long familiar. Tn the past two centuries the average mate- 
rial well-being of the inhabitants of many countries of the world has im- 
proved remarkably if one may judge from the criteria that appear to be 
relevant for such judgments. To be sure, what is envisaged and sought after 
by the underdeveloped areas in the middle of the twentieth century is not 
identical with what has occurred in times past. Nevertheless, the record of 
past instances of development perhaps has more application to the present- 
day problems than might be supposed. At any rate, we incline toward this 
belief, and we have therefore included historical sketches of development 
in England, France, Germany, Japan and Russia. It is not presumed that 
these will satisfy the professional economic historian; they are too brief and 
too avowedly selective for that. They are intended, however, to suggest 
certain points which appear pertinent to the problems facing the under- 
developed countries in our time. 

At one time, interest in the United States in these problems might have 
been mainly academic. This is far from true today. Both in the sphere of 

viii Preface 

national foreign policy and through membership in the United Nations 
and its affiliated agencies the United States must reckon with the aspira- 
tions of the underdeveloped areas and, presumably, help these countries 
realize their objectives. This implies something more than voting funds for 
dollar assistance through an abhorrence of poverty and sympathy for the 
underfed. Its heavy obligations at home and elsewhere abroad leave the 
United States only limited resources for assisting the underdeveloped areas 
in their struggle for material betterment. This means that what resources 
are expended toward this end should be wisely committed: the attack 
should be directed at the heart of the development problem, not merely its 
surface manifestations. Moreover, tangible assistance for development 
should be joined with wise policies in other directions that work toward 
similar or at least harmonious objectives of American foreign policy as a 

From the time we first began our study in the summer of 1951 we have 
been acutely aware that we were running grave risks in attempting to 
sketch on such a large canvas. No two persons, no matter how assiduous, 
could hope to examine, comprehend and integrate the bewildering mass of 
materials on the subject of the underdeveloped areas and their develop- 
ment problems. Moreover this mass is growing visibly day by day. We arc 
quite certain, therefore, that we have overlooked some studies we might 
have examined with profit. For these sins of omission we apologize sin- 
cerely. We must also point out that our manuscript was virtually completed 
at the end of the summer of 1953 and that this accounts for the regrettable 
fact that we make no reference to several important studies since published. 
Although an earlier publication date would have been highly pleasing to 
all concerned, unfortunately that proved to be quite impossible. 

We are indebted and grateful to many persons for their advice and assist- 
ance. For brief periods, or on particular topics, we had research assistance 
from Charles F. Haywood, James F. Mahar, Dr. Leon A. Mears of San 
Francisco State College and Dr. Norman Zellner of the University of Cali- 
fornia at Davis. Professor Erskine McKinley of the University of Indiana 
worked part time for more than a year as general research assistant. His 
perceptive and imaginative approach to our problems and difficulties 
helped us appreciably. Frances J. Toler, our secretary and typist, con- 
tributed far more than she might suppose to our endeavors by her unfailing 
good humor and endless patience in the face of all difficulties. Josephine 
Haywood, Dolores Hiskes, and Jeanne Trahan assisted Mrs. Toler in 
typing and reconciling the various copies of the manuscript as it evolved 
into its present form. 

Professor M. K. Bennett of Stanford University, Professor J. B. Cond- 
liffe of the University of California at Berkeley, Richard H. Demuth of the 

Preface ix 

International Bank for Reconstruction and Development, Washington, 
D. C., and George Wythe of the U.S. Department of Commerce read the 
manuscript in substantially its present form with extreme care and con- 
tributed many helpful suggestions and criticisms for which we are exceed- 
ingly grateful. Professor Arthur Geddes of the University of Edinburgh 
and Professor George J. Stolnitz of Princeton University contributed 
helpful criticisms of an earlier draft of Chapter 5. 

Gloria Waldron Grover improved the readability of the manuscript by 
rooting out some of our obscurities in style and expression; she also added 
most of the sideheads. Finally, the staff of the Twentieth Century Fund and 
its director Evans Clark until August 1953 and since then J. Frederic 
Dewhurst have, from the start, lightened our task considerably by the 
grace and considerateness of their friendly cooperation. We extend our sin- 
cere thanks to all these persons. Friends, colleagues and professional ac- 
quaintances have been unfailingly helpful at all times. 































xii Contents 


1-1. Estimated Proportion of Per Capita Calorie Intake Derived from 

Various Sources, Selected Countries, Prewar Years 457 

2-1. Agricultural Area and Agricultural Labor Force in Selected 

Countries, 1938-1948 458 

2-2. Indicators of Capital Inputs: Energy Consumed, Freight Car- 
ried, Railroad Mileage, Motor Vehicles, Telephones, Animal 
Units 461 

5-1. Measurement of Population Growth 464 


1. Nonmonetary Indicators of Relative National Consumption 

Levels, in 31 Countries, around 1934-1938 16 

2. Land Suitable for Agriculture in Each Continent 34 

3. Geographic Distribution of Land in Each Continent by Natural 

Fertility 35 

4. Europe's Railway Network, 1848 and 1877 167 
Sr'mdustrial Growth in Germany and France after 1860 168 

6. Distribution of Land in Each Continent by Agricultural 

Productivity 238 


1-1. Expectation of Life at Specified Ages 9 

1-2. Crude Death Rates and Infant Mortality Rates for Selected 

Countries, 1938 11 

1-3. Death Rates by Cause in Selected Countries 13 

1-4. Per Capita Income, Population and Population Groups of 

53 Countries, 1939 19 

2-1. Age Distribution of Population in Regions of the World, 1947 28 
2-2. Indicators of Low Average Productivity 31 

2-3. Land in Relation to Population, about 1940 33 

5-1. Approximate Population of the World and Its Subdivisions, 

1700-1949 93 

5-2. Average Death Rates in 12 Underdeveloped Countries, 1936- 

1940 and 1946-1950 98 

Contents xiii 

5-3. Trend of Gross Reproduction Rates, 1880-1925 106 

5-4. Crude Birth Rates, Crude Death Rates, Natural Rates of 

Population Increase in Underdeveloped Areas, 1946-1950 108 

7-1 . Structure of Manufacturing Production in the United Kingdom, 

Germany and the United States, mid- 1930s 139 

7-2. Industrial Occupational Groupings in England and Germany, 

1851 and 1855 139 

7-3. British Exports and Imports, 1800-1910 and 1913 144 

9- iT'japanese Foreign Trade, 1868-1 920 1 87 

9-2." x Structure of Japan's Foreign Trade, 1868-1912 187 

10-1. ^Percentage Distribution of Investments in the U.S.S.R. by 

Major Economic Fields, under Three Five-Year Plans 195 

10-2^-Physical Production in Russian Industry, Selected Years 196 

10-3. Sown Area and Agricultural Production in the U.S.S.R., 

1913-1939 207 

10-4. Per Capita Production in the U.S.S.R. in 1937 and in Other 

Industrial Countries around 1929 210 

11-1. Coal Production in Selected Countries, 1770-1938 218 

11-2. Average Annual Percentage Rate of Growth in Coal Production 

in Selected Countries, Selected Periods, 1770-1938 219 

11-3. Production of Pig Iron in Selected Countries, 1500-1910 220 

1 1-4. Average Annual Percentage Rate of Growth in Pig Iron Produc- 
tion in Selected Countries, Selected Periods, 1500-1910 222 

1 1-5. Average Annual Rate of Growth of Manufacturing in Selected 

Countries, Selected Periods, 1871-1913 223 

11-6. Estimated Population of Selected Industrial Countries, 1800- 

1949 225 

11-7. Estimated Percentage Increase in Population per Decade in 

Selected industrial Countries, 1800-1949 226 

11-8. Percentage Decline in Mortality Rates in Sweden, 1751-1945 228 

11-9. Approximate Ratio of Average Real Wage Rate at End of 

Period to Its Initial Value, 1860-1913 and 1919-1939 232 

15-1. Taxes on Income and Wealth in Selected Countries, Fiscal or 

Calendar Year 1950 325 

15-2. Taxes on Foreign Trade in Selected Countries, Fiscal or 

Calendar Year 1950 327 

15-3. Taxes on Consumption, in Selected Countries, Fiscal or 

Calendar Year 1950 330 

xiv Contents 

15-4. National Debt as Percentage of National Income in Selected 

Countries, 1950 334 

15-5. Total and Per Capita Government Expenditures in Selected 

Countries, 1949-1950 335 

15-6. Major Components of Government Expenditure as Percentage 

of Total, Selected Countries, Fiscal or Calendar Year 1950 336 

16-1. Net Movements of Private Long-Term United States Capital, 

1946-1952 346 

16-2. Net Additions to Private United States Direct Investments 

Abroad, 1946-1950 348 

16-3. Ratio of Earnings to Book Value of Private U. S. Foreign Direct 
Investments in Developed and Underdeveloped Areas and in 
the United States, 1945-1948 350 

17-1. Loans by the International Bank for Reconstruction and Devel- 
opment to Underdeveloped Areas, Fiscal Years, 1948-1953 363 

17-2. Grants and Loans by the United States Government to Under- 
developed Areas, Fiscal Years, 1949-1953 363 

17-3. Foreign Aid Programs of the United States Government: Grants 
and Credits Utilized in the Postwar Period and Unutilized as 
of December 3 1 , 1 952 364 

17-4. United States Government Foreign Grants and Credits, 1945- 
1952, and Loans by the International Bank for Reconstruction 
and Development, 1947-1953 367 

17-5. Net Credits Authorized by the Export-Import Bank, by Area 

and Country, July 1, 1945 to June 30, 1953 370 

Part I 


1. What Is an Underdeveloped Area? 

A GRADIENT AND NOT A CLIFF separates the underdeveloped areas of the 
world from the developed areas when countries and regions are placed in 
an array. At the extremes the contrasts are dramatically sharp, but in the 
middle ranges blurring is unavoidable. Nevertheless, to follow the now 
widely used terms appears to be the desirable course, even though to gen- 
eralize on this basis will stretch the facts a bit at times. For nowadays the 
usage is nearly universal and a satisfactory classification into more cat- 
egories is not easily devised. 

Present usage would put much of Asia and Africa, the Near and Middle 
East, southeastern Europe, the Caribbean and most of Central and South 
America in the underdeveloped category. On the other hand, the developed 
areas would include Western Europe, the U.S.S.R., northern North 
America, Japan, Australia and New Zealand, and the Union of South 
Africa. The developed areas are mostly in the temperate zones. Though 
China and Chile are also in the temperate zones, the underdeveloped areas 
tend to lie either in the tropics Indonesia, the Malay Peninsula and much 
of India, South America and Africa or in the adjacent fringes of the 
temperate zones. 

Loose generalizations about the underdeveloped areas as a whole, 
however, can easily be misleading because the countries or areas usually so 
categorized differ greatly in the degree to which they can be called under- 
developed by acceptable objective tests. Colombia and Ceylon, for instance, 
are usually referred to as underdeveloped countries and so are Egypt and 
Ecuador along with Nigeria and Nicaragua. But a generalization that 
would fit both Ceylon and Egypt might require appreciable qualification if 
applied to Nigeria. Similarly, if Western Europe is an already developed 
area it ought also to be kept in mind that to lump Spain and Portugal to- 
gether with Denmark and Germany makes an uneven loaf too. Finally, 
there arc often sharp contrasts between different regions within the same 
national boundaries: Michigan as against Mississippi, for example, or Sao 
Paulo, Brazil, as compared with Mato Grosso. 


An economically underdeveloped country is one which on the average 
affords its inhabitants an end product of consumption and material well- 


4 Approaches to Economic Development 

being appreciably inferior to that provided by the economies of the de- 
veloped countries. The underdeveloped countries are often called "poor" 
countries. Poor is a relative term. The citizen of first century Rome was 
materially poorer than today's resident of Copenhagen or Colombo. But he 
was not poor compared with people living on the outskirts of the then 
Roman world, for example in Germany or Macedonia. Similarly, the aver- 
age resident of Colombo today may be better off than he was a century ago 
but badly off as against the average resident of Stockholm today. 

Comparative Nature of Concept 

Thus, the concept is, first of all, a comparative one and refers to the 
performance record of a country's economy. Outside the economic sphere, 
an underdeveloped country may be highly developed in art, religion, 
philosophy or social organization, for example. To designate a country as 
underdeveloped also implies that its present economic performance as 
evidenced by the average of consumption and material well-being could 
be improved by means which are known and understood. If the under- 
developed countries were to use their existing productive resources more 
effectively and if, too, they were to augment the productive resources at 
their disposal, their people would get an appreciably better end product of 
consumption and material well-being than they are now getting. The task is 
not easy, and simple remedies are not ready to hand. Nevertheless, if much 
of what is routine practice in the developed countries could be transferred 
and applied in the underdeveloped countries, their residents would be dis- 
tinctly better off than they are now. 

Underdevelopment means poor economic performance as evidenced 
by the comparatively low average of consumption and material well-being 
of the people, plus the potentiality of improvement through the application 
of known means. 1 

The Potentiality of Improvement 

If a low average of material well-being were wholly explainable by im- 
mutable facts of physical environment or human nature, it would have to 
be accepted, like the weather, with resignation and despair. Yet such a 
view appears untenable. To be sure, there is no magic device which can 
immediately catapult an area to a much higher material plane. But more 
than a little is known about the nature of the changes required and the 
means by which they can be brought about. 

1. The above concept is much broader than use of the term "underdeveloped" to mean only the presence 
of underdeveloped "natural" resources such as basic raw materials or hydroelectric power sites. This usage 
seems much too restricted. While most underdeveloped countries doubtless have some unutilized natural 
resources of this type which could be exploited, this will usually not be the main avenue by which economic 
betterment will be attained. Moreover, the existence of such natural resources is not a necessary prior 
condition to development. 

What Is an Underdeveloped Area ? 5 

Among the reasons for believing that the average level of material 
welfare in the underdeveloped areas can be greatly improved is that two 
centuries ago, or more recently in many cases, consumption and material 
well-being in the now developed countries were little better than they are in 
most underdeveloped areas today. Although such comparisons are treach- 
erous, accounts of life in seventeenth- or early eighteenth-century Europe 
portray the people as living under conditions remarkably similar to those 
now found in many underdeveloped areas. These societies, however, sub- 
sequently developed and progressed sufficiently to provide a vastly im- 
proved material welfare. By present standards, though not by his, life in 
Hobbes's England was "poor, nasty, brutish and short," yet the circum- 
stances which made it so have given way to others which afford the average 
person both a longer and a better life. 

Clearly these changes had no single cause. The evolution of the West- 
ern world since the eighteenth century has been multiform and complex. 
Yet out of it all emerged an average of consumption and material well-being 
for the individual that is richer in texture and variety and available to more 
people over a longer life span. Furthermore, and perhaps most important 
of all, the changes wrought appear to be progressive and in a measure self- 
generating, so that further gains are still in prospect. 

Unfortunately, the underdeveloped countries of today have undergone 
no similar transformation. Average material welfare in these areas has not 
improved appreciably in modern times. Modes of thought remain essen- 
tially unchanged. Their societies, in the main, neither generate change from 
within nor easily accommodate it when it impinges from without. 

If these countries should develop as many appear determined to do 
the ensuing changes will probably not be wholly different from those which 
have brought about improvement of material welfare in the western world. 
This is not to say that the underdeveloped countries must repeat altogether 
the recent economic history of Western societies. The task may be easier and 
the time span shorter. But it is unlikely that the changes will be wholly 
different in character or that the dislocations, adjustments and adaptations 
which the developed countries have experienced can be altogether avoided. 
Moreover, the process of development as it has already occurred presum- 
ably has relevance in more ways than one to the problem of the material 
advancement of the now underdeveloped countries. 


International comparisons of human well-being are conceptually difficult 
and often statistically impossible. Among the reasons for these difficulties 
is the fact that many developed and nearly all underdeveloped countries 

6 Approaches to Economic Development 

have not compiled the relevant statistical data. The process of collecting 
and compiling reliable statistics demands sophistication and is expensive. 
Moreover, until recently, few countries saw any need for even the most 
elementary national statistics. 

Even were the desired statistical data available, however, international 
comparisons of human well-being would still involve sticky, often insoluble, 
problems of interpretation. Societies have their own cultures, and each 
culture has its own scale of values. This diversity means that identical physi- 
cal facts may have different significance for human well-being in different 
cultures. Few indexes of well-being would be placed at the top of the value 
scale in all cultures. Consequently international statistical comparisons 
may give misleading results. Furthermore, different particular indexes will 
almost certainly rank countries in different order. Ideally, one would like 
some over-all index of human well-being which would overcome the 
"weighting problem" implicit in partial indexes. But at present this ideal 
cannot be fully realized. 

A further fact often overlooked is that human well-being is not 
wholly reducible to quantitative terms. Psychological, anthropological and 
sociological studies seem to show that nonmatcrial drives and achievements 
are fundamental in all social groups, and that how well or how poorly a 
particular society provides for their expression will notably raise or lower 
the individual's sense of well-being. Related studies seem to indicate, more- 
over, that some highly developed societies with high material standards of 
living leave the individual rather badly off in these nonmaterial respects 
both absolutely and by comparison with societies that are less highly de- 
veloped in an economic sense. 

Peace of mind and contentment cannot be bought as commodities, while 
frustration and dissatisfaction are often free goods. But since these elements 
of human well-being do not lend themselves to statistical recording 
especially for comparative purposes as between countries or areas they 
tend to be glossed over or disregarded in international comparisons. This 
is even more likely if, as has often been true, the statistical compilations 
used to compare developed and underdeveloped areas tend to reflect the 
value scales of the already developed areas. 

International comparisons of human well-being must be gingerly handled 
and cautiously interpreted. They can lend themselves all too readily to false 
inferences and conclusions. Still worse, well-intentioned persons may find 
them a ready springboard for action programs verging on the grotesque. 

Two Kinds of Measures 

Keeping in mind the limitations just mentioned, statistical data bearing 
on development or underdevelopment in different countries may be con- 

What Is an Underdeveloped Area ? 1 

veniently divided into two groups. Group I would include those which 
indicate the quality and texture of life as "end product." That is, the statis- 
tical measure portrays some aspect of life which can be regarded as good 
or bad in itself, rather than as a means to, or an explanation of, something 
else desirable or undesirable. For example, higher life expectancy at birth or 
lower infant mortality or "better health" are presumably desirable as ends 
in themselves rather than as means to something else. 

Group If, on the other hand, would include those statistical findings 
which tend to portray economic performance and therefore to explain, or 
at least to correlate with, a poor end product of life as a whole as recorded 
by data of the first type. For example, a low agricultural productivity per 
person or per acre is presumably neither good nor bad in itself. But it may 
partially explain why diets are deficient and why the incidence of certain 
deficiency diseases is strikingly high in a particular area. 

Indexes in Group 1 variously express the fact that the underdeveloped 
countries are poor; those in Group II suggest some of the reasons for the 
low quality of life and the lines along which remedial action could proceed. 
The indexes in Group 1 are more likely to display the composite effects of 
a number of interacting causes. For example, a high rate of infant mortal- 
ity will usually not be solely a matter of diet or maternal health; it will also 
reflect the availability of medical care and prevailing sanitary practices. 
Though multiple causation may also be present in Group IT data, the factors 
at work and their relative importance will usually be easier to disentangle. 

Some statistical indexes may belong in both groups. According to the 
point of view, they are either end results or they help to explain why the 
over-all end product is what it is. For example, an endemic disease such as 
malaria may be undesirable by its very nature; but it may also seriously 
affect the energy and endurance and thus the productivity of the labor 
force. Illiteracy is another example. The statistical tabulations which follow 
in this chapter and the next, however, usually fall into one or the other of 
the two broad types. 


There are few wholly satisfactory indexes of the general texture of life as 
end product in one area or one historical period as against another. An 
acceptable index of life as end product should be free from subjective in- 
fluences, and either wholly outside the value scales dominating the cultures 
of the countries being compared or present as common elements in all. 
These are severe limitations, particularly so in view of the paucity of statis- 
tical data relating to most underdeveloped areas. Nevertheless, some few 
are available. 

8 Approaches to Economic Development 

Life Expectancy 

Life expectancy is surely one such index. So far as can be learned, people 
in all societies in all times and places have seemed to prefer life to death. 
Regardless of how they rank other values, people consider longer individual 
and average life expectancy desirable ends. This is not to say that in all 
cultures people prefer longer life to the realization of all other ends. This 
is manifestly not the case. But, other things being equal, a longer life is re- 
garded as better than a shorter life. 

As Edmund Halley suggested in 1693, in offering one of the first life tables 
ever prepared, its "Uses are manifold, and give a more just Idea of the State 
and Condition of Mankind, than any thing extant that I know of." 2 

A table of life expectancies shows, for a given population, the age to 
which an individual may, on the average, expect to survive. For example, 
it has been estimated that the life expectancy at birth of white males in the 
United States was 48.2 years in 1900-1902 but had risen to 64.4 in 1945 and 
to 65.9 in 1949. Similar figures for Massachusetts in 1789 indicate an ex- 
pectancy of only 34.5 years. A computation of expectation of life can of 
course be made for any age from birth onward. 3 

While life expectancies are by no means available for all countries, those 
that are available show striking contrasts. In the countries usually regarded 
as underdeveloped, life expectancy at birth frequently falls short of that in 
developed countries by 20 or even 25 years. In Scandinavia, England and 
most of Western Europe, life expectancy at birth in the period before 
World War II was above 60 years and sometimes above 65. In India, China, 
Indonesia and the rest of Asia, as well as most of the Arab world, the com- 
parable figure was probably more often below 40 than above. In Latin 
America, expectancies may have been somewhat higher. (See Table 1-1.) In 
the U.S.S.R. before World War II, the figure is reported at 46.7 for males; 
it has probably climbed somewhat in the postwar years. Since the end of the 
war, life expectancies have improved appreciably in some underdeveloped 
areas because of falling mortality rates, as they have in almost all developed 

2. As quoted in A. Wolf, A History of Science, Technology, and Philosophy in the XVlth and XVUth 
Centuries. Allen and Unwin, London, 1935, p. 610. Halley's paper, "An Estimate of the Degrees of Mor- 
tality of Mankind drawn from curious tables of the Births and Funerals at the City of Breslaw; with an 
Attempt to ascertain the Price of Annuities upon Lives," appeared in 1693. Until his paper appeared, life 
insurance, although already used in the sixteenth century, was akin to a game of chance or a wager. Earlier 
tabulations of the number of deaths in relation to population and the causes of death were made by John 
Graunt (1620-1674), Sir William Petty (1623-1687) and Gregory King (1648-1712). See ibid., pp. 587-608. 
But it was only in the eighteenth century that any serious efforts were made to calculate the population in 
France, Germany, Sweden and England. See also D. V. Glass, "The Population Controversy m Eighteenth- 
century England, Part I: The Background," Population Studies, July 1952, pp. 69-91. 

3. Life expectancy tables are computed for a given population cohort (say 100,000 live births) by recording 
the numbers actually removed by death in each age year. These may then be used to get an average age of 
death, which is the average life expectancy at birth. It is not a highly refined statistical measurement at all ; 
moreover, small differences between countries, especially underdeveloped countries, may not be significant 
because of possible imperfections in the raw data. 

What Is an Underdeveloped Area? 


(Average number of years of life remaining to persons of exact age specified, 
if subject to mortality conditions of period indicated) 


Period of Data 

Age in Year\ 




Developed Countries 

United States 

1 900-1 902 b 




1909-191 l b 








England and Wales 



















































Intermediately Developed Countries 














Underdeveloped Countries 

Southern North America 

Guatemala' 1 












55 J 

Costa Rica" 




Puerto Rico* 




Jamaica 11 





South America 

Brazil 1 








51 1 













. . 

. . 





Middle East 
(Continued on page 10) 

10 Approaches to Economic Development 


in Yean 

Count! y Penod of Data 0* 5 15 

U nderdeveloped Countries continued 
South Asia 

India' 1901-1911 23.0 35.2 30.6 

1921-1931 26.7 37.8 31.4 

Korea 1 ' 1938 48.9 55.1 47.3 

Southeast Asia 

Thailand^ 1937-1938 400 51.9 43.7 

Southeastern Europe 

Bulgaria 1899-1902 40.2 51.0 45.4 

1925-1928 46.3 56.8 49.3 

Greece 1920 447 52.9 45.6 

1926-1930 49.9 567 49.3 

Source' United Nations, Statistical Yearbook, 1V49 50, NewYoik, 1450, pp 54-63, unless otherwise 

a. Life expectancy figures exclude stillbirths 

b. Based on data for ten death-registration states ot 1900 

c. Including war losses. 

d Based on data for Department of Guatemala only 

e. Point Fow, U. S. Department of State, Publication 3719, January 1950, pp. 115-16 
f Excluding tribal Indians 

g. Kingsley Davis, The Population ot India and Pakistan, Pnnceton University Press, Princeton, 1951, 
p. 62 

h. United Nations, Statistical Yew boo!*, 1951, New York, 1951. 

i Based on data foi the Federal District and thirteen cities 

j. Including Burma Figures for India computed by Kingsley Davis in his book cited above are as follows. 

4ge in Years (Males Onlv) 
10 20 30 40 

1911-1921 194 267 255 216 179 

1931-1941 321 412 350 29.0 233 

k For Bangkok municipal area 

Average life expectancy is the net result of a wide variety of causes diet, 
disease, infant and maternal health, exposure to hazards, availability of 
medical care, sanitary practices, etc. As such, it supplies an over-all meas- 
ure of what a particular society affords as end product to the people who 
compose it. There can be little question that improved life expectancy is 
indicative of improved well-being, especially if the improvement is appre- 


Where detailed vital statistics arc unavailable or too unreliable for the 
computation of life expectancies, one has to resort to correlative measures 
such as crude death rates or infant mortality rates. 4 Here, as in the case of 
life expectancies, countries usually regarded as underdeveloped compare 

4. The compilation of life expectancies for underdeveloped areas is difficult not merely because deaths 
are incompletely recorded but also because many of the people literally do not know their own age, so that 
their age at death cannot be recorded a ecu lately 

What Is an Underdeveloped Area? 







Central America and West Indies 
Costa Rica 
HI Salvador 

Panama Canal Zone 
Puerto Rico 

South America 


China (Formosa) 
Federation of Malaya 

North America 
United States 

United Kingdom. England and Wales 

Far East 

Infant Mortality Rate 

Crude Death Rate 

(Number of Death i (Number of Deaths, 

in First Year of Life Exclusive of Stillbirths, 
per 1,000 Live Buth\) per 1,000 Population) 

U.S.S.R. a 



101 1 



























Source: United Nations, Demographic Yearbook, 1952, New York, 1952, pp. 264, 320. 
a Figures are conjectural and are for 1938-1940. See Frank Lonmer, The Population of the Soviet Union 
History and Prospects, League of Nations, Geneva, 1946, p 124. 

12 Approaches to Economic Development 

unfavorably with developed countries. In prewar years, the crude death 
rates number of deaths, exclusive of stillbirths, per 1,000 population- 
ranged between 16 and 23 in the underdeveloped areas as against 10 to 14 
in the developed countries. The picture of infant mortality is even more 
dismal. In the developed countries, the prewar infant mortality rate 
number of deaths in the first year of life per 1,000 live births was usually 
between 40 and 60, whereas in underdeveloped countries the rate was 
usually above 100 and sometimes above 200. (See Table 1-2. 6 ) Joseph J. 
Spengler even reports the surely incredible figure of over 500 for Iran. 
In 1949 in Sweden, on the other hand, the infant mortality rate had been 
cut to 23.2! 

General Health 

The general health of a population as an index of human well-being is 
closely akin to life expectancy indeed one of its determinants. The health 
of a population cannot be portrayed by any single measure, but it is mostly 
independent of cultural differences and can be objectively measured, at 
least in part. 7 If many eradicable diseases or debilitating ailments such as 
malaria, diphtheria, dysentery, hookworm or trachoma are endemic to 
some areas but almost absent in others, one may almost certainly conclude 
that the people in the infected areas have poorer health and, therefore, less 

The general health of the people in underdeveloped areas as measured 
by the incidence and mortality rates for certain common diseases com- 
pares unfavorably with the more developed regions. Disease is more wide- 
spread and it takes a heavier toll. Although comprehensive figures appar- 
ently are not available, the United Nations reports, for example, that the 
death rate from diphtheria in Costa Rica, Puerto Rico or Colombia is 6 to 9 
times that in the United Kingdom; from malaria, it may be 10 to 100 times 
greater; and for "other infectious or parasitic diseases" 10 to 15 times 
greater. Such preventable scourges as malaria and enteritis take a huge toll 
in underdeveloped areas, while only heart disease is shown as a significant 
killer in developed countries. (See Table 1-3.) 

5. The reader will observe that, if the data in Table 1-2 arc reliable, some underdeveloped countries, for 
example Surinam and Thailand, have death rates lower than Japan, which would not be considered under- 
developed by most people. Also one wonders if the infant mortality rate in the U S S R was, in tact, higher 
than m India. 

6 Joseph J. Spengler, "Economic Factors in the Development of Densely Populated Areas," Pt acceding? 
of the American Philosophical Society, February 1951, p. 39/i. 

7. It seems necessary to confine the comparisons to diseases for which medical science has evolved effec- 
tive means of control or of alleviation. Cancer and heart diseases are important causes of death in many 
highly developed countries and they also account for a certain number of deaths m underdeveloped coun- 
tries as well, but so far medical science has not developed means for substantially reducing the incidence of 
these ailments. By contrast, although people in the more developed countries still die of malaria or typhoid 
or tuberculosis, medical science has been able to cut the incidence of these diseases substantially in the last 
half century and similar techniques would presumably be as efficacious in the underdeveloped areas. 

What Is an Underdeveloped Area? 

(Deaths per 100,000 Population) 





Malaria Smallpox 



Diseases Infectious or 
of the Parasitic 
Heart Diseases 
















Costa Rica 









United States 









Puerto Rico 



















































Source. United Nations, Demovaplnc Yearbook, 1951, New York, 1951, pp. 396-419. 

If the death rates from eradicable diseases are so high in the under- 
developed areas the incidence rates must also be high, with all that this 
implies for human suffering and misery. While precise data on the incidence 
of certain diseases are unavailable, Joseph J. Spengler has recently stated : 

. . . malaria affects 300 million persons per year, killing 3 million and causing a 
loss of 20-40 days per person afflicted per year; schistosomiasis, a debilitating 
rural disease like malaria, afflicts 20-30 million people in the Near East alone and 
millions more in Africa, Asia and Latin America; filariasis cases number about 
189 million per year in underdeveloped countries; yaws, widespread in tropical 
countries, afflicts over one million in Haiti alone; hookworm and other intestinal 
parasites debilitate millions; cases of syphilis number 20-100 millions and those 
of gonorrhea 2-3 times as many. There is high incidence also in many under- 
developed countries of diseases accompanied by high mortality (e.g., smallpox, 
typhus, cholera, plague, kala azar, some fevers) or by disability (e.g., trachoma, 
leishmaniasis). 8 

All this even if the statement is somewhat exaggerated represents 
well-being with a huge minus sign. And what is more, with present knowl- 
edge, the incidence of these diseases could be reduced by large percentages 
at only moderate cost. 

Food, Clothing and Shelter 

"Food, clothing and shelter" was long the familiar phrase to designate 

man's minimal needs, and even today the degree to which a society pro- 

, vides these needs is some measure of its over-all achievement. Unfortunately, 

8. Spcngler, he. cit , pp. 38-39n. 

14 Approaches to Economic Development 

however, they only partly lend themselves to meaningful comparisons. So- 
cial custom, religious convictions, cultural patterns and geographical and 
climatic factors tend to make comparison exceedingly difficult and even, at 
times, meaningless. 

One may be reasonably sure that people everywhere dislike being hungry 
or without protection from the elements. But eating and housing are every- 
where something more than taking in calories and being sheltered from the 
rain. Yet the "something more" is likely to be so indigenous to each culture 
as often to defy objective comparison. What measures are available on 
these fundamentals of life are thus likely to be only indirectly revealing. 
Minor differences in calorie intake are likely to be due to food preferences 
or cultural differences; only a very low calorie intake probably signifies 
a hunger diet. On the other hand, where the calories are obtained almost 
entirely from cereals and/or potatoes, this is more likely to be by force of 
circumstances than by consumer preference. 

In the United States before World War II, calories per person were 
estimated at 3,249, of which 30-40 per cent were from cereals and potatoes; 
in India the calorie intake was about 2,021, of which 60-70 per cent was 
from cereals or potatoes. In India the calorie intake may be too low and 
too largely composed of cereals to give the population resistance to disease 
and the energy needed for the day's work. Estimates have been made of the 
amount and sources of calories consumed in a number of countries in pre- 
war years. (See Appendix 1-1.) Although these estimates are doubtless 
subject to a wide margin of error, they nevertheless indicate the inferior 
position of the underdeveloped countries relative to the developed coun- 
tries. Those that are underdeveloped consume considerably fewer calories, 
and the amount that they consume consists to a much greater degree of 
cereals and potatoes. 

An interesting study by M. K. Bennett compares prewar consumption 
and material well-being in 31 countries by means of 19 nonmonetary indi- 
cators. 9 Bennett groups his 19 indicators under six headings: Food and 
Tobacco; Health; Housing and Clothing; Education and Recreation; 
Transport and Communication; and, lastly, Balancing Indicators. His 
method is to set at 100 for each indicator the highest absolute figure found 
among the 31 countries, and then to express the absolute figures for the 
other 30 countries in that series as percentages of this figure. Since 19 series 
are used, the maximum rating any country could possibly score would be 
1900, and it would score that figure only if it stood highest among the 31 
countries in every one of the 19 indicators of consumption and material 

9 M. K. Bennett, "International Disparities in Consumption Levels," American Economic Review, 
September 1951, pp. 632 49. Bennett stresses the dangers of misinterpretation in reasoning from differences 
in patterns of consumption in different countries to differences in well-being. 

What Is an Underdeveloped Area ? 1 5 

well-being. No country scored this maximum, but the United States did get 
the highest score among the 31 countries included in the tabulation. 
Bennett reports that: 

The nearest competitor, Canada, scored only about four-fifths as many points; 
and the lowest-ranking nation, French West Africa, only about one-sixth as 
many. The gradient from highest scorer downward was initially steep and there- 
after more gradual. Only six countries Canada, Australia, the United Kingdom, 
Germany, France, and Argentina scored more than half as many points as the 
United States. There were 1 3 countries which scored from a fourth to a half as 
many points as the United States, and 1 1 countries which scored less than a 
fourth as many. 10 

The results of Bennett's calculations are shown graphically in Figure 1. 

Per Capita Income 

Finally, per capita income computations are also indicative of the quality 
of life as end product. These have often been used to compare under- 
developed areas with one another and with the more developed countries. 
And when used cautiously they can be enlightening. Nevertheless, they can 
easily be misleading. 11 As a Latin American writer has expressed it, 

A North American is interested in knowing the national income of the various 
Latin American countries expressed in dollars the only currency which for him 
has a definite meaning in terms of commodities and services. The basket of goods 
bought by North Americans is, nevertheless, different from that bought, for 
example, by Brazilians or Panamanians. Tastes and habits differ widely; natural 
conditions in the various countries are such that goods readily and cheaply 
available in the United States are rarities or delicacies in Latin America, and vice 
versa . . . clothing, buildings, transportation, almost everything is subject to 
regional differentiation which prevents any sort of accurate inter-country com- 
parison of national incomes or standards of living. 12 

10. Ibid., p 640. The details of the 19 series cannot be reproduced here but are fully explained in the 
article. Dr Bennett in private correspondence has made the following interesting comment on his calorie 
figures: "I now take issue strongly with the idea that figures on estimated calorie consumption per head 
indicate anything at all about relative well-being These are estimates pertaining to a five-year period. They 
pertain to 'calories at retail level,' not to ingestion, and thus include household waste ... I would not again 
use even calories per 100 pounds of humanity as an indicator, much less calories per head. There is no such 
thing as continuing chronic calorie shortage over years, what there is is sporadic shortage associated with 
war or crop failure." 

11 Simon Kuznets has called attention to this in a recent article, "in studying temporal changes and 
spatial differences in statistical indices it is necessary to consider the bias introduced by the changing or 
difletcnt proportion of the measurable to the total But recognition of this bias is not assurance of ability 
to adjust for it 

"A notable case of this difliculty, which becomes a pitfall when overlooked, is provided by national 
income, the most compiehensive measure of a country's economy and a gauge of its total current output 
The customary exclusion from this total of services rendered within the household, and of other services not 
designed for the market, means that at any given time the measure covers only part of the total volume of 
economic goods produced ; that over time, in a country in the process of industrialization, the proportion 
of total economic activity covered by the measure increases; and that at a given time the measure is more 
complete for industrialized than for underdeveloped countries. Yet it is widely employed with inadequate 
or no correction at all for these biases." Simon Kuznets, "Statistical Trends and Historical Changes," 
Etonomic Hi\torv Review, 2d Series, Vol. Ill, No. 3, 1951, p 275. 

12. Loreto M Dommgue/, "National Income Estimates of Latin American Countries" in Studies in 
Income and Wealth, Vol 10, National Bureau of Economic Research, New York, 1947. p. 236 












10 11 12 13 14 15 16 17 1819/ 


Total calories 
Nongram calories 
Infant mortality 
Sawn lumber 

Household energy 
Textile fibers 
School attendance 
Pieces of mail 
Movie theaters 
Railway freight 
Transport energy 
Motor vehicles 
Manufacturing energy 
Livestock units 






1400 1600 



Source: M. K. Bennett, "International Disparities in Consumption Levels," American Economic Re- 
view, September 1951. 


What Is an Underdeveloped Area? 17 

Any visitor in a foreign country will readily confirm the high cost abroad 
of stubborn adherence to his c^tomary pattern of living and consumption. 
The conversion of money figures in national currencies to some common 
currency, say U.S. dollars, is another difficulty which raises problems too 
numerous and complex to be dealt with here. 13 

Special Difficulties of Computation 

These and similar difficulties are particularly acute in the case of the 
underdeveloped countries. Perhaps the worst stumbling block is the fact 
that in many underdeveloped areas so much of "production" and "con- 
sumption" occurs wholly outside the market economy and therefore cannot 
be interpreted according to the usual principles of valuation and ex- 
change. 14 Economic activity is often almost indistinguishable from social 
behavior in general. In developed countries, the services of housewives may 
legitimately be excluded in reckoning national income. But if the wives sow, 
cultivate and harvest the entire food supply, exclusion of their services is 
surely absurd. Apparently, too, in some underdeveloped regions China, 
for example "income in kind" and services rendered gratis are exceedingly 
common. These are not easily valued and totaled. 15 

Other difficulties arise from the great variation among countries in the 
range, scope and conception of government activities. The services of 
governments of underdeveloped countries often bear little similarity to 
those accepted in more developed countries where national income calcula- 
tions have been developed. While one cannot be positive in these matters, 
the likelihood is that per capita income comparisons between developed 
and underdeveloped countries usually tend to exaggerate rather than to 
understate the gap between them in real terms, large as that gap undoubt- 
edly is. 

The reasons for this belief are numerous; some of them, however, are 
subjective and so not easily substantiated. For the more highly developed 
countries, consumers' durable goods and investment goods bulk large in 
the computations and tend to skew the results. Many of these goods are as 
much a measure of the degree of urbanization as they are of material wel- 
fare. The fact that the already developed countries are nearly all in the 
temperate zones and the underdeveloped countries mostly in the tropical 

13. See, however, Morris A. Copeland, Jerome Jacob&on and Bernard Clyman, "Problems of Interna- 
tional Comparisons of Income and Wealth" in ibid , pp 136-59; Ta-Chung Liu and Shan-K\vei Fong, "The 
Construction of National Income Tables and International Comparisons of National Incomes" ; Phyllis 
Deane, "Measuring National Income in Colonial Territories," in Studies in Income and Wealth, Vol. 8, 
National Bureau of Economic Research, New York, 1946. See also Phyllis Deane, The Measurement of 
Colonial National Incomes, Cambudge University Press, Cambridge, 1948. This volume contains estimates 
for Northern Rhodesia, Nyasaland and Jamaica 

14. The common technique of valuing such production at prices in adjacent markets often cannot be used 
because the markets do not exist or because the amount passing through them is but a tiny fraction of the 
whole. See The Measurement of Colonial National Incomes, pp. 153-58. 

15. See Liu and Fong, loc. ctt., pp. 95ff. 

18 Approaches to Economic Development 

latitudes also tends to make the per capita income figures higher in the de- 
veloped countries because so much effort must be spent there in protection 
from the elements. The commercialization of agriculture in the developed 
countries, in contrast to many underdeveloped countries, also tends to 
overstate the differences between them. Lastly, the simple fact that the sta- 
tistical data are plentiful for the developed countries and often nearly non- 
existent for the underdeveloped countries tends to mean that many things 
get "counted in" in the developed countries, while comparable items are 
omitted from the totals for the underdeveloped countries. This last may be 
only an extension of the general rule that income figures as between rural 
and urban areas tend to exaggerate the margin (in real terms) between 
them. And this is particularly true if price differentials between rural and 
urban areas are disregarded in the income comparisons. Underdeveloped 
countries are of course predominantly agricultural. 16 

Notwithstanding these difficulties, comparisons of per capita income are 
used frequently to suggest international differences in the flow of goods and 
services. For example, 1939 per capita income in the United States, accord- 
ing to one widely used estimate, was $554, in Argentina $218, in Bulgaria 
$109, in Indonesia $22. In the first 15 of 53 countries ranked in descending 
order of per capita income (Table 1-4), all but one (Argentina) had popula- 
tions with low growth potential (Type 1 : birth rates and death rates largely 
under control). On the other hand, of those countries ranking from 26th to 
last place in per capita income, 25 had populations with high growth poten- 
tial (Type 3: neither birth rates nor death rates in reasonably secure con- 
trol, although death rates, but not birth rates, generally falling) and only 
three had populations in transitional growth (Type 2: death rates, but not 
birth rates, coming under control). 

Polarization Shown by Indexes 

It was stated at the beginning of this chapter that an underdeveloped 
country is one which affords its people a comparatively poor end product 
of consumption and material well-being and that this relatively poor eco- 
nomic performance could be improved by means which are known, under- 
stood and have already been applied by the developed countries. Objective 
measures of net economic performance have demonstrated the validity of 
the first part of this statement. Whether the measure was expectation of life 
at birth, death rates, infant mortality rates, the health of the people, con- 

16. For an interesting discussion of some of the theoretical and statistical difficulties inherent in rural- 
urban and international comparisons of real incomes, see Nathan Koffsky, "Farm and Urban Purchasing 
Power,*' with comments by Margaret G. Reid, D. Gale Johnson and E. W. Grove; and Hans Staehle, "The 
International Comparison of Real National Income; A Note on Methods," with comments by Abram 
Bergson, Dorothy Brady and Eleanor M. Snyder, Morris A. Copeland and William Vickrey, in Studies In 
Income and Wealth^ National Bureau of Economic Research, Vol. 11, New York, 1949, pp. 156-272. Sec 
also Bennett, he. c//., pasiim. 

What Is an Underdeveloped Area ? 



53 COUNTRIES, 1939 

Per Capita 







[U.S. Dalian 

per Year) 




Upper income group (over $200) : 

United States 








United Kingdom 
















New Zealand 





































Middle income group ($101-$200): 

Union of South Africa 


















































Lower income group ($100 and below) 





































Costa Rica 



































Dominican Republic 










(Continued on page 20) 


Approaches to Economic Development 

53 COUNTRIES, 1939 Continued 


Per Capita 




(U.S. Dollars 

per Year) 






















El Salvador 








































Source U S Department of State, Point Four, Publication 3719, January 1950, pp. 113-14. 

Type I Low gmwth potential. Birth rates below 25 per thousand population Low death rates Small 
natural increase with prospect of relatively stationary populations in the future. 

Type 2. Transitional growth. Birth rates 25 -35 Both birth and death rates generally falling Rapid popula- 
tion growth. 

Type 3. High growth potential. Birth rates over 35. Death rates (but not birth rates) generally declining. 
Rapid grow th in absence of civil disturbance, famine, and epidemic. 

The birth rates refer to average annual figures for the period 1931-40 Official vital statistics were used 
where available, though for a number o*" countries these were corrected to take account of apparent under- 
reporting ot births. Birth rates were estimated from other demographic information for countries lacking 
official vital statistics 

sumption as revealed by certain nonmonetary indicators or by per capita 
incomes, the broad results were essentially the same: one group of countries 
tended to cluster at the favorable end of the scale; another and much larger 
group fell more or less regularly and consistently at the unfavorable end. 
The order of rank among those countries at the lower end was of course not 
always the same with each measure of net economic performance. Never- 
theless, the broad picture is unmistakable: one group of countries rates 
relatively well on the indicators, the other group quite poorly. Thus, pro- 
vided the criteria are accepted, countries can be roughly differentiated into 
those which provide their inhabitants a relatively good end product of con- 
sumption and material well-being and those which do not. 

The indexes that have been used to distinguish between countries which 
generally afford their residents a relatively poor life and those which do 
much better in this respect do not indicate in themselves to what degree or 
along what lines the end product can be improved. Answers to this question 
will necessarily depend upon a variety of factors the reasons for the low 
level of economic performance at present, the ease or difficulty with which 
the barriers to better performance can be removed, the kinds of positive 
measures introduced, the possibility of outside assistance, and a host of re- 

What Is an Underdeveloped Area? 21 

lated considerations. Even the most cursory glance at the underdeveloped 
countries from this point of view shows that they differ appreciably in their 
potentiality for bettering the lot of their people. And unfortunately, it is by 
no means true that those countries which stand most in need of betterment 
have the greatest potentiality for improvement. 


If underdeveloped areas can be distinguished from the already developed 
countries by means of certain indexes of life as end product that is, 
monetary and nonmonetary indicators which suggest economic perform- 
ance and material well-being then presumably a country could be said to 
be achieving development if these indexes showed sustained improvement. 
If the phrase "real income per person" is used as a shorthand expression for 
all these partial indicators of material well-being taken together, then de- 
velopment implies raising real income per person. In other words, viewed 
broadly, what is underdeveloped in the underdeveloped areas is their real 
income potentialities; development means exploiting these potentialities. 
The real income potential of the land and the people, together with what 
capital equipment and technical knowledge they now have or can obtain, is 
for the underdeveloped areas appreciably above the level of real incomes 
which now prevail. 

A Broad Concept 

Underdevelopment of real income potentialities is clearly a broader con- 
cept than underdevelopment of natural resources or lack of industrializa- 
tion. Either exploitation of natural resources or industrialization or both 
might lead to higher real incomes in a particular underdeveloped area; but 
the concept of development is broader than either. To say that a country is 
underdeveloped does not necessarily imply that it has an abundance of un- 
tapped natural resources or that it should be industrialized. Development 
consists in making those changes nearly all will require use of resources 
to some degree which will most effectively realize the real income poten- 
tialities of a particular area. 

What these changes will be probably cannot be answered by general 
economic analysis. The most promising approach for some areas may be 
via a more efficient use of the productive resources already in hand, for 
example, the labor force or land as a factor of production ; for others, the 
important obstacles to higher real incomes may be a dearth of entrepre- 
neurial abilities and productive capital equipment or socio-cultural factors. 
Regardless of these differences, development means developing the real 
income potentialities of the underdeveloped areas by using investment to 

22 Approaches to Economic Development 

effect those changes and to augment those productive resources which 
promise to raise real incomes per person. 

The phrase "economic resources available to an area" has little meaning 
unless the state of the industrial arts or technology of the particular area is 
specified. Coal was not an economic resource to the Welsh or the English in 
1066, nor is uranium an economic resource to the native tribes of the Bel- 
gian Congo today. What is a productive resource in any area depends a 
good deal upon the technical and industrial sophistication of the people 
who inhabit it. Consequently, the more literate, skilled and knowing the 
people become, the more numerous are the productive resources external 
to themselves which are available to them for augmenting their real in- 
comes. The nonhuman resources tend to be a variable, dependent upon the 
character of the human productive resources. 

The emphasis in the above is to identify development with those changes 
and investments which lift real incomes per person as measured by vari- 
ous monetary and nonmonetary indicators of material well-being closer 
to their potential level. Presumably, developmental changes should be of 
a kind and type which generate a sustained growth in real incomes. A tem- 
porary upsurge in material well-being followed by a recession to the initial 
levels could scarcely be called development. 

While the foregoing probably corresponds to the common understanding 
of the term development, an awkward difficulty remains: What of the case 
where, despite important changes and sizable investments of a develop- 
mental character, real income per person does not increase over time, but 
instead a larger population gets an unchanged average income? Can one 
still say there has been development? Probably so. For it must be conceded 
that if the economy over time is able to support larger and larger numbers 
at the same level of material welfare, then welfare has improved: had de- 
velopmental changes not been instituted, some persons now alive would not 
have survived, or if they had, they would have been less well off than they 
now are. Though this conclusion may seem paradoxical it appears to be the 
more reasonable of the alternatives. 

The case is of more than hypothetical interest. In countries with high 
birth rates and falling death rates, a goodly share of the benefits of what 
would usually be regarded as developmental projects will take the form of 
increased numbers in the population rather than appreciably higher real 
incomes per person. The case of India comes to mind at once. 17 

17. See Chapter 5. 

2. The Determinants of Real Income: 
Resources and Their Productivity in Underdeveloped Areas 

THE FLOW OF OUTPUT, and hence average real incomes, in any society de- 
pends upon the productive resources available to it; how effectively these 
are used; and the cultural, social and political framework within which all 
economic activity in the particular society is carried on. These three factors 
broadly determine the level of total output and thus per capita incomes at 
any point in time. Similarly, efforts to raise real incomes in any area can be 
classified initially according to whether they attempt to augment the pro- 
ductive resources available, to improve the efficiency with which resources 
are used, or, lastly, to modify the socio-cultural environment in ways that 
either increase the available productive resources or enlarge the output 
they yield. 1 

In any actual society, of course, the three major factors or determinants 
have numerous cross relationships. But before examining these intricacies 
let us first attempt to give more content to the three determinants. 2 


Real income per person may be low primarily because the productive 
resources available though efficiently used are so poor in quality or so 
deficient in quantity that little, if any, greater output can be had from them. 
If so, a better end product for the inhabitants depends upon augmenting the 
quantity and improving the quality of the area's productive resources. 
Since labor is a basic resource, people who are illiterate, diseased and 
undernourished, for example, are necessarily poor workers who will have 
a low output per person. Or if virtually all the arable land is already being 
cultivated efficiently, then a greater agricultural output would require more 
capital in production. Even areas that are already densely populated may 

1. At least theoretically, income distribution in underdeveloped areas could be a problem. The existing 
aggregate output could conceivably give most of the people a better end product if it were not so badly 
skewed in its distribution: a few have far too much, many have far too little. 

Although incomes are badly distributed in most underdeveloped areas, this factor appears to be of minor 
direct importance in explaining the low incomes of the bulk of the population. Incomes are not low primarily 
because output is badly divided. However, the indirect effects of a more nearly equal income distribution 
upon the size and composition of total output might be appreciable. Also, a badly skewed income distribu- 
tion has important indirect effects upon output through the kind of social system, governmental organiza- 
tion, fiscal and tax arrangements and economic motivation likely to be associated with gross inequalities. 

2. Consideration of the socio-cultural factor is mostly postponed to Chapter 4. 


24 Approaches to Economic Development 

be acutely short of certain kinds of human skills or special abilities entre- 
preneurs, innovators, administrators, for example. Thus the kinds and 
quantities of productive factors available are an important determinant of 
average real income. 

Resource Utilization 

Real income per person may also be low, however, partly because the 
country does not use the productive resources it already has as effectively 
as it might. The land, the capital equipment and the labor force as they now 
are poor quality and all could be made to yield an appreciably larger 

In the underdeveloped areas, this present inefficiency in resource use or 
underutilization of productive resources will necessarily be found chiefly in 
agriculture since the population is now mostly employed in agriculture. 
Better systems of crop rotation without additional land, labor or capital 
would often improve output. The seasonality of agriculture often means 
that much of the labor force is nearly idle for long intervals when instead it 
might be productively occupied. And there may be other people who are 
only nominally engaged in agricultural production in the sense that if they 
were withdrawn, total output would not decline. These are only a few ex- 
amples. Of a different sort are inefficiencies in production which arise from 
the geographical and occupational immobility of the labor force. The low 
level of real incomes in underdeveloped areas is thus not simply a matter of 
insufficient resources, but also of the inefficiency with which present re- 
sources are being used. 

Some observers would insist that perhaps the primary reason why pro- 
ductive resources in underdeveloped areas are often unutilized or ineffi- 
ciently employed is the great dearth of persons with organizational and 
administrative skills in nearly all branches of private and public life. Entre- 
preneurs and entrepreneurial abilities are in short supply. The qualities of 
leadership combined with organizational and administrative skills are said 
to be all too rare in the underdeveloped areas. Were these skills more plenti- 
ful and more widely diffused and applied, the other resources would yield 
a better product and the present environment would be seen to contain far 
more resources than are now believed to exist. The inefficiency with which 
some resources land and labor, for example are currently used is 
attributable in part to the fact that a particular kind of productive factor, 
entrepreneurial and organizational ability, is in short supply. 3 

3. Consideration of some of the reasons for this dearth of entrepreneurial abilities in underdeveloped 
areas is postponed to Chapter 4 since the reasons for it appear to be primarily social and cultural. The 
importance of entrepreneurial and organizational abilities is well demonstrated by J B. Condhffe in The 
Commerce of Nations, Norton, New York, 1950, pp. 677-95. For a particularly graphic account of the tragic 
consequence of the absence of such organizational and administrative abilities see Peter G. Franck, "Eco- 
nomic Planners in Afghanistan," Economic Development and Cultural Change, February 1953, pp. 323-40. 

Resources and Their Productivity in Underdeveloped Areas 25 

The Socio-Cultural Environment 

The third major factor in the flow of output and hence of real incomes 
in any area is the social, cultural or political environment within which the 
existing productive resources are used and increments thereto must be 
effected. Output and income per person in any society depend not alone on 
the kinds and quantities of productive resources available and how these 
are utilized in production, but also on those more intangible but no less 
"real" conditions which formal economic analysis is likely to pass over. If 
the Hindu religion attaches special significance to the cow, it seems a bit 
forced to say that the people of India make less than full and effective use 
of their cattle as an economic resource. Similarly, if the value system of a 
society assigns a low prestige index to entrepreneurial abilities or to com- 
parable personality traits like leadership, initiative, imagination and or- 
ganizational ability displayed in other spheres, then it is more reasonable 
to say that social and cultural factors inhibit economic achievement than 
to say that these abilities are untapped. 

This category is clearly an omnibus affair. It includes a wide variety of 
institutions, mores and habits of thought which reflect the value systems 
and religious tenets dominant within the area or country. Among many 
other things, it would include the legal and political organization of the 
society, the structure of family organization and the values which dominate 
it, the extent to which work, creativeness and productive activity are held 
in esteem or treated with disdain. All in all, this factor relates to the whole 
environment which surrounds the use of productive resources in the society 
and the conditions within which economic resources must be reallocated 
and increased in number and kind. 4 

A Necessary Caution 

This formulation of three determinants of income, however, calls for a 
word of caution. As formulated, the quality of life as end product, real 
income per capita, etc., has been treated as the result, the dependent varia- 
ble, which is determined by certain identifiable causal factors. The answer 
to the question, Why do underdeveloped areas have the low incomes they 
do? has been put in terms of three groups of causal factors which tend to fix 
the level of total output and, hence, income per person. While this formula- 
tion is analytically useful, it is also true that the low productivity which 
"explains" the low incomes in underdeveloped areas is itself partly the 
result of poor diet and poor health which make people lethargic, of incomes 

4. For various economic approaches to this range of problems see Moses Abramovitz, "The Economics 
of Growth" in Bernard F. Haley (Ed.), A Survey of Contemporary Economic*, Vol. II, Irwm, Homewood, 
Illinois, 1952, pp. 132-78, especially pp. 138-44; W. W. Rostow, The Process of Economic Growth, Norton, 
New York, 1952, Chapter 2 and pa\\im, and Joseph J. Spengler, "Economic Factors in the Development of 
Densely Populated Areas," Proceeding of the American Philosophical Society, February 1951, pp. 20~53. 

26 Approaches to Economic Development 

per capita so low that they leave little beyond bare consumption needs from 
which to accumulate capital goods, of a cultural environment which checks 
the incentive to greater efficiency in production. 

The very quality and texture of life as end product is thus in part the 
explanation of why it is what it is. It is paradoxically true that people are 
poor in underdeveloped areas simply because they are poor. In other words, 
there is no simple causal relation between the end product and the factors 
which make the end product what it is; rather, the relation is one of com- 
plex interdependence and interaction between the variables, much after the 
fashion of the general equilibrium theory in economics of the relation be- 
tween product prices and factor prices. 

Much of this paradox arises from the fact that people are at one and the 
same time a factor in production and the recipients of the end product 
which flows from all the factors of production used in combination. Hence 
one can say that when people are ridden with malaria or when they have 
diets so poor that they are easy victims to epidemic diseases, they are badly 
off: the end product of the economy is poor. But one can equally well say 
that they have these diseases mainly because they produce so little and that 
one of the reasons why they produce so little is the fact that their illnesses 
seriously reduce their working effectiveness. 

Differences among Countries 

Notwithstanding this interdependence, the relative importance of the 
three causal factors mentioned above is quite uneven among the under- 
developed areas. In some, the evidence suggests that the crux of the problem 
of low incomes lies in the socio-cultural environment rather than in any 
acute shortage of productive resources relative to the population. In others, 
the populations are so large and the available capital equipment and arable 
land so small in quantity or poor in quality that even the most favorable 
socio-cultural environment might not suffice appreciably to raise real in- 
comes per person. In Egypt, for example, the productivity of agriculture per 
unit of land area is notably higher than in most underdeveloped areas. 
Consequently, higher real incomes must probably be sought mainly in other 
directions. But the same could not be said of parts of Latin America, where 
the income potentialities in agriculture are far from fully exploited. 

In other words, while all three elements factor supply, factor use and 
the socio-cultural environment are probably of some causal importance 
in accounting for the low incomes in all underdeveloped areas, their relative 
importance as between one country and another is very uneven. Conse- 
quently, the most effective way to raise real incomes will not be everywhere 
the same. Economic development will necessarily mean different things in 
different areas simply because the factors which account for the low level 

Resources and Their Productivity in Underdeveloped Areas 27 

of real incomes at present are not of equal importance in all countries and 
because, too, the means or directions by which these incomes can be im- 
proved are not everywhere equally promising. 


Unlike land and capital, human beings are at once a factor in production 
and the end purpose of economic activity as a whole. Viewed as "labor," 
human beings are an agent of production ; viewed as people, they alone 
have wants and needs to be satisfied by the productive process. Here the 
emphasis is entirely upon labor as a factor in production. 

Broadly speaking, the productivity of human labor when combined with 
land and capital resources depends upon the numbers and skills of the total 
population and the energy, drive, regularity and ingenuity with which these 
are applied in productive activity. The total population in relation to usable 
land area or to the available stock of capital goods does not constitute the 
effective labor force. The age and sex composition of the population and 
the mortality rates and fertility rates at various ages, along with social and 
cultural factors, chiefly determine the size of the labor force or the supply 
of labor. But even this statement is only approximately correct, since it 
takes no account of the varying amounts of time that members of the labor 
force may be willing or able to devote to productive activity. Also it does 
not measure differences in relative efficiency. Two equal populations might 
have identical proportions "in" the labor force yet in one of them more 
people might be involuntarily idle for several months each year and also 
measurably less efficient when actually working. Economically, therefore, 
the two labor forces of the same actual numbers are of unequal significance. 
Countries differ appreciably in this regard. 

Demographic Differences 

Leaving aside for the moment unemployment and differences in the 
average skill or efficiency per person in the labor force, the contrast between 
the developed and underdeveloped areas is demographically most striking 
in three respects. First, in the underdeveloped areas characteristically a 
much higher proportion of the total population is in the younger age 
groups. Second, the mortality rates in these younger age groups are appre- 
ciably higher. Third, those who do escape death in childhood and reach a 
productive age have, on the average, fewer productive years remaining 
to them. 

Available evidence shows that, on the average, in the underdeveloped 
.countries about 40 per cent of the population is below 1 5 years of age as 
against only 25 per cent in the more developed countries. Thus the under- 
developed areas have about 15 fewer persons per 100 inhabitants who are 

28 Approaches to Economic Development 

old enough to work and be productive than the developed countries 
assuming of course that children do not work before the age of 15. (See 
Table 2-1.) 


Estimated Percentage of Population 


15 Years 


60 Years 
and Over 










United States and Canada 




Latin America 




Asia a 

Near East 




South-Central Asia 








Remainder of Far East 




Europe 1 ' 

North- West-Central Europe 




Southern Europe 




Eastern Europe b 








Source United Nations, Demographic Yeatbook, 1949-50, New York, 1950, p 15 

a. Excluding Asiatic pait of the U.S S.R. 

b. Including Asiatic part of the U S.S.R 

The underdeveloped areas are even worse off in the productivity of their 
numbers than these figures suggest, because a larger proportion of the 
group "under 15" in these areas is made up of children under 5 or under 
10 years of age. Young children not only have no productivity but they 
pre-empt the working time of many adults. For example, in Egypt in 1937, 
39.2 per cent of the total population was below the age of 15, 27.2 per cent 
was below age 10 and 13.4 per cent below age 4. By contrast, in the United 
States in 1940 only 25 per cent of the population was below age 15, 16.1 
per cent below age 10 and 8 per cent below age 4. These figures, more- 
over, probably understate the differences because of underreporting of 
young children in the census and the use of rounded figures for the ages of 
young children/' 

5. Joseph J Spengler points out that these differences in the age composition of the populations of de- 
veloped and underdeveloped areas are principally the result of the fall in mortality in the developed coun- 
tries. He also suggests that this improved age composition may have "increased per capita productive 
capacity perhaps 10-25 per cent and . . . made age structures such as the American about one-sixth more 
productive than those of Asia and Latin America." See his chapter entitled "Population Theory" in Bernard 
F. Haley (Ed.), A Survey of Contemporary Economics, Vol. II, Irwin, Homewood, Illinois, 1952, p. 106. 

Resources and Their Productivity in Underdeveloped Areas 29 

Waste in Costs of Dependency 

Any society necessarily uses productive resources in the rearing and 
training of its children. From the economic point of view, this is a social 
investment which will yield benefits as the children advance into the pro- 
ductive years. Unfortunately, in the underdeveloped areas, these social 
investments yield smaller returns than in the more developed countries for 
two reasons. The first is that a sizable proportion of the dependency out- 
lays yield no return at all because of the high infant and juvenile mortality 
rates: many of those born and reared through part of childhood never 
reach an age at which productivity could commence. 6 Moreover, in some 
underdeveloped areas, the ceremonies attendant upon birth, death and 
burial impose a further drain on resources that could be better used in other 
ways were mortality rates not so high in relation to birth rates. 

The second reason why underdeveloped countries get smaller returns 
from the outlay costs of dependency is that a child who has reached the age 
of 15 may look forward to fewer years of productive work before his de- 
mise. The expectation of life at age 15 in Sweden in 1941-1945 was 56.7 
years and in the United States in 1939-1941 it was 53.2 years. In contrast, 
life expectancy at age 15 in Guatemala was only 41.7 years (1939-1941); in 
Mexico, 39.4 (1929-1933); in Brazil, 40.1 (1920); in Korea, 47.3 (1938); 
and in India, only 31.4 years (1921-1931). The gap is thus appreciable. 


The labor supply in underdeveloped areas has so far been discussed 
chiefly in terms of the numbers in the population, their age distribution and 
the time span of their economically productive years. The assumption im- 
plicit in this treatment was that productive efficiency per person in the labor 
force was uniform: that one might reason from the numbers and composi- 
tion of the labor force, their average life expectancy, and so on, to the sup- 
ply of labor. This is patently false, since average efficiency per member of 
the working population differs appreciably between one underdeveloped 
area and another, and differs markedly as between developed areas and 
underdeveloped areas. 

Factors in Inefficiency 

Unfortunately, no general index of the economic efficiency of labor is 
available which can be used to compare countries with one another. One 
can only infer probable efficiency from certain collateral facts which, 
a priori, seem to be associated with efficiency. For example, a population 

* 6. The relevant data on infant mortality have already been presented in Table 1-2. But juvenile mortality 
rates are also appreciably higher in underdeveloped areas. In the more developed countries mortality rates 
in the age category 1-4 years range from about 1.5 per 1,000 (Sweden, 1947) to 4.0; in the underdeveloped 
countries the comparable range is perhaps 25 to 70. 

30 Approaches to Economic Development 

with a literacy rate of, say, 90 per cent is certain to be more efficient eco- 
nomically than one where the rate is 10 per cent. The tasks people will be 
able readily to perform where literacy is the rule will differ vastly from 
those people will be able to perform where it is the exception. Conse- 
quently, a high rate of illiteracy is prima facie evidence that a whole range 
of skills will be lacking because illiterates cannot acquire these skills. Sim- 
ilarly, a nation having few schools or teachers, or where people normally 
spend only a brief period in school, has, by definition, less effective means 
for imparting many skills to its people. 

Labor efficiency is also affected by the energy people have available for 
the work in hand. Apart from cultural and social factors, which will be con- 
sidered separately, this is probably largely a matter of diet and disease. 
Diets below the biological minimum requirements and endemic disease 
induce lethargy and apathy. People are often too ill to work at all, and even 
when they are at work they may lack the energy to be efficient producers. 
On both counts, the average annual output of the population is reduced. 

Evidences of Inefficiency 

In spite of the absence of any over-all index of labor efficiency by which 
directly to compare countries with one another, certain useful inferences 
can probably be drawn from such collateral facts as those just mentioned. 
And as might be supposed, the indirect evidence available suggests a marked 
gap between average labor efficiency in underdeveloped areas and that in 
the more developed countries. 

In the underdeveloped areas, the proportion of illiterates ranges from 
40 per cent to 90 per cent as against 4 to 8 per cent in the more developed 
countries. 7 Educational facilities are also far less abundant in the under- 
developed countries. Whereas in the underdeveloped countries the number 
of elementary school teachers per 1,000 population seems to vary from 0.63 
(Haiti) to 2.4 (Mexico), the developed countries have ratios of from 4 
to 5 more than twice as many. Technical schools and higher schools are 
much fewer in relation to the population in underdeveloped regions and 
are sometimes almost nonexistent. 8 

The profound effect of poor diets, endemic disease and lack of medical 
and hospital care upon the energy, and thus the efficiency, of labor in under- 
developed areas has been touched upon in Chapter 1. Mortality from 
tuberculosis ranges from 41 per 100,000 in the Netherlands to over 400 in 

7. See United Nations, Statistical Yearbook, 1949-50, New York, 1950, Table 163, pp. 486^. Generally 
speaking, the illiteracy rate is higher among females than among males and higher for the older age groups 
than for those in the earlier years. Ordinarily, illiteracy is expressed in terms of percentage of the population 
10 years of age and over. 

8. The United Nations classifies educational institutions under four headings: primary, secondary, 
technical and higher. For most underdeveloped countries there are few entries in the higher classifications, 
There are exceptions, however; for example, although the United Nations' Statistical Yearbook, 1949-50, 
gives no data on India or China, it is well known that these countries have long had universities. 



Death Rates 
per 100,000 

of Population 
Age 10 and Over 
(about 1930) 

per 1,000 

School Teacher* 
per 1,000 

United States 


below 5 





" 5 



United Kingdom 


" 5 





" 5 





" 5 





" 5 



New Zealand 


" 5 





" 5 





" 5 





" 5 










below 5 










below 5 








Union of South Africa 

















below 5 




















below 5 






























below 10 


















Costa Rica 
























, . 











Dominican Republic 






























El Salvador 








































Source: U.S. Department of State, Point Four, Publication 3719, January 1950, pp. 115-16, 122-23. 


32 Approaches to Economic Development 

China; the number of physicians per 1,000 population from 1.38 in Pales- 
tine and 1.37 in the United States to .02 in Indonesia. (See Table 2-2.) While 
the data are fragmentary and imprecise, they point to one of the primary 
causes of the low efficiency of labor in underdeveloped areas. 

Mobility and Productivity 

One of the striking features of the labor force in most underdeveloped 
areas is its relative immobility geographical, occupational and social. The 
allocation of the labor force appears to be based much more on caste, class, 
custom, tradition or similar social sanction than on personal preferences 
and abilities. Consequently good talent may go unutilized and obvious 
ineptness may go uncorrected. Market considerations such as cost and 
returns play a smaller part than in developed countries in determining how 
the labor force is utilized in production. 

While geographical mobility is partly held in check because of poor com- 
munications and transport, the social and cultural factors governing entry 
and exit into various callings appear to be considerably more important. 
The usually greater rigidity of class distinctions and class lines in under- 
developed areas, which often virtually preclude vertical mobility, must also, 
it would seem, inhibit diligence, imagination and ingenuity among mem- 
bers of the labor force. If "advancement" to a higher social class and "de- 
motion" to a lower are both nearly impossible, then neither the spur of 
ambition nor the fear of failure will be of much importance as a factor in 
labor output. 


Land, regarded as an economic resource, implies not mere area alone but 
its climatic complement, topography, soil, vegetation cover, water tables, 
mineral content, waterways and much else besides. Together these deter- 
mine what useful products can be obtained when land is combined in pro- 
duction with labor and capital equipment. 

Some characteristics of particular land areas are virtually immutable, 
with important consequences for their potential productivity. Man cannot 
change the winds of Patagonia, the heavy rains in parts of the tropics or the 
monsoons in India. On the other hand, judicious investment of labor and 
capital in irrigation works, transport facilities, harbor developments, fer- 
tilizers and so on can often greatly increase the output even from poor land. 
Similarly, technical advances in agricultural science may convert barren 
wastes into fruitful fields. For example, in recent decades improved strains 
of wheat have pushed the boundaries for the economical production of this 
crop much closer to the poles. 

Resources and Their Productivity in Underdeveloped Areas 


The physical and economic geography of particular underdeveloped 
areas must be left to specialized studies with maps of topography, rainfall, 
soil, mineral deposits and the like. Economic development, moreover, 
depends not so much on the physical characteristics of the land areas where 
low incomes prevail as on the possibilities of raising these incomes by com- 
bining the land with other productive agents to yield a larger output. 

Cultivable Land 

Only about 7 per cent, or 2.6 billion acres, of the 35.7 billion acres of the 
earth's surface is believed to be suitable for agricultural production. Of 
these 2.6 billion acres, about 60 per cent is now used for the production of 
food, including grain feeds for livestock, while the remaining 40 per cent 
produces nonedible crops or stands idle. 



Adapted to 
Produ( tion 

Used for Food 
Crops, Including 
Grain Fed to 

Acres per Capita 

Adapted to 

Used for Food 
Crops, Including 
Grain Fed to 

Food Crops : 
Yield per 
Harvested Acre 

(Millions of Acres) 

(Lbs. Dry Weight) 







North America 






South America 







Source Adapted from Joseph J. Spengler, "Aspects of the Economics of Population Growth, Part II," 
Southern Economic Journal, January 1948, p 252. 

But this world figure of 60 per cent is the result of averaging out wide 
disparities among the continents. North America, for example, is estimated 
to have 570 million acres of land suited to agricultural production, of which 
317 million acres, or 55 per cent, is now devoted to food production. In 
South America, only 37 per cent of the 220 million acres of comparable 
land is used for food production. But in Asia, 79 per cent of the usable 600 
million acres is already being used to produce food. When these figures are 
reduced to a per capita basis, the land scarcity in Asia shows up even more 
sharply. Asia has only .52 acre per capita suited for agriculture and only 
.41 acre per capita devoted to food production. In North America, the 
corresponding per capita figures are 3.10 and 1.72 acres, or roughly six 
times and four times as much. (See Table 2-3.) 

Even these statistics do not show the marked differences among individ- 
ual countries. Insofar as a global picture can be conveyed, Figures 2 and 3 



36 Approaches to Economic Development 

come about as close to portraying the "facts" as can be done in summary 
form. 9 

Only a few underdeveloped areas appear to have much potentially pro- 
ductive land which is not already in use. One index sometimes used to 
indicate the possibilities of further land development is the percentage that 
the area of unused but potentially productive land area forms of that 
already in use. On this basis, Nicaragua (827 per cent), Brazil (155 per 
cent), India (57 per cent), Burma (64 per cent), Syria (147 per cent), Tunisia 
(109 per cent) and Liberia (150 per cent) all appear to have at least half as 
much unused but potentially productive land as they have land already in 
use. 10 These figures are not to be taken too literally, however, and their 
usefulness is limited by the lack of comparable data for many other under- 
developed countries. Moreover, the phrase "potentially cultivable" implies 
a host of assumptions as to the "other conditions" necessary to realize this 
potential. The underdeveloped areas as a whole and especially those with 
already large populations probably do not have large unused but poten- 
tially cultivable land areas. Much of the unused land is little more than 
desert. In the Middle East, for example, "desert comprises 95 per cent of 
area of Egypt, 80 per cent of Jordan, 40 per cent of Israel (35 per cent of 
Palestine), 33 per cent of Iraq, 25 per cent of Iran and Syria and 20 per cent 
of the Anglo-Egyptian Sudan; figures are approximate." 11 

Implications of Land Scarcity 

Some underdeveloped areas already suffer so much from acute over- 
crowding on the land that, barring technological progress or large invest- 
ments, the prospects for higher incomes through further intensification of 
land use are not encouraging. Others are in a more favorable position, in 
India, for example, the ratio of the arable land in hectares (one hectare = 
2.47 acres) to the agricultural labor force was already 1.04 in 1947; that is, 
each agricultural laborer had on the average 1.04 hectares of land with 
which to work. 12 In Indonesia, the comparable figure was 0.797. Turkey, 
on the other hand, had 3.087 hectares per agricultural worker, Mexico 5.26 
and Venezuela 31.94. As compared with Canada's 28.37, Egypt had only 
0.57 and Japan 0.34. 13 

9. As a friendly critic has pointed out, however, there are no really accurate data as to what lands are 
suited to agricultural production among those that are not actually cultivated at present : the tendency is to 
list uncultivated lands as incapable of cultivation or at least economically uncultivable. In a good many 
underdeveloped areas, however, only a modicum of reliable information exists concerning the productive 
potential of lands not now in use Moreover, the usability of land, as of other resources, is a function of the 
level of technical knowledge in the population and the degree of economic development. 

10. Computed from Appendix 2-1 by dividing the figure in column 6 by that in column 4. 

11. United Nations, Review of Economic Condition? in the Middle Ea\t (Supplement to World Economic 
Report, 1949-50), 1951, New York, 1951, Table 30, p. 64. 

12. Note that these figures relate land area to the labor force and not to total population as in Table 2-3. 

13. Figures for these and other countries are shown in Appendix 2-1, which is a summary of data on the 
relation between land and people in agriculture. 

Resources and Their Productivity in Underdeveloped Areas 37 

A low ratio of land area to labor force in agriculture is not necessarily 
associated with low income per person: Switzerland (1.22), Belgium (1.60) 
and the Netherlands (1.89) are all examples of the contrary. When the ratio 
drops below one hectare of arable land, however, the probabilities are that 
per capita income will also be at a very low figure, say less than $100. 

Thus to a limited extent scarcity of land accounts for the low incomes of 
the underdeveloped areas. Unfortunately, however, the large potentially 
cultivable land areas that are known to exist are mostly either in already 
developed countries such as Canada, Australia and the United States or in 
underdeveloped countries that are remote from the overcrowded countries, 
for example in Latin America. Consequently, at least for the present, no 
appreciable increase in incomes is in prospect merely through making more 
land available to those who need it. Better incomes will have to come 
chiefly from better use of existing land resources. From the point of view 
of its productive contribution, moreover, land varies widely in "quality." 
Yet the underdeveloped countries, by and large, are less able than others to 
make full use of the potential productivity of their best land or to modify 
or overcome the deficiencies of their poorer land: their people lack the 
technical knowledge and real capital resources which, if combined with 
existing land resources, could provide higher real incomes. 


Productive capital resources are those used primarily to further the out- 
put of final consumption goods and services. They include factory build- 
ings, machinery and equipment, transport facilities, water, sewerage and 
irrigation works, communication facilities, public buildings, laboratories, 
schools, land improvements, work animals, livestock, inventories of raw 
materials and goods-in-process, etc. Apart from these productive capital 
goods, all societies possess other capital goods which yield a direct flow of 
consumption goods and services. These consumption capital goods, which 
include dwellings, churches, shrines, museums, chattels and consumers' 
durable goods, afford comfort, satisfaction and pride to a people within 
their particular cultural environment. 

Most countries have gradually accumulated capital goods of both types 
over the centuries. But the developed countries have greater stocks of each 
per capita, and especially of productive capital goods. Development, indus- 
trialization and productive capital accumulation have gone hand in hand 
in the now high income countries over the past one hundred and fifty years. 

Contrasts among Countries 

Direct comparisons of the productive capital resources of developed and 
underdeveloped countries, by an inventory method, for example, is im- 

38 Approaches to Economic Development 

possible because adequate data are not available. Nevertheless, the indirect 
evidence on the dearth of productive capital goods in the underdeveloped 
areas is sufficiently convincing. 

The very fact that incomes are so low in the underdeveloped areas is 
itself indicative of capital scarcity. The same deduction can be drawn by 
reasoning along the following lines. In the underdeveloped countries the 
labor force is predominantly in agriculture; hence, what productive capital 
there is must be primarily in agriculture unless there are other industries 
which use much capital and relatively little labor. The meager data avail- 
able, however, suggest that the workers outside agriculture say, usually, 
less than a third of the total are primarily in commerce and transport, in 
manufactures and handicrafts, and in administration, domestic service, 
etc. 14 Of these activities only manufactures and transport are likely to be 
conducted with any appreciable amount of capital equipment. 15 Conse- 
quently, the capital equipment in agriculture must account for the bulk of 
the total in the underdeveloped areas. But all the evidence is that agriculture 
in underdeveloped areas is not abundantly supplied with capital. 

Capital Resources in Agriculture 

The real capital resources in agriculture may be classified roughly under 
three heads: (1) direct capital input in the form of seeds, fertilizers, work 
animals, farm tools and machinery, etc.; (2) fixed capital installations used 
directly in agriculture such as drainage systems, irrigation facilities, storage 
tanks, buildings, farm roads; (3) ancillary capital installations serving agri- 
culture along with other economic activities such as electrical power, road 
and rail transport facilities, communication systems, which contribute 
indirectly to agricultural productivity. Good facilities for the transport of 
crops are no less important than silos or hoes. 

The available statistical data under these three headings, however, are 
fragmentary and at times difficult to interpret. 

14. A Burmese census of 1931 shows 69 per cent of the gainfully occupied population in agriculture, 
13 per cent in manufacturing and handicrafts, 14 per cent in commerce and transport and 4 per cent m 
administration, domestic service, etc. See International Labor Office, Economic Background of Social Policy, 
New Delhi, 1947, p. 4, and Chapter 4. Egypt had 11 per cent of its gainfully employed population in manu- 
facturing and handicrafts, Mexico and India each had 13 per cent as of about 1930, according to Industrial- 
ization and Foreign Trade, League of Nations, Geneva, 1945, pp. 26-27. 

15. Manufactures in the underdeveloped areas seem to display certain essential similarities even though 
generalization is hazardous. While basic producers' goods industries iron and steel, metallurgy, engineering 
and chemicals are scarcely present in modern form, local handicraft industries do provide some of their 
simpler products either for domestic use or even for export for example, simple tools, dyestuflfs, salt, 
matches, soap and glass. Direct foreign investment has typically concentrated upon the processing of 
primary products for export and often, too, upon transport facilities necessary to get primary pioducts to 
world markets. Examples from the Far East include petroleum (Indonesia), tin (Malaya, Indonesia, etc.), 
rice milling (Siam and Burma), tea (Ceylon and India), sugar (Philippines, Indonesia, etc.), coconuts 
(Philippines), sawmilhng (Siam and Burma). A third type of industry is the manufacture of consumers' 
goods for the home market or for export to other underdeveloped countries. Here, textiles and tobacco, 
financed either by local or foreign capital, are likely to predominate. The overwhelming importance of 
textiles as measured by the number of persons employed is striking: this industry often accounts for over 
50 per cent of those employed in manufactures in underdeveloped countries. 

Resources and Their Productivity in Underdeveloped Areas 39 

Direct Capital Input in Agriculture 

As for direct capital input, the more advanced countries use more ferti- 
lizer and more pesticides than the underdeveloped countries. If tons of 
fertilizer per 1,000 hectares of arable land are used as a measure of fer- 
tilizer-capital input, the five largest consumers among the developed 
countries, around 1948-1949, were Belgium (294.8), the Netherlands 
(283.1), New Zealand (246.8), Switzerland (166.6) and Germany (131.5). 16 
In the underdeveloped countries, the amount used rarely rises above 2 tons 
per 1,000 hectares and is below one ton in India (0.55), Indonesia (0.709), 
Syria (0.218) and Burma (0.057). 

Fertilizer consumption is determined by the type of agriculture as well as 
by the degree of economic development. It is likely to be greater in those 
underdeveloped countries where plantation agriculture is practiced. Egypt 
uses more tons (54.3) of fertilizer per 1,000 hectares of arable land than does 
the United States (29.6). Argentina uses less than either India or Indonesia, 
while Korea is a substantially heavier consumer (20.4 tons) than most Latin 
American countries and even some central and southeastern European 

Similarly, the few figures available on pesticide consumption indicate 
much higher consumption in the more developed countries. 17 

The underdeveloped countries, as one would expect, use more work 
animals and fewer tractors than the developed countries. (See Appendix 
2-2, column 8.) Their working livestock includes asses, mules, buffaloes, 
camels, oxen and horses according to the type of agriculture and the level 
of poverty. In many underdeveloped areas, of course, work animals and 
human muscles are close substitutes for each other. 

Fixed Capital Installations 

Fixed capital resources used either directly or indirectly in agriculture are 
doubtless exceedingly sparse in underdeveloped areas. All indirect evidence 
such as energy consumption per capita, railway mileage in relation to 
area, motor vehicles or telephones in relation to population emphasizes 
the enormous gulf between the developed and underdeveloped areas in the 
amount and variety of their fixed capital resources. For example, whereas 
the United States consumes 37.6 horsepower-hours of all kinds of energy 
per capita per day and the United Kingdom 27.1, the amount consumed in 
Haiti, Bolivia, India, China and Indonesia is 0.5 or less. 

As for transport, China, Paraguay, Nicaragua, Peru and Venezuela all 
have less than 5 miles of railway per 1,000 square miles of area while 

16. The fertilizers included are commercial nitrogenous fertilizers (N), commercial phosphoric acid (PO*) 
and commercial potash fertilizers (KsO). See United Nations, Yearbook of Food and Agriculture^ New York, 
1949, Tables 74-76. 

17. Ibid., Table 78. 

40 Approaches to Economic Development 

Belgium, Germany, Switzerland and the United Kingdom have over 200. 
Differences are even greater if the measure used is ton-miles of freight 
carried per capita per year. India and Finland, for instance, both have 26 
miles of railroad per 1,000 square miles of area, but the number of ton- 
miles of freight carried per capita per year is 60 in India and 508 in Finland. 
The underdeveloped areas not only have fewer miles of railways, but what 
mileage they have is used less intensively. 18 

The meager data on real capital resources in agriculture in under- 
developed countries suggest that they compare quite unfavorably with the 
more developed countries. Land scarcity or inefficiency of labor is not 
offset by capital abundance. But since industry is typically of minor impor- 
tance this is the same as saying that aggregate capital resources available 
are exceedingly small compared with the more developed countries. 19 

Differences in Kinds of Productive Capital Resources 

Among the many contrasts between the underdeveloped countries and 
the more well-to-do countries none is perhaps more striking than the differ- 
ences in productive real capital resources. The high-income countries pos- 
sess certainly more real capital per person ; but, perhaps even more impor- 
tant, their capital is more diversified in type and serves economic welfare 
in ways which have no real counterpart in underdeveloped areas. 

Among the most important of these services of capital in high-income 
countries are the huge investments in "general purpose" capital goods 
railways, highways, telephone and telegraph installations, river and harbor 
developments, electric power facilities, flood control and irrigation works, 
educational facilities and the like. All these contribute enormously to the 
effectiveness with which human skills and natural resources can yield out- 
is. The broad picture on ancillary and "general purpose" capital goods will be found in Appendix 2-2, 
from which the figures above are drawn. 

19. The omission of any explicit reference to plantation agriculture from the foregoing discussion of real 
capital resources in agriculture in underdeveloped areas deserves a word of explanation. Plantation agri- 
culture is typically much more highly capitalistic than subsistence agriculture, s.o that some of the foregoing 
comments would not be relevant. Indeed, the plantation is probably more similar to an industrial under- 
taking in its methods of finance, organization and control than to indigenous agriculture. Typically, the 
capital has come from abroad, the manager also, and the product is largely marketed abroad. In other 
words, plantations might be regarded as overseas outposts of advanced economies rather than as segments 
of underdeveloped economies that directly permit the local populations to finance imports. The contribu- 
tion of plantations to the welfare of underdeveloped countries is made indirectly through their contribution 
to exports after deduction of capital charges, profits and wages of the foreign personnel. On a net basis, 
therefore, their contribution to the financing of imports would be about equivalent to the wages and other 
outlays paid directly to the native workers on the plantation Though substantially less than the f o.b. value 
of the exported products of the plantation, this still amounts to a suable sum annually but probably quite 
small per person in the underdeveloped area. In other words, the contribution of the capital invested in 
plantations to real incomes in underdeveloped areas would not usually raise appreciably the general average 
or much modify the general argument in the text. In any case, whatever modification is necessary is peihaps 
better approximated by an examination of export statistics than by estimates of capital invested in planta- 

Among the principal products of plantation agriculture are tea, coffee, rubber, cocoa, coconut, cinchona, 
cotton, cinchona bark, abaca, tobacco, sugar, sisal and various vegetable oils. For an interesting discussion 
of some economic aspects of plantation agriculture see C. R. Fay, "Plantation Economy," Economic 
Journal, December 1936, pp. 620-44. 

Resources and Their Productivity in Underdeveloped Areas 41 

put through the specialization of persons in productive activities and the 
specialization of production by geographical areas. The combination of 
specialization and power and transport facilities is so effective that only a 
comparatively small fraction of the working population in the high-income 
countries is needed to produce the basic necessities of life while the re- 
mainder can engage in manufactures, service industries, etc., which make 
life richer and more varied. But these activities are also carried on with a 
substantial complement of real capital resources, so that output per person 
in manufacturing, for example, is generally strikingly higher than in the 
underdeveloped countries wherever any comparison is possible. Thus the 
high-income countries have more productive capital per person and use 
most of it in types of economic activity which are almost nonexistent in the 
underdeveloped areas. 

Rate of Accumulation 

Beyond the fact that the developed countries have more capital per 
person, they are adding to these stocks more rapidly than the under- 
developed countries. Whether measured against existing stocks of capital 
or against national incomes, capital accumulation proceeds faster in the 
already developed countries. Indeed, the problem of capital in the under- 
developed countries is not so much that of providing a stock of real capital 
goods a once-and-for-all proposition as it is to create those conditions 
and attitudes which generate capital accumulation as a continuing process. 
For today's capital goods will often be obsolete tomorrow, and tomorrow's 
requirements probably cannot be foreseen today; a country must maintain 
a steady flow of new investment if, year in and year out, it is to realize its 
real income potentialities. 20 


Labor, land and capital complement one another as agents of production 
in the sense that usually no production is possible without some amount of 

20. The amount of savings in relation to national income in underdeveloped areas is undoubtedly low, but 
accurate statistical information is raiely available. Perhaps most authorities would agree with the generalisa- 
tion made recently by the United Nations' experts: "In most countries where rapid economic progress is 
occurring, net capital formation at home is at least 10 per cent of the national income, and in some it is 
substantially higher. By contrast, in most under-developed countries net capital formation is not as high as 
5 per cent of the national income, even when foreign investment is included." United Nations, Measures for 
the Economic Development of Under- Developed Countries, New York, 1951, p. 35. Home-financed investment 
in India is said to be about 2 5 per cent of national income. See 7 he Colombo Plan for Co-Operative Eco- 
nomic Development in South and South-East Asia, Cmd. 8080, H M.S.O., London, 1950, p. 54. In much of 
the rest of Southeast Asia the rate is doubtless no higher. See ibid., pa\sim and United Nations, Economic 
Survey of Asia and the Far Ea\t 1950, New York, 1951, pp. 121-25 and passim. 

The familiar generah/ation that savings are a small fraction of national income in underdeveloped coun- 
tries may not apply to certain Latin American countries, for example Brazil, Chile and Mexico, where rates 
comparable to (or greater than, as in Brazil) those in developed countries are said to prevail. See Simon G. 
Hanson, Economic Development in Latin America, Inter- American Affairs Press, Washington, 1951, pp. 
188^., where it is alleged (p. 190) that "The ineffective mobilization of available domestic capital constitutes 
the real challenge." 

42 Approaches to Economic Development 

all three. Only rarely, however, do the technical conditions of production 
require that the agents be used in a fixed proportion to give a desired prod- 
uct. One agent labor, for example can be used in partial substitution for 
another, say capital equipment. It is possible to dig a ditch or build a road 
by using many men with shovels or a few men with machinery. Or again, 
farming can be conducted by the methods of the homesteader using a 
quarter section and his own labor or by many laborers on a small plot. The 
agents of production can be substituted for one another, within limits, to 
produce the same end product. But the limits of substitution are clearly 
finite, not infinite. 

A Special Problem in Underdeveloped Areas 

This imperfect substitutability of the factors of production goes far to 
explain the low per capita level of output, and hence of real incomes, in the 
underdeveloped areas. If labor were completely substitutable for land and 
capital equipment in production, then the dearth of land and capital rela- 
tive to labor in the underdeveloped areas would make no difference: output 
per person could be just as high as in the high-income countries. In fact, 
however, real output per person is necessarily lower because of the limited 
range over which labor can be substituted for land or capital to obtain the 
same total output. 

The possibilities of substitution among the agents of production differ 
enormously according to the type of final product. In electric power produc- 
tion, for example, the range over which more labor and less capital can be 
used is narrowly restricted. In raising cotton or in the manufacture of cer- 
tain types of cotton textiles, the range is much broader. But in all cases the 
limits of substitution are short of infinity. 

Broadly speaking, the stubborn fact of less-than-infinite substitutability 
among the factors of production, in conjunction with the inequality of en- 
dowments as between different countries and regions, goes far to explain 
the marked differences between countries in the relative costs and prices of 
the same or similar goods. In a country with abundant labor and little capi- 
tal equipment, goods which take much labor in their production will be 
relatively cheap; for example, craft goods such as filigree jewelry, tooled 
leather goods and all kinds of personal services. On the other hand, goods 
that require large amounts of scarce capital equipment and relatively little 
labor will be much more expensive in these countries than in more de- 
veloped countries where capital equipment is more abundant. The con- 
verse is observed in countries like the United States where the relative 
scarcity of the productive factors is reversed : refrigerators and automobiles 
are relatively cheap but hand tailoring, watch repairs, maids and butlers 
come high. 

Resources and Their Productivity in Underdeveloped Areas 43 

The consequence is that the consumption patterns in different countries 
tend to conform to these differences in relative product prices, which in 
turn reflect the relative supplies of the factors of production and the tech- 
nical possibilities of substitution among them. There may be a large demand 
for home haircutters in the United States but almost none at all in China. 

Limitations of Substitution 

The possibilities of substituting the cheap for the dear in consumption 
and what is cheap and what is dear in any area depends largely upon the 
relative scarcities of productive factors are severely limited in under- 
developed areas. In other words, the fact that personal services are so cheap 
in underdeveloped areas does not mean that the people there can get along 
without food or clothing or shelter: a certain consumption of these goods 
is essential. Moreover, to take food as an example, the possibilities of sub- 
stitution, both on the side of consumption and on the side of production, 
are soon exhausted: the substitution of other items for food in consumption 
is limited; the substitution of labor for land in food production is limited. 

The underdeveloped areas therefore cannot fully adjust their consump- 
tion habits to their endowment of productive factors, nor can they com- 
pletely substitute abundant labor for scarce land and capital in production 
to supply their consumption needs and wants. They can substitute partially 
in consumption and partially in production, but in neither are the possibili- 
ties of substitution unlimited. Consequently, output, consumption and 
material well-being are all at a lower level than they would be if the possi- 
bilities of substitution were greater or if the factor endowments were less 

Consequences of Limited Substitutability 

If underdeveloped areas are characterized by relatively abundant labor 
and relatively scarce land and capital equipment, this must mean that per 
capita output is low and will remain low as long as this disproportion 
persists. 21 Moreover, the worse the disproportion becomes, the lower will 
be per capita incomes. Economic necessity will force the substitution of 
labor for land or capital equipment wherever possible in the struggle to 
raise total output. But if the possibilities of substitution are finite, as the 
evidence indicates they are, then it follows that further increments in the 
labor factor, with unchanged quantities of land and capital equipment, will 
no longer add anything to total output. The marginal physical product of 
the labor factor becomes zero: no further increases in total output from 

2 1. 'In some underdeveloped areas parts of Latin America, for example the land supply is not notably 
deficient even though capital equipment is relatively scarce. Here part of the explanation for the low incomes 
lies in the fact that institutional or social factors prevent the land from being used m production as efficiently 
as it might be or even from being used at all. 

44 Approaches to Economic Development 

merely applying more labor are possible. If population increases beyond 
this point and still more labor is applied with the existing land and capital 
equipment, total output will remain the same and output per person will 
fall. The average person will be worse off because more people have to be 
fed and these additional people add nothing to total output. 

The degree of this disproportion between the labor factor and the com- 
plementary production factors of land and capital equipment will of course 
determine how low real incomes per capita will be. 22 For present purposes, 
two groups are worth distinguishing: first, those underdeveloped areas in 
which the marginal physical product of labor, primarily agricultural labor, 
while possibly quite low, is still greater than zero, so that if labor were with- 
drawn from agriculture total farm output would decline; second, those 
others in which the marginal physical product of labor has already fallen 
to zero, so that some labor perhaps more than a modest fraction of the 
labor force in some underdeveloped areas could be withdrawn without 
reducing total output. 

The second group includes nearly all those underdeveloped countries 
which are usually referred to as "overpopulated," such as India, Java, and 
other areas in Southeastern Asia, Egypt and some other Arab countries, 
parts of Southeastern Europe, as well as much of the Caribbean. Most of 
Latin America and even some countries in Asia fall in the first group. 
Theoretically, the dividing line between the two groups is whether or not 
the marginal physical productivity of labor in agriculture has already fallen 
to zero. It may have fallen below zero outside agriculture as well, but since 
most of the labor force is in agriculture the rest can be neglected for the 
time being. 

Disguised Unemployment 

These overpopulated or densely populated underdeveloped countries in 
which some labor might be withdrawn from agriculture without reducing 
output are usually said to have "disguised unemployment" or "over- 
employment" in agriculture. This phenomenon is not a mere figment of the 
economic theorist's imagination, even though precise estimates of its 
amount and extent are at present impossible. According to W. Arthur 
Lewis, an English economist who has closely observed underdeveloped 
areas in the Caribbean and the Orient, "Indian economists estimate con- 
servatively that a quarter of the rural population is surplus, in the sense 
that its removal from the land would make no difference to agricultural 

22. This disproportion of the factors of production also accounts to a considerable degree for the great 
disparity in incomes among persons in underdeveloped areas. Landowners will have high incomes from 
the very fact that land is scarce; moneylenders who have command over liquid resources which can be made 
the means of acquiring capital for production or consumption purposes will be well paid for the accommoda- 
tion they supply. 

Resources and Their Productivity in Underdeveloped Areas 45 

output." 23 W. E. Moore, in his Economic Demography of Eastern and South- 
eastern Europe, suggests that perhaps 35 to 45 per cent of the population 
dependent on agriculture in that region adds little or nothing to output. 24 
Similar conclusions have been drawn with respect to other underdeveloped 
areas. 25 

If the facts are as alleged by these and other observers, namely, that in 
many densely populated underdeveloped areas perhaps as much as 25 per 
cent of the agricultural labor force could be withdrawn without diminishing 
output, there is a strong presumption that this economically unproductive 
portion of the labor force could be turned to better account in other 

Seasonal Idleness 

Even in those underdeveloped areas in the first group, where population 
on the land is not so large that the addition of more labor would not in- 
crease production, seasonal unemployment of the labor force often runs 
high. Seasonal unemployment in agriculture is everywhere prevalent to 
some extent, but in the more economically advanced countries it is not ac- 
companied by low levels of material well-being and it probably amounts to 
less loss of working days per year because of greater diversification in pro- 
duction and because of the greater possibilities for direct farm investment 
in improvements during slack periods. Insofar as seasonal idleness exists, 
it also offers a potential for improved welfare. 20 

Thus disguised unemployment in the densely populated underdeveloped 
areas and seasonal idleness in the others represent failure to utilize an 
economic resource. Whether effective means can be devised for the utiliza- 
tion of this labor potential that now runs to waste will be examined in a 
later chapter. Certainly with the organization of production that now pre- 
vails in most underdeveloped areas, and with the disproportion between 
labor and other productive factors that now severely limits further substitu- 

23. W. Arthur Lewis, "Reflections on South-East Asia," District Rank Review, December 1952, p. 11. 

24. League of Nations, Geneva, 1945, pp. 61-75 and appendices. 

25. See, for example, Doreen Warriner, Land and Povertv in the Middle East, Royal Institute of Interna- 
tional Affairs, London, 1948; also her earlier study. Economics of Peasant Farming, Oxford University 
Press, London, 1939, which relates to eastern and southeastern Europe. 

In order to avoid possible misunderstanding, it should be stressed that the notion of excess population 
in agriculture used in the text relates to the numbers or the fraction of the working force or total population 
that might be withdrawn from agriculture without any absolute fall m output. The marginal physical 
product of labor is already zero. 

A quite different concept of excess population in agriculture is one which makes the criterion whether or 
not the level of living in agriculture with these numbeis can be "decent" or "acceptable," that is, does it fall 
below the level that the social conscience or social policy allows? The notion of "submargmal" fanners as 
the term has been used in the United States is of this kind. It does not imply that the marginal physical 
product of labor on those farms is zero, only that it is unconscionably low. 

26. The seasonal variation in agriculture in underdeveloped areas is a huge topic with striking differences 
from area to area. For an unusually interesting account of certain seasonal features in Indonesian agricul- 
ture, see the remarks of Egbert DeVries in Formulation ami Economic Appraisal of Development Projects, 
Vol. I, United Nations, Lahore, 1951, pp. 357-67 and pawim. 

46 Approaches to Economic Development 

tion between them, there is little reason to believe that the problem will 
solve itself. Indeed, if allowed to drift, it is likely to become worse rather 
than better. For disproportion means low incomes, and low incomes imply 
little possibility of capital formation out of savings. Yet it is the shortage of 
capital, and of land, relative to labor that is a primary cause of the low 


Insofar as the low incomes of the underdeveloped areas have their root 
cause in the lack of proportion among the productive factors of labor, land 
and capital, and in the limited possibilities of technical substitution among 
them, there are only three types of change by which output and incomes 
can be improved. 

Technical Changes 

First, output from existing productive factors could be increased by 
means of technical changes that make it easier to substitute abundant labor 
for relatively scarce capital equipment and land. A spate of innovations 
that were capital-saving or land-saving or both would raise total output. 

This is not inconceivable. The adaptations need not be completely new 
techniques or methods of production; the techniques of production used 
in some underdeveloped areas are much inferior to those already in use in 
other underdeveloped areas where labor is also abundant and about equally 
cheap compared with land and capital. These better techniques need to be 
transferred and applied. Point IV "technical assistance" programs are often 
essentially of this character. More generally, greater specialization and 
division of labor in the underdeveloped areas is probably feasible and 
would tend to raise total output. The precise forms of specialization would 
undoubtedly vary greatly from country to country and region to region. 

Apart from adapting and applying superior techniques already in use 
elsewhere, genuine land-saving or capital-saving innovations might be de- 
veloped to meet the special problems of the underdeveloped areas. Unfor- 
tunately, most innovations and technical advances now originate in the 
already developed countries where labor is the relatively expensive factor, 
rather than land or capital. Hence new techniques in the developed coun- 
tries mainly tend to save labor. But in the underdeveloped areas it is land- 
saving or capital-saving innovations that are needed, simply because they 
are the relatively scarce and costly factors. Logically there is no reason why 
capital-saving innovations are not just as possible as laborsaving innova- 
tions. They are not likely, however, to originate in the already developed 

Resources and Their Productivity in Underdeveloped Areas 47 

Greater Demand for Labor- Using Products 

Second, any change in the structure of domestic and world demand for 
final products in favor of those using relatively more labor in their produc- 
tion would tend to raise incomes in countries where labor is abundant. In 
other words, a shift in domestic and world demand toward goods that the 
underdeveloped areas are well equipped to supply would raise incomes in 
those areas. Doubtless this is a far less promising approach for the time 
being than technical adaptations and innovations. But it should not be dis- 

The possibilities of altering the composition of the present demand for 
final products within underdeveloped areas themselves in this direction are 
surely almost negligible; most of the possibilities of substitution in con- 
sumption have already been exploited to the full. But the same cannot be 
said of increments in consumption. If some development does occur in the 
underdeveloped areas, then so far as possible increments in consumption 
might be made to take forms that economize scarce land and scarce capital 
resources in favor of abundant labor services. 27 

Any change in demand in the world outside the underdeveloped areas in 
favor of products with a high labor content would necessarily be favorable 
to incomes in the underdeveloped areas. For example, if the demand for 
Oriental rugs a product that requires a minimum of materials and im- 
mense amounts of labor should greatly increase, incomes in the producing 
areas would rise. The same would be true for certain types of pottery, 
filigree work, fine laces, hand-patterned fabrics, etc. Many Japanese ex- 
ports to the more developed areas were products with a high labor content. 
The possibilities for the now underdeveloped countries along similar lines 
are surely worth exploring. Raw materials and primary products generally, 
while not final products in the sense of consumers' goods, are of course a 
prime example of labor-using output with a wide market outside the under- 
developed areas. All the indications are for a strong upward secular trend 
in the demand for foods and industrial raw materials which would tend to 
raise incomes in the producing countries. A wise policy would attempt to 
gear production to the satisfaction of this demand. 

Correcting the Basic Lack of Proportion 

Third, and finally, real incomes in the underdeveloped areas can be 
raised by removing the existing disproportion among the factors of produc- 

27. From the point of view of development, the spectacle of certain underdeveloped areas that had 
acquired substantial foreign exchange reserves during World War II squandering these reserves after the 
war on imported consumers' durable goods, trashy trifles and the like does not represent the ideal way of 
achieving increments in consumption. And the point here does not rest on the fact that the goods were 
imported, even though that raises considerations of its own; the same could be said if the increased con- 
sumption took the form of domestically produced substitutes which required plentiful supplies of capital 
goods in their production. 

48 Approaches to Economic Development 

tion that is economically responsible for the low level of output. This is un- 
doubtedly the most important means of all and it may take two forms. 
First, the relationships among the factors can be improved by increasing 
land and capital relative to labor. Since the possibilities of augmenting the 
land resources in many underdeveloped countries are severely limited, the 
major stress is likely to be upon increasing productive capital equipment. 
The other possibility is to shrink the supply of labor relative to the quan- 
tities of land and capital equipment. Internal migration, international 
migration, or a fall in birth rates relative to death rates, appear to be the 
only means by which changes in labor supply could better the relationships 
among the productive factors. 

Clearly, the two approaches are not mutually exclusive: capital can be 
made more plentiful and labor made less abundant. The one does not pre- 
clude the other. Both may not be equally feasible in all underdeveloped 
areas, however, and therefore they must to some extent be viewed as two 
alternative means to a single objective. 

The Triangular Pattern 

Thus, apart from social, political and cultural changes that improve the 
environment within which all economic activity is carried on in the under- 
developed areas, the economic means to greater output and improved real 
incomes are basically three: technical changes and innovations that im- 
prove the flow of output from existing resources; shifts in demand within 
and without the underdeveloped areas that increase the demand for their 
abundant labor supply; and, finally, improvements in the relationships 
among the productive factors, through increasing the quantities of the 
relatively scarce land and capital factors or reducing the superabundance of 
the labor factor or by doing both at the same time. All three measures, 
whether undertaken singly or in combination, would have the desired 
result of raising output and real incomes. 

Even a brief survey of labor, land and capital resources in the under- 
developed areas suffices to indicate that scarcity of productive resources 
and inefficiency in their use, given the possibilities of substitution among 
them, must account to a large extent for the low average real incomes of the 
people. All the same, however, one cannot entirely escape the uncomfort- 
able feeling that this is not the whole story, particularly if the inference is 
that adding more economic resources would assuredly raise real incomes. 
Certainly most underdeveloped countries are "resource poor" as compared 
with the more developed countries; but differences in resource endowment, 

Resources and Their Productivity in Underdeveloped Areas 49 

important as they are, do not suffice either as an explanation or as an index 
of the range in real incomes. 

The observable differences in real incomes between the developed and 
underdeveloped countries seem to be explicable only by passing from static 
to dynamic factors. An inventory of productive resources is inescapably 
static. Changes in resources, changes in their use through time and changes 
in the level of real incomes resulting therefrom are dynamic factors. And 
these, in turn, must be traceable to certain traits and characteristics of flesh 
and blood people and the interests and bents that they display and pursue 
within their social environment. It must suffice here merely to illustrate 
these generalizations by a few examples. 

The people of any area are not likely to make the most of the resources at 
their disposal unless they are, in a sense, dissatisfied with the end product 
that those resources currently supply. If the "standard of living" the pat- 
terns of consumption to which people aspire is not above the "level of 
living" of their present patterns of consumption, then the level of living of 
the group is not likely to rise. In other words, perhaps a prerequisite to 
better living is an aspiration to better living plus the conviction that it is 
worth striving for and working for. Without this conviction a man is un- 
likely to tackle his job with the gusto, ingenuity and perception that make 
for high productivity and, more important, for secularly rising productiv- 
ity. While these comments sound banal, reflection suggests that one of the 
most striking general differences between people in developed and people in 
underdeveloped areas is precisely this difference in attitude toward the 
day's work and the morrow's promise. 28 

Persons who possess ingenuity and aspiration to a marked degree and 
who combine them with organizational and administrative abilities of a 
high order are usually among the most effective instrumentalities for mate- 
rial progress. These are the entrepreneurs. Whatever their motivations 
a point much in dispute they seem to possess a peculiar knack for seeing 
how productive resources may be used in unfamiliar ways to produce a 
better result. Moreover, they have the skill required to organize people, 
tools, equipment and segments of land into a functioning unit of production 
something more than the mere sum of the parts. In economies with a 
secularly rising level of material well-being entrepreneurs do much to ease 
it cumulatively upward year after year by their restless search for better 
ways of doing things and their almost implacable dissatisfaction with the 
gap between the realized and the realizable. This is a dynamic factor of 
peculiar importance for material progress that seems to be largely absent in 

28/ The reasons for this difference are doubtless complex. But surely one of them is the plain fact that past 
experience in most underdeveloped areas gives no ground* for believing that aspiring to a higher standard 
or struggling to attain it has much changed the level of living that most of the people actually realized. 
Aspirations and strivings must sooner or later bear fruit or people will cease to hold or pursue them. 

50 Approaches to Economic Development 

the underdeveloped areas. Entrepreneurial abilities, organizational skills 
and administrative talents seem to be scarce both in absolute amount and, 
even more so, in relation to size of the labor force as a whole. 

Innovations, another important dynamic factor in high income coun- 
tries, are also strikingly rare in underdeveloped areas. 29 Except in the most 
general terms, little is known about what factors are responsible for the 
stream of innovations that is so characteristic of the more developed coun- 
tries. The spread of literacy, education and scientific knowledge doubtless 
affords a partial explanation ; but further explanation usually trails off in 
vague references to the "socio-cultural environment" and the like. The 
absence of innovations in the underdeveloped countries is at least equally 
puzzling; here again the level of education does not seem sufficiently to 
account for the obvious facts. Innovations, however, whatever their ex- 
planation, are fully as important as productive resources in accounting for 
the secular rise in real incomes per person in the now developed countries 
and for the persistently low level of real incomes over much of the rest of 
the globe. 

These admittedly loose generalizations are intended only to inject a note 
of caution particularly when joined with the different dynamics of popu- 
lation in developed and underdeveloped countries to be explored in Chap- 
ter 5 against the easy inference that shortages of productive resources or 
inefficiencies in their use adequately explain the persistently low level of 
real incomes in the underdeveloped areas. Along with social and cultural 
factors, they do tend to explain why incomes are as low as they are in the 
historical present. But they do not altogether account for the persistence of 
low incomes in the past and the prospects of continuing low incomes in the 
foreseeable future if other factors do not intervene. Dynamic factors such 
as those just alluded to must also be woven into the analysis. 

29. Whether innovators should be legarded as the only true entrepreneurs, as Schumpeter cogently 
argued, or as a group at least logically separate is of no particular relevance in the present context. 

Social and Cultural Factors in Development 

of production, shortage of capital, adherence to outmoded techniques, and 
so on. The implication is that if capital were made available or new tech- 
niques were introduced, productivity would increase and real incomes 
would rise. This does not necessarily follow. Despite more capital equip- 
ment or the demonstration of better production methods, no rise in output 
will occur if the socially accepted goals or the culturally accepted values 
assign little importance to material achievements, such as greater produc- 
tion. If material accomplishments are little esteemed, people will devote 
little effort to achieving them. In other words, although greater output will 
be impossible without more capital and improved techniques, the mere 
provision of these does not assure that output and material welfare will 

In the final analysis, whatever is accomplished in any society is accom- 
plished by the people who compose it. Hence, what they will actually 
accomplish depends as much on the drives and motivations that compel 
them as on the economic resources at their disposal. As Thomas R. Malthus 
^served long ago: 

^ . the powers of production, to whatever extent they may exist, are not alone 
sufficient to secure the creation of a proportionate degree of wealth. Something 
else seems to be necessary in order to call these powers fully into action . . . 
Unless the estimation in which an object is held, or the value which an individual, 
or the society places on it when obtained, adequately compensates the sacrifice 

which has been made to obtain it, such wealth will not be produced in future. 2 

Even the most superficial comparison of the value scales and correlative 
institutional forms in underdeveloped and developed countries shows 
striking contrasts. Such contrasts necessarily reflect differences in the his- 
torical experience of different jsocieties. Only a Toynbee or a Spengler 
would attempt to explain why the contrasts in values and institutions are 
as they are and to what origins they are historically traceable. 

Different Sources of Values 

Broadly viewed, the dominant values in the economically developed 
countries stem from Greek and Roman civilization, the Judaic-Christian 
religious system, the Renaissance, the Reformation and the Enlighten- 
ment. 3 Among many of the economically less developed countries, on the 

2. T. R. Malthus, Principles of Political Economy, 2d edition, William Pickering, London, 1836, p. 361 
(London School of Economics reprint, 1936). Malthus seems to have believed strongly in what, following 
James S. Duesenberry (Income, Saving ana' the Theory of Consumer Behavior, Harvard University Press, 
Cambridge, 1949), has been called "the demonstration effect," that is. that people will adopt new consump- 
tion patterns and work hard to finance them when those new patterns have been set by persons above them 
in the social scale. 

3. The ideals, the values, the mores, the intellectual atmosphere and the points of view that have evolved 
from these origins are now exceedingly complex Nevertheless, they are still fundamentally the animating 
spirit behind the institutional framework of Western society And, with the exception of the U S S R , all 
societies that are economically highly developed are Western in orientation if not in geographical location. 

76 Approaches to Economic Development 

other hand, the dominant values and points of view have their origins in 
non-Christian religions Islam, Buddhism, Confucianism, Hinduism and 
many others. In the words of Professor F. S. C. Northrop: 

The mentality of the Middle East stems from the prophet Mohammed and em- 
braces the thought of Arabian, Persian and Turkish Islam. The Islamic mentality 
holds sway from the northwest tip of Africa, opposite Gibraltar, eastward by way 
of Egypt through the entire Middle East, Pakistan and Indonesia to the Philip- 

The mentality of the Far East rises out of Hinduism, Buddhism, Taoism and 
Confucianism. (Some objection . . . can be made against lumping Confucianism 
with the other three.) The Far Eastern mentality embraces present-day India 
(except for her remaining Moslem minority), Tibet, Burma, Thailand, Ceylon, 
Bali, Indo-China, China, Korea and Japan. 4 

These doctrines have been largely untouched by the ideas and attitudes 
generated by the development of scientific thought in Western society over 
the past three centuries. Similarly, the whole body of Western thought since 
the eighteenth century known as "political and economic liberalism" has 
scarcely tinged the prevailing outlook in many of these economical 1 ^ 
underdeveloped areas. The contrasts between the two groups are enormt 
and have been described from many points of view. A recent writer, lot 
example, speaks of the "open society" and the "closed society." 

The open society is one which recognizes the freedom of man to shape his own 
destinies in accordance with the findings of a scientifically enlightened empiricism 
. . . Primitive man lives in a stable and tradition-dominated world, a closed 
society, where external forces seem to determine the conditions of human 
existence. To perceive and conform to the requirements of these extra-human 
forces is the primary problem. 5 

Whatever may be the most incisive or perceptive way to put the contrast, 
the fact remains that the "culturally recognized values" in the economically 
underdeveloped countries are often strikingly different from those which 
prevail in the economically developed countries, and that these differences 
bear directly upon present economic achievements in the underdeveloped 
countries and the means and possibilities for their improvement. Let us 
consider a few of the more important. 

The Individual In Relation to His Social Environment 

Few conceptions basic to the Western world view are more important in 
their range and implications than those associated with "the inherent 
dignity of man" or "individualism." These terms and others like them 
epitomize a whole body of economic, political and social relationships that 
characterize Western society: the conceptions of citizenship, of the state and 

4. F. S. C. Northrop, "The Mind of Asia," Life, December 31, 1951, p. 39. 

5 F. M. Watkms in a review of The Open Society and Iti Enemies, by Karl B. Popper (Princeton Univer- 
sity Press, Princeton, 1950), Canadian Journal of Economics and Political Science, November 1951, p 570. 

Social and Cultural Factors in Development 77 

of government; the principles of private property, individual initiative and 
independence; the conviction that knowledge, education and learning are 
valuable in their own right and open to all rather than the prescribed 
privilege of a small minority; the belief that creativeness and self-expres- 
sion are among the highest manifestations of man as man. 

The dominant philosophical preconceptions in many underdeveloped 
areas are often directly antithetical to the Western view of individualism. 
Instead of the individual, the stress is rather upon the family or clan as the 
inviolable social unit. Social organization tends to be more rigidly hier- 
archical and stratified. While a caste system is not everywhere formalized, 
as in India, social transgressions are usually so severely stigmatized that 
they occur infrequently. Social and occupational mobility are severely re- 
stricted. Education tends to be formalized and often esoteric: it bears little, 
if at all, upon the problems of day-to-day living. All these factors in com- 
bination tend to promote attitudes of resignation and acceptance rather 
than ambition and ingenuity. Group loyalties and group relations tend to 
outweigh logic and rationality in the approach to problems of everyday 
'ng. More attention is devoted to preserving the delicate balance of social 
^anization than to devising better means of providing for the basic 
material needs of the whole group. () 

Rationalism^ Secularism and Materialism 

Western society tends to be rationalistic in approach and secular in out- 
look. There is enormous faith in "the scientific approach" to secular af- 
fairs. Few things are deemed to be immutable because preordained. Change 
is to be expected and encouraged. The individual does not accept his per- 
sonal status with resignation; and for society as a whole the status quo only 
shows the possibilities of further progress. The prevailing attitude toward 
both the physical and the social environment is rationalistic and material- 
istic rather than fatalistic or metaphysical one of scientific detachment 
rather than traditional or religious absolutism. The secular and the non- 
secular in human affairs are separate and distinguishable. 

The prevailing cultures of certain economically underdeveloped coun- 
tries, by contrast, seem to be characterized by a world outlook reminiscent 
of medieval Europe. The late Carl Becker once described this view of life 
in these words: 

Existence was thus regarded by the medieval man as a cosmic drama, composed 
by the master dramatist according to a central theme and on a rational plan. 

6. Consider the following, for example, by a scholar with wide experience in the Near East: "The person 
who is not loyal first of all to his family and village is regarded as being something of a traitor, and, therefore, 
the pressure is for staunch loyalty to the smaller unit. 

"This feature of life in the Near East is still abundantly evident in the village and tribal feuds which 
continue today in such highly-developed countries as Egypt and Iraq." W. Wendell Cleland, "Social Condi- 
tions and Social Change," Journal of International Affairs, Winter 1952, p. 12. 

78 Approaches to Economic Development 

Finished in idea before it was enacted in fact, before the world began written 
down to the last syllable of recorded time, the drama was unalterable either for 
good or evil. There it was, precisely defined, . . . The duty of man was to accept 
the drama as written, since he could not alter it; his function, to play the role 
assigned. 7 

The views of medieval Christianity and the outlook of Buddhism, 
Confucianism, Taoism, Mohammedanism, Hinduism and the other non- 
Western religions or philosophies are of course quite dissimilar at many 
important points. 8 Yet the implications of these beliefs for economic affairs, 
as these are understood in the Western world, appear to be somewhat 

Secular affairs are considered inseparable from the nonsecular: the dis- 
tinction lacks meaning. This is true of the Middle East, for example. It is 
said that "The Koran provides for the believer not only the forms and 
content of his worship, but also a complete rule of life and a social and 
legal system (Shari'a)." 9 Material achievements pale to insignificance before 
the appeal of the mystical entity that is the universe. Man is expected to 
disdain the relative and transitory in favor of the absolute and the timeless. 
Acceptance, resignation, compassion, piety and reverence come close ^ 
being the proper descriptive terms. 10 

Underdeveloped Countries in the West 

In Latin America and the Caribbean, the dominant value systems do not 
derive from Oriental philosophies or religions. Yet here, too, economic 
achievements have traditionally been assigned a relatively low rank in the 
cultural value scale. Perhaps the most striking cultural contrasts between 
these regions and the more economically developed countries are, on the 
one hand, less complete separation between church and state and, on the 
other, the persistence well into the twentieth century of value systems and 
codes of behavior usually associated with a landholding, semifeudal 

The forms, as a rule, rather than the full substance of political and 
economic liberalism were transplanted from Europe and the United States 

7. Carl L. Becker, The Heavenly City of the Eighteenth-Century Philosophers, Yale University Press, New 
Haven, 1932, p. 7. 

8 F. S. C. Northrop states that "The Oriental portion of the world has concentrated its attention upon 
the nature of all things in their emotional and aesthetic, purely empirical and positivistic immediacy . . . 
the East tends to concentrate its attention upon this differentiated aesthetic continuum in and for itself for 
its own sake." The Meeting of East and West, Macmillan, New York, 1946, p. 375. Just what this means, 
however, occupies a good part of Professor Northrop's book. 

9. Royal Institute of International Affairs, The Middle East: A Political and Economic Survey, Oxford 
University Press, London, 1950, p. 50. 

10. "The peasant in whose mind is firmly established the idea that Allah has decreed from the beginning 
of time his present existence and condition, sees little use in trying to change the will of Allah and goes 
along patiently accepting the status quo, hoping for a happier setting in his next existence." Cleland, loc. at , 
p. 12. 

Social and Cultural Factors in Development 79 

during the nineteenth century; but they appear not to have taken firm root 
in the new soil. 11 The organization of society appears to be more similar to 
pre-eighteenth-century Europe than to late eighteenth-century Europe or 
even late seventeenth-century England. Whether this is because these lands 
were all colonies until after the Napoleonic wars when some of the fervor 
had gone from the revolutionary phrases, slogans and concepts or, rather, 
as some would contend, because they have continued as primary producers 
for world markets overseas, is not here at issue. 

Regardless of the cause, the countries of Latin America give the strong 
impression that neither political nor economic liberalism, nor any similar 
revolutionary movement, has yet swept away the feudal values and the 
feudal organization of society inherited from the colonial era. 12 Land own- 
ership, for example, seems to be valued rather more for the cultural and 
social prestige it affords than for its worth as an agent of production. 
Education, even higher education, emphasizes formal learning along classi- 
cal and traditional lines with surprisingly little attention at least until very 
recently to the pure or the applied sciences. To be a "gentleman" and to 
lead a "gentleman's" life is still an objective widely esteemed and widely 
pursued. % 

The pervasiveness of the Church in all phases of social life in Latin 
America is much broader and deeper than in the more economically de- 
veloped countries, though probably less far-reaching than in many Oriental 
cultures. Because neither Spain nor Portugal had to accommodate the 
Protestant Reformation, their colonies were founded and developed in 
accordance with the views on the relation between church and state then 
prevailing in the mother countries. These views seem to have persisted with 
only minor changes long after the colonies gained their political inde- 

The strong position of the Church in Latin America also seems to have 
retarded scientific speculation and intellectual boldness: the Catholic 
Church has never encouraged and at times not even accepted these values. 13 
Traditionally, too, the Catholic Church has strongly stressed the impor- 

1 1. Even so, one is a little taken aback by statements like the following in William S Stokcs's Honduras 
An Area Study in Government (University of Wisconsin Press, Madison, 1950): "The slogan 'to the victors 
belong the spoils' means, in Honduras, that personal and partisan factors dominate all phases of administra- 
tion at every level in government" (p. 191); "Parties seldom recognize the legal and moral right of their 
opponents to register and vote. The political faction in control of local government is almost always re- 
luctant to permit members of rival groups to register, and in some cases, it may even be dangerous for a 
citizen to demand his legal rights" (p. 231); "Correspondingly, all those who have not been Tor' are adjudged 
to have been 'against,* and in the field of politics they must make their peace with the victors, leave the 
country, or reconcile themselves to persecution" (p. 295). These quotations are taken almost at random 
from the study. 

12. The importance of the institution of slavery should also not be overlooked. 

13. This is not to suggest that the Protestant faiths were usually strong for "scientific speculation" and 
"intellectual boldness." Often quite the contrary. Nevertheless, the Protestant revolt tended to separate 
church and state so that the aversion of the particular faiths or sects to scientific thought had diminished 

80 Approaches to Economic Development 

tance of the family, family ties and family obligations against the alterna- 
tive view of the importance of the individual and the fullest development 
of his talents, interests and personality. Finally, and more or less paren- 
thetically, the value scales promulgated and fostered by the Church have 
appreciably influenced demographic patterns and the forms and types of 
real capital formation that have so far oc9urred. 14 

Thus even the most cursory glance at the value scales that are dominant 
in underdeveloped countries discloses that they differ appreciably from 
those characteristic of economically more developed countries. These 
values strongly affect the drives and motivations to which the people in 
these areas will respond, how they will approach the problem of getting a 
living from the resources available to them, and, not least, the responses 
they will make to the efforts of their governments and their leaders to 
achieve economic development. 


The ultimate values of any society display themselves most concretely in 
the institutional forms by which the people organize their social life. By 
their very nature, these are almost invariably complex in their structure and 
intricate in their workings, according to anthropologists and sociologists. 
These institutional forms extend over all phases of social life kinship and 
family relations, property relations, differentiation of function between per- 
sons, and the hierarchy of authority in social and political affairs, to name 
only a few. Fortunately, not all these aspects of social organization are 
immediately relevant to problems of economic development. But some few 
of them seem so clearly to affect current and potential economic perform- 
ance in underdeveloped areas that they must be briefly noted. 

Government and Administration 

In many economically underdeveloped countries, the concepts and atti- 
tudes underlying government and administration differ so greatly from 
those in the economically developed countries that they are not well 
adapted for the planning and execution of programs of economic develop- 
ment. The concept of "sovereignty" or the derivative concept of "the 
state," in the Anglo-European or American sense, for example, is alien or 
unfamiliar. Such concepts do not constitute the foundation of government 
authority and administration in the economically underdeveloped coun- 
tries. The primary loyalties and responsibilities that people recognize tend 
instead to be those of the person-to-person type the member of the family 

14. The importance of the Church in these respects is clearly seen in miniature from even a superficial 
comparison between the Canadian provinces of Quebec and Ontario. Quebec has many elaborate churches 
and other religious structures, but it has less productive capital equipment and substantially higher birth 
rates than its neighbor province. 

Social and Cultural Factors in Development 81 

to the family group or the individual to his racial or religious group. 
Nepotism and ethnic or religious loyalties in public administration are, of 
course, not unknown in developed countries, but they are much less a part 
of the normal order of things. 

In underdeveloped areas, moreover, people tend not to distinguish in 
thought or practice between the hierarchy of the social structure and the 
logically quite separate concept at least in Western thought of the rela- 
tion between the individual and the state. The notion of political rights and 
obligations attaching to persons as persons, without regard to social status, 
ethnic origin or religious belief, is usually absent. Those persons highest in 
the hierarchy are the state or the government. Rights and privileges are a 
function of class, occupation or lineage rather than the very basis of the 
concept of citizenship. 

Attitudes toward Government 

The implications of these preconceptions and attitudes for the actual 
functioning of government are that the people at the top interpret their 
position as one of indisputable right rather than one of public responsibility 
and similarly at the successive steps downward in the hierarchy of 
authority and administration. Seen from the underside, it is taken for 
granted that the authorities or the officials are primarily occupied only with 
maintaining or strengthening their own interests. The concept of the "gen- 
eral welfare" or the notion of "the public servant" is usually neither 
expected nor exemplified in the practice of government and public adminis- 

These attitudes have naturally been reinforced by the fact that for cen- 
turies past in many economically underdeveloped countries governments 
have done little else but collect taxes and maintain order. In other words, 
the great masses of the people have encountered their government officials 
only in the role of tax collector or magistrate. 15 

The concepts of government and the practices of government administra- 
tion commonly found in economically underdeveloped areas are not well 
suited to the task of introducing the basic changes needed for economic 
development. Development is not likely to burst forth spontaneously in 
isolated village economies. Yet the government official from outside the 
village is likely to be regarded with suspicion and distrust simply because he 

IS. Government tax revenues in underdeveloped countries come primarily from consumption taxes, 
customs and excise duties, license taxes, transactions taxes and levies on real property. The tax burden thus 
falls proportionately more on the poor than on the well-to-do. Few of the taxes commonly used in under- 
developed countries are incentive taxes in that they deliberately encourage economic activity and initiative; 
they tend to be repressive or, at best, neutral. Even more important, their imposition and collection fre- 
quently are capricious and inequitable; influence and even bribery often determine the levy. To the average 
person in underdeveloped areas, taxes are a staggering, if often hidden, burden that consumes much of his 
ingenuity and craft. From the point of view of the state, on the other hand, collection costs are high and the 
yields disappointing. 

82 Approaches to Economic Development 

is an official. Moreover, the traditional government bureaucracy is usually 
unaccustomed to the kind of cooperative effort with the villager that is 
necessary to bring about changes in tillage methods, sanitary practices, 
land use and the like. Efforts to meet this difficulty by setting up new gov- 
ernment agencies to undertake the new tasks of development have often 
been less successful than expected because of the obstructionist tactics of 
the old bureaucracy whose members stand to lose status and influence by 
the success of the new. 16 

Hence those who insist, as some do, that the absence of private entre- 
preneurs in most underdeveloped countries means that the government will 
have to perform these functions if development is to be achieved must 
perforce take full cognizance of what this means in terms of the conceptions 
of government and public administration that prevail in these countries. 
The substitution of government entrepreneurship for private entrepreneurs 
merely changes the administrative form, not the economic character, of the 
development undertaking; to assume that the government will necessarily 
be an efficient agency of administration is often unwarranted. 17 

The Importance of the Legal System 

The legal system its conceptualization, its principles, interpretation and 
administration is one of the most important of all institutions in its per- 
vasive influence on economic activity. Cross-cultural comparison of laws 
and legal administration is of course an enormous subject. Broadly speak- 
ing, however, the underdeveloped countries either have a legal system 
which is based on principles of jurisprudence that are wholly different from 
those in the developed countries, as in the Orient and the Middle East, or, 
as in Latin America, a legal system with its roots in continental European 
jurisprudence but often lacking the elaborations and extensions necessary 
for an industrialized and urbanized society. 18 In either case, the legal 

16. It will be recalled that President Franklin D. Roosevelt was of the opinion that the "old line agencies" 
in Washington were probably incapable of carrying out the bold program launched during his first adminis- 
tration and that he accordingly set up wholly new agencies to carry it forward. 

17. A recent writer asserts that the reason why Adam Smith and his followers so strongly espoused 
laissez-faire policies, as against government direction and control, was that at the end of the eighteenth 
century so many of the then European governments were notoriously incompetent and corrupt. Conse- 
quently, these eighteenth-century writers sought "to confine the activities of government within the narrow- 
est practicable limits, so as to minimize the damage that they might do." W. Arthur Lewis, The Principles of 
Economic Planning, Dobson, London, 1949, p. 121. The suggestion may be more plausible than historically 
defensible, however. 

18. The intent here is not to suggest that the basis and theory of law are essentially similar in all Oriental 
countries but only to group them together in the negative sense that they have been largely untouched by the 
stream of thought which has shaped European and Anglo-Saxon law, that is, Roman law and customary law 
(common law) with a strong admixture of natural law concepts. There are also, of course, important differ- 
ences between Anglo-American and continental European legal theory. For a brief historical introduction 
to the topic see Charles Grove Raines, The Revival of Natural Law Concepts, Harvard University Press, 
Cambridge, 1930, Part I. 

The legal systems in Latin America are much closer to continental legal systems than those of Oriental 
countries. But because of the persistence of an agrarian type of society in many Latin American countries, 
their legal systems are probably more nearly similar to those of eighteenth-century Europe than to those of 
twentieth-century Europe. 

Social and Cultural Factors in Development 83 

systems in underdeveloped areas are probably less satisfactorily adapted to 
the promotion of economic activity than those in the economically more 
developed countries. In some instances it would appear to be the juris- 
prudence which is unconducive to the fostering of economic activity; in 
others the weakness, from the economic point of view, is centered more 
nearly in the actual functioning of legal administration through the judges 
and the courts. 

In industrialized countries, especially since the eighteenth century, the 
legal system has to a remarkable degree developed along lines deliberately 
intended to foster economic activity. 19 The shift of Anglo-American and 
continental law away from a feudal-agrarian orientation has been going on 
for at least two centuries and still continues. There now exists a body of 
law which, while not nearly as simple as might be wished, is yet able to 
effect property transfers, to provide for a variety of equities of parties to 
contracts and, not least in importance, to litigate disputes effectively 
through a hierarchy of courts. The economic significance of this develop- 
ment is evidenced by the number of statutes, principles, doctrines and cases 
relating to the corporation and other business associations, the transfer of 
property, leases, mortgages, conveyances, trusts, agency, employer-em- 
ployee relationships, etc. These are all concrete manifestations of the view 
now accepted in developed countries that the state should positively pro- 
mote economic activity and provide the appropriate enabling rules and 
facilities. 20 

Deficiencies of the Legal System in Underdeveloped Areas 

The underdeveloped countries do not compare favorably with the de- 
veloped countries in these respects: the arrangements for property trans- 
fers, contracts and the like are more cumbersome, more costly, less flexible 
and less well adapted to nurturing, promoting and giving free play to the 
economic interests of persons as individuals or in association. 21 The legal 
point of view toward economic affairs appears to be paternal and permissive 
rather than enabling and promotional. Insofar as this is true, the full poten- 
tial of the existing factors of production to yield real incomes is not realized. 

19. This is part and parcel of the shift in Western Europe away from mercantilism and toward laissez faire. 
To place the point in the text above in a broader setting: Most underdeveloped countries have not yet passed 
through a thorough revision of their age-old conceptions of the relation of the state or sovereign authority 
to economic activity such as occurred in Western society during the eighteenth century and later. 

20. A friendly critic with wide experience in underdeveloped areas points out that one reason for their 
limited use of the corporate form of business enterprise is the virtual lack of protection afforded minority 
investors where the state does not require the filing and publication of certified balance sheets and income 
statements which must be transmitted to the shareholders. The minority investor invests in the dark and is 
kept in the dark concerning his company's affairs. 

21. The leaders in some underdeveloped countries have stated repeatedly and forcefully that they distrust 
and dislike the "free play of economic forces" as against the alternative of comprehensive planning from 
above. Tnis point is not here at issue and it probably cannot be answered wholly on economic considerations 
in any case. The only concern here is to point out the relation between the legal system and the flow of 
output from whatever economic resources a country possesses. 

84 Approaches to Economic Development 

The rules governing the inheritance of land, land tenancy and land own- 
ership are often among the most far-reaching legal institutions in their 
effects upon economic activity and initiative. The law or precedent that 
requires that even small pieces of land be subdivided among the children 
upon the death of the father often fragments the unit of tillage far beyond 
the limits of effective cultivation. Tenancy provides another example. In 
and of itself, tenancy is not necessarily an impediment to productivity; but 
if the tenant has no security or renewal rights he is not likely to improve his 
plot or husband its natural fertility. Similarly, if any increments in output 
are likely to accrue to the landowner, more or less regardless of the tenant's 
diligence or enterprise, then the tenant has little incentive to produce more. 

Land titles, registration of land ownership, holdings in usufruct that are 
neither owned nor leased in the occidental sense, and various other hybrid 
forms of land "ownership" all these, as they exist within the legal systems 
of many underdeveloped areas, seem to be such a quagmire of confusion, 
uncertainty and despair for all concerned that it is hard to believe that their 
effects on productivity are not strongly adverse. These difficulties are said 
to be particularly acute in the successor states to former parts of the Otto- 
man Empire. Concerning Iraq, for example, Sir Ernest Dowson says: 

Everyone directly or indirectly concerned with agriculture in el 'Iraq must know 
many individual cases in which the development and use of the land has been 
gravely obstructed by the widespread insecurity and confusion of rights. Indeed 
the most diligent inquiry would be unlikely to reveal anywhere any appreciable 
number of holdings, large or small, held in undisputed possession and free from 
hampering and conflicting claims. 22 

These obstacles to economic performance and development are deep 
rooted in the legal system. Until they are cleared away, economic measures 
are likely to be ineffectual. 

Institutional Aspects of Work Attitudes 

The prevailing value systems in underdeveloped areas are often con- 
ducive to occupational and work attitudes that impede development. Some- 
times this takes the form of contempt for anything that could be called 
"work," though more commonly only manual work is held in acute disdain. 

Samuel P. Hayes, Jr., formerly of the Technical Co-operation Adminis- 
tration of the U.S. Department of State, has said: 

In a number of Near Eastern countries there are apparently plenty of technically 
competent personnel in the professions; what is lacking ... is ... the great 

22. Sir Ernest Dowson, An Inquiry into Land Tenure and Related Question*, p. 33, as quoted by Doreen 
Warriner in Land and Poverty in the Middle East, Royal Institute of International Affairs, London, 1948, 
p. 103. The Warriner volume gives an excellent account of these problems in the Middle East. See also 
Economic Survey Mission to the Philippines, Report to the President of the United States, Washington, 1950, 
p. 56. 

Social and Cultural Factors in Development 85 

middle group of foremen, supervisors, etc. . . . willing to get their hands dirty 
in actually getting a project under way. In a number of Latin- American countries 
the same general prejudice against work, especially manual work, exists. One 
gains prestige by delegating work to others. If one has been fortunate enough to 
get advanced training, especially abroad, one at once becomes too good for one's 
past job or for any job that takes one out of one's clean office. 23 

Professor P. T. Ellsworth draws attention to similar attitudes in Ceylon: 

. . . such skilled workers as carpenters, blacksmiths come much lower down the 
scale [than cultivators], not to mention the still lower fishermen, potters, laundry- 
men, and the like. 

Co-ordinate with the bias of the educational system and influence of caste in 
restricting the formation of a class of skilled and technical workers is the unusual 
prestige accorded government employment. 24 

Just why the value systems in many economically underdeveloped areas 
assign various occupations the prestige indexes they do is a problem for 
specialists in anthropology or sociology. Moreover, in drawing attention to 
such attitudes, the present writers do not mean to imply that they are 
"wrong" and "ought" to be changed. This is a question for the peoples in 
the economically underdeveloped areas to decide for themselves. What can 
be pointed out, however, is that such work attitudes are probably incom- 
patible with a professed determination to achieve rapid material progress. 
For, among other reasons, a highly productive economic system is one that 
is characterized by a marked specialization of function and division of 
labor. This requires more than planners at the top and workers below. In 
between must be foremen, supervisors, technicians, minor bosses and a 
host of others whose jobs command respect and engender self-respect in 
those who perform them. 

Economists are wont to emphasize cooperation as the reverse side of 
intensive specialization and division of labor. But this cooperative aspect 
of economic efficiency includes more than the organization of production 
through a price and market system that economists have often described. 
It involves the ability of people with different social, cultural, religious and 
political orientations to get along together well enough to avoid paralyzing 
wrangles, to engage in joint economic pursuits ignoring their differences of 
views on more fundamental matters. There is considerable evidence that 
this type of cooperation is less common in underdeveloped areas. It appears 
to be difficult to disentangle a person's abilities and capacities as a worker 
from his caste, religious beliefs, social or geographical origin or other at- 

23. Samuel P. Hayes, Jr., "Personality and Culture Problems of Point IV," in Bert F. Hosehtz (Ed.), 
The Progress of Underdeveloped Areas, University of Chicago Press, Chicago, 1952, p. 211. 

24. P. T. Ellsworth, "Factors in the Economic Development of Ceylon," American Economic Review, 
Papers and Proceedings, May 1953, p. 121. 

86 Approaches to Economic Development 

tributes that have little to do with his potential contribution in production. 25 
Consequently, efficiency suffers because special abilities go unused and job 
and worker are unlikely to be as well matched as they might be. 

The capacity of a people to tolerate and compromise their differences, 
to distinguish between relevant and irrelevant considerations for the task in 
hand, to formulate decisions and then to execute these decisions in the 
spirit of the agreement has great economic significance. For, in the final 
analysis, economic resources such as labor, land and capital goods are 
brought together by human beings. What these resources can be made to 
yield for human welfare therefore depends a good deal upon how well the 
people can work together. 

Diverse Nature of the Institutional Problem 

Few, if any, of these general comments on the value systems and their 
accompanying institutional expressions that tend to be characteristic of the 
economically underdeveloped countries would be applicable to any par- 
ticular underdeveloped country without substantial modification. The 
institutional structures of India and Pakistan, Brazil and Bolivia, Iran and 
Iraq, or of almost any two neighboring countries, differ greatly from one 
another in their implications for problems of economic development. 
Nevertheless, to assume, as is sometimes done, that one may proceed from 
a strictly economic analysis of the development problem to a prescription 
of a program for development without careful attention to the socio- 
cultural environment within which this program will have to be undertaken 
is to proceed in ignorance toward almost certain disillusionment and 
possibly outright disaster. 


Cultural change is not to be desired for its own sake. Insofar as certain 
features of the cultural environment stand in the way of material progress, 
however, they will need modification if the desire for development is to be 

The problem of cultural change can be approached in two ways. One 
approach would endeavor to achieve change directly by means which 
expose people to new ideas and techniques. This is essentially the Point IV 
concept, although the same results can be obtained by methods other than 

25. Consider the following by a well-known anthropologist: "What I have said about the peasant society 
studied by the anthropologist is very much what the historian has described in other language for the eco- 
nomic life of the Middle Ages. One can translate this into various propositions. One may say that in such a 
peasant economy economic ties are personalized that is, relationships as economic agents depend on the 
social status and relationships of the persons concerned Put another way, labour is given as a social service, 
and not simply an economic service ... In primitive communities the individual as an economic factor is 
personalized, not anonymous. He tends to hold his economic position in virtue of his social position." 
Raymond Firth, Elements of Social Organization, Watts, London, 1951, p. 137. 

Social and Cultural Factors in Development 87 

those now used in technical assistance programs. The second approach is 
indirect and is based on the belief that if the economic foundations of the 
old culture, with its inhibiting institutions, can be destroyed, it will sink 
into insignificance. Some of those who favor the indirect approach insist 
that the economically underdeveloped areas will have to be "dynamited" 
into development; others believe that more gradual measures are not only 
possible but, in the long run, likely to be more effective. 

For the economist, the question is summed up concretely and fully in the 
rate of capital accumulation required to effect the cultural changes neces- 
sary for development. 


The direct approach to cultural change relies essentially on an educa- 
tional process. Like all education, knowledge of modes of living and work- 
ing can be acquired by direct contact or by formal instruction. Historically, 
direct contact has been much the more important process, although, since 
the end of World War II, the other has been coming increasingly to the fore. 

Effects of Immigration and Migration 

Social values and institutions are likely to be eroded and may give way 
altogether when a society is confronted with the necessity of accommodat- 
ing new groups in large numbers. The rapid growth of a town or city, for 
instance, almost necessarily forces adaptations in the structure of values 
and in the accompanying social and economic institutions. The newcomers 
do not share the beliefs and attitudes of the old inhabitants and are likely 
to elbow them aside in introducing new activities, changing land uses, and 
so on. 26 

In recent times, migrations have commonly been associated with broad 
changes in the composition of demand, exploitation of new sources of raw 
materials, technical innovations, and the like. In earlier times, they appear 
to have been concomitants of invasions, wars, revolutions, religious perse- 
cutions and similar violent eruptions. But whatever their causes, sizable 
migrations usually have disrupted the established social and economic 
order. Frequently, the newcomers have brought superior techniques of 
production against which the traditional practices could not compete suc- 
cessfully; as a result, the old techniques were superseded. 

The immediate prospects of international migration on a scale large 
enough to effect major cultural changes are quite unpromising. Internal 
migrations, on the other hand, could bring similar, if less rapid, results if 
communication and transport facilities were to be sufficiently well devel- 

26. The north-south migration of many industries in the United States and the wartime mushroom 
growth of many towns in the Southwest and Far West afford many examples of this type of change. 

88 Approaches to Economic Development 

oped. The opening of new industries in new places tends also to produce 
similar results. 

Rural-urban movement is doubtless a peculiarly effective form of migra- 
tion for breaking down old ways and creating a new elite group. The city- 
ward migrants will almost certainly acquire new value patterns, new ways 
of life and new attitudes. Rapidly growing cities usually bring a new elite 
group to the fore because the process of growth is likely to call for talents 
and abilities of a type that the old elite do not possess. The migrants from 
the country inevitably tend to absorb the values and attitudes of the new 
elite. Moreover, some of the migrants will not remain permanently in the 
city but in due course will return to their villages with urban ideas and new 
points of view that implicitly call into question the traditional ways of the 
village and its hierarchical structure. And the impact of the returned 
migrants upon village life will of course be greatly enhanced if they come 
with accumulated savings that give them affluence and influence well above 
their original status. The old forms are often helpless against these sub- 

Education and Technical Assistance 

An obvious alternative to internal migration or immigration, as a means 
of modifying deep-seated cultural values and institutions, is to attempt to 
expose the people to new and different ideas through education and demon- 
stration. Reorientation of the educational system, agricultural extension 
services, sending students abroad, importing technicians, and the whole 
range of activities implied nowadays by the phrase "technical assistance" 
are examples that at once come to mind. 

These methods operate more slowly and are probably less satisfactory 
because they can be more easily resisted. Exhortation accomplishes little, 
and the assumption that people need only to be shown in order to adopt 
new ways is usually ill-founded. Much "good advice" has been exported to 
the underdeveloped areas on the subject of taxation and fiscal policy, but 
most of it has had little effect on their management of financial affairs. 
The time-honored patterns of government remain unshaken. Disappointing 
results have also at times followed efforts to introduce better sanitary prac- 
tices and techniques of cultivation or harvesting. Old customs are not easily 

If the culturally elite in the society reorient their values and drives, or 
if a new elite should rise to power and influence, the adjustments in the 
lower strata will be the more easily accomplished. The history of Japan fol- 
lowing the Meiji restoration in 1867 (see Chapter 8) provides a good 
example of the first situation and Russia after the 1917 revolution illustrates 
the second, though, to be sure, with certain special features. A somewhat 

Social and Cultural Factors in Development 89 

similar change appears to be currently under way in Mexico. 27 However, 
not much can be said, in general terms, concerning the factors that are 
primarily responsible for fundamental shifts in the value orientation of 
elite groups. 

Barring abrupt shifts of this kind, the possibilities of modifying the 
cultural environment through patient education and instruction appear to 
vary widely according to the phase of the culture that is to be modified. 
Health and sanitary practices are perhaps the easiest to change because the 
beneficial results are so readily apparent, as for example with inoculation. 
Even here, however, a large trained staff is necessary and it must be willing 
to work at the grass roots level persistently and patiently. An effective 
program usually can only be undertaken by people native to the culture; 
it can be directed, but not carried out, by specialists from abroad. 28 


The indirect approach to cultural change is based on the belief that if 
the economic roots of the inhibiting values and institutions can be cut off 
they will lose their influence and wither away. Concretely, this usually 
means displacing the multitude of local and more or less isolated econo- 
mies, with their personalized economic relationships and their largely 
static patterns of resource use and demand, by an expanding network of 
specialization and exchange with impersonal economic relationships. The 
approach is thus a dual one: static patterns of demand and resource 
utilization need to be disrupted; economic relationships need to be 

The values and institutions that tend to debar material progress are sup- 
ported from two sides. First, no competing possibilities exist for the utiliza- 
tion of productive factors, so that traditional uses are repeated decade after 
decade with little variation. Second, no new wants or tastes spring up to 
compete with the wants generated by the traditional value structure. In 
other words, so long as an underdeveloped country consists largely of 
village economies virtually isolated from one another, it is reasonably cer- 
tain, first, that no new products or services will come into being to weaken 
the existing composition of demand for final products; second, that no 

27. Sec, for example, Sanford A. Mosk, Industrial Revolution in Mexico, University of California Press, 
Berkeley, 1950, passim. 

28. Dr. Sylvester M. Lambert, a physician with wide experience in the South Pacific, insisted, for example, 
that the concept of medical care as used m more developed countries had to be drastically modified before it 
could be applied in the South Pacific Islands. Western trained physicians, he argued, could never perform 
the task. Raymond B. Fosdick quotes his arguments as follows: " 'In the first place/ he said, 'their cost 
makes an adequate number prohibitive. Secondly, they fail to answer their full purpose from ignorance of 
the language and customs. Thirdly, they cannot and will not stand the hardships which medical work entails 
in these islands.' He had nothing but scorn for the average white doctor he met. 'He comes out to the 
islands often with no knowledge of tropical medicine,' he said, 'frequently an alcoholic, usually a medical 
cripple of some sort.* " Raymond B Fosdick, The Story of the Rockefeller Foundation, Harper, New York, 
1952, pp. 117-18. 

90 Approaches to Economic Development 

changes will penetrate from outside to alter the way in which the village 
uses its productive resources. New wants and demands cannot appear as 
long as the isolation exists. And no alternative possibilities of resource 
utilization can arise. Consequently, one means of loosening the cultural 
ties is to introduce new wants competitive with the old and also to introduce 
new possibilities of using productive resources which compete with the old. 
In practice, of course, the two procedures are almost inevitably linked 

Undoubtedly among the most powerful instruments for disrupting the 
settled pattern of consumers' tastes and demands in underdeveloped areas 
are radio and motion pictures. An entertainment film that incidentally 
portrays the level of material well-being and the mode of living in the more 
developed countries must be unsettling to ways of life in underdeveloped 
countries. The realization that not everywhere is life lived as it is in the 
local setting must create a desire for change, and perhaps even a determi- 
nation to make changes. These disturbances tend to be reinforced by the 
speed with which ideas are communicated between and within countries by 
means of the radio. The greater frequency and intimacy of contact between 
national leaders that air travel permits also stimulates new ways of think- 
ing. Consequently the demand structure in underdeveloped areas, even in 
the more remote regions, may be potentially much less inflexible and tradi- 
tion bound than it was before mass communications were developed. 

The depersonalization of economic relationships as a means of weaken- 
ing cultural ties is perhaps more accurately regarded as a concomitant of 
the changes discussed than as an independent factor. Nevertheless, its 
importance needs to be underscored because, where the circumstances are 
such that economic relationships are strongly personalized, strictly eco- 
nomic considerations for example, improvements in efficiency, acceptance 
of innovations, changes in the products grown or goods produced are 
likely to be overridden by those of a socio-cultural nature. Thus, to de- 
personalize economic relationships is at once to weaken cultural bonds and 
beliefs and to promote efficiency. 

Two Routes of Indirect Economic Change 

The indirect assault on the cultural barriers to economic development by 
depersonalizing economic relationships and by introducing new patterns of 
resource use and new demand structures may proceed by either of two 
routes. One method is the spread of the price-market system. The other is 
central economic planning. Both methods have been used in the past and 
are being used now. Moreover, the two methods can be combined, at least 
in part, by confining central planning to certain sectors of the economy and 

Social and Cultural Factors in Development 91 

leaving the rest to be operated by the price-market system. The "mixed 
economy" as envisioned for India is a case in point. 

Regardless of whether the market approach or the planning approach is 
used, their effects on the socio-cultural environment are likely to be felt 
through essentially similar channels. In either case, new possibilities of 
resource utilization are introduced and new demand structures appear in 
the many localized, self-sufficient village economies. From a broader point 
of view, there is increasing specialization and exchange among persons and 
regions and a growth of the stock of productive capital. In part, the first 
is the obverse of the second. But as already argued, it is the new patterns 
of resource use and demand that, by depersonalizing economic relation- 
ships, weaken the socio-cultural structure. 

Nothing very useful can be said in general terms concerning the relative 
merits of the price-market system and central economic planning as means 
of effecting the economic changes necessary to undercut the cultural dead- 
wood in underdeveloped areas. Either approach implicitly assumes that if 
new demand patterns and new ways of using productive resources are intro- 
duced, the necessary cultural changes will follow along. Economically, the 
only question is which approach will be the more effective. Invariably, 
however, far more than strictly economic considerations are at issue. 

5. Demographic Factors in Development 

IF WHAT ANY ECONOMY AFFORDS at any particular time as end product 
to its members depends largely upon the productive resources available to 
it and how effectively these resources are used within its particular socio- 
cultural environment, it is also true that how rapidly this end product will 
improve over time depends upon the rate of change in total output in 
relation to the rate of change in the numbers in the total population. Higher 
real incomes per capita in an area are contingent upon a more rapid rise in 
total output than in the numbers in the population. Since the vent of emi- 
gration is rarely available, this means that the rate of growth of output 
must exceed the rate of natural increase in the population. Unfortunately, 
the high growth potential of the populations in many underdeveloped 
areas, in relation to the prospective growth in national output in the near 
future, is sufficiently disquieting to raise, in some quarters, the fear that 
economic development is really a polite name for schemes designed merely 
to prevent a decline in the average level of material well-being. 

Whether these fears are warranted or not depends largely upon whether 
the factors that account for this high population growth potential are likely 
to diminish in force over the near future. Can development itself be ex- 
pected to react upon mortality and fertility in the underdeveloped areas in 
such a way that the end result will be higher levels of material well-being 
rather than larger populations at levels of well-being little different from 
those now prevailing? If the probable end result of economic development 
were simply larger numbers at about the same miserable level of existence, 
development schemes and programs would hold little appeal in many 
circles. Consequently, no discussion of the development problem can ig- 
nore the population factor without distorting the problem almost beyond 


Roughly two thirds of the world's people live in the underdeveloped 
areas and, with few exceptions, the populations of these areas have in- 
creased substantially during the past century. The population of India in 
1850 was almost certainly less than 190 million, according to one authority; 
in 1950 this area, including Pakistan, held more than 400 million people. 
The population of Egypt has grown from probably about 3 million in 1845 


Demographic Factors in Development 93 

SUBDIVISIONS, 1700-1949 

Country or Region 





















Asiatic Russia 







Southwest Asia a 














China major 1 ' 














Southeast Asia, 















The Americas 







Sources: Merrill K. Bennett, "Population, Food, and Economic Progress," The Rice Institute Pamphlet, 
July 1952, pp. 13 and 68. Bennett says that his estimates for the period up to 1850 differ very little from the 
well-known figures published earlier by Walter F. Wiilcox (Ed.) in Internation Migrations, Vol. II, National 
Bureau of Economic Research, New York, 1931, or A. M. Carr-Saunders in World Population: Past Growth 
and Present Trend?, Oxford University Press, London, 1936. 

a. Afghanistan, Persia, all of Asia Minor, and the Arabian peninsula. 

b. China proper plus Manchuria and Korea, Outer Mongolia, Chinese Turkestan or Smkiang, and 

c. Siam, Indochina, the Malay States, Indonesia and other islands of the East Indies, the Philippines, 
Australia and New Zealand, and the Pacific Islands. 

to more than 20 million in 1950. Ceylon's population 7.75 million in 1951 
is said to have trebled in the past seventy-five years. 1 Parts of Latin 
America, Africa, the Middle East and southeastern Europe have experi- 
enced similar large increases over the past century. A recent analysis of 
United Nations data on rates of natural increase in population shows that: 

Of the 125 countries for which statistics for a recent postwar year (in most cases, 
1950) are available, 43 report rates of natural increase of two per cent or more 
. . . More than half of these are Latin American countries. In this region, 25 of 
the 39 countries supplying vital data report rates of natural increase higher than 
two per cent and five a rate of more than three per cent. Seven of 17 Asian coun- 
tries show rates of two per cent or more and five of the ten countries in Oceania 
report rates at this level. In contrast, 21 of the 39 European countries are increas- 
ing at a rate of less than one per cent per year. 2 

Estimates of the number of people in the main subdivisions of the world 
since 1700 show that the growth of population in the underdeveloped areas 
has occurred mostly in the past century and a half, and has been particu- 

1. The present-day population figures are chiefly from United Nations, Demographic Yearbook, 1952, 
New York, 1953. Estimates for earlier years are from the following sources: for India, from Kmgsley Davis, 
The Population of India and Pakistan, Princeton University Press, Princeton, 1951, pp. 26-27; for Egypt, 
from Charles Issawi, Egypt An Economic and Social Analysis, Royal Institute of International Affairs, 
Oxford University Press, London, 1947, p. 48; for Ceylon, from International Bank for Reconstruction and 
Development, The Economic Development of Ceylon, Johns Hopkins Press, Baltimore, 1953, pp. 1 and 8. 

2. Hope Tisdale Eldridge, "Population Growth and Economic Development," Land Economics, February 
1952, p. 2. Eldridge points out that, especially in the underdeveloped areas, birth registration is probably less 
complete than death registration, so that the calculated rates of natural increase are probably understated. 

94 Approaches to Economic Development 

larly rapid since 1900. The growth in Asia is particularly remarkable. 
Southeast Asia and Oceania, for example, gained only 8 million in popula- 
tion between 1700 and 1800, but the increase from 1900 to 1949 was 87 
million. The population of the world as a whole increased by approxi- 
mately one third from 1850 to 1900 and by more than half from 1900 to 
1949, compared with an increase of roughly one fifth from 1700 to 1750. 
(See Table 5-1.) 

Not all underdeveloped areas necessarily have unusually high rates of 
population increase. But even modest rates, compounded on an already 
large total, yield alarmingly large absolute increases in population in a few 

Growth in the Nineteenth Century 

The very fact that many underdeveloped areas have substantially in- 
creased their populations over the past century, and especially in recent 
decades, is evidence that "development" of a sort has occurred. If India, 
for example, now supports a population of 400 million as against less than 
half that many in 1850, then assuredly its consumable output must have 
increased. For somehow, by 1950, the combination of persons, natural 
resources and productive equipment was able to support more than twice 
as many people. Even if the average Indian in 1950 was no better off than 
his forefather in 1850, there was "development" at least in the sense that in 
later years certain persons survived who could not have been supported by 
the product of the economy in the earlier period. Apart from immigration, 
population will increase only if births exceed deaths. Hence, if, as the 
evidence strongly suggests, population growth in the underdeveloped areas 
is a phenomenon of the past century and a half, and if growth has been 
accelerating in recent decades, then certain changes must have lately ap- 
peared which disturbed the pre-existing relation between deaths and births. 

Only three kinds of change are theoretically possible: (1) death rates 
remained the same while birth rates rose; (2) both death rates and birth 
rates rose, or both fell, but the excess of births over deaths increased; 
(3) death rates fell while birth rates remained at about their former level. 


The remarkable growth of population in the underdeveloped areas in 
recent times is almost entirely attributable to a decline in death rates. While 
in many areas death rates are still high compared with the more highly 
developed countries, they have nonetheless fallen sufficiently in recent 
decades to cause the population substantially to increase. For example, in 
India crude death ratesthe number of deaths per year per 1,000 persons 

Demographic Factors in Development 95 

in the populationfell from an average of 41.3 in the decade 1881-1891 to 
31.2 in the decade 1931-1941. In Puerto Rico the death rate dropped from 
perhaps 24 at the turn of the century to 18.4 in 1940 and to 9.9 in 1950. By 
way of comparison, the United States death rate in 1940 was 11.5 and 9.6 
in 1950. 3 


The drop in death rates in underdeveloped areas before 1940 is at first 
glance somewhat puzzling. It cannot be attributed to economic develop- 
ment in the popular present-day sense of the term since little of that 
occurred. The only plausible explanation seems to be that the increasing 
contacts of the Western world with the underdeveloped areas the Orient, 
the Middle East, Africa, and Latin America directly and indirectly 
brought about certain changes in these countries which resulted in lower 
death rates. Some of these changes were due to the spread of colonialism. 
Others were perhaps direct, though incidental, by-products of economic 
exploitation in the form of plantations or mining ventures. During the 
nineteenth century, the expansion of the European economy to overseas 
areas greatly intensified its contacts with the underdeveloped areas and 
many Europeans migrated to assist in the exploitation of overseas re- 
sources. While it is now fashionable to emphasize the more sordid aspects 
of this economic penetration, it seems nevertheless to have been primarily 
responsible for lowering mortality and thus disturbing the population 
equilibrium in these areas. 

Doubtless, the precise causes of the fall in death rates in the under- 
developed areas were not everywhere identical. Yet, in retrospect, two 
broad types of changes seem to have been the principal causative factors. 

Order and Security 

First, economic penetration by the more advanced countries, either as 
colonial powers or as traders, usually led to greater internal stability and 
greater security for the people as a whole in these areas. Consequently, 
average usable output per worker rose as the people were freed from the 
more rampant forms of rapine, pillage and banditry. As a recent report on 
current conditions in the Far East put it: 

There is little doubt that a period of peace and strong government, even one that 
merely improves the functioning of the economy along existing lines, would bring 

3. In the period 1931-1935 no European country had a death rate greater than 20. The spread between the 
prevailing death rates in different countries in any year, or between the average rates in any one country at 
different historical periods, is usually greater than one might suppose. A death rate of 8 or even 9.0 is 
definitely low; in the Netherlands in 1950 the rate was 7.5. (Death rates in the neighborhood of 8-9 per 
1 ,000 reported at times by some countries are not always to be relied upon.) In times of epidemic or acute 
famine a country's death rate may rise above 50 per 1,000. During the 1918 influenza epidemic in the United 
States the annual death rate rose only from 14 to 18, although the rate for the month of October 1918 
was 44.1. 

96 Approaches to Economic Development 

considerably more favorable conditions than have existed in the past two decades 
and would reduce death rates for at least some time. 4 

While India and the Netherlands Indies are probably the classic examples 
of improved internal security and stability resulting from overseas inter- 
vention, these are not isolated instances. They probably exemplify the 
kinds of changes which occurred elsewhere in the Orient, in Latin America, 
the Middle East and Africa during the nineteenth century and later. 5 

Famines Less Frequent 

Economic penetration, however, usually meant more than merely estab- 
lishing a semblance of internal order. Transport was improved, partly to 
assist in the exploitation of resources, but partly, too, as in India, to 
ameliorate local famines. The same was true of irrigation. In the words gf 
Kingsley Davis : 

In times of scarcity the same channels which ordinarily took food out of the 
country could bring food into it, and the breakdown of isolation inside India 
enabled areas of surplus to succor areas of deprivation . . . Some of the railways 
and hard-surfaced roads in India were undertaken precisely for the purpose of 
preventing famines. 6 

The promotion of commercial crops and the exploitation of mineral 
resources were also probably responsible for a sufficiently greater output 
per person to affect mortality. One may deplore some aspects of the 
"plantation system" as manifested in the production of sugar, coffee, tea, 
rubber, tobacco, bananas, cotton and other crops, or the paternalism of 
foreign capitalists in mining diamonds, tin, bauxite, etc., yet these outposts 
of the world economy probably more often lowered than raised death rates 
in the areas where they were established. 7 Population increased rather than 

4. Marshall C. Balfour, Roger F. Evans, Frank W. Notestein and Irene B. Taeuber, Public Health and 
Demography in the Far East, Rockefeller Foundation, New York, 1950, p. 75 Issawi (pp. cit., p. 48) states 
that "the order and security introduced by Mohammed Ah" was a prime factor in Egypt's population 
growth in the nineteenth century. 

5. The belief that most of those areas were serene and peaceful in their economic and political isolation 
before the great powers took an interest in them is a romantic delusion similar to Rousseau's well-known 
beliefs on the nature of primitive man before society corrupted him. Such views are still frequently encoun- 
tered although historical and anthropological research give them little support. Whatever they may have 
been in some earlier millennium, few of the areas which attracted the interest of the European powers in the 
seventeenth century and later were then politically or economically secure. 

6. Davis, op. ciV., p. 39. 

7. The writers are not here concerned with the ultimate merit of these ventures from the point of view 
of the native populations or with their long-term international economic consequences. Such judgments 
involve far broader considerations than are now under discussion. The only concern is to point out that, 
whatever may have been their other effects, these enterprises probably reduced mortality in the areas where 
they were introduced. 

Demographic Factors in Development 97 

Health and Sanitation Measures 

A second, though probably less important, reason why mortality de- 
clined with increasing contacts between the more developed and less de- 
veloped countries is that certain health and sanitation measures were intro- 
duced which struck directly at the high death rates. To be sure, the science 
of public health and sanitation as it is today was developed only in the very 
late nineteenth century and after. Nevertheless, even by 1850, medical 
knowledge and at least the rudiments of public health were better under- 
stood in the Western countries than in the rest of the world, and some of 
this experience was applied in the underdeveloped areas. Before 1900, such 
efforts were probably confined chiefly to the port cities and other centers 
where Westerners congregated and felt the need of self-protection. The 
control of smallpox in India and the Netherlands Indies is an instance. 8 

Against these advances, however, must be set the damage done by 
exposing the people in the underdeveloped areas to new diseases. Kingsley 
Davis points out that: 

It seems clear, for example, that the invasion of India by tuberculosis began in the 
cities, and that at the present time, with the breakdown of the isolation of the 
rural villages, it is spreading rapidly and alarmingly to the countryside. Also, it 
is believed that India was not exposed to plague prior to 1896. 9 

As a result of contacts with the outside world, tuberculosis, syphilis and 
other diseases have at times nearly decimated the local populations, as for 
example in parts of the Pacific and Africa and among the Eskimos. 

The net result of these opposing influences purposive health measures 
as against the introduction of new diseases cannot be estimated with any 
accuracy for, say, the period down to 1890. After 1900, the evidence sug- 
gests that public health measures, sanitation programs and medical care as 
transferred from the more developed countries outweighed the trans- 
planted diseases in their effects upon mortality. 

Thus, the remarkable growth in population in the underdeveloped areas 
from around 1850 down to the outbreak of World War II is perhaps 
largely attributable, on the one hand, to the rise in productivity resulting 
from outside contact and exploitation and, on the other, to direct attacks 
on some of the more patent causes of morbidity and mortality. The two 
factors are not entirely separable, of course. If, for example, improvements 
in well-being resulting from greater productivity take the form principally 
of more food and fewer famines, this in itself would increase resistance to 
disease and reduce mortality. 

8. Cf. Davis, op. cit., p. 47. 

9. Ibid., p. 42, citations omitted. 

98 Approaches to Economic Development 


The declines in mortality rates in underdeveloped areas during the nine- 
teenth century, and in some of them even up to 1939, came mostly as by- 
products of rising productivity rather than from direct assaults on the 
causes of morbidity and mortality. The fall in mortality was mostly a con- 
comitant of other changes rather than an end directly pursued. Insofar as 
economic development does succeed over the near future in the underde- 
veloped areas, further declines in mortality must therefore be the expected 
consequence. At the same time, however, evidence is accumulating that the 
now underdeveloped countries can probably lower their mortality rates 
much more rapidly than the now developed countries did in the past, and, 

1936-1940 AND 1946-1950 

(Rate per 1,000 Population) 


1 936- 1940 

7946-7 950 

Puerto Rico 






























Yugoslavia 11 






Source: Population Bulletin, June 1952, p. 12. 

a. Statistics for Poland are incomplete and the averages are for the years 1936-1938 and 1947-1950. 

b. Averages shown are for 1936-1939 and 1948-1950. 

furthermore, that some of this fall can be brought about without appreci- 
able improvement in most of the usual economic indices of development. 
In other words, the rate of decline may be more rapid in the future and it 
may now be less dependent upon over-all economic progress. 

The primary reason why further declines in mortality in the underde- 
veloped areas may soon be dramatically rapid is that certain infectious 
diseases, which are still major scourges in these areas, have been virtually 
eliminated in the developed countries by techniques that can be easily, and 
often cheaply, transferred to other parts of the world. These important 
scientific advances have been widely applied in the developed countries in 
the past two or three decades. The underdeveloped countries will not need 

Demographic Factors in Development 99 

to discover for themselves the causes of cholera, plague, typhus, smallpox, 
typhoid, malaria, etc. That knowledge exists and is freely available. The 
underdeveloped countries need only the material resources, the trained 
personnel, and, perhaps, the requisite administrative efficiency to apply this 
knowledge on an extensive scale. With some assistance from abroad, the 
underdeveloped areas could soon effect a sharp drop in their high mortality 
rates, even without much economic development in other directions. 
Mortality rates may now be much less closely tied to general economic 
development than they were in the nineteenth century. 

Just how rapidly death rates may decline under modern conditions is 
shown by the declines that occurred in twelve underdeveloped countries 
between 1936-1940 and 1946-1950 a period too short to have permitted 
any comparable gain in general economic achievement. In half of these 
countries the death rate fell by one fifth or more in the ten-year interval. 
The declines ranged from nearly 40 per cent in Puerto Rico to about 11 
per cent in Guatemala. (See Table 5-2.) If these data are approximately 
accurate, they suggest that mortality rates in the underdeveloped areas now 
can be reduced very rapidly and that, unless comparable declines in birth 
rates are to be expected, rates of population growth could be dangerously 


All the evidence seems to indicate that in the Western world fertility 10 has 
declined with the spread of "modern civilization," which, on its material 
side, has been based on the economic developments after 1800. In the 
underdeveloped countries, fertility rates are now well above those in the 
developed countries perhaps even above the rates prevailing in Western 
Europe before the Industrial Revolution. Granted the probability that 
mortality rates will fall as development proceeds in the poor countries, 
what is the likelihood that fertility rates will also decline? And how rapidly 
can the change be expected? 

The usual approach to these questions is to try to discover what factors 
either directly resulting from economic development or virtually certain to 
accompany it have been primarily responsible for the drop in fertility in 
the Western world, and to what extent they can be expected to become 
operative where economic development is now in prospect of realization. 

This type of causal analysis can be pursued at different levels. At the one 
extreme, for example, one might try to explain the decline in births by 
alleging though there is little supporting evidence that there has been a 
decline in "reproductive capacity" in a straightforward biological or 

10. For an explanation of the methods of measuring fertility see Appendix 5-1. 

100 Approaches to Economic Development 

physiological sense. 11 Only slightly removed from this level would be the 
generally accepted view that "the major part if not all of the decline in 
family size has been brought about by the practice of family limitation." 12 
Statements so formulated, however, immediately pose the question why 
"the practice of family limitation" should have become so general in the 
Western world in the past century. What aspects of economic progress or 
modern civilization seem to make family limitation so widespread in con- 
temporary Western society but so rare (apparently) in underdeveloped 
countries? This question can be approached by asking: (1) Why is fertility 
relatively low in developed countries? or (2) Why is it so high in underde- 
veloped countries? Presumably, the same types of factors are operative in 
either case. As might be expected, disagreements on these points arise less 
over the facts themselves than over their interpretation. Thus, there is 
agreement that urbanization and relatively low fertility are usually found 
together; but just what features in urban life tend to bring this about may 
be hotly debated. 


Perhaps the most generally accepted view of the decline in fertility in 
already developed countries is that it is 

. . . due to a complex of inter-related causes acting upon one another and 
jointly bringing about the decline . . . the decline in fertility is closely connected 
with the changes which have fundamentally transformed European society in the 
last two centuries, but attempts to associate the decline exclusively with a par- 
ticular aspect of these changes such as urbanization have not proved satis- 
factory. 13 

While conceding the complex interrelationships of the factors that have 
lowered fertility, we may still note the findings of a few studies which 
attempt to link fertility decline with something more specific than "the 
changes which have fundamentally transformed European society in the 

11. Raymond Pearl lists six "direct" factors of this biological or physiological character that affect indi- 
vidual and group fertility sexual desire, age-specific innate reproductive capacity, coitus rate, conception 
rate, contraceptive rate and reproductive wastage rate. But like other writers he also points out that these 
direct factors are not constant in their effects on fertility because they are modified by first and second order 
"indirect" factors. First order indirect factors would include economic circumstances, density of population, 
religious tenets, institutions of property, etc., which in turn fix the second order indirect factors premarital 
fertility, age of marriage, education, occupation, personal values, physical and mental health, etc. See 
Raymond Pearl, "Biological Factors in Fertility," Annals of the American Academy of Political and Social 
Science, November 1936, pp. 24-25. 

Pearl's classification suggests that efforts to influence fertility might be aimed at either the first or second 
order indirect factors or even at the direct factors. Probably most specialists in these matters would argue 
that efforts to influence fertility by modifying the direct factors, while leaving the indirect factors as they 
were, would be largely ineffective. In other words, fertility control will only be applied by populations whose 
value systems and economic and social conditions make people wish to control fertility. 

12. United Nations, Economic and Social Council, "Economic and Social Factors Affecting Fertility," 
Finding? of Studies on the Relationship*, between Population Trends and Economic and Social Factors, Chap- 
ter 2 of the final report, April 24, 1951, p. 34. The text discussion has drawn heavily on this document. 

13. Ibid., p. 55. 

Demographic Factors in Development 101 

last two centuries." Urbanization, income and literacy are three factors 
considered here because they seem to be nearly inevitable concomitants of 
economic development and they are also partially measurable. 

Urban-Rural Differences 

Fertility in rural areas seems to have been higher than urban fertility 
even in the eighteenth century and this differential appears to have per- 
sisted up to the present in most countries, even though the margin has 
probably narrowed somewhat. 14 Frank Lorimer reports that in 1926-1928 
in the U.S.S.R., rural birth rates held at 45 per 1,000 population, while 
urban rates moved down from 33.9 in 1926 to 28.3 in 1928. The gross 
reproduction rate in rural areas he calculated to be 2.87 as against 1.71 in 
the urban areas, though with marked differences between regions. 15 As to 
the regional differences he says: 

. . . the difference in fertility between cities and rural districts overshadows all 
regional variations either among urban or among rural districts considered 
separately. In fact the most conspicuous regional differences are largely a function 
of degree of urbanization. In the U.S.S.R. as a whole, the gross reproduction 
ratio for the rural population is 68 percent higher and the net reproduction ratio 
55 percent higher, than the corresponding ratios for the urban population. 16 

In Japan, between 1920 and 1935, urban gross reproduction rates fell 
from 1.8 to 1.6 and the rural rates from 2.8 to 2.6. 17 In Puerto Rico urban 
fertility rates also are lower than rural. 18 In India, the same generalization 
is applicable, with a further differential between smaller cities and larger 
cities. 19 

No useful purpose would be served by assembling all the illustrative 
cases. The general point is clear: with few exceptions, urban fertility rates 

14. Ibid , pp. 18-19. P K. Whelpton has shown ("Industrial Development and Population Growth," 
Social Forces, March 1928, p. 462) that in the United States the number of children in the age range 0-4 
years per 1,000 women aged 16-44 was consistently higher for each census year between 1800 and 1920 in 
agricultural states than in either semi-industrial or industrial states The numbers fell in all three groups 
throughout the nineteenth century, though not with perfect consistency. Between 1800 and 1910 Whelpton's 
figures show a drop of 35 per cent in the agricultural states (from 1,043 children 0-4 years per 1,000 women 
to 678) as against a drop of 43 per cent (from 786 to 444) in the industrial states. 

15. Frank Lorimer, The Population of the Soviet Union: History and Projects, League of Nations, 
Geneva, 1946, pp. 87 and 90. Roughly, gross reproduction rates tell the number of females (potential 
mothers) born to the average woman in her lifetime, assuming she lives through the childbeanng years, 
while net reproduction rates take into account the fact that not all women will survive through the repro- 
ductive years. Gross and net reproduction rates are described more fully in Appendix 5-1. 

16. /We/., pp. 89-92. 

17. Irene B. Taeuber and Edwin G. Deal, "The Dynamics of Population in Japan," in Demographic 
Studies of Selected Atcax of Rapid Growth, Milbank Memorial Fund, New York, 1944, p. 28. Net rates fell 
less than gross rates because of reduced mortality among women in the reproductive yeais. 

18. See Lydia J. Roberts, Pattern* of Living in Puerto Rican Families, University of Puerto Rico, Rio 
Piedras, Puerto Rico, 1949, pp. 288-89. 

19. Davis; op. cit., pp. 70-73. Davis adds (p. 73): "In so far, then, as urbanization continues it will have 
slight effect in decreasing total fertility; but there is apparently no extra diffusion, no multiplier effect, that 
intensifies the influence of cities beyond their natural growth as time goes by. In short, the rural-urban and 
intra-urban differentials do not indicate an imminent decline of general fertility in India." 

102 Approaches to Economic Development 

are below rural fertility rates even though the urban rates may differ sub- 
stantially among countries. It should follow from past experience, there- 
fore, that insofar as economic development induces urbanization, it should 
tend to cut fertility rates. 

Explanations of why urbanization of a population tends to lower its 
fertility (by bringing it under conscious control) almost invariably stress the 
multiplicity of factors at work. As the United Nations report phrases it, the 
small-family system is not to be viewed as 

... the result of a particular development, such as higher standards of living, 
but as a characteristic of a whole new way of life, of "civilization" in general, as 
it has sometimes been expressed. To describe the mentality accompanying family 
limitation, words such as "rational," "rationalization," "rationalist civilization" 
are often used. What constitutes this "rational mentality"? An element com- 
monly stressed is freedom from tradition, the willingness to analyze institutions, 
values, patterns of behavior which were traditionally accepted without question 
. . . Economic rationalism has been particularly stressed. 20 

If the question is put the other way about What kind of environment 
tends to make for high fertility? the answer is probably similar: tradi- 
tionalized ways of life, familial dominance, primacy of the male, ignorance 
and illiteracy, extreme poverty, and spatial, social and economic immobil- 
ity. All these and related influences are likely to operate with diminished 
force in an urban environment. City life is more impersonal than rural life; 
the individual can be more anonymous and more free to fix his own social 
patterns. Consequently, it is not surprising that growing urbanization 
should be accompanied by new ways and new mores, including those 
affecting fertility. 21 

Education and Fertility 

These characteristics of urban living and urban points of view may 
partly explain the close correlations frequently found between education 
and fertility and income and fertility. That is to say, education may be 
indicative of the acceptance and adoption of urban points of view; higher 
incomes may imply modes of life patterned after those prevailing in the 
more highly developed urban centers, which often come to be almost 
axiomatically accepted as the standard of comparison. The American scene 
abounds in examples. 

A recent study by Sven Moberg shows that among industrial workers in 
Swedish towns, the average number of live births per marriage fell as the 
income of the family rose. Among employers and officials, this held true 

20. "Economic and Social Factors Affecting Fertility," p. 56. 

21. Perhaps no change resulting from the shift from rural to urban living affects fertility more than the 
altered status of women. They cease to be regarded as inferiors fit only for Kinder, Kitchen und Kirchen. 

Demographic Factors in Development 103 

for all successive income groups except the highest. Moreover, in the first 
two income categories among employers and officials, the average number 
of live births per marriage fell as the index of educational achievement rose. 
In the two highest income categories, however, the average increased as the 
index of educational attainment went higher. In other words, toward the 
top of the scale, fertility was positively, not negatively, correlated with 
income and education. 22 

For the United States, Bernard D. Karpinos and Clyde V. Kiser have 
shown that both net and gross reproduction rates in 1935 for urban popula- 
tions, when classified by size of city and by income class, declined as the 
size of the city increased and as the average income rose. In cities of 100,000 
and over, for example, gross reproduction rates for those in the $1,000- 
$1,499 income bracket were 0.81 as against only 0.42 for those with in- 
comes over $3,000. For cities under 25,000, the gross reproduction rates in 
these income categories were 0.96 and 0.52 respectively. 23 

A Puerto Rican study in 1946 showed that more schooling for the women 
meant fewer children. Mothers with no schooling had had an average of 6.1 
live births in comparison with an average of 2.4 live births for those with 
high school education or above; and the average moved steadily upward as 
the amount of schooling became less. Urban mothers with no schooling had 
fewer live births than rural mothers without schooling, 5.5 as compared 
with 6.3. 24 Studies in other areas tend to show similar results. 


It is unnecessary to belabor the point: more education and diminished 
fertility seem usually to be associated; higher incomes and lower fertility 
tend to go together. And, perhaps, both incomes and education are not so 
inherently significant in themselves as for what they betoken of ways of life 
dominated by those mores and cultural values characteristic of modern, 
occidental, urban civilization values which stress the importance of the 
individual and his well-being and so push more fertility per se far down the 
scale. 25 

Thus, some of the components of economic development and some of its 
direct consequences appear to evoke certain conscious attitudes toward 

22. Sven Mobcrg, "Mantal Status and Family Size among Matuculated Persons in Sweden," Population 
Studies, June 1950, p. 124. 

23. Bernard D. Karpmos and Clyde V. Kiser, "The Differential Fertility and Potential Rates of Growth 
of Various Income and Educational Classes of Urban Populations in the United States," Milbank Memorial 
Fund Quarterly, October 1939, p. 383. 

24. Roberts, op. cit. t pp. 288-89. 

25. One of the most striking carry-overs of this kind is the differential between Oriental and Western 
Jews in Palestine. The Kurds and Yemenites are said to average about 8 children per woman, the Austrian 
Jews only about 1 3. The Austrians have the fertility patterns of contemporary, urbanized, Western groups 
while the Kurds and Yemenites have the fertility patterns of ancient, agricultural, Oriental groups. "Eco- 
nomic and Social Factois Aflectmg Fertility," pp. 75-76. 

104 Approaches to Economic Development 

fertility which result in fewer births. Family limitation apparently tends to 
become a widespread practice. 

Yet even were the evidence for this view overwhelming, one could not on 
that account casually drop the population problem from discussions of 
economic development. And this for two reasons. First, the decline in 
fertility that comes with development and progress is slow in getting 
started compared either with development itself or with the fall in mortality 
rates. Experience suggests that it does not occur simultaneously with de- 
velopment, but only after a lag. Second, even if fertility should decline as 
development moves forward, many of the now underdeveloped areas will 
start from such high plateaus of fertility that even an appreciable drop will 
still leave fertility rates dangerously high. Thus, on the one hand, there is a 
strong possibility of a time lag before fertility declines; on the other, even a 
sizable decline from present levels will not necessarily mean low fertility 
rates in many underdeveloped countries. 


No one can forecast with any accuracy how rapidly fertility is likely to 
fall in consequence of economic development in the now poor countries. 
But more than a little is known as to when fertility began its steady decline 
in a number of already developed countries. This experience is not con- 
clusive, of course; but it is suggestive for the question in hand. 

European Experience 

For western and northern Europe as a whole, the average birth rate for 
the years 1841-1845 has been estimated at 31.8 per 1,000 population; it 
held close to this level up to 1891-1895, when it fell below 30 for the first 
time, dropping to 29.7. 26 Up to 1936, the average birth rate of this region 
never again climbed above 30. It dropped below 20 for the first time in 
1924 and, according to Kuczynski's study, remained below 20 in every year 
from 1924 to 1936. 

In a period of approximately 35 years, therefore, the birth rate in western 
and northern Europe dropped by about one third. This decline cannot, of 
course, be attributed entirely to development and urbanization. Some of it 
reflects the changing age composition of the population as a result of 
mortality changes and emigration. World War I also took a heavy toll in 

26. R. R. Kuczynski, "The International Decline in Fertility," in Lancelot Hogben (Ed.), Political Arith- 
metic, Macmillan, New York, 1938, Table II, p. 50. Western and northern Europe for this calculation is 
said to include "Present [1938] territory of Belgium, Denmark (including Faroe Islands and Iceland), 
United Kingdom (including islands in the British Seas), Irish Free State, France, Germany, Holland, 
Luxembourg, Norway, Sweden, Switzerland." 

Demographic Factors in Development 105 

dead and crippled, especially in France, Germany and the United King- 
dom, and as a result more women remained unmarried. 

For central and southern Europe, data are not available covering so long 
a time span. 27 Between 1922 and 1936, however, average birth rates for this 
area dropped from 32.0 to 24.6 a recorded drop of roughly 25 per cent in 
13 years. Birth rates in central and southern Europe in 1936 were thus about 
where they were in western and northern Europe in 191 1-1914. The period 
covered is possibly too short for safe inference and is subject to the influ- 
ence of World War I. Moreover, the 1936 rate doubtless reflects the influ- 
ence of the world depression of the 1930s as well as long-run factors. 

Although these European data are averages for groups of countries, they 
nevertheless suggest two important points. The decline in birth rates began 
only after economic development had been in progress for some time. The 
decline in central and southern Europe began perhaps three decades later 
than in northern and western Europe; but once it did set in, birth rates fell 
rather more rapidly. Kuczynski says: 

While it took France over seventy years to experience a drop in her birth-rate 
from 30 to 20, while this process lasted about forty years in Sweden and Switzer- 
land and about thirty years in England and Denmark, in the last twelve years 
(from 1924 to 1936) the birth-rate has fallen in Bulgaria from 40 to 26, in Poland 
from 35 to 26, in Czechoslovakia from 26 to 17. 28 

Gross Reproduction Rates 

Crude birth rates are a less satisfactory index of fertility than gross 
reproduction rates. 29 Kuczynski reports that about 1880 gross reproduction 
rates were over 3.2 in Russia; between 2.4 and 2.8 in Austria and Germany; 
between 2.2 and 2.4 in England, Denmark, Norway and Sweden; and 
between 1.6 and 1.8 in France. But by 1910, thirty years later, only two of 
these countries Russia and Austria had gross reproduction rates above 
2.0. And by 1925, only Russia remained above 2.0 and her rate had fallen 
to about 2.7. The rates in some of these other countries in 1925 were: 
England and Wales, 1.086; Germany, 1.116; Sweden, 1.121; and France, 
1.146. 30 (See Table 5-3.) It appears then, that in three of the principal coun- 

27. Central and southern Europe for this purpose includes the 1938 territory of "Austria, Bulgaria. 
Czechoslovakia, Danzig, Estonia, Finland, Gibraltar, Greece, Hungary, Italy, Latvia, Lithuania, Maltese 
Islands, Poland, Portugal, Rumania, Spain, Yugoslavia." IbuL 

Accurate data on birth rates in the United States are not available before 1915. The rate for the white 
population was 25.1 in 1915, as against 16-17 in the 1930s. Historical Statistics of the United States, 1789- 
1945, U.S. Bureau of the Census, 1949, p, 46, 

28. Kuczynski, he. cit , p. 53. That these 1936 rates were partially influenced by depression conditions is 
shown by the fact that in Czechoslovakia in the period 1940-1948 the birth rate was above 20 most of the 
time; but the Bulgarian rate continued to fall. See United Nations, Demographic Yearbook, 1949-50, New 
York, 1950, pp. 292 93. 

29. Net reproduction rates are not of particular interest in the present context since we are not here con- 
cerned with the combined effects of changes in fertility and mortality but only with the amount and timing 
of the changes in fertility. Kuczynski does, however, present estimates of net reproduction rates in his study. 

30. Ibid., p. 60. 


Approaches to Economic Development 


Over 3.2 



About 1910 About 1925 

About JX8U 








About 1895 








Sweden Denmark 




Baltic Prov. 





Union of 
South Africa 



New Zealand 




United States 
New Zealand 





Source R. R. Kuc^ynski, "The Intel national Decline of Pertilily," in Lancelot liogbcn (hd ), Pulitital 
Arithmetic, Macrmllan, New York, 1938, p. 60. 

tries of Europe England, Germany and Sweden fertility, as measured by 
gross reproduction rates, fell fully 50 per cent between 1880 and 1925. 31 

31 How specialists in these matters analyze the reasons for the decline in fertility may be seen from a 
study by D. V. Glass, "Changes in Fertility in England and Wales, 1851-1931," m Hogben (Ed.), op. t//., 
pp. 161-212. This is a careful study of changing fertility in hngland and Wales by counties. These counties 
snowed considerable variation in the timing of their respective declines m fertility. Glass points out, too 
(pp 165#), that for England and Wales as a whole, fertility increased slightly between 1841 and 1871, 
though when special circumstances arc allowed for, the increase was probably concentrated between 1841 
and 1851 Down to 1911, fcitihty differentials even increased somewhat. For this he otters the explanation 
that "regional differences in fertility are only marked in a peiiod when industrial expansion has still not 
proceeded far enough to urbanize the whole community. In 1911 ... large sections of the country still 
remained untouched by urban developments" (p 193) But after 191 1, developments in transport and com- 
munication destroyed the isolation of rural areas from the cities and so produced "a more universal pattern 
of life, a more generally accepted set of social mores" (p. 193). Glass tries to correlate the decline in fertility 
with marriage, employment of women, occupational type of the district and the employment of children but 
has to conclude that while these correlate quite well for any one year for which the statistics are available, 
the relationship breaks down "if we try to link up progressive changes in the operation of these social 
factors with the decline of fertility from one period to another" (p. 210). He says finally that the fall in 
fertility seems to have been caused by "less tangible factors which, so far, we have not been able to measure" 
(p. 211). 

Demographic Factors in Development 107 

The drop in birth rates in northern and western Europe from about 30 
to under 20 per 1,000, and the decline in gross reproduction rates from over 
2.0 to slightly more than 1.0, thus extended over several decades. In central 
and southern Europe the change apparently went more rapidly; but the 
latest data show birth rates for most countries in this region still above 
those for northern and central Europe. 

Japanese Experience 

Japanese experience scarcely justifies the assumption that development 
soon results in lower fertility as a matter of course. The birth rate in Japan 
fell from 34.6 per 1,000 population in 1921-1925 to 27.0 in 1938. However, 
the decline occurred largely in the younger age classes, because of fewer 
early marriages, and also among women over 30. Between 1920 and 1935, 
"the gross reproduction rate for all Japan declined from 2.6 to 2.2, for 
urban areas from 1 .8 to 1.6, and for rural areas from 2.8 to 2.6." 32 But these 
reproduction rates were comparable to those in Bulgaria in 1925 or in 
England and the Scandinavian countries about 1895. Fertility declined in 
Japan, but up to World War II it was high compared with fertility in the 

The changes in Japanese fertility after World War II were partly due to 
special factors, too complex to be described accurately here. After a tempo- 
rary upsurge in 1947-1949, when birth rates averaged over 33 per 1,000, 
the birth rate declined again in 1950 to 28.3. The gross reproduction rate 
fell from 2.1 in 1940 to 1.8 in 1950. 33 The prewar trend toward lower 
fertility seems to be again in evidence. 

Demographic Patterns in Underdeveloped Countries 

The demographic history just sketched might appear to justify the infer- 
ence that high fertility rates in the underdeveloped areas, do not, perhaps, 
constitute as serious a problem as often alleged. Past experience suggests 
that fertility will probably decline as development moves forward. Yet one 
extremely important fact remains: almost all the underdeveloped areas now 
have fertility rates well above the corresponding Western European rates 
before a decline set in about 1880-1890. 

Even if births should begin to decline at once in, say, India or Egypt or 
Ceylon, they would have to decline some 25 to 30 per cent, or more, before 

32. Taeuber and Beal, he cit., p. 28. The discussion of Japanese experience is hugely based on this study. 

33. See Irene B. Taeuber and Marshall C. Balfour, "The Control of Fertility in Japan," in Approaches 
to Problems of Hugh Fertility in Atftarian Societies, Milbank Memorial Fund, New York, 1952, p. 102. 
Taeuber and Balfour discuss at length the effects of the war and changed social customs on postwar Japa- 
nese fertility They comment (p 109): "Fifty-six per cent of the women aged 20 to 24 are single. The pro- 
portion of the widowed and the separated rises steeply from five per cent at ages 25 to 29 to 15 per cent 
at ages 35 to 39 . . . Japanese women as a group [are] less married in 1950 than at any time in the recorded 
statistical history of Japan." Taeuber and Balfour feel, however, that the impoitance of these changes for 
future Japanese fertility patterns cannot yet be assessed with full confidence. 

108 Approaches to Economic Development 


Crude Crude Rate of 

Country Birth Rate Death Rate Natural Increase 


Egypt 42.5 22.2 20.3 

Mauritius (without dependencies) [U. K.] 44.1 20.8 23.3 

Central America 

Costa Rica 44.9 12.6 32.3 

Dominican Republic 35.4 9.9 25.5 

El Salvador 40.8 14.6 26.2 

Honduras* 40.1 15.0 25.1 

Mexico 45.1 17.4 27.7 

Nicaragua 35.9 11.1 24.8 

Panama 11 (excluding tribal Indians) 34.8 8.8 26.0 

Caribbean area 

Jamaica (without dependencies) [U. K.] 31.9 12.9 1 9.0 

Puerto Rico [U. SJ 40.5 11.5 29.0 

South America 

Argentina* 24.8 9.5 15.3 

Bolivia 30.1 12.2 17.9 

Chile 33.1 17.0 16.1 

Colombia 11 34.4 14.6 19.8 

Peru (excluding jungle population) 26.8 11.3 15.5 

Venezuela 41.0 13.1 27.9 

British Guiana' 1 39.9 14.7 25.2 
Surinam (excluding Bush Negroes and 

aborigines) 34.5 11.7 22.8 


Ceylon 39.7 14.6 25.1 

India* 26.9 17.9 9.0 

Indonesia (1940 only) 28.5 20.3 8.2 

Thailand* 24.8 12.5 12.3 

Federation of Malaya [U. K.] 40.8 17.1 23.7 


Greece (excluding Dodecanese) 27.2 10.6 16.6 


New Zealand (excluding Maoris) 25.3 9.3 16.0 

Maoris 47.0 13.8 33.2 

Sources: Population Bulletin, June 1952, p 12, and United Nations, Demographic Yearbook, 1951 , New 
York, 1951. Notes are omitted. 
a. 1946-1949 only. 

they reached the level already prevailing in Western Europe about 1880. 
Around 1881-1885, according to Kuczynski, only four European coun- 
tries had crude birth rates above 40 per 1,000: Serbia (46.8), Hungary 
(44.4), Rumania (42.2) and Poland (41. 9). 34 But more than a dozen areas 

34. Kuczynski, he. cit., p. 52. 

Demographic Factors in Development 109 

reported birth rates above 40 per 1,000 during one or more years in the 
1940s some of them every year and some well above 40. (See Table 5-4.) 
Insofar as the data are imprecise, they are likely to have erred on the side of 
understating rather than overreporting the actual number of births. 


Mexico illustrates the problem nicely. In no year from 1932 through 1948 
was the crude birth rate in Mexico below 42.2 (1933), and the average for 
1940-1948 was 44.9. The Mexican birth rate would thus have to drop by 
about one third before it reached 30. Between 1932 and 1948, the death 
rate dropped from 26.1 per 1,000 population to 16.8. This means that in 
1948, with a birth rate of 44.6 and a death rate of 16.8 per 1,000, the 
"natural increase" was 27.8 per 1,000, or 2.78 per cent, a year. 35 

Other Underdeveloped Areas 

Mexico, however, is not an isolated or extreme case. If accurate and 
complete data were available, the Caribbean, much of Latin America, 
North Africa, the Middle East and perhaps most of Asia would probably 
show birth rates not much lower than Mexico's. Estimated annual rates of 
growth give some idea of the probable birth rates in these areas. 

For nine Caribbean and Central American countries in 1940, the average 
annual rate of growth has been estimated at 21.3 per 1,000. In South 
America, rates of increase are believed to be similar to those in Central 
America and the Caribbean; only Argentina and Chile show much evidence 
of falling birth rates. 30 A recent writer reports that 25 Latin American 
countries have annual rates of increase of 20 or more per 1,000, according 
to the most recent data available. 37 

Kingsley Davis' calculations for India show an estimated birth rate of 45 
per 1,000 rather than the much lower official figure shown in Table 5-4. In 
what is now Indonesia, the calculated annual increase for the period 1920- 

35. Against this rate of "natural increase" of 27.8 per 1,000 per year in Mexico may be set the following 
careful estimates of annual rates of growth per 1,000 over long periods in four countries of northern Europe: 

Period Sweden Norway Denmark Finland 
1735-1800 5 7 3 12 

1801-1900 7 9 9 11 

1901-1940 6 7 11 9 

See H. Gille, "The Demographic History of the Northern European Countries in the Eighteenth Century," 
Population Studies, June 1949, p. 28. 

36. Most of these comments on rates of growth are drawn from United Nations, "Historical Outline of 
World Population Growth," in Finding* ofStudiei on the Relationships between Population Trends and Eco- 
nomic and Social Factors, October 23, 1951, pp. 29 ff. Since the calculations are at best rough indications, it 
is unnecessary to cite here all the various original sources, some of which were not available to the present 

37. Eldndge, he. c/f., p. 3. 

1 10 Approaches to Economic Development 

1930 was 17.3 per 1,000. Other estimates show Malaya (1948) at 24 and 
Ceylon (1948) at 27.4. 

Although satisfactory data for the Middle East are virtually nonexistent, 
birth rates in this region are generally believed to be very highranging 
from perhaps as low as 27 in European Turkey to over 60, and to as high 
as 70 in some sparsely settled regions of Saudi Arabia. Birth rates below 
50 are said to be "relatively low" for the Middle East. 38 Both here and in 
North Africa mortality rates are also high, however, so that the annual 
rates of increase are generally believed to be modest. 

The Prospects 

The implications of the foregoing for economic development are pain- 
fully obvious. The "natural" fall in fertility which results from the social 
and cultural changes incident to development may be "sure" but it is also 
discouragingly "slow." Perhaps fertility will decline appreciably in two 
decades as it did in parts of central and southeastern Europe, the U.S.S.R. 
and, to a lesser extent, in Japan ; the longer time span necessary in Western 
Europe may not be directly relevant. Nevertheless, any assumption that 
fertility will automatically decline rapidly in, say, five years coincident 
with the successful completion of a "five-year plan" for development is 
unwarranted. Finally, even were fertility to decline more rapidly than in all 
previous demographic experience, birth rates are already so high in many 
underdeveloped areas that even a large percentage decline would leave 
these rates well above those in developed countries and probably far above 
the corresponding death rates. The danger of a rapid rise in population 
would remain. 


The gap between birth and death rates which looms ahead for many 
underdeveloped areas inevitably opens the question of the possibility of 
reducing fertility in these areas by deliberate efforts, instead of waiting for 
the slow workings of social change or for the grim alternative of a rise in 
mortality. The problem of bringing underdeveloped, agrarian societies to 
adopt the practice of birth prevention bristles with difficulties. These diffi- 
culties range all the way from unresolved problems in applied medical 
research to thorny questions of social anthropology and foreign policy. All 
that can be essayed here is to indicate briefly what some of these problems 
are and wherein their importance lies. 

38. See Ernest Jurkat, "Prospects for Population Growth in the Near East," in Demographic Studies of 
Selected Areas of Rapid Growth, Milbank Memorial Fund, New York, 1944, pp. 85-87. Some demographers 
regard these high estimates for the Middle East with skepticism. 

Demographic Factors in Development 1 1 1 

Birth Prevention 

Barring a rise in death rates, the only means of checking population 
growth is to make widespread the practice of "birth prevention." 39 All the 
evidence seems to show that the much lower fertility rates so common in 
already developed countries primarily result from the fact that their popu- 
lations deliberately limit fertility while people in the underdeveloped coun- 
tries do not. The broad problem, therefore, can be formulated in the follow- 
ing way: first, Are there contraceptive techniques which are suitable for the 
kind of living conditions which exist in most underdeveloped areas? 
second, If such techniques were readily available, would the people use 
them? third assuming that a reliable answer can be given to the second 
question What are the appropriate means of introducing these techniques 
and bringing about their widespread use among people in the under- 
developed areas? 

These appear to be the essential questions implicit in any direct attempt 
to lower the dangerously high fertility rates now so characteristic of many 
underdeveloped areas. Such tentative answers as are available give little 
cause for jubilation. 

Cost Important 

Competent medical opinion seems to be quite positive that "We have no 
known harmless, simple, or low cost method today with which we can apply 
fertility control." The most that can be said, evidently, is this: "We appear, 
though, to be nearing avenues of research that may lead to that goal. 
There is some indication for reasonable hope." 40 

The methods of contraception in use in already developed societies are 
said to be either poorly adapted for use in underdeveloped areas or too 
costly in relation to the real incomes of the people. 41 Insofar as the limit 

39. This is the term used by David Glass to cover all practices, behavior patterns and techniques which 
have as their purpose the limitation of births. (See D. V. Glass, Population, Clarendon Press, Oxford, 1940, 
p. 28.) Besides contraception in the ordinary sense, the term therefore includes abortion and infanticide, the 
"rhythm method," moral restraint, etc. Presumably, moral restraint includes later age of marriage and 

40. Clair E. Folsome, "Progress in the Search for Methods of Family Limitation Suitable for Agrarian 
Societies," in Approaches to Problem? of High Fertility in Agrarian Societies, Milbank Memorial Fund, 
New York, 1952, p. 130 (italics in original). To judge from this paper much additional work remains 
to be done on the physiology of human reproduction before the "goal" is likely to be reached. Folsome 
remarks (pp. 129-30) that "Far more knowledge about the reproductive processes of farm animals and race 
horses is available than of their owner, man himself . . . Large public funds can be used to promote re- 
search on reproductivity of stock or fur-bearing animals by the Department of Agriculture. No funds are 
available to study reproduction of mankind on a comparable scale." This paper gives a short summary of 
some of the medical approaches to fertility control in underdeveloped areas. 

41. One writer with considerable firsthand experience with public health programs in underdeveloped 
countries in many parts of the world has said: "In general terms, a contraceptive method for use in under- 
developed countries should be effective in reducing pregnancies; not harmful physiologically; practical and 
acceptable from the point of view of custom, sanitation and hygiene and climate; and above all, it must be 
cheap . . . within the range of one to five cents per family per week." Marshall C. Balfour, "Administrative 
Problems in Connection with Aid to Underdeveloped Areas" in tbtd. t pp. 168-69. 

112 Approaches to Economic Development 

to use is one of cost, however, this might be removed by having the public 
health authorities assume the burden. The cost might be small in relation 
to the social benefits to be derived and in comparison with the costs of the 
development program as a whole. 

Cultural Acceptance of Birth Prevention 

The question whether the great masses of the people in the underde- 
veloped areas would use contraceptives if they were available cannot be 
answered with assurance. In any case, opinion differs. Moreover, it is not 
known to what extent careful studies of the problem in one area provide 
even tentative answers for other and different areas. One can scarcely 
assume out of hand nor have the investigators so pretended- that the 
findings of a study in Puerto Rico or Mexico show what attitudes toward 
family limitation prevail in the Middle East or Java and studies in this 
field have so far been confined to a very few countries and localities. 42 

Two officers of the Milbank Memorial Fund, summarizing the opinions 
of a conference of experts on problems of fertility control in underde- 
veloped areas, judged that: 

Most of the participants believed that it would be erroneous and unwise to 
assume that the rank and file of the population in the underdeveloped countries 
are now ready for contraceptives, no matter how cheap, simple, and effective 
they may appear to be. They doubted that this attitude would change before 
public education becomes more generalized and before a more widespread incul- 
cation of desires for higher levels of living occurs. 43 

Not all persons competent to judge would be equally pessimistic. Irene 
Taeuber seems to be among the more optimistic. 44 An unpublished manu- 
script by Kingsley Davis gives a similar impression of hopefulness. Recent 
press reports from India on the results of a sampling study of the accept- 
ance of "family planning" by lower income groups in rural and urban 
areas are also encouraging. 45 

Doctrinal Opposition 

For some countries, the acceptability of family limitation among the 
people at large may be a less immediate question than the attitude of their 
leaders. The newly adopted official attitude of the government of India that 

42. See, for example, Paul K. Hatt, "Some Social and Psychological Aspects of Human Fertility in 
Puerto Rico"; Millard Hansen, "The Family in Puerto Rico Research Project"; Wilbert E. Moore, "Atti- 
tudes of Mexican Factory Workers toward Fertility Control" all three in ibid. 

43. Foreword by Frank G. Boudreau and Clyde V. Kiser in Ibid., p. 7. 

44. See Irene Taeuber, "The Reproductive Mores of the Asian Peasant," in G. F. Mair (Ed.), Studies in 
Population, Princeton University Press. Princeton, 1949. 

45. See New York Times, November 28, 1952, p. 27. 

Demographic Factors in Development 113 

population does constitute a problem for India, and a probable threat to 
its aspirations for improved welfare through development, is undoubtedly 
encouraging. This official view is very recent, however. It represents a 
complete reversal of Gandhi's firm, doctrinal opposition to contraception 
(though not to continence or moral restraint). Mr. Nehru's former position 
that "in the present scheme of political representation the use of biological 
propensity as a weapon of increase of political power is implicit" 46 is 
probably more nearly characteristic of official attitudes in many under- 
developed countries. 

In other countries family limitation may run so counter to religious 
tenets that their governments are virtually estopped from officially encour- 
aging proposals and programs for deliberately lowering fertility. Most 
Latin American governments would probably find themselves in this 

Finally, the official Communist position that fertility control is need- 
less, that it merely demonstrates the determination of the "imperialist 
powers" to keep the underdeveloped countries subjugated by holding down 
their numbersdoes not go entirely unheeded in the underdeveloped 
world. 47 

International Complications 

The pressure for diminished fertility comes at present, and will probably 
continue to come, from outside the high fertility countries themselves. 
Hence, even granted suitable techniques of control along with public and 
official acceptance of programs to generalize their application, two sets of 
problems still remain. First, too little is known concerning the principles of 
applied social psychology and cultural anthropology required to carry such 
a program through to successful realization. 48 Second, the international 
political connotations of a more developed country attempting deliberately 
to change fertility patterns on a large scale in other countries would require 
a plan formulated and executed with the utmost delicacy. The device of 
channeling the effort through international agencies is a partial, though 
probably not a sufficient, solution. 

46. As quoted by N. V. Sovani, "The Problem of Fertility Control in India: Cultural Factors and Devel- 
opment of Policy," in Approaches to Problems of High Fertility in Agrarian Societies, p. 66. 

47. Serious difficulties might also arise in the developed countries over giving official sponsorship to 
programs for lowering fertility in underdeveloped areas. From the days of Francis Place in early nineteenth- 
century England down to the present, proponents of birth control have often encountered strong opposition 
to their programs both from religious groups and from prevailing public opinion. 

48. Persons experienced in public health programs to be carried on outside their own culture area have 
often stressed the intricate difficulties encountered in getting the local population to accept even the simplest 
remedies or to modify traditional practices ever so slightly. The readjustment of sexual mores and behavior 
is surely at least as difficult to achieve. As one writer put it, "Do cultural complexes travel as wholes, or can 
specific traits be spread faster than the complex as a whole?" Clarence Senior, "An Approach to Research 
in Overcoming Cultural Barriers to Family Limitation," in George F. Mair (Ed.), op. cit. t p. 149. Another 
question here is that of how separable sexual desire and the desire for progeny may be in the cultures pre- 
vailing in the several important underdeveloped areas that have serious population problems. 

1 14 Approaches to Economic Development 


If innovation, capital accumulation and cultural change are the three 
dynamic factors in the long-term growth of total output and regardless of 
how they may be related to one another as cause and effect the secular 
rise in real incomes per capita will depend upon the rate of change in total 
output relative to the rate of change in population. 

Since about 1800 or 1850, the dynamic factors that make for progress have 
operated less powerfully in the underdeveloped areas than in the economies 
that are now more highly developed. At the same time, the dynamic factors 
making for population growth in the underdeveloped areas have been more 
powerfully operative than in the developed countries. Whatever potential for 
general betterment there might have been in the factors stimulating greater 
output and material progress whether indigenous or imported was 
largely nullified in the underdeveloped areas by the more powerful factors 
that stimulated population growth. Instead of any appreciable improvement 
in average material well-being, the result was mainly larger populations at 
about the same level of material welfare. Total output must have risen, 
because a larger population was supported; but the rise in total output was 
about matched by a proportionate rise in total numbers. 49 

From the social welfare point of view, the crux of the development 
problem obviously is to cause total output to grow faster than population. 
And the more the rate of growth in total output exceeds the rate of growth 
in population, the greater the welfare dividend per capita will be. 

How rapidly total output can reasonably be expected to rise in a given 
period of time can scarcely be stated satisfactorily in general terms. The 
answer depends on the values assigned to certain variables. But, over a 
considerable range, various alternative values appear to be about equally 
plausible assumptions. For example, what average rates of saving should 
be assumed? Is 5 per cent of national income or 10 per cent the more 
plausible figure? What of marginal rates of saving? Theoretically, these 
might approach 100 per cent almost all the increase in output might be 
poured back into further investment. In actuality, however, if the ratio of 
the increment in saving to the increment in income were to approach 30-40 
per cent in any country this would be a remarkable achievement. 

Again, what is a plausible figure to postulate for the capital-income or 
capital-output ratio with respect to increments in new investment? To put 
it another way: What is the relation between increments in capital invest- 
ment and the increments in output or income consequent upon the new 

49. It can be argued that this was because the innovations, capital accretions and cultural modifications 
the factors tending to promote secular growth of total output were nearly all superimposed from without 
the underdeveloped areas rather than generated from within; consequently the social conditions that ac- 
counted for the high birth rates lost none of their force or pervasiveness. If this is true, however, then it 
follows that until the factors making for economic development become truly indigenous to the underdevel- 
oped areas not much change in fertility patterns and average material well-being is to be expected. 

Demographic Factors in Development 115 

investment? In public utility undertakings and other capital-intensive 
investments a ratio of 5 to 1 or even 6 to 1 appears reasonable. But in 
agriculture or light industry the ratio is perhaps closer to 2 to 1 or even 
1.5 to 1. What value to assign to this ratio for developmental investment 
as a whole cannot be specified with any confidence between, say, 2.5 to 1 
and 4 to 1. But selecting 3 to 1 as against 4 to 1 makes an enormous 
difference in the derivative rate of growth in total output. And the same can 
be said for the savings percentages within the ranges mentioned above. 50 

Another important group of assumptions that must be made in order to 
calculate an estimated rate of growth in total output has to do with how 
rapidly, and by how much, productivity can be expected to increase from 
the productive resources already in hand as the development process gets 
under way. Reflection on the experience of countries that have already 
developed suggests that this question may be fully as important as the 
contribution to output from new investment. Yet is there any basis for a 
prognostication on this point? 

The rate of growth in total output would of course be greater, and more 
soundly grounded as well, if there should be a revival of international 
investment and if the world economy should again move in the direction of 
greater international specialization and exchange. Yet it is almost anyone's 
guess how much capital investment and technical assistance can be ex- 
pected to flow from the already developed countries into the underde- 
veloped areas over the proximate future. Similarly, a revival of the world 
trading system within a framework that would permit the underdeveloped 
areas increasingly to market abroad products requiring much labor and 
relatively little capital in their production would also raise total output and 
incomes appreciably in the underdeveloped areas. 

In view of all the uncertainties the possibility of major innovations is of 
course wholly unpredictable it is difficult to arrive at a plausible potential 
rate of growth in total output. If the secular rate of growth in the past in 
now developed countries is any guide, a sustained rate as high as 3 to 5 
per cent per year would not be surprising, though for short spurts 6 to 8 per 
cent might not be impossible. 

Whatever the rate of growth in total output, however, it will have to be 
set against the potential rate of growth in population in order to determine 
the probable rise in average real income. The potential rates of population 
growth in the underdeveloped areas derive from projections of the trends 
of death rates and birth rates. Death rates have already declined appre- 
ciably and can be expected to fall further and perhaps quite rapidly. But 
no one can say how rapidly and how far fertility rates can be expected to 
decline with development, and how closely that decline will be linked with 

50. For some interesting calculations on some of these points even under greatly simplified assumptions 
see H. W. Singer, "The Mechanics of Economic Development," Indian Economic Review t August 1952, 
pp. 1-18, and the "Comment" following by S. Sioma J. Kagan. 

116 Approaches to Economic Development 

the rate of improvement in average well-being. Clearly, the more rapidly 
fertility does decline, the more rapidly will welfare improve. 

The potential benefits from establishing new fertility patterns in the 
underdeveloped areas, simultaneously with programs for their economic 
development in the usual sense, are undoubtedly enormous. Indeed, per- 
haps no single change would be more effective in raising the general level 
of well-being. Hence, the most earnest attention, study and research de- 
serve to be directed to overcoming some of the formidable difficulties which 
now seem to block the practical realization of this change. While it would 
be idle to pretend that real difficulties do not exist, it would be defeatist to 
conclude that they are insoluble. Yet the urgency of an early solution to 
the problem cannot be overstressed. As has been pointed out, the rates of 
annual increase in the populations of many underdeveloped areas are al- 
ready high and their total numbers discouragingly large. The underde- 
veloped areas most in danger of experiencing acute population pressure are 
the greater part of the Orient, the Middle East and the Caribbean. Latin 
America appears to be in less immediate difficulties because the ratio of its 
population to resources is more favorable. Even if a thoroughly sound pro- 
gram for lowering fertility were now available and could be applied over- 
night, it would take nearly a generation before the total population would 
be appreciably affected. 

All these considerations suggest a moderately pessimistic conclusion as 
to the probable relation between the output potential and the population 
potential in the underdeveloped areas over the near future. Most of the 
available facts give little ground for optimism. Nevertheless, the outlook 
is not entirely bleak. One ray of hope is this: While public health programs 
will doubtless cut mortality, they are also likely to increase productivity 
and output. Better health and sanitation, in other words, do not merely 
reduce mortality rates but also result in an improved factor of production 
a better labor supply. Conceivably, this greater efficiency could keep pace 
with the growing numbers sufficiently well to prevent most of the dire con- 
sequences that the pessimists foresee. A second reassuring circumstance is 
that gloomy predictions of the same sort in the past have proved wrong. 
More than a century ago Malthus, too, saw no solution to the population 
problem for reasons remarkably similar to those adduced with respect to 
the underdeveloped areas today. As matters worked out, however, technical 
advance and the growth of the world economy with its complicated net- 
work of specialization and exchange prevented Malthus' predictions from 
being realized. Although no one can assert with confidence that further 
technical and scientific advances will soon obviate the present problem, 
there is little basis for contending that this is impossible. In the main, the 
optimists, not the pessimists, have the better record over past history. It 
may prove so again. 

Part II 


6. Introduction to Part Two: 
Progress in the Past and Present 

to explain those complicated economic developments of the past two cen- 
turies that have brought a number of countries to comparatively high 
levels of material well-being. At least no theory sufficiently encompasses 
most of the major facts to command general acceptance. It is therefore 
possible only to summarize some of the more salient facts concerning the 
economic development of the present high-income countries. 


It is often said that the quickened pace of economic development in 
England and parts of Western Europe during the late eighteenth and early 
nineteenth centuries occurred because "conditions were ripe for it." This 
merely emphasizes that the more rapid economic development would not 
have occurred had certain other changes not already gone before. Among 
these antecedent changes, the Renaissance and Reformation, the discovery 
of the New World, the rise of national states, the scientific revolution and the 
commercial revolution rank high. More narrowly economic in character, 
yet inseparable from these, were the inflow of precious metals and the ensu- 
ing "price revolution" of the late sixteenth century, the seventeenth-century 
growth of trade and commerce, and the growing numbers of commercially 
minded entrepreneurs who thought in terms of markets, prices and profits. 

Of course no one can say with assurance that all these changes were 
indispensable prerequisites to the later developments in agriculture, trans- 
port, manufactures and foreign trade and investment. Yet it is hard to 
believe that the economic progress which did occur would have been 
realized if most of these important changes had not gone before. 

The Idea of Progress 

Until the late seventeenth century in Western Europe, the very "idea of 
progress" in human affairs was notably absent. 1 Indeed, the conviction 

1. This discussion of the development of this idea in Western Europe owes much to J. B. Bury, The Idea 
of Progress (American edition with an introduction by Charles A. Beard), Macmillan, New York, 1932. 
Also exceedingly valuable are the two large volumes by A. Wolf, A Hiitorv of Science, Technology and 
Philosophy in the XVIth and XVIIth Centuries, Allen and Unwin, London, 1935, and A History of Science, 
Technology. and Philosophy in the XVIIIth Century, Allen and Unwin, London, 1938. A convenient brief 
account is "The Origin of Modern Civilization," Appendix XVII, in Quincy Wright, A Study of War, Vol. I, 
University of Chicago Press, Chicago, 1942, pp. 598-614. 


120 Approaches to Economic Development 

prevailed that history marked a steady retrogression from some earlier 
golden age. Moreover, this degeneration was expected to continue. 

The golden age was variously placed in time according to the particular 
aspect of human affairs in immediate consideration. In moral or spiritual 
matters, the Garden of Eden or the days of Christ and the Twelve Apostles 
were obvious choices. In philosophical speculation, the tendency was to 
hold that no one was the equal of Plato and Aristotle. Even the physical 
prowess of the ancients was believed to be unmatchable by the best speci- 
mens of later generations. 

Bury has summed it up as follows: 

So long as men believed that the Greeks and Romans had attained, in the best 
days of their civilization, to an intellectual plane which posterity could never hope 
to reach, so long as the authority of their thinkers was set up as unimpeachable, 
a theory of degeneration held the field, which excluded a theory of Progress. 2 

The Change from Pessimism to Optimism 

This belief in human retrogression was in keeping with the general world 
view of the times. Throughout the Middle Ages and perhaps even up to the 
seventeenth century, many people believed that the world would "soon" 
come to an end; consequently, long-range views of progress and develop- 
ment lacked meaning or relevance. The impressive Roman ruins scattered 
all over Europe must also have suggested decay instead of progress to most 
people. During the Renaissance, those who could read or were privileged 
to listen to lectures must have felt that life in Imperial Rome or fifth- 
century Athens was a richer experience than what they themselves knew. 
Moreover, the dominance of a dark religious outlook in all phases of 
human existence tended to exalt the virtues of poverty, suffering and 
travail, and perhaps even to raise a question of the moral rectitude or social 
desirability of ameliorating man's lot. Man was born to suffer. The curse 
of Adam was upon him. 

How these views changed with the birth of a new confidence and self- 
assurance among men is a fascinating story. The Renaissance led people to 
read about the past and also to look at the world about them. They read, 
they thought, they discussed, they wrote, they painted, they sculptured, 
they built, they went abroad and they discovered a new world. And as they 
looked about them, they became engrossed with their own world; it chal- 

2. Bury, op cit., p. 66. Not least remarkable were the views held in the seventeenth century and even in 
the eighteenth century about the size of the population of the Greek and Roman world. Walter F. Willcox 
quotes Montesquieu as writing in 1721, "after a computation as careful as can be made in matters of this 
kind, I have found that there are on the earth scarcely one-tenth as many persons as there were in ancient 
times." Apparently people also completely accepted such statements as Herodotus' assertion that Xerxes 
had an army of 1 .4 million men or Tacitus' claim that Rome had 6.9 million people under Claudius. See 
Walter F. Willcox, "Increase in the Population of the Earth and of the Continents since 1650," in Walter 
F Willcox (Ed.), International Migrations, Vol. I, National Bureau of Economic Research, New York, 1931, 
p. 44. 

Progress in the Past and Present 121 

lenged their imagination and ingenuity. Moreover, they had good reason to 
question the belief that all was retrogression and decay. Were the new 
thinkers not the equal of the old? Was Sir Francis Drake not as remarkable 
a mariner as those of classical times? Did the rise of the new national 
states of Holland, England, Portugal, Spain and France suggest decay or 
retrogression? Francis Bacon (1561-1626) boldly proclaimed that printing, 
gunpowder and the compass "have changed the appearance and state of 
the whole world; ... no empire, sect or star appears to have exercised a 
greater power or influence on human affairs than these mechanical dis- 
coveries." 3 As a modern writer has expressed it: 

Thus in the century between 1450 and 1550 Western civilization . . . lost the 
sense of being itself a universal civilization. It saw itself as but a small portion of 
a world of great variety . . . This realization gave the coup de grace to the basic 
postulate of Western civilization its own universality in a geocentric universe 
with an ecclesiocentric religion, an imperiocentric economy. The complete and 
rigid philosophy of Aquinas, expounded by ecclesiastically controlled universi- 
ties, which had taught men how to adjust themselves to their closed world, 
perished before a vision of a great, varied, unexplored universe, presenting 
infinite opportunities. 4 

The idea of progress in human affairs thus displaced the age-old conviction 
of inevitable retrogression. This was a dramatic idea in the history of the 
Western world. 

The idea that progress was natural and necessary, and that experience 
tended to demonstrate it so, was closely related to the opening up of the 
New World and the growth of the experimental sciences in the seventeenth 
century. 5 But it is doubtful whether it had penetrated far past the ranks of 
the intelligentsia even two centuries later when the classical economists 
were writing about progress. The common man might occasionally aspire 
to better his lot, but belief in material progress for the whole society was not 


The conviction that progress is possible is probably a necessary precondi- 
tion to its realization. The idea of progress is still not a mass conviction in 
all countries, even in those that are officially announcing programs of 
economic development. Nevertheless, it does frequently approach a pop- 
ular ideal in contrast to the narrow circle of believers perhaps even two 
centuries ago. 

3. As quoted in Bury, op. cit., p. 54. 

4. Wright, op. ctt., Vol. I, p. 609. 

5. George Hildebrand, The Idea of Progress, University of California Press, Berkeley, 1949, p. 12; also 
Carl Becker, "Progress," in Encyclopedia of the Social Sciences, Vol. 12, Macmillan, New York, 1934, p. 497. 

122 Approaches to Economic Development 

The fact that progress is now often a popular ideal probably immediately 
underlies another contrast with the past. Economic development now has 
much more explicit political and ethical objectives than inhered in the old 
tradition of economic progress. The classical and neoclassical economists 
were disposed to regard the problems of increasing wealth and income as 
something rather generally apart from questions of morals and politics. 
Needless to say, the great drive toward economic development in most 
underdeveloped countries today either springs from or is intimately con- 
nected with movements of national independence and glory, internal polit- 
ical changes, and generally speaking equalitarian and social welfare 
sentiments. Ideological elements play a more conspicuous role in "develop- 
ment" than they did in the concept of "progress" a century ago. Paralleling 
this difference is a further one: nationalism imbues the current movement, 
whereas classical and neoclassical economics had, with some conspicuous 
exceptions, a strong international slant, especially in England. 

Such contrasts as these characterize the idea of economic development as 
"forward looking," as planned or consciously directed action toward 
definite goals, as a break with the past. Older discussions, on the other 
hand, were marked by the idea of progress as a natural process of "growth," 
paralleling the biological concepts of inexorable continuity and unfolding. 
A kind of evolutionary "natural selection" in the economic realm was 
favored over the setting of goals or standards. The tempo of progress, sub- 
ject in some degree to the influence of economic and political institutions, 
was thought to rest primarily upon deep-rooted and relatively stable habits 
and motives, such as saving and the individual's efforts to better his lot. 

The planner of development today, however, often seems to have limit- 
less faith in his ability to improve and quicken the process of evolutionary 
growth. This implies, of course, a far greater role for state initiative and 
control than the classical economists who wrote on progress would ever 
have thought justified. If capital is not forthcoming through saving, it is to 
be taken by forced levies, of which taxes are often merely the most polite 
form. If domestic compulsory and voluntary savings do not provide a 
sufficiently rapid pace of development, the gap is to be closed by foreign 
countries or international agencies. Direct action by governments moves 
capital in the international sphere, not the old-fashioned differences in 
rates of interest and profits. Little reliance seems to be placed upon the 
indigenous origination of new and highly productive techniques (unless, 
perhaps, through government research); here again, foreign governments 
or international organizations are vested with responsibility for supplying 
an essential element of development. 

This is not to say that current development schemes all involve state 
socialism or totalitarian control. But they are a far cry from what was 

Progress in the Past and Present 123 

envisaged by Smith and Mill in terms of the reliance placed on the energy, 
saving, inventiveness and venturousness of the individual or the private firm. 

Similarities between the Past and the Present 

On the other hand, there is also a profound similarity between the eco- 
nomic problems confronted by the older and the newer traditions of 
progress and development. Pressure upon productive resources now as then 
supplies a prime mover toward economic change; now as then, innovation, 
the creation of new productive resources, or the fuller exploitation of exist- 
ing resources offer the chief available remedies. The supply of capital was 
and is a primary limitational factor. The means of transport and com- 
munication, along with costs and prices, have always been a chief element 
in the "extent of the market," and this in turn has always determined the 
possible division of labor and the feasibility of particular undertakings. 
From the very beginning of modern economics in the writings of the 
mercantilists, the "revenues of the sovereign" have effectively limited de- 
velopmental projects except by inflation, which is itself a time-honored 
institution. A surprising degree of continuity characterizes the problems of 
how much and in what ways to tax, how much to borrow, how much to 
spend, and similar fundamental questions. 

Without something new, there would be no progress, but the new grows 
or springs out of the old. Just as biology supplies many examples of the 
gradual evolution of new forms of life and not a few cases of sports or 
mutations, so economic history supplies a wealth of evidence of continuity 
in development and some dramatic discontinuities. For this reason, one 
cannot pretend to foresee the course of development in the underdeveloped 
regions with any exactitude or to prescribe policy with any great degree of 
certainty. Perhaps, however, if some of the main causes of economic 
progress in past decades and centuries can be discerned, it will be possible 
to discover something worth while about the present and the future. 


The most obvious difference which distinguishes the contemporary from 
the past setting of the economic development problem is that the present 
underdeveloped countries appear to have a less favorable ratio of popula- 
tion to resources than did Western Europe, the British dominions and the 
United States in the nineteenth century. Many, though not all, underde- 
veloped countries are faced with a population problem high annual rates 
of increase, overcrowding in rural and urban areas, almost no "free land" 
to be settled, little prospect of emigration, and an age composition of the 
population which assures a high fecundity. Moreover, tangible productive 

124 Approaches to Economic Development 

resources other than agricultural land capital equipment, mineral deposits 
(insofar as they are known), internal transport and communication systems, 
etc. are small in the aggregate and still smaller per capita. This generally 
less favorable ratio of population to resources distinguishes the present de- 
velopment problem in numerous ways from nineteenth-century experience. 

Nineteenth-Century Progress 

Economic progress of the western world in the nineteenth century origi- 
nated in and derived much of its character from the agricultural and com- 
mercial revolutions of the seventeenth and eighteenth centuries. This cir- 
cumstance greatly facilitated later industrial developments. 

By the early eighteenth century, Western Europe and the American 
colonies had created a "middle class" which was able to recognize and 
create economic opportunities and to exploit them with vigor and inge- 
nuity. 7 A management-entrepreneurial class was already on the scene before 
the industrial revolution began. The commercial revolution, moreover, had 
already accustomed these people to capital and they already had funds 
available when the new opportunities for investment first appeared. 

The underdeveloped countries at present have no comparable pools of 
managerial skill and investible capital upon which to draw, while in most 
of them, commercial or other gainful employment still carries a stigma of 
long standing. In other words, the capital and the people to initiate develop- 
ment are not abundant and the socio-cultural environment may not favor 
their increase. 8 

Further, the centralized power and efficiency achieved by national gov- 
ernments in Western Europe and America in the eighteenth century prob- 
ably made them better able to foster economic development than the gov- 
ernments in many underdeveloped areas today. While Adam Smith and 
others railed against the clumsiness, inefficiency and corruption of govern- 
ment and government administration in the eighteenth century, conditions 

6. The skills, energy and literacy rates of these large populations are typically at a low average, so that 
even the limited nonhuman productive resources available are used ineffectively. A highly skilled, indus- 
trious population can sometimes extract a relatively high standard of living from quite poor natural re- 
sources, as Switzerland and Finland evidence. 

7. Some writers attribute the new spirit of enterprise to the rise of Protestantism. One need not embrace 
this thesis to recognize the importance of the merchant classes in laying the grounds for the industrial revolu- 
tion. Certainly these people were infused with new motives, new drives, new value scales and astounding 
energy and ingenuity regardless of whether the causes are to be found in Protestantism or in some other 
force. See R. H. Tawney, Religion and the Rise of Capitalism, John Murray, London, 1929, and Max Weber, 
The Protestant Ethic and the Spirit of Modern Capitalism, Scribner, New York, 1950. See also Karl F. 
Helleiner, "Moral Conditions of Economic Growth," Journal of Economic History, Spring 1951, pp. 97- 
116 and the literature there cited. 

8. In some underdeveloped areas, parts of the Middle East for example, trade and commerce have been 
relegated to minority groups who suffer varying degrees of social ostracism In parts of the Far East, the 
Chinese minorities living outside China hold a rather similar position. In Latin America the situation seems 
to be somewhat mixed. In Mexico, for example, quite striking changes have apparently occurred in recent 
years. See Sanford A. Mosk, Industrial Revolution in Mexico, University of California Press, Berkeley, 1950, 
Chapters 1 and 2 passim. In Europe the merchant and industrialist groups were accepted only very gradually. 
Traces of the earlier dominance of aristocratic values are still encountered today. 

Progress in the Past and Present 125 

in many underdeveloped countries today are probably no less deplorable. 
Many of the ruling groups are new governments which have inherited 
authority but not an adequate civil service from the recently departed 
metropolitan powers. Others are dominated by long-outmoded concep- 
tiohs of government functions or are riddled with corruption, sinecures and 
nepotism. Such conditions make administrative efficiency impossible, often 
negating the good intentions and imaginative undertakings of the national 
leaders. Some of the newer governments have not even been able to 
maintain satisfactory order. 9 A further difficulty is that, in some underde- 
veloped countries, the government is in the hands of groups that would lose 
personal power and influence if development were to occur. Hence they 
give it lip service but not genuine support. 

New Factors Which Facilitate Progress Today 

Although the underdeveloped countries may not possess some of the 
environmental factors which favored economic progress in earlier times, 
they have at least two significant advantages over their predecessors. In the 
first place, since economic development has already proceeded far in the 
rest of the world, they can borrow extensively from these achievements and 
need not repeat the whole life history of the already developed countries. 
Compared to Great Britain, Japan industrialized quite rapidly and Russia 
even more quickly. Thus, the underdeveloped countries have all the ad- 
vantages of "a late start" in being able to profit by others' mistakes and to 
utilize their accomplishments. A country nowadays can develop hydro- 
electric power, for example, without first producing a Thomas Edison or 
developing a General Electric Company to make the equipment. 

Second, the often burning determination of the poorer countries to 
develop economically or perhaps more accurately the insistence of their 
leaders that they must develop is quite unmatched in the earlier indus- 
trializations. Moreover, these leaders are dealing with populations accus- 
tomed to being ruled by fiat and edict. If the authority of the state can be 
combined with the requisite administrative skills, this enthusiastic determi- 
nation may overcome many obstacles. 

These and other peculiarities of the present situation seriously complicate 
any attempt to draw lessons from the past that might be helpful to coun- 
tries now striving to achieve economic development. If the sights are not 
set too high, however, useful inferences may perhaps be drawn from past 
experience that have pertinence to the present problem. 

9. Sec, for example, the report on conditions in Indonesia in early 1951 in The Economist, June 23, 1951, 
p. 1512, where it is stated: "Theft, indeed, is the order of the day: factories and estates have to count on 
losing regularly up to 25 per cent of their production an almost incredible and ruinous figure ... In the 
harbours nothing is safe. On the inter-island steamers, officers are not allowed to go into the holds and cargo 
is ransacked right and left. Indeed, one crew, seeing that they were carrying bales of textiles, sent one of their 
members ashore to fetch a sewing machine so that during the voyage what clothes they needed could be 
run up according to taste from the bales at hand." 

7. Early Economic Development: England 

THE GENERAL RISE IN PRODUCTIVITY which was the essence of economic 
development in the nineteenth century, and must also be its essence in the 
now underdeveloped areas, is bewilderingly complex both in its sequence 
and in its composition. 

The current fashion is to measure economic achievement by national 
income data. Rising real incomes per person in the population presumably 
indicate rising productivity per person. Rising productivity per person, in 
turn, results from improved efficiency or technical progress in the use of 
economic resources already in hand and from the growing stock of real 
capital. Thus national income data, with due allowance for short-run 
cyclical variations, provide a general index of long-term changes in 

No country, however, has reliable national income figures extending 
back more than a few decades. 1 Consequently, changes in productivity 
over longer periods can only be inferred from data for certain elements in 
the economy. But this deficiency in the data is not so serious as it might 
seem. For the sectors of the national economy that together make up the 
national product were far fewer in number in most countries from, say, 
1750 down to 1850 than they are today or were even half a century ago. 
Thus coal, iron, textiles, transport and foreign commerce for which some 
data exist accounted for more nearly the whole of nonagricultural output 
than they do today. Consequently, the growth and development of these 
sectors of the economy, along with agriculture, more nearly portray eco- 
nomic development as a whole in the earlier periods. Furthermore, and for 
similar reasons, what technical progress and capital accumulation did occur 
was also largely centered in these industries. Hence, if the available data 
on economic development down to 1850 seem meager and fragmentary by 
present standards of national income reckoning, it is partly because in the 
earlier periods fewer industries existed as a source of national income or as 
a draft on current investment. 


The eighteenth-century improvements in agriculture, the most important 
single element of the economy at the time, are fundamental, for without 

1. Simon Kuznets has prepared decennial estimates of national income in the United States back to the 
Civil War with as great accuracy as the available data permit. See, for example, his National Product since 
1869, National Bureau of Economic Research, New York, 1946. 


Early Economic Development: England 127 

them advances in industry could hardly have proceeded as they did. In the 
middle of the twentieth century it is easy to forget that in 1700 by far the 
greatest proportionprobably more than 80 per cent of the people in 
Western Europe were cultivators of the soil. Even in 1800, the typical 
European was a peasant. Moreover, his methods of cultivation were little 
different from those which his forefathers had been using for centuries past. 
What causes were responsible for initiating the agricultural revolution are 
less easily specified than what actually occurred. The economic improve- 
ments in agriculture of course did not occur all at once, nor did they 
quickly come into common use throughout Western Europe. The "revolu- 
tion" in agriculture was less a few startling discoveries than the gradual 
accumulation of superior knowledge and its slow diffusion into accepted 

The changes in agriculture were basically similar throughout Europe, 
despite local differences in detail and timing. Three types of change appear 
to be distinguishable: the change from fragmented to larger units of land 
cultivation; changes in the techniques of agricultural production; changes 
in the outlook from which the peasants and larger landholders themselves 
approached their occupations and their problems of production. 


The gradual change from smaller to larger units of land cultivation in 
England and Western Europe in the eighteenth and nineteenth centuries 
was really a dual process. 2 On the one hand, the scattered arable strips of 
the medieval three-field system 3 tended to disappear in favor of larger 
enclosed plots. On the other hand, land that had been traditionally avail- 
able for common use as pasture or woodland, or even not used at all, was 
also "enclosed." Enclosure thus involved both the disappearance of frag- 
mented holdings and the extension of the area under cultivation. 4 Under 

2. Most readers will be sufficiently familiar with the medieval system of landholdings and cultivation to 
make any discussion of it unnecessary here. Of course, the system was not the same in all important respects 
all over Western Europe, nor, except in a very broad way, was the process the same by which it disappeared 
through the enclosure movement. 

3. The usual practice of cultivation in the three-field system has been well described as follows: "In the 
superior three-field system, rye, wheat, and winter barley would be planted in one-third of the arable land ; 
oats, summer barley, drage and some beans, peas and vetches, in another part; and the remaining third of 
the arable land would lie fallow, though it would be ploughed two or three times in the course of the year 
so as to clean it and prepare it for the next year's crop." A. Wolf, A Hittory of Science, Technology and 
Philosophy in the XVlllth Century, Allen and Unwin, London, 1938, p. 502. 

4. The kind of land enclosed and the use to which it was put varied considerably from period to period 
and from one part of England to another. Indeed, the variation is so considerable that it is difficult to 
generalize. Nevertheless, it appears that the later eighteenth-century enclosures mostly took in meadows and 
pastures and were used chiefly for pasturing sheep rather than growing grain. On the other hand, beginning 
with the scarcities and high wheat prices at the time of the Napoleonic wars and continuing well down to 
the middle of the nineteenth century, the tendency was much more to enclose wasteland and convert it to 
wheat production. 

The later enclosures were thus not a factor in driving people off the land, since the land had not previously 
been used for wheat in any case, but they were an important factor in increasing food production. See 
A. Redford, Labour Migration in England, 1800-1850, The University Press, Manchester, 1926, pp. 60-62. 

128 Approaches to Economic Development 

the strip system, the individual plots were not fenced but separated by 
untilled balks; no one could cultivate the common so long as it was 
literally the common. No less important than the enlargement of the area 
of cultivation was the fact that the enclosures opened the way to better 
methods of land use. Two authorities of the time, Arthur Young and 
Albrecht Thaer, were agreed that: 

. . . common rights were a standing obstacle to rational agriculture. Where 
holdings lay scattered in the fields and access to one was by right across another, 
where one cropping routine was enforced on a whole village, and where the right 
of stubble pasture prevailed, reforms were blocked at the start. 5 

New Agricultural Techniques and Methods 

The pressure to get on with the enclosures so that "reforms were [not] 
blocked at the start" was primarily due to the development of new 
methods of cultivation and husbandry which a new class of energetic land- 
lords was anxious to put into practice. In other words, it was the profit 
possibilities of the new agricultural techniques that largely forced through 
the enclosure despite the opposition of tenants and peasants. 6 

The improved agricultural practices which took hold first in England 
in the eighteenth century and subsequently spread over Western Europe- 
consisted, on the one hand, of more intensive methods of land use and, on 
the other, of better ways of doing such traditional farm work as plowing, 
sowing, harvesting and threshing. Selective breeding of livestock was also 

The age-old parceling of land into arable, meadow, pasture and waste 
land was usually associated with the three-field system of cultivation which 
left fallow a third or even a half of the arable land each year. During the 
eighteenth century, the "Norfolk system" of crop rotation tended to dis- 
place the three-field system. Based on the sequence of clover, wheat, 
turnips, barley, the Norfolk system obviated the necessity of fallowing 
every third year. In a crude sense, this was equivalent to increasing the 
available arable land by 50 per cent, with the consequence that the poten- 

5. J. H. Clapham, The Economic Development of France and Germany, 1815-1914, Cambridge University 
Press, Cambridge, 1921, p. 48. Albrecht Thaer (1752-1828), who founded the first Prussian school of agri- 
culture in 1804, published a book on English agriculture in German in 1798. See ibid., p. 47. 

6. The rural village with its open fields and traditional three-field system of cultivation was fairly general, 
according to Clapham, "from the basin of the Seine and the Swiss Alps to the plains of the Slavonic north- 
east, and over the Danish peninsula to the lowlands of Scandinavia. The flats of western and northern 
Belgium, of Holland and of the marshy valley of the Ems in western Germany, were an exception, being 
in the main covered with hamlets and scattered farmsteads." Ibid , p. 29. For an account of the enclosures 
(skifte) in Sweden see G. A. Montgomery, The K/V of Modern Industry in Sweden, P. S. King, London, 
1939, pp. 50# 

Early Economic Development: England 129 

tial output in agriculture increased substantially. 7 As one writer has aptly 
put it, 'The Agricultural Revolution was simply the use of root crops and 
clover unlike so many technical improvements, it really merits the name 
of revolution, because it at one blow doubled the productivity of land and 
provided food for live-stock fattening." 8 

The output potential in agriculture was further raised in the eighteenth 
century by the discovery and introduction of better agricultural techniques 
in a narrower sense. For example, lighter and better plows were developed 
which could be drawn by two horses instead of six or eight oxen. By 
dibbling seeds in rows instead of broadcasting them by hand there was less 
waste and the shoots could be better cultivated as they grew. Other im- 
provements occurred in harvesting and threshing. 

The common-field system, according to Arthur Young, yielded 17-18 bushels of 
wheat per acre, the new system of large farms 26; the fleece of sheep pastured on 
common fields weighed only 3 ! /i pounds as compared with 9 pounds on enclo- 
sures . . . the average size of cattle was greatly increased without any increase 
in expenditure. 9 

In general, however, these improved techniques required greater capital 
investments in agriculture, both as fixed investment and as working capital. 

Social Attitudes 

These potential gains in agricultural productivity, of course, had not 
merely to be discovered and made known in order to be exploited in 
England and other countries. For example, although horse and dog breed- 
ing had long been practiced in Europe, no one thought to apply this 
knowledge systematically to cattle, sheep and poultry before Robert Bake- 
well of Leicestershire (1 725-1 790). 10 Nor could the common man be ex- 
pected to take kindly to the new methods of cultivation that encouraged 
the more enterprising or rapacious squires and landlords to force through 
the enclosures. For if these changes had the over-all effect of increasing 

7. The English are said to have borrowed the system from Flanders, where it is said to have been in use 
considerably earlier. See N. S. B. Gras, A History of Agriculture in Kuiope and America. 2d edition, Appleton- 
Century, New York, 1940, p. 209. Gras says also: "The agricultural revolution was made in England out of 
Continental materials: Spanish clover, Burgundian and French grasses, the Dutch plow, the horse-shoe of 
Languedoc, and the Flemish methods of cultivating turnips in fields . . . But . . . the important general 
background was native. England experienced the revolution herself rather than just learned it from abroad, 
though much of it might conceivably have been taken whole cloth from across the Channel." The introduc- 
tion of clover and turnips as well as cabbages, carrots, parsnips and hops into England is usually credited to 
Sir Richard Weston (1591-1652) and Charles Townshend (1674-1738). Jethro Tull (1674-1741) showed the 
advantages of pulverizing soil as a restorative. The efforts of these men and others bore fruit only gradually, 
of course. 

8. Doreen Warriner, Economics of Peasant Farming, Oxford University Press, London, 1939, p. 8. 

9. Adna Ferrin Weber, The Growth of Cities in the Nineteenth Century, Columbia University Press, New 
York, 1899, p. 165, citing Gibbins and Prothero. 

10. Perhaps, for one reason, because the practice of common pasture and common grazing, before land 
was fenced, made breeding hard to control. 

130 Approaches to Economic Development 

agricultural productivity, they also initially brought misery and hardship to 
those directly forced off the land by these very changes. But the social 
conscience of the eighteenth century was not that of the middle of the 
twentieth century. Nevertheless, in England, had it not been for a group of 
enterprising landlords with an enthusiasm for agriculture and an eye to its 
profit possibilities from expanding markets, the agricultural revolution 
would doubtless have gone much more slowly than it did. 11 

Superiority of English Agriculture 

By 1800, England was regarded as the agricultural leader of the Western 
world; people came from Germany, France, Flanders and America to 
learn English methods, which they then adapted to their own soils. British 
methods thus spread to the continent, where monarchs and governments 
lent their support. 12 In Prussia, Clapham reports: 

Agricultural information was spread among eastern land-owners by methods now 
familiarcattle shows, shows of implements, agricultural societies and agricul- 
tural colleges. The first cattle shows, in the early [eighteen] thirties, were wisely 
combined with race meetings. Get the squires together for what the most stupid 
of them appreciates and work from the known to the unknown, was the policy. 13 

But these were characteristically English ways, already developed in Eng- 
land toward the end of the eighteenth century, along with treatises, journals 
and magazines. The University of Edinburgh even established a chair in 
agriculture in 1790. 

Bases of the Agricultural Revolution 

In brief, then, the agricultural revolution consisted essentially in the 
larger units of cultivation, the improved methods and techniques of cultiva- 
tion, and the rise of a more entrepreneurially minded and commercially 
oriented group of entrepreneurs who found a growing market for their 
output. Also important was the shift from grain production to an increasing 
output of animal products, fibers and other products not immediately 
suitable for human consumption. 

Yet, though this was the nature of the agricultural revolution, it was the 
expansion of trade and commerceforeign and domestic that was its 
driving force. This increased demand tended to raise prices and profits in 
agriculture, and thus put pressure on existing forms and methods of pro- 
duction. The enthusiasm for agriculture would probably have soon spent 

11. For a brief sketch of some of the leaders among this new group of landlords see Gras, op. cit. t 
pp. 211-20. 

12. Gras reports that "Catherine II of Russia, Joseph H of Austria, Gustavus II of Sweden, Leopold II of 
Tuscany, Stanislaus II of Poland, and George III of Britain, lent their support to agriculture. Thinkers in 
France erected agriculture into an economic system." Ibid., p. 217. 

13. Clapham, op. cit., pp. 51-52. 

Early Economic Development: England 131 

itself if the growing towns which were growing partly because fewer peo- 
ple were needed on the land as a result of the agricultural innovations had 
not created an insistent demand for agricultural products. In other words, 
agriculture tended to be profitable because markets for old products were 
expanding and because new markets for new products were opening up. 
The process in England probably took nearly three quarters of a century, 
both because established economic and social institutions resist change and 
because people learn slowly even when they have for an example the evident 
success of their fellows. Even with the benefit of demonstrations, lectures 
and reading matter, the improved agricultural techniques only gradually 
became general practice over the decades. It took longer still for them to 
spread over Europe from England. The hard economic realities of cost, 
income and profit or the necessity of getting a living probably had as much 
to do with converting the average landlord, squire, worker or peasant to 
the new practices as friendly exhortation or the gracious patronage of 
royalty. Yet surely this is not a peculiarity of eighteenth- or nineteenth- 
century England or Europe. Do not people usually change and adapt their 
ways only under pressure? 

The Underdeveloped Countries Today 

For the now underdeveloped areas, the question arises as to how to press 
toward rapid improvements in agriculture in order to achieve a larger out- 
put. There will be substantial obstacles and sullen resentments to be over- 
come. Some of these will be similar to the obstructions which earlier 
blocked agricultural progress in England and Western Europe. Will the 
growth of trade and commerce be the major solvent as it appears to have 
been in England? What other measures can be taken to clear the way 
without recourse to tyranny and naked force? The success with which this 
problem is faced and handled may well be of cardinal importance for the 
already developed, but nonauthoritarian, countries in their dealings with 
the underdeveloped areas. 


Adam Smith once observed that "Good roads, canals, and navigable 
rivers, by diminishing the expense of carriage, put the remote parts of the 
country nearly on a level with those in the neighborhood of a town: they 
are, upon that account, the greatest of all improvements." The truth of this 
statement is apparent whether one is reviewing the economic development 
of already advanced countries or contemplating the development problems 
of low-income countries in our day. Unless his cargo is exceedingly valu- 
able at its destination, a man with a pack will consume in a few days a sum 

132 Approaches to Economic Development 

equal to the full value of his load. The cost of transport in China today, 
for example, is said to double the price of wheat in fifty miles. Thus, how 
far division of labor between town and country, or between region and 
region, is feasible depends, fundamentally, on the efficiency of transport. 
The historical development of transport and communication in modern 
times is a complicated story. A formidable literature exists on the improve- 
ment of transport and communication by road, river, coastal vessel, canals, 
railways, transoceanic shipping, postal service and telegraphy, together 
with the many mechanical inventions and technical advances which made 
these improvements possible. The general sequence of this development is 
familiar, however. Let us therefore inquire first into the nature of "im- 
provements" in transport and communication and then try to outline some 
of the more important consequences of these improvements for economic 

Nature of "Improvements" 

Improvements in transport and communications are usually recognizable 
even though the indirectness of their contribution to productivity and well- 
being makes them difficult to measure. 14 "Improvements" whether in 
reference to a particular country or region at different times, or as between 
one country and another may relate either to the coverage or extent of the 
facilities for transport and communications, or to their "efficiency" in some 
sense. The rate or degree of improvement to be recorded will differ accord- 
ing to whether the emphasis is upon the spread of the network or upon its 
"efficiency" either in its principal arteries or in general. Certainly from the 
middle of the eighteenth century onward transport and communication 
have improved greatly on both counts: the network has spread and it has 
gained in efficiency as well. Several criteria appear to be useful in judging 
the economic efficiency of a network of transport and communication. 

Safety and Reliability 

First is the criterion of safety and reliability. To what degree may persons 
or goods move between various points on the network without danger of 

14 Except where transport or communication are direct consumption goods, as in pleasure travel, they 
manifest their improvement either through changes in the costs of manufactures, agricultural products, etc , 
or through the greater accessibility or mobility of factors of production, the consequences of which are 
almost impossible to measure. For instance, how can one measure the full economic effects of the following: 
"In 1754 the journey between London and Edinburgh required ten days in summer and twelve days in 
winter. In the summer of 1776 the flying coach performed the same distance in four days. In 1818 the mail 
coach took only fifty-nine hours, and . . . in 1836 the mail coach was timed through in forty-five and one- 
half hours, at an average speed of nine and one-half miles an hour, exclusive of stoppages for meals and 
official work. Thus ... the time required in 1836 was practically one-fifth of that required in 1754." W. T. 
Jackman, The Development of Transportation in Modern England, Vol. I, Cambridge University Press, 
Cambridge, 1916, p 335 (notes omitted). 

Early Economic Development: England 133 

injury or loss? What degree of certainty is there that a journey begun will 
be completed? Although coaches had been introduced in England in the 
towns in Elizabeth's reign (1558-1603), a traveler in 1747 wrote: 

In my journey to London, I travelled from Harborough to Northampton, and 
well it was that I was in a light Berlin, and six good horses, or I might have been 
overlaid in that turnpike road. But for fear of life and limb, I walked several 
miles on foot, met twenty waggons tearing their goods to pieces, and the drivers 
cursing and swearing for being robbed on the highway by a turnpike, screened 
under an act of parliament. 15 

Even toward the end of the eighteenth century in England many high- 
ways were extremely hazardous in winter while the byways were often quite 
impassable. Small wonder that such roads were infested with footpads, rob- 
bers and highwaymen, who often connived with the innkeepers to the 
traveler's peril. French roads were probably somewhat better, while the 
canal traffic in Flanders must have been comparatively safe. As for Ger- 
many, Clapham says: "When Prussia took over the great Bishopric of 
Mtinster, 1803, a high official sent to open a meeting of magnates at the 
town of Hamm found it wiser to walk 4 and }4 (German) miles [about 23 
English miles] to the ceremony than to venture upon the local road in a 
wheeled conveyance." This, Clapham adds, is "an extreme case, no doubt, 
but instructive." 16 

The remarkable improvements in safety and reliability of travel and 
communication which came in the nineteenth century with better roads, 
canals and the railway were both cause and consequence of the contempo- 
rary changes in agriculture, commerce and industry. 


A second criterion of the efficiency of a system of- transport and com- 
munication is the cost of the service performed. Absolute money figures, 
though often suggestive, are usually difficult to interpret unless the relative 
prices of other services and goods are also known, as often they are not. 
Nevertheless, costs of travel and of the carriage of goods undoubtedly 
declined enormously from 1750 to 1850. Jackman concludes, for example, 
that in England in the early nineteenth century "the cost of canal carriage 
normally did not exceed one-half, and in most cases was from one-fourth 

15. As quoted in ihid , p 85. 

16. Clapham, op. cit , pp. 107-08 Another English writer records that in 1752 (or thereabouts) "a rich 
citizen in London who had relatives or friends in the west of England might hear of their welfare half a 
dozen time^ in his life, by post, 'he thinks no more of visiting them than of traversing the deserts of Nubia.' " 
tdwm A Pratt, A History of Inland Transport and Communication in England, Kegan Paul, London, 1912, 
p. 94. 

134 Approaches to Economic Development 

to one-third, of the cost of land carriage." 17 By the third quarter of the 
nineteenth century the railways were often able to cut below these canal 
charges by a third to a half, and frequently more. 18 But the canals by no 
means disappeared; for a long time they held their own in the haulage of 
heavy, bulky cargoes for which rapid transit was unimportant. The tonnage 
volume of canal-barge traffic in Europe is still very substantial. 


Speed is a further criterion of the efficiency of a transport and com- 
munications network. Speed in the transport of goods is usually important 
only if storage costs are high or the cargo perishable. For some goods, 
storage costs, apart from interest on the investment, are often trifling. 
Sand, gravel, coal and ore are examples. For grains, flour, dry goods, etc., 
costs of storage are often great enough so that small inventories combined 
with rapid delivery from suppliers are more efficient than larger inventories 
combined with cheap but slow delivery. 

While greater speed may occasionally be valuable for its own sake, its 
more pervasive effects are probably felt in two directions: first, it permits 
large national and international markets to develop out of a host of small, 
isolated markets; second, it tends to integrate a country politically and 
socially to a degree quite impossible when the horse is the fastest available 
means of locomotion. Both developments are likely to have profound 
economic consequences. One well-known, though often forgotten, conse- 
quence of the increased speed and lower cost of transport in nineteenth- 
century Europe was that local famines and gluts virtually disappeared be- 
cause the transport system was sufficiently good to overcome a local crop 
failure or carry away a local surplus. Down to the end of the eighteenth 
century, famine was a real threat in most parts of Europe. 

The broad consequences of increased speed of travel, transport and 
communication achieved during the nineteenth century cannot be fully 
appreciated by merely noting that, for example, the two hundred and ten 
miles from London to Liverpool took two days in summer and three in 
winter by coach in 1776, as against seven to eight hours by railway in 1900. 
Far more important than the mere fact of greater speed of movement and 
contact between major centers was the fact that, with rapid transit, the 
average merchant or businessman in these centers for the first time really 
came into touch with whole sections of the country, for example, Wales and 

17. Jackman, op. cit , Vol. I, p 449. As partial explanation of this result he states (p 448). "In the early 
years of the nineteenth century, a very careful historian referred to the fact that where, forty years before, 
a single horse toiled along the road from Knaresborough to Sktpton, with a sack of wheat upon his back, 
now a horse would draw, with equal or greater ease, a canal boat loaded with forty tons of wheat." 

18. Ibid, Vol. II, Appendix 10, pp. 731/f. 

Early Economic Development: England 135 

the West Country. The railways truly "opened up" the country. For, as 
Usher has nicely put it, "Before the development of the railroad the world 
economy was in effect the maritime fringe of the great continents. The 
interiors were open only to the extent that some form of water transport 
was available." 19 

Spread of the Network 

If improvement in transport and communication is essentially a matter 
of the greater spread of the network and of its increased efficiency in terms 
of speed, cost and reliability, then certainly there was steady improvement 
in Western Europe from the middle of the eighteenth century forward. At 
the beginning of the period, those few people who traveled by land found 
it costly, time-consuming and hazardous. Goods moved by packhorse or in 
lumbering wagons at a pace too slow for perishables and at a cost too high 
for hauling bulky raw materials more than short distances. Consequently, 
the inland towns depended for their sustenance mainly upon the immedi- 
ately adjacent countryside, for which they, in turn, were almost the sole 
market outlet. 

Sea transport was of course much better by comparison, with the result 
that the seaport towns had a more thriving commerce and a more diversi- 
fied existence. Remarkable progress in sea navigation occurred in the 
seventeenth century. It was mainly in land transport that the major 
eighteenth-century improvements occurred. This is not to say that no 
further improvements were made in sea transport, but rather that before 
the use of steam and the appearance of the iron ship these improvements 
were mainly along already familiar lines. 20 

With the coming of the railways, the gap between seaports and inland 
towns narrowed greatly as the inland areas began a rapid development. As 
one writer has put it, "There was no longer the same necessity for each 
family to brew its own ale, to bake its own bread and make its own cloth, 
or to provide stores of salt beef and other supplies as if for a winter siege." 2 ' 
These changes, which occurred first in England, were little different from 
those that appeared later on the continent. 22 

19. Abbott Payson Usher, "Technical Change and Capital Formation," a paper submitted to the Con- 
ference on Capital Formation and Economic Growth, November 1953, sponsored by the National Bureau 
of Economic Research. 

20. Melvm M. Knight, Harry Elmer Barnes and Felix Flugel, Economic History of Europe, Houghton 
Mifflm, Boston, 1928, pp 298-99 

21. Pratt, op. ut., p. 398. 

22. The growth of railways on the European continent followed that in England by a lag that seems 
rather remarkable in retrospect For example, while the United Kingdom had 10,500 kilometers of line open 
for traffic in 1850, the Austro- Hungarian Empire had only 1,500, and Russia only 500; Germany had 6,000 
as against only 3,000 for France. Spam with twenty-eight kilometers and Switzerland with twenty-five had 
virtually no railways at all. See Clapham, op. of., pp. 339-40. 

136 Approaches to Economic Development 

Effects of Transport Improvements 

In relation to economic development, the primary effects of improved 
transport and communications are probably threefold. In the first place, 
improvements in transport and communications extend the area over which 
productive resources can be utilized in production. Arable land, even if 
distant from the centers of population, becomes usable because other 
factors of production can now be combined with it and because its product 
can move to market. Alternatively expressed, better transport widens the 
market and broadens the area over which specialization is feasible. Hence, 
output improves both in volume and variety because specialization per se 
raises productivity and because the natural advantages of each locality can 
be exploited. Moreover, the superior quality of product available in some 
regions will tend to force higher standards of performance upon producers 
in other regions, with the result that the general average tends to improve. 
Consequently, the widening of the market and the bringing into production 
of previously unused resources are likely to increase total output, enrich its 
variety and improve its quality. 

Second, economic development is stimulated because, as transport and 
communication improve, the country's markets tend to change from a host 
of isolated centers of trading and exchange into a complex of closely inter- 
connected markets. This means more than the disappearance of local gluts 
and famines. It means also that any appreciable change, either on the side 
of supply or that of demand, will spread its effects over the whole country 
through the linkage of prices. But this very diffusion of effects tends to 
lessen the impact of the change at the point of origin and hence to ease the 
process of adaptation. Small adjustments over a large area are less trouble- 
some and more easily made than major shifts which must be worked out 
locally. On the more positive side, this economic linkage means that if 
economic development is proceeding apace at certain points, these centers 
can draw on the resources of the rest of the country to support this develop- 
ment and by so doing impart an impetus to development even in regions 
far removed. The nineteenth century is replete with examples of this type of 
diffusion of development both nationally and internationally. 

Finally, ease of communication and transport also have the effect of 
forcing new ideas and methods of production into practice despite the 
"crust of custom" and the tenaciousness of outmoded techniques. This is 
not only because people move about more and are otherwise in touch with 
what is going on elsewhere. Even more important, probably, is the fact that 
better methods of production already in use elsewhere push down prices in 
the local markets to a point where the local producers must improve their 
methods or go out of business. Consequently, better methods of production 

Early Economic Development: England 137 

are likely to be more quickly generalized throughout the country and so to 
raise the average level of efficiency. 

In the nineteenth century these forced adaptations were often accom- 
panied by great human hardship and suffering. Nevertheless, average 
efficiency rose enormously and the improvements of transport and com- 
munication did much to bring it about. Similar results would probably 
flow from improved transport in now underdeveloped areas. 

Conclusions Suggested by Transport History 

The conclusion seems inescapable that improved transport played an 
enormous role in the rise in productivity and real incomes during the 
nineteenth century, although this role was less direct and less obvious than 
the effects of some of the great inventions of Watt or Arkwright now so 
familiar to every schoolboy. 

Two other points emerge from the historical record that appear to have 
relevance to the problems of the now underdeveloped areas. First, the 
improvements in transport necessitated large capital investments which, 
though highly productive within the economy as a whole, frequently did 
not "pay off" for those who made them. Many private investors for 
example in turnpikes, canals and railways in England and overseas cer- 
tainly lost heavily, notwithstanding the high economic productivity of their 
investments. The second point is quite different in character and less easily 
documented. At the time these improvements in transport and communica- 
tion were being proposed and even introduced, few people realized how 
drastically they would change the economic organization of production. 
The possibilities of increased specialization and exchange, of bringing new 
resources into production, of the greater mobility of productive factors, 
and of generally improving agriculture, commerce and industry through 
better transport and communication were usually grossly underestimated 
by contemporary observers. Perhaps this was inevitable. 


Although the phrase "industrial revolution" usually recalls the dramatic 
inventions in textiles or iron manufacture, the accelerated growth and ex- 
pansion of industrialization after 1850 also saw the appearance and devel- 
opment of wholly new industries. 23 Historically, industrial development 

23. Knight, Barnes and Flugel (op. at , pp. 368./O use the phrase "new industrial revolution." The term 
"industrial revolution" apparently only came into popular use after 1837. Ibid , p. 383. These writers empha- 
size that: "The Industrial Revolution did not burst upon a stereotyped and unsuspecting world in 1750, 
1770, or at>any other time. Professor Ashley's characterization of it as a 'rapid and irresistible evolution* is 
quite strong enough to suit the critical mind. Too much attention has been paid to a few textile inventions." 
Ibid., p. 376. 

138 Approaches to Economic Development 

was perhaps less a matter of improvements in existing industries than of 
the rise of industries theretofore almost unknown. 

A comparative study by L. Rostas of the structure of manufacturing in 
the mid- 1930s in the United Kingdom, Germany and the United States 
illustrates the point. Rostas breaks down manufacturing into 13 categories 
and shows their relative importance in net output and employment. His 
calculations, as shown in Table 7-1, demonstrate the latter-day dominance 
of the "engineering" industries, iron and steel and chemicals over textiles 
and clothing. Yet figures on industrial employment in England in 1851 and 
in Prussia in 1855, cited by Usher, show that about 35 per cent of industrial 
employment at that time was in textiles and clothing. (See Table 7-2.) For 
1800 or 1750 the percentage of workers in clothing and textiles would be 
greater still. Moreover, if textiles and clothing are lumped together with 
mines and metals in Table 7-2, they together account for about one half of 
total industrial employment in England in 1851. Industrial development up 
to 1850 was heavily centered in textiles, coal and iron. 

This fact points to an important difference between the spread of indus- 
trialism in the first half of the nineteenth century and the problem of 
underdeveloped countries bent on industrial development today. In the 
early nineteenth century, the choice of industries to be developed in follow- 
ing England's lead was obvious. But the many new industries which have 
since appeared and grown to importance offer countries that are now un- 
derdeveloped a wide range of selection. While textiles, for example, may 
still be a logical starting point for a country desiring to industrialize, this 
is by no means the only possible choice. 

Evidences of Industrial Growth 

The amazing improvements in industry during the nineteenth century are 
perhaps best illustrated by noting how output rose and prices fell for a few 
key products. 

The five-year average centering on 1776 of cotton imports into England 
was 6.7 million pounds; for the year 1831, imports were 280.5 million 
pounds; and for 1861, 1,261 million pounds. In 1779, the selling price of 
Number 40 cotton yarn was 16,?.; in 1830, Is. 2 l /id.\ and in 1860 only 
HVirf. 24 For coal, English production figures for the early period are 
apparently somewhat in dispute, although Clapham suggests perhaps 
6.2 million tons in 1770 and possibly 6.4 million tons in 1780. He adds: 

If an output of some 16,000,000 tons of Great Britain in 1816 be accepted as a 
starting point, some such progression as the following may be suggested as not 

24. Figures as cited by Abbott Payson Usher, The Industrial History of England, Houghton Mifflm, 
Boston, 1920, pp. 305 and 310. During this period cotton textiles overtook wool in value terms, both in 
home consumption and exports. See ibid , p. 308. 


Percentage Share In: 

Net Output 



Branch of Manufacturing 1935 













Total factory trades 









Iron and steel 









Engineering, shipbuilding 

and vehicles 









Nonferrous metals 






















































Clay and stone 


















Paper and printing 









Food, beverages and tobacco 17.0 

















Source. L. Rostas, "Industrial Production, Productivity and Distribution in Britain, Germany and 
United States," Economic Journal, April 1943, p 44 

GERMANY, 1851 AND 1855 a 

England, 1851 Prussia, 1855 

Occupational Gioup 

of Persons 

of Total 

of Persons 

of Total 


Food b 
Clay, st< 

Paper and 



id clothing 











j, etc. (including 


























Source Abbott Payson Usher, The Industrial History of England, Houghton Mifflin, Boston, 1920, p. 257. 

a. The figures for England are from the Census for 1851, Population Tables, Vol. II, Part I. p. c. The 
figures for Prussia are from Dietenci, Stathtik das preuiwchen Stoats, Berlin, 1861, p. 400. The states covered 
by the enumeration are. Prussia, Posen, Brandenburg, Pomerania, Silesia, Saxony, Westphalia and the 
Rhine Province. 

b This heading refers to the preparation of food products, beverages and tobacco. It excludes all agricul- 
tural work. 


140 Approaches to Economic Development 

unlikely: 1826, 21,000,000 tons; 1836, 30,000,000 tons; 1846, 44,000,000 tons; 
1856, 65,000,000 tons. 25 

And these increases in the production of coal occurred despite enormous 
improvements in the efficiency with which coal was used in steam engines. 26 
Prices which varied considerably according to the means of transport 
available and proximity to the mines also declined, particularly after 
1825. 27 

Figures for pig iron tell a similar story. About 1800 the pig iron produc- 
tion in Great Britain was perhaps 200,000 tons, having risen from about 
68,000 tons in 1788. By 1830, production had risen to 678,000 tons and by 
1850 it was 2.5 million tons. 28 

The price of pig iron in England between 1800 and 1830 varied con- 
siderably and per ton was "upon two occasions as low as 3, but 7 to 
9 was not an uncommon figure." 29 But by 1850 Scotch pig iron is said 

25. J. H. Clapham, An Economic Hutoty of Modem Britain, 2d edition, Vol 1, Cambridge University 
Press, Cambridge, 1930, p 431. Compare the following figures in metric tons for France: 

1787 215,000 1840 3,003,000 

1802 844,000 1850 4,433,000 

1811 773,000 I860 8,309,000 

1820 1,093,000 1865 11,652,000 

1830 1,862,000 1870 13,179,000 

From Witt Bowden, Michael Karpovich and Abbott Payson Usher, An Economic History of Europe ume 
1750, American Book Company, New York, 1937, p 451 (citing F. E. Saward, The Coal Trade, Philadelphia, 
1879, p. 47). Even in 1910, however, French coal production at 38.5 million tons was only 8.6 per cent of 
British coal production of 445 8 million tons. Ibid , p 452. For figures on coal production m other countries 
see pp. 162, 164, below. 

26. W. Stanley Jevons cited figures to show that between 1769 and 1859 "the efficiency of the engine [was] 
increased at least ten-fold." The Coal Question, 2d edition, revised, Macmillan, London, 1866, p. 128 

27. A chart in L. H. Dupriez, De v Mouvementi Econorniaue^ Generaux, Vol II, Institut de Recherches 
Economiques et Sociales, Umversite de Louvam, Louvam, 1947, p. 38, shows a fall m the index of coal 
prices (1909-1912 average = 100) from about 160 m 1820-1825 to about 100 after 1845, with of course 
frequent fluctuations. According to the Dupriez chart British coal prices down to 1910 did not decline 
substantially below the level already reached in 1 845. 

These calculations are confirmed in a more recent study by W. W. Rostow (which puts together data from 
Jevons, Mulhall, the Royal Statistical Society and an unfinished study by the late A. D. Gayer) using over- 
lapping eleven-year averages. Rostow reports the following indexes of British coal prices ( 1 840- 1 850 = 100) 

1790-1800 1705 1830-1840 114.1 

1795-1805 159.8 1835-1845 1H.5 

1800-1810 1725 1840-1850 1000 

1805-1815 1808 1845-1855 97.2 

1810-1820 1684 1850-1860 975 

1815-1825 149.1 1855-1865 979 

1820-1830 139.8 1860-1870 97.7 

1825-1835 120.0 1865-1875 111.1 

W. W. Rostow, "The Historical Analysis of the Terms of Trade," Economic History Review, 2d Scries, 
Vol. IV, No. 1, 1951, p. 72. 

28. These figures probably are not precise but they appear to be the best available. They are taken from 
Sir Lowthian Bell, The It on Trade of the United Kingdom, British Iron Trade Association, London, 1886, 
pp 4-6. By the middle 1880s, production was around 7.5 million tons. Ibid , p. 165. 

29. Ibid , p 6. According to Usher the per capita consumption of pig iron in Gieat Britain was 15 pounds 
in 1735, 26 pounds in 1800, 77 pounds in 1830 and 303 pounds in 1890. See Usher, loc cit , p. 30. 

Early Economic Development: England 141 

to have averaged less than 45 shillings per ton. 30 Prices of bar iron at the 
forges in certain European countries in January 1825 are said to have 
compared unfavorably with English bar iron prices in 1825. Prices per ton 
were: 31 

France 26 IQs. 

Belgium and Germany 16 14s. 

Sweden (at Stockholm) 1313^. 

Russia (at St. Petersburg) 13 13^. 

England (at Cardiff) 10 

Late Growth of Manufactures 

Despite this remarkable development of manufactures in the first half of 
the nineteenth century, by 1870 manufacturing was still far below the level 
it was to reach in the succeeding forty years. According to Folke Hilgerdt, 
taking an average for 1871-1875, the index of manufacturing (with 1913 
as the base year at 100) stood at only 22.4 for the world as a whole, 49.0 
for the United Kingdom, 20.5 for Germany, 14.8 for the United States and 
11.1 for Sweden the only countries for which such an estimate is possible. 
For the year 1 870, Hilgerdt estimates that the indexes of manufacturing had 
probably attained the following percentages of their 1913 level: 32 

United Kingdom 44.0 

France 31.7 

Germany 16.3 

United States 12.7 

Italy 17.0 

Russia 1 3.0 

Belgium 27.4 

Canada 9.1 

Sweden 8.1 

30. Ibid , p. 8. This is a somewhat greater decline than that indicated by Dupriez's chart of the course of 
pig iron prices. Cf. Dupriez, op. cit.. Vol. II, p. 38. The Rostow study referred to above shows the behavior 
of British iron prices as follows (overlapping eleven-year averages, 1840-1850 = 100): 

1790-1800 151 2 1830-1840 121.4 

1795-1805 165.0 1835-1845 114.9 

1800-1810 1732 1840-1850 100.0 

1805-1815 1754 1845-1855 1070 

1810-1820 174.8 1850-1860 110.1 

1815-1825 1694 1855-1865 109.9 

1820-1830 1494 1860-1870 102.4 

1825-1835 132.8 1865-1875 130.2 

31. As reported in Harry Scrivenor, Hi\tory of the Iron Trade, Longman, Brown, Green and Longmans. 
London, 1854, p. 270. 

32. League of Nations, Industrialization and Foreign Trade, Geneva, 1945, Annex A, especially pp. 130-33. 

142 Approaches to Economic Development 

Thus, the growth of manufacturing production for most countries came 
after, not before, 1870. Moreover, of what manufacturing there was in 
1870, almost 70 per cent was in four countries: the United Kingdom, 31.8 
per cent; the United States, 23.3 per cent; Germany, 13.2 per cent; and 
France, 10.3 per cent. 33 

Means of Financing 

Where did the entrepreneurs come from to initiate these new industrial 
undertakings and what was the source of the capital that they used in 
financing them? 34 Apparently, the early industrial entrepreneurs came 
mostly from the merchant and trading classes and already had capital of 
their own to invest. The great growth of commerce in the seventeenth and 
early eighteenth century in England had produced a substantial number of 
prosperous merchants who had funds to invest and saw market outlets at 
home and abroad for manufactured products. As long as industry was a 
small-scale affair, the capital needs of the merchants to finance their inven- 
tories were greater than the investments needed for fixed plant in manu- 
factures. When the fixed capital investments in industry did increase, how- 
ever, it was the merchants who had the liquid capital and access to credit 
to finance them; they also had the entrepreneurial vision and skills to 
create and direct them. Thus, initially, the entrepreneurs and the capital 
both came out of the flourishing growth of commerce that preceded the 
industrial developments of the late eighteenth and early nineteenth century. 
The government supplied neither entrepreneurship nor capital. 

Social Results 

The remarkable changes in industrial production during the nineteenth 
century and the urbanization that accompanied them, had their sordid side 
and were often tainted with human suffering and misery. Only after indus- 
trialization had gone on apace for some time did the social conscience of 
the times belatedly recognize the dangers and evils of industrialism by en- 
acting legislation affecting hours and conditions of work, safety precau- 
tions, urban living, etc. Unemployment, old age, sickness and other prob- 
lems of economic insecurity were of course recognized as a social responsi- 
bility only at a very much later date. Perhaps the pace of industrial advance 
in the first half of the nineteenth century is therefore partly to be explained 
by the fact that these social costs of the transition to industrialism were 
not included in the reckoning. But they were none the less real, even though 

33. Ibid., p. 13. 

34. On these questions see Bert F. Hosehtz, "Entrepreneurship and Capital Formation in France and 
Britain since 1700," a paper submitted to the Conference on Capital Formation and Economic Growth, 
November 1953, sponsored by the National Bureau of Economic Research. 

Early Economic Development: England 143 

they fell where they might rather than immediately upon those responsible 
for them or upon the economy as a whole. 

Industrial development in the now underdeveloped countries is not 
likely to proceed with anything like so callous an attitude toward its social 
costs. To this extent, the process is likely to proceed more slowly, at a 
greater capital cost and more directly under the supervision of the state. 
Perhaps, too, the social evils of nineteenth-century industrial development 
that produced Manchester and the Manchester school of laissez-faire think- 
ing partly account for the present distrust, in many underdeveloped areas, 
of allowing private enterprise any important role in their development 
plans. It is also a striking fact that present laws and regulations relating to 
industrial employment and social security in many underdeveloped areas, 
for example some Latin American countries, are often far more stringent 
at least on paper than those in the economically most developed coun- 
tries. How far this may influence their pace of industrial development, in 
comparison with nineteenth-century development, is an interesting ques- 


The development of British foreign commerce and investment, which 
went hand in hand with the internal changes in the British economy, is 
not easily summarized nor interpreted. Changes in volume and prices of 
exports and imports inevitably reflect wars and revolutions, changing 
technology and efficiency at home and abroad, cyclical oscillations, changes 
in transport costs, tariff changes, shifts in demand preferences or sources of 
supply, capital movements and much else besides. The problem of interpre- 
tation is further complicated by recent researches that cast doubts on what 
were long considered to be the actual "facts" concerning the prices of 
British exports and imports in the first half of the nineteenth century. 35 

Exports and Imports, 1800-1913 

In 1820 after the disturbances created by the French Revolution and 
the Napoleonic wars had subsided the British export volume was only 
6.7 per cent of the point to which it was to climb by 1880. The export price 
index, according to Albert Imlah, fell from 242 in 1820 to 100 in 1880, the 
base year. (See Table 7-3.) In other words, the physical volume of exports 
rose greatly while export prices fell. 

35. The price statistics long used in studies of British exports and imports in the nineteenth century have 
been the "official values" reported in the Parliamentary Papers, But a recent study by Albert H. Imlah 
("Real Values, in British Foreign Trade, 1798-1853," Journal of Economic History, November 1948, pp. 133- 
52), seems to prove that these "official values" are unreliable for the first half of the nineteenth century. 
Much of what follows here is based on Imlah's researches. 


Approaches to Economic Development 

In total exports, cotton goods held a predominant place; they accounted 
for as much as 40 per cent of the value of British exports in 1816 and the 
same in 1850. Even in 1880, despite the fall in cotton goods prices and 
despite the more diversified export list, cotton goods still accounted for 34 
per cent of the total value of exports. 36 The overseas markets to which these 
exports went were in America, Europe, the Orient and British overseas 
possessions like India and Ceylon. 

(Indexes Based on 1880 as 100) 


Net Imports 































































































































Source Albert H. Imlah, "The Terms of Trade of the United Kingdom, 1798-1913," Journal of Eio- 
nomic History, November 1950, pp. 177-82. 

On the import side, the volume index in 1820 was only 8.4 per cent of the 
1880 level; only in 1866 did it first reach one half its 1880 level. But the 
import price index in 1820 at 150 was much nearer its 1880 level than the 
price index for exports (242). Indeed, the import price index between 1842 
and 1854 was already generally below its 1880 level. The import price of 
cotton fell more rapidly than that of wool, while the prices of imports other 
than cotton and wool moved downward slowly, but more or less steadily: 
in only eight years between 1820 and 1880 did the price index for imports 
other than cotton and wool dip below the 1880 base. 37 Yet these imports, 
too, consisted predominantly of food and other primary products sugar, 
tea, timber, coffee, silk, saltpeter, etc. 

36. Albert H. Imlah, "The Terms of Trade of the United Kingdom, 1798-1913," Journal of Economic 
History, November 1950, p. 184/1. 

37. Imlah. "The Terms of Trade of the United Kingdom, 1798 -1913," loc. cit. t Tables I and II. 

Early Economic Development: England 145 

The Import Surplus 

More remarkable than the growth of British exports and imports and 
the fall in prices is the evidence, brought out by Imlah's studies, that Great 
Britain had a negative balance, a surplus of imports over exports, on 
"visible trade," or merchandise trade, in all but four years between 1798 
and 1880. Contrary to general belief, the import surplus did not arise out 
of the free-trade policies of the 1840sthough of course free-trade policies 
made it larger than it would otherwise have been. It appeared much earlier. 
As Imlah has expressed it: 

There seems to be no escape, therefore, from the conclusion that Britain's new 
industrial system did not create export surpluses, and that her phenomenal 
accumulation of overseas credits in the nineteenth century cannot be explained 
by this time-honored assumption ... In this period, as later, Britain's invisible 
credits the earnings of the merchant marine, the commercial commissions, the 
savings of her experts and technicians and colonial officials abroad, and the 
income from the investments already placed in other lands made up the deficit 
on her visible trade and supplied whatever new capital was invested abroad. 38 

Foreign Lending 

If this view, that the British trade balance showed an import surplus even 
as early as 1800, is accepted, it becomes all the more remarkable when con- 
sidered in connection with the substantial British foreign investments in the 
same period. For foreign investment tends to stimulate exports relative to 

British foreign lending in this early period of capital export, however, 
followed no simple pattern. Immediately after the French wars, France, 
Russia, Austria and Prussia floated loans in the British market. In the 
1820s there was a flurry of loans to Colombia, Chile, Peru, Mexico and 
Guatemala as well as a romantic but scandalously executed loan in aid of 
Greek independence. 39 In the 1830s many loans were made for ventures in 
the United States. British capital built railways on the continent of Europe 
in the 1840s; more than a decade later it was performing the same service in 
India and, later still, in Canada. More than 37 million was invested in 
Indian railways between 1858 and 1863, and more than another 32 million 
between 1864 and 1869. 40 Foreign governments alone borrowed more than 

38. Imlah, "Real Values in British Foreign Trade, 1798-1853," he. cit., p. 149. 

39. Leland Jenks says: "the migration of capital from Great Britain began as a function of the activity 
of a handful of merchant-bankers interested primarily in keeping alive the foreign connections which 
were the basis of their business life. Between 1815 and 1830 at least fifty million pounds had been invested 
more or less permanently in the securities of the most stable European governments, more than twenty 
millions had been invested in one form or another in Latin America, and five or six millions had very 
quietly found their way to the United States." Leland Hamilton Jenks, The Migration of British Capital to 
1875, Knopf, New York, 1927, pp. 63-64. 

40. Ibid., Chapter 2. 

146 Approaches to Economic Development 

320 million in the London market between 1860 and 1879. 41 According to 
Jenks, British holdings of foreign investments in 1854 amounted to be- 
tween 195 and 230 million, of which perhaps nearly one half were loans 
to governments. 42 

Statistics on British foreign investments in the whole period down to 191 3 
are unfortunately fragmentary and conjectural. The following, however, 
appear to be the best available estimates of the probable size of British 
foreign investment holdings in various years (in millions of pounds): 43 

1825-1830 100 1895 1,600 

1843 150 1905 2,025 

1854 210 1909 2,332 

1880 1,300 1913 3,763 

1885 1,302 

Implications for Underdeveloped Countries 

The bearing of all this on contemporary problems of economic develop- 
ment is more oblique than direct. Domestic economic development and 
expansion of overseas trade certainly went hand in hand in Great Britain, 
and they were intimately linked from at least the late sixteenth century 
onward. But the important point is that expansion of foreign commerce and 
the profits to be made from that trade were of the greatest importance, 
along with transport improvements, in inducing changes in the composition 
of output and the deployment of productive resources within the domestic 
economy. The highly profitable foreign trade and its expanding volume put 
pressure on the older methods of production and, to a considerable extent, 
the merchant and trading groups directly exerted that pressure. Commerce 
with overseas markets quickened domestic trade, and a livelier domestic 
trade forced changes in methods of production and in the kinds of goods 
produced. As a means of bringing about internal economic changes foreign 
commerce was highly effective. May it not also be true that foreign trade is 
still one of the most effective means of reorienting a traditionalized, static 
and unprogressive economy? 

In view of the marked degree to which eighteenth- and early nineteenth- 
century industrial development in England was concentrated in cotton 
textiles, it is worth noting that cotton was an imported raw material. 
Although wool and woolens had long been traditional English specialties, 
the industrial advance did not appear there first but rather in cottons, 
which soon rose to a position of primary importance in British exports 

41. Ibid., p. 280. 

42. Ibid., p. 413. 

43. Royal Institute of International Affairs, The Problem of International Investment, Oxford University 
Press, London, 1937, p. 1 15. These estimates are not from any single source but have been consolidated from 
several. Cf. Ibid., pp. 113.0: 

Early Economic Development: England 147 

accounting for 40 per cent of the total even in 1850. From this, it might be 
urged that industrial development does not necessarily require domestic 
sources of supply unless one starts with autarchic preconceptions. Perhaps 
<a less obvious inference is that long-established trades do not offer the most 
hospitable environment for innovations and rapid technological advance. 
Viewed from the present, it might seem that the rapid industrial develop- 
ment in England would have made England a net borrower on interna- 
tional account. But the exact opposite seems to have occurred: England 
was probably a net exporter of capital during the nineteenth century. Tn 
contrast to what has happened in many now underdeveloped countries, 
industrial development in England did not, apparently, cause her to experi- 
ence a shortage of foreign exchange. The explanation is doubtless that the 
machinery and other capital goods needed for industrial development 
simply could not be imported because other countries were even less indus- 
trially advanced than England. Hence, there was no foreign exchange drain 
from this source. Rather, what England had to do was to import more raw 
materials and more food as people were drawn into industry, and in order 
to get these flowing she had often to make sizable foreign investments. It 
is noteworthy that England was able to provide for herself all the capital 
needed for her domestic industrial development and to invest considerable 
sums abroad as well. 

Trade Linked with Investment 

Thus, England's industrial development was from the first intimately 
linked with her international commerce. Around this nucleus, moreover, 
gradually evolved the familiar "network of world trade" based on the 
principle of international specialization, which, from one point of view, was 
perhaps the most distinctive economic achievement of the whole nineteenth 
century. As the center of this development, England not only provided the 
capital for her own industrial advance, but also supplied productive invest- 
ments to other points in the network in substantial amounts. This was a 
unique accomplishment. 

Capital accumulation in England during the early phases of the indus- 
trial revolution cannot be separated from the amazing commercial expan- 
sion of the seventeenth and early eighteenth centuries which preceded it. 
This commercial expansion yielded substantial profits, which, for the most 
part, were reinvested rather than consumed; real capital accumulated. 
Even more important, however, the growth of commerce greatly fostered 
the idea of investment for profit and its concrete manifestations such as 
government stock, trading companies, banks, bourses, bills of exchange, 

148 Approaches to Economic Development 

etc. While these developments were often heavily charged with the fever of 
speculation and a quick profit, as with John Law or the South Sea Bubble, 
other enterprises, like the East India Company or the Hudson's Bay Com- 
pany, represented more solid undertakings using substantial amounts of 
capital goods. Also, as previously emphasized, the commercial expansion 
developed a group of merchants, traders and adventurers who had a quick 
eye for profitable undertakings and had resources in hand with which to 
exploit them. Consequently, with trade profitable and with a group of 
people eager to invest for further profit, total consumption in England 
rather consistently lagged behind the total value of output. Capital 

So far as can be determined, this same process of financing capital 
accumulation out of current production continued throughout the early 
phases of English industrial development. Productivity rose. Profits in- 
creased. The profits were reinvested. Productivity increased still further. In 
other words, capital accumulation went hand in hand with rising produc- 
tivity. The "Protestant ethic" may have led people to work harder or may 
have constrained them from dissipating their profits in luxurious consump- 
tion. The inflation of the Napoleonic period probably fostered capital 
accumulation at the expense of consumption. Yet, all in all, it was the rising 
productivity in many branches of agriculture, commerce and industry that 
made possible the simultaneous growth of consumption and real capital 
per person in the population. 


The role of the state in British economic development during its most 
vigorous advance was largely permissive and passive, rather than directive 
and promotive. Nowadays, schemes for economic development are likely 
to assign the state a dominant influence in the whole plan. But in the late 
eighteenth and early nineteenth century, the emphasis in political thought 
and discussion was to get the state out of economic affairs, not to draw it 
in further. Adam Smith, for one, stressed "the obvious and simple system 
of natural liberty" as against, in his view, the paternalistic, obstructionist 
and bumbling activities of the state in economic affairs. In England, the 
state was in no sense considered the ideal entrepreneur, nor did it have any 
plan for economic development in the modern meaning of that phrase. In 
the laissez-faire mood which prevailed in the early stages of British eco- 
nomic development, the role of the state was to keep out of the way of 
private initiative. The state did not try to guide development, set its pace, 
or decide what form it should take. 

Where the state did intervene in economic affairs, it usually did so in 
belated recognition of blatant evils or clear and present dangers. Thus, the 

Early Economic Development: England 149 

conditions of employment of women and children in mine and factory 
were shown to be so scandalous that they threatened the future vigor of the 
English population. Sanitary conditions in the early industrial towns made 
plague and epidemic an ever-present danger. Housing conditions not only 
created a bad moral environment but constituted a real fire hazard. Only 
when these conditions were recognized as a threat to the general welfare, 
or when it was seen that they would not be corrected by people acting in 
pursuit of their own self-interest, did the state intervene. Yet state interven- 
tion was contrary to the political philosophy of the times and often only 
grudgingly undertaken. Nor did the social conscience of the day view the 
inevitable dislocations which accompany rapid economic change as social 
costs to be borne by society at large: they were regarded as misfortunes 
which befell people in the normal course of events and were to be suffered 

Thus the role of the state in early English economic development was 
both reluctant and timorous. In the main, economic events ran ahead of 
state action. Yet, despite the hardships which this laissez-faire attitude 
often engendered, the fact remains that industrial development did take 
place and took place rapidly. 


From the point of view of the now underdeveloped areas, with their 
strong desire to lift themselves from economic stagnation on to the road 
of progress, it would be helpful to have a clear-cut answer as to whether it 
was historically first agriculture that changed, and then industry, or the 
other way about in English economic development. Was it, broadly speak- 
ing, the improvements in agricultural productivity that drove people off the 
land and so made possible the development of manufacturing? Or did 
manufacturing pull people out of agriculture and so pave the way for 
improvements and readjustments in agriculture? Perhaps the more logical 
view is that improvements in agriculture came first. But if the agricultural 
improvements tended to push people out of agriculture, the newly develop- 
ing manufactures also pulled people into industry and commerce. 

As to the economic developments in agriculture, it is noteworthy that 
progress was not dramatically rapid nor did it proceed without opposition 
or hardships. Moreover, to a remarkable degree, eighteenth-century agri- 
culture in England and Western Europe displayed many of the bad features 
of present-day agriculture in underdeveloped areas traditionalized meth- 
ods of production, fragmented holdings and systems of land use which 
checked- production and inhibited its improvement. Yet these obstacles 
were overcome; productivity rose; total output increased. 

150 Approaches to Economic Development 

Importance of Transport Development 

The role of improvements in transport and communication in making 
possible and quickening late eighteenth- and early nineteenth-century eco- 
nomic development in England was probably of fundamental importance. 
Because the effects of improvements in transport and communication are 
so diffused and indirect their significance is easily underrated. But by 
widening the market and so extending the area over which specialization 
and exchange are possible better transport increases and improves the 
output from resources already in use and brings previously idle resources 
into production. Perhaps of all the improvements that facilitate economic 
development those in transport and communication because they foster 
trade, specialization, innovation are at once the most certain to yield 
results and the most widespread in their consequences. 

Effects of War 

The rapid pace of English economic development might not have been 
achieved had the French Revolution and the Napoleonic wars not isolated 
England from the European continent during much of the period 1789- 
1815. This was plainly a fortuitous circumstance; but the consequences 
were no less on that account. When the French Revolution broke out Eng- 
land had made some promising beginnings in industrial development. 
When Napoleon was defeated at Waterloo, England was the world's most 
advanced country economically with a substantial lead over the others. 

The reasons for this spurt ahead seem to center around two factors. 
First, the war created an inflationary environment "too much money 
chasing too few goods" which strongly stimulated the production of 
goods of all kinds including foods. This put existing methods of production 
under pressure. Improvements were therefore more readily adopted. Con- 
sequently, too, the usual obstacles to such changes which might have pre- 
vailed in more tranquil times were the more easily and often harshly 
brushed aside. Second, wars and disturbances by breaking customary rela- 
tions with the outside world are likely to open up new economic oppor- 
tunities internally and allow them to be developed through the early stages 
without their being checked by counterdevelopments in the outside world. 
Recent history abounds in examples of this phenomenon of wartime eco- 
nomic isolation jolting an economy onto a new plane of economic develop- 
ment. The Napoleonic period seems to have given England just such a 
timely forward propulsion. 

Population Shifts and Food 

Out of the bewildering complexity of Britain's economic development 
two consequences emerged which may prove important to the now under- 

Early Economic Development: England 151 

developed areas. First, England's economic development was accompanied 
by an important geographical shift in the centers of concentration of her 
population. An agricultural economy and an industrial economy deploy 
their populations differently. In England, as probably also in most such 
cases, the shift in population was accomplished by "short distance" migra- 
tion : the expanding urban areas drew most of their increased numbers 
from the immediately surrounding countryside which, in turn, drew from 
the adjacent territory, and so on. Few people moved great distances; but 
the net result was a major shift in the centers of population. 44 Moreover, 
probably because of the great differential in real wages and the low cost of 
transport by water, considerable numbers immigrated from Ireland to man 
the factories in the Manchester-Merseyside area. Important population 
shifts such as these break up long-established social and cultural patterns 
that tend to inhibit economic change because they destroy the economic 
foundations on which these patterns rest. 

Second, industrialization made England dependent upon foreign food. 
In her heyday England was able to exchange manufactures for inexpensive 
food from abroad with comparative ease because of the opening of new 
lands overseas. How other countries would make a comparable adjustment 
in the twentieth century particularly if industrial development proceeds 
rapidly in a number of countries simultaneously is far from clear. 

It is currently fashionable to stress the sordidness, the ugliness, the vul- 
garity or the suffering which the rapid industrial development of England 
brought in its turbulent wake. But this emphasis is often so highlighted as 
to obscure the fact that the average Englishman lived less than an idyllic 
existence in his rural hamlet before industrialization got under way. All the 
evidence indicates that, before industry developed, his life span was shorter, 
he ate less well, he was more poorly clothed and housed, and that he 
usually had to struggle harder with nature to eke out a humble living. In 
the Epilogue to his classic work, 77?? Economic Development of France and 
Germany 9 1815-1914, J. H. Clapham has written the following: 

That the land reforms had been accompanied by a certain crushing of men down 
in the social scale, and that the peasant of the east in 1914 was often miserable 
enough, judged by absolute standards, must not be allowed to hide the far more 
miserable position from which he had been raised. The "hapless missing link 
between a beast of burden and a man" had become at least human. It was no 
longer likely that a traveller in the east would see a woman in the fields, in 
October, working in an old open coat, a skirt, and nothing else, a sight possible 
in the years before emancipation. 45 

Such miserable conditions were not exceptional; indeed, they were pretty 
much the common lot before industrial development began. 

44 See Redford, op. c/f., Chapter 11. 
45. Clapham, op. cit., p. 403. 

8. Early Economic Development in Western Europe 
and Europe Overseas 

JUST AS IN A FAMILY the younger children never develop in quite the same 
environment as the first-born, so countries that developed economically 
during the nineteenth century were bound to be affected by the plain fact 
that England had gone before. English experience and English achieve- 
ments were an inescapable part of the background from which other coun- 
tries approached their own development problems and aspirations. In a 
very real sense, there was no "problem" of initiating or accelerating eco- 
nomic development until England had first shown that a novel and higher 
level of economic performance was possible. Once England had done this, 
as it clearly had by, say, 1850, then other countries faced the question of 
how, and against what obstacles, they might bring their own economies to 
comparable achievements. Economic development came into existence as 
an objective and a "problem." 


Economic development in Western Europe in the nineteenth century is of 
major interest here for the light it may shed on the important problem of 
"getting started" and picking up momentum. What changes appear to have 
been peculiarly effective in bringing the countries in Western Europe closer 
to England's new pattern in the use of economic resources? What factors 
tended to accelerate this transition and what factors tended to retard it? 

The General Setting 

While historical parallels are always hazardous, nevertheless there were 
striking similarities between the economic, political and social setting in 
Western continental Europe after 1815 and that in many underdeveloped 
countries after 1945. In both cases, there seems to have been a mounting 
awareness that fundamental economic and social changes were imperative 
and past due, that economic development was neither inconceivable nor 
impossible. Neither in 1815 nor in 1945 did the average man comprehend 
the momentous character of the events through which he had recently lived ; 
but he probably was aware that broad changes were afoot and felt 
especially when told that he should that some of the annoyances and 


Development in Western Europe and Europe Overseas 153 

frustrations of his daily existence "ought" to be set right. Some of his 
leaders or rulers, whose lives were not circumscribed by the local village, 
doubtless saw certain implications in recent historical happenings and drew 
from them important conclusions for public policy and action. 

The French Revolution and its aftermath could hardly have failed to 
leave a profound impression upon thoughtful men in Western European 
countries and upon their monarchs and ministers. Some of these confined 
themselves to bemoaning the passing of a social order long familiar; but 
others sensed or half-realized two important implications of the events of 
the period 1789-1815. The first was that feudalism in economic affairs 
would have to go. The second was that, in the end, England had been able 
to win out over France in the Napoleonic wars partly because English 
industry and commerce had outstripped that of France and the rest of 
Europe. The two principles were closely interwoven: England's industrial 
strength, for example, was partly due to the efficiency of agriculture under 
the English system. After Waterloo, no astute ruler was likely to overlook 
the political implications of these crude facts. Consequently, rulers and 
statesmen in post-Napoleonic Europe took more than a casual, if at times 
grudging, interest in the agricultural and industrial development of their 
particular countries. 

Such concerns were by no means unknown before 1789; but after 1815 
they took more concrete form in measures to modernize agriculture and to 
foster industry. Indeed, economic development in Western Europe seems 
to have been motivated primarily by considerations of political power and 
the threat of social unrest and only secondarily and at far remove by a 
desire to improve the general level of well-being of the people. Conse- 
quently, the state and considerations of national political power played a 
larger role than they did in England. In England, political power was a 
welcome consequence of economic development, but it was scarcely the 
impelling factor. 


The changes in European agriculture that occurred in the several decades 
following Napoleon appear to have their explanation in two sets of influ- 
ences. On the one hand is the breakup of the feudal system of landholdings 
and land-utilization and its accompanying body of privileges and obliga- 
tions. On the other are such more narrowly economic factors as new 
methods of cultivation, new crops, new markets and the general commer- 
cialization of agricultural activity. The two sets of influences operated 
conjointly; only in an analytical sense can they be separated. Moreover, the 
relative importance of each differs considerably from place to place and 

154 Approaches to Economic Development 

from time to time. Only a very broad, general view can overlook important 
local differences of timing and detail. For example, interest in agricultural 
improvement in France antedated the Revolution, but according to Her- 
bert Heaton it is difficult to judge how far a desire for improvement was 
carried over into practice. 1 

Agricultural Change in France 

Feudalism in agricultural production crumbled away gradually in 
Western Europe. In France, most of the feudal dues, tithes and obligations 
were summarily abolished during the Revolution. In the next few decades 
large holdings seem to have diminished; however, French agriculture, 
except in the north, was not well suited to large units of cultivation and the 
principle of equal inheritance operated also to keep the units small. Perhaps 
the most important change wrought in agriculture in France by the Revolu- 
tion was the sweeping away of the many restrictions on ownership and 
types of crops. 2 After the Revolution, anyone could own land or make a 
free contract for sharing the produce of land belonging to another. Many 
of the lands confiscated from the nobility and the Church were sold to 
members of the new aristocracy, who farmed them on shares or leased 
them at fixed money rentals. Commons were also broken up, though to a 
lesser extent than in England, and common pasturing after the harvest 
(vaine pdture) gradually disappeared. On the whole, the pattern of French 
agriculture was not dramatically and drastically changed by the Revolu- 
tion, but the changes left no doubt that the ancien regime had passed and 
that the French peasant was a free man. 3 

Agricultural Advances in Germany 

In Germany, the post-Napoleonic period saw many important shifts 
from a feudal type of organization in agriculture to a freer peasantry and 
more rational methods of land use. Though Frederick the Great (1740- 

1. Herbert Heaton, Economic History of Europe, revised edition, Harper, New York, 1948, p. 433. 

2. In pre-Revolutionary France there were numerous rules which sought to assure an adequate grain 
supply in each district. See J. H. Clapham, The Economic Development of France and Germany, 1815-1914, 
Cambridge University Press, Cambridge, 1921, p. 10 One writer has summed up the matter as follows: 
"If the Revolution of 1789 was essentially a peasant revolution, it was not a revolution of landless men to 
divide between themselves the land of those in possession, but a revolution of small owners who wanted both 
to round off their properties and, above all, to shake off the yoke which weighed on them. The principal 
effect of the Revolution was not to cause any considerable increase in the division of ownership, which was 
already a characteristic feature of the French countryside, nor to augment the number of properties to enor- 
mous proportions, but to liberate peasant property." H. Hauser, "The Characteristic Features of French 
Economic History from the Middle of the Sixteenth to the Middle of the Eighteenth Century," The Economic 
History Review, October 1933, pp. 271-72. 

3. Particularly in the south of France there was far less economic justification for any drastic changes in 
the kind and methods of cultivation in use at the time of the Revolution. The open-field system was found 
only in patches, but the crops raised vines, fruits, olives, etc. were usually not suited to such a system. 
Cf. Clapham, op. cit., p. 7. 

Development in Western Europe and Europe Overseas 155 

1786) had tried both to lighten the obligations of the peasants on his own 
estates and to foster improved methods of cultivation, the nobility and 
gentry gave him little support. Only after the disastrous defeat of the 
Prussians at Jena in 1806 did these privileged groups concede the necessity 
for reform. There followed the emancipation edicts of 1807-1808, which 
abolished personal serfdom, established freedom of choice of occupation 
and permitted land transfers between classes. 4 Adam Smith's doctrine of 
economic freedom was acknowledged to have merit as applied to agricul- 
ture; peasant protection and paternalism in economic affairs were in 
obvious decline. The edicts of 1807 were followed by others in 181 1, 1816 
and 1821. 

One feature of the Prussian reforms was that the seigneurs were com- 
pensated in land for the loss of their rights to receive dues. At the same 
time, the Prussian peasants got rather more protection, on the whole, than 
did their English cousins when common pastures and wastelands were 
broken up. Agricultural reforms seem to have been conducted with much 
greater attention to the "general welfare" of the people as a whole than in 
either England or France. 5 

The implications of these changes were not identical for all of Prussia, 
because the way in which agriculture was conducted east of the Elbe River 
differed fully as much from that of the west as did the relations between the 
peasants and their betters in the two areas. Broadly speaking, the emancipa- 
tion of the peasants had a shorter distance to go in west Prussia and 
western Germany than in the east, because more of the peasants were close 
to being freeholders and servitude was less onerous. Proximity to the Low 
Countries, where peasant ownership of land was customary well before 
1789, had somewhat strengthened the position of the peasants in the west; 
the French, during their stay, removed other restrictions. But even after the 
edicts, the peasants did little to abolish the common pasture and woodland 
because "common use was congenial to peasant habits and on the whole 
not uneconomical." 6 The peasants were not innovators by temperament. 

In the Prussian kingdom east of the Elbe Brandenburg, Silesia, Pomer- 
ania and the province of Prussia the landlord was more powerful and the 
emancipation tended to strengthen his economic position. Large units of 
operation were the rule well before the reforms. The estate owners had 
managed to bring much of the commons under their own control even 
before 1807. The reforms, however, increased the number of landless 
peasants in the east. As one writer put it, 

4. Before the edicts Prussia had a kind of caste system which required townsmen, nobles and peasants 
not to venture outside occupations reserved for their particular group. See Heaton, op. ctt. t p. 440 

5. See Witt Bowden, Michael Karpovich and Abbott Payson Usher, An Economic History of Europe since 
1750 1 American' Book Company, New York, 1937, pp. 27 Iff. 

6. Clapham, op. c//., p. 47. 

156 Approaches to Economic Development 

... the losses in land and money which were the price of this emancipation left 
great masses of peasants either landless or with so little land as to leave them only 
the choice between labouring on the estates and more substantial peasant holdings 
or seeking the industrial labour market of the towns, chiefly in the West. 7 

Harsh as some of these developments were, they nevertheless opened the 
way to more efficient agricultural production. As it had done earlier in 
England, large-scale, commercialized farming grew in importance in 
eastern Prussia after the edicts of reform. 8 

Feudalism Persisted Elsewhere 

The gradual disappearance of feudalism in agriculture in Europe after 
1815 was mainly confined to France, Prussia and northwestern Europe. In 
Sweden also, however, agricultural modernization went forward along 
familiar lines after 1815: wastelands were reclaimed; some men grown rich 
in commerce became landlords and operated their lands commercially, 
using more capital and better techniques. In the kingdom of the Nether- 
lands feudalism had disappeared long before. 

In Russia, the Iberian peninsula, central and southern Europe, including 
southern Italy, reforms came much later. Despite the ostensible freeing of 
the peasants in Russia in 1861, that country was essentially feudalistic until 
1905. In Spain, only the Spanish-American War seems to have brought a 
belated realization that the rest of Europe had changed during the preced- 
ing century. Romania abolished serfdom only in 1864, and in other parts 
of the Balkans some long-overdue land reforms occurred only after 1918. 
In terms of social outlook and agricultural practice Russia, central and 
southeastern Europe, Spain and southern Italy were underdeveloped areas 
until well toward the end of the nineteenth century. 

Innovations in Agricultural Practice 

The benign view that the European peasant, once freed from his feudal 
obligations and restrictions, rushed eagerly forward to adopt new ways and 
better practices of land utilization is palpably false. Peasants are cautious 
conservatives as a rule: their environment and outlook are hostile to 
change. If the changes in European agriculture after 1815 had had to draw 
their impetus directly from the emancipated peasants, the rate of progress 
would have been discouragingly slow. Other influences had to impinge 
from without to break down outmoded practices. It seems reasonable to 
suppose that similar generalizations are valid for Asiatic peasants or 

7. Carl Brinkmann, "The Place of Germany in the Economic History of the Nineteenth Century," The 
Economic History Review, April 1933, p. 132. 

8. Whether the long-term political consequences of strengthening the position of the east Prussian land- 
lords more than outweighed the gain in other directions is not examined here But see Alexander Gerschen- 
kron, Bread and Democracy In Germany, University of California Press, Berkeley, 1943. 

Development in Western Europe and Europe Overseas 157 

Middle Eastern peasants today. Merely to relieve them of the dominance of 
landlords or moneylenders is not to assure progress in agriculture. Prob- 
ably lectures, demonstrations and exhortations will not suffice to do the job 
either, unless they are supplemented by the pressure of the market in 
combination with high rewards to a few aggressive innovators who serve as 

Broadly speaking, two influences were of dominant importance in 
modernizing European agriculture once the old restrictions and stifling 
restraints were lifted. The first of these was the compelling force of the 
changing markets for agricultural products joined with an insistence from 
certain quarters outside the peasantry that agriculture be modernized. 
The second was the introduction of new techniques and the appearance of 
certain previously unfamiliar crops, the cultivation of which required a 
fresh approach to production problems. These two influences of course 
acted and reacted on each other so as to be often indistinguishable. 
Nevertheless, they are separable analytically. 

New Crops and Methods 

Between the appearance of new techniques and new crops and their 
general acceptance and use, there was typically an appreciable lag. For 
example, in France, Parmentier had tried unsuccessfully to introduce pota- 
toes during the reign of Louis XVI. Potatoes were long regarded as 
poisonous and they were apparently considered an inferior food, as com- 
pared with rye and wheat, all through the Napoleonic period. But by 1850 
their use was widespread, partly, it appears, because they were found 
suitable for cultivation along with turnips and grasses in land previously 
fallowed or left as waste. In Germany, perhaps because soils were more 
favorable and the people poorer, the potato was more quickly accepted as a 
basic food. "By 1815," Clapham says, "it was grown everywhere, east and 
west, by squire and peasant; and within a few years spirit was being dis- 
tilled from it extensively." 9 

The continental blockade gave the impetus to the introduction of sugar 
beets in France, especially in Flanders, the Pas de Calais and Somme 
regions. In Germany the big extension of sugar beets came only in the 
1830s, after the depressed period in agriculture following the defeat of 
Napoleon. From the point of view of agricultural progress, the sugar beet 
had salutary effects. Its cultivation demanded more careful planting than 
broadside sowing; the land had to be more deeply plowed; and after the 
sugar had been extracted, the pulp was good fodder. These advantages 
were most fully exploited in eastern Prussia where beet cultivation led to 

9. Clapham, op. c//., p. 51. 

158 Approaches to Economic Development 

substantial improvements in agricultural implements and to a more scien- 
tific approach to agricultural problems. 10 

The new agricultural products were by no means limited to edible foods. 
Both in France and in Germany, the wool yield was improved by introduc- 
ing merino sheep, although this had begun in France before 1789. The out- 
put of silk also expanded greatly in France under official stimulation 
between 1815 and 1850. In Germany linseed, rape and other oil seeds came 
into active production. 

An adequate discussion of the progress of these newer crops and newer 
techniques in Western Europe would require many pages. From the eco- 
nomic point of view, they suggest more intensive and more careful land 
utilization, more variety and specialization in production, more skillful 
management and, not least in importance, a greater tendency to subject 
agriculture to the economic calculus of costs and returns. Before 1850, 
however, and before the coming of the railways, such practices did not 
become general among the peasants in Western Europe despite official 
sponsorship and some enthusiastic pioneers. How did these new attitudes 
come about and how were they infused into agricultural practice? 

In both France and Germany, the government pushed vigorously for 
agricultural progress. In both countries, too, there were aggressive men who 
were ready to try better methods and anxious to secure better returns. But 
in Germany, the government's methods were generally more successful be- 
cause, first, the east Prussian squires formed a more numerous group of 
ingenious, commercially minded men with whom to work, and, second, 
these men had large estates with hired laborers and so could experiment 
with new crops and methods. In France, and also in southwestern Ger- 
many, the small farms were owned and operated by peasants with a peasant 
outlook who were less easily converted to new crops or new methods. The 
French authorities thus found it harder to stimulate progress in agriculture, 
although, on the technical side, probably fewer changes were needed. From 
the point of view of the now underdeveloped areas, therefore, the German 
program carries greater interest. 

Roots of German Agricultural Change 

The modernization of agriculture in Prussia in the nineteenth century had 
its roots in the efforts of Frederick the Great and the considerable interest 
in English farming methods generated during his reign crop rotation, 
enclosures, more scientific methods of approach, and so on. But not until 
after the humiliating defeat of the Prussians at Jena in 1806 did the king 

10. Beet sugar production in France up to 1850 is said to have rarely exceeded 50,000 tons annually. Ibid.. 
p. 26. Perhaps the production of cane sugar in the French colonies was partially responsible for this slow 
advance in France proper, compared with Germany, but the application of comparative cost principles was 
probably the main reason. 

Development in Western Europe and Europe Overseas 159 

grant authority to the administrative departments to make substantive 
changes. 11 There then followed a whole series of legal changes extending to 

Once the legal framework was modified, the economic factors could 
exert their influence. The high prices and expanded production that were 
characteristic of the Napoleonic period were followed by a severe slump 
in the 1820s. But recovery was not long delayed, as both home and foreign 
markets expanded for grain, wool, sugar and potatoes. All these products 
except grain were relatively new in the Prussian provinces east of the Elbe, 
and their production both increased and became more efficient. The num- 
ber of sheep in the province of Prussia more than doubled between 1816 
and 1837, according to Heaton. Wool exports to Great Britain rose from 
5 million pounds in 1820 to 32 million in 1836. 12 

For the most part, it was the large, commercially minded landlords who 
tried the new crops and pushed their production. They formed agricultural 
societies; they held cattle shows; they patronized touring exhibits of farm 
implements and machinery; they learned about drainage and fertilizers; 
and they even studied bookkeeping. Moreover, they had capital with which 
to apply what they learned. In the 1830s and after, Liebig and Wohler 
brought their researches in organic chemistry to bear upon the complex 
problems of plant growth. Though their findings were subsequently modi- 
fied by further researches, it is significant that their work appeared in 
Germany during a period of feverish interest in agricultural progress. 13 But 
what kept this interest alive and vigorous was probably the fact that mar- 
kets were good and that astute squires would be well repaid for being 
knowledgeable and efficient. By 1840, it is said, even the peasants east of 
the Elbe were beginning to comprehend scientific crop rotation. 14 

Thus, in Germany it would appear that the government helped to pave 
the way for agricultural progress by cutting away feudal restrictions and 
obligations; the larger estate owners saw the opportunities afforded by 
bigger markets, new crops and improved techniques and made the most of 
them; and these conditions together established a situation in which gov- 
ernment officials, estate owners and university scientists collaborated to 
carry progress still further. All three factors appear to have been important 

11. Frederick the Great had built up an efficient and enlightened administration. Some of the leaders and 
department heads had studied English farming methods and tried to relate them to the widely varying condi- 
tions throughout the Prussian kingdom. Consequently after Jena it was not necessary to start from the begin- 
ning and consider what was to be done and how it was to be put into effect. Much of this groundwork had 
already been done. What was needed mainly was the authority to proceed. This came with the recall of Baron 
von Stein as minister in 1807. The Edict of 1807 was published eight days after his recall on October 9. See 
Bowden, Karpovich and Usher, op. cit., pp. 271/7*. 

12. Heaton, op. cit., p. 443. 

13. See Bowden, Karpovich and Usher, op. cit., pp. 283-87. Ironically, Liebig did some of his early work 
in Paris and Wohler in Sweden. 

14. Clapham, op. cit., p. 52. 

160 Approaches to Economic Development 

in getting agricultural progress under way and keeping it moving forward. 
In a very real sense, it was a cooperative achievement. The Landschaft for 
making mortgage loans on land and the Raiffeisen cooperative credit banks 
were only material manifestations of a cooperative effort which was much 
broader and deeper. 


Industry, as loosely contrasted with agriculture, was of course far from 
nonexistent in Europe before 1789, and it did not lack its advocates and 
sponsors in high authority. Frederick the Great not only continued the 
protective system begun by his father but fostered and subsidized the pro- 
duction of woolens, satins, leather goods and even iron and sugar. Peter the 
Great (1682-1725) tried to "Europeanize" Russia after he had seen for 
himself, in Holland, England, Austria and Italy, how backward industry 
was in his own country. In France, from Colbert to Turgot, many efforts 
were made to promote industry, but other policies were at times econom- 
ically disastrous, as in the case of the expulsion of the enterprising 

European Industry before 1800 

An emphasis on industry and a desire to see it flourish in Europe well 
antedated Napoleon. But what was implied by "industry," as against agri- 
culture, in the seventeenth and eighteenth centuries was something rather 
different from what the term came to mean during the nineteenth century. 
Early industry was handicraft work, with some specialization and even 
with some persons who can only be called "capitalists." Essentially, it 
consisted in the production of wearing apparel of cloth or leather, the 
simple tools needed in agricultural production at the time, and all those 
activities necessary to provide the nobles and clergy with those amenities 
and appurtenances of living characteristic of a stratified society based on 
agriculture. And then finally there were those industries that could rightly 
be regarded as indispensable to the army or navy. All such "industry," 
however, differed appreciably from industry in the modern sense of the 
term: the workers were not factory laborers using machinery to make 
goods for a wide market. Until well into the nineteenth century in most of 
Western Europe industry meant workers in arts and crafts catering to the 
few or furnishing locally a few bare necessities to the poor and humble. 

All this was to change in the course of the nineteenth century. The full 
story of that transition cannot be undertaken here, but some few of its 
salient features seem so pertinent to the present-day problem of develop- 
ment, from the point of view of holding back or moving forward the 
modernization of industry, that they must be mentioned. 

Development in Western Europe and Europe Overseas 161 

The State and Industrial Development 

The state played a greater role in industrial progress in continental 
Europe than it had earlier in England. The reasons are many, but three 
particularly seem worthy of mention. 

First, the governments and statesmen of Europe after 1815 were rarely 
able to separate the development of industry from problems of politics. 
Consequently, their concern for industry was usually linked with their 
determination to make their particular nations politically powerful. For 
some countries France, for instance this meant protecting and bolster- 
ing what strengths the country had already achieved. For others, like 
Germany, it meant trying to create what had not previously existed and 
weakening foreign industry if possible. Different countries followed differ- 
ent policies to try to reach closely similar ends. 

Second, continental European countries tried to match quickly or sur- 
pass England's industrial success, without undergoing either the social 
upheavals or the weakening of domestic agriculture that England had 
experienced. The national state therefore had to bear some of the costs of 
moving ahead more rapidly than private initiative would have done and 
of protecting those interests that private enterprise would not have included 
in its reckoning. 

Thirdand this may be more questionable most Western European 
countries in the early nineteenth century appear to have lacked entrepre- 
neurs and capitalists in sufficient numbers and with" sufficient energy and 
aggressiveness to achieve an "industrial revolution" on their own. 15 Conse- 
quently, government played the role of entrepreneur and capitalist more 
than in England. 

The Case of Germany 

All these influences are apparent in the nineteenth-century economic 
history of Germany. The Zollverein (customs union), established under 
Prussian sponsorship in 1834, finally cleared away a tangle of trade restric- 
tions, taxes and other regulations which inhibited commerce and choked 
industry. But it represented also the triumph of Prussian efforts since Stein 
to unify Germany under Prussian leadership. The customs union of 1834 
was preceded by the important Prussian tariff act of 1818, which made 
customs and excise duties uniform throughout the Prussian kingdom and 
applied to transit trade as well. The political map of Germany at the time 
made these transit duties exceedingly burdensome for the smaller states 

15. Holland was more nearly comparable to England in this respect than any other European country, 
but the nature of her resources as well as political developments afforded her relatively little opportunity 
to develop industrially in the early nineteenth century. What is now Belgium was separated from France in 
1815 and given to Holland. Belgium did develop rapidly in industry after 1815, but in 1830 it became an 
independent country. Moreover, many Dutch migrated to Germany. 

162 Approaches to Economic Development 

contiguous to Prussia and this was a powerful factor in bringing them to 
accept Prussian proposals. 10 

The Zollverein, however, according to Friedrich List (1789-1846), was a 
"Siamese twin" of the German railways. At any rate, in 1838 Prussia 
announced that it would willingly foster railroad construction by bond 
purchases and interest guarantees and by granting monopolies; in 1848, 
mainly for military reasons, the state itself began construction of a line 
from Berlin to the Russian border. Although the lines were often built 
cheaply and with little regard to providing really fast transport, "this 
service had far-reaching effects in tying town and country together, foster- 
ing interregional exchange of goods, stimulating industry, and encouraging 
commercial farming." 17 The preceding chapter has already analyzed and 
stressed the pervasive effects of improved transport upon development. In 
industry proper in the modern sense, German progress was slow and uncer- 
tain until after 1850. As late as 1871 Germany had only eight cities with 
more than one hundred thousand population and nearly two thirds of the 
German population was still engaged in agriculture. 18 

Some steps toward industrial development that antedated 1850 are of 
interest. In 1821, the Prussian government set up the Gewerbe Institut to 
make available knowledge of new processes and developments in technol- 
ogy and to encourage their adoption. In the early stages, German industry 
mainly applied methods that had already proved successful in England. 
The customs union and the tariff afforded a good home market for develop- 
ing industries. Significantly, the cotton and silk industries both of which 
used imported raw materials were modernized more easily and rapidly 
than such traditional German industries as woolens and linens. By 1850, 
Germany supplied about half her own needs for cotton yarn for weaving. 

Coal output was not large until after 1845, because it required the cheap 
transport provided by river steamers and railways. The iron industry was 
also unimportant until after 1850; steel, of course, came much later. Mod- 
ern German industry, indeed, flowered to the full only after the establish- 
ment of the empire in 1864 and the annexation of Alsace-Lorraine in 1870. 
The advances in coal and iron before 1850 were striking in terms of per- 
centage increases, although small in absolute quantities. In Prussia, for 
example, output of coal and lignite amounted to 1.7 million tons in 1831, 
3.0 million in 1839 and 4.6 million in 1845; but in 1861 it reached 12.8 
million tons. The period of greatest expansion was 1849-1857, when coal 
output increased at an average rate of approximately 1 1 per cent a year. 10 

16. For a brief account of the developments leading up to the Zollverein of 1834 see Bowden, Karpovich 
and Usher, op. ciV., pp. 331-40. 

17. Beaton, op. cff., p. 531, on which this account of German railway development is largely based. 

18. See Melvin M. Knight, Harry Elmer Barnes and Felix Flugel, Economic History of Europe, Houghton 
Mifflin, Boston, 1928, p. 529. 

19. See Bowden, Karpovich and Usher, op. c/f., pp. 470-71. 

Development in Western Europe and Europe Overseas 163 

The important steps in development had been taken before 1864, how- 
ever, with establishment of the Zollverein, removal of restrictions on choice 
of occupation, agricultural improvements, a start on railway construction, 
and the formulation of a government policy designed to stimulate and 
promote industry in many directions. 20 How important these positive 
efforts of the government directly to promote economic development were, 
in comparison with the significant emphasis on general and scientific educa- 
tion, is a matter of dispute. J. B. Condliffe, for example, has insisted that 
the fact that Germany provided "both general and technical education for 
the masses of the people, earlier and more adequately than did the govern- 
ments of other countries," was more important in her industrial develop- 
ment than state aid and tariff protection. 21 In any case the combination 
appears to have been notably effective. 

French Efforts at Industrialization 

The course of French economic progress outside agriculture after 1815 
has features that puzzle anyone interested in development problems and 
policy. France is said to have been the leading industrial nation of Europe 
just before the 1789 revolution 22 and certainly many changes occurred 
between 1789 and 1815 which would seem to have been helpful to industry. 
Yet neither in comparison with the pace of development elsewhere nor in 
terms of relative efficiency in particular industries were France's industrial 
achievements down to 1850 impressive. In very general terms, and apart 
from the Revolution itself and its aftermath, the explanation may, perhaps, 
be a combination of the following factors: the humiliation of Waterloo; the 
severance of Belgium from France; the delay in commercialization of agri- 
culture until after the construction of railways; a protectionism which 
tended to guard what already existed rather than to foster the new and 
promising; a dearth of aggressive entrepreneurs; and last, a national 
economic policy that wavered between conciliating conflicting sectional 
interests and trying to restore France's former greatness by giving her a 
strong industrial economy. These features were of varying importance in 
the several segments of the French economy outside agriculture; their inter- 
action seems to have been responsible for the end result. A few illustrations 

20. Friednch List played an active part in the formulation of ideas bearing on the industrial development 
of Germany. He argued strongly in favor of the protectionist policy for German industry until it could com- 
pete on even terms with English industry. His American sojourn impressed upon him the great importance 
of good transport, especially railways, and he pressed vigorously for railway construction in Germany and 
mapped out many of the routes. Perhaps most important of all, he emphasized, as against the Manchester 
school of economists, the powerful role which wise government policy could play in accelerating sound 
economic development. 

21. J. B. Condliffe, The Commerce of Nations, Norton, New York, 1950, p 280; the argument is developed 
in ibid., pp. 273-81. 

22. See Bowden, Karpovich and Usher, op. cit., pp. 477/7. 

164 Approaches to Economic Development 

drawn from industry and transport lend support to these broad generaliza- 

Examples of French Policy 

In textiles wool, linen and silk there had been a long tradition, dating 
from the time of Colbert, of rules and restrictions to promote stability and 
discourage innovation. But the new English processes and techniques were 
primarily in cottons, which afforded a cheaper product with a potential 
mass market. France had the choice of shifting over to cottons or protecting 
the textile industries she had already established. She chose to bolster what 
she had by imposing virtually prohibitive duties on imported textiles. 

In iron manufactures, France, with no shortage of charcoal as in Eng- 
land, found no immediate need, for domestic reasons, to go over to the 
newer techniques which used coal. But the iron manufacturers demanded 
and got highly protective import duties against the cheaper English 
products. When the railways had to be built, the French iron industry was 
not equipped to supply the necessary rolled products and large castings. 
Again, protection did not promote technical progress, but merely preserved 
outmoded practices in established industry. 

France also lagged behind her neighbors in coal production. In 1840, 
Great Britain produced ten times as much coal as France and both Belgium 
and Prussia produced more than France's 3 million tons. 23 Doubtless 
French coal production would have moved ahead more rapidly if France 
had not lost Belgium in 1815. However, the Belgian deposits in the 
Valenciennes field were extensively developed long before the French de- 
posits though, allegedly, the exploitation of the deposits on the French 
side of the border encountered certain technical obstacles not present on 
the Belgian side. 

French Railways 

The industrial progress of France quickened with the coming of the rail- 
ways, but they, too, were delayed in comparison with those of other coun- 
tries. Partly, this seems to have been because French roads were better than 
most European roads and because France had done much to improve river 
navigation and canals. But there was another reason. Heaton puts it this 
way: "As ministries changed frequently, policy changed abruptly, and 
meanwhile the bureaucrats who were in charge of inland transportation 
were skeptics, quick to see problems and difficulties but slow to find 
solutions." 24 

23. Bowden, Karpovich and Usher, op. c/7., p. 451. The paragraphs immediately preceding have drawn 
heavily from Chapter 22 of this work. 

24. Heaton, op. cit., p. 529. 

Development in Western Europe and Europe Overseas 165 

The Liverpool-Manchester railway was opened in 1830; yet only in 1842 
did France pass an "organic law" for railways. 25 Although some lines of a 
few miles had been built earlier for example, from Lyon to St. fetienne 
the first important line was the Paris-Rouen railway, which was opened in 
1843 and was extended to Le Havre in 1846. But this line was conceived, 
financed and built by Englishmen. 26 Despite the speculative aura which 
surrounded the undertaking, other lines might have been built with English 
capital had not the revolution of 1 848 brought such schemes to an abrupt 
halt. As matters worked out, the basic plan of the 1842 law which com- 
bined public and private enterprise in construction and finance with the 
principle of regional monopolies was the policy actually followed. After 
1850, French railway construction went ahead rapidly until a crisis de- 
veloped in 1857. The financial difficulties then besetting the companies led 
the French government in 1859 to make new agreements with the com- 
panies, by which they were guaranteed interest charges on new construction 
costs, so that the railway network contemplated in the 1 842 law could be 
constructed. By 1870, most of the principal lines of the French railway 
network were completed. 27 

Industrialization Elsewhere in Europe 

If space permitted, it would be useful to trace the economic development 
of the rest of Europe. Yet, apart from Belgium, which forged ahead rapidly 
after it was transferred from French to Dutch control in 1815 and even 
more rapidly after it became independent in 1830, these other European 
countries generally did not develop industrially until after 1870. 

Belgium, after being joined with Holland, was fortunate in having Dutch 
capital and enterprise flow into manufacturing and commerce. Linens, 
cottons, woolens, leather, hardware and coal were among the important 
exports. After gaining her independence, Belgium began to build railways 
rapidly according to a plan formulated as early as 1834. Some of these were 
constructed and partly financed by English firms. At the same time, she 
used her roads and canals to serve western Germany and central Europe 

25. Although there wete proposals for railways in France as early as 1835, and others before 1842, the 
projects bogged down in debate over the issue of state ownership. The 1842 law was comprehensive and pro- 
vided for a joint effort by the state and private companies: the state was to acquire the land and to construct 
the roadbed, together with tunnels and bridges; the companies were to provide the rolling stock, operate the 
trackage on a lease from the government and manage the undertaking. A later law of 1845, granting the 
charter for a line from Pans to Belgium, spelled out these policies in detail and became the pattern for later 
charters. See Bowden, Karpovich and Usher, op. ut , pp. 528/7*. 

26. For an account of this venture and subsequent efforts of British financiers in French railway construc- 
tion see Leland Hamilton Jenks, The Migration of British Capital to 1875, Knopf, New York, 1927, pp. 140/f 

27. On the financial side the principles of the law of 1842, and the further state assistance provided by the 
1859 agreements, did not work out satisfactorily for the French government. After 1870 the state had to 
build lines at Us own expense to round out the system, and in 1883 the state undertook to guarantee a return 
to bondholders and shareholders. In 1938 the government nationalized the system. See Heaton, op. cit., 
p. 529. 

166 Approaches to Economic Development 

commercially. In cotton textiles, Belgium early adopted English methods. 
To find out just why Belgium spurted ahead as it did after 1815 would 
require more analysis than is possible here. However, the presence of a 
powerful entrepreneurial class in a small country with relatively superior 
transport facilities, combined with enlightened government policy, appears 
to have had much to do with the country's rapid development. 28 

Each country possessed its own special characteristics geographical, 
political and historical and these helped shape its economic development. 
Generally speaking, modernization and industrialization came sooner to 
European countries that were close to the centers of development than to 
those that were more remote. Scandinavia, for example, went ahead more 
rapidly than did the Balkan portion of Austria-Hungary. Italy could make 
little progress until it was unified and better governed. Even then it was 
handicapped, as were other countries, by having no coal and iron. The 
Iberian peninsula remains economically backward even today. Yet, geo- 
graphical remoteness or lack of coal and iron do not wholly explain the 
levels of economic achievement attained in the various European countries 
by, say, 1900. Past history, public policy, the "character" of the people, 
chance factors and much else appear to play a part in the development 

Perhaps no single factor has been more important in breaking down 
isolation and planting the seeds of economic change than improvements in 
transport and communication. The effects of such improvements are so 
pervasive and their influence so fundamental that it is not easy to exag- 
gerate their importance. Consequently, one way of getting a quick impres- 
sion of the advances in the European economy during the last half of the 
nineteenth century is to compare railway maps of Europe in 1848 and in 
1877. 29 (See Figure 4.) The results in terms of industrial production in 
France and Germany are shown graphically in Figure 5. 

28. For a brief account of Belgian economic development after 1815 see Knight, Barnes and Flugel, 
op. at., pp. 673-76. 

29. For those who find statistical tabulations easier to interpret than maps, the following figures may be 

Railway Mileage 

1840 1860 1880 

United Kingdom 840 10,430 17,930 

France 260 5,860 16,260 

Prussia 290 6,890 20,750 

Austria-Hungary 290 3,200 11,470 

European Russia 20 990 14,820 

Rest of Europe 230 4.870 23,350 

Total Europe 1,930 32,240 104,580 

United State* 3,320 30,590 90,560 

Adapted from Melvin M. Knight, Introduction to Modern Economic History (processed), Berkeley, 1940, 
p. 140. 


Source /'Varian Fry, Uriels without Mortar (Headline Series), Foreign Policy Association, 1938. 



Approaches to Economic Development 








1860 1870 1880 1890 1900 1910 1920 19 1940 


Source: Carl Snydcr, "Measures of Industrial Growth and Their Significance," in Beitrage zur Konjunk- 
turlehre, Hanseatische Verlagsanstalt, 1936. 


The economic developments in England and Western Europe in the 
nineteenth century were accompanied by a remarkable growth in the eco- 
nomic relations of these countries with the rest of the world. This is not to 

Development in Western Europe and Europe Overseas 169 

play down the importance of overseas commerce by the English, Dutch, 
French, Spanish and Portuguese in the sixteenth, seventeenth and eight- 
eenth centuries. But the twentyfold increase in the value of world trade 
between 1815 and 1914 was something unique. The new situation gave 
meaning to the term "world economy" the phrase commonly used to 
describe it after its disintegration was far advanced. The main features of 
the development are so well known that attention need be given here to 
only one or two aspects of this "reaching out" of the developing European 
economy to less developed areas. 

Technical progress was of fundamental importance to this expansion. 
The growing intimacy and variety of the economic relations between 
Europe and the outside world would have been quite impossible without 
the improvements in transport and communication achieved during the 
nineteenth century. Improved sailing vessels and the steamship dramati- 
cally cut the costs, time and risks of moving cargoes and passengers by sea. 
These advances in sea transport would have been much less far-reaching, 
however, if there had not also been improvements in port facilities and in 
land transport by railway and canal. The Argentine pampas and the plains 
of Kansas were no better suited climatically for wheat production in 1880 
than they were in 1750; but by the late nineteenth century their wheat could 
be brought to Manchester or to Frankfurt at a cost that made it salable. 

Investment and Migration Abroad 

To achieve this result, the European economy, and Britain especially, had 
to invest heavily in transport and ancillary facilities in the overseas areas. 
The people of these areas lacked either the financial resources or the tech- 
nical skills, or both, to develop transport and communication. The capital 
and technical assistance could come only from the more economically 
advanced European countries. As one writer has described it, "Everywhere 
it was the same story of the rail pushing over ground hitherto trodden only 
by hunters, explorers and nomadic savages, and carrying labour and capital 
to the exploitation of corn lands and pasture lands, wealth-yielding forests, 
and mining areas previously unworkable." 30 In all this, England, the first 
country to develop industrially, took the lead. 31 Her victory in the war 
against Napoleon "confirmed and extended the earlier imperial victories. 
Britain emerged with a special set of trade relations with India and most 
of the Western Hemisphere that were virtually monopolistic in their 
effect." 32 

30. James A. Williamson, A Shoit Hi\torv of British E\/)an\ion, 2d edition, Vol II, Macnullan, London, 
1930, p. 167 

31. See Chapter 7, pp. 143-46 

32. W. W. Rostow, The Process of Economic Growth, Norton, New York, 1952, p 159. 

170 Approaches to Economic Development 

It would be wrong to suppose that these achievements were made pos- 
sible by the mere investment of profit-seeking funds on private account. It 
took also a vast migration of people and the active, frequently forcible, 
intervention of the authority of the European nation-states. 33 Without both 
these factors the private capital doubtless would never have been com- 
mitted or, if it had been, it would frequently have failed to achieve its 

Government Aid to Overseas Expansion 

The role of European governments in the nineteenth century in opening 
up non-European areas and initiating changes in the use of their particular 
economic resources is a large subject. 34 To some people, the whole story is 
one of sordid exploitation of subject peoples, summed up in the scornful 
epithet "imperialism." To others, it is the record of how the miserable lot 
of most of mankind was made less wretched than before. Regardless of 
which of the many shades of these two opposing views one accepts, 
European governments undeniably played an indispensable role in making 
private investments both possible and productive in these overseas areas. 

This role was apparently dual. On the one hand, the authority of these 
governments made entry into overseas areas possible and assured personal 
protection to their nationals in their economic pursuits. On the other, 
government funds supplied whatever capital was necessary as "social over- 
head," either to make the area habitable for Europeans or to assure the 
productivity of investments in mines, plantations, warehouses and other 

In the early stages, the contribution of government was preponderantly 
that of opening the way and establishing a semblance of internal order. 
Later on, the costs of health services, public works, public administration, 
etc., became more important. The essential point is that these were neces- 
sary outlays, for without them the private investments which did so much 
directly to bring about the astounding growth of production and trade in 
the nineteenth century would have been largely abortive. If they were often 

33. Humanitarian sentiment and the missionary movement played an important part, especially after the 
ate eighteenth century. A hatred of oppression and a sense of duty to people less economically and politically 

developed were sincerely felt by men like William Wilberforce, who agitated for the abolition of the slave 
trade before the French Revolution broke out in 1789. The London Missionary Society was formed in 1795. 

34. Many important non-European areas came under European influence only in the nineteenth century. 
In 1785 British rule in India was largely confined to Bengal and some hinterland of the ports of Bombay and 
Madras. British rule did not become fairly extensive until 1850 and it was threatened by revolt in 1857. 
Singapore came under British control in 1824 Although the British had traded with China at Canton in the 
late seventeenth century, the notorious "treaty ports" with their extraterritorial privileges for Europeans 
were opened only in 1842. Japan's connection with the West came mostly after 1860. France completed its 
efforts to control Cochin-China only in 1868. 

If one remembers that the Monroe Doctrine was given formal expression only in 1823, that the partition 
of Africa by the European powers occurred after 1870, and that the Suez Canal was opened in 1869, one 
begins to realize how much of the world's surface came under European influence during the nineteenth 
century. For a fascinating account of the growth of the British Empire over the globe see Williamson, op. cit. 

Development in Western Europe and Europe Overseas 171 

made as much in the vainglory of empire building as from a calculation of 
their prospective over-all economic returns, that is immaterial. They had to 
be made if the area was to have any economic significance. They were, in 
fact, made as public, not private, commitments. One of the most crucial 
problems in many underdeveloped areas today is how to finance the large 
capital investments in "social overhead" requisite to the achievement of 
their economic aspirations, now that the metropolitan powers have with- 

Migration of People 

Probably as important as the overseas investment of European public 
and private capital in bringing the outlying regions into a world economy 
centered in Western Europe was the actual migration of many Europeans 
to these regions. These people brought the technical knowledge and spe- 
cialized skills that gave the investment funds their productivity potential. 
To be sure, the outsiders frequently assumed privileges that still rankle; but 
their services were indispensable to the growth of production and the flow 
of trade in these areas. The search for an alternative means of providing 
comparable specialized abilities in the underdeveloped areas continues 
today, notwithstanding technical assistance programs. 

Thus the extension of the European economy into overseas areas in the 
nineteenth century involved more than the obvious and important growth 
of commerce and trade. This was the result. Beneath this obvious achieve- 
ment lay a complex and shifting pattern of combined private and public 
investment in far-off places to which European specialists migrated in large 
numbers. That the whole episode benefited the average Western European 
is undeniable. As for the others at the fringes of the trade network the 
people in those regions that now constitute some of the most important 
underdeveloped areas there is room for question. 


The course of economic progress in France and Germany after England 
had pointed the way is illuminating for the whole problem of economic 
development. The experience of the two countries suggests the difference 
between creating an environment which, in a negative sense, is conducive to 
development because it is relatively free from hampering restrictions and pos- 
itively interjecting into such an environment factors which directly effectuate 
progress even though people in general are content to let well enough alone. 35 

35. While the present work is in press there comes to hand a valuable new study. W. O. Henderson, 
Britain and Industrial Euiope, 1750-1870, University Press, Liverpool, 1954. Henderson stresses and vividly 
illustrates, by numerous specific examples, how large a role British entrepreneurs and skilled workmen 
played in Western European economic development in its early stages. This tact, we think, could have been 
more stressed in the text above than it was. 

172 Approaches to Economic Development 

For example, both French agriculture after 1800 and Prussian agriculture 
after 1821 were no longer checked by confining regulations. But a peasantry 
freed from its shackles does not at once leap forward to adopt new tech- 
niques or to devise novel methods: more often than not, the peasant's 
attitude is one of husbandry and caution frosted over with rote and tradi- 
tion. Rapid progress requires a catalyst. In Germany, the combination of 
entrepreneurially minded landlords and the introduction of such new crops 
as sugar beets and potatoes initiated an agricultural revolution, even 
though it also made hired laborers out of many peasants by making them 
landless. As improved transport opened wider markets at home and abroad, 
these agricultural changes picked up momentum and extended their scope. 
France apparently lacked an entrepreneurial class of comparable vigor, 
with the result that, even though the restrictions were removed earlier than 
in Germany, the farming methods and types of crops in French agriculture 
changed very little. Only with the coming of the railways in the 1850s and 
later did the peasant cultivators appreciably change their practices. The 
railways upset price relationships because they widened markets and 
thereby extended the area of competition. The peasants had change and 
improvement forced upon them. The evidence suggests, therefore, that 
merely abolishing hampering restrictions in a peasant economy will not in 
itself much affect agricultural practice or productivity. 

Stimulus of New Crops and Products 

It would seem also that in both agriculture and industry, technical 
progress moves more rapidly with "new" crops, with products using "new" 
raw materials, and in "new" environments in the broadest sense. Well- 
established industries or crops long cultivated tend to impede progress 
because the people who labor in them gradually build up a complex of 
institutionalized practices, traditional beliefs and self-protective behavior 
patterns which repel innovation and resist change. It is a striking fact that 
in textiles the important technical advances and price declines came not in 
woolens or linens traditionally important industries in England, France 
and Germany for centuries past but in cottons, a minor industry using an 
imported raw material. Similarly, discovering the best way to cultivate 
sugar beets or potatoes could be considered as a practical problem in ways 
and means uncomplicated by pre-existing folklore. 

The development process is also likely to proceed more rapidly if new 
groups can assume control, either through the entrance of migrants from 
outside the region or through shifts in economic or political power. The 
new bourgeoisie in France, for example, who acquired much of the land 
confiscated from the nobles, were scarcely more "market conscious" in 
their attitude toward their absentee holdings than the courtiers of Louis XVI 

Development in Western Europe and Europe Overseas 173 

from whom the lands had been taken. Thus agricultural progress lagged in 
France until after the railroads came and forced changes. 

Role of Government 

The role of the state in stimulating and guiding economic progress, as 
exemplified by Germany and France in the first half of the nineteenth 
century, is decidedly varied. Certainly good will and good intentions are 
not enough. The Zollverein and railway development together apparently 
did much to forward economic development in Germany. Protectionism in 
France, however, seems to have fostered no new industries, but merely 
sheltered vested interests against the superior efficiency of industry abroad. 
In retrospect, this protectionism appears to have served as a delaying 
action in circumstances where delay was exceedingly costly in the longer 
run. Perhaps, also, France and Germany illustrate the pervasive and pro- 
found effectiveness of improved transport and communication in destroy- 
ing isolationism and spreading new ideas and practices by making possible 
a national price system which links all of the parts of the economy together. 
Goods move. Ideas spread about. People migrate. And these factors com- 
bine to lift the level of economic achievement and keep it moving upward. 
Consequently, if it appears that no private groups are likely to modernize 
transport and communications as they did in England, for example then 
perhaps a wise government, intent upon developing the national economy, 
should concentrate first on transport and communications. 

These impressions are offered in a tentative fashion. Drawing "lessons" 
from history is fraught with the danger of self-delusion, but the pastime 
will probably never lose its fascination since man is constantly forced to 
make choices between alternative policies affecting his uncertain future. 

Importance of Overseas Areas 

How important the access to overseas areas was in the economic develop- 
ment of Western Europe is not easy to decide. Certainly, without the re- 
markable technical improvements in transport and ancillary facilities it 
would have been impossible for the raw materials and supplies from over- 
seas to have been furnished to the expanding economies in Western Europe. 
Cotton textiles in which so much early industrialization centered de- 
pended on a raw material which was not produced in Europe. But it was 
not enough merely to "get in touch" with these distant areas; this had 
indeed already happened in the seventeenth century. Before raw material 
supplies could be drawn from them much capital had to be invested on 
private and public account and many people with the requisite technical 
and organizational skills had to migrate abroad. Capital and technical 
assistance came from without, and here the role of governments appears 

174 Approaches to Economic Development 

to have been much larger than casual observation might suggest. Whether 
these ventures into overseas areas "paid," in the sense that they yielded net 
returns to the metropolitan economies from which they came, is an open 
question. But at least the gross returns from overseas areas contributed 
appreciably to economic development in Western Europe and often gave 
particular national economies much of their individual form and content. 
The foregoing discussion has no more than sketched the early stages of 
the development process in England and Western Europe, a limited geo- 
graphical area. Yet it was the kind of process that seems to have been 
repeated, though not without important differences, by most of the coun- 
tries that modernized their economies in the nineteenth century on the 
principles of the price system and predominantly private initiative. Japan 
and the U.S.S.R. have since joined the list of industrialized countries by 
converting their economies from a primarily agricultural base to one resting 
heavily on industry. Their development, however, followed different pat- 
terns, which now need to be examined. 

9. The Economic Development of Japan: 1868-1914 

JAPAN AND THE U.S.S.R. ARE OUTSTANDING examples of countries that have 
deliberately converted their economies from a predominantly agricultural 
base to a heavily industrial one. Because it has occurred so recently, the 
economic development of these two countries may throw more light on the 
problems of the underdeveloped areas than the earlier experiences of Eng- 
land and Western Europe. 

Japan's drive toward industrialization did not get under way until after 
the middle of the nineteenth century. Historians usually divide Japanese 
history into three periods. The first is the period of autocracy from 660 B.C. 
to A.D. 1192. The second is the period of "feudalism" from 1192 to 1868. 
The latter part of the second period is frequently referred to as Tokugawa 
feudalism, after the Tokugawa family, which was the ruling feudal family 
from the beginning of the seventeenth century until 1868. The head of this 
family exercised full governing authority as the shogun, while the emperor 
lived in seclusion in Kyoto, apparently occupied officially with religious 
concerns. The third or "modern" period dates from the restoration of the 
emperor's power in 1868, known as the Meiji restoration. 

Until Commodore Perry reached Japan in 1853 the country had been 
virtually isolated from the outside world for many centuries. The Portu- 
guese are said to have introduced "tobacco, firearms and Christianity in its 
Roman Catholic form" in 1543, but they were excluded in 1638 because of 
their alleged complicity in an attempted revolution. The Dutch were li- 
censed to trade with Japan in 1605 and thereafter maintained for a time a 
precarious trade monopoly. When Perry came in 1853 a representative of 
the shogun called upon him, though not without great reluctance. Perry's 
arrival marks the beginning of Western pressure upon Japan and the conse- 
quent internal turmoil which was climaxed by the shogun's formal sur- 
render of power to the emperor. This consolidation of authority was, in 
effect, a restoration of the Meiji. 1 

It was with the Meiji restoration in 1868 that Japan began to develop 
economically. Understandably enough, not all scholars are agreed upon the 
relative importance of the factors involved in Japan's dramatic rise to 
industrial eminence, or upon the real costs of this rise for Japan and the 
world. Despite their differences, all authorities agree that in the forty-five 

1. See Ernast Wilson Clement, A Short History of Japan, University of Chicago Press, Chicago, 1915, 
pp. 60 and 94ff. 


176 Approaches to Economic Development 

years preceding 1914, Japan was transformed from a secluded preindustrial 
society into an industrialized nation-state commanding universal economic 
and political respect. E. Herbert Norman has described the transition in 
this way: 

Japan skipped from feudalism into capitalism omitting the laissez-faire stage and 
its political counterpart, Victorian liberalism . . . [Her leaders] were so far in 
advance of the rest of their countrymen that they had to drag a complaining, 
half-awakened nation of merchants and peasants after them. The autocratic or 
paternalistic way seemed to the Meiji leaders the only possible method if Japan 
was not to sink into the ranks of a colonial country. 2 

The rapidity of Japan's economic transformation is seen at once in a few 
production indices. With the years 1921-1925 taken as 100, the index of 
primary production jumped from 15.7 in 1873 to 52.1 in 1900, and that of 
mineral production from 1.03 in 1874 to 28.15 in 1900. Rice output rose 
from 119.1 million bushels in 1873 to 205.6 million in 1900; in the same 
period the output of silk increased more than sixfold and the output of 
cotton yarn four hundred and thirty times. Railway mileage increased from 
only 18 miles in 1872 to 3,855 miles in 1900, while steamship tonnage grew 
from 15,500 tons in 1870 to 543,400 tons in 1900. Pig iron production 
increased sevenfold between 1874 and 1900 and the number of factories 
increased from 24 to 662 between 1868 and 1900. 3 These achievements 
appear all the more remarkable when it is considered that Japan's economic 
position in the eighteenth century probably compared unfavorably with 
England's in the sixteenth. 4 

The restoration of the Meiji in itself was of course not sufficient to put 
Japan on the road to economic progress. 5 It was the way in which this 
consolidation of power was applied that pointed the Japanese economy in 
a new direction. For purposes of discussion, it seems convenient to disen- 
tangle those changes that were essentially a sweeping away of outmoded 
forms, practices and institutions from those more positive changes that 
clearly promoted economic development. The second type of change is 
impossible without the first; the dead timber must be cleared out to make 
way for the new growth. But merely clearing away the clutter of the past 
does not produce development automatically. The postrestoration leaders 
of Japan seem to have been fully aware of this. 

2. E. Herbert Norman, Japan's Emergence as a Modem State, Institute of Pacific Relations, New York, 
1946, p. 47. This remarkably informative account of the development of modern Japan has used Japanese 
sources extensively. It contains also (pp. 211-22) an annotated bibliography of the principal works on the 
subject which the nonspecialist will find invaluable. 

3. All figures are from Shigeto Tsuru, "Economic Fluctuations in Japan, 1863-1893," Review of Economic 
Statistics, November 1941, p. 187 

4. Norman, op. cit., commenting on a comparison made by John E Orchard. 

5. The seeds of change were already germinating in the late Tokugawa period, so that "the Meiji Restora- 
tion was bound to come sooner or later, and the invasion on the part of foreign capitalism decisively accel- 
erated its advent." Yasuzo Horie, "The Economic Significance of the Meiji Restoration," Kyoto University 
Economic Review, December 1937, p. 70. 

The Economic Development of Japan: 1868-1914 111 


By 1853, Japanese leaders realized that Japan would fall under the 
domination of one or more of the European powers unless she quickly 
acquired economic and military strength. This, rather than social reform 
for its own sake or the welfare of the people, was what motivated the new 
Japanese government after 1868. The leaders in the modernization of 
Japan, the samurai-bureaucrats, feared foreign encroachment above all 
else. They were therefore determined to "modernize" Japanese social and 
economic organization rapidly from above. 6 

In the economic sphere, the most far-reaching changes that were made 
were those intended to establish a competitive, market-type economy based 
on principles of private property. As one Japanese writer reports, 

. . . under the category of the recognition of free competition fall the abolition 
of the system of Kabunakama (a guild system authorized by the Shogunate or by 
the feudal lords) in commerce and industry, in the first year of Meiji (1868) and 
the recognition of the freedom of occupation for four classes (samurai, farmers, 
craftsmen, and chonin) of people, in the fourth and fifth years of Meiji . . . the 
embargo on the permanent sales of land was lifted . . . restrictions on Bunchi 
(division of land among sons and daughters) were removed . . . Besides, the 
operation of commerce by prefectures or clans, which had been impeding the 
development of the commercial interests of merchants, was prohibited. 7 

Land Titles and Taxes 

In the middle of the nineteenth century the Japanese peasant typically 
cultivated rice on land which, by custom and long practice, was his to work 
as he saw fit subject to the superior rights of the warrior or samurai class. 
The Japanese "manor" of 1853 has been described as 

an untidy conglomeration of irregular plots which, as far as the cultivated parts 
were concerned, were perpetually left under the individual possession and the 
personal exploitation of their holders. Subject only to the dues which he owed, the 
tenant enjoyed large freedom in the disposition of his plots and their profits, so 
that the communal life of the domain as a whole was extremely tenuous. 8 

Japanese agriculture had for centuries been characterized by small family 
plots intensively cultivated. There was no open-field system as in Europe 
and very little livestock. There were, however, common rights in forests and 

6. See Norman, op. c/r., Chapter 3 and/jasww. 

7. Horie, loc. cit., p. 77. The samurai were the feudal warriors or knights, also called bushi; the chonin 
were originally commoners but during the Tokugawa period (and later) the term was applied to the merchant 
class. The feudal-type lords ranking above the knights (samurai) were the daimyo For an account of agrarian 
organization in relation to the foregoing see Thomas C. Smith, "The Japanese Village in the Seventeenth 
Century," Journal of Economic History, Winter 1952, pp. 1-20. 

8. K. Hsakawa, "Agriculture in Japanese History: a General Survey," The Economic Hhtorv Review, 
January 1929, p 87. 

178 Approaches to Economic Development 

fishing grounds. The samurai tended to live in towns and not on the land, 
from which they collected revenues in kind. 

In 1872 the ban on the sale of land was lifted and in 1873 a new land tax 
law was passed. This law substituted a money tax, based on the value of the 
land, for tax payments in kind, which were a customary fraction of the 
crops harvested. After the passage of the new tax law, the government 
undertook a land survey to assess land values. These assessments were 
based on the capitalization of the five-year average value of the product. 9 
By making the owner of the land liable to the national central government 
for tax payments and by divorcing the amount of the tax from the yearly 
vagaries of the harvest, the state both blocked evasion and assured itself of 
a steady stream of tax revenues. Indeed, down to 1882, about 80 per cent 
of the government's revenue came from this land tax. 

Results of the New Land Laws 

Merely to require land titles and to impose a money tax calculated on 
assessed land values and payable to the central government rather than 
let the cultivator render a portion of the harvest to the local overlord 
would not, at first glance, be expected to initiate important changes or have 
profound consequences. Yet major changes followed. Moreover, the effec- 
tiveness of these changes, from the point of view of development, lay not 
in any increase in the tax levy, which was actually diminished slightly, but 
in the fact that they tended to commercialize agriculture. 

This occurred in three ways. First, in requiring that land ownership be 
formalized by possession of legally recognized title certificates, the govern- 
ment gave force to the concept of private property in land. As might be 
expected, the process also caused many small cultivators to be, in effect, 
dispossessed because they could not establish their rights to title certificates. 
Tenancy therefore increased as the lands of some of the smaller cultivators 
passed legally out of their hands. 10 Second, the necessity of paying a fixed 
money tax, regardless of the size of the harvest, forced many farmers to 
borrow from moneylenders against their title certificates. When they failed 
to repay the debt they lost their land. Finally, the whole arrangement 
tended to force the cultivators to market their crops promptly for cash, so 
that they might pay the government or the landlords the amounts due them. 

Thus an increasing commercialization of agriculture and growing ten- 
ancy seem to have been the net effects of the new land laws. This transfor- 
mation did not come about overnight; but between 1873 and 1890 both 

9. See Norman, op. cit. t pp. 138-44, on which the above draws heavily. 

10. Some of the land formerly held in common in the rural areas was taken over by the central govern- 
ment and later (after 1876) sold to former feudal lords (daimyo) at attractive prices. See Norman, op. c/f., 
p. 99. 

The Economic Development of Japan: 1868-1914 179 

tenancy and commercialization of agriculture increased appreciably. Dis- 
possession of the peasants did not lead to any increase in the unit of cultiva- 
tion, however. This had long been small and remained so. 11 

Effects of Commercialization of Agriculture 

It is not at all clear how far the leaders of the new Japan foresaw that 
commercialized agriculture would follow from the changes they imposed 
for the purpose of increasing the power of the central government by 
assuring it a steady flow of tax revenues. According to Norman's account, 
action was taken only "After a patient, exhaustive review of all relevant 
memoranda, and after many deliberations of committees and assemblies." 12 
The revenue aspect of the change seems to have been the primary consid- 
eration, however. Whatever the leaders' intentions, Japanese agriculture 
was able both to increase rice production by about 40 per cent between 
1879 and 1903 just about enough to match the increase in population 
and, through the migration of second and third children to cities, to 
provide labor for industry. 13 In addition, the agricultural areas became 
increasingly important suppliers of manufactures produced in the rural 

In 1873, five years after the Meiji restoration, about 78 per cent of the 
employed Japanese population were engaged in agriculture. (Prior to the 
restoration the percentage was probably slightly larger.) By 1876 the pro- 
portion had decreased only slightly to 77 per cent, but it was down to 
52 per cent by 1920. On the other hand, artisans and those engaged in 
commerce, who constituted about 1 1 per cent of the employed population 
in 1873 and 1876, jointly made up a much larger bloc of 32 per cent 
in 1920. 14 

Despite changes in forms of land tenure, agricultural practices continued 
much as before though cultivation increased in intensity and was extended 
to lands not previously worked. G. C. Allen puts the amount of new rice- 
land brought under cultivation in the thirty years 1878-1908 at 343,000 

11. See ibid., pp. 144-48 and 153/7". 

12. Ibid., p. 140. 

13. See G. C. Allen, A Short Economic History of Modem Japan, 1868-1937, Allen and Unwin, London, 
1946, Tables, pp. 58 and 163. The connection between domestic consumption of rice and population growth 
is made closer by the fact that Japanese rice is apparently not acceptable as an export commodity and the 
Japanese regard foreign rice as a substitute for barley or wheat but not for rice. Cf. Tokutaro Yamanaka, 
"Japanese Small Industries during the Industrial Revolution," Annah of the Hitotsubashi Academy, October 
1951, p. 33 and pa^im. For a "corrected" population Elizabeth Schumpeter finds a 43 per cent increase 
in Japan from 1871 to 1911, and one of 60 per cent for England and Wales. Hence, after the Meiji restora- 
tion, the Japanese population rose above the plateau which had existed from 1721 to 1846; but Japan 
did not overtake the English- Welsh rate of increase until 1911. See E. B. Schumpeter et al., The Industrializa- 
tion of Japan and Manchukuo, Macmillan, New York, 1940, pp. 49 and 53. 

14. These figures are roughly adapted from Schumpeter, op. cit., p. 64, n. 37, and Table 6, p. 76. The 
classification "artisans" was used in the earlier years and this was changed in 1920 to "manufacturing." 
Clearly the groups are not the same, but they roughly represent the nonagriculturally occupied. 

180 Approaches to Economic Development 

cho (840,000 acres). Although the age-old method office production may 
not lend itself to further development, 15 Allen indicates an increase in pro- 
duction per cho from 11.6 koku to 17.0 koku from the "early eighties 
to ... the years just before the Great War." 16 

Japanese agriculture did not undergo a revolution after the Meiji restora- 
tion: the economic position of the farmer remained practically unchanged ; 
he still had to work hard to meet his taxes and provide a meager living for 
his family. The environment in which he worked altered, of course, chiefly 
in that he was increasingly exposed to the exigencies of the market and to 
the spreading system of private property and free contract. But, by preserv- 
ing stability and maintaining output, all this facilitated rather than ham- 
pered economic development. Moreover, if the landlord-tenant relation- 
ships shifted income distributions and tax burdens in a way contrary to 
modern notions of "social justice," they also limited consumption in favor 
of investment. From a broader point of view, the truly remarkable fact was 
that a new government was able to impose drastic social and economic 
changes from above without throwing the country into hopeless confusion 
or economic collapse. 

Other Important Changes 

Apart from the changes in agriculture, the samurai-bureaucrats who 
came to power with the Meiji restoration also cleared the way for economic 
development by abolishing the feudal tariffs and tolls on internal trade and 
commerce, by granting freedom of occupation, domicile or trade, and by 
lifting the bans on dealings with the outside world. These steps were im- 
portant because they cleared away the debris that blocked initiative and 
enterprise and hampered the internal mobility of economic resources that is 
so necessary to specialization and greater productivity. As might be ex- 
pected, the merchant class were the first ones to benefit from these new 

In setting the stage for more positive measures designed to promote 
economic development, the leaders of the new Japan displayed remarkable 
skill as policy-makers and administrators. There was no social upheaval 
comparable to the French Revolution. The government's policies were of 
course not entirely unopposed, but by autocratic measures and skillful 
political maneuvering the government succeeded in keeping its critics from 
seriously interfering with its plans, although it had to use force to put down 
some revolts in 1882-1884. 17 

15. See Yamanaka, he. cit. 

16. Allen, op. cit., p. 57. (One koku is approximately 5.12 American bushels.) 

17. See Norman, op. cit., Chapter 5. 

The Economic Development of Japan: 1868-1914 181 


As already pointed out, the dominant drive in the economic moderniza- 
tion of Japan came from the fear of the samurai-bureaucrats that Japan, 
like China, might fall under the domination of a foreign power. The re- 
shaping of the Japanese economy according to the principles of private 
property and free enterprise came about not because the leaders in the 
Meiji restoration were fired by the principles of the French Revolution or 
the liberalism of John Stuart Mill, but because they believed that, with 
proper guidance from the top, economic liberalism offered the most effec- 
tive means of quickly building the military strength necessary to assure 
political security. As G. C. Allen has expressed it, the government's func- 
tion was 

... to set up certain economic objectives and to assist private enterprise to 
attain them. In other words, its aim has been to create the conditions which 
should lead the entrepreneur to direct and organize the economic resources of the 
country in the way believed to be desirable. 18 

The samurai-bureaucrats saw that a modernized economy could not be 
created merely by sweeping away feudal restrictions and replacing them 
with the principles of personal freedom, private property and free contract. 
Problems still remained, which they believed required positive action on the 
part of the government. There was no entrepreneurial class at hand with 
the drive and the investible capital resources necessary to launch a com- 
mercial and industrial revolution. Moreover, at the time of the restoration 
there were no financial institutions that could be expected to foster real 
capital formation and allocate it wisely in modernizing the economy. 
Finally, Japan would have to have capital equipment and technical assist- 
ance from abroad. Therefore, she needed imports, which would have to be 
paid for by exports. But her people, long isolated from the rest of the world, 
could not be expected to develop a vigorous foreign trade without guidance 
and assistance from her new leaders. In brief, the government believed it 
had to perform entrepreneurial functions, to foster capital formation and to 
fit Japan into the growing network of international trade and finance. 19 
Although closely linked, these were three distinct areas in which the govern- 
ment felt it had to take positive action if it was to achieve political security 
through rapid development of the economy. 

Government Action to Develop Industry 

The government used both direct and indirect means in attacking the 
problems of entrepreneurship and capital mobilization and allocation. On 

18. G. C. 'Allen, "The Last Decade in Japan," Economic History, January 1933, p. 629. 

19. See ibid., pp. 629-34. 

182 Approaches to Economic Development 

the one hand, the state itself at times acted as entrepreneur and capital 
supplier; on the other hand and perhaps this was more important in 
generating a self-sustaining economic development the state encouraged 
and fostered private enterprise and investment. 

Directly following the Meiji restoration the government took the lead in 
developing industry. 20 It saw that, at least in the beginning, private groups 
would not build railways and telegraph lines or factories to manufacture 
wholly unfamiliar products even though these might be necessary to assure 
Japan's political independence. Consequently the government established 
railways and telegraph systems, constructed pilot plants or demonstration 
plants and saw to it that foreign experts and technicians were brought to 
Japan so that the people might learn. By 1880, government properties are 
said to have included "3 shipbuilding yards, 51 merchant ships, 5 munition 
works, 52 other factories, 10 mines, 75 miles of railways, and a telegraph 
system which linked all the chief towns." 21 

Even in 1880, however, shipping, telegraph systems, railways and muni- 
tions were widely regarded as undertakings appropriate to government, 
either on the grounds of strategic necessity or because the important indi- 
rect benefits that they conferred were so diffused that no private entre- 
preneur could turn them into collectible revenues. In other words, much of 
the state enterprise in Japan up to this time was in undertakings already 
sponsored by the state in other countries. 22 The rest were mainly manufac- 
turing plants constructed at government expense to show what was pos- 
sible. Following a change in policy in 1880, most of these were turned over 
to private firms, often, to be sure, at attractive prices. By then, however, 
industrial progress had picked up enough momentum from the govern- 
ment's efforts for private firms to carry on, aided, if necessary, by the 
government. 23 


The government financed these undertakings from tax revenues, from 
loans and by fiat currency issues. Between 1872 and 1877 the internal 
national debt rose from 23 million yen to 213 million yen; the external 
debt, however, rose only from 10 million yen to 27 million yen. The totals 
remained about the same in 1885: 223 million yen in internal debt as 

20. Even before 1868, some of the more powerful clans had built works for the manufacture of arms and 
ships; a steamboat was built in 1857. These industries were taken over by the state in 1868. See Norman, 
op. c//., pp. 118-21. 

21. Allen, A Short Economic History of Modern Japan, p. 30. 

22. The Yawata Iron Works, which was formed much later, in 1896, was established largely to supply 
military needs. 

23. Joint-stock companies were inaugurated in Japan in 1869. Norman, op cit., p. 112. 

The Economic Development of Japan 1868-1914 1 83 

against only 16 million yen in external debt. 24 Apparently, however, whole- 
sale prices in Japan rose slightly less than 10 per cent between 1875 and 
1880. 25 

Indirect Promotion of Production 

The government's efforts to promote the modernization of the economy 
by indirect methods are less easily summarized. The way in which the gov- 
ernment handled the financial side of the breakup of the feudal-type 
agrarian system provides one example. Before the Meiji restoration, the 
peasant paid dues in kind to his feudal lord, who in turn supported his 
knights. When in 1873 the government substituted a direct money tax on 
land values for these feudal dues, it placated the daimyo and samurai by 
paying them in money one half the value of their former annual revenues. 26 
This was only a stopgap arrangement, however, for three years later, in 
1876, the government capitalized its obligations to the daimyo and samurai 
and issued them bonds in satisfaction of their acknowledged claims. As 
Norman has neatly put it, 

In Japan, the feudal lord ceased to be a territorial magnate drawing his income 
from the peasant and became instead, by virtue of the commutation of his pen- 
sion, & financial magnate investing his freshly capitalized wealth in banks, stocks, 
industries, or landed estates, and so joined the small financial oligarchy. 27 

Actually the bond allotments going to the samurai, while large in total, 
were small per capita not large enough, it is said, to support an individual 
for a year. Perhaps partly for this reason, the leaders in the Meiji restora- 
tion did all they could to absorb the former samurai into posts in the ex- 
panding government bureaucracy. In the main, the samurai were not 
wealthy following the abolition of the feudal-type agrarian system. 

24. The Japanese national debt from 1872 to 1919 was as follows (in millions of yen): 

Year Total Internal External 

1872 Y 33 Y 23 Y 10 

1877 240 213 27 

1885 239 223 16 

1894 234 230 4 

1903 539 441 98 

1907 2,224 1,078 1,166 

1914 2,561 1,036 1,525 

1919 3,326 1,995 1,331 

Allen, A Short Economic History of Modern Japan, p. 187. The Sino-Japanese war occurred in 1894-1895 
and the Russo-Japanese war in 1904. 

25. Harry T. Oshima, "Survey of Various Long-Term Estimates of Japanese National Income,** paper 
presented at the Conference on Economic Growth in Brazil. India and Japan, 1952, Social Science Research 
Council, New York, Table 1. (Unpublished.) 

26. The restoration government had agreed as early as 1869 to pay the daimyo one half their usual 
revenues if the feudal dues should be abolished. This concession to the daimyo was apparently necessary to 
enlist their, support for the new regime. See Norman, op. cit., p. 94. 

27. Ibid , p. 94. Italics in original. 

184 Approaches to Economic Development 

At the time of the restoration the government also guaranteed the claims 
of the moneylenders many of whom were landlords as well and these, 
too, were paid off by the issuance of bonds. These claims were mostly 
debts contracted by the daimyo during the late Tokugawa period. The 
Meiji government did not, however, recognize the debts of the shogunate 
to some of the more powerful merchants; about 80 per cent of these were 
repudiated. 28 Presumably, the bonds issued to the daimyo in commutation 
of their former feudal rights were net of the indebtedness these daimyo 
owed to the moneylenders, although this point is not clear. Indeed, the 
details of the funding operation are too complex to be described here in 
full. 29 What was important politically was that the way these debts were 
recognized and funded enabled the new government to draw strong support 
from the moneylenders and many of the daimyo alike. 

Bonds, Paper Money and Banks 

The bonds issued to settle feudal dues and debts could be used as a 
reserve against national bank notes, and many of them were so used. Some 
one hundred and forty-eight national banks are said to have been organized 
on this basis. By handling the commutation of feudal dues as it did, the 
government funded sizable claims against itself, and, in effect, checked the 
holders of bonds from spending them; simultaneously, however, the gov- 
ernment made the bonds a base for credit creation in the form of bank 
notes which could assist industrial financing and, through their contribu- 
tion to inflation, "force" savings on the population at large. 30 

This was not all the government did in the sphere of banking and cur- 
rency. Before the founding of the Bank of Japan in 1882 the government 
resorted to direct issues of paper money to such an extent that the period 
prior to 1880 has been called the "era of paper money." These paper 
money issues were gradually retired in favor of notes of the Bank of Japan. 31 

28. See Smith, loc. at , p. 3. 

29. See Norman, op. at., pp 94-99. 

30. The total bonds issued under this arrangement amounted to 190 8 million yen at interest rates ranging 
from 5 to 10 per cent. Since the total of national hank notes outstanding in 1881 is reported to he 34 million 
yen (Allen, A Short Economic History of Modern Japan, p 46), it is obvious that many bonds were not used as 
backing for notes The fraction actually so used cannot be expressed as a percentage because not all of the 
bonds issued were necessarily still outstanding in 1881. 

Nonetheless, the classes that actually received these bonds were the same groups who owned most of the 
shares in the national banks According to a Japanese study reported by Norman (op. c//., p. 100), the 
former feudal lords (daimyo) and court nobles (kuge) together owned 44 per cent, the samurai 32 per cent 
and the merchants IS per cent of the national bank shares outstanding in 1880 - a total of 91 per cent in all. 
Thus, their influence in the banking system was not limited to their use of bonds as backing for bank notes. 

31. The amount of paper money outstanding in various yeais was as follows (in millions of yen): 

Government National Bank of 

End of Year Paper Money Bank Notes Japan Notes 

1881 Y1I89 Y 34.0 

1885 93.4 30.2 Y 4.0 

1890 40.1 26.4 102.9 

1895 15.7 22.3 110.5 

1900 5.1 1.6 179.8 
Allen, op. ctt., p. 46. 

The Economic Development of Japan: 1868-1914 185 

In order to help finance industry and agriculture, the government also 
established three special banks the Hypothec Bank for agriculture, the 
Industrial Bank, and the Yokohama Specie Bank to assist in the financing 
of foreign trade. These banks were used primarily to provide long-term 
credits in much the same ways as the German banks and in contrast to the 
traditions of English and American banking. 

The Spirit of Enterprise 

The relative importance of other indirect measures taken by the govern- 
ment to foster industry and propagate the entrepreneurial and capitalist 
spirit is hard to assess. After the state had pointed the way with pilot plants 
and demonstrations, individuals and private groups seem to have displayed 
a remarkable willingness to try new ventures and master new techniques 
and skills. According to one Japanese writer: 

The section of the samurai class that did not take an active part in politics entered 
the business world. Many of these failed miserably in their new ventures, but the 
capitalist spirit which they displayed in trying their hands at company enterprises 
did much to arouse public interest in such enterprises. The general sentiment 
among the samurai in those days was that if new occupations must be chosen, they 
should turn to novel industries and undertakings not yet tried by chonin or farm- 
ers. Prince lawakura was quite right when he declared that the samurai class 
alone had the capitalist spirit. 32 

Just how the samurai were brought to accept the fact that "new occupa- 
tions must be chosen" and that they should try "novel industries and 
undertakings'" would be an interesting sociological study, the results of 
which might be applicable to many underdeveloped countries. The im- 
portant point is that a traditionally "elite" group was drawn into the drive 
toward development, instead of becoming obstructionists or useless rem- 
nants of a bygone age. 

Household Industry, Education and Public Works 

The development of household industry in Japan seems to have been 
the result of both deliberate encouragement by the government and tax 
pressure upon the small agricultural producer. This tax pressure forced the 
farming families to take on manufactures in the home, to limit their con- 
sumption to the traditionally meager level and to send off much of their 
produce, and their younger children as well, to the industrializing urban 
areas. Judged by the standards of a later age, the process doubtless had its 
ruthless aspects; as a means of transforming a feudal agricultural economy 
into an industrialized economy it was remarkably efficacious. 

32. Yasuzo Hone, "An Outline of the Rise of Modern Capitalism in Japan," Kyoto University Economic 
Review, July 1936, p 112. 

186 Approaches to Economic Development 

The samurai-bureaucrats were not unmindful of the necessity of improv- 
ing the educational system and of providing some local public works. 
Before the Meiji restoration, the masses of the people, as in many Oriental 
countries, were left illiterate and uneducated, except for the apprenticeship 
system, while the samurai, daimyo and kuge cultivated formal learning. 
Yet once the new leaders had settled on their ultimate objectives, they 
transplanted Western science and learning to Japan by bringing in foreign 
experts and sending students abroad. Primary and secondary schools were 
set up to combat illiteracy and ignorance, and technical schools and uni- 
versities were established through grants-in-aid from the central govern- 
ment in order to give roots to the imported Western learning. One eminent 
specialist on Japan writes: "this system of general and technical educa- 
tion as it expanded was fundamental to Japan's industrial advance . . . 
No other enterprise of the State paid more handsome dividends to the 
nation." 33 The technique of grants-in-aid was also used to provide local 
public works, though in the main these were left to the ingenuity of the 
local authorities. 

Foreign Trade 

The industrial development of Japan would have been impossible with- 
out imports of capital goods. The samurai-bureaucrats seem to have recog- 
nized this early and to have encouraged associations of manufacturers and 
merchants in order to push export trade as a means of paying for the 
needed imports. At least one Japanese writer, however, contended that it 
was the flood of imports from the more developed countries that forced 
Japan to develop her own consumers' goods industries to supply the home 
market and, later on, to finance the import of those heavy goods especially 
desired by the government. Count Okuma wrote in 1900 that "Japan thus 
adopted a Free Trade policy neither voluntarily nor knowingly, but at the 
pleasure of the Treaty Powers. This was the external force which helped to 
bring about the industrial revolution . . ," 34 

Participation in the evolving system of multilateral trade was, fortu- 
nately, relatively easy at the time Japan needed it most. From 1880 to 1914, 
the world economybuilt on the principles of multilateralism, the ex- 
change of specialties, moderate tariffs and long-term trade treaties was in 
its full vigor and strength. Any country willing to follow the accepted 
standards of commercial and financial conduct was readily admitted to the 
system. Japan qualified for full membership by her adoption of the gold 

33. William W. Lockwood, "The State and Economic Enterprise in Modern Japan, 1868-1939," paper 
presented at the Conference on Economic Growth in Brazil, India and Japan, 1952, Social Science Research 
Council, New York, p. II. (Unpublished.) 

34. Count Okuma, "The Industrial Revolution in Japan/' North American Review, November 1900, 
pp. 677-78. 

The Economic Development of Japan: 1868-1914 


standard in 1897, which was made possible partly by a gold indemnity 
collected 'from China. 

Japanese foreign trade grew remarkably in volume between 1868 and 
1914. Imports increased in annual average value from 23 million yen in 
1868-1872 to 223 million yen in 1894-1898 and to 544 million yen in 1909- 
1913, just before World War I. Exports, averaged for the same years, rose 
from 16 million yen to 139 million yen to 496 million yen. (See Table 9-1.) 


(In Millions of Yen, Annual Averages) 





Y 23 

Y 16 




























Source G. C. Allen, A Short Economic Histoty of Modern Japan, 1868-1937, Allen and Unwin, London, 
1946, p. 179. 
a Excludes trade between Japan and her colonies. 

The composition of Japanese trade also changed. Imports of food and 
drink and finished goods diminished in importance relative to raw ma- 
terials; in exports, semimanufactured goods and finished goods steadily 
gained over raw materials and food and drink. (See Table 9-2.) 


Value as Percentage of Total Exports 


Food and 



































































Source G. C. Allen, A Short Economic History of Modern Japan, 1868-1937, Allen and Unwin, London, 
1946. p. 181. 

188 Approaches to Economic Development 


Once the development process has attained a certain momentum in a 
country, it is not difficult to understand why it is likely to generate its own 
power of forward propulsion. The early stages in which "everything 
seems to depend on everything else" or in which "nothing can be done be- 
cause everything needs to be done at once" present the most stubborn diffi- 
culties. So it is these problems and the ways in which they were overcome 
in Japan that are of principal interest. What, then, does Japanese expe- 
rience suggest on the crucial problem of initiating economic development? 

The Role of Government 

First, Japanese experience seems to underscore the importance of a 
strong central government with definite objectives and an ability to focus 
old traditions toward new ends. One of the most remarkable features of 
the Japanese achievement was the fact that, despite drastic changes in the 
old order, the economy as a whole never broke pace in confusion or dis- 
order. Even though the social, political and economic orientation of agri- 
culture was drastically altered, there was no agricultural revolution and no 
decline in output. The daimyo and samurai were shorn of their traditional 
privileges, but they quickly adapted themselves to the new points of view 
and to the new roles assigned to them. Most remarkable of all perhaps was 
the ability of the postrestoration leaders to set up a system of centralized 
administration which was able from the start to cope with the most difficult 
problems on a nationwide scale. There was revolution in the sense of very 
rapid and drastic change but not economic collapse. Neither in the 
French nor in the Russian Revolution did the new groups coming into 
power know how to administer the national economy once they had 
gained control. 

The Land Tax 

The second feature of Japan's economic development that bears on the 
problem of "getting started" is the amazing speed with which a few funda- 
mental institutional changes created an economy founded on the price 
system out of a feudalistic economy based on rights and obligations. The 
stroke of genius here seems to have been to link private property in land 
with a money tax system based on assessed land values. When this was 
combined with the abolition of guild restrictions and, at least legally, with 
free choice of occupation for all, a price-market economy seems to have 
quickly emerged. All four factors were doubtless of great importance, but 
the tax device which forced the peasants to market their produce, instead of 
hoarding it or consuming it or investing it in livestock and the like, was 
perhaps the most powerful. 

The Economic Development of Japan: 1868-1914 189 

Capital Formation 

Finally, Japan's experience in initiating the development process is 
significant because of the techniques used to effectuate real capital forma- 
tion. Japan was a poor country in 1868, with a stock of real capital little 
different in amount or composition from that of other economies in which 
agriculture occupies most of the population. Yet by 1914 she had all the 
attributes of an emerging world power backed by an industrialized econ- 
omy. How was the real capital created? 

In the early stages, the major role fell to the government, which used 
taxation and inflationary finance to command the real resources needed to 
build at home and to import from abroad those real capital goods that were 
indispensable to industrial development. The government decided both the 
total amount that could be accumulated and how it should be allocated 
between possible alternative uses. Subsequently, it veered toward more 
orthodox finance, but it kept income distributed in such a way that total 
consumption was limited in favor of savings. There was no foreign borrow- 
ing until development was well under way. Japanese economic develop- 
ment was initiated and financed at home throughout the difficult early 

Factors other than the three touched upon here were of vital importance, 
too, in the sense that Japanese development would have followed different 
lines had they not been present. There were also chance factors and non- 
economic events that proved to be favorable for development the collapse 
of the European silk industry as a result of the silkworm disease, for 
example, and the stimulus of two important wars. It is likely, however, that 
influences such as these were of secondary rather than primary importance 
in the impressive development of the Japanese economy between 1868 
and 1914. 

10. Economic Development of the U.S.S.R. 

THE TRANSFORMATION OF THE U.S.S.R. from an agricultural to an indus- 
trial economy is one of the most interesting and controversial chapters in 
recent economic history. The case is unique in many respects. In the first 
place, it was a "planned" development that made little use of the usual 
institutions of markets and prices so that other means had to be devised to 
organize output and allocate investment. Second, the drive toward indus- 
trialization was from the start permeated by the leaders' fears of foreign 
intervention; this fear gave the industrial development a special character 
which it has never lost. Of course this feature may only reflect the pervasive 
influence of Marxist-Socialist ideology in all economic and political ques- 
tions in Russia since 1917. Finally, Russia's industrial development was 
remarkably swift. It began inauspiciously after a decade of internal strife 
and disastrous policies had virtually destroyed the national economy 
which the new leaders took over from the old. Before there could be indus- 
trial advance at least as measured by the usual indices the Russian 
economy had first to regain its previous level of achievement. This it did 
not do until early 1927. Consequently, the period of Russian industrial 
development of primary interest to countries yet to develop extends from 
1927 to the outbreak of World War II in 1939. Russian development did 
not stop in 1939; but most of the worst problems had already been sur- 
mounted by that time. 


Russia's economic development after 1927 was facilitated somewhat by 
the start made on industrialization between 1880 and 1913; some of the 
real capital resources then accumulated remained usable and did not have 
to be provided anew. In 1913, for example, Russia had more than 40,000 
miles of railways, mostly built and financed by the state, a respectable 
inheritance for any country bent on industrialization. 

While Russia was far from industrialized in 1913, she was still not wholly 
agricultural. Slightly less than 18 per cent of the population was urban. 1 
Russia's coal production of 36 million long tons was only 7.4 per cent of 
Germany's output, on a per capita basis. The comparable figure for pig 

1. Alexander Baykov, in Bulletins on Soviet Economic Development, Bulletin 1, Faculty of Commerce and 
Social Science, University of Birmingham, Birmingham, May 1949, p. 3. 


Economic Development of the U.S.S.R. 191 

iron was 8.3 per cent; for mechanical horsepower used in industry, 8.1 per 
cent. 2 Foreign capital French, English, Belgian and German, in that order 
dominated joint-stock enterprises, especially in mining, chemicals, iron 
and steel, and engineering. Even in textiles, 28 per cent of the capital is said 
to have been foreign capital. 3 Most of this foreign capital came in after 
1890. According to Alexander Gerschenkron's estimates, industrial pro- 
duction in Russia doubled between 1898 and 1913 and, except for 1888, 
increased every year between 1885 and 1905 . 4 

Russian foreign trade in 1913 also reflected her limited industrial devel- 
opment. In 1909-1913, 70 per cent of her exports were agricultural products 
and the remaining 30 per cent in industrial products were mainly raw 
materials. Imports in the same period were largely consumption goods (27 
per cent), mostly manufactured, and manufactured production goods (33 
per cent); the remainder was raw materials and semimanufactures used in 

In 1913, Russian industry was developing along much the same lines as 
industry in other central European countries. If Russia's achievements at 
that time were not impressive compared with those of England, Germany 
or the United States, it nevertheless took ten years following the 1917 
revolution for output again to reach its absolute 1913 level. In the interval, 
of course, other countries were not marking time. 

Agriculture before 1913 

Russian agriculture in 1913 was probably less efficient than German or 
English agriculture of a half century earlier. Serfdom had been abolished 
in 1861 ; the nobility are said to have lost about one third of their land, as 
well as their serfs, by the emancipation. In compensation for the serfs the 
landlords received payments totaling about one billion rubles. Agriculture 
did not quickly take on a commercial character as in Germany, however, 
nor did the landlords mainly shift their money capital to industrial under- 

2. Calculated from data in ibid. 

3. Alexander Baykov, The Development of the Soviet Economic System, Cambridge University Press, 
Cambridge, 1946, p. 3. 

4. The rate of growth varied as follows: 

Average Annual Yean Requited to 

Percentage Rate Double Output 

of Growth at Thh Rate 

1885-1889 6.10 11.7 

1890-1899 8.03 9.0 

1900-1906 1.43 49.0 

1907-1913 6.25 11.4 

1885-1913 5.72 12.5 

Alexander Gerschenkron, "The Rate of Industrial Growth in Russia since 1885," Journal of Economic 
History, Supplement VII, 1947, pp. 145-46. For the period 1862-1882 Gerschenkron estimates the average 
annual rate of growth to have been 3.5 per cent. 

192 Approaches to Economic Development 

takings as in Japan. In fact, the landlords were so anxious or so pressed to 
convert their securities into liquid form that they forced down the market 
value of the securities 30 per cent below par. 5 Unfortunately, too, the law 
required the serfs to cover part of the payments due to the landlords and, 
until they had done so, ownership was vested in the commune. Although 
this arrangement generated much discontent, the payments were not can- 
celed until 1905, after revolutionary outbreaks among the peasants. The 
Stolypin reforms in that year enabled the peasants actually to claim land, 
and also to consolidate scattered strips into more efficient units of pro- 


Despite the 44-year delay between the freeing of the serfs and the enact- 
ment of the Stolypin reforms, the average annual yield of cereals on peasant 
holdings increased as much as 48 per cent between 1861-1870 and 1901- 
1910. 6 On "other" lands, the increase in cereal yields was 64 per cent. Thus 
agricultural productivity increased after the emancipation, but it increased 
more on the larger units than on the smaller peasant holdings. Moreover, 
the gap in average yield between the larger and the smaller units increased 
on the average from 4 poods to 1 1 poods. 7 Lyashchenko, a Russian econo- 
mist, declares that "for a period of sixty years during the nineteenth cen- 
tury, our agriculture under serfdom was distinguished by an almost sta- 
tionary yield." 8 In contrast to this stagnation of 1801-1870, agricultural 
productivity increased more than 50 per cent from 1870 to 1910. If this was 
not spectacular progress it was scarcely economic stagnation. Indeed, in the 
24 years between 1909-1913 and 1933-1937 the average yield of grain crops 

5. Witt Bowden, Michael Karpovich and Abbott Payson Usher, An Economic History of Europe <nnce 
1750, American Book Co., New York, 1937, p. 602. About 40 per cent of the amounts payable to the 
landlords for the loss of their land was withheld by the government against debts already owed on ptevious 
borrowing from state agencies. Ibid., p. 601. The pressure of debts and the costs of their accustomed living 
patterns apparently forced the aristocracy to dispose of their bonds at a discount. See Peter Lyashchenko, 
History of the National Economy of Ru^ia, Macmillan, New York, 1949, pp 41 1 --12. 

6. The lot of the peasants during much of this period was often marked by great hardship and suffering 
Tax burdens were heavy and discriminated against small holdings. According to Gerschenkron (lot. at., 
p. 149), taxes on peasant land were close to seven times as high per acre as on estate lands. The tax burdens 
allowed the peasants little chance to accumulate any icserves, so that crop failures easily led to famines. 

7. The average cereal yields on peasant holdings and "other" lands are calculated to have vaued between 
1861 and 1910 as follows: 

Peasant Holdings Other Lands 

Poods Per Cent Poods Per Cent 

1861-1870 29 100 33 100 

1871-1880 31 107 37 112 

1881-1890 34 117 42 127 

1891-1900 39 134 47 142 

1901-1910 43 148 54 164 

Alexis N. Antsiferov et at., Ruuian Agriculture during the War, Yale University Press, New Haven, 1930, 
p. 55. One pood equals 36. 1 pounds. 

8. Lyashchenko, op. cit., p. 324. 

Economic Development of the U.S.S.R. 193 

climbed only from 7.4 quintals per hectare to 9.1 a gain of not quite 
23 per cent. 9 

By 1913, economic development in Russia had made some progress. 
Industrial growth was especially rapid during the 1890s, slowed down 
almost to a standstill during the disturbed years of 1900-1906, but resumed 
thereafter with renewed vigor. Most important, the country acquired a 
railway network. Agriculture also improved, though probably less rapidly 
than it would have if the Stolypin reforms had not been so long delayed. 
World War I intervened before these reforms had time to exert their full 
economic effects. Close on the heels of the war came the revolution of 


Few events in world history have had more profound or more enduring 
consequences than the political and economic upheaval in Russia between 
1917 and 1920. Nor can anyone say whether the consequences yet to appear 
will be more far-reaching or less than those already visible. 

By 1920, three years after the revolution, the gross value of output in 
large-scale industry in Russia had fallen to 12.8 per cent of its 1913 level 
and in small industry to 20.4 per cent. The causes of these and other 
declines, according to Gerschenkron, lay in "sanguinary civil war, nation- 
alization of industries coupled with syndicalist tendencies among the work- 
ers, other ill-advised industrial policies, inflation, and the transformation of 
basic property relationships in agriculture." 10 

The economic development that followed after 1920 can only be 
sketched. 11 The revival of output began with the New Economic Policy, but 
important as the N.E.P. was in restoring the economy to working efficiency, 
the deliberate industrialization under the five-year plans from 1927 to 1939 
is more pertinent to the economic development problems of still under- 
developed countries. Primary attention will be directed to industrial devel- 
opment, leaving discussion of the changes in agriculture to the last. There 
are some reasons for believing that the Soviet leaders themselves considered 
their problem from this angle, that is, the primary decisions were those re- 
lating to industry, and agriculture had to be adapted accordingly, not the 
other way about. 

9. Bulletins on Soviet Economic Development, Bulletin 2, December 1949. Around 1913, peasant agricul- 
ture in Russia, while probably less efficient than agriculture in Western Europe, seems not to have been as 
poverty-stricken as is sometimes assumed. Peasant farms "had at their disposal" 10.6 acres on the average. 
As for capital equipment, "34.8% of peasant farms had no horses, 45 2% had only one horse, 16. 1% had 
two horses, 2.9% had 3 horses and only 2% had four horses." Ibid., pp 3-4. 

10. Gerschenkron, loc. cit., p. 158. 

11. Perhaps tfie most readable and informative report on the subject is Maurice Dobb's Soviet Economic 
Development unce 1917, International Publishers, New York, 1948. 

194 Approaches to Economic Development 

Basic Aims 

The overriding objective in all three of the five-year plans was the rapid 
development of industry, above all, heavy industry. The decision to move 
in this direction was reached only after bitter controversy. But in December 
1925 the 14th Congress of the Russian Communist party voted: 

... to convert our country from an agrarian into an industrial country able to 
produce all necessary equipment by its own means. To carry out such measures of 
industrialization as will secure the economic independence of the country, 
strengthen its defensive capacity and create the conditions necessary for the 
victory of Socialism in the U.S.S.R. 12 

During the period of the N.E.P., the issue of whether or not to indus- 
trialize was hotly disputed by the Soviet leaders. The decision to do so 
seems to have been prompted by the realization, or even fear, that without 
industrialization the power of the Communist party would be threatened. 
Baykov phrases it differently: "without a speedy reconstruction of the 
country's economy it would be impossible to solve those ideological prob- 
lems for the sake of which the Revolution had been made." 13 The emphasis 
on defense and economic independence, and the necessity for establishing 
a particular kind of social and economic system, necessarily gave promi- 
nence to heavy industry and often dictated the means used to solve par- 
ticular problems in the industrialization process. 

The Stress on Industry 

The stress on industry in the five-year plans is apparent from the alloca- 
tion of investment by major economic fields. Industry accounted for a 
strikingly high proportion of investment, almost 40 per cent of the total in 
all three plans, while the commitments to communications and to trade and 
procurement were trifling by comparison. (See Table 10-1.) Moreover, the 
investments in industry were predominantly in capital goods industry (re- 
ferred to as Group A in the Soviet scheme of classification), not in industry 
for the production of consumption goods (Group B). Between 1929 and 
1932 the investments in Group A averaged 84.8 per cent of all investments 
in industry; in 1933-1937, the figure was 83.0 per cent, while the plan for 
1938-1942 called for 84.1 per cent. 14 In other words, about 40 per cent of 
total investment was investment in industry, and of this amount more than 
four fifths was investment in capital goods industry and only about one 
fifth in consumption goods industry. 

12. As quoted in Bulletins on Soviet Economic Development* Bulletin 1, p. 4. The dates for the first three 
five-year plans were as follows: I, 1928-1929 to 1932-1933; II. 1933-1937; HI, 1938-1942. 

13. Baykov, The Development of the Soviet Economic System, p. 158. 

14. Norman M. Kaplan, Soviet Capital Formation and Industrialization (processed), Rand Corporation, 
Santa Monica, 1952, pp. 78-79 and 84. These percentages correspond closely with those which can be 
calculated from figures appearing in Baykov, The Development of the Soviet Economic System, p. 421. 

Economic Development of the U.S.S.R. 195 

Among the capital goods industries, those stressed were electric power, 
coal, petroleum, and ferrous and nonferrous metals. These five groups in 
the early years of the program got between 37.5 per cent and 42.7 per cent 
of the total investments in all industry, or roughly one half of the total 
capital goods investment. By contrast the textile industries, food industries 
and light industry usually got less than 20 per cent of all industrial invest- 
ment, except in 1929, when they received 25 per cent. 15 


Economic Field 
























Trade and procurement 




Socio-cultural services and administration 




Housing b 




Source: Norman M. Kaplan, Soviet Capital Formation and industrialization (processed), Rand Corpora- 
tion, Santa Monica, 1952, Table 7, p. 15. 

a. "Nonproductive" investment by economic organizations eliminated from economic sectors and added 
to "Socio-cultural services and administration." 

b. Housing is included in "Socio-cultural services and administration" but is given separately m order to 
facilitate comparison with other components of total investment. 

This concentration on capital goods is also apparent from data on 
growth of output and employment by industrial classifications. Comparison 
of the physical output of different industries, both heavy and light, at 
various stages of industrialization shows that the gains in capital goods 
industry far exceeded those in consumer goods. The deliberate concentra- 
tion on the capital goods sector is apparent from the striking increases in 
the output of iron and steel products, of coal, oil and cement, in sharp 
contrast to the slight increases in the output of cottons and woolens. (See 
Table 10-2.) On a per capita basis, less textile goods were available in 1937 
than in 1929 or 1913. 

Geographical Distribution of Industry 

An additional feature of the industrial development of the U.S.S.R. was 
the planned geographical distribution of industry as a whole. 

15. Kaplan, op. cit. t p. 85. 

16. A brie/ and easily accessible account of the purposes and accomplishments of the relocation of 
Russian industry will be found in Maurice Dobb, Sovtct Economy and the War, International Publishers, 
New York, 1943, Chapter 6. 


Approaches to Economic Development 

The heavy industrial investments were not altogether in areas that had 
already evidenced some industrial concentration prior to 1929. Mixed 
motives appear to have been at work considerations of national security, 
a desire to economize in the use of very scarce transportation resources, the 
known existence of rich raw materials in nonindustrial areas, and probably 
the usual social and cultural arguments that are advanced for a dispersion 









Engineering and 

billion rubies, 

metal industries 

1926-1927 value 












Goods trucks 







Motor cars 







Electric power 

billion kw-h. 







million tons 







million tons 






iron ore 

million tons 






Manganese ore 

thousand tons 






Pig iron 

million tons 







million tons 






Rolled steel 

million tons 







thousand tons 






thousand tons 

m f 

. . 





million tons 






Cotton textiles 

million meters 






Woolen textiles 

million meters 






Leather shoes 

million pairs 





Raw sugar 

thousand tons 






Source- Alexander Baykov, The Development of the Soviet Economic System, Cambridge University 
Press, Cambridge, 1946, p. 307. 

of industry. 17 The areas specially marked for intensive industrial develop- 
ment appear to have been Siberia and the eastern portion of European 
Russia. Coal production shows a marked percentage increase in a number 
of new regions, but in 1937 the Donbas area still accounted for 60 per cent 
of the total, as against 77 per cent in 1927-1928. Electric generating instal- 
lations were concentrated in the industrial areas, as one might expect. In 
pig iron, steel and rolled steel, the south still accounted for 53 to 63 per cent 
of total output in 1939, compared with the only slightly higher range of 
59-73 per cent in 1927-1928, although the national output of these prod- 

17. More attention seems to have been devoted to geographical dispersion of industry and to bringing 
industry nearer to raw material supplies in the third five-year plan than in the first two. The third plan also 
aimed to make the areas contiguous to the newer industrialized regions a source of food and other bulky 
materials for local consumption. See Baykov, The Development of the Soviet Economic System, p. 287. 
Transport congestion appears partly to have dictated this policy. 

Economic Development of the U.S.S.R. 197 

ucts increased roughly 400 per cent in the interval. 18 There is some evidence 
that geographical dispersion in the consumption of iron increased over the 
period, but this appears to have occasioned bottlenecks in transportation. 

On the whole, the statistical data do not seem to evidence as much 
decentralization of industrial production as is popularly assumed to have 
occurred. The percentage increases in some regions are certainly startling, 
but their share in the total is often negligible. If at the start output is 
virtually zero, its percentage increase can be enormous and it can still be a 
trifling fraction of total output. 

From the point of view of type of production as well as geography, only 
a planned and strictly controlled economic system could have followed this 
pattern of investment and output. In market economies, in which the price 
system organizes output and allocates investment, consumers' goods indus- 
tries would have increased their output much more and would have bid 
capital for investment away from producers' goods industries. Thus, the 
extreme concentration on capital goods industries, one of the outstanding 
features of Russian development, would be impossible in a market economy 
if consumers and entrepreneurs held sway without interference. The author- 
ities would have to direct the price system by a combination of taxes, 
subsidies and direct controls such as are usually reserved for time of war. 

"Social Overhead" Investments 

Activities classed as "socio-cultural services and administration" claimed 
a large percentage of investment in Russia, being second only to industry. 
(See Table 10-1.) This group includes those investments imposed by grow- 
ing urbanization incident to industrial development "public works" in 
American usage; housing; education and public health; and, lastly, admin- 
istration and military facilities and installations. 19 

A detailed breakdown of these investments, both as to kinds and types 
and in relation to productive investment in industry, would be of great 
interest, since in contemporary development programs such investments, 
which are ancillary to industrialization, present special financial difficulties 
and are of uncertain cost. There is usually the widest disagreement concern- 
ing the "indispensable minimum" in housing, public works, public health, 
education and similar facilities and services. All agree that investment for 
such purposes is unavoidable. But the question of how much and what 
kinds provokes much controversy. Unfortunately, however, such data are 
not available in detail for Russia. 

18. Pi eduction data cited in this paragraph are from Birmingham Bureau of Research on Russian Eco- 
nomic Conditions, /??s/fs of the Second Fi\e-Yeai Plan and the Pioject of the Third Five-Year Plan (Memo- 
randum No. T2), Birmingham, 1939, p 7. 

19. See Kaplan, op. cit., p 13. 

198 Approaches to Economic Development 

Lacking such a breakdown, it is possible only to note the percentage of 
total investment that went for housing. In view of the fact that some 23 
million persons migrated from rural to urban areas between 1926 and 1939, 
it is astonishing to discover that the planned investment in housing for 
1933-1937 was only 10.1 per cent of total investments and for 1938-1942 
only 8.2 per cent. And the amounts actually invested fell below those 
planned by roughly one tenth. For every ruble invested in housing during 
the period 1933-1937, 4.06 rubles were apparently invested in industry. 20 
Moreover, during the 1930s the proportion of housing within the omnibus 
category "socio-cultural services and administration" actually declined. 21 

The rapid expansion of Soviet industry must, therefore, have been made 
possible, in part, by limiting drastically the outlays on housing that is, by 
urban crowding and by "making do" with what already existed. Presum- 
ably not all the housing construction was in urban areas but much the 
greatest proportion was probably concentrated there. 

Investments in Transport 

New investment in transport during the five-year plans accounted for a 
remarkably small fraction of total investment: 17.3 per cent from 1928- 
1929 to 1932 and 15.6 per cent in the following period. (See Table 10-1.) 
However, the U.S.S.R., unlike countries that industrialized in the nine- 
teenth century, inherited a railway network from the old regime. Moreover, 
much of the fixed investment in railways is virtually indestructible, as war- 
time experience in many countries has shown; railways will continue to 
function for long periods despite substantial undermaintenance. Under- 
maintenance makes for inefficient operation, of course, and not all parts of 
the railway investment can be wholly neglected. The rolling stock will break 
down unless repairs and replacements are made. But the roadbed, stations 
and other installations are nearly permanent in their usefulness barring 
competition from other types of transport and require little upkeep. In 
the circumstances, if the U.S.S.R. was determined quickly to create heavy 
industries and was hard pressed to find the real resources to do so, the 
authorities may have been compelled to cut transport investment to the 
barest minimum. In other words, some of the new investment in industry 
may have been financed by deliberate disinvestment in the transport sector. 

20. Figures on housing investments from ibid , p. 83. Actual investments in housing in 1933-1937 
amounted to 9.1 per cent of total investments. (See Table 10-1.) Ratio of housing investments to total invest- 
ments in industry computed by the authors from data in ibid., pp. IS and 23. 

21 . According to Simon Kuznets* calculations, investments in housing in the United States averaged about 
25 per cent of total investments until 1929 and even in the depression of 1930-1940 dropped only to 13.5 
per cent See ibid , p. 23. It has recently been reported that, from the end of 1926 to the beginning of 1939, 
the urban population in Russia increased 1 12 per cent as against only a 50 per cent increase in urban living 
space. As a consequence the space per capita was reduced from 6 to 4 square meters, omitting halls, kitchens, 
lavatories, closets, etc. Gregory Grossman, "Some Current Trends in Soviet Capital Formation" (mimeo- 
graphed; Conference on Capital Formation and Economic Growth, November 1953), National Bureau of 
Economic Research, New York, 1953, p. 25, citing a forthcoming study by Timothy Sosnovy. 

Economic Development of the U.S.S.R. 199 

Although there is no clear-cut evidence that this was, in fact, the logic of 
the allocation of investment to transport under the five-year plans, the 
decisions could have been defended on these grounds. 

A recent writer puts the total "first main track" in the Soviet railway 
system in 1940 at 106,102 kilometers (66,300 miles), of which he estimates 
67 per cent was inherited from the czars; 15 per cent acquired along with 
new territories annexed in 1939-1940; and 18 per cent was newly built. Thus 
the newly built lines are estimated at 18,798 kilometers. 22 Of the total 
mileage in 1940, about 23 per cent was double-track and about 8 per cent 
was equipped with automatic block signaling. Many of the new lines were 
apparently constructed in remote new areas or for suburban needs. 

The Pressure on the Railways 

The allocation of investment between railways and other alternative uses 
seems to have put the railways under extreme pressure during most of the 
period 1928-1939. The volume of freight and passenger traffic increased 
greatly as the industrialization program got under way and more raw 
materials, finished goods and factory workers had to be moved. Colin 
Clark gives the following comparative figures on traffic density (in millions 
of ton-kilometers per kilometer of line per year): 23 

1913 1934 1934 or 1935 1935 1936 

U.S.S.R. 1.13 2.47 3.06 3.80 

Germany 1.17 

France .81 

Belgium .98 

Sweden .21 

Canada .50 

Australia .13 

United States 1.08 

Great Britain .83 

This increased traffic density, combined with parsimonious capital ex- 
penditures on the railways, made for costly delays in shipment and for 
inevitable confusion. The backlog of unshipped freight is said to have 
amounted to 20 million tons at the end of 1932, and it increased during 
1 933. Despite exhortations to improve efficiency, the backlog was still about 

22 Different authorities give rather different figures for the railway mileage of Russia in 1913 or 1917 
So far as can be determined, these discrepancies arise from two sources: first, some writers give figures 
referring to European Russia alone and either omit entirely or report separately the lines in Asiatic Russia; 
second, the figures sometimes refer to the 1913 boundaries of Russia and sometimes to the boundaries of the 
U S.S R. in the intcrwar period. The figures given in the text above are from Holland Hunter, "Soviet Rail- 
roads since 1940," in Bulletins on Soviet Economic Development, Bulletin 4, 1950, pp. 10-11. 

23. Colin, Clark, A Critique of Russian Statistics, Macmillan, London, 1939, p. 66. Clark's figures for the 
U.S.S.R. are from the Handbook of the Soviet Union, and for other countries, where the year is either 1934 
or 1935, from the official German Statistical Yearbook. 

200 Approaches to Economic Development 

15 million tons at the end of 1934. Rationing and priority systems failed to 
solve the crisis, with the result that in 1935 the government was forced to 
double-track certain key lines and otherwise improve their efficiency under 
a reorganized Communications Commissariat. When, by 1937, the freight 
backlog was reduced to tolerable size, "the amount of iron and steel allo- 
cated to the railroads was cut back, and emphasis was again placed on 
other sectors of the economy." 24 

Thus, the investment allocations to transport during the five-year plans 
prior to 1939 were evidently deliberately small and may have been insuffi- 
cient to maintain the system. This undermaintenance doubtless allowed in- 
vestment in industry to proceed at a faster pace. At the same time, however, 
it produced difficulties on its own account, because efficient transport is a 
prerequisite to efficient industrial production. 

In the middle 1930s the transport problem seems to have become so 
acute that the government had to reverse itself and assign greater resources 
to certain key railway lines in order to overcome the emergency. Whether, 
in retrospect, the Soviet authorities would conclude that their industrializa- 
tion program would have gone more rapidly, as measured by the flow of 
final product, had they invested more in transport and less directly in 
industry is an open question. One rather suspects that they would. 25 

Sources of Labor Supply 

The problem of labor supply is bound to be acute in any program of 
rapid industrialization. It is likely to present a congeries of problems rather 
than a single difficulty. In a traditionally agricultural country, the peasants 
unless overcrowding is already acute usually prefer the familiar rou- 
tines of their villages to the uncertainties of factory employment and urban 
living. Yet to man factories people have to be drawn off the land by one 
means or another. An enclosure movement, a shift in the type of agricul- 
ture, or the pressure of taxes may serve this purpose as they did in 
England, Prussia and Japan respectively. If the market mechanism with its 
wage and price differentials is unacceptable, other means must be used to 
draw labor out of agriculture and into industry. 

24. Hunter, he. cit., p 11. The above paragraph is little more than a paraphrase of Hunter's article. Dur- 
ing the period of most acute pressure on the transport system, in 1931-1936, the number of accidents appears 
to have been appalling. An article in Izvettia (March 20, 1935) announced: "According to a statement 
of the State Commissar of Railways, in 1934, there were 62,000 accidents and disasters in which 7,000 
engines were more or less seriously damaged . . . 4,500 coaches were destroyed and more than 60,000 
damaged, hundreds of people were killed and thousands injured as a result of these accidents." This is 
reported in Birmingham Bureau of Research on Russian Economic Conditions, Results of the Second Five- 
Year Plan and the Project of the Third Five-Year Plan. Since the same report gives the figure of 19,400 as the 
total number of engines in 1934, the Izvestia article would imply that in one year more than 35 per cent of 
the engines were "more or less seriously damaged." This figure is so high that it suggests the new commissar 
was making a stern announcement in order to drive home to the workers the urgent need for improvement. 

25. The foregoing discussion has related only to the railways. But according to Hunter, loc. cit., p. 11, 
"Both in 1937 and 1940, the railroads accounted for 86% of domestic freight traffic, measured in ton- 
kilometers, the remainder being divided among river (7%), sea (5%), and road carriers (2%)," 

Economic Development of the U.S.S.R. 201 

Soviet policy concerning labor procurement for industry seems to have 
relied chiefly on the pull exerted by opportunities for industrial employ- 
ment, and the push provided by agricultural mechanization. Frank Lorimer 
estimates that between 1926 and 1939 a net number of not less than 23 
million persons shifted from rural to urban areas. 26 The decreases in rural 
population were greatest, he says, "in the fertile steppe zone across southern 
Russia, western Siberia, and Kazakhstan, i.e., in the regions most adapted 
to mechanized, large-scale farming." As Lorimer points out, "These are the 
areas where the reorganization and mechanization of agriculture could 
release the largest number of potential industrial workers, simultaneously 
with an extension of sown area and an increase in agricultural produc- 
tion." 27 These regions accounted for about three fourths of the total de- 
crease in rural population, even though in 1926 they had only slightly more 
than half, 53 per cent, of the total rural population, according to Lorimer. 

As would be expected, the urban areas of in-migration were the centers 
of industrial activity and the capital cities (the administrative centers) of the 
Soviet Socialist Republics. Moscow, for example, rose in population from 
2.02 million in December 1926 to 4.13 million in January 1939; Leningrad, 
from 1.69 million to 3.19 million. Although Moscow and Leningrad thus 
had populations of over 4 million and 3 million respectively in 1939, the 
next largest city in Russia, Kiev, had only 846,000 inhabitants. 28 This drift 
to the cities and growing industrial areas was reinforced by the fact that 
industrial workers received much higher real wages than workers on the 
collective farms. 29 With the intense drive toward collectivization, inde- 
pendent peasants probably fared little, if any, better than the workers on 
the collective farms. Consequently, the countryside lost labor to the indus- 
trializing urban centers. 

Soviet Redeployment Policies 

"Planless" migrations prompted by general economic forces did not, ap- 
parently, solve the problem of labor supply and allocation completely. 
Lorimer quotes the following 1938 proclamation of the Communist party: 

It is imperative for the planned development of our national economy that 
there be maximum utilization of the labor force and that it be so distributed, 
both territorially and throughout the various branches of economy > as to result in 

26. Frank Lorimer, The Population of the Soviet Union: History and Prospects* League of Nations, 
Geneva, 1946, p. 149 and Chapter 10 pa^tm. The urban migration was far from evenly disti ibuted as be- 
tween the individual years; in 1930 and 1931, the years of greatest net migration, the numbers were 2.6 
million and 4.1 million respectively. The marked variations reported by Lorimer are puzzling. See ibid , 
p. 150. 

27. Ibid, p. 161. 

28. Ibid , p. 250. 

29. Maurice Dobb, certainly not an unfriendly critic, quotes figures which suggest that industrial workers 
in 1937 got Incomes more than twice those of workers on the collective farms. See his Soviet Economy and 
the War, p, 73. 

202 Approaches to Economic Development 

its most efficient use. The Soviet Government must immediately address itself to 
this problem. 30 

In other words, merely to draw workers from agriculture into the cities 
does not necessarily assure a labor force for the more distant regions or the 
less appealing occupations. 

The Soviet solution to this difficulty appears to have proceeded along two 
lines. First, the government set up a recruitment program based on the 
principles of wage differentials, tax exemptions, subsidies and "fringe bene- 
fits" to entice workers into those branches of the economy where labor was 
in short supply. Second, it assigned labor battalions composed of "prison- 
ers, deported kulaks, and those condemned for political deviations" to 
work at those tasks and in those areas that were unable to attract enough 
laborers. In 1940, after the outbreak of war in Europe, public control over 
migration and occupational changes was made much more stringent. 31 

On the whole, Russia apparently experienced less difficulty with the 
basic problem of labor supply than might have been expected. The number 
of "workers and employees" which excludes farmers but includes work- 
ers on state-owned farms increased between 1928 and 1938 as follows 
(figures in millions): 32 

1928 11.6 1934 23.7 

1929 12.2 1935 24.8 

1930 14.5 1936 25.8 

1931 19.4 1937 27.0 

1932 22.9 1938 27.8 

1933 22.3 

The primary means used to achieve this migration were differentials in real 
wages, mechanization of agriculture and a program of recruitment. 

Unlike many underdeveloped countries today, Russia had the advantage 
of a labor force that already had a fairly high degree of literacy before the 
five-year plans began. As early as 1926, two thirds of the males in Russia 
nine years of age or over were able to "read or write," although for females 
the corresponding percentage was much lower, only 37.1 per cent. In fact, 
the proportion of literate males was above 70 per cent in three areas that 
included many of the most important sites chosen for industrial develop- 
ment. These were the Ukraine, Belorussia and the R.S.F.S.R. the Russian 
Soviet Federated Socialist Republic, an administrative district comprising 
nineteen different regions. 33 

30. Lonmer, op. c//., p. 173. Italics added. 

31. See ibid., pp. 172-75, for details. 

32. See Baykov, The Development of the Soviet Economic System, p. 342. 

33. See the map in Lorimer, op. cit., p. 91. 

Economic Development of the U.S.S.R. 203 

During the five-year plans the concerted attack on illiteracy succeeded in 
raising the percentage of Russian males nine years of age and over able to 
read or write to 90.8 per cent in 1939 and that of females to 72.6 per cent. 
According to figures given by Lorimer, in the Tadzhik S.S.R. the literacy 
rate for males was only 6.2 per cent in 1926 but 77.7 per cent in 1939! 34 

Skilled Labor Needs 

Apart from the mere numbers needed to man the new industrial plants, 
obviously one of the greatest difficulties in a program of rapid industrializa- 
tion is to provide skilled laborers and technicians in adequate numbers. 
Machine technology is not something that an agricultural population can 
absorb overnight. In addition, a sizable body of administrative personnel is 
necessary to plan and operate a large-scale industrialization program. Plant 
foremen, engineers, supervisors, and a host of other specialized workers 
also seem to be indispensable. 

The U.S.S.R. encountered serious shortages of all such workers. Even at 
the beginning of the third five-year plan (1938) the shortages seem to have 
been acute because insufficient numbers were -being trained and recruitment 
and selection were not altogether satisfactory. 35 Foreign specialists were 
used in some of the earliest undertakings. Besides their specific assignments, 
they were to be used in such a way as to afford training to the Soviet 
specialists. 36 When the census of 1929 showed that 42 per cent of the indus- 
trial workers had had no industrial experience prior to the revolution, and 
that 43 per cent of those holding posts requiring technical training were 
without such training, it became clear that a thoroughgoing recruitment 
and education program was essential. The universities are said to have 
trained 170,000 specialists during the first five-year plan and 369,000 during 
the second; the technical schools, 291,000 and 623,000 respectively. Among 
the 106,000 graduates from the universities and technical schools in 1938, 
there were 25,000 engineers for industry and construction, and 35,000 
teachers for secondary and workers' schools, besides nearly 6,000 lawyers 

34 Ibid., p. 199. 

35. One major difficulty in the earliest years after the revolution was that Russian specialists were often 
suspect, because of their "class origins," and so were unwilling to accept responsibility for tasks that often 
they alone were able to perform. In this period, the press is reported to have carried many news items such 
as the following "Every specialist is branded as a criminal in advance." "When it is deemed necessary to 
accuse or attack a specialist, more often than not the charge brought against him is that he persecutes Party 
men. And only those who are subjected to these accusations know how difficult it is under the circumstances 
to defend one's good name." "For instance, proceedings have been started 27 times in the course of a year 
(1928) against the director of the Shaitan works on various trifling charges. The director of the Berezmkov 
works in the course of 8 months has been called upon 28 times to defend himself." As reported by Baykov, 
The Development 0} the Soviet Economic System, p. 151. 

36. Among the Ameiican firms which supplied technical assistance were Electric Auto-Lite Co., Ford 
Motor Co.,.Seiberling Rubber Co., Timken-Detroit Axle Co., and Brown-Lipe Gear Co. Some Japanese 
specialists were employed in improving the railway repairs industry. See Handbook of the Soviet Union, 
American-Russian Chamber of Commerce, New York, 1936, pp. 164-247. 

204 Approaches to Economic Development 

and economists and almost 10,000 miscellaneous specialists. 37 Despite these 
numbers, shortages continued acute. Effective industrialization consists of 
something more than constructing buildings and installing machinery. 
What Veblen called the "state of the industrial arts" must also be cultivated. 
Space does not permit discussion of the difficulties encountered in indus- 
trial management, labor incentives, differential wages, and a host of other 
matters important in the problem of labor procurement. There were diffi- 
culties with respect to all these and they were only gradually overcome. 


Few aspects of Russian economic development between 1928 and 1939 
are more controversial than those pertaining to agriculture. Collectivization 
and mechanization are the dominant features of both official policy and the 
recorded facts. Stalin established these aims when he proclaimed before the 
15th Congress of the Communist party in 1927: 

The way out is to unite the small and dwarf peasant farm gradually but surely, 
not by pressure, but by example and persuasion, into large farms based on com- 
mon, co-operative, collective cultivation of the soil, with the use of agricultural 
machines and tractors and scientific methods of intensive agriculture. There is no 
other way out. 38 

Dobb calls this pronouncement *'an act of great political courage as well as 
of genius." But others have contested this view quite apart from the 
human costs suffered because collectivization was not carried through 
"gradually" and merely by "example and persuasion." 39 

Whether collectivization and mechanization succeeded or failed seems to 
depend largely upon the criteria used to assess them. By the test of maxi- 
mizing agricultural output or improving agricultural efficiency, these poli- 
cies were probably less effective than others that might have been followed. 
On the other hand, the overriding objective of the government of the 
U.S.S.R. was to develop heavy industry quickly, and this in a social envir- 
onment that was badly disorganized and frequently hostile. Consequently, 
people and produce had to be drawn off the land into the industrializing 
urban centers. As a means toward this end the collective farm was a signal 
success. Moreover, the collective farm, especially when dominated by a few 

37. Baykov, The Development of the Soviet Economic System, pp. 161, 217 and 353. Since there were some 
22 million workers and employees in industry at the end of the first five-year plan in 1932, the half million 
(461,000) specialists and technical school graduates trained during the first five-year plan constituted around 
2 per cent of those employed in industry. This is a small ratio for a country that, prior to 1928, was pre- 
dominantly agricultural. 

38. As quoted by Dobb, Soviet Economy and the War, p 22. 

39. For example, Naum Jasny, The Socialized Agriculture of the USSR. Plan\ and Performance, Stanford 
University Press, Stanford, 1939, and Lazar Volin, A Survey of Soviet Ruuian Agriculture (Monograph 5), 
U.S. Department of Agriculture, 1951. 

Economic Development of the U.S.S.R. 205 

Party members, offered a means of keeping the central administration in- 
formed of what was afoot in the hinterland so that it could crush incipient 
resistance before it became unmanageable. The Party was never more than 
a small fraction of the total population, and the policy of relentlessly steer- 
ing the course of events must have presented acute problems at all times. 
In agriculture, collectivization offered a solution to this stubborn difficulty. 


Collectivization went hand in hand with increased mechanization. Mecha- 
nization of agriculture was emphasized partly because it served to speed 
up the familiarity of the population at large with machine technology, and 
thereby to facilitate rapid industrial development. Moreover, farm machin- 
ery, especially the tractor, seems to have fascinated the early leaders of the 
new Russia. For example, Naum Jasny writes: 

Lenin thought, or at least said, in 1919 that "if we could only provide agri- 
culture with 100,000 tractors the peasants would turn Communists." . . . Hub- 
bard correctly stated : "The tractor is to the Russian Communist something more 
than a machine; in his heart of hearts he regards it as, in some way, a mystical 
symbol of the new faith." 40 

This enthusiasm for mechanization was apparently linked with the firm 
conviction that the economies of scale in agriculture were virtually un- 

The first machine-tractor station came into existence only in 1928. By 
1940 there were nearly 7,000 such stations with 523,000 tractors. There 
were also 182,000 harvester combines in 1940, as against 1,700 as late as 
1930. In 1938, the 153,000 harvester combines are said to have performed 
slightly less than half, 48 per cent, of the total harvesting, while mechanical 
threshers did 95 per cent of the total threshing. In the same year, 71 per cent 
of the plowing is said to have been done by tractor-drawn plows. The 
quantity of fertilizers supplied to agriculture is stated to have grown from 
234,000 tons in 1928 to 3,216,000 tons ten years later in 1938. In 1913 only 
188,000 tons of fertilizer were used, according to Baykov. 41 

Changes in Output 

In view of the application of capitalistic methods increased consump- 
tion of fertilizer and increased mechanization the gains in agricultural 
production seem small. The area sown to crops in 1939 was 27 per cent 
greater than in 1913 according to the present "official" figure for 1913, 
which gives a more favorable comparison than the previous figure for that 
year. As compared with the 1928 acreage, the sown area in 1939 was up 

40. Jasny ,'op. "/., p. 27. 

41. Baykov, The Development of the Soviet Economic System, op. cit , p. 331. 

206 Approaches to Economic Development 

18 per cent. With a reduction in the proportion of the sown area used for 
grain crops from 90 per cent in 1913 to 82 per cent in 1928 and 74 per cent 
in 1939 gross production of cotton and sugar beets increased markedly. 
Between 1928 and 1939, cotton output showed almost a fourfold gain and 
output of sugar beets doubled. In contrast, production of grain increased 
43 per cent in this interval, and the average yield of grain per hectare rose 
only from 7.5 quintals in 1928-1932 to 9.3 quintals in 1939. (See Table 

There was, of course, a drain of population to the urban areas. In 1914, 
the urban population is estimated to have been 17.5 per cent of the total 
as against 33 per cent in 1939. 42 Since the total population increased from 
142.3 to 170.5 million in these years, however, the absolute numbers in 
rural areas, those presumably primarily engaged in agricultural production, 
changed very little from 117.4 million in 1914 to 114.5 million in 1939. 43 
With nearly the same number of people in agriculture, using more capital- 
istic and larger-scale methods of production as well as about 18 per cent 
more land, it is surprising that production in 1939 was so little over the 1914 
output perhaps not more than 30-35 per cent. 44 

Agriculture in Relation to Industrialization 

The role assigned to agriculture in Soviet industrialization appears to 
have been largely influenced by certain highly unique features of the indus- 
trialization process, as determined by the planning authorities. The indus- 
trialization program deliberately put almost its whole emphasis on capital 
goods. The plans did not call for any appreciable increase in the total flow 
of consumption goods, and certainly not for increased consumption per 
capita. The planning authorities must have foreseen that the peasants would 
not easily be enticed into shipping their produce to the towns and cities 
unless the industrial sector could furnish them consumption goods in ex- 
change. But the plans did not contemplate more consumption goods out- 
put. Had the organization of agriculture been left unchanged, two diffi- 
culties might well have arisen to block the industrialization program. First, 
though total agricultural output would probably have risen, the farmers 
would have tended to expand their own consumption and to increase their 

42. Alexander Baykov, "Note on the Trend of Population and the Labour Problems of the U.S.S.R.," 
Journal of the Royal Statistical Society, Part IV, 1943, p. 349. 

43. Computed from figures in Lorimer, op. tit., pp. 30-32 and 241. 

44. As Table 10-3 shows, the increase in gram crops from 1913 to 1939 was 31 per cent, and grains ac- 
counted for about three quarters of the sown area. Further details, by types of crops and regions, are given by 
Volin, op. c//., pp. 111-13. Also to be taken into account, perhaps, are the changes in livestock numbers. 
Between 1916 (which is usually considered about the same as 1913) and 1938, horses decreased about 50 per 
cent; cattle increased about 5 per cent; sheep and goats seem to have diminished about 15 per cent; while 
swine increased about 50 per cent. See ibid , p. 153. Just what weights should be assigned to these various 
changes to reach an over-all figure for production increases is too technical a question to be discussed here. 
Around 30-35 per cent appears to be a reasonable estimate. 

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208 Approaches to Economic Development 

farm investments by building up their herds and improving their farms 
in short they would have done what peasants have done for centuries. 45 
Second, there would be little in this combination of circumstances to draw 
people off the land and into the cities; labor would be short, either to build 
the factories or to man them when finished. Consequently, either the indus- 
trialization program had to be substantially modified or agriculture had to 
be so reorganized that these difficulties did not arise. Collectivization and 
mechanization of agriculture offered a solution that would drive people 
into industry and assure their food supply once they got there and, at the 
same time, check increased consumption and investment on the part of 
those who remained on the land. 


The planned industrialization of the U.S.S.R. encountered problems and 
difficulties little different from those experienced by other countries. At the 
outset, the economy lacked the entrepreneurial skills, the capital and the 
labor force from which to create an industrial system. On the favorable 
side, however, was an inheritance of capital goods in the form of a railway 
network, some industrial plants, mines and other facilities, and a small, 
tightly knit group of zealots determined to achieve a special kind of indus- 
trial development regardless of cost, obstacles or opposition. This group 
supplied the entrepreneurship, fired not by profits but by the tenets of 
dialectical materialism as pronounced by Marx, Lenin and Stalin. It was 
entrepreneurship of a special type, but it was entrepreneurship nonetheless. 

Apart from determining the basic aims of Russian industrialization- 
which were self-sufficiency in producers' goods and the development of a 
military potential adequate to the believed need the task of the Commu- 
nist entrepreneurs was to redeploy much of the labor force and inherited 
capital assets into building up heavy industry. The "real saving" necessary 
to this end was brought about by a combination of controls and organiza- 
tional changes that severely limited total consumption of all kinds food, 
clothing, housing and the like and that allocated it among persons and 
groups so that the industrial program could be carried out. Probably some 
capital formation came from resources saved through undermaintenance of 
existing capital assets. Even if a rational accounting would show that rail- 
roads and housing, for example, were not actually undermaintained, these 
sectors of the economy will probably have to be assigned considerably 
more investment than they have received since 1928 if the industrial system 
is not to become so unbalanced as to reduce its efficiency. 

45. Exactly the same problem arose in Western Europe during and immediately after World War II. The 
cities had nothing to offer the countryside, with the result that the peasants both ate better and increased 
their investments, instead of delivering their produce to the cities in exchange for paper money. 

Economic Development of the U.S.S.R. 209 

Capital Goods versus Consumers' Goods 

The all-important fact is that the Soviets did transform an agricultural 
economy into an industrialized economy in little more than a decade. At 
any rate, the U.S.S.R. became an industrialized economy in the sense that 
it possessed a capital goods sector and a substantial fraction of its popula- 
tion was engaged in nonagricultural pursuits. It was not geared to the pro- 
duction of a large flow of consumption goods; but then this was not the 
objective sought. 46 The plans concentrated on the capital goods industries 
with the result that the consumers' goods industries were allotted relatively 
few resources. It is estimated that in both 1913 and 1928 the gross output 
of consumers' goods was double the output of producers' goods, but in 
1937 and 1940 the gross output of consumers' goods had fallen to less than 
half, 46 per cent, of the gross output of all industry. 47 

Actually, in both the first and second five-year plans, the committed 
investment was only a little more than half the amount originally planned. 
In other words, as the program got under way it was found that the develop- 
ment of "key" or "basic" industries required more productive resources 
than was expected: consumers' goods industries had to go short because of 
the priorities established by the whole spirit of the program. 

It is interesting to speculate on why the development of the consumption 
goods industries proceeded less rapidly than the planned schedule. While 
it is not easy to give a satisfactory answer, there is some evidence that two 
facts may have been mainly responsible. First, the training and develop- 
ment of adequate numbers of supervisors, technicians, specialists, opera- 
tives and other skilled workers proved to be more difficult than was antici- 
pated. Since skilled labor was generally scarce, this meant a slowing down 
in the rate of progress over a wide front. In the circumstances consumption 
goods industries were sacrificed. Second, in planning the development of 
key industries, such as steel, coal and machinery, there was probably a 
tendency to concentrate on large undertakings, big production units, obvi- 
ous deficiencies, and to overlook the statistically less important but still 
indispensable ancillary industries and production units that made the whole 
undertaking workable. Hence, in addition to the planned utilization of 
resources in the major undertakings, it was found that resources were 
needed for these ancillary activities, and so consumption goods had to be 
cut more than was planned. 

Notwithstanding the frenzied pace of industrialization and the strict con- 
centration on producers' goods, the U.S.S.R. in 1937 was still well below 
other industrial countries in per capita output of these goods and very 

46. Sec p. 194. The expectation of life at birth for males rose in Russia from 41.0 years in 1926-1927 to an 
estimated 46.7 in 1938-1940. Thus well-being improved but even in 1940 was well below that in Western 
Europe. See Lorimer, op. cit., p. 125. 

47. A. Yugow, Russia's Economic Front for War and Peace, Harper, New York, 1942, p. 14. 

210 Approaches to Economic Development 

much below in per capita output of consumers' goods. Per capita, the 
U.S.S.R. produced less pig iron, steel and coal in 1937 than the United 
States, Germany, England and France did in 1929. Its 1937 per capita out- 
put of electric power and cement was surpassed in 1929 by these countries 
and by Japan as well. In per capita production of such consumers' goods as 
cotton cloth, footwear, sugar and soap the U.S.S.R. in 1937 was appreci- 
ably behind the level these countries had reached in 1929, and the gap 
would probably be even more pronounced if data on more such goods was 
available. (See Table 10-4.) 


Product Unit U.S.S.R. States Germany England France Japan 

Electric power 








Pig iron 
































Cotton cloth 

sq. me. 












. . 

. . 

























Source: A. Yugow, Russia's Economic Front for War and Peace , Harper, New York, 1942, p. 32. 

National Income 

Between 1928 and 1937 the Soviets officially reckon that their net na- 
tional income increased from 25.0 to 96.3 billion rubles of the base year 
1926-1927. This is an increase of 3.85 times, or an annual average of 16 
per cent. But most authorities agree that this reckoning overstates the 
increase, although by exactly how much depends upon the methods of 
computation. Probably the average annual rate of increase did not exceed 
8.8 per cent and was not less than 5.1 per cent. Gregory Grossman seems 
to feel that 6.5 to 7 per cent is a reasonable approximation. 48 Whatever the 
"true" rate, if any such can be firmly established, the expansion was cer- 
tainly a rapid one and one which has rarely, if ever, been matched by other 
countries even for short periods. 49 

Basic Problems: Skilled Labor 

The economic development of the U.S.S.R. illustrates some of the prob- 
lems that might be encountered by other countries bent on development. 

48. Gregory Grossman, "Soviet National Income and Product: Trends and Prospectives" (processed), 
Russian Research Center, Harvard University, Cambridge, 1952, pp. 7 and 8^". 

49. See Colin Clark, The Conditions of Economic Progress, 2d edition, Macmillan, London, 1951, Chap- 
ters 10 and 11. 

Economic Development of the U.S.S.R. 211 

It would appear that the most difficult problem of all was that of provid- 
ing adequate numbers of skilled and trained workers capable of carrying 
through the construction program as planned, and capable also of operat- 
ing the industrial facilities when they were completed. Planning steel mills 
and hydroelectric power plants is one thing. To bring a large rural popula- 
tion quickly to a degree of technical proficiency in industrial techniques and 
operations is something else again. Observation and reflection upon ad- 
vanced industrial cultures suggest that, on the human side as well as in the 
more narrowly technical aspects, the process of industrialization is highly 
organic. It is not something that can be fabricated overnight. 

In planning the industrialization of the U.S.S.R., a large educational 
program was recognized as an important part of the whole undertaking. 
Much training was planned and a good deal carried through. Neverthe- 
less, shortages of skilled personnel appear to have been one of the main 
limitations in the effort to raise output. More resources used for labor 
training and less for plant construction might have been a wiser allocation. 
In formal planning for deliberate industrialization, there may be an almost 
inevitable tendency to concentrate on the more tangible undertakings such 
as plants, equipment, machinery and raw materials, and to allocate re- 
sources accordingly. A priorities system for the allocation of scarce re- 
sources is likely to be so administered that tangible rather than intangible 
undertakings get a high rating. 50 Consequently, when the scarce resource 
becomes even scarcer than was originally contemplated, it is the compara- 
tively intangible undertakings that are most likely to suffer. It may not be 
so surprising, therefore, that the Russian five-year plans slighted worker- 
training programs in comparison with construction programs and output of 
"basic" materials. In retrospect, the wisdom of this policy is questionable. 
In the industrialization of other areas, special care might be exercised to 
prevent a similar development. 


More resources might also have been allocated to transportation. Effi- 
cient transportation is such an integral part of effective industrial produc- 
tion that it is perilous to jeopardize it by undermaintenance. Whether the 
U.S.S.R. actually did so is obviously difficult to judge. However, statements 
of the Soviet authorities themselves, as well as certain data already cited, 
suggest that transportation might have been allocated a greater share of 
investment with beneficial effects on total output. 

50. There are some interesting parallels between the difficulties encountered in administering a priorities 
system of allocation, in contrast to allocation by the price system, in the American war economy and the 
Russian industrialization program. 

212 Approaches to Economic Development 

Large-Scale Undertakings 

There is, finally, some evidence that the planning authorities were overly 
impressed with the possible economies of large-scale undertakings and 
insufficiently appreciative of their limitations and handicaps. The result was 
that investment commitments were often a long time in coming into pro- 
duction, that transport facilities were strained, and, not least in importance, 
that management and control problems were multiplied out of proportion 
to the gain in productive capacity while, at the same time, there was a loss 
of flexibility in production. 51 The evidence is not conclusive, but there is 
more than a suggestion in the record that this was the case. 

These comments on the industrialization of the U.S.S.R. are necessarily 
general and to a degree inconclusive. But the Russian experience does sug- 
gest how complicated a process industrialization is and how easily many 
of the most important factors may be overlooked or given insufficient 
weight. Industrialization is something more than the erection of factories 
in a rural wilderness. People, as well as the landscape, have to be industrialized. 

51. In the early days of the war production program in the United States, there appears to have been a 
similar tendency to assume a direct relationship between size and efficiency and to construct production 
units that were too big for optimum efficiency For example, if it were to be done over again, would the 
Willow Run plant be authorized <? 

1 1 . The Pace of Material Progress in the Past 

THE EXPECTED DIVIDEND OF ECONOMIC development nowadays is an im- 
provement in average material well-being. If this dividend is to be realized, 
total output must grow more rapidly than population. Whether or not this 
objective will be achieved in the now underdeveloped countries remains an 
open question. It is worth examining the relationship between growth in 
output and growth in population in the developed countries, since this 
relationship must have determined the per capita gain in material well- 
being that they have realized. As their development programs get under 
way, the presently underdeveloped countries may do much better on both 
counts: real incomes per person may rise more rapidly than they have in 
the past. Nevertheless, the historical record of the already developed coun- 
tries may provide a rough benchmark against which to check contemporary 

In comparing rates of growth as between one country and another, at 
least two general considerations must be kept in mind. First, there is a 
strong presumption that the later in time a country develops the more 
rapid should be its progress. Since it comes late to the task, it can borrow 
from already developed countries their technical achievements with the cer- 
tainty that the techniques will work all the experimental, pilot-plant diffi- 
culties and costs have already been shouldered elsewhere. And, because 
technical progress is cumulative, the later in time the borrowing occurs, the 
more there will be to borrow. Hence, the latecomer can apply borrowed 
knowledge over a wider front. For example, Russian development after 
1928 proceeded on a number of fronts simultaneously, in pig iron, steel, 
tractors and motor cars, etc. In 1900, it would have been impossible to 
borrow tractors or, in 1850, the advanced technology of steel production. 
By the same token, the longer a country delays before embarking on de- 
velopment, the greater will be the gap between its level of economic 
achievement and that of the technically advanced economies. To this 
extent, it may be harder to overcome the gap. Nevertheless, its rate of 
progress should be comparatively more rapid than that of the countries 
that developed earlier. 

The second general comment on rates of development is that the actual 
rates in particular countries always reflect random influences as well as 
developmental factors. A war, fear of external aggression, social upheavals 


214 Approaches to Economic Development 

and other social, psychological or political factors will accelerate or hold 
down a country's rate of economic development according to the timing 
and combination of circumstances that accompany them. The fact that 
Japan, for example, was able to pass from a quasi-feudal economy to an 
industrial economy without a violent social revolution was probably ex- 
tremely favorable to its economic development. Similarly, the 1917 revolu- 
tion in Russia put economic development in reverse for a time, while later 
on the fear of external aggression drove it rapidly forward. Thus, before 
development begins, the facts of a country's economic position, both 
internally and in relation to the rest of the world, do no more than fix its 
potential rate of growth. It will approximate or fall short of this potential 
according to how certain chance or circumstantial factors impinge upon it. 
In the future, as in the past, these factors are likely to be quite as important 
as the economic data. 


National income series are frequently used nowadays to portray a coun- 
try's economic performance over a span of years, or to compare economic 
performance between countries as of a particular year. Provided the time 
span is moderate, or the degree of development in the countries compared 
is not widely disparate, such national income comparisons per capita are 
often highly revealing. Neither qualification can be met for the countries 
that developed economically between, say, 1800 and 1938. Even if national 
income calculations were available for England, Germany, France, Japan, 
Russia and the rest of these countries for the whole period 1800-1938 
which of course they are not most of the conclusions drawn from such 
data as to relative rates of development would still be dubious. If, for 
example, one had figures of per capita income for England in 1800 and 1900 
and found that the 1900 income was some multiple, x, times that of 1800, 
one would find the utmost difficulty in interpreting what this meant be- 
cause of the enormous changes in products consumed, in the way of life, the 
scale of values, and so on between these years. Let any reader old enough to 
remember the 1920s in the United States try to compare that decade with 
the 1950s and the difficulties will be readily apparent. 

The Long-Run Growth in Income 

According to Simon Kuznets, "the rates of growth in per capita income 
(in constant prices) are quite high. On a per century basis, they are: USA, 
1869-1938: 381 percent; Sweden, 1861-1938: 661 percent; UK, 1860-1938: 

The Pace of Material Progress in the Past 215 

231 percent; France, 1950-1938 [sic: 18507-1938]: 135 percent." 1 Reduced 
to a crude annual basis that is, the total percentage gain divided by the 
years in the intervalthese figures become: United States, 4.8 per cent; 
Sweden, 8.5 per cent; United Kingdom, 2.9 per cent; and France, 1.5 per 
cent. But such figures mask the important facts that the rate of growth 
was far from even over these long intervals; that the rate of growth in the 
United Kingdom was almost certainly higher before than after 1860; and 
that, as Kuznets points out, "for the economically advanced countries, we 
observe in all provided the record is carried far enough back a retarda- 
tion, a decline in the percentage rates of growth of population, total na- 
tional income, and income per capita." 2 Tn the case of Japan, the index of 
per capita national income in constant (1928-1932) prices is estimated to 
have moved as follows: 3 

1878-82 100 

1888-92 137 

1898-1902 189 

1908-12 220 

1918-22 270 

1928-32 400 

1938-42 526 

Crudely reckoned as before, this gives an annual average, over the 60 years, 
of 7.1 per cent; but it will be observed again that the rate varied from 
decade to decade. For Russia the comparable per capita figure for the 
period 1928-1939 would probably be higher, though by how much is open 
to dispute. 

Capital Formation 

Rates of capital formation might be compared among countries on 
several bases. Perhaps the most useful method would be to compare 
increases in the capital stock expressed as a percentage of the capital stock 
in other words, the rate at which the capital stock was growing as 
economic development moved forward. Apart from the inherent theoretical 
difficulties, which are formidable, the data necessary for such calculations 
are simply not available over long periods for any of the countries that 

1. Simon Kuznets, "Population, Income and Capital" (mimeographed), Round Table on Economic 
Progress, International Economic Association, Santa Marghcrita Ligure, Italy, 1953, p. 6. 

2. Ibid., p. 8. 

3. Adapted from Shigeto Tsuru and Kazushi Ohkawa, "Long-Term Changes in the National Product of 
Japan since 1878," in Milton Gilbert (Ed.), Income and Wealth, Series III, International Association for 
Research ip Income and Wealth, Bowes and Bowes, Cambridge, 1953, p. 39. 

216 Approaches to Economic Development 

developed during the nineteenth century. 4 Furthermore, the absence of 
data on the capital stock in various European countries a century or more 
ago is not likely to be remedied in the near future, if ever. 

Some crude estimates of the ratio of net capital formation to net national 
product have recently been compiled for a few countries. These show a 
wide variation- from a figure as high as 14.5 per cent in the United States 
in the decade 1889-1898 to one of less than 3.5 per cent for Sweden in 
1861-1870. For the United Kingdom between 1870 and 1909, net capital 
formation seems to have been a fairly steady proportion of net national 
product at about 8.2 per cent. In France, the rate is believed to have been 
similar at 8.3 per cent for the period 1853-1878, but only 4.6 per cent for 
the period 1878-1903. The Swedish rate seems to have risen each decade 
from its initial 3.5 per cent in 1861-1870 to 13.5 per cent in 1911-1920. 5 

Other than their obviously considerable range, these figures do not reveal 
much. At best, they seem only to confirm, in a very crude fashion, what 
one would have supposed to have been true of capital formation from the 
figures given previously on the change in per capita income in constant 

Difficulties of Partial Measurement 

Lacking an over-all measure of economic achievement, as provided by 
national income, one must resort to partial measures. Because economic 
development is a many-sided process, individual statistical series can be 
only partially descriptive at best and sometimes downright misleading. For 
example, an index of manufacturing production or industrial production 
will almost certainly exaggerate economic progress as a whole simply be- 
cause it probably portrays the very sector that is developing most rapidly. 
Similarly, to use the rates of increase in production of certain products as 
indicative of manufacturing as a whole especially where these products 
were virtually nonexistent before the period of development will usually 
exaggerate, by implication, the rate of increase in the whole manufacturing 

4. Among the theoretical difficulties are such questions as, What is a suitable concept of capital and hence 
of capital formation? If capital growth is conceived as one of the primary causes of the growth in total out- 
put, then many items for instance, houses and many consumers' durable goods are scarcely relevant be- 
cause they are more an expression of the fact that total output did grow than an explanation of why it grew. 
On the other hand, if the focus is on the growth rate of output as a whole, then there are reasons for believing 
that the capital stock will tend to grow in proportion to output, so that it may not give any additional infor- 
mation. A further difficulty is that the yield rate on capital investment may change substantially over long 
periods so that there is no uniform significance, in terms of income, to be attached to a given percentage 
increment to the capital stock. Finally, capital equipment may be, and almost certainly has been, of different 
degrees of durability over the past two centuries; the same gross capital formation means a different amount 
of net capital formation because the average depreciation rate properly to be applied to the existing capital 
stock keeps changing. All these are problems over and above those inherent in the question of how to value 
capital by a capitalization method or otherwise. 

5. These figures are drawn from Simon Kuznets, "International Differences in Capital Formation and 
Financing" (mimeographed; Conference on Capital Formation and Economic Growth, November 1953), 
National Bureau of Economic Research, New York, 1953, Appendix A, Table 1-3. Kuznets also gives figures 

r *ViA t>itis\ rf <vrrtcQ nnrtttnl frtrmntinn tr orrcc nattnnal nrrtrliirt 

The Pace of Material Progress in the Past 217 

or industrial sector. To illustrate by an extreme example: Table 10-2 shows 
that the Soviet output of motor cars increased from 1,400 in 1929 to 
200,000 in 1937. But this large increase is obviously far greater than the 
increase in industrial output as a whole, while this in turn was far greater 
in Russia than the rise in total output, which includes agriculture, industry 
and services. A small segment of an economy can grow at a very high 
percentage rate at the expense of, or in lieu of, growth elsewhere. In 
Russia, the very rapid growth of heavy-goods production was possible in 
part because consumers' goods production was deliberately held down. 

Coal Output as a Measure of Development 

Apart from textiles, economic development in the past has been built 
heavily on coal and iron. Consequently, comparative rates of growth in 
output of coal and iron afford at least a rough indication of the pace of 
economic development. Because of the rise of electricity and oil as sources 
of power, however, coal is now less the primary source of power than it 
was in the nineteenth century. Hence, economic development in the future 
will be founded rather less on coal than it has been in the past. Moreover, 
many of the now underdeveloped countries have practically no coal and so 
will resort to hydroelectric power and oil instead. 

The growth of coal production in the nineteenth century can be cal- 
culated for several countries. For England, coal output in 1826 was 31 per 
cent above that in 1816; 1836 was nearly 43 per cent above that of 1826; 
1846 was 46 per cent above 1836; and 1856 was 43 per cent above 1846. In 
other words, between 1836 and 1856 in England, coal production increased 
on the average approximately 4 per cent a year. By 1836, England was, of 
course, well into the industrial revolution although the big period of rail- 
way construction was still ahead. For France, the comparable percentage 
increases in coal production beginning with the decade 1820-1830 and end- 
ing with that of 1860-1870 were as follows: 80, 66, 46, 88 and 36. These 
show much greater variation but also a higher average than the figures for 
England. Germany's coal production increased 100 per cent in the decade 
1860-1870, but in the three succeeding decades to 1900 the increases were 
only 74, 50 and 67 per cent. In Belgium, coal production increased 70 per 
cent between 1831 and 1840, 40 per cent from 1840 to 1850, 65 per cent 
between 1850 and 1860, 41 per cent from 1860 to 1 870, but only 24 per cent 
from 1870 to 1880. For Sweden which produced no coal the percentage 
increases in the consumption of coal and coke using a five-year average, 
such as 1861-1865 compared with 1871-1875 by decades from the early 
1860s to the early 1900s appear to be 82, 84, 66 and 23. In Russia between 
1929 and 1938, coal production rose by 231 per cent. (See Table 11-1.) 


Approaches to Economic Development 

Accepting Russia as a special case for several reasons, it is somewhat 
surprising to find that the variations between countries are no greater. Less 
than 50 per cent per decade seems to be a bit on the low side, while slightly 
more than 80 per cent seems to have been near the ceiling. Thus, in very 
rough terms, 5-8 per cent represents about the average annual rate of 


(Millions of Tons) 

England United State? France 

Germany Belgium 


/toss /a 


21 o 









Source* Figures for England arc from J. 1 1 Clapham, An Economic History of Modern Bntam, 2d edition, 
Cambridge University Press, Cambridge, 1930, p. 431; for Sweden, from G A Montgomei y, The Rue of 
Modern Industry in Sweden, King, London, 1939, pp. 136-37; for Russia, from A Baykov, The Development 
of the Soviet Economic System, Cambridge University Press, Cambridge. 1946, p. 307; for other countries 
figures are from Simon Kuznets, Secular Movement? in Production and Prices, Houghton Mifflin, Boston, 
1930, Appendix, which has also been used to supplement some of the sources just cited Certain relatively 
unimportant notes appearing in some of the sources have been omitted 

a. Data are for consumption of coal and coke and are based on five-year averages. 

b. 1929. 












































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If the percentage increases per decade for the various countries are con- 
verted to compound annual rates, however, the range is somewhat lower. 
The compound annual rates of growth seem to have been most frequently 
about 4-6 per cent though with some lower and some higher rates. (See 
Table J 1-2.) 

The Pace of Material Progress in the Past 219 

Output of Pig Iron 

The comparable figures for pig iron show for most countries for which 
the data are available somewhat greater variations decade by decade and, 
on the whole, somewhat smaller rates of increase. For the United Kingdom, 
for example, after 1800 only once did the annual compound rate of increase 
go above 5.5 per cent; that was in 1830-1840, when the rate was 7.5 per 




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a. Data are for consumption of coal and coke and are based on five-year averages. 

cent. For France, the highest rate achieved was 5 per cent in 1840-1850; 
the other periods show rates of increase that are below 5 per cent more 
frequently than above. The German rate was apparently 9.0 per cent in 
1840-1850, and above 7 per cent from 1860 to 1880. Belgium sustained the 
noteworthy rate of 7-8 per cent from 1830 to 1860. The rate of increase in 
the United States was above 9 per cent from the early 1870s to the mid- 
18908. Canada's rate for 1891 to 1910 was higher, and the rate reached 
24 per cent in the decade just before World War I. 

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The Pace of Material Progress in the Past 221 

Broadly speaking, the countries that industrialized later had somewhat 
more rapid rates of increase in pig iron production than those that indus- 
trialized earlier, although there were exceptions. A compound annual rate 
of increase of under 5 per cent was not at all unusual in the nineteenth 
century, while rates of increase of above 7 per cent were rather out of the 
ordinary. (See Tables 11-3 and 11-4.) 

Manufacturing Production 

Dr. Folke Hilgerdt has computed indexes of manufacturing for several 
countries back to 1870 and these also afford some indication of relative 
rates of growth at different periods in different countries. According to these 
figures, the compound annual rate of increase in manufacturing between 
1871 and 1913 was more frequently below 3.5 per cent than above, espe- 
cially in those countries that accounted for the largest proportion of total 
manufacturing output prior to 1913. The rate of increase in Sweden from 
the early 1880s to 1905 was notably high. (See Table 11-5.) 

Figures for production of coal, pig iron and manufacturing undoubtedly 
show more rapid rates of increase than figures for output as a whole would 
show if complete data were available. Yet, in general, the compound annual 
rates of increase in these three areas were only 3 to 8 per cent or there- 
abouts. If the figures were corrected for population growth by reducing 
them to a per capita basis, the annual rate of increase would be smaller 
still. Thus, although the nineteenth century was a period of very rapid 
economic development, the rates of growth of even those indices that por- 
tray what was undoubtedly growing most rapidly seem to have been sur- 
prisingly small. 


Contrary to an apparently popular view, secular growth in population 
has not been the "normal" state of affairs throughout human history. The 
population history of Western Europe during the past two centuries is quite 
unique. As one eminent scholar, R. R. Kuczynski, has written: 

Practically nothing is known of the trend of the total population of Europe prior 
to the eighteenth century; there is no reason to assume that the population in 1700 
was any larger than in 1600 or that the population in 1600 was much larger than 
in 1300. Although there is no doubt that the total population of Europe increased 
in the course of the eighteenth century, the size of the increase is not known. It 
amounted apparently to about 25 per cent in France, to about 50 per cent in 
England and Wales and to about 60 per cent in Sweden ... It was probably 
much larger in Russia, where the population of the territory constituting the 
empire -of Peter the Great is reported to have doubled between 1724 and 1796. 
From 1770 to 1800 the combined population of England, Denmark, Norway, 



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224 Approaches to Economic Development 

Sweden, Finland, France, Spain and Italy rose from 61,000,000 to 69,800,000, or 
by one seventh. 6 

Carr-Saunders reaches a similar conclusion: "there may have been some 
increase in the population of certain parts of Europe during the later years 
of the seventeenth century ... On the whole it is more likely that the 
definitive increase in the population of Europe began after than before 
1700." 7 

Population Growth in the Nineteenth Century 

Whatever uncertainty attaches to the estimates of European population 
for the seventeenth and eighteenth centuries, those for the nineteenth 
century and later probably are reasonably accurate. The best available 
estimates show a notably high rate of population increase in the United 
Kingdom from 1800 to 1840 and again from 1860 to 1870; an even higher 
rate in Germany and Belgium from 1870 to 1910; and a still higher rate in 
the Netherlands from 1870 to 1920. Unusually high rates of increase in 
Sweden and Norway between 1840 and 1860, in contrast to appreciably 
lower rates both before and after, are puzzling unless they can be attributed 
to the rising prosperity from foreign commerce and shipping. 8 Low rates of 
increase in France, where total output undoubtedly improved, especially 
during the last half of the century, and a rise in Spain after 1880, where 
aggregate output probably increased only moderately, are contrary to the 
general pattern. Tn the main, the period 1820-1910 was characterized by 
rates of population growth in the several European countries that roughly 
parallel the timing of their accelerated economic development. (See Tables 
11-6 and 11-7.) 

Decline in Mortality 

The growth of population in Western Europe in the late nineteenth 
century was almost entirely attributable to the fall in mortality rates that 
accompanied development. 9 

6. R. R. Kuczynski in Encyclopaedia of the Social Sciences, Vol. 12, Macmillan, New York, 1933, p. 243. 
While European population as a whole may not have increased between 1600 and 1700, the evidence seems 
to suggest that the population of some individual European countries increased appreciably during the 
seventeenth century. The population of England appears to be variously estimated at from 3.5 to 4 8 million 
about 1600 and at from 5.5 to 6.5 million about a century later. J. N. L. Baker, "England in the Seventeenth 
Century," in H. C. Darby (Ed ), An Historical Geography of England before 1800, 2d edition, Cambridge 
University Press, Cambridge, 1948, pp. 435/7 See also A. P Usher, The Industrial History of England, 
Houghton Mifflin, Boston, 1920, p. 89. 

7. A. M. Carr-Saunders, World Population, Oxford University Press Oxford, 1936, p. 43. 

8. See G. A. Montgomery, The Rise of Modern Industry in Sweden, King, London, 1939, pp. 115 ff. 

9. The decline in mortality rates and the resulting growth of population in nineteenth-century Europe 
would probably have been considerably greater had development not been accompanied by increasing 
agglomeration and urbanization of the population. Authorities seem to agree that the growing urban areas 
generally had higher mortality rates than the rural areas. Without migration from the countryside, the towns 
would probably have declined in population because their birth rates are usually believed to have been well 
below their death rates. On comparative rates of growth of cities and urban areas in different European 
countries during the nineteenth century see Adna Ferrin Weber, The Growth of Cities in the Nineteenth 
Century, Columbia University Press, New York, 1899, pp. 144-45 and passim. 

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Sources: Figures for 
hanan and Friedrich ^ 

g, Aperfus statistiques i 
; or from publications 

. Figure in 1830 colum 
. Figures in columns f( 

. Figure in 1910 colum 
. Figures in columns fc 
. Figure given for 1880 
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The Pace of Material Progress in the Past 221 

The primary reason why economic development tends to cut mortality 
appears to be twofold: first, greater output per capita permits greater con- 
sumption per capita, including better diets, clothing, housing, personal 
sanitation, all of which tend to lessen morbidity and mortality; second, 
because of its enhanced productivity, a more developed society can provide 
its people with the public health and sanitation measures (and the basic 
substructure of scientific knowledge on which these rest) which hold disease 
in check. A poor country can neither afford the health and sanitation 
measures necessary to lower mortality directly, nor does its economy 
afford the people a level of consumption high enough to enable them to 
resist disease. 10 

Mortality Decline at Different Ages 

In Western Europe the influence of economic development on mortality 
was typically not uniform in all age groups nor were its effects equally 
visible with respect to the various causes of death. In other words, to judge 
from the rather scanty data available, development appears to have 
lowered mortality much more at some ages than at others and to have 
reduced deaths from some causes much more than from others. 11 

As between different age classes, infant and child mortality seem to 
have shown the greatest decline. Between the first decade of the nineteenth 
century and the first decade of the twentieth, the over-all infant mortality 
rate for legitimate births in Sweden fell from 199 to 85. The rate in England 
and Wales at the beginning of the nineteenth century is apparently not 
known, but in 1841-1850 it was 167. This was higher than the Swedish 
rate at the time (153), but about 16 per cent below the Swedish rate at the 
beginning of the nineteenth century. After 1841-1850 the English- Welsh 
rate declined little until the end of the century. 12 The most suggestive infor- 
mation on mortality by age categories is provided by the Swedish data 
said to be much the most complete for any country for the period since 
1750. The greatest declines were achieved at the younger ages even though 

10. Poverty and high death rates, moreover, are likely to be associated with, if not actually caused by, 
apathy and acceptance of the kind of conditions of filth, squalor and neglect which breed disease and facili- 
tate its spread. A tidy slum, for example, is a contradiction in terms. 

Even in countries with high average incomes per capita, economic status is inversely correlated with death 
rates. For example, in England and Wales, "The standardized mortality index for males was 90 for social 
class I (professional) compared to 1 1 1 for social class V (unskilled workers) . . . The standardized mortality 
index for married women, grouped according to the social class of the husband, shows a similar relation- 
ship, varying from 81 for class I to 113 for class V ... Infant mortality varies more sharply with differences 
in socio-economic status than does general mortality. In England and Wales, for example, the legitimate 
mortality rate, in 1939, was more than twice as high in class V ... as in class I ... and rose with each 
step from class I to class V." United Nations, "Economic and Social Factors Affecting Mortality," Finding* 
of Studies on Relationships between Population Trends and Economic and Social Factors (mimeographed), 
Chapter 1 of the final report, March 14, 1951, pp. 27-28. 

1 1. While age of death and cause of death are often closely correlated, they are not necessarily so linked ; 
for example, enteritis probably is age linked while cholera, typhoid and diphtheria are not. 

12. Figures from S. Peller, "Mortality, Past and Future," Population Studies, March 1948, p. 409. 

228 Approaches to Economic Development 



Age Group 





Under 1 






























65 and over 





Source United Nations, "Economic and Social Factors Affecting Mortality," Finding* of Studies on 
Relationships between Population Trends and Economic and Social Factors (mimeographed), Chapter 1 of the 
final report, March 14, 1951, p. 16. 

notable declines occurred also at the middle and later ages. 13 (See Table 

These reductions in infant and child mortality doubtless were traceable 
to two factors: the general improvements in diet and physical comfort of 
mothers and young children in both the prenatal and postnatal period; and 
the striking advances in knowledge and practice concerning the control and 
treatment of infectious diseases and other childhood ailments. For example, 
it is reported that: 

Infectious diseases which strike by preference during the ages of childhood and 
early maturity were by 87 per cent reduced in England and Wales from 1848-72 
to 1947. Diarrhea and enteritis, a major cause of death for infants and children, 
was lowered 86 per cent; maternal mortality 80 per cent and pneumonia, 53 
per cent. 14 

There is probably no way of determining to what extent the declines in 
infant and child mortality in developed countries are traceable to generally 
improved living conditions as against advances in the handling of particular 
sources of morbidity. 

Progress and Mortality 

Insofar as economic progress has entailed improved housing, shorter 
work periods, sanitation control and a generally better physical environ- 
ment in which to work, especially in urban areas, it has brought truly 

13. English and Swedish experiences were broadly similar but the sequence in which the different age 
groups showed a decline in their respective mortality rates was not quite the same. In England between 1850 
and 1900 mortality fell somewhat more in the age group 5-14 years than in the group 0-4 years. See United 
Nations, "Economic and Social Factors Affecting Mortality," pp. 16-17 and references there cited. 

14. Ibid., p. 18. These percentages relate to the direct causes of death in a medical sense. Probably the 
accuracy of diagnosis has improved over the past century and, if so, this would make the percentage declines 
rather more striking than the "facts" might warrant. 

The Pace of Material Progress in the Past 229 

remarkable declines in mortality. Better sanitation through improved 
sewage disposal, water supply and facilities for personal cleanliness has 
cut mortality sharply by drastically reducing the incidence of such "filth" 
diseases as typhus, cholera, plague, typhoid and dysentery. Some of these 
diseases have become almost clinical curiosities in the United States and 
most other developed countries. 15 

The virtual disappearance of many of these diseases from the developed 
countries could not have occurred of course without the great strides that 
have been made in scientific medicine and public health. And many of 
these are almost contemporary achievements. It was only in the last 
quarter of the nineteenth century that Pasteur and Koch established the 
microbic origin of infectious diseases. The implications of their discoveries 
were enormous for, 

As a consequence, the formerly vague consciousness of a relation between filth 
and infectious disease, coloured by the traditional Hippocratic doctrine of 
miasms, gave way to the scientific knowledge of the real causation of these 
diseases. Progress followed rapidly. Lister, inspired by the above events, made 
surgery safer and more effective through the application of antiseptic methods. 
Behring's antitoxin, which conveys immunity against diphtheria, was placed on 
the market in 1892. During the following fifty years, the death rate from diph- 
theria declined by over 90 per cent in the United States and several other coun- 
tries. 16 

But these were merely the beginnings of modern medical science and of 
systematic efforts to establish comprehensive public health programs. Even 
since 1920, the progress made in both has been enormous. Recent advances 
in sanitation, inoculations, antibiotics and other developments less familiar 
to the layman have probably gone beyond even the most optimistic 


Considerations of social welfare played a distinctly minor role in the 
drive for economic development in the Western world after 1815. Neverthe- 
less, the astounding gain in the average level of human well-being which 
accompanied this development is both its most important consequence and 
the primary source of its interest in the present day. To be sure, this gain 

15. It is easy to forget that many of the sanitary practices which today are accepted as a matter of course 
in developed countries are of very recent origin. Only in 1865 did London provide a series of interconnected 
sewers which gradually displaced open ditches and cesspools. Filtered water for cities apparently did not 
become general in Europe until 1900; chlormation was introduced only after 1900. The fall in the price of 
soap and cotton goods apparently had much to do with making some pretense of personal cleanliness pos- 
sible for most people. The more powerful cleansers which now find so many applications in factories and the 
home have only been available for a few decades or years. See ibid., pp. 20-21. 

16. Ibid., p! 22. 

230 Approaches to Economic Development 

was not everywhere the same nor did it cumulate at a steady rate from year 
to year. But taking the period from 1815 to 1914 as a whole, or more 
especially its latter half, the improvement in the lot of the average man was 
probably greater than during any comparable span in recorded history. 

Population Growth 

Perhaps the most incontrovertible evidence of the improvement in the 
average level of human well-being in Europe during the nineteenth century 
is the fact that Europe's population more than doubled between 1800 and 
1900. This growth in population was the end result of a complex of changes 
that profoundly altered the whole environment and context of human 
existence. The life expectancy of the average Western European in 1800 was 
probably little more than 33 or 34 years at birth, while his familial de- 
scendant in 1890 had an expectancy of about 44 years; a child born in 1890 
could look forward to almost a 30 per cent longer life span on the average 
than one born in 1800. 17 The authors of a recent article go so far as to 
proclaim that "if the expectations derived from prehistoric skeletons and 
from ancient tombstones are even approximately correct, expectation of 
life has increased as much since 1800 as it did during the entire preceding 
50,000 years." 18 

Moreover, the varying rates of growth of population by decades in par- 
ticular European countries seem to conform fairly well to the uneven rates 
of economic progress as recorded by familiar indices. The relatively high 
rates of population growth in England between 1820 and 1840, and in 
Germany between 1870 and 1910, and the notably higher rates of growth 
in Belgium than in France between 1830 and 1900, all seem to suggest a 
close relation between economic development and improved well-being. 

Diet as an Example of Well-Being 

The stuff and substance of this improved well-being is well illustrated by 
a few figures showing the changes in per capita consumption of some 
familiar articles in the English diet between 1840 and 1886: 19 

17. An addition often years to life expectancy may not appear dt all noteworthy today, in view of the very 
remarkable improvements that have so raised life expectancy in advanced countries in recent decades. In 
the United States, for example, the life expectancy of white males at birth rose from about 49 years in 1900 
to about 64 years in 1940. But this is a distinctly modern phenomenon, wholly untypical of the history of 

18. Hornell Hart and Hilda Hertz, "Expectation of Life as an Index of Social Progress," American 
Sociological Review, December 1944, p. 621. 

19. David A. Wells, Recent Economic Changes, Appleton, New York, 1889, p. 356. Since these commodi- 
ties were either subject to excise tax or imported, there is a strong presumption that the figures are not far 
wide of the mark. The gains for wheat and wheat flour, however, are probably considerably exaggerated. 

The Pace of Material Progress in the Past 231 

Annual Per Capita 
Item Unit Consumption 

1840 1886 

Bacon and ham Ib. 0.01 11.95 

Butter Ib. 1.05 7.17 

Cheese Ib. 0.92 5.14 

Eggs no. 3.63 28.12 

Wheat and wheat flour Ib. 42.47 185.76 

Raw sugar Ib. 15.20 47.21 

Refined sugar Ib. 0.00 18.75 

Tea Ib. 1.22 4.87 

Bacon, butter, flour, eggs and tea may not by themselves assure a longer 
life span but they doubtless increase resistance to disease as well as add to 
the satisfaction of the daily round. The remarkable increases in per capita 
consumption of these products provide homely examples of how the wel- 
fare of the English population improved in the last half of the nineteenth 
century. The fourfold increase in sugar, the more than fourfold increase in 
eggs and even greater increases in butter and cheese arc striking illustrations 
of welfare gains. 

Real Wages 

The behavior of real wages money wages in terms of their command 
over goods and services at prevailing prices affords another measure of 
improved well-being. A recent careful study by Phelps Brown and Sheila 
Hopkins compares average real wage rates in 1860 and 1913, and in 1919 
and 1939 as well, in five countries. 20 According to these investigators, the 
money wage rate paid in employment in 1913 in France and Germany was 
such that it was able to buy at 1913 prices 60 per cent more than the 
average wage rate of 1860 would buy of goods and services at 1860 prices; 
in the United Kingdom, 90 per cent more; and in Sweden, three times as 
much. (See Table 11-9.) 

These figures compare wage rates, not earnings, by means of a fixed- 
weight index; consequently, they make no allowance for the shortening of 
the working day, improved physical conditions under which people labored, 

20 E. H Phelps Brown and Sheila V. Hopkins, "The Course of Wage-Rates in Five Countries, 1860- 
1939," O\jord Economic Papers (New Senes), June 1950, pp. 226-96 This detailed study evidences a 
prodigious amount of research into a variety of sources which the authors have weighed and sifted with 
apparently great care. They repeatedly emphasize that the raw data do not warrant drawing inferences of 
consequence from small differences in the ratios calculated. 

232 Approaches to Economic Development 

social security benefits, shifts between occupations, or other changes. 21 
Thus the gain in real incomes was probably greater. What a comparable 
study for the period 1815-1860 would show, were the data available, one 
can only guess. But that it would show a very appreciable gain can hardly 
be doubted. 

The rise in real wage rates in the nineteenth century seems to have 
reached what the investigators call a "climacteric" in the late 1880s: a 
"turn towards a lower rate of rise in real wage-rates . . . occurred, in each 
of our countries except Sweden, at some time not earlier than 1886." In 
France and Germany, for example, real wage rates continued to advance 
after the late 1880s, but they advanced at a rate than they did be- 
tween 1860 and, say, 1886. 22 

PERIOD TO ITS INITIAL VALUE, 1860-1913 AND 1919-1939 


1860-1913 1919-1939 











United Kingdom 
United States 




Source: E. H. Phelps Brown and Sheila V. Hopkins, "The Course of Wage-Rates in Five Countries, 
1860-1939," Oxford Economic Papers (New Series), June 1950, p. 236. 

Social Legislation 

The improved welfare position of Western European peoples during the 
nineteenth century was strengthened by laws governing conditions and 
hours of work, by social insurance schemes and by other social legislation. 
In part, these measures evidenced an awakened social conscience, but in 
part, too, they resulted from the persistent efforts of trade unions, socialist 
leaders and reformers to bring about a more equalitarian distribution of an 
enlarged total output. Public education was extended and illiteracy de- 

21. As Phelps Brown and Hopkins explain (/or. cif., p. 228), "the movements of the earnings of the 
average wage-earner are the outcome not only of changes in the rate of pay for a given job but also of the 
shift of wage-earners between one job and another . . . We should have liked to combine these wage-rates 
in a chain index whose weights changed with changes in the distribution of wage-earners between occupa- 
tions and industries, but the evidence is not usually extensive enough for this, . . . where we are able to 
compare the movements of a fixed-weight index of wage-rates with those of the earnings of the average 
wage-earner, we generally find that the latter rises more, because of the continual upgrading of labour, the 
shifting of the centre of gravity of the wage-earners to higher levels of competence and pay." In other words, 
the study tends to underestimate rather than overestimate the improvement in the wage earner's position. 

22. This illustrates the point that different indexes of improved well-being show different results. If well- 
being is measured by death rates, the period after 1886 does not show any less favorable rate of improvement 
than the period before. This does not mean, of course, that either one or the other measure must give a 
"wrong" inference. It is reasonable to believe that the purchasing power of money wage rates over food and 
other necessaries of life was increasing at a slower rate at the same time that the environmental circumstances 
in which people lived continued to improve sufficiently to lower death rates at, if necessary, an accelerated 
rate. An index of real wage rates, for example, would be unlikely to reflect a better system of sewage disposal. 

The Pace of Material Progress in the Past 233 

clined. 23 Thus not only were there direct gains in real wages in the nine- 
teenth century, but also, and especially from 1870 on, a number of support- 
ing changes were introduced that improved the "quality and texture of life 
as end product" for the average European. 

The End Result of Development 

The complex of changes that constituted economic development in the 
nineteenth century unquestionably improved the well-being of the average 
man. While betterment of the common lot can scarcely be said to have 
inspired the people who were most active in bringing about this develop- 
ment, it was nevertheless the result. Much of the improvement came from 
the simple fact that people on the average were better fed, better clothed 
and better housed because their productivity was greater. But much of it 
came, too, because this higher productivity made it possible for the econ- 
omy to support a whole host of activities in science, government and com- 
munity living which earlier societies had neither the knowledge nor the 
wealth to undertake. In retrospect, one can see how at various points the 
development might perhaps have been accompanied by less suffering and a 
more equitable division of its benefits. Yet, when all is said and done, the 
gain in well-being which was achieved appears truly remarkable. 

23. Probably the most important factor making for the decline in illiteracy was the spreading realization 
of the close relationship between relevant information and economic rewards. The rise in Protestantism and 
the Sunday School movement for example, in nineteenth-century England were also influential In 1839 
in England, about one third of the adult males and about one half of the adult females are said to have been 
illiterate; but by 1893 a comparable estimate puts the proportion at 5 per cent, which would appear to be 
probably too low. In France, around 1827-1829, about 55 per cent of the population is alleged to have been 
illiterate For other countries the following figures aie reported: Italy, in 1872, 69 per cent; Portugal, in 1872. 
82 per cent; and Russia, in 1897, 78 per cent. Figures from Helen Sullivan, "Literacy and Illiteracy," in 
Encyclopaedia of the Social Scienct"*, Vol. 9, Macmillan, New York, 1935, pp. 51 1-23 In England, school at- 
tendance was not required for children under twelve years of age until 1 876, and the provision ot elementary 
education out of public funds came only in 1890. 

Part III 


12. Agricultural Development for Increased Welfare 

POVERTY IN THE UNDERDEVELOPED REGIONS of the world is almost always 
associated with low incomes derived from agriculture. In Africa and Asia, 
which include most of the regions lowest in per capita income, 74 per cent 
and 70 per cent of the total population is rural; in Europe and North 
America, the areas of highest income, the percentages are 33 and 20. 1 
Indeed, the close association of agriculture and low incomes has been 
regarded in some quarters as evidence of cause and effect. But some of the 
regions with the highest average incomes, such as Nevada in the United 
States, Australia, Denmark and Argentina, are also preponderantly agri- 
cultural. Thus a simple and exclusive explanation of poverty is hardly pro- 
vided by its association with agriculture. 

Low Productivity in Agriculture 

But low productivity in agriculture undeniably explains the low income 
level of the great underdeveloped regions. Of the world's population, 1.3 
billion, or 60 per cent, depend upon agriculture; and of these, over one 
billion live in Asia, Africa, and Central and South America, where the 
yields of agriculture per person are the lowest of the six continents. A 
glance at Figure 6 reveals the close association of lack of economic develop- 
ment and low agricultural productivity. Output in metric tons per person 
in agriculture on the North American continent exceeds the world average 
by sixfold, the average of Asia by tenfold and of Africa by twentyfold! 2 As 
a unit of productivity, the metric measure may seem rough and ready, since 
it reduces caviar and beans to the common denominator of weight. But for 
the broad masses, wheat, potatoes and rice are the great staples and com- 
prise a very large fraction of the total food produced and consumed; hence 
the measure of product by weight alone is probably superior to any other 
single comparison. 

Yields per hectare differ very much less than output per capita. The 
extremes are represented by the European average wheat production at 
1,450 kilograms per hectare and the African, which is about half as much. 3 
Greater equality of yield per hectare follows naturally from the lower popu- 

1. United Nations, Food and Agriculture Organization, Yearbook of Food and Agricultural Statistics, 
1951, Vol. V, Part 1, Rome, 1952, p. 15. 

2. See Point Four, U.S. Department of State, Publication 3719, January 1950, p. 121. 

3. United Nations, Yearbook of Food and Agricultural Statistics, 1951, p. 23. 



Agricultural Development for Increased Welfare 239 

lation density in the continents of high per capita output. Yet probably the 
most striking feature of such agricultural statistics is that output per 
hectare is lower on an absolute basis in the agricultural than in the indus- 
trial regions! Thus either when output is measured per capita or per unit 
of land, low productivity in agriculture underlies the low incomes of the 
underdeveloped world. 

Differences in agricultural productivity are even more striking when the 
large total figures by continents are broken down into individual countries. 4 
Among wheat-consuming nations, for example, the average yield per 
hectare in 1935-1939 varied from 730 kilograms in Israel and 760 in Brazil 
to 2,640 kilograms in the United Kingdom and 3,230 in the Netherlands. 
For rice-consuming nations, the Indian yield was 1,020 kilograms per 
hectare and the Indonesian, 2,290; but the yield in Japan with no better 
inherent physical factors amounted to 4,010. 

Factors in Low Productivity 

Disparities of such striking magnitude arise from a great variety of 
causes. Some of them, such as conditions of soil, climate, terrain and 
natural waterways, are relatively immutable; some, such as population 
densities, availability of capital, social mores and religious taboos, appear 
as relatively fixed from a short-run view but vary strikingly over the decades ; 
others, such as production techniques, systems of land tenure, irrigation 
and drainage projects, can bring revolutionary changes in a single decade; 
while still others, such as monetary and credit policies, taxes, marketing 
channels, relative demands and prices, can produce large effects in the span 
of a year. Whether subject to fast or slow change, however, any of these and 
many other factors can become the strategic one, that is, the one (or ones) 
which seems most crucial in a given context of time and place, and which 
seems most urgently to demand remedy. Some remedies, such as the im- 
provement of plant and animal breeds and strains, frequently promise large 
increases of output without vast projects of mechanization. Other remedies, 
particularly the provision of public utilities, are inevitably expensive. The 
combined effort of engineers, agricultural specialists, economists, anthro- 
pologists, population experts, political scientists, politicians and practical 
businessmen will generally be required to determine what factors are really 
strategic for the increase of agricultural productivity in a given situation. 

Agricultural production in the world as a whole lagged seriously behind 
the population increase of 20 million annually in the immediate postwar 
years but has now begun to catch up. The world total of agricultural output 
is now 20 per cent over the prewar level; from mid- 1950 to mid- 1953 it 
increased by 2 per cent annually, while population grew by 1.4 per cent 

4. See /6/</., pp. 24-25. 

240 Approaches to Economic Development 

each year. But this general improvement masks the fact that the Far East 
has fallen far short of providing for its rapidly growing population. Agricul- 
tural output in the Far East is still only 80 to 85 per cent of the prewar 
level. 5 The better showing of other parts of the world also conceals the fact 
that output lags in particular countries. Even where agricultural production 
is increasing faster than population, many economies would gain from an 
increased efficiency of production coupled with a shift from starchy to more 
diversified diets, particularly those providing proteins. Thus the high inci- 
dence of tuberculosis in Japan could be reduced. Finally, increased produc- 
tive efficiency in agriculture, even beyond the provision of physiologically 
adequate diets, is desirable wherever the factors of production it employs 
can be shifted to those other employments which higher standards of living 


One of the most potent factors in economic progress is motivation. The 
masses of people must be imbued with a desire to better their material lot; 
in other words, the standard of living that is considered desirable for rearing 
a family must exceed the level of living actually attained. 6 Since the great 
masses in the underdeveloped areas live and work on the land, this means 
that the motivation of the agricultural laborer is basic. One well-qualified 
student of this problem says : 

It was my observation in East Africa that a great increase in agricultural output 
would physically be possible merely if those who worked with nothing but hoe 
and digging stick had an incentive to do more digging and weeding: capital was 
less prominently the lack than was sheer incentive to work. I do not know how to 
demonstrate that this shortage of incentive is prevalent in a wide range of under- 
developed countries, or that it may very well be a more important drag on eco- 
nomic advance than lack of capital; but I am convinced that it is. 7 

Education and Incentives 

Partly, no doubt, this lack of motivation may be traced to unfavorable 
political and economic settings to corrupt governments, bad tax systems, 
racial discrimination and caste systems, inflations, poor systems of land 
tenure, and to poverty itself including physical debilities. Another con- 
tributing factor is that "Many cultures . . . have placed a low value on 

5. Figures given by the World Food Council of the United Nations Food and Agriculture Organization, 
reported in the New York Time*, July 1, 1953. 

6. Joseph S. Davis, "Standards and Content of Living," American Economic Review, March 1945, pp. 

7. Comment by Merrill K. Bennett, Director of the Food Research Institute, Stanford University, in a 
private communication. 

Agricultural Development for Increased Welfare 241 

material advance and, indeed, some have regarded it as incompatible with 
more desirable objectives of society and of the individual." 8 

In part, however, weak motivation toward material improvement may 
be an aspect of ignorance, and ignorance and illiteracy, though by no means 
synonymous, are closely conjoined. The countries lowest in income are 
generally also lowest in literacy. Only one of the fifteen countries of the 
world having per capita incomes exceeding $200 on a prewar basis had an 
illiteracy rate above 5 per cent. But in a group of 28 countries (most of 
Africa being omitted) with average annual incomes less than $100, the pro- 
portion of illiteracy was rarely below 50 per cent, and in the most populous 
countries Egypt, India, China and Indonesia, for example it ran from 
85 to 92 per cent. 9 High levels of illiteracy surely impair the quality of life 
as end product, both spiritually and materially. 

Nowadays, of course, motion pictures and radio may contribute to the 
enlightenment of the completely illiterate, particularly in communicating 
higher standards of living. American films may have had a good deal to do 
with revolutionary movements in the economically underdeveloped world. 
But while motion pictures and radio can provide the impulse toward de- 
velopment, it would be difficult to imagine their sustaining the movement 
past a rather low level if the population remained illiterate. 

Technical Education 

In demonstrating simple industrial and agricultural techniques and rudi- 
mentary matters of public health, motion pictures and radio are highly 
effective. It has been said it would take 5,000 agricultural teachers to convey 
the elements of rational peasant farming to the population of Nigeria 
alone. 10 Modern methods of mass communication could greatly reduce this 
demand upon skilled manpower and finances. 

The propagation of improved agricultural methods for the underde- 
veloped areas needs to be undertaken at a very modest level. Eloquent 
accounts have been given as to the necessary simplicity of instruction, and 
the high value of the teacher's living in close association with the peasant 
farmers. For example, to induce the farmers in the neighborhood of 
Mahewa, India, to plow under green legumes for the purpose of fertilizer, it 
was necessary to convince them that taking the life of a growing tiling was 
warranted in the Vedic laws by the superior injunction to the household 
head to provide for his family. 11 In Nigeria, the introduction of goats to 

8. International Bank for Reconstruction and Development, Eighth innmil Repot t, 1952-53, Washington, 
1953, p. 9. 

9. Point Four, Appendix C-3, pp. 117-18 

10. W. Arthur Lewis, "Developing Colonial Agriculture," The Ttnee Banks Review, June 1949, pp. 6-8. 

11. Point Four Pioneers, U.S. Department of State, Publication 4279, October 1951, p. 32. 

242 Approaches to Economic Development 

provide milk had first to surmount the belief of the emirs that goat's milk 
causes smallpox. 12 

The skillful use of direct and simple methods of instruction may be at- 
tended by marked "multiplier effects" through imitation. The following is 
an illustration from Liberia: 

When Finder first started making his expeditions into the countryside living 
with the people and making note of what was lacking in their diet, he was struck 
by the small, scrawny chickens which laid eggs not much larger than robins' eggs. 
At his recommendation, the Economic Mission and the Department of Agricul- 
ture imported from the United States several hundred large roosters of the best 
strains . . . Reports of big, healthy chickens and the size of the eggs they laid 
spread through the countryside. People traveled long distances on foot or by 
canoe to see them. A few of the new chicks were given to native farmers. They 
agreed to feed them strictly according to the rules laid down by the Mission, and 
later to distribute their offspring to neighbors . . . Large, fresh eggs are doing 
wonders in raising the Liberian standard of living and eating. 13 

For most countries in the early phases of development, scientific research 
in agriculture on soils, fertilizers, insecticides, plant strains and animal 
breeds will have to be limited to a very few centers, while a large part of 
the funds available for education will need to be spent to train teachers of 
elementary techniques. The native agricultural expert trained in European 
or American universities cannot always be used for this purpose because 
his ideas are often much too "fancy." 11 

Appropriate Agricultural Techniques 

Determining just what agricultural techniques are to be propagated may 
be a complex matter. On the one hand, Western methods may be too ad- 
vanced in any one of several senses. Where labor is the cheap factor, labor- 
saving machinery is uneconomical: the cheapest method of production 
depends upon relative factor prices. The primitive nail-board plow may 
therefore prove to be the best type of equipment. Any particular improve- 
ment, moreover, must be appraised not only for its immediate effect on 
costs and output, but also in the general economic matrix of complemen- 
tary industries. Are transportation, processing and marketing facilities ade- 
quate for the expansion of primary production? Finally, the saving of labor 
may encounter limits in the social cost and disruption entailed by tech- 
nological unemployment. 15 

12. United Nations, Proceedings of the Scientific Conference on the Conservation and Utilization of Re- 
sources, 1949, Vol. I, Plenary Meetings, New York, 1950, p. 315. 

13. Point Four Pioneers, pp. 7-8. 

14. See the testimony to this effect of Professor Albert Rhoad of the Inter-American Institute of Agricul- 
tural Science (Costa Rica) in United Nations, Proceeding? of the Scientific Conference on the Conservation 
and Utilization of Resources, 1949, Vol. I, p. 8. 

15. On this general range of topics see James Bastcr, "A Second Look at Point Four," American Eco- 
nomic Review,' Proceedings, May 1951, pp. 399-406. 

Agricultural Development for Increased Welfare 243 

On the other hand, the only way to break the vicious circle of surplus 
labor, low incomes and concealed unemployment in agriculture is to make 
the unemployment explicit, that is, to introduce progressive methods of 
production which will raise wages even at the cost of throwing people out 
of work. As the International Labor Office study of unemployment in less 
developed regions emphasizes, "extreme labour-intensive methods of cul- 
tivation . . . [are] the result of centuries of adaptation to growing pressure 
on the land." 1(i Somewhere between enduring the full amount of unemploy- 
ment that would follow from the most promising innovations and avoiding 
unemployment altogether by conforming to present prices and practices is 
a reasonable degree of progressiveness. What is reasonable depends, of 
course, on the availability of alternative industrial employments and pro- 
visions for the transitionally unemployed. 

The risk that outside experts or native officials imbued with excessive 
enthusiasm for up-to-date techniques might proceed with too little regard 
for the factor endowment of less developed areas, or with too little concern 
for technological unemployment at the other extreme, has made some 
observers quite skeptical of the consequences of technical aid. 17 Several 
writers stress agricultural cooperatives as a hedge against the possible mis- 
takes of imported techniques. In India the "pilot development projects," 
which are partly paternalistic enterprises of the central government and 
partly cooperative, seem to work effectively. In the United Provinces 
(Uttar Pradesh), for example, such projects have not only increased wheat 
yields per acre by 20 per cent in two years but have also introduced the 
villagers to more modern ways of living. 18 

It would be well to remember, too, that Western Europe and the Western 
world in general may not be the sole reservoirs of technical knowledge for 
improvement of agriculture in underdeveloped areas. Japanese methods, 
for example, have constantly improved the land and the forests, while sup- 
porting the highest recorded density of rural population, with a standard of 
living considerably superior to the rest of Asia. Japan would have much to 
offer in techniques applicable to India, Southeast Asia and other areas. 


From the time of Adam Smith's chapter "Of the Rent of Land" in Book I 
of The Wealth of Nations, through John Stuart Mill's successive chapters on 
"peasant proprietors, metayers, and cottiers," to Alfred Marshall's analysis 

16. C. Hsieh, "The Special Problem of the Less Developed Areas," in Action against Unemployment, 
International Labor Office, Geneva, 1950, Chapter 7. 

17. Baster, loc. cit.. see also Joseph E. Stepanek and Charles H. Pnen, "The Role of Rural Industries 
in Underdeveloped Areas," Pacific Affairs, March 1950, p. 69. 

18. Elizabeth Converse, "Pilot Development Projects in India," Far Eastern Survey, February 7, 1951, 
pp. 21-27. 

244 Approaches to Economic Development 

in Chapter 10, Book VI of the Principles, economists have stressed the 
importance of systems of land tenure. These matters have receded some- 
what into the background in the advanced industrial nations through legal 
reforms and the lessened importance of agriculture; but they stand in the 
forefront of the economic problems of underdeveloped areas. Agrarian 
reform in the sense of redistribution of land ownership, and beginning 
with the Communist revolution in Russia has swept through the satellite 
states of central and eastern Europe, through Manchuria, China, Indonesia, 
etc., and was carried through by the Far Eastern Command in Japan. To 
this vast movement it is possible to give only sporadic notice here. The 
present discussion will largely concentrate on other regions as yet un- 
touched by the movement and will be concerned less with the problem of 
equalitarian ethics than with productive efficiency in terms of the two as- 
pects of optimal size and economic incentive. 

Property Rights 

Let us begin with the "simple" matter of legal ownership. Clear title in 
any system of private property seems to be a matter of course to the average 
American or European. And yet this is far from the fact in many large 
areas, particularly where tribal community of land has recently disinte- 
grated, as in Africa, or where property rights have never been well defined. 
In the Near East, for example, the Ottoman legal code of ownership was 
never really enforced, and mere customary possession often prevailed in 
conflict with the law. In Palestine, Transjordan and Syria a periodic three- 
year reallocation of land has discouraged permanent improvement. In Iraq 
the legal tenure system is said to be a "complete muddle." 19 Many under- 
developed countries have never had a complete land survey; in China, ac- 
cording to John Lossing Buck, as much as one third of the land in the late 
1940s was not recorded in the deed offices. 20 Situations of this sort lack the 
definiteness of outright collectivism, tribal or modern communal tenure, 
feudalism or private property. Developing economies which rely on private 
enterprise must begin by an exhaustive registration of title; and uncertainty 
as to ownership and control would be inimical to productive efficiency 
under any system. 

The separation of individual holdings into small parcels is another im- 
portant problem. Over much of Europe this condition has survived from 
feudalism, and has been intensified by the principle of succession of the 
Napoleonic Code. In Asia, subdivision and separation result chiefly from 

19. Doreen Warriner, Land and Poverty in the Middle Eait, Royal Institute of International Affairs, 
London, 1948, p. 22. 

20. John Lossing Buck, Some Basic Agricultural Problems of China (Secretariat Paper No. 1 [mimeo- 
graphed], Tenth Conference of the Institute of Pacific Relations, Stratford-on-Avon, September 1947), 
International Secretariat, Institute of Pacific Relations, New York, 1947, p. 21. 

Agricultural Development for Increased Welfare 245 

pressure of population. Fragmentation interferes with the use of agricul- 
tural machinery; even with primitive labor methods it reduces efficiency by 
a large fraction 21 through wasted effort in moving from one plot to another, 
sometimes far separated. The Monnet Plan in France, aided by Marshall 
Plan funds, has consolidated 1.3 million acres into larger plots and is aim- 
ing at an eventual goal of 25 million acres. 22 India is proceeding by means 
of a voluntary cooperative system inaugurated in the Punjab in 1921 and 
continued in other provinces under later legislation. By 1949 the number of 
plots in the United Provinces had been reduced from 4,250,000 to 646,000. 23 
Consolidation of holdings is an obvious channel of improvement of the 
productive power of agriculture. In some areas, land yields have been 
increased by 50 to 100 per cent through this measure. 24 

A peculiar type of fragmentation or, alternatively, of uncertainty of title 
in the Near East has been the separation, under the Ottoman code, of 
water rights from title to land. Not only has this limited the full use of the 
cultivated land and delayed necessary irrigation projects, but it has in addi- 
tion enabled the wealthy owner of water to rack-rent the poorer land- 
owners. Generally, state control of these rights appears to have been the 
best solution. 


Another set of problems has to do with tenancy. There is a predisposition 
in much popular discourse and even in some economic writings to couple 
tenancy with exploitation and low standards of living. But Buck's painstak- 
ing statistical investigations into land tenure and land utilization in China 
show that sweeping generalizations of this sort are fallacious. 25 In the first 
place, tenancy rates are as high or higher in some high-income countries. 
In England 75 per cent of the farmers are tenants, in the United States 42 
per cent, and in Germany 25 per cent, as compared with 50 per cent in 
China and 27 per cent in Japan. True, the farmer's low income makes it 
difficult for him to mount the ladder from tenancy to ownership; but this 
is a matter of income and not of the institution of tenancy. Tenant farms 
in China approached closer to the minimum size for economic operation 
than owner farms because tenant and owner automatically pooled re- 
sources, the owner supplying the fixed capital and the tenant the operating 
capital. Yields per acre were found to be about equal for owner and tenant 
farms, though the tenant's living conditions were somewhat inferior to the 

21. Estimated at 30 per cent for the Middle East by Warriner, op. cit , p. 20. 

22. W. S. and E. S. Woytinsky, World Population and Production, Twentieth Century Fund, New York, 
1953, p. 494. 

23. United Nations, Land Reform Defects in Agtarian Structure as Obstacle v to Economic Development, 
New York, 1951, pp. 11-14 and 67. 

24. Woytinsky, op. cit., p. 492. 

25. Buck, op. cit., pp. 24-48. 

246 Approaches to Economic Development 

landlord's since the tenant depended on wage income alone. J. H. Boeke 
gives a favorable evaluation of sharecropping in Indonesia. 26 

Elsewhere in the underdeveloped regions the story is different. Syria, for 
example, illustrates nearly all of the sinister possibilities of tenant systems: 
absentee landlordism, rack-renting, arbitrary evictions, uncertainty of 
tenure, and chronic indebtedness of the peasants. 27 Evils of this sort are 
widespread and are too familiar to require detailed description of their 
mutations in various regions. 28 Insecurity of tenure has the universal conse- 
quence that tenants are loath to make improvements or even to maintain 
the land. Excessive rentals (exceeding the true economic rent) operate in the 
same direction. By engendering a general feeling of hopelessness, they dis- 
courage the tenant from efforts even to maximize current outputs and 
thereby contribute to his low income and his tendency to run into debt for 
consumption outlays, particularly in bad seasons. On the part of the owner, 
excessive rentals encourage laxity in administration of the property, a 
penchant toward purchasing more land without maintaining the soil, and 
finally idleness and absenteeism. 

Correcting Abuses of Tenancy 

Since tenancy itself cannot be held to be the root of these evils, a direct 
attack on tenancy as such is indiscriminate and futile. Even the Draconian 
measure of equalization of landholdings, however much it may appear as 
retributive justice against the inequities and iniquities of landlordism in 
some countries, is not a final solution. Thus, following the "basic land 
reform" of the Mao regime in China, it appears that: 

... the old class distinctions have been re-emerging. The investigators were 
surprised to find that 96 peasant families had sold land to pay for wedding and 
funeral expenses, an affront to the new social order. About 20 per cent of the 
peasants had become poor again; and an equal percentage "obviously wealthy." 
This was blamed on the fact that 99 family heads had increased their land hold- 
ings, causing prices to rise. They had even begun lending money at the usurious 
rate of 60 per cent per annum. 29 

What are the alternatives to an evolution of this sort, which implies a 
reversion to primitive systems of periodic equalization with their inevitable 
ruin of incentive and impoverishment of the populace? 

26. J. H. Boeke, The Structure of Netherlands Indian Economy, Institute of Pacific Relations, New York, 
1942, p. 42. 

27. Warriner, op. c/Y., pp. 84-85. 

28. In addition to the sources already referred to, note especially Appendix III, "Survey of Land Tenure 
and Agricultural Labor Systems in Eastern and Southern Europe," m Wilbert E. Moore, Economic Demog- 
raphy of Eastern and Southern Europe, League of Nations, Geneva, 1945, pp. 210-67. 

29. Robert Neville, "Rise of the Red Star," Life, December 31, 1951, p. 18. 

Agricultural Development for Increased Welfare 247 

In the first place, the "natural" tendencies toward inequality could be 
suppressed by totalitarian controls which would in effect abolish private 
property. Second, the land might simply be collectivized. Third, various 
milder forms of modified private ownership might be introduced under the 
concept of "cooperation." Finally, multiple reforms under private owner- 
ship could as they generally do in Western Europe and the English- 
speaking countries result in workable systems of land tenure. 


Collectivization of agriculture seems in recent history to be designed 
chiefly for two ends: to control the peasants politically, and to absorb from 
them a maximum of agricultural produce. These are the only plausible 
reasons why the U.S.S.R. has persisted in its course of collectivizing agri- 
culture despite its notable failure to achieve much progress in food 

The idea that "the small enterprise creates capitalism and the bourgeoisie 
permanently, hourly, daily, inescapably, and on a mass scale" 30 supplies one 
motive for the U.S.S.R.'s liquidation of 20 million peasant farmers in the 
collectivization drive of 1928. The other motive for the U.S.S.R.'s col- 
lectivization program, as Naum Jasny points out, is revealed by the trends 
of agricultural output and income. Though the annual output per person 
employed in agriculture increased by 15 to 20 per cent in the decade follow- 
ing collectivization, average agricultural income per capita fell by 10 per 
cent, and the income of the rank and file peasant fell by 20 per cent. 31 Thus 
industrialization was literally squeezed out of the bodies of the poorest 
peasants. But from the standpoint of technical performance, collectiviza- 
tion was a failure. The 15 to 20 per cent increase in annual output per 
person falls considerably short of the 45 per cent increase in number of days 
worked annually, and this despite a considerable increase in mechanization. 
In Jasny's opinion, productivity per hour did not increase and may indeed 
have fallen. 32 Total income from agriculture regained the level prior to col- 
ectivization only by 1938, and the setback of World War II was probably 
only recouped by 1950. 33 

Jasny's general diagnosis has been seconded more recently by Lazar 
Volin, who characterizes the recent drive in Russia to merge agricultural 
collectives as "gigantomania." Volin believes that the main motives have 

30. V. I. Lenin, Works, Vol. 25, p. 173; quoted by Joseph Stalin in Foundation ofLemnivn, 10th edition, 
International Publishers, New York, 1932, p. 48. 

31. Naum Jasny, Hie Soualized Agriculture of the USSR; Plam and Performance, Stanford University 
Press, Stanford, 1949, pp. 75, 417 and 701. 

32. Ioid. t p. 416. This conclusion takes account of the shortened work day. 

33. Ibid., pp. 68 and 70. 

248 Approaches to Economic Development 

been to control the peasant's use of his time more strictly and to make sure 
that he remains merely a "residual claimant" on the produce of the farms. 34 

Reforms within Private Enterprise 

Contemplating this experience, free nations in the underdeveloped areas 
may well choose to remove the evils, or more accurately the abuses, of land 
ownership and tenancy by reliance upon reforms within a private enter- 
prise system or by the elaboration of cooperative schemes. Some of the 
reforms within a system of private property and enterprise have directly to 
do with tenancy and ownership themselves and others with the general 
economic setting of these institutions. 

Uncertainty of tenure, one of the most widespread curses of the tenant's 
status, can be alleviated by legal codes protecting tenants from arbitrary 
eviction and covering all matters generally relevant to the tenant-landlord 
relation, and by clearly drawn contracts for each individual case. Uncer- 
tainty of tenure is, however, largely a consequence of the tenant's slender 
financial position, a matter embracing nothing less than the whole problem 
of low incomes in the underdeveloped areas. Much the same general 
diagnosis must be made of chronic indebtedness, another evil associated 
with tenancy but not a necessary part of it. Improved agricultural credit 
facilities, discussed in Chapter 1 4, could relieve the uncertainty created by a 
single bad harvest and persistent indebtedness by reducing interest charges 
from usurious levels sometimes 50 per cent or more a year to manage- 
able proportions. 

Uncertainty of tenure and chronic indebtedness cannot be cured by 
ad hoc measures, however. They can be alleviated to some extent by the 
whole galaxy of measures to increase the general productivity of agriculture 
and industry. But, in part, these and other evils associated with tenancy 
emanate from corrupt and oppressive governments, from the lack of free 
elementary education, from regressive systems of taxation, from the ab- 
sence of social security legislation, from social systems which reduce one 
race or class to inferior status, and from other characteristics of the political 
and social setting. In Latin America, the pernicious workings of the land 
system seem to have begun with outright expropriation of the traditional 
native owners and to have been perpetuated by general conditions of the 
sorts just described. 35 

A general parallel emerges from an analysis of the economic ills asso- 
ciated with land ownership. Here, too, ad hoc measures cannot suffice. 

34. Lazar Volin, "The Turn of the Screw in Russian Agriculture," Foreign Affair?, January 1952, pp. 
277-88. A similar view of collectw/ation of agriculture in North Korea has been expressed by Arthur 
Bunce, quoted by Isidor Lubin in "Hope of the Hungry Millions," New York Times Magazine, February 10, 
1952, p. 49. 

35. See Stanford A. Mosk, "Latin America versus the United States," American Economic Review, 
Proceeding?, May 1951, pp. 367-83. 

Agricultural Development for Increased Welfare 249 

Certainty of title forms the bedrock of incentives in a private enterprise 
system of agriculture. Consolidation of scattered holdings, while it is a 
merely mechanical matter, also conditions productive efficiency. Water 
rights must be definite at least, but state operation of irrigation and drain- 
age systems would in most cases seem to be necessary. Aside from certain 
specific conditions such as these, however, the efficiency and merit of 
private ownership of land depend upon the whole environment. This does 
not deny that the distribution of ownership and the way ownership rights 
are exercised may not in particular cases assume strategic importance in the 
character of the environment. Extreme concentration of land ownership 
seems eventually to lead to either peaceful or violent redistribution. But 
once a fresh start is made or before the concentration has progressed too 
far, a private enterprise society can prevent progressive concentration. The 
remedies, however, are not particularly different in the case of landholding 
from those designed to prevent too great inequality of wealth and income 
in any form. Underdeveloped countries have an opportunity not only to 
take some technological short cuts by adopting already known techniques 
of production, but also to take over some of the specific devices for recon- 
ciling capitalism and equality of opportunity. 


The most interesting issue concerning the type of productive unit in 
agriculture pertains to the relative merits of plantation or commercial 
farms which produce cash crops for a local or international market as 
against peasant or "subsistence" farming. 36 The issue is a complex one, 
involving among other things the most economical size of agricultural unit, 
the availability of farm labor, profitability and welfare aspects of "com- 
mercial" crops (often export, compared to domestic food supplies), the 
subtle social and economic utilities or disutilities accompanying the status 
of "landless worker" compared to the small landowner, and the relative 
significance of equalitarian ideals compared to sheer productivity. In view 
of all these elements, which inevitably differ in relative importance in vary- 
ing climates, with different crops, and with widely diverse political and 
social structures, it requires considerable hardihood to declare, as one close 
student of the problem does, that the plantation system is now finished be- 
cause it is dependent on indentured labor. 37 

36. The association of plantation and commercial agriculture is usual but not invariable. Thus in the 
South of the United States, the plantation ownership unit included subsistence farmers and sharecroppers. 
See Thomas C. Blaisdell, Jr., in the Proceedings of the International Conference on Agricultural and Coopera- 
tive Credit, August 4-October 2, 1952, University of California Press, Berkeley, 1953, Vol. I, pp. 590-93. 

37. Lewis," he. at., p. 4. 

250 Approaches to Economic Development 

Advantages of Large-Scale Production 

The great strength of the plantation or commercial type of agriculture 
lies in the effectiveness of large-scale production. 38 The advantages include 
superior command of advanced techniques, adequate capital for machinery 
and improvements, skilled management, superior knowledge of world de- 
mands and fuller utilization of overhead. The per acre yield of sugar on the 
large plantation is said to be double that of small farms. But its very bigness 
and its specialization in particular products bananas, sugar, coffee, beef, 
cacao, sisal, tea make commercialized agriculture more vulnerable to 
cyclical and secular change than the small, diversified peasant economy. 
Even the generalization that higher yields accompany large scale is subject 
to some notable exceptions: the great grain estates of eastern Europe failed 
to rotate crops scientifically, and in Venezuela the large ranches, protected 
by the existing land tenure, occupy rich bottom lands which would produce 
more as truck gardens. 39 

Writers on the present theme often betray a certain naivete in decrying 
large commercial agriculture based on a cheap and abundant labor supply. 
The labor supply would be cheap and abundant anyway, whether farms 
were large or small. The high ratio of labor to cultivated land results from 
relative factor prices. The large size of the farm derives basically from cer- 
tain virtual indivisibilities, such as the manager or owner, machinery and 
the owner's resources. Mere size, resting on cheap labor, is only to be de- 
cried if the low wages rest on exploitation. Thus the apparent efficiency of 
the large plantations of the ante bellum South was partly spurious, depending 
partly at least upon the institution of slavery. In many South American coun- 
tries, the great estates are built on a foundation of peonage fostered by various 
devices for keeping the laborer in bondage to his debts. As underdeveloped 
areas progress, it would be fair to assume that, insofar as such exploitative 
practices disappear, and insofar as wages rise simply from the fact of economic 
progress, the natural tendency would be for the size of the agricultural unit 
to decline. 40 But such a tendency must be relatively weak in view of the persist- 
ence of large farms and ranches even in the high-wage United States of today. 

Negative Factors in Commercial Systems 

As economic development proceeds, a force which may play a larger role 
in the future of commercial versus peasant farming may be the increasing 

38. There is a certain irony in the fact that Communist Russia adopts collectivized agriculture for this 
ostensible reason, being willing to take into the bargain all of the supposed disadvantages to the common 
man ("landless laborer," "peon," etc.) which the political radicals of many other countries decry in the 
plantation system! 

39. United Nations, Land Reform, pp. 20 and 71. 

40 The presumption in economic theory is that the size of the productive unit varies directly as the 
manager's capacity to manage resources. As a given physical unit of resources grew more valuable for 
example, as labor and land rose in price optimum efficiency would imply the combination of a smaller 
physical quantity of these resources with an entrepreneur of given capacity. 

Agricultural Development for Increased Welfare 251 

competition of the native population for foodstuffs as their incomes rise. 41 
One of the chief economic interests of Western Europe and America in the 
underdeveloped world a quite legitimate interest requiring no apology 
has always been the relatively abundant exports of textile fibers and food. 
The great commercial farms have been the source of this exportable surplus, 
but often this has meant for the indigenous population a lack of variety in 
diet or an actual deficiency of certain basic foods. Throughout Latin 
America, milk is in short supply because grazing lands are devoted to meat 
production ; in Nyasaland, Kenya, Rhodesia and South Africa, food pro- 
duction is scarcely adequate because of the competition of commercial 
crops for labor. 42 A natural accompaniment of rising real incomes would 
be a certain growth in smaller-scale, diversified agriculture and in "sub- 
sistence" farming, both supplying more products and more diversified diets 
to the native population. But, as Sir Alan Pirn points out, subsistence 
agriculture cannot support a very great advance in the standard of living. 43 
Agricultural exports will be required to command the wherewithal for a 
larger flow of imported consumers' and producers' goods. Conceivably, 
peasant farming could itself reach a level of productivity high enough to 
supply the requisite exports; but experience in Europe and North America 
would point to the survival of much large-scale commercial agriculture. 

Finally, developing economies may be considerably influenced by the lot 
of the "landless laborer." The implication of this term ought to be rejected 
if it means that laborers, even farm laborers, who do not own land are 
impoverished. Bank clerks in Manhattan or cowboys in Texas are not 
necessarily impoverished. In many primitive economies, however, the sole 
means of livelihood is a small plot of ground or free access to common 
hunting or fishing territory. The British in Uganda, the Belgians in the 
Congo, and the French in French Equatorial Africa discovered that the 
allocation of "unoccupied" lands to foreign concessionaires or even to 
natives left many people destitute. In most cases, some degree of restitution 
and protection has followed. But "landless laborers" have also presented 
problems in less primitive, but still underdeveloped, economies that have 
undertaken to redistribute the land. After 1945, many eastern European 
governments followed this course. But the results are often disappointing: 
in Poland the tracts range from 2.5 to 10 acres; in Hungary 7 out of 10 
holdings amount to less than 7 acres; and in Rumania 12.5 acres is a maxi- 

41. D. II. Robertson wrote pungently: "How strong and persistent are the forces making it progressively 
more difficult for the manufacturing populations of Western Europe, however correct their monetary ar- 
rangements, to earn from overseas the requisite fodder alike for their own fastidious stomachs and for their 
insatiable machines . . . We ought perhaps to have foreseen the emergence of the revolutionary notion that 
some day 1,000 million Asiatics would take it into their heads to expect to have enough to eat." "Britain and 
European Recovery," Lloyds Bank Review, July 1949, p. 3. 

42. United Nations, Land Reform, pp. 20 and 31. 

43. Sir Alan Pirn, Colonial Agricultural Production, Oxford University Press, Oxford, 1946, p. 177. 

252 Approaches to Economic Development 

mum. This kind of "reform" conforms to Churchill's description of Com- 
munism as equal sharing of misery. It is a "once-for-all measure," ex- 
hausted in one act; it generally results in lowered productive efficiency; and 
it does not afford the new "landed" peasant a decent, or even sometimes a 
subsistence, income. 44 


In summary, then, neither tenancy nor a "landless" condition of agricul- 
tural labor is necessarily an evil or a handicap to advancing agricultural 
economies. Several particular evils of an institutional sort exist, however, 
which can be remedied with potentially great gains to productivity. So far 
as concerns peasant versus commercial agriculture, both have their merits 
and both will persist. As incomes rise, the larger resources of the typical 
farmer may bring about some increase in the proportion of owner-occupied 
farms. But unless the evolution of peasant farming is so favorable as to 
make it no longer "subsistence" farming, capitalistic farming or commer- 
cial agriculture will continue to be the main source of purchasing power for 


Economic development in countries dependent at present upon primary 
production, particularly upon agriculture, awaits the realization of further 
reforms and improvements, some of them directly pertaining to agriculture, 
and others relating to the national and international economies. 

Land Improvement and Reclamation 

Improvement and reclamation of land through drainage, irrigation and 
other means offer the double advantage of extending productive capacity 
and, for the duration of the undertaking, also absorbing labor in those 
countries that suffer from surpluses of agricultural manpower. Many opera- 
tions of this sort require relatively large amounts of labor and can be car- 
ried on without violence to relative factor prices in underdeveloped areas. 
Gigantic multipurpose developments, combining the reclamation of land 
for the plow with large-scale hydroelectric and possibly also water and 
navigation facilities, require large drafts on capital, engineering skills, con- 
struction laborers and technicians, all of which are usually scarce and ex- 
pensive. On the other hand, the value of these projects, in introducing new 
techniques, alleviating shortages of land, power and water, and fostering a 
progressive spirit in the populace, may be immense. The large commit- 
ments which such projects entail imply a careful weighing of costs and 

44. Sec Woytmsky, op. cit , pp 502-05; Moore, op. cit., pp. 103/f., United Nations, Land Reform, pp. 

Agricultural Development for Increased Welfare 253 

advantages in advance. Beyond this warning the economist cannot offer 
many useful generalizations because of the diversity of regional conditions. 

Farm Machinery 

Something of the same sort is true of investment in farm machinery : 
there is virtually no possibility of useful generalization. Heavy and expen- 
sive equipment may pay in some regions and not in others. John Lossing 
Buck has carried through some computations of the cost of plowing with 
a water buffalo and a tractor, and of threshing with a flail and a threshing 
machine, under farming conditions near Nanking. In the case of plowing, 
the water buffalo came out the winner, but the thresher was superior to the 
flail. Buck's eloquent platitude is worth repeating: "'Farmers should not 
use power machinery only because it is considered 'modern.' Farmers 
cannot afford to gain 'face' by using machines if this means increasing 
expenses greater than the saving in labor costs. By doing this, the farmer 
will soon lose his farm." 45 

On the other hand, even within the past decade or so, the range over 
which expensive machinery can be used more economically than hand labor 
has been considerably extended. For some time, bulldozers have supplanted 
labor in most large-scale earth-moving operations, as in the building of 
dams and the leveling or contouring of land; and more recently mechanical 
pickers have been found economical for harvesting corn, cotton and other 
crops in some regions. Depending, of course, on wage levels and on the size 
of the agricultural unit (plantation, cooperative, etc.), "costly" machinery 
is increasingly applicable even in the less developed areas. 

Taxation Reform 

In many primitive economies of Asia and the Middle East, the farmers 
are taxed on the units of products marketed. This would seem to be a 
fairly good tax in providing a rough-and-ready exemption for subsistence 
on the output not marketed, and in avoiding the expense of trying to collect 
on these small sums. Even the more "advanced countries rely heavily on 
direct land taxation, the defects of which are sufficiently familiar to Euro- 
peans and Americans its lack of progressive rates, the inequities of assess- 
ment, its too onerous weight in depression, and so on. In contrast to Europe 
and America, however, rural incomes elsewhere are often more heavily 
taxed than urban incomes. This circumstance is particularly perverse where 
the prospects of economic development depend chiefly upon agriculture. 
Brazil, Argentina and Chile apply income taxation to farmers and ranchers, 
but also tax the land directly, in Pakistan and India, movements are under 
way to introduce progressive income taxation in agriculture. The difficulty 

45. Buck, op. cit., p. 12; cf Moore, op. cit , pp. 108-09, to similar effect. 

254 Approaches to Economic Development 

of successfully administering income taxation of farmers, particularly of 
illiterate peasants, is proverbial; but, otherwise, the merits of the tax are 
substantial from the angles of equity and of economic incentive. 40 

Marketing and Other Institutions 

The marketing of farm products offers a field in which much improve- 
ment is possible, particularly for the peasant producer whose knowledge of 
outlets, prices and desirable types of goods is limited and whose financial 
resources are equally slender. A report on Turkey states: 

No important agricultural progress is possible without provision of better 
marketing outlets than those which survive from ancient times and still charac- 
terize most of Turkey . . . The farmer, his wife, and perhaps his children, lay 
out their modest produce and wait for a buyer to appear. If the buyer is a mer- 
chant, the peasant is likely to be in debt to him and is in no position to bargain. 47 

Marketing facilities are so limited that the report concludes "it would be 
useless to attempt to increase agricultural output by improved methods." 
In China, it is said, it was easier in the late 1940s for a Shanghai merchant 
to purchase wheat by cable from Australia than to buy domestic wheat 
because the home product had to be acquired in small lots, and then 
cleaned, graded and stored. 48 Farmers' cooperatives occasionally can over- 
come these difficulties, but their generally limited resources and limited 
business abilities indicate the necessity of central government aid. 

It will be apparent how intimately agricultural development depends 
upon good roads, rail connections or water transport for the marketing of 
farm produce. Of immediate importance, also, are the agricultural process- 
ing industries, which represent one of the most basic investment require- 
ments for underdeveloped areas. Agriculture would benefit from increased 
storage facilities to even out seasonal and annual variations in production; 
from refrigerated transportation for perishable produce; and from stand- 
ardized cleaning and grading practices. 

Another specific need of considerable importance arises from the lack of 
lending agencies for agriculture at nonusurious rates of interest. But it will, 
perhaps, be better to consider this in the general context of capital problems 
in underdeveloped areas. (See Chapter 14.) 

Responsibility of the State 

A deliberate development process probably implies a considerable role 
for the state in all cases, and for relatively primitive or illiterate peoples this 
may imply a sort of paternalism. W. Arthur Lewis goes so far as to suggest 

46. United Nations, Land Reform, pp. 43-48. 

47. Max W. Thornburg, Graham Spry and George Soule, Turkey: An Economic Appraisal, Twentieth 
Century Fund, New York, 1949, pp. 52-53. 

48. Buck, op. cit., p. 17. 

Agricultural Development for Increased Welfare 255 

that in order to avoid the rapid depletion of newly opened agricultural 
lands, the government should stipulate the actual cultivation practices, be- 
sides providing roads, water, capital for livestock, etc. 49 Elsewhere, govern- 
ment may dispense with prescription and own or manage pilot projects as 
in India, cooperative farms as in China, "proportional profit" farms as in 
Puerto Rico enterprises which not only yield living wages to the partici- 
pants but also demonstrate new techniques, provide some general educa- 
tion, disseminate the basic principles of sanitation and health, and instill a 
progressive spirit. Under some conditions, cooperatives successfully take 
over responsibility for agricultural credit, marketing and crop insurance. 
Sir Alan Pim describes these establishments for the colonial areas and 
Wilbert E. Moore for eastern and southern Europe. 50 Ownership and 
management of power machinery, particularly of tractors, seem also to 
be a promising activity for cooperatives or for the village or central govern- 

In short, the proportions of private, cooperative and government owner- 
ship and enterprise can be varied infinitely to fit the requirements of the 
particular society. Whatever the line of procedure, however, there is no 
substitute for honest and effective government. It may require a political 
revolution as it did in eighteenth-century France, to rid a country of cor- 
rupt government, landlordism, absenteeism, extreme inequality of wealth 
and opportunity, and grinding taxation of the peasant. 

A Stable World Economy 

Economic progress is fostered by reasonable stability of demand for 
exports and by free and expanding multilateral trade. Agricultural coun- 
tries fare badly in depressions: they lose in their terms of trade with other 
countries and in volume of sales, and, possessing small reserves of gold and 
international balances, they face the alternatives of strong depreciation of 
their currencies or artificially high exchange rates supported by exchange 
control. Moreover, the rudimentary financial and fiscal organization of 
many of these countries makes impossible the application of contra-cyclical 
policies or "compensatory" monetary and fiscal policy for the time being. 
Undoubtedly, the best remedy against the vulnerability of primary pro- 
ducers would be the stabilization of domestic economic activity in the chief 
industrial nations. But until some measure of stability has actually been 
achieved, one need not be surprised if primary producing countries elect to 
follow a conscious policy of diversifying exports, purchasing some measure 
of stability by some sacrifice in export yields. 51 This policy, in turn, is sub- 

49. Lewis, loc. cit., p. 17. 

50. Pirn, op. c//., pp. 41-42, 57-58, 68, 86, 105-06 and 145-47; Moore, op. cit., pp. 111-14. 

51. S. G. Triantis, "Cyclical Changes in the Balance of Trade," American Economic Review, March 1952, 
pp. 68-86. 

256 Approaches to Economic Development 

ject to severe limitations, which cannot be pursued here. 52 But if no policy 
for stabilizing export yields succeeds, the agricultural exporting countries 
are likely to be thrown by depressions into devaluations, exchange con- 
trols, quotas and embargoes. If the agriculture of the underdeveloped world 
is to flourish and contribute to economic progress, the industrial nations 
will need to cooperate in stabilizing the markets for the great international 
primary products. 


Probably no one would deny that rational lines of economic develop- 
ment differ substantially as between regions of heavy or light pressure of 
population; but it is hard if not impossible to draw a logically neat 
dividing line between the two categories. The change-over from increasing 
to decreasing product per capita with increments to population might sug- 
gest itself; but this dividing line proves to be not only spuriously exact, for 
reasons yet to be explained, but also too rigorous. Rent in the sense of 
economic theory begins to arise at the "point of diminishing average 
product.'* By this criterion any land would be overpopulated if it bears 
rent, and this is surely too inclusive for any operational use of the term. 

An inviting alternative would be to designate as underpopulated any 
region (with its given complement of natural resources) in which incre- 
ments to population have not yet brought the productivity of labor below 
a wage affording the workers an "acceptable" standard of living. But eco- 
nomics is partly normative, and nothing in its character prevents an econo- 
mist from declaring that a given standard of living is "too low," whereupon 
the definiteness of the line between underpopulated and overpopulated 

But what is worse, many other economic factors besides the mere ratio 
of manpower to natural resources operate upon the marginal productivity 
of labor, such as variations in its skills, energies and age distribution. 
Beyond the economic factors are political and sociological forces of con- 
siderable importance. Finally, the size of a country's population is seldom 
evaluated from a purely economic standpoint unless there is an extreme de- 
ficiency or surfeit in numbers of human beingsand not always even then. 

Nevertheless, it is the extreme cases which offer the most profitable em- 
ployment of the terms, particularly in relation to economic development. 
Thus if numbers are so great that laborers could be removed from agri- 
culture (or other genetic or extractive industries) without reducing even 
possibly with the effect of increasing the total product, there could be 

52. See Chapter 18. 

Agricultural Development for Increased Welfare 257 

little objection to designating the region as overpopulated. And if numbers 
could be increased without serious reduction permitting even an increase 
possibly of per capita productivity, the region is clearly underpopulated. 
By restricting these terms to the extremes we are left with an "undistributed 
middle/' In view, however, of the numerous economic factors other than 
mere numbers which determine productivity, and in view also of the politi- 
cal and social factors which inevitably enter into any judgment as to 
whether population is deficient, excessive or not conspicuously either, it is 
well to have an undesignated middle ground. 

On the basis of these definitions, Japan, China, India, much of South- 
east Asia, parts of the Middle and Near East, and much of southeastern 
Europe are overpopulated. Much of Africa, Australasia and Latin America 
are underpopulated. Other great areas, such as the United States and much 
of Western Europe, would not be meaningfully characterized by either 

Misconceptions about Overpopulated Areas 

From this discussion of terms it is possible to draw an important moral 
concerning development. Dense population does not necessarily mean 
overpopulation. Surely Western Germany, Belgium, the English Midlands 
and the northeastern seaboard of the United States are densely populated, 
but it would be difficult except perhaps on aesthetic grounds to hold 
that they are overpopulated. The element which intervenes to destroy the 
synonym is trade. From an economic angle, the export of products of the 
relatively abundant factor of production (say labor) can, within certain 
limits, act as a substitute for the outward migration of the abundant factor 
itself. 53 Thus the relationship of freedom of international trade and pay- 
ments to the welfare of the underdeveloped but overpopulated world is 

Some people have held that excess population is a real asset for develop- 
ing countries because the increase of national income cannot be impeded 
by a labor shortage. 64 Stated in this general way, the argument can just as 
easily be reversed to say that underpopulation is an asset since an increase of 
national income cannot be impeded by a shortage of land and natural 
resources. In fact, the excess or deficiency of any factor of production 
relative to others is an unmitigated nuisance. But this truth in no way 
denies the attractiveness of measures to absorb surplus agricultural labor 

53. Paul A. Samuelson, "International Trade and the Equalization of Factor Prices,*' Economic Journal, 
June 1948, pp. 163-84, and "International Factor-Price Equalization Once Again," ibid., June 1949, pp. 
181-97. Samuelson's position, however, has been shown to be extreme. 

54. Hans W. Singer, "Problems of Industrialization of Under-Developed Areas" (mimeographed), Round 
Table on Economic Progress, International Economic Association, Santa Margherita Ligure, Italy, 1953. 

258 Approaches to Economic Development 

into other pursuits, its original surplus character being taken as a datum. 
Nor does it deny that, in exceptionally favorable circumstances, a surplus 
of labor can rapidly be absorbed by economic progress. 55 

Pressure of population has frequently been held accountable for certain 
undesirable features of agriculture in the underdeveloped areas: uneco- 
nomically small holdings of land, geographically fragmented units and 
extreme inequality in land ownership. But the connection, if real, is by no 
means direct or invariant. Population pressure may lead to too small 
holdings if inheritance customs dictate the distribution of a man's land to 
all his sons; but it may be prevented from doing so by primogeniture, by 
emigration, by alternative pursuits in trade and industry, and other means. 
Fragmentation of holdings can occur in a country like France, with no 
conspicuous overpopulation; or it can be present in sparsely settled regions, 
as in parts of Africa, if rules of inheritance and dowries are sufficiently 
complex. Finally, inequality of land ownership seems no less characteristic 
of Latin America, for example, than it is of, say, the Near East. 

Implications of the Land-Labor Ratio 

There have, then, been a number of false leads for economic policy from 
conditions of overpopulation or underpopulation; but the contrast does 
form the bedrock of policies for development. Tt will, in general, suffice to 
draw some necessary inferences regarding overpopulated regions, since the 
policies appropriate to underpopulated areas will be apparent. 

For the quite short run, during which the population in agriculture has 
to be regarded as fixed, the chief available remedies against overpopulation, 
aside from improved production techniques, are the utilization of surplus 
labor and the liberation of exports and imports from artificial impediments. 
Surplus labor, if it is genuinely surplus, can be advantageously absorbed 
into any use with a productivity above zero. This implies great emphasis on 
labor-using techniques in agriculture and industry short of plain "make 
work" and on public works requiring relatively small amounts of capital. 
As for the international field, measures to expand profitable exports or im- 
ports operate immediately to lessen the pressure of population on domestic 
resources alone. 

In a somewhat longer run, the agricultural population becomes a variable 
while the total population of the country remains constant or changes too 
slowly to matter. The greater the degree of overpopulation and the closer 
the agriculture of the country already approaches optimum techniques, the 
more vital is the shift of surplus farm labor to industry. 

55. Tt is said, for example, that Western Germany, having suffered in the immediate postwar years from 
the influx of ten million refugees from the east, has already largely utilized them in her rapid development. 
But it would be surprising to discover a parallel in a nonindustrial, and indeed in any, underdeveloped 

Agricultural Development for Increased Welfare 259 

In the truly long run, if these more immediate measures have not relieved 
the pressure of population, the only remedies remaining are the demo- 
graphic ones emigration and declining birth rates. The world today affords 
meager opportunities for emigration, least of all to the great masses of Asia. 
In the last analysis, therefore, the only solution to overpopulation in the 
underdeveloped world lies in the behavior of population itself. 

Whether underdeveloped countries are overpopulated or underpopu- 
lated, they earn most of their livelihood now from primary production 
agriculture, mining and, in a few cases, forestry. National income, there- 
fore, cannot rise much without improvements in agricultural and kindred 
incomes; furthermore, most of the wherewithal for industrialization will 
have at the beginning to come from the yield of primary production. For 
these reasons, the discussion of agriculture in earlier parts of this chapter 
could largely dispense with the contrast between areas of greater or lesser 
pressure of population. The same may be said of increasing the level of low- 
income countries by measures to expand multilateral international com- 
merce: its benefits extend equally to overpopulated and underpopulated 


Since underdeveloped regions are primarily agricultural, chief emphasis 
should be placed initially on increasing agricultural output in attempts to 
raise incomes. This is frequently not the conviction of national leaders in 
countries that are economically underdeveloped. Desire for self-sufficiency 
or military power, national pride, or a purely romantic association of 
manufacture with affluence these and other noneconomic motivations 
frequently result in an almost contemptuous attitude toward farming and 
in the glorification of gigantic industrial or public utility projects. Attitudes 
of this sort, however irrational, have to be reckoned as part of the general 
setting of the problem of economic development. 

Is Agriculture Inferior to Industry ? 

But what of the position, maintained with great vigor by several econo- 
mists, that agriculture in a genuinely economic sense is somehow inferior to 
industry? While these economists would presumably not deny the desir- 
ability of efforts to raise the productivity of agriculture, they do not put 
much faith in such policies but, instead, lay chief emphasis on industry. At 
least, they say, the proportion of agricultural to industrial output should 
be reduced. 

The plain fact is that economic analysis provides no basis whatsoever for 
inferring a general inferiority of primary production. As Jacob Viner says: 

260 Approaches to Economic Development 

Misallocation of resources as between agriculture and manufactures is prob- 
ably rarely a major cause of poverty and backwardness, except where govern- 
ment, through tariffs, discriminatory taxation and expenditure policies, and fail- 
ure to provide, on a regionally non-discriminatory pattern, facilities for educa- 
tion, health promotion, and technical training, is itself responsible for this misal- 
location. 56 

Why then do some economists believe that agriculture is inherently inferior 
to industry in an economic sense? 

Over two decades ago, Mihail Manoilesco, M i nister of Industry and Trade 
of Rumania, attempted to demonstrate by means of largely "unreliable 
and irrelevant" statistics, according to his critics that industrial produc- 
tion is always more efficient than agriculture, and that David Ricardo's law 
of comparative costs did not apply to countries of low agricultural pro- 
ductivity. Protective tariffs offered the only solution. His position drew the 
attention of some of the most distinguished international-trade economists. 57 

More recently, Louis Bean, an economist then connected with the 
United States Department of Agriculture, offered a superficially much more 
sophisticated demonstration of a supposedly "universal need for occupa- 
tional adjustments out of agriculture into other industries and services." 58 
Bean presents statistics for the main countries of the world and for the 
states of the United States purporting to show that low proportions of the 
labor force engaged in primary (agricultural and extractive) industries and 
high proportions in secondary (manufacturing) and tertiary (service) indus- 
tries are closely associated with high per capita incomes. The degree of 
association of the two variables is artificially enhanced by a purely arbitrary 
division of the statistical items into four or five groups. 

But an even more serious error arises from implicitly ascribing low per 
capita incomes to the high proportion of labor in primary production. Bean 
once recognizes explicitly that other factors may be responsible for low 
incomes "population density, per acre productivity in agriculture, indus- 
trial productivity, and the relative volume of power, mechanical equip- 
ment, and other capital resources available to rural and urban popula- 
tions." 59 Thus although too low proportions of the population engaged in 
manufacture or in tertiary production may be a contributory cause, along 

56. Jacob Viner, International Trade and Economic Development, The Free Press, Glencoe, Illinois, 1952, 
p. 71. 

57. M. Manoilesco, Theone du protectionnisme et de I 1 ^change international, Paris, 1929 (English transla- 
tion: Theory of Protection and International Trade, King, London, 1931). The book was reviewed by Bertil 
Ohlin in Weltwirtschaftlkhes Archiv, January 1931, pp. 30-45, and by Jacob Viner in the Journal of Political 
Economy \ February 1932, pp. 121-25, reprinted in his International Economics, The Free Press, Glencoe, 
Illinois, 1951, pp. 119-22. See also Wilhelm Ropke, International Economic Disintegration, Hodge, London, 
1942, p. 167. 

58. Louis Bean, "International Industrialization and Per Capita Income," in Studies in Income and 
Wealth, Vol. 8, National Bureau of Economic Research, New York, 1946, pp. 119-43. 

59. Ibid., pp. 126-27. 

Agricultural Development for Increased Welfare 261 

with many other factors, of low incomes, the main line of causation may 
be from low incomes to low proportions in these fields. As Jacob Viner has 
pungently remarked: "if the data were available it could be demonstrated 
that the positive correlation between percentages of the national popula- 
tions who were dentists or hairdressers and the national per capita incomes 
was even higher than Bean's correlations." 00 

The Prebisch Analysis 

Another supporter of the idea of the generic inferiority of primary pro- 
duction compared to industry is Raul Prebisch, Governor of the Central 
Bank of Argentina from 1935 to 1943 and now Executive Secretary of the 
United Nations Commission for Latin America. 61 It is Prebisch's belief 
that the price ratio of primary to manufactured goods in international trade 
has fallen since the 1870s, and that this means that labor and entrepreneur 
incomes in the industrial countries have increased more than productivity, 
since otherwise prices would have fallen as productivity rose. By this reason- 
ing, incomes in the "periphery" countries producing primary goods have 
increased less than productivity. The benefits of technical progress have 
thus gone disproportionately to the industrial countries, and will continue 
to do so until the underdeveloped areas are themselves industrialized. The 
essential fact accounting for these disparate movements of incomes in 
Prebisch's view is a ratcheting action upon money wages produced by labor 
unions in the advanced countries. During the prosperity phase of a business 
cycle, money wages rise along with prices; but in depression wages are 
inflexible downward. This resistance sustains aggregate incomes in the in- 
dustrial countries, but the gain accrues at the cost of the "peripheral" or 
primary production countries where laborers are not generally organized. 

It would readily be granted, in appraising Prebisch's position, that agri- 
cultural countries may suffer in depression by reason of the tendency of 
industrial prices to be maintained and of competitively produced primary 
goods to decline. Furthermore, primary producer countries are more likely 
to have one or two major exports and this may expose the economy to 
greater risks than a diversity of export commodities would. 

The Factor of Quality of Exports 

It seems very questionable, however, whether the raw-material-producing 
country has undergone a progressive deterioration of its real terms of trade 
over the three quarters of a century (1876-1947) covered by the British 
Board of Trade price indexes used by Prebisch. The one great variable 
which eludes this price comparison is the quality of industrial exports. 

60. Viner, International Trade and Economic Development, p. 64. Italics added. 

61. United Nations Economic Commission for Latin America, The Economic Development of latin 
America and Its Principal Problem*, New York, 1950. 

262 Approaches to Economic Development 

Technological advances have improved manufactured products enor- 
mously over this period, but the quality of wheat, tin, rubber and other 
primary products must have remained practically constant. The real terms 
of trade and real incomes of primary producers can scarcely have been im- 
paired significantly as a long-term development. Any such loss as was 
actually realized would shrink to complete insignificance as a cause of the 
low incomes of underdeveloped areas in comparison with lack of capital, 
inefficiency of agricultural methods, political conditions, feudal land sys- 
tems, ill-conceived taxation, inflation and the like. 62 

The Singer Analysis 

That agriculture is generically inferior to industry is also the view of 
H. W. Singer, an economist of the United Nations in New York. Singer's 
case for industrialization seems to embrace three elements: (1) a special 
aspect of the "infant industry" argument; (2) an extended meaning of 
"external economies" of industry; (3) a supposed progressive decline in the 
terms of trade for primary producers. 63 With regard to the third of these, 
Singer resembles Prebisch in one respect. Both apparently take it as axio- 
matic that technological progress has always been (and always will be?) 
much more prevalent in industry than in agriculture. But this fact should 
turn the terms of trade progressively in favor of agriculture. Hence, both 
writers shy away from the factor of technical cost of production altogether. 
For Prebisch, agriculture finally gets the worst of the deal through monop- 
oly exaction by labor unions in the manufacturing countries. Singer asserts 
that technical progress in industry accrues to the producers in the form of 
higher prices and incomes, but in agriculture it accrues to consumers in the 
form of lower prices and higher real incomes. Instead of supporting this 
argument by a reference to the greater frequency of administered prices in 
manufacturing, Singer supposes that inelastic demand for foodstuffs would 
explain a long-term decline in their prices. Equally implausibly, he argues 
that "in the case of raw materials, technical progress in manufactures 
largely consists of a reduction of the amounts of raw material used per unit 
of output." 64 But the real weakness of the terms-of-trade basis of a sup- 
posed inferiority of primary production lies, as emphasized in the com- 
ments on Prebisch, in its failure to allow for the vast increase in the quality 
of manufactured goods. 

The infant-industry argument, in Singer's hands, takes on a form fre- 
quently encountered in discussions of developing areas: that the preoccupa- 

62. Prebisch himself points out that inflation has been one of the chief factors which have seriously 
limited economic progress in many Latin American countries. Ihid., p. 41. 

63. H. W. Singer, "The Distribution of Gams between Investing and Borrowing Countries," Ametican 
Economic Review, Proceedings, May 1950, pp. 472 94. 

64. Ibid., p. 479. Italics added. 

Agricultural Development for Increased Welfare 263 

tion of these areas with exporting raw materials interfered with the growth 
of potentially productive enterprise in other fields. This possibility cannot 
be altogether denied. But it is problematical to what degree a benevolent 
dictator of such a region would in the past or in the present wish to sub- 
stitute merely potentially productive manufacture for actually profitable 
primary production. If industry may have suffered from relative neglect, so 
may also diversified agriculture and improved agricultural techniques in 
general. The "infant" may well have been or may well be something other 
than industry, particularly industry in the all too usual sense of big fac- 
tories and large-scale capital ventures in general. 

Finally there remains Singer's extension of the "external economies" 
idea of Marshall and Pigou. The most important contribution of industry, 
he hazards, may not be its immediate product, but rather "its effect on the 
general level of education, skill, way of life, inventiveness, habits, store of 
technology, creation of new demand, etc." ( ' r> One may wonder, however, 
how exclusively these benefits accrue merely to industrial economics, and to 
what degree they may be the causes, accompanying circumstances and re- 
sults of high average incomes, however earned. Consider Holland's position 
in the fifteenth and sixteenth centuries arising from its maritime trade; the 
affluence of a state like Iowa or Nevada, or a country like New Zealand, 
arising from agriculture. Furthermore, many or most of the indirect ex- 
ternal economies of manufacture accrue to agricultural regions in the form 
of cheaper or better products and also in the form of techniques which can, 
with appropriate modifications, be applied to genetic and extractive 

Clearly, there are no generally valid reasons why countries that possess 
natural advantages in agriculture and other types of primary production 
should not expand and improve these outputs. This does not deny the 
benefits of industrialization or development of tertiary production when 
these bid fair to cover costs or, within a predictable future, to lay the foun- 
dation of profitable operation. The question of the future of agricultural 
prices still remains, however. Will prices of agricultural products (specifi- 
cally, and not the products of fishing, forestry and mining) be subject to 
long-term decline in the future? Or is the prospect rather that foodstuffs 
and textile fibers will rise in value over the next half century relative to 


Certain economists who have concentrated their attention on population 
trends favor the idea that agricultural prices will rise in value in the next 
half century. Best known among these is Colin Clark, formerly economic 

65. Ibid., p. 476. 

264 Approaches to Economic Development 

adviser to the government of Queensland and presently professor at Oxford 
University, whose Economics of 1960, written in 1940-1941, boldly pro- 
claimed the thesis of increasing scarcity. 00 Clark recently has reaffirmed his 
belief in the correctness of this prediction and has extended his statistical 
analysis through 1970. 07 

Clark points to the expectation that the population of the world will 
increase at about 1.125 per cent a year for the period 1950-1970 or by 25 
per cent in total. The consensus of evidence, he believes, is that European 
countries and Japan can increase agricultural output at a rate of 1.5 per 
cent annually and the United States and Australasia by 2 per cent. But 
any increase of agricultural output in other regions is conditioned in his 
view on a painful process of raising the level of literacy and developing 
transportation and commerce. Conceivably, and from the technical side 
alone, average output over the world might rise by 1.5 per cent annually. 
But this ignores the long-run tendency of the rural labor force to de- 
cline and its increasing claim for a shorter working week. On balance, 
Clark believes that the prospect is for a 70 per cent advance of world food 
prices, relative to industrial products, to meet the demand for an increasing 
standard of living, and that it will require twenty or thirty years to achieve 

Similar reflections lead W. Arthur Lewis of Manchester University to 
comparable conclusions. Lewis points to the fact that in the forty years 
before 1913, manufacturing and primary production grew at about the 
same rate. Since 1913, however, manufacturing has risen by 147 per cent 
and primary production by only 55 per cent; in other words, the annual 
growth rate of primary production (allowing for compounding) is only half 
that of manufactures. On the technical side, Lewis believes that nothing 
prevents an increase of agricultural production by 2 or 3 per cent annually, 
and this would equal or outstrip the annual rate of population increase. 
But the obstacles to achieving this increase of primary production are 
social, with the provision of adequate investment perhaps the chief 
factor. Britain's interest in overseas investment, in his opinion, is to pro- 
tect her standard of living from a progressive scarcity of food and raw 
materials. 68 

Contrasting with the pessimistic or at least apprehensive views of such 
writers as Clark and Lewis, leading American agricultural economists such 
as Davis, Schultz and Black take more sanguine views of the future supply 

66. Colin Clark, Fhe Etonumict of I960, Maamilan, London, 1942; 2d edition, 1951. 

67. Colin Clark, "The future ot the Terms of Trade" (Proceedings ol the International Economic Asso- 
ciation, Monaco, September 1950), International Social Science Bulletin, Spring 1951, pp 37 40 See also 
"World Resources and World Population," in United Nations, Pnn ceding nf the Scientific Conference on 
the Conservation ami Utilization of Resource, 194, Vol T, pp 15-27 

68. W. Arthur Lewis, "Food and Raw Materials," Dutntt Bank Review t September 1951, pp 1- 11. 

Agricultural Development for Increased Welfare 265 

of foodstuffs and other agricultural products. 09 We need not concern our- 
selves with the details of this position, which rests in general on the expecta- 
tion of noteworthy technological advances in food production. 

Pitfalls in Analyzing Price Developments 

In order to discover the significance of future price developments of 
agricultural as against manufactured products for underdeveloped areas, 
several pitfalls must be avoided. In the first place, population increase 
like the physiological * 'requirement" of the individual for calories does 
not in itself signify demand and an increase in the price of foodstuffs. As 
Professor Davis sagely warns: "Demand is different from need or want, and 
low individual productivity and purchasing power spell weak demand 
despite urgent needs and wants." 70 Doubtless some relation obtains be- 
tween mere numbers and demand, but a simple or perhaps even any 
definite ratio cannot be assumed. Second, dealing with this matter in 
global figures may mislead the unwary. Not all foodstuffs pass across world 
markets. Wheat and rice conform to the classical requirements of a perfect 
market reasonably well, though even here exchange controls, tariffs and 
quotas interfere with the formation of a single world price. Potatoes, fish, 
vegetables and many fruits, however, conform more to the character of 
Roy Harrod's C-type or "purely domestic" goods. It is quite conceivable 
therefore that agricultural products may rise in price relative to manu- 
factured goods in one region while they fall in another region where other 
supply conditions and food habits prevail. 

Future development of these two sets of prices can bear intimately upon 
the success of economic development in any country. But the possibility of 
planning development for any significant number of years in advance with 
reference specifically to the price ratio of food and manufactures would 
seem to be quite limited. Differential rates of technical progress in the two 
spheres are, in sober truth, simply not predictable. Furthermore, this rela- 
tionship is subject to strong influences proceeding from national programs 
of price support or protection, from employment conditions the world 
over, from inflation or deflation, and from whether there is peace or war. 
The failure of concerted attempts to stabilize the price of raw materials or 
foodstuffs, such as the Stevenson rubber scheme and the world wheat 
stabilization plan, reveals the vicissitudes to which these markets are ex- 
posed. For about a year following the outbreak of the Korean war, raw 

69. Joseph S. Davis, "American Agriculture: Schult/' Analysis and Policy Proposals," Review of Eco- 
nomic Statistics, May 1947, pp. 80-91; Theodore W Schultz (Ed.), Food for the World (Harris Foundation 
Lectures), Univeisity of Chicago Press, Chicago, 1945, pp. 306-20. For John D. Black's opinions see United 
Nations, Proceedings of the Scientific Conference on the Ctmwvatton and Utilization of Redout ct-v, 1949, 
Vol. 1, pp. 211-14. 

70. Davis, be. itt , p 83, n. 7. 

266 Approaches to Economic Development 

materials supplied from south and southeast Asia commanded such favor- 
able prices that the world dollar shortage vanished. One journal declared 
that if the favorable swing in the terms of trade were to persist for five or 
six years, the Colombo Plan, except for India, could be financed without 
external aid. 71 This is unlikely, but who can say with certainty? 

Conclusions from Analysis of Price Developments 

For underdeveloped countries the moral would seem to be clear: the 
future of prices several decades hence cannot be foretold. Furthermore, 
assuming that governments do not withhold from private enterprisers the 
statistical and other information which they and the international agencies 
possess, there is no reason to believe that government planning will be any 
more successful than the planning of individual producers in exploiting 
favorable market prospects. 

All of this, however, need not be particularly disturbing. The die need 
not be cast for decades ahead ; new investment year by year can be adapted 
to the changing relative demands in world and local markets. Particularly 
for agriculture, where investment is less specific and more flexible than in 
industry, this is reassuring, especially for underdeveloped areas, where 
agriculture predominates. Fundamentally, the divergence of convictions 
among food supply experts as to the future course of prices does not affect 
the basic requirement for increasing the income levels of the less developed 
nations; agricultural production must in any case be raised by strenuous 
and persistent effort. 

71. "Recovery in South-East Asia," The Eastern Economist, April 27, 1951, pp 679-80. 

13. Commerce and Industry in Economic Development 

THE FORMS, MEANS, AND GOALS of industrialization are often vague in the 
mixture of reason, rationalizing and sentiment accompanying the clamor 
for it. Occasionally, no doubt, an almost childish admiration for compli- 
cated machinery underlies an agrarian nation's attitude toward industriali- 
zation. Perhaps the driving force has often been a blind emulation of the 
opulent industrial nations of the Western world, particularly England and 
more lately the United States, in the belief that monstrous factories are the 
"open sesame" to wealth and prestige. National pride, the desire for 
"economic independence" however much "independence" may cost in 
terms of real income plays a role. Certainly autarchy, nationalism and the 
desire to create offensive or defensive armaments are, in conspicuous cases 
today, the driving forces. On a more nearly economic plane, it is often said 
that primary producers cannot escape the devastation of recurrent depres- 
sions originating in America or Europe except by lessening their depend- 
ence on the markets of the industrial West. 

Whether rational or not, most of these urges have a surprising force 
which it would be folly to ignore. Analysis on a purely economic level does 
not suffice either for diagnosis or prescription. Thus it would seem wise to 
point out that better remedies for cyclical depression and unemployment 
are available than a retreat into autarchy if it is a remedy. But other aims 
of industrialization, such as "defense," will have to be taken into account 
by each country according to its own circumstances. In this discussion, the 
raising of levels and standards of living is regarded as the economic motive 
par excellence; and it is chiefly with this welfare objective in mind that the 
subject of industrialization is approached. 


The first "industrialization" is scarcely distinguishable from improved 
agriculture. In the broadest sense of the term, it includes the building of 
highways and access roads and railways to help in the marketing of farm 
products; it would include the development of electrical or other sources of 
power for rural industries and the securing of wood, coal or oil to supplant 
animal droppings as fuel in some countries; in very many cases, it would 
mean the development of agricultural processing plants to prevent spoilage 
or to permit more diversified farming. 


268 Approaches to Economic Development 

Wherever low incomes are associated with surplus population on the 
land another very potent reason exists for investing in industries which can 
successfully operate in rural areas. Human resources are utilized where 
they naturally occur, without the delay, social disruption and capital costs 
entailed by the movement of population into cities. 

Finally, where the majority of the inhabitants are peasants with very low 
incomes, many manufactures are precluded by the limited size of the 
domestic market. Mass production cannot be introduced to achieve low 
unit costs and thus to offer competition to imported items. It would, indeed, 
be difficult to exaggerate the obstacle to the growth of industry created by 
the sheer incapacity of most of the population to buy. A striking example 
is given in the International Bank study of Colombia: for the production 
of electric light bulbs, "the smallest mechanized plant is such that three 
months' operation would fulfill Colombia's present demands for a year. 
The smallness of the domestic market is primarily due to the extremely low 
purchasing power of the mass of the people." 1 From similar facts, Sanford 
Mosk in his illuminating study of the economic development of Mexico 
concludes that higher agricultural productivity is a prime requisite for 
industrialization. "The Mexican farmer," he says, "will not be a better 
buyer until he is a better producer." 2 

Developing Industry Based on Agriculture 

To sum up, the same logic which recommends first emphasis on direct 
measures to improve agricultural techniques and implements in regions pre- 
ponderantly agricultural also counsels the orientation of a large share of 
early investment in industry toward processes intimately associated with 
agriculture. First, this is necessary because of the sheer magnitude of agri- 
culture in the gross national output. Second, the scarcity of capital, skilled 
labor and trained management makes preferable those uses of resources 
belonging to a "stage of production" close to the great producer in the 
backward economies the land. Among those uses, the provision of trans- 
portation and marketing facilities is very important. Third, where too many 
people are on the farms, plantations or paddies, Mahomet should move to 
the mountain; industry should generally move to labor. Thus the heavy 
costs of urbanization can be postponed until incomes have risen. Finally, 
industries based on farm production and farm population afford a direct 
means of increasing mass purchasing power, expanding the domestic mar- 
ket and laying the base for thriving domestic manufactures of varied sorts. 
True, large-scale urban industry is an indispensable complement to the 

1. International Bank for Reconstruction and Development, The Basis of a Development Pro-am for 
Colombia (Report of a Mission Headed by Lauchlin Curne), Washington, 1950, p 93. 

2. Sanford A. Mosk, Industrial Revolution in Mexico, University of California Press, Berkeley, 1950, 
p. 209. 

Commerce ami Industry in Economic Development 269 

small-scale dispersed production of the villages and farms. But there is a 
significant contrast in emphasis as between step-by-step improvement in 
many localities at once and the concentration of investment in a few large 


In India, small-scale or cottage industries account for 85 per cent of all 
industrial employment; in China, small units produce 85 per cent of the 
sugar, half the paper and half the cotton cloth; in Japan, 75 per cent of the 
textile workers are engaged in plants with fewer than 50 employees and 50 
per cent in plants with fewer than 14. 3 Some of these small plants, of course, 
are to be found in the cities, but many are scattered throughout the country 
in small villages and towns. In Indonesia, pursuant to the welfare program 
or "ethical policy" adopted by the Dutch in 1900, the old native handloom 
industry was revived. 'The success of this policy," one writer reports, "is 
indicated by the increase in the number of mechanical looms between 1930 
and 1941 from almost none to about 10,000, while the number of modern 
hand looms perfected by the government's Textile Institute increased from 
around 500 to 49,000.' M In India, several thousand demonstration centers 
have been established to develop the so-called cottage industries. 

Advantages of Village- Rural Industry 

The case for village and rural industries as the chief carriers of indus- 
trialization in the Orient rests not only on the four general economic factors 
previously mentioned, but also on two further and somewhat special con- 
siderations. The first is the relief from want attending seasonal unemploy- 
ment in agriculture. In Japan, it was estimated in 1938, 54 per cent of the 
peasants were engaged in supplementary jobs. 5 The International Labor 
Office has urged that governments consider the possibility of "dovetailing 
of public works with seasonal variations in the excess supply of agricultural 
labour." Highway, irrigation and drainage projects could thus create 
highly necessary capital out of waste manpower and eliminate the misery of 
seasonal unemployment as well. 

Another potential gain from the village and rural industries would be 
their appeal to local savers and investors. Large imports of gold and silver 
bullion into the Orient over many decades suggest that substantial private 

3. Henry G. Aubrey, "Small Industry in Economic Development," Social Research. September 1951. 
p. 276; Joseph E. Stepanek and Charles If. Pnen, "The Role of Rural Industries in Underdeveloped Areas," 
Pacific Affairs, March 1950, pp. 68 69. 

4. Aubrey, he. cit., p, 279. 

5. Ibid., p. 290. 

6. International Labor Office, Action against Unemployment, Geneva, 1950, p. 138. 

270 Approaches to Economic Development 

investment could come from hoards scattered throughout the broad 
masses. 7 The main emphasis, however, should doubtless be put on current 
saving and investing. In relatively primitive economies lacking banking 
facilities, especially in rural areas, the visual appeal of the small village 
industry may be important. 8 

Raising Efficiency of Peasant Industry 

If all these substantial social and economic gains are to be realized from 
peasant industry, why has it not laid the basis of significant advances in 
incomes? The answer lies in the inefficiency of traditional production. The 
small gains made in the past have not sufficed to alter standards of living; 
much of the increase has been swallowed up in population growth. But if, 
as may be possible, a 5 to 10 per cent annual increase in the productivity 
of rural industry can be achieved, this large and cumulative advance might 
conduce to lower birth rates. What steps are necessary to raise efficiency? 

As previously noted, the first industrialization is scarcely distinguishable 
from improved agriculture, and high in the list of priorities should stand 
the provision of simple, improved tools and instruments. The development 
of an improved metal plowshare costing about 60 cents by the Agricultural 
Department of Burma before World War II resulted in sales of 5,000 
annually and a noticeable increase in crop yields. 9 The introduction into 
India of the fly-shuttle, which ushered in the industrial revolution in Eng- 
land, increased output in typical households by 30 per cent; and a 40- 
spindle foot-powered cotton-spinning machine amortized its cost in a 
month if operated full time. 10 

Another high priority for improving peasant industry is the opening up 
of roads, highways and other facilities for transportation, both for obtain- 
ing raw materials and for marketing produce. Over the past decade there 
has been a decided shift in emphasis in many development plans from blast 
furnaces to roads. The opportunity to create transportation facilities with 
seasonally slack agricultural labor is worthy of note. 

The industrial revolution in Western Europe and America was based on 
steam as the motive power; power-driven machinery was consequently 
heavy and expensive. But the advent of internal combustion engines and of 
electric motors driven from central generators has made possible the decen- 
tralized use of power machinery. Japan, with its highly developed electric 

7. See Stepanek and Prien, loc. at., p. 66. The simple creation of money by the government or banking 
system could supply the same funds, but the difference for central banking reserves and international trade 
is obvious. 

8. Morton Solomon, "The Structure of the Market in Underdeveloped Economies," Quarterly Journal of 
Economics, August 1948, p. 532. 

9. H. Belshaw, "Observations on Industrialization for Higher Incomes," Economic Journal, September 
1947, p. 383, n. 3. 

10. Aubrey, loc. cit., p. 280. 

Commerce and Industry in Economic Development 271 

grid, has brought cheap electric power to every hamlet and within reach of 
every farmstead. This achievement goes far to explain the efficiency of the 
small-scale industry of that country, including its notable gains in wool- 
weaving output 11 

Other channels of improvement await exploitation. Government inves- 
tigations into the most promising lines of future development for peasant 
industry may be desirable as complements to private initiative, especially 
where the populace is generally illiterate, apathetic or ridden by disease and 
poverty. The encouragement of producing or marketing cooperatives for 
peasant manufactures is recommended in many quarters; they have at- 
tained modest success in India, Pakistan, Burma, Indochina and China. 
The availability of credit at reasonable rates is often stressed. 

Further argument and documentation could be presented, but probably 
enough has been said to indicate the promise and necessity of improving 
the rural and village industries. 

Processing Farm Products 

Another phase of industrialization which often should be accorded high 
investment priority on much the same grounds as peasant industry is the 
processing of agricultural produce. Processing in a broad sense includes not 
only simple operations such as the milling of rice, ginning of cotton, grind- 
ing of sugar and molasses production for domestic or export markets, but 
also grading, standardizing, packaging and storing. The primitiveness of 
many poorer economies is painfully evident in these latter activities, which 
often, indeed, are almost completely absent. Thus in China, as in much of 
the underdeveloped world, refrigeration facilities are limited to the foreign 
sectors of the port cities, and refrigeration for food in transit is simply not 
available. The effect of this on the market values for primary producers of 
perishable goods requires no explanation. 

An increasing emphasis appears in development programs on industries 
using the raw materials of domestic agriculture. Mosk regards these as 
"foremost among the industries which should be expanded at once" in the 
economy of Mexico. 12 He includes "the processing of cereals; the prepara- 
tion of edible oils from various seeds and nuts; the production of sugar and 
sugar by-products such as alcohol; the fabrication of articles made from 
fibres, such as cotton, silk, wool, henequen, ixtle, and lechu-guilla; produc- 
tion of raw rubber." Similar emphasis is put on processing industries, with 
appropriate changes in the list of products, by the Economic Survey Mis- 
sion to the Philippines (the Bell Mission) and the Joint Brazil-U.S. Tech- 

11. Ibid., p. 286. 

12. Mosk, op. ci/., p 36. 

272 Approaches to Economic Development 

nical Commission. 13 A recent economic survey of Cuba recommends, as the 
chief measure to ensure the island's comparative advantage in sugar export 
in the future, the provision of supplementary income for sugar workers in 
the off-season through processing such by-products as molasses, sirups, 
alcohols, rum and cane spirits. Aside from this, Cuba could raise agricul- 
tural incomes significantly by producing candies, preserves and mar- 
malades from her abundant fruit and sugar. 14 But enough examples have 
been given to underscore the importance of "industrialization" in the 
processing of foods and other farm products. 

Monopoly in Processing 

Unfortunately, the inadequacy of processing and marketing facilities for 
the peasant or small farmer is not the end of his troubles, for often when 
the facilities are available they are the object of monopolistic restriction. 
W. Arthur Lewis declares flatly that "we are compelled to write off private 
enterprise in processing as a social failure." 1 - 5 Some colonial experts incline 
to the view that cooperative storage, finance and marketing are the only 
guarantee that the native producer shall not receive a price so low as to 
preclude him from any gain in the level of living. 16 Others are inclined to 
believe that cooperatives have in general not yet demonstrated their 
viability. 17 However this may be, it seems very likely that government 
action, whether in fostering cooperatives, in providing agricultural credit, 
in negotiating with strong monopolists as the government of Jamaica did 
with the United Fruit Company on the price paid for bananas may prove 
necessary at times. 


The most urgent and most profitable lines of first development in proc- 
esses closely linked with the produce of the land have usually been food 
processing, transportation and marketing facilities, and home and village 
manufactures, in which of course textiles bulk large. Beyond this, what is 
the probable sequence of industrial growth? 

Eliminating Obsolete Methods 

One fairly safe generalization is that any process carried on by obsolete 
methods should come under scrutiny. Many underdeveloped regions are 

13. M. J. Deutsch (adviser to the Bell Mission), Technical Memorandum on Industrial Development and 
Utilities (mimeographed, no date), pp. 8-23. Report of the Joint Braztl-U S. Technical Commiwon, Publica- 
tion 3487, U.S. Department of State, June 1949, pp. 80 and 208-12. 

14. Stacy May, Economic Development in Cuba (a report for the Chase National Bank), International 
Basic Economy Technical Services Corporation, New York, 1948, pp. 11, 111, 46-47 and 51-54. 

15. W. Arthur Lewis, "Developing Colonial Agriculture," The Three Bank* Review, June 1949, pp. 14-15. 

16. Erich H. Jacoby, Agrarian Unrest in Southeast Asia, Columbia University Press, New York, 1949, p. 

17. Sir Alan Pirn, Colonial Agricultural Production, Oxford University Press, London, 1946, pp. 10-11. 

Commerce and Industry in Economic Development 273 

indeed "rampant with technological slack"; 18 here may lie a prospect of 
getting something for nothing, or for very little. Without doubt, this con- 
sideration explains the complete reorientation of President Truman's Point 
Four, which was originally interpreted in some quarters as a plan for bil- 
lions of capital investment, to the more realistic and compassable present 
program of technical aid in terms of millions. 

When improvement begins to cost, however, many criteria present them- 
selves, and their proper evaluation will vary greatly from one country to 
another. Often, the criteria will prove in greater or lesser degree mutually 
incompatible; as in all genuinely economic problems, opportunity costs 
make themselves felt. Whether industrialization is carried on by govern- 
ments with civil servants making the decisions, or by private enterprises 
under the guidance of corporation managers and technical experts, much 
the same general kinds of problems, with the necessity of resolving com- 
peting or conflicting objectives, will be involved. 

Basic Industries 

Among the industries stressed in recent studies of particular economies 
have been chemicals, power, fertilizers, machine tools, and such industrial 
equipment as pumps, filters, centrifugals, mixers, heat exchangers and com- 
pressors. 19 In some cases, the list continues with electrical goods, motor 
vehicles, paper and pulp, and even steel. Apparently, the criterion here is 
the generality of the industry or its lack of specificity; multitudes of 
products depend upon it for raw materials. There can be little doubt that 
this criterion is important at least until it runs afoul of such other con- 
siderations as scarcity of capital and of skilled labor and management. 

One possible solution to the dilemma created by the need for basic 
industries which are often highly capitalistic and the limited resources from 
which they must be bought or produced lies in concentrating the indus- 
trialization in limited regions within countries, particularly in large and 
populous countries. 20 From these more highly developed regions, industry 
can then be spread into the provinces as a result of the increased income 
generated at the centers. 

The Productivity Test 

A rule for determining the sequence of investment among industries, and 
undoubtedly the most basic single consideration, is the test of productivity: 

18. Warren Wilhelm, "Soviet Central Asia: Development of a Backward Area," Foreign Policy Reports , 
February 1, 1950, p. 225. Obsolete equipment, however, may not be uneconomical, see below, p. 277. 

19. See Mosk, op. cif., pp. 36-37; Report to the President of the United State* by the Economic Survey 
Mission to the Philippines, U.S. Department of State, October 9, 1950, p. 62. hereafter called the Bell Report; 
Deutsch, op. cit. t p. 6; Report oj the Joint Brazil-U.S. Technical Commission, pp. 96-101. 

20. H. W. Singer, "Development Projects as Part of National Development Programmes," in United 
Nations, Formulation and Economic Appraisal of Development Projects (Major Course Lectures Delivered at 
the Asian Centre on Agriculture and Allied Projects, Lahore, Pakistan, October-December 1950), Lahore, 
1951, Book I, p. 29. 

274 Approaches to Economic Development 

as more funds are accumulated, the normal progression would be from the 
higher to the lower productivity. Indeed, it has been argued that this is the 
sole legitimate test, and that the admission of other elements leads to un- 
warranted conservatism. 21 In a world in which unlimited capital was avail- 
able, provided the going interest charges could be met, in which economic 
fluctuations and the risk of withdrawal of foreign loans were absent, and 
in which the articulation of economic processes was perfectly adjusted so 
that the flow of output in one line would never be impaired by hitches in 
another, the productivity rule might suffice. 

But loan capital is always limited for any one borrower (capital is "ra- 
tioned" in the technical parlance); national reserves of foreign exchange 
are always more or less limited and more or less exposed to unpredictable 
hazards: domestic markets undergo depression. And it is no part of false 
conservatism if the order or sequence of industrialization takes account, at 
private or public hand alike, of these risks. 

Factors Determining Priority 

Thus, because sufficient capital cannot be saved or borrowed, a given 
country may assign lower priority to a continuous-production steel mill. 
Because foreign capital may in some cases be had only at short term, or 
because governments, in investing domestic capital, may have to make a 
quick showing for political reasons, priority in the sequence of industriali- 
zation may have to go to industries with short gestation periods. Because 
domestic or foreign depressions may threaten currency reserves and na- 
tional currency values, the time-shape of export yields and of imports in- 
duced by higher incomes may assume great importance. Because plant 
operation at a loss in depression is frequently less costly than a complete 
shutdown, industries involving relatively low capital intensity may take 
preference in the industrialization process. The removal of bottlenecks of 
production may assume a significance not measured by the profitability or 
productivity of the particular operation in any normal sense of the term. 22 
Finally, of course, in many types of investment for public health, educa- 
tion and the like productivity can scarcely be measured in quantitative 
terms. Other things being equal, the guide of productivity is not being 
called into question here, but there are other criteria. 

New planned or socialist economies must, in general, face the same facts 
and the same mutually exclusive choices as private enterprise. Even booms 
and slack times occur in socialist as well as in private enterprise economies, 

21. Alfred E. Kahn, "Investment Criteria in Development Programs," Quarterly Journal of Economics, 
February 1951, pp. 38-61. 

22. See E. De Vries, "Financial Aspects of Economic Development," in United Nations, Economic Com- 
mission for Asia and the Far East, Cottage and Small Scale Industries (mimeographed), E/EC-1 1/1 & T/30, 
pp. 337-42. 

Commerce and Industry in Economic Development 275 

if from no other cause than wars, defense activities and change-overs to 
peace. The basic conditions of industrialization probably show greater 
diversity from such factors as population pressure, natural resources, 
literacy and technological practices than from political organization. 

So far as generalization is possible, industrialization has commonly and 
rationally begun with processes close to agriculture, including food process- 
ing and the manufacture of textiles. The next stage would seem rationally 
to include such basic and general industries as chemicals, power, fertilizer, 
electrical equipment, machine tools, and standard and common industrial 
equipment. Further stages can be predicted only in a specific situation. 


Aside from the time sequence of industries to be established in the 
process of economic development, there are far-reaching questions regard- 
ing the desirable proportions of capital and labor, that is, capital intensity, 
the appropriate size of industrial projects, and the rapidity with which the 
whole evolution should proceed. These three issues are involved and con- 
troversial; furthermore, they lead immediately into questions of the state's 
role in the whole process of development. 


There is a philosophy of economic development which stresses the im- 
portance of tools, equipment and projects relatively economical of capital; 
of modest beginnings in light industry and small-scale operations; and of a 
close association of industry at least initially with agriculture. It tends 
to stress the many pitfalls in the path of rapid development and to raise 
doubts about the capacity of governments to force the process successfully 
past certain limits. On the other hand, an eloquent case can be pleaded for 
capital-intensive projects, for large units to realize the economies of scale, 
for pushing hard upon industry (as opposed to agriculture) for the sake of 
the gains of complementarity, "external economies," or "increasing re- 
turns," and for operating the engine of development under forced draft 
through extensive state controls and compulsions. 

General issues of this sort can seldom be resolved categorically, for much 
depends upon the particular time and place. Yet it is a striking circumstance 
that the second of these two philosophies permeated the earlier and more 
abstract treatments of economic development, while the first has gained 
ground steadily in empirical studies of particular economies. 

A general common sense presumption exists for using the scarce and 
expensive factor of capital sparingly relative to labor; the theoretical 
counterpart of this common sense is the productivity test examined in the 
previous section. Capital-intensive investment should grow out of abundant 

276 Approaches to Economic Development 

capital supplies and low interest rates. Historically, industrialization has 
typically progressed from light to heavy forms, a dramatic example being 
afforded by the industrialization of Japan. 23 Critics of the light-industry 
position accept this as the traditional progression, but they would hold 
with Maurice Dobb that "this is a purely static argument. It starts from a 
given endowment of capital in each country; whereas the crucial question 
at issue in discussing policies of economic development concerns change in 
the capital endowment of a country and how rapidly this capital endow- 
ment should be changed." 24 With Evgeni Preobrazhenski -apparently a 
leader in theoretical discussions in the U.S.S.R. of the 1920s the argument 
takes the form that "highly capitalistic technology" on a large scale greatly 
expands output by using surplus farm labor. 25 

Both these lines of argument play fast and loose with two quite separate 
phenomena. Doubtless, as Dobb implies, the rate of increasing "capital 
endowment" can be greatly accelerated by government compulsions; but 
nothing in a rapid rate of saving and investment dictates the practical use of 
capital in combination with labor at a higher ratio than would minimize 
costs on the basis of current interest and wage rates. Any departure from 
this test, even though the interest rate were not a form of actual payment 
to private persons but only an approximate market-clearing rate for gov- 
ernment cost-accounting purposes, would be as wasteful to a planned or 
socialist economy as to the capitalistic private entrepreneur. Precisely the 
same criticism applies to Preobrazhenski's argument proceeding from the 
use of surplus labor to capital-intensive forms of investment. On any sensi- 
ble calculus, surplus labor requires the opposite high ratios of labor to 
capital! The argument is not about what is made, whether capital goods or 
consumers' goods, but how. Even if the pace of capital accumulation is 
rapid, the appropriate instruments for a developing country may be light; 
and if accumulation proceeds against odds, as frequently happens, a high 
ratio of labor to capital is appropriate. 

Studies of Particular Countries 

An overwhelming proportion of recent studies of particular countries 
emphasize this position; but a few examples must suffice for illustration. 
With respect to Turkey, William Nicholls complains of inattention to the 
scarcity of managerial skills, capital and foreign exchange requirements; 

23. Tokutaro Yamanaka, "Japanese Small Industries during the Industrial Revolution," Annals of the 
Hitotsubashi Academy, October 1951, pp. 15-36. 

24. Maurice Dobb, Some Aspect* of Economic Development (Three Lectures at the Delhi School of 
Economics), Ranjit Printers, Delhi, 1951, p. 54. Author's italics. Dobb's views on this matter are apparently 
shared by K. Mandelbaum, The Industrialization of Backward Areas (Oxford Institute of Statistics, Mono- 
graph No. 2), Blackwell, Oxford, 1945, pp. 14-15. 

25. Alexander Erlich, "Preobrazhenski and the Economics of Soviet Industrialization," Quarterly Journal 
of Economics, February 1950, pp. 64-65. 

Commerce and Industry in Economic Development 277 

"the result has been an undue emphasis upon inefficient, capital intensive 
producer-goods industries." 26 Lewis says of colonial agriculture generally 
that the farmer needs spades instead of wooden digging sticks not trac- 
tors. 27 The Economic Commission for Latin America complains that many 
machines imported by the less developed economies are too saving of labor, 
thus causing unemployment and wasting capital. 28 "Even in this machine 
age," says the Brazil-U.S. Technical Commission, "Brazil might more 
profitably direct its efforts first toward improvements in animal traction 
with simple implements, and not toward extensive power mechaniza- 
tion." 29 Using data of the Central Planning Bureau of the Netherlands 
which show value added by labor and by capital for twenty industries, 
De Vries emphasizes the necessity for Asian countries to concentrate on 
labor-intensive industries. 30 

The Factor of Obsolete Equipment 

An interesting aspect of the general presumption in favor of light, or 
labor-intensive, industry is the matter of technically obsolete equipment. 
The Latin American Commission observes perceptively that the relative 
scarcity of capital makes it economical to continue obsolete equipment in 
operation ; and Aubrey remarks that if equipment is simple, the problem of 
obsolescence as such is less serious. 31 It would be consistent with these con- 
clusions to say that an all-round saving for both more mature and less 
developed countries could be effected by the importation into under- 
developed countries of technologically obsolete equipment such, for ex- 
ample, as outmoded coach or Pullman cars. 


Separate from the question of light or heavy industry (the choice be- 
tween labor- and capital-intensive production) is the question of scale or 
size of producing unit. Planners for underdeveloped countries often betray 
a Marxian fascination with mere size and an implicit faith in the economies 
of large-scale production. Of course, no hard and fast generalizations can 
be laid down: occasionally these economies may be quite real. Capital- 
intensive producer goods are likely to be associated with large scale, how- 
ever, and in all such cases the evidence already cited for light industry and 
for peasant and village industry makes a powerful argument for relatively 
small-scale ventures. 

26. William H. Nicholls, "Trade in an Underdeveloped Country Turkey," Journal of Political Economy, 
December 1951, p. 465. 

27. Lewis, he. cit., p. 13. 

28. United Nations, Economic and Social Council, Theoretical and Practical Problems of Economic 
Growth, Economic Commission for Latin America, Fourth Session, Mexico, May 28, 1950, pp. 14 and 51 

29. Report of the Joint Brazil-U.S. Technical Commission, p. 202. 

30. De'Vries, he. cit., p 338. 

31. Theoretical and Practical Problems of Economic Growth, p. 57; Aubiey, he. cit , p. 294. 

278 Approaches to Economic Development 

Disadvantages of Large Projects 

Beyond the ever-present problem of scarcity of capital, several further 
considerations point to the wisdom of conservatism in the matter of size. 
For one thing, large projects come slowly into fruition; meanwhile, ancil- 
lary projects may be delayed, or consumers may chafe under the postpone- 
ment of services. None other than Molotov complained in a speech in 1939 
of a "megalomania in construction . . . There are many instances of 
cases," he said, "where we embarked upon construction of gigantic proj- 
ects, sank a lot of money into these schemes, but their completion dragged 
out interminably." He gave as illustration the Frunze heat and power sta- 
tion in Moscow, which was still unfinished after seven years of construction 
though two or three smaller plants could have been completed in the same 
period. 32 

Much of the success of industrial development, as everyone recognizes, 
depends upon the proper articulation of the several parts of the economy. 
If investment is committed to huge projects, the danger of wrongly estimat- 
ing optimum outputs and optimum locations for plants is augmented. A 
further risk lies in the exhaustion of financial resources before the project 
can be completed. Finally, the risk of technical obsolescence also mounts. 

Modern Technology and Small Plants 

A further significant fact is that modern mechanical engineering, par- 
ticularly as aided by electrical motive power, is able to reduce the size of 
plant required for the full realization of economies of scale. Aubrey points 
to the accomplishments of the Agricultural Industry Service of UNRRA 
in this respect. Cement factories, brick kilns, sulphuric acid plants and 
spinning and weaving equipment are a few examples among many. 

It is well to recall the large role played in the development of Japan and 
even in its present economy by small-scale industries. They prevail not 
only in more or less indigenous commodities such as various types of 
brushes, paper lanterns, paper umbrellas and dolls (for all of which there 
is a very lively home market), but also in "Western" goods fountain pens, 
bicycles and rubber shoes, boots and tires, for example, In some industries, 
such as wool-weaving, the large-scale producer has even lost ground within 
the past few decades to smaller units. 3 - 3 Widespread availability of electric 
power, in contrast to the earlier concentration induced by steam-driven 
machinery, helps to account for this. Japan's experience provides an in- 
structive example of how possession of a large sector of small-scale enter- 

32. Reported in Pravda in 1939, according to the Birmingham Bureau of Research on Russian Economic 
Conditions, Results of the Second Five-Year Plan and the Project of the Third Five-Year Plan (Memorandum 
No. 12), Birmingham, 1939, pp. 6-7. 

33. See Aubrey, loc. cit., pp. 282-86. 

Commerce and Industry in Economic Development 279 

prise may give initial impulse to industrialization as well as sustain its 


Countries embarking on economic development programs must settle, 
besides the questions of the correct degree of capital-intensity and of suit- 
able scale, the difficult problem of the tempo of industrialization. Some note- 
worthy students of economic development have written rhapsodic accounts 
of the potentialities of rapid progress. This conviction rests in part on 
factors already mentioned enthusiasm for heavy industry and belief in 
nearly limitless economies of scale. But it also involves some new elements 
of expectation : the gains of complementarity among the many industries, 
"external economies," increasing returns of industry as opposed to agricul- 
ture, and kindred ideas, all of them closely related and often not clearly 
distinguishable. To appraise this fabric, it is necessary to disentangle the 
many threads and to test their tensile strength. One thing, of course, is clear: 
so far as the economic aspect of development is concerned and aside from 
sociological, moral and political issues, a maximum tempo of increase in 
income is the objective. 34 The practical issue is whether haste is better made 
precipitately or slowly. 

Complementarity and "External Economies" 

Complementarity and "external economies" may profitably be consid- 
ered together. Complementarity refers to the fact that virtually all the indus- 
tries of an economy are interdependent: each furnishes a market for the 
others and each determines the prices of productive factors and raw mate- 
rials used by the others. In an expanding economy each industry, provided 
its growth is gauged correctly to the growth of others, should develop 
economies of production or improve its product; and the benefits of each 
to the others arc augmented by their very interdependence. External 
economies refers essentially to the same phenomenon except that the 
viewpoint is shifted from all industries to a particular one. Even if a plant 
or industry has already realized all internal economies (perfectly exploiting 
its overhead or fixed factors), its expansion may induce other related and 
contributory services or industries to better their products or to realize 
lower costs, and these improvements in turn lower the costs of the first 

A number of writers have seized upon the fact of complementarity and 
the potentiality of external economies as prima-facie evidence that indus- 
trialization of underdeveloped areas must proceed rapidly, on a large scale 

34. Mere aggregate or average income may increase without an increase ot welfare if inequality grows, 
or if the average increase is ground out of some luckless class, such as the bourgeoisie or the peasants. 

280 Approaches to Economic Development 

and under the auspices of the state. According to Rosenstein-Rodan, 
"complementarity of different industries provides the most important set 
of arguments in favour of large-scale planned industrialization." 35 Much 
the same conviction is expressed by Preobrazhenski : "to secure the develop- 
ment of the whole complex of the state economy and not only of its par- 
ticular parts," the state must provide for rapid expansion of its capital 
equipment "because the chain connection in the movement of the whole 
complex makes an isolated advance entirely impossible." 36 Similar views 
are set forth by Mandelbaum and Dobb. 37 

Whether or not these arguments support extensive state intervention, 38 
one thing is certain: external economies and complementarity have a 
completely neutral relation to the tempo of industrialization. External 
economies cannot banish the scarcity of capital and of skilled labor from 
the scene nor annihilate illiteracy, poor health and apathy, bad systems of 
land tenure and other real limits to progress. As for complementarity, if 
panegyrics can be written on the great possibilities of development through 
the successful dovetailing of industries, volumes can also be written on the 
complexity of the problem and the infinity of chances to go wrong, whether 
the investment process is controlled privately or by the state. 

Technological Improvements in Industry and Agriculture 

Is the rate of industrialization to be pressed hard because, in the terms of 
English classical and neoclassical economics, "industry is subject to in- 
creasing but agriculture to diminishing returns"? Modern economics re- 
jects this quaint language because both industrial and agricultural units of 
production are characterized by decreasing, optimal and increasing phases 
of costs. What the contrast usually means, even with the classical econo- 
mists, is that technological improvements are more numerous in industry 
than in agriculture; and this seems to be the conviction of many of the 
proponents of rapid and heavy industrialization already named. But this 
generalization is categorically rejected by outstanding agricultural econo- 
mists. John D. Black, for example, asserts that "agricultural revolution has 
accompanied industrial revolution and has kept pace with it." 39 

Recently, indeed, the number and variety of inventions and their prac- 
tical application in agriculture have been striking. Mechanization, im- 
proved varieties of crops that reduce the hazards of weather by shortening 
the maturing periods, liming, fertilizers, control of insects and diseases and 

35. P. N. Rosenstein-Rodan, "Problems of Industrialization of Eastern and South-eastern Europe," 
Economic Journal, June-September J943, p. 205. 

36. Erlich, loc. cit., p. 67, quoting from Preobrazhenski's Novaia Ekonomika (p. 92). 

37. Mandelbaum, op. cit., p. 4; Dobb, op. cit., pp. 58-59. 

38. See pp. 290^. 

39. John D. Black in United Nations, Proceedings of the Scientific Conference on the Conservation and 
Utilization of Resources, 1949, Vol. I, Plenary Meetings, New York, 1950, p. 213. 

Commerce and Industry in Economic Development 281 

land conservation have produced near miracles since the late 1930s. In com- 
parison with averages over the years 1920-1939, wheat, corn and hay yields 
were, respectively, one quarter, one third and one tenth higher in the 
United States in 1945-1949; and livestock productivity per animal unit 
rose by 15 to 20 per cent, largely as a result of the development of high- 
protein legume hays. 40 The consumption of liming materials increased by 
400 per cent from 1935 to 1947; of fertilizer, from 1936 to 1948, by 300 
per cent; egg production per layer rose over the years 1909 to 1948 by 
60 per cent. 41 

The technological knowledge is already available to allow even more 
remarkable increases in production, and means of further expanding such 
knowledge are promising. 42 This seems to be the general opinion of agri- 
cultural experts today. Of course, the future of technical discovery and of 
its practical application cannot be scientifically predicted. But unless per- 
verse intervention on the part of governments interferes too sorely, the 
incentive for invention and the elaboration of improved agricultural tech- 
niques will be very strong. 

Should the character of investment in underdeveloped areas be guided to 
any significant degree, however, simply by guesses as to lines of production 
which the future may bless by rapid technological advance? The really 
relevant test would seem to be present productivity. From this standpoint 
the tempo of industrialization might well be held somewhat in restraint in 
order to exploit first the more widespread and less costly opportunities for 
increasing incomes from the farms, paddies, ranches and plantations. 

Technical Aid from Abroad 

The availability of advanced productive techniques from the industrial- 
ized nations has led some people to the belief, shared by some persons in 
the underdeveloped areas themselves, that these areas can attain to the 
levels of per capita income of the West in as many decades as the process 
originally required in centuries. At the other extreme stands the view that 
cultural differences are so great that Western techniques are quite inap- 
propriate or that they almost inevitably lead to such social disruption as to 
make any material gains in output too costly in cultural and other intangi- 
ble values. 

Surely there must be a middle way. In some degree even techniques must 
be indigenous, and it is well that cautions have been sounded against the 

40. A Water Policv for the American People, Report of the President's Water Resources Policy Commis- 
sion, December 1950, Vol. I, p. 155. 

41. Sherman E. Johnson, Channel in American Farming (Miscellaneous Publication No. 707), U.S. De- 
partment of Agriculture, December 1949, pp. 26, 27 and 49. 

42. A Water Policy for the American People, p. 163; see also Reuben W. Hecht and Glenn T. Barton, 
Gains in Productivity of Farm Labor (Technical Bulletin No. 1020), U.S. Department of Agriculture, De- 
cember 1950, p. 3; and John A. Hopkins, Changing Technology and Employment in Agriculture, U.S. Depart- 
ment of Agriculture, May 1941. 

282 Approaches to Economic Development 

absurd assumption that techniques can be transplanted bodily, and trans- 
planted without vast complementary changes in the whole society. As 
Herbert Frankel complains, there has been too great a tendency "to speak 
of 'the social consequences of technical change,' and not of 'technical 
change as a social consequence.' " 43 It may even be true, as Simon Kuznets 
suggests, that, instead of trying to transfer techniques, "it is more a matter 
of finding within the country whatever groups among its population are 
aware of the need for and the ways in which elements of the industrial 
system can be adopted; and of mobilizing support behind these groups in 
the difficult effort which they will necessarily face." 44 

Yet the fact remains that the history of Western Europe and even of non- 
European countries shows numerous examples of the transfer of tech- 
niques, including industrial techniques, to the great advantage of the re- 
ceiving economy. 15 They have not, it is true, been transferred without 
modification, without a laborious refitting of other economic elements 
complementary to them, or without substantial social costs. But all progress 
entails adaptation and costs. When all is said and done, it would appear 
that the advanced techniques of the industrial nations offer, with proper 
modifications, one of the most promising channels for raising the levels of 
living and the quality of life as end product of the less developed areas. But 
it may be that the greatest danger to desirable changes within the native 
cultures is the very speed of industrialization to which these areas them- 
selves aspire. 


Neither the mechanical wonders of heavy industry nor the potentialities 
of external economies and of technical complementarity nor future pos- 
sible inventions establish any presumption favorable or unfavorable to 
rapid industrialization. What then are the real factors determining its rate? 
Probably the chief limiting factors are the supply of raw materials, capital, 
skilled labor, trained managers and able entrepreneurs, the general eco- 
nomic organization of the society, and access to foreign markets. To these 
may be added a host of economic and noneconomic elements: production 
techniques, public health, life expectancy, general literacy and education, 
morals and morale, religious taboos, etc., to many of which attention is 
devoted elsewhere. Here the main concern is with the scarce factors of 
production and their organization. 

43. S. Herbert Frankel, The Economic Impact on Under-Developed Societiei, Blackwell, Oxford, 1953, 
p. 18. 

44. Simon Kuznets, "International Differences in Income Levels: Some Reflections on Their Causes," 
Economic Development and Cultural Change, April 1953, p. 25. 

45. See Chapters 6-11. 

Commerce and Industry in Economic Development 283 

Capital Formation 

Progress and accumulation are not quite synonymous, as Ricardo seemed 
disposed to assume. And yet the generalization is valid that investment 
without inflation cannot exceed "voluntary" saving and foreign borrowing. 
A later chapter inquires into these sources of capital in some detail. 
Briefly, how formidable or how easy is the problem of accumulation for 
underdeveloped areas? 

Some writers on economics apparently consider the matter to be rela- 
tively simple: create capital from surplus agricultural labor. One writer 
goes so far as to suggest that this surplus obviates the necessity of saving. 46 
Of course, to the degree that the surplus labor is successfully employed, 
national income increases by just so much. If this increase is saved either 
privately or by the government, the saving involves no deprivation com- 
pared to the original state of affairs. But to say that no saving is necessary 
is to forget that added income can be consumed. 47 In poor economies, 
excluding for the moment fairly ruthless totalitarian regimes, the pressure 
in both private and government sectors to devote increments of income to 
consumption will be very great. Indeed, in view of the poor health and low 
energy of the populace, considerations of human welfare and efficiency 
alike may recommend precisely this use of increased income for a certain 
range. 48 Past this point the public clamor for bread and circuses may, 
however, merely impair saving and investment. 

Monetary Expansion; State Appropriation 

Kcynesian methods or more precisely monetary expansion for ab- 
sorbing unemployment do not ordinarily hold forth much promise for 
underdeveloped areas. 49 On the contrary, the typical prevalence of fear of 
inflation or actual inflation in these economies would counsel a consider- 
able degree of monetary orthodoxy. The use of monetary expansion as a 
remedy for unemployment depends upon the existence of a plethora of idle 
plant and equipment. Where capital goods are scarce, pressures on capacity 
with consequent rising costs will quickly cause a cheap money policy to 
blow off in inflationary steam. Furthermore, in "underpopulated" areas, an 
additional obstacle presents itself to increasing output through mere credit 
creation in the scarcity of labor, particularly of certain kinds. 

46. By way of flat assertion, Dobb (pp. cit., p. 39) says merely that prior savings are not necessary. But he 
discredits the view that a "savings fund" limits accumulation (p. 36) and e-ven says (p. 43) that sa\mg may 
put out of use equipment specialized for producing consumers' goods, at least "immediately.** 

47. Except, perhaps, in those cases in which the saving is done "in kind," e g., where surplus labor is 
devoted to road-building and the like. 

48. See Joseph J. Spengler, "Economic Factors in the Development of Densely Populated Areas," 
Proceedings of the American Philosophical Society, February 1951, pp. 20-53; se especially p. 36. 

49. The contrary view seems to be represented by Mandelbaum, op. cit , pp. 4-11. 

284 Approaches to Economic Development 

Totalitarian economies can theoretically appropriate all income in excess 
of bare subsistence for capital formation, and capital formation rates 
realized by the U.S.S.R. have been high. 30 But even Dobb, who bases his 
recommendations for underdeveloped countries quite forthrightly on the 
Russian example, apparently recognizes limits to the completeness with 
which the "marketable surplus" product of agriculture can be diverted to 
industrialization. 51 In passing, it may be worth noting that, while surplus 
agricultural labor may be an asset to a totalitarian state undertaking indus- 
trial expansion, the same is not necessarily true in a free economy in which 
these people, along with others, will naturally consume all or virtually all 
of their increased disposable income, up to a considerable point at least. 52 
Examination of policies which have increased productive saving in the less 
advanced economies is postponed to a later chapter. Aside from direct 
compulsion, it is clear that the chief measures lie along the well-worn route 
of monetary and political stability, effective savings institutions and the 
general encouragement and reward of thrift. 

Skills and Techniques 

It would be gratuitous to attempt to assign any order of rank to the 
various shortages or bottlenecks which condition the speed of industrializa- 
tion ; but the paucity of skilled laborers and managers, and the general level 
of enterprise, literacy and energy among ordinary laborers would stand 
high in any list. Russia has suffered perennial limitations on these scores. 
In 1929, more than 40 per cent of persons holding posts requiring technical 
training lacked it completely; administrative personnel has been scarce, 
partly because of exposure to accusations and reprisals. 53 

Some writers believe that industrialization creates its own skills, but 
students of particular countries in the early stages of development speak 
otherwise. Concerning Mexico's "human resources for industrialization, 
industrial wage earners, industrial technicians, and industrial managers," 
Mosk writes: "In time the shortages will be overcome from within Mexico, 
but this will be a long-drawn-out process because it involves a complex 

50. Norman M. Kaplan, Soviet Capital Formation and Industry (processed), Rand Corporation, Santa 
Monica, 1952, p. 12, gives the following figures: 

Investment as Per Cent Investment us Per Cent 
of Beginning Capital of Average Capital 

July 1, 1928-July 1, 1935 23.3 12.8 

July 1, 1928-Jan. 1, 1938 28.3 12.1 

Jan. 1, 1931-Jan. 1, 1936 22.7 14.5 

Jan. 1, 1933-Jan. 1, 1938 19.7 13.2 

51. Dobb, op. cit. t pp. 34 and 45-48. 

52. Part of the additional consumption takes the form of durable consumers* goods. These goods may be 
considered as capital, though scarcely in the sense of an addition to the apparatus turning out further goods. 

Commerce and Industry in Economic Development 285 

social readjustment for large numbers of people." 54 The shortage of tech- 
nicians in some countries is appalling. Paraguay, with a population of 
1,406,000 chiefly dependent on agriculture, is reported to have only nine 
native graduates of an agricultural college. 65 In Indonesia with 60 million 
people, where doctors are numbered in the hundreds, and where there are 
ten persons holding Ph.D. degrees in economics, the "crowning lack" is 
teachers for general and vocational training. The problem is made more 
serious, if not desperate, by poor communication and transport facilities, a 
shortage or complete lack of textbooks and paper, and a bewildering variety 
of dialects. 50 

Quality of the Labor Force 

However important basic education and special training, the availability 
and quality of labor are based on certain physiological facts and are inti- 
mately bound up with a host of psychological and cultural elements. Most 
of the factors bearing on the general rate of development impinge even 
more sharply on the tempo of industrialization. Work in modern factories 
may be more exacting of physical and nervous energy than the pace of the 
plantation; it probably requires a higher level of discipline; and it depends 
for its effectiveness in large degree upon the incentive of money wages. 

The transition to industrialism involves formidable questions of labor 
motivation, frequently complicated by industrial relations problems which 
have been imported along with the technology of more advanced econo- 
mies. 57 Thus Curric remarks that in Colombia "the provision of three good 
meals a day within the plant enabled workers to handle heavy work which 
they previously had been incapable of performing."-"' 8 In the Caribbean, as 
an economist has written in a letter to one of the authors, "it seems to be an 
established fact . . . that if wages are raised, as they have been for ex- 
ample on public works projects, there will be less work offered ... in 
these areas elasticity of effort with respect to income is negative at all points 
even at a level which we would consider way below subsistence or at 

54. Mosk, op. cit., p. 272; Chapter 13, on "Labor, Technicians, and Management," supplies many 
examples supporting this conclusion. 

55. Harold B. Hinton, "Point Four Methods in Use Ten Years," New York Times, February 4, 1952, 
p. 49. 

56. Lawrence S. Finkehtme, "Education in Indonesia," Far Eastern Survey, August 22, 1951, pp. 149-53. 

57. Guatemala presents a specific example. "Money wages have barely kept pace with the rise of the price 
level. Working standards appear to have declined and higher wages, even though often they have been 
largely nominal, seem to have given rise to greater irregularity in working habits Resistance to moderniza- 
tion and mechanization of factories, as well as legal provisions which make it extremely difficult to release 
unsatisfactory workers, have naturally raised manufacturing costs and impeded development." The Labor 
Code of 1947 is "frequently described as being so partial as to impose unjustified, and at times almost 
ruinous, requirements upon the employer." G. E. Bntnell, "Problems of Economic and Social Change in 
Guatemala," Canadian Journal of Economics and Political Science, November 1951, pp. 477-78. 

58. International Bank for Reconstruction and Development, The Basis of a Development Program for 
Colombia, p. 92. 

286 Approaches to Economic Development 

least below minimum health." Many factors beyond mere indolence help 
to explain this phenomenon, but they would form the subject matter for a 
separate treatise/"' 9 

Finally, it is quite evident that, where industrialization depends upon 
private initiative, it will be effectively conditioned by the supply of able 
entrepreneurs and the conditions under which they operate. This is a matter 
so intimately involved with the role of the state that it is treated in that 
connection in a later section. 

Historical Examples: The West 

How much can be learned about the probable rate of industrialization of 
underdeveloped areas from historical examples? The review of industriali- 
zation in Western Europe, Japan and the U.S.S.R. in Part II has revealed 
a wide range of underlying conditions and accomplishments. While the 
industrial revolution in England doubtless serves as a prototype in much 
thinking about this process, it probably would be generally agreed that the 
succession of technological discoveries supplying the main drive of this 
transformation, the wide areas of unexploited colonial territories that ex- 
isted then and the singularly favorable context of domestic and interna- 
tional politics are scarcely to be paralleled in the future. The industrializa- 
tion of a country such as Norway, which came relatively late, beginning 
about the middle of the nineteenth century and reaching relative maturity 
by the time of the first world war, benefited at least indirectly from these 
same highly favorable conditions. 60 The still later and more spectacular 
industrialization of Germany between the unification in 1873 and World 
War I took place in the same general setting, now so greatly changed. 
Furthermore, these and all other European industrial nations and North 
America took as a point of departure a level of average income, of general 
health, of education, of business and financial conditions and of social 
institutions favorable to industrialism so far in advance of most of the 
present economically underdeveloped world that analogy breaks down 

Japan and Russia 

Japan and Russia doubtless supply much closer analogies to the present 
underdeveloped world. And yet there are notable differences. Japanese 
industrialization was certainly forwarded, particularly in the concentrated 
development of heavy industry in the interwar period, by the fact that 

59. See Wilbert E. Moore's articles on "Primitives and Peasants in Industry," and "Theoretical Aspects 
of Industrialization," m Social Research, March 1948, pp. 44-81, and September 1948, pp. 277-303; his 
book Industrialization and Labor Social A \pect\ of Economic Development, Cornell University Press, Ithaca, 
1951; and the extensive bibliographies given in these three sources. 

60. Allan Lyle, Die fndustrialuierung Norwegens, Problcme der Weltwirtschaft, Schriften des Instituts fur 
Weltwirtschaft an der Umversitat Kiel, No. 65, Gustav Fischer, Jena, 1939. 

Commerce and Industry in Economic Development 287 

Japan had a free hand in Manchuria and a dominant position in China. 
Russia, it is true, has never been a colonial power; but economically 
Asiatic Russia can in many ways be regarded as a region of colonial ex- 
pansion for western Russia. The great difference between both these coun- 
tries and most of the nations now entering upon industrialization is the 
"monolithic" character of the state and society the absolute power of the 
central government, the presence of able and dedicated leaders devoted to 
a few overwhelmingly strong objectives such as "defense" and national 
economic strength, and the subservience of the populace and their institu- 
tions to these objectives. 61 China may now be moving in this direction and 
other countries may swing into the totalitarian drift. But most of the under- 
developed world shows a weakness of government and a diffusion of pur- 
pose which, though they may have their merits in certain respects, cer- 
tainly do not make for a maximum tempo of industrialization. 

Contemporary Conditions 

Whether contemporary conditions favor a more rapid rate than has 
characteristically been attained in the past can be argued both ways. The 
one most powerfully favorable factor would seem to be the existence of 
superior production techniques, both simple and more advanced, which are 
available for application. Furthermore, transplanting and adapting these 
superior methods of production is now probably easier. Communication is 
technically faster and more widespread, as is physical transportation of per- 
sons and goods. Governments, and even private firms, of the industrial 
nations seem favorably disposed toward the export of scientific and prac- 
tical knowledge; the United States leads with its technical aid policy; and 
the international agencies carry on a widely ramified program of similar 
nature, beginning with elementary steps in public health and education. 
Another powerful and favorable factor is the availability of government 
and international loans for development. 62 In part, of course, this merely 
takes the place of the flow of private funds which was so important in the 
nineteenth century; and it is far from certain that, for the developing areas, 
the place has been taken in equal measure. 

The progressive breakdown of colonial empires, the ferment of national- 
ism in Asia, the general political and social unrest throughout the under- 

61. For the somewhat less well known case of Japan, see D. II Buchanan, "Japan versus 'Asia/ " Amer- 
ican Economic Review, Proceeding's, May 1951, pp. 359-66, Shigeto I sum, "Economic Fluctuations in 
Japan, 1868-1893," Review of Economy Statistic*, November 1941, pp. 176-89; G. E. Hubbard, Eastern 
Industrialization and Its Effect on the We\t, Oxford University Pi ess, London, 1935, pp. 45-63; and for the 
immediate prewar period, E. B. Schumpeter and others, 'I he Industrialization of Japan and Manchukuo, 
1930-1940, Macmillan, New York, 1940, pp. 789-864. 

62. United States foreign aid in the postwar period to March 31, 1951, was $31.4 billion (New York 
Times, September 19, 1951). This amounted to more than the sum total of all outstanding foreign investment 
by all countries of the world in 1947. However, a substantial part of this aid merely offset war damage to 
productive plant and sustained consumption. See Chapter 20. 

288 Approaches to Economic Development 

developed world and the spread of Communism outside the U.S.S.R. all 
of these furnish a powerful drive toward increasing incomes and indus- 
trialization, but also they give rise to some formidable obstacles. The dis- 
turbed international scene, actual domestic strife in some countries and the 
turbulent state of political and social affairs in others create legal and 
psychological barriers to saving, investment and enterprise. In much of 
Southeast Asia, production falls below prewar levels in significant parts of 
the economy. 

Negative Factors Today 

Indeed, among the distinctly negative or adverse forces not present in 
earlier periods is the general reduction of labor and capital mobility and 
the growth of sensitiveness to uncertainty. This takes several forms. Private 
capital moves with difficulty against exchange controls and the danger of 
discriminatory taxation, to say nothing of nationalization and expropria- 
tion. International trade moves against quotas and other direct limitations 
unknown to an earlier age, and the international movement of labor has 
become sporadic and exceptional. Equalitarian redistributions of wealth, 
while they may in some ways have improved the lot of the common man 
somewhat, have reduced the flow of private saving and have thrown the 
responsibility for accumulation upon governments, which sometimes re- 
spond successfully and sometimes not. Finally, the growth of social security 
legislation, of labor union power and of labor laws, however they may be 
judged on humanitarian and ethical grounds, involves heavy budgetary 
burdens and costs for private business, which weigh against industrial 

On balance, the component of forces at work may favor a more rapid 
tempo of industrialization than in the past. But the rate will certainly be 
less than many countries expect. In successive annual reports, the Interna- 
tional Bank for Reconstruction and Development has emphasized the 
paucity of really promising projects. 63 The head of the Joint Brazil-U.S. 
Technical Commission, Mr. John Abbink, observed: "few of these 
countries are ready for the degree of industrialization to which they seem to 
aspire . . . industrialization may easily create more problems than it 
solves." 64 Population growth alone will require large increases of output in 
many countries even to maintain present levels of living. It is an open 
question whether population or output will win the race. But in the early 
stages of the race the most crucial part of output is food, fuel and raiment; 

63. International Bank for Reconstruction and Development, Second Annual Report, 1946-47 ', Washing- 
ton, 1947, p. 5; Third Annual Report, 1947-48, Washington, 1948, pp. 5 and 15-16; see also New York 
Times, December 11, 1951, "World Bank Head Rejects U.N. Plan." 

64. United Nations, Proceedings of the Scientific Conference on the Conservation and Utilization of Re- 
sources, 1949, Vol. I, p. 476. 

Commerce and Industry in Economic Development 289 

that is the reason why improvements in agriculture and the industries most 
directly related to it are so fundamental. 


Although the world is being shaken today by the ideological conflict 
between government and private conduct of economic activity, a more 
fundamental issue for the rate of economic progress is the contrast between 
good and bad government. This issue affects every phase of economic life, 
from fundamental legal and political institutions such as land tenure sys- 
tems, water rights and the security of life and property, through such ele- 
ments of the social structure as health and literacy, to more complex levels 
involving saving and investment institutions, taxation and monetary sys- 
tems and foreign exchange controls. 

"Government-generated insecurity" the fear of ruinous taxes, infla- 
tion, expropriation and political reprisals goes far toward explaining some 
of the most formidable obstacles to industrial development. The English 
classical economists laid great stress on this fact. In the contemporary scene 
it is reflected in hoarding, the flight of capital abroad, investment in land 
instead of equipment, price policies designed "to amortize plants in as little 
as three years to assure recovery of ... capital before some unexpected 
blow falls," and the like. 05 Indeed, there is little doubt that the "necessity" 
of government undertakings in finance and production often appears as the 
direct consequence of "government-generated insecurity" for private enter- 
prise. The circle is closed in a curious fashion when state enterprises func- 
tion badly and the demand arises for a return to private operation. The 
Bell Report on the Philippines characterized the twenty-four government 
corporations, organized for the most part after 1938, as "inefficient, waste- 
fully operated, and in some instances . . . misused," and called for a house 
cleaning of the corporations and a return of most of their functions to 
private initiative in order to "assure a management with a basic interest in 
efficient and economical production." 66 

By contrast, one may contemplate the case of El Salvador, which, despite 
the highest population density and the poorest natural resources, has 
achieved distinction as one of the most prosperous of Central American 
countries. This record is ascribed to "political ability and sound adminis- 
tration of the Government," including efforts to reduce inequality and 
raise the income level of the masses of agricultural laborers. 67 Good govern- 
ment is the cornerstone of all efforts to improve the economic lot of under- 
developed countries. 

65. See Solomon, foe. c//., p. 537, Britnell, loc. /., p. 476. 

66. Bell Report, p. 67; see also Deutsch, op. c//., p. 5. 

67. C. H. Calhoun, "Central America Betters Economy," New York Times, January 4, 1952, pp. 41 and 43, 

290 Approaches to Economic Development 

Where State Intervention Is Needed 

Generally speaking, government action will be called for in those fields 
in which private profit-making particularly competitive enterprise is 
precluded in the nature of the case, where profits would be too low or the 
risks too large, or where private enterprise produces unsatisfactory results 
in decisive respects. Elementary and sometimes also more advanced educa- 
tion, public health undertakings and large segments of the transportation 
and communications industries have proved themselves particularly suit- 
able for public initiative and operation in the industrially more mature 
countries, and thus presumably for the industrially younger countries as 
well. But scarcity of capital establishes a further argument for state enter- 
prise in several fields where private undertakings have been quite adequate 
in the richer nations in banking and other businesses concerned with the 
flow of accumulation and investment, and in large "developmental" proj- 
ects such as hydroelectric plants for which the capital requirements are so 
large and the returns often so low or uncertain that they do not attract 
private resources. 

Present Trends 

Aside from its frequently extended role in supplying capital and in the 
normal public utilities and services, government activity in underdeveloped 
areas has, of course, varied widely from country to country, and there is no 
compelling reason for believing that the future will be otherwise. Partly as 
a consequence of the chaotic condition of property rights after World 
War II, and partly, if not chiefly, as a political tactic, nationalization has 
absorbed most of the industry of the satellite nations of eastern Europe. 08 
Latin America, Egypt and most of the Near East base their plans for indus- 
trialization chiefly on private entrepreneurship, while India follows a mid- 
dle way. The course of events in Africa and Southeast Asia is problematic ; 
but there is a fair chance that it will be dictated more by political events 
than by a purely rational economic point of view. 

Of one thing, however, one may, unfortunately, be fairly certain: govern- 
ments of underdeveloped areas will make extensive use of the "infant 
industry" argument, and of tariff, quota and exchange control devices to 
put this argument into effect. Many countries, particularly in Latin Amer- 
ica, regard this as the state's most important role in industrialization; and 
they have not hesitated to proclaim this conviction at international assem- 
blies such as the Chapultepec Conference in 1945 and the London, Geneva 

68. A good factual account, written, however, at a relatively early stage, can be had from Samuel L. 
Sharp, Nationalization of Key Industries in Eastern Europe, Foundation for Foreign Affairs, Washington, 

Commerce and Industry in Economic Development 291 

and Havana negotiations (1946-1948) which led to the proposed Interna- 
tional Trade Organization charter. 

Efforts on the part of the United States to limit these protectionist urges 
in the interest of expanding international trade encounter at least two em- 
barrassing obstacles. In the first place, there is the abstract case for shelter- 
ing infant industries, the pure logic of which, assuming a superior knowl- 
edge of future development on the part of legislative chambers over private 
entrepreneurs and the eventual weaning of the infant from the protectionist 
pap, has always been admitted. In the second place, the underdeveloped 
countries can always discount the concrete evidences of economic disarma- 
ment by the more mature countries the Hull program, G.A.T.T. and the 
reductions of quotas in Europe under the O.E.E.C. by saying that, having 
once attained their strong position, the industrial nations now want to deny 
to potential competitors an essential condition for the growth of young in- 
dustries. Although the United States and Western European countries can- 
not completely be exonerated from this motivation, their general recognition 
of the peculiar position of the underdeveloped countries is clearly embodied 
in exemptions and escape clauses from the general principle of free multi- 
lateral trade in both the statutes of the International Monetary Fund and 
the proposed charter for an International Trade Organization. 

Dangers of Protecting Infant Industries 

The real perils of infant industry protection in any objective view, how- 
ever, are not its threat to the older countries but the potential losses for the 
underdeveloped areas themselves. How long are these countries prepared 
to deny to their domestic consumers the gains of cheaper or better imports? 
Is it certain that protection may not have exactly the wrong effect in per- 
petuating technical backwardness? 09 Are the import quotas and tariffs im- 
posed only on those lines of production which careful scientific study and 
not the pressure of vested interests recommends for what amounts to 
concealed subsidies? 70 

Perhaps still more important is the danger that the hue and cry for pro- 
tection diverts attention from more important factors in development. As 
Clair Wilcox writes: 

The basic importance of natural resources, of agriculture, and other extractive 
industries, and of power, transportation, and communications is lost from sight; 
attention is centered on manufacturing. The dependence of manufactures on raw 
materials, skilled labor, managerial talent, wide markets, and marketing facilities 

69. This seems clearly to have been true of protection in France; see Chapter 8. 

70. Mosk, op. cit., pp. 71 and 73. Apparently no such study has been given to the sheltered industries in 
Mexico where protective tariffs are high and numerous. 

292 Approaches to Economic Development 

is forgotten; factories are wanted whether or not they can ultimately face competi- 
tion on the basis of comparative costs . . . The obstacles to industrialization 
inherent in social and religious patterns, in lack of health and education, and in 
political instability and corruption are never mentioned ; the fact that increasing 
population may cancel increasing output is ignored. 71 

This does not signify that infant industry protection can never be success- 
ful; but it indicates the relative unimportance of the whole effort and the 
strong chance of its eventual miscarriage. 

Industrial Monopolies 

Not far removed from the question of infant industries is the problem of 
industrial monopolies in the early stages of development. Commercial and 
sometimes other types of monopoly characterized much of the economic 
expansion of Western Europe in the colonial areas from the seventeenth 
century onward. In part, this is explicable in terms of cost and risk. Only 
by the assurance of high profit rates could the East India or Hudson's 
Bay companies assemble sufficient capital for "developmental" types of 
investment, currently so strongly emphasized, which were entailed by their 
more directly profitable operations; these investments in relatively un- 
known lands were fraught with risk. Another reason for the frequency of 
monopoly particularly aside from these cases of exclusive charters is, as 
Adam Smith pointed out and George Stigler has recently re-emphasized, 
that the division of labor is limited by the extent of the market. 72 Until the 
whole market has grown to a certain size, potential economies within the 
single firm prevent it from specializing and afford it a monopoly for the 
time being. Finally, of course, many purely institutional and adventitious 
factors may enter. 

This reasoning may lead to conclusions almost diametrically opposed to 
the Marxian tenet of increasing monopoly under capitalism; and one 
economist, who bases his conclusions on experience in the Middle East but 
is convinced of the wide applicability of his analysis, finds that in the 
majority of market-type cases, monopoly is more prevalent in the less than 
in the more developed world. 73 However this may be, and however "nat- 
ural" monopoly may be in early phases of development, the possible or 
actual abuses of monopoly power inevitably require public control. 

Intervention to Induce External Economies 

Another factor considered to support the necessity of state intervention 
is external economies. These are economies that occur in contributory or 

71. Clair Wilcox, A Charter for World Trade, Macmillan, New York, 1949, p. 143. 

72. George J. Stigler, "The Division of Labor Is Limited by the Extent of the Market," Journal of Political 
Economy, June 1951, pp. 185-94. 

73. Solomon, loc. cit., pp. 519-41. 

Commerce and Industry in Economic Development 293 

"feeder" industries when they are enabled to expand output and thus to 
realize internal economies, as a result of increased output in the key indus- 
try. The internal economies of ancillary or feeder industries are external to 
the key industry, but its costs and also its prices, if it is not a monopoly, 
can effectively be lowered by these external economies. But all of this is 
contingent upon an initial expansion of output in the key industry, and this 
expansion may not be forthcoming because the indirect savings to the key 
industry are uncertain and are furthermore spread over the several ancillary 
industries. A case can thus be made under certain circumstances for govern- 
ment subsidy to induce the original expansion. 74 

Certain socialist or interventionist writers have seized upon this argu- 
ment of orthodox economics as a proof that the state must manage indus- 
trialization in underdeveloped countries in order to realize the benefits of 
external economies and complementarity. 75 But the case for subsidy or gov- 
ernment support of "external economy" industries is conditioned in the 
first place by all the limitations upon the typical "infant industry" defense 
of protecting young industries. It has to be assumed that experts hired by 
the government can make better guesses about the future development of 
industry than can the experts hired by private business. It has to be clear 
also that the subsidizing does not need to be perpetual and, finally, that 
when the need is past, the subsidy will in fact be withdrawn all of which 
has rarely occurred. 

To this line of reasoning the interventionists might respond that they are 
not necessarily contemplating a process of industrialization through sub- 
sidy, that in a developing economy, wherein all industries may be assumed 
to be expanding, it is not necessary to induce expansion in the key industry 
by subsidies since the feeder or ancillary industries will likewise be growing. 
This response shifts the argument from external economies to general 
complementarity. But if one assumes that feeder or ancillary industries are 
expanding anyway without subsidy to the key industry (not the assumption 
of the orthodox economists), then the special case favorable to government 
intervention for industries of decreasing cost from external economies 
collapses along with the disappearance of the case for subsidy. 70 The argu- 
ment loses its special sanction from economic theory and narrows down to 

74. The case for subsidies for industries of decreasing costs from external economies was stated by 
Marshall, Pigou and F. D. Graham. They failed to distinguish two cases: one in which, if the subsidy is 
removed, output lapses to its original si/e and the external economies disappear; and another more inter- 
esting from the angle of economic development in which the subsidy can be transitional without causing 
output to lapse by its eventual removal. The second case is essentially analogous to the "infant industry" 
defense of protective tariffs. See Howard S. Ellis and William Fellner, "External Economies and Disecono- 
mies," American Economic Review, September 1943, pp. 503-1 1. 

75. See the authors cited in notes 35, 36 and 37. 

76. Marshall and Pigou, assuming that other industries do not expand, would scaicely have ventured to 
generalize their argument for subsidy in case all industries are expanding, since this would amount to offering 
a rigorous 'quantitative proof that economies can grow only by universal subsidy or nationalization of all 

294 Approaches to Economic Development 

the bare assertion that government can manage industrialization better 
than private enterprise. 

Kinds of State Intervention 

The very liveliness of such issues as protection for infant industry, regu- 
lation of monopoly, subsidizing or "planning" the expansion of "external 
economy" or complementary industries illustrates a broad principle of 
great importance. Government participation in industrial development is 
by no means identical with state ownership and operation; on the contrary, 
it may assume a wide variety of forms, of which some arc quite compatible 
with freedom of the market and others are designed even to increase the 
scope and effectiveness of private enterprise. 

The industrialization of Japan from the Meiji restoration in 1868 to the 
second world war is an instructive example. The central government itself 
imported machinery from Europe; trained laborers, managers and tech- 
nical experts; built and operated factories; and marketed produce at home 
and abroad. But one industry after another, once brought to a certain level 
of development, was sold or leased to private hands. In addition, a panoply 
of policies subsidies, tariffs, banking, taxation marshaled the flow of 
savings and forced the tempo of industrialization. It seems generally to be 
agreed that the animating purpose was "to create the conditions which 
should lead the entrepreneur to direct and organize the economic resources 
of the country in the way believed to be desirable. Only in this sense can 
Japan be said to possess a 'planned economy.' " 77 

Taking as a point of departure the proposition that deliberate indus- 
trialization requires "planning," some persons have regarded government 
planning and state socialism as synonymous. But there are many kinds and 
degrees of intervention. At the opposite pole from economic totalitarianism 
would stand a completely laissez-faire policy such as characterized the 
great industrial revolution in England. Nowadays, however, with the obvi- 
ous necessity of making productivity outstrip population increases, the 
practicable antithesis to socialism involves the concept of "planning" 
described by the International Bank: 

The technique of development-programming consists in essence of making an 
inventory of the sum total of resources available to each economy, and then 
deciding the order in which various development projects should be undertaken 
within the limits of available resources . . . The main instrument of all develop- 
ment is accelerated capital formation. 78 

77. G. C. Allen, quoted by G. E. Hubbard, op tit., p 67 See also, in the same sense, the sources on 
Japan cited in note 61. 

78. International Bank for Reconstruction and Development, Si.\th Annual Repot t, 1950-5 /, Washington, 
1951, p. 12. 

Commerce and Industry in Economic Development 295 

Planned industrialization thus involves three main elements at a minimum: 
a survey of resources; the establishment of a schedule of priorities; and 
measures to promote capital formation. None of these necessarily, involves 
the state as entrepreneur. 

Minimum Requirements of the State 

What is implied, aside from the essential preliminary stocktaking of the 
economy, is that at a minimum the state create "favourable conditions for 
private enterprise and . . . the indispensable incentives which will enable 
it to fulfill the planned goals.'* 79 Public health and education, economic 
stability and political security certainly belong to the "favourable condi- 
tions"; but the incentives may be the ordinary individual's economic mo- 
tives, influenced in the direction of the schedule of priorities only by taxa- 
tion and public expenditure policies. Thus the International Bank's report 
on Colombia contemplates a program which "has the great merit of avoid- 
ing the use of a wide variety of restraints and orders which the use of direct 
control requires. It also dispenses with much of the policing and the neces- 
sity for building up a large bureaucracy to administer the controls." 80 

In addition to providing incentives for private undertakings the state will, 
of course, engage in some or many development projects which surely 
ought to be "planned" in the sense of resting on a careful appraisal of 
resources, of being mutually consistent and of proceeding according to 
rational priorities. Even in government projects, however, the widest 
imaginable latitude obtains for the state's own activity: it can build, own 
and operate or confine itself to one of these three; it can do all three and, 
after a period, sell or lease to private entrepreneurs; it can leave all three to 
private initiative and regulate operation; it can build and operate "pilot 
projects" and leave the bulk of production to imitation by private pro- 
ducers; or it may seek to realize its schedule of priorities solely by taxes and 
subsidies. Any of these procedures can be called "planning"; any one may 
be best for a given country or region; and probably only the first of the long 
list would be clearly recognized as socialism. 

"Planning," even in the limited sense of a schedule of investment priori- 
ties to be encouraged by government policies, has constantly to be revised. 
Just as in the case of planning by private corporations, it must make wide 
use of trial and error; and there is no magic in five-year intervals. "La carga 
se arregla andando" says an Argentine proverb: the load settles itself on 
the way. 

79. United Nations, Theoretical and Practical Problems of Economic Growth, p. 22. 

80. International Bank for Reconstruction and Development, Tlie Basis of a Development Program for 
Colombia, p. 609. 

296 Approaches to Economic Development 


In a program of deliberate industrialization for higher incomes, the 
actual formulation of policy will encounter certain important choices in- 
volving gains and losses of unlike kind. It is tempting to designate these as 
"dilemmas," but since nearly every economic choice for the individual, and 
much of life itself, involves rule-of-thumb resolution, perhaps these should 
be regarded simply as difficult marginal decisions. 

Technological Unemployment 

Among them is a possible conflict between employment and progress, at 
least in the short run. A United Nations group of experts, commissioned to 
report on unemployment in underdeveloped areas, takes the position that 
unemployment is basically to be remedied by increased productivity. 81 And 
basically the position cannot be questioned. In the short run, however, the 
factor of technological unemployment, of workers thrown out of jobs by 
improved methods of production, cannot be ignored. Measures may be 
introduced to increase labor mobility; and the encouragement of village 
and cottage industries may soften the impact of change. Yet a certain 
residuum of technological unemployment will persist. Theoretically, the 
cost of unemployment relief could be balanced against the increase of social 
output; but this ignores the human costs of idleness and uselessness. Deci- 
sion about technological innovation will at best be difficult and uncertain. 

Technical Equipment 

Another difficulty pertains to the optimum technical equipment in a 
society which progresses rapidly. Here the choice may involve a simpler 
machine which is correct for present relative factor prices but will be wrong 
if labor incomes rise and interest rates fall. Or the choice may concern, not 
the labor-capital ratio, but the size of the venture: optimum size now may 
presently be uneconomically small. Yet if rates of growth in population and 
income are estimated and allowed to influence choice of industrial equip- 
ment in the direction of large, expensive and labor-saving machines, the 
risks of misdirected investment and technological obsolescence increase. 
All these problems beset any progressing economy; but the general poverty 
of underdeveloped areas makes the cost of errors more burdensome for 

Social Effects of Industrialization 

Finally, many dilemmas beset deliberate industrialization as a result of 
the disruptive effect of the sheer material gains of higher incomes on tradi- 

81. United Nations, Department of Economic Affairs, Measures for the Economic Development of Undei- 
developed Countries, New York, May 1951, pp. 7-9. 

Commerce and Industry in Economic Development 297 

tional ways of life, the human and material costs of big industrial cities, the 
rise of new labor-management problems involving the whole fabric of 

Complications such as these do not destroy the case for industrialization 
nor do they prove that it must move at a snail's pace. But they do reinforce 
the growing conviction that headlong introduction of European and 
American techniques and machinery does not in itself improve life in the 
relatively primitive economies nor even necessarily eventuate in increased 
productivity. The mere fact that Western Europe and the United States are 
the objects of widespread emulation constitutes a real danger that the full 
implications of industrial society will not be recognized. 

14. Domestic Financing of Development: 
Private Saving 

THE ORIGINAL ANNOUNCEMENT of the Point Four Program in President 
Truman's Inaugural Address on January 20, 1949 produced in many quar- 
ters the expectation of massive capital exports by the United States to the 
underdeveloped areas. Earlier discussions of the economic problems of 
these areas had, however, aroused some skepticism concerning such a 
program. 1 What seemed essential, in this view, was an initial "grubstake" 
of international investment, the yeast to leaven the mass, rather than 
Utopian schemes of international gifts or even vast loans, which could com- 
plicate the future for lender and creditor alike. Probably a much greater 
number, however, adhered to the view that international and national loans 
and grants to the economically less developed countries should be both 
large and extended in time; arguments of both political and economic 
nature, they believed, supported this conviction. 


On the political side there was and is the rationale of the European 
Recovery Program, that low incomes without prospect or hope of improve- 
ment offer fertile soil for Communist infiltration. An additional argument 
of political and ethical character has, however, recently won some adher- 
ents. Three decades ago Alfred Marshall wrote: 

... it is becoming clear that this [England] and every other western country can 
now afford to make increased sacrifices of material wealth for the purpose of 
raising the quality of life throughout their whole populations. A time may come 
when such matters will be treated as of cosmopolitan rather than national obliga- 
tion; but that time is not in sight. 2 

That time is now in sight, though it would be rash to herald its actual 
advent. One committee of the United Nations has indeed gone so far as 
to express the hope that private investors will be moved to invest in under- 
developed areas "in the interests of world economic development, of the 
promotion of world peace, and of the achievement of the objectives of the 

1. Norman S Buchanan, International Investment and Domestic Welfare, Holt, New York, 1945; Norman 
S. Buchanan and Fricdnch A. Lutz, Rebuilding the World Economy, Twentieth Century Fund, New York, 

2. Alfred Marshall, Industry and Trade, 4th edition, Macmillan, London, 1923, p. 5. 


Domestic Financing of Development : Private Saving 299 

United Nations." 3 Somewhat less Utopian is the idea that governments or 
international agencies should regard loans or grants to underdeveloped 
areas as a logical extension of the principle of progressive taxation, long 
since accepted within the national economies of the West. Even this is 
quite premature as a rigorous principle. But there is no denying that 
humanitarian sentiments played a considerable role during the past few 
years in the international loans coming directly and indirectly from the 
United States, Canada, England and other countries. 

Economic Reasons for Loans 

On an ostensibly economic plane it is frequently argued that develop- 
ment must come through foreign grants or loans, since living levels in the 
underdeveloped world are so low that they cannot be trenched upon by 
either voluntary or compulsory savings. But in the first place, the increase 
in population of many underdeveloped areas not long after the beginnings 
of trading relations with Europe and North America must have been made 
possible by increased income, which afforded a potential choice between 
some capital accumulation and a mere increase of population. This poten- 
tial choice still exists. Aside from this, as many commentators have empha- 
sized, the great inequality of wealth in many of these countries points 
toward a source of capital in progressive taxation. Furthermore, many 
countries with marked potentials for further development are currently 
achieving quite satisfactory rates of capital formation ; in a large number of 
Latin American countries the rates exceed 12 per cent. Finally, even in 
economies where the average per capita income is very low, the utilization 
of surplus agricultural labor offers possibilities of increasing capital, par- 
ticularly of the basic social or community-use variety. The experiences of 
Japan and Russia in financing their development almost entirely at home 
seem to show that "minimum" standards of living are somewhat elastic. 

The basic economic justification of loans and grants to underdeveloped 
areas quite apart from political and moral considerations depends upon 
a positive yield differential as between lending and borrowing countries. 
This justification is not one which derives solely from the interests of the 
private capitalist. The Charter of the United Nations contemplated as one 
of its objectives equality of access to the natural resources of the world. 
Free international migration of labor would go far toward accomplishing 
this end, but can scarcely be seriously contemplated in fact. Free interna- 
tional movement of goods and services can, within limits, substitute for 
labor mobility. 4 In default of significant labor mobility and with freedom 

3. United Nations, Sub-Commission on Economic Development, Method* of Financing Economic De- 
velopment in Underdeveloped Areas, New York, 1949, p. 126. 

4. Paul A. Samuelson, "International Trade and the Equalization of Factor Prices," Economic Joutnal, 
June 1948, pp. 163-84. 

300 Approaches to Economic Development 

of trade and payments seriously impaired in the present day, capital move- 
ments in the direction of higher productivity can work powerfully toward 
reducing the inequalities and inequities in the lot of the common man as 
among the rich and poor countries. 5 

No really fundamental doubt can be raised as to the presumptive benefits 
of a capital flow from lower to higher productivity areas. These benefits, 
such as "making development possible," "speeding up capital formation," 
"longer range for development programs," "maintaining consumption," 
"reducing inflationary pressure," "reducing balance-of-payments pres- 
sure," "increasing the international division of labor" all these are real 
economic advantages // the capital moves from lower to higher produc- 
tivity regions. 6 Otherwise, it scarcely needs to be said, the capital movement 
can be justified only on political or ethical grounds. 

Change in Emphasis on Economic Aid 

With the lapse of time the emphasis on massive foreign loans and grants 
has declined. Equal or greater attention has come to be given to the transfer 
of techniques, to public health and education, to the necessity of inducing 
effective public administration, and so on. American private investors have 
clearly shown their judgment that, allowing for risks, the realizable yields 
of capital are lower in underdeveloped areas than at home. And the direc- 
tors of international and national lending agencies have emphasized the 
fact that capital alone cannot produce miracles: social, economic and polit- 
ical organization conditions its effective use. 


Corresponding to this change, the emphasis has been moving from 
foreign to domestic finance. For certain countries, as for example Indo- 
nesia, Iran and Egypt, this change may parallel a revival of the old suspicion 
of imperialism or a new xenophobia. For other countries, it may spring 
from the conviction that sufficient foreign capital will not be forthcoming, 
and from apprehensions of cyclical variation in the flow of international 
capital. But the conviction of experts in such international organs as the 

5. Productivity is the basic fact in the case for the foreign financing of underdeveloped areas. It is a basic 
common-sense fact which stands independently of any supposed tendency of "mature" capitalist economics 
to drop into a Keynesian trap of equilibrium with less than full employment, or to founder in the Hansen 
morass of economic stagnation. It is a fact which also stands despite the Marxian belief that investment or 
loans from the capitalistic West fasten imperialistic exploitation upon the capital receiver and artificially 
prolong the throes of a dying capitalist system. Increased productivity through foreign capital is a basic 
fact which can also contribute to offsetting autarchic developments, furthering the international division of 
labor and articulating all areas into a world economy. See P. N. Rosenstein-Rodan, "The International 
Development of Economically Backward Areas," International Affairs, April 1944, p. 162. 

6. United Nations, Formulation and Economic Appraisal of Development Project*, Vol. I, New York, 1951, 
pp. 102-07. This enumeration of the advantages of foreign finance was set forth by H. W. Singer, but 
without the proviso given above regarding higher productivity. 

Domestic Financing of Development : Private Saving 301 

United Nations and the International Bank that "the role of foreign 
finance in economic development can therefore only be of a subordinate 
character" derives from a more fundamental reflection. 7 Unless the habits 
of consumption and saving, the institutions and legal framework for ac- 
cumulation, lending and investing can be adapted to the building and main- 
tenance of capital, foreign aid can bring only transitory benefits. A perma- 
nent basis for higher living standards must be created within the society; 
indeed, this is the very meaning of economic development. Unless the chief 
nurture of growth is indigenous, the society is constantly exposed to ret- 

In certain senses foreign and domestic finance are complementary. For 
one thing, with present rates of population increase, most countries will 
find it necessary to exploit both sources of capital to the utmost in the 
attempt to achieve a sufficiently strong forward surge in productivity to 
break the vicious circle of poverty and high birth rates. It is also true that 
foreign investment is most likely to be attracted to those countries in which 
domestic saving and investing thrive best. Conversely, but in a quite 
limited and transitory sense, an inflow of foreign capital may induce 
domestic capital formation. But it is parsimony on the part of the indige- 
nous population, their willingness to venture capital in new investment and 
their wise use of capital which will finally prove to be the more basic 
foundations of progress. 


Throughout the economically underdeveloped world, with only rare 
exceptions, the typical peasant, fellah, coolie or peon saves little or nothing. 
A middle class, composed of comfortable farmers after the American pro- 
totype and the members of the "tertiary" or service industries, is so 
limited in number that it does not contribute much to the meager flow of 
nonbusiness saving. Prosperous landowners, merchants and industrialists 
save; but their savings frequently do not go into forms which increase the 
productivity of the economy. 


Very low per capita incomes make saving difficult and the dearth of 
saving holds incomes at low levels. In the lowest-income countries, hope- 
less poverty, illiteracy and poor health would smother the spark of eco- 
nomic motivation to save even if age-old cultural patterns had not long 
since allowed it to flicker out. In agricultural pursuits, systems of land 

7. United Nations, Methods of Financing Economic Development in Underdeveloped Areas, p. 94. 

302 Approaches to Economic Development 

tenure frequently discourage the improvement or, indeed, even the main- 
tenance of the soil, and alternative lines of investment may scarcely exist; 
rack-renting and usurious rates on loans similarly balk "the effective desire 
of accumulation." When average incomes are somewhat higher, spend- 
thrift habits often prevail; or ceremonial consumption in ostentatious wed- 
dings, funerals and religious celebrations may claim any surplus over daily 
needs. When incomes rise still further, the populace may attempt to emu- 
late Western, and more specifically American, standards of living. While 
progressive taxation may garner a certain amount of compulsory saving, 
equalitarian redistribution may have a preponderantly adverse effect on 
aggregate saving, particularly at modest average per capita income levels, 
stimulating wage and personal consumption demands and excessive social 
security and other forms of communal consumption. 8 In Africa and Asia, 
even the most rudimentary forms of saving and investment institutions may 
be lacking. Chronic inflation often deals the final blow. 

Fruitless Saving 

Individual voluntary saving, even such as there is, may fail to come to 
fruition in productive investment. In many of the less developed countries, 
capital owners seek to transfer their wealth into more solid currencies, and 
embargoes on the export of capital are by no means easy to enforce. It is 
often said also that the hoarding of money causes much saving to be lost 
to the society. This would be true if governments, particularly in the newer 
republics, permitted hoarding to have a general deflationary effect on 
prices and incomes. In point of fact, however, inflation appears to be so 
endemic in Latin America and other developing regions that hoarding 
renders a public service in offsetting inflation as much as it does. 

Investing in the title to land may be a wasteful use of "savings" if the 
recipients of the appreciation of land values dissipate the "savings" in 
luxury consumption. On balance in such circumstances there has been very 
little saving. 

The Problem of Interest Rates 

High rates of interest, which obtain in so much of the world outside of 
Western Europe and other Western countries, are unwelcome to the bor- 
rowing investor; but simply to impose legal maximum rates would be a 
perverse way of encouraging development. The combination of circum- 
stances just reviewed results in capital being in short supply; and it is 

8. The International Bank reports social security taxes of 13 to 15 per cent of wages in Turkey, which is 
judged to be "excessive for a country in Turkey's stage of economic development." International Bank for 
Reconstruction and Development, The Economy of Turkey, Johns Hopkins Press, Baltimore, 1951, p. 224. 

Domestic Financing of Development : Private Saving 303 

usually this fact, rather than a high productivity of capital, which explains 
the high rates of interest. To depress this price by legal measures might 
somewhat lessen the supply; but more important it would certainly im- 
pair the desirable selection of profitable uses on the side of demand. 

Living Levels and Saving 

Economic progress in the underdeveloped world requires, not that levels 
of consumption should generally fall, but merely that a part of the rise be 
devoted to capital formation. But even this milder requirement may be 
extraordinarily difficult to attain. Evidence to this effect appears with 
dramatic force in the use made of the large gains in export values to much 
of the underdeveloped world in the twelvemonth following the outbreak of 
war in Korea. The World Economic Report of the United Nations finds that 
only a tenth of the increase of export yields between the first half of 1950 
and of 1951 went into imports of machinery, metals, manufactures and 
trucks. India devoted all of the increase to food, raw cotton and jute; 
indeed, imports of capital goods actually fell! 9 This was also the case for 
Indonesia and the Philippines during 1950 and to the midyear of 1951, as 
compared with 1949. Between the first half of 1950 and of 1951, passenger 
car imports increased by 100 per cent or more in the Middle East and Latin 
America. 10 Accumulation of capital is a thorny path. 

Many writers quite properly stress the cumulative effect of increased sav- 
ing, which can increase national income and permit larger absolute and 
relative saving quotas and so on in a spiral, without incursions on living 
standards. Thus, taking the recent 12 per cent net capital formation rate 
attained by many countries in Latin America as a point of departure, John 
H. Adler assumes that this addition to capital adds about thirty times its 
own magnitude to net national product, which equals a 4 per cent annual 
increase thereof, or 2 per cent if population increases even as much as 
2 per cent a year. But if the marginal rate of saving (the proportion of addi- 
tional output which is saved) could be raised to 25 per cent, the average 
proportion of income saved would rise to 13.2 per cent in five years, 14.3 
per cent in ten years and 16.3 in twenty years. 11 

The crucial problem of economic progress at the outset is to prevent the 
dissipation of the whole of increased output by population increases or 
advances of consumption. How can the scene be set favorably for beginning 
and maintaining the cumulative process of saving and investment? 

9. The short crop in India in that year and the dispute with Pakistan over jute were probably partly 

10. United Nations, World Economic Report, 1950-51, New York, 1952, passim. 

11. John H. Adler, "The Fiscal and Monetary Implementation of Development Programs," American 
Economic Review, Proceedings, May 1952, pp. 597-98. 

304 Approaches to Economic Development 


Frugality, thrift and good economic management are scarcely to be 
expected in a setting of endemic disease, ignorance and hopeless poverty. 
Hence, the route to national material prosperity must begin with instruc- 
tion and measures for public health, with general education and with the 
introduction of simple and easily available improvements in productive 
techniques. Security of persons and property stands high in the list of 
requirements. Preventing inflation would also seem to belong in an equally 
conspicuous place, although the advocacy of inflation as a method of ex- 
tracting forced saving is not unknown. But forced saving must occur at the 
expense of voluntary saving on this particular score; and the fruits of sav- 
ing of any sort are wasted by inflationary distortions in the use of real 

Local Projects 

A simple and direct method of capital formation which seems to hold 
much promise for relatively primitive economies is offered by the so-called 
self-help local work projects. They swell the stream of national savings if 
they elicit the donation of spare-time labor or the services of the unem- 
ployed, if these workers are supported by their families or if they work for 
less than market wage rates, or if the benefits of the improvement to the 
locality induce the people of the region to restrict consumption in order to 
provide the wherewithal for the undertaking. In Greece, a program called 
"Community Development Employment for the Utilization of Idle Man- 
power" has successfully engaged in road building, irrigation, flood control, 
water supply and sewer projects, small incentive payments being supplied 
to the workers by the national government. 12 The International Bank has 
recommended for Iraq a system by which the sarifa dwellers would build 
their own mud houses with some help from the government. 13 The govern- 
ment would supply sewer and water systems and a few essential structural 
materials. 14 Volunteer labor is to supply the basis of the new National 
Extension Service of India, which is eventually to reach 120,000 villages 
with a population of 80 million. The new plan represents an enlargement of 
the present program of rural and community development by voluntary 
labor which has been partly financed by $100 million in grants from the 
United States Technical Cooperation Administration. 15 

12. United Nations Bulletin, March 1, 1951, pp. 235-37. 

13. The sarifa dwellers of Baghdad and Basra, numbering 60,000 and 20,000, are unemployed people 
from rural areas who have settled in great squalor in the empty lots and on the periphery of the cities. 

14. International Bank for Reconstruction and Development, The Economic Development of Iraq, Wash- 
ington, 1952, pp. 55, 59, 60. 

15. New York Times, May 1, 1953, p. 4. 

Domestic Financing of Development : Private Saving 305 

Local work projects of a second category are designed, not to utilize idle 
manpower, but to evoke savings from a local clientele by establishing small 
industries with which the populace is familiar and which they would trust 
more than a plant in a faraway city. A United Nations survey indicates 
considerable success with the device in Mexico and Chile; but elsewhere, as 
in India and the United Kingdom colonies, it seems to have met with 
difficulties. 16 

Savings Institutions 

Savings institutions, especially for the small man, who is typically a 
farmer in the underdeveloped areas, are relatively few and far between. 
Banking systems in these regions have generally been oriented to the needs 
of the large estates, plantations or other primary production units. But in 
some regions cooperative agricultural credit societies have achieved a con- 
siderable measure of success in the Caribbean countries, Cyprus, Egypt, 
Turkey, Ceylon and latterly in India. In Burma and Indonesia, the credit 
cooperatives collapsed in the depression of the 1930s. More recently, how- 
ever, the movement has revived in Indonesia; the credit groups have accu- 
mulated a capital of $3 million with only slight aid from the government. 17 
Mexico and Puerto Rico have had only limited success with cooperatives. 
But in Ceylon there were 897 cooperative credit societies as early as 1934. 
In Egypt one fifth, and in Turkey one sixth, of the rural population is in- 
cluded in the membership of cooperatives; and in India the cooperatives 
are estimated to provide 15 per cent of the total financial requirements of 
agriculture. 18 While the contribution of these associations to the flow of 
capital has been modest, they have also frequently served as vehicles of 
education and technological improvement. 

With rather rare exceptions, countries now in the early stages of eco- 
nomic development have not exploited the potentialities of savings bank- 
ing. In Brazil, it is said, the major part of the savings of the middle and 
working classes flows into the federal savings banks. 19 In Colombia, savings 
banking is virtually a legal monopoly of the state-owned Caja Colombiana 
de Ahorros, but the annual supply of funds from this source is small. 20 In 
Mexico, savings banking is a recent development. As in the United States, 

16. United Nations, Department of Economic Affairs, Domestic Financing oj Economic Development, 
New York, 1950, pp. 20-22. 

17. New York Times, October 10, 1951, p. 5. 

18. Sir Alan Pirn, Colonial Agi {cultural Production, Oxford University Press, London, 1946, pp. 68-69; 
United Nations, Department of Economic Affairs, Land Reform Defects in Agtarian Structure ai Obstacles 
to Economic Development, New York, 1951, pp. 37-43 and 74-77. 

19. They also have a monopoly of pawnbrokmg and of discounting the salaries of public servants and 
bank employees, U.S. Department of State, Report of the Joint Brazil-U.S. Technical Commission, Publica- 
tion 3487, June 1949, pp. 159-60. 

20. International Bank for Reconstruction and Development, The Basis of a Development Program for 
Colombia* Washington, 1950, pp. 52-53. 

306 Approaches to Economic Development 

it is generally conjoined with commercial banking; but the Mexican savings 
banks make short-term commercial loans and do not invest extensively in 
industrial or government bonds. 21 

Surveying the entire scene, a United Nations inquiry recommends the 
extension of savings banks to small communities, economizing on overhead 
and personnel by utilizing the post offices or any existing system of federal 
local offices. The study also recommends that higher rates be paid on sav- 
ings deposits, partly, no doubt, to evoke more capital for public lending 
agencies and thus to break the monopoly of the local moneylender in cer- 
tain primitive economies. 22 The report notes several further measures espe- 
cially designed for the small saver: government sponsorship of building 
societies, of industrial risk and old-age insurance schemes and of lotteries, 
which curiously enough have successfully been operated in conjunction 
with savings banking in Mexico, Israel and India. 

Commercial Banks and Securities Exchanges 

Commercial banking has thus far played a role in the underdeveloped 
area largely limited to the financing of exports and imports and, to a some- 
what less important extent, domestic trade. Its significance in gathering up 
funds for long-term investment has been correspondingly slight. Mention 
will be made of commercial banking, however, in a later context, since by 
their very nature commercial banking operations are not primarily con- 
cerned with savings. 

At some stage in its history, a developing economy will find an organized 
securities exchange to be a necessary institution for the process of evoking 
savings and allocating capital among competing uses. Most of the under- 
developed world lacks any semblance of capital markets, and in many 
regions there would be no purpose in stock exchanges. Where they exist 
already, their significance is usually very limited, as in Mexico, Chile, 
Colombia, the Philippines and Brazil. This is usually less the fault of the 
exchange organization than a result of lack of confidence of the public in, 
or their complete unfamiliarity with, corporate securities, the close holding 
of stock by wealthy families, and a preference for investment in real estate. 
Furthermore, various tax and other impediments to the corporate form of 
organization in some countries account for a dearth of security offerings to 
attract savings. Nevertheless, in some of the more advanced commercial 
and industrial centers, an effort to promote the functioning of existing 
exchanges seems to be in order. India has under way legislation to provide 
government supervision of the stock exchanges, which are private organ- 

21. Sanford A. Mosk, Industrial Revolution in Mexico, University of California Press, Berkeley, 1950, 
pp. 241-42. 

22. United Nations, Domestic Financing of Economic Development ', pp. 16-20. 

Domestic Financing of Development : Private Saving 307 

izations. For Brazil, the first Joint Technical Commission recommended a 
supervisory authority similar to the United States Securities and Exchange 
Commission, the overhauling of corporation law and also the examination 
of certain taxes which inhibit security trading. 23 

Government Securities 

For any government, but especially for the governments of rapidly de- 
veloping countries, a broad and receptive market for government bonds 
with the saving pliblic affords an invaluable, indeed an almost indis- 
pensable, basis for domestic finance without inflation. In this respect, coun- 
tries vary between the extremes of India and Egypt, where the Treasury can 
tap the savings of the public, to the case of several Latin American coun- 
tries where the prospects of borrowing from the public are negligible. The 
typical situation, unfortunately, is closer to the latter: the native population 
distrusts the bonds of its own government. Partly, this distrust emanates 
directly from misgivings as to the stability of the government itself; partly, 
it is the inevitable consequence of past inflations and the fear of inflation; 
sometimes it is explained by defaults or postponements of interest or prin- 
cipal payments; finally, even without these catastrophes, if there exists no 
organized market for government securities, the individual hesitates to 
sacrifice liquidity by buying bonds. The remedies for several of these major 
obstacles require no comment save that, if there were any doubt as to the 
generally pernicious effects of inflation on other scores, its effect on the 
government bond market should be conclusive. Conversely, as will appear 
in a subsequent connection, a well-developed government securities market 
is essential to central bank open-market operations for monetary control 
purposes, and to Treasury debt management for monetary and fiscal 

What measures can a government take to increase the breadth of its 
securities market, assuming other matters to be in order? Compulsory bond 
purchases, such as those once imposed on Brazilian exporters, tend to 
undermine receptiveness for other bond issues and in other quarters. Gen- 
erally speaking, the issuance of securities by other divisions or agencies of 
the government than the Treasury comes under suspicion. A variety of 
Treasury issues, suited to the varying needs of different sectors of the 
market, increases marketability. Propaganda to acquaint the public with 
the advantages of government securities and of regular saving habits may 
have a place. Needless to say, the rate structure must be competitive with 
private issues. 

23. Report of the Joint Brazil-U.S. Technical Cowiw/s v/o/i, pp. 152-54; United Nations, Domestic Finan- 
cing of Economic Development, pp 70-73; Mosk, op. c//. f pp. 229-30; International Bank, The Baits of a 
Development Program for Colombia, pp. 55-56; Report to the President of the United State* by the Economic 
Survey Mission to the Philippines, U.S. Department of State, October 9, 1950, p. 75 (the Bell Report). 

308 Approaches to Economic Development 

The investment portfolios of commercial banks offer a promising field 
for the placement of government securities which has been imperfectly 
recognized in many developing countries. In some cases, the traditional 
orientation of commercial banking in colonial areas exclusively to the 
financing of foreign and domestic trade has to be overcome. Mosk reports 
that in Mexico the commercial bankers refuse to absorb government bonds 
because of their hostility to the social program of the revolution. 24 It is 
difficult to believe, however, that the banking community would long with- 
stand the attractions of government securities if the basic requirements for 
making these issues generally acceptable were fulfilled. Another field for 
government issues is to be found with insurance companies. 25 

Commercial bank purchases of government bonds, just like purchases of 
private securities or notes, may involve the creation of additional purchas- 
ing power. They are inflationary only if the purchases (i.e., loans) are a net 
addition to securities already held by the banking system as a whole, and 
if the additional purchasing power increases faster than the flow of avail- 
able commodities. Government agency purchase of government securities 
avoids a deflationary alternative, the holding of idle cash; but ordinarily the 
agency is not endowed with the power of creating demand deposits. Hence, 
the government agency, like the individual purchaser, cannot have an in- 
flationary effect unless in both casesa commercial bank or the central 
bank makes additional loans to cover the security purchases. Central bank 
purchases of government securities create reserves for the commercial bank- 
ing system and are therefore inflationary if the banks expand credit on the in- 
creased base, and if the bank credit creation outstrips production. One writer, 
observing the proliferation of central banks during the past decade, states: 

This inability of government to sell securities to its own people is the primary 
reason for the establishment of national central banks in virtually all of the 
underdeveloped economies, for it is only from this source that governments can 
obtain credits. 26 

Credit from this source, as we have just observed, does not necessarily 
mean inflation; but there is danger that it may. Inflation is, indeed, a con- 
stant threat to developing economies. 

The less developed areas are even more vulnerable to inflation than the 
older industrialized nations. Prices rose fourfold in Mexico from 1932 to 
1948 and between three- and fourfold in Brazil from 1939 to 1948, although 

24. Mosk, op, cit., pp. 233-34. 

25. But it is doubtful how far governments should go to compel insurance companies to invest in govern- 
ment securities. See International Bank for Reconstruction and Development, The Economic Development 
of Guatemala, Washington, 1951, p. 277. 

26. Morton Solomon, "The Structure of the Market in Underdeveloped Economies," Quarterly Journal 
of Economics, August 1948, p. 536. 

Domestic Financing of Development : Private Saving 309 

neither country was deeply involved in the war. For Brazil, this was merely 
a short segment of a century of rising prices. Prices have risen continuously 
in Chile since 1870 and by five and one half times from 1937 to 1950. 27 
Inflation is, of course, lamentably common in the settled economies of the 
West, generally in consequence of wars. But in time of war and peace 
alike, countries in process of development show the same inveterate tend- 
ency with only rare exceptions. 

For one thing, excess capacity scarcely exists in plant and equipment be- 
cause, being generally designed for processing agricultural raw material, 
the units are small and simple. Outputs are thus fairly rigid, and increases 
of money income quickly force up prices. The propensity to consume is 
characteristically high; and the facilities for moving savings into new in- 
vestment are limited, so that monetary expansion may simply bid up the 
prices of existing assets. An economy in the midst of development encoun- 
ters many bottlenecks in production, and the lag between launching an in- 
vestment project and its fruition in actual production leaves the economy 
vulnerable to inflationary impacts. Even the use of surplus agricultural 
labor produces inflation unless food supplies are elastic, or unless taxes are 
increased. But the fiscal and monetary devices for coping with inflation may 
still be rudimentary. Confidence in the financial probity of the national 
government may be lacking, and long experience with inflations often pro- 
duces a persistent inflationary pressure to consume or to transfer savings 
abroad. Older industrial countries may experience any and all of these, but 
less constantly and forcefully. 


Deliberate Inflation 

As a method of extracting the wherewithal for economic development in 
countries without good fiscal and financial institutions, inflation has not 
lacked apologists. One writer apparently would recommend mild inflation 
"when inducements are necessary for large-scale movements of labor and 
for increased supplies of foodstuffs and raw materials to be made available 
by the village for the towns." 28 In South America, particularly in Chile, 
government officials have frankly been ready to countenance the redis- 
tributive effect of inflation in favor of the more well-to-do classes, on the 
grounds that they save and invest more than the poor. 29 A number of 

27. Mosk, op. r/V., p. 274; Report of the Joint Brazil-U.S. Technical Commission, p. 12; H. W. Spiegel, 
The Brazilian Economy, Chronic Inflation and Sporadic Industrialization, Blakiston, Philadelphia, 1949, pp. 
52-54; David L. Grove, "The Role of the Banking System in the Chilean Inflation," International Monetary 
Fund, Staff Papers, September 1951, pp. 33-59. 

28. Maurice Dobb, Some Aspects of Economic Development, Ranjit Printers, Delhi, 1951, p. 48. 

29. David L. Grove, Objectives and Potentialities of Monetary Policy in Underdeveloped Countries (unpub- 
lished study), p. 17; H. C. Wallich, "Underdeveloped Countries and the International Monetary Mecha- 
nism," in Money* Trade , and Economic Growth, Macmillan, New York, 1951, p. 29. 

310 Approaches to Economic Development 

American economists, contemplating the war and postwar boom in the 
prices of raw materials, emphasize the fact that an attempt to preserve 
stability of the general price level in the primary producing countries would 
have required that rising export prices be compensated by a fall in the 
prices of purely domestic goods. And this, they believe, would lead to de- 
pression and interrupt the process of development. 30 

But there are overriding objections. Mobility of factors can be furthered 
by direct measures without the high social costs of inflation. Of course, 
Dobb's "mild inflation" would have only mild disadvantages; but a de- 
liberate policy of mild inflation in this best of all possible worlds usually 
gathers momentum into a substantial inflation, particularly in an inflation- 
sensitive age. Few champions of forced saving through the deliberate in- 
crease of inequality of wealth and income would be found in most of the 
young republics now bent on progress. As for allowing the inflation of 
international commodities to be paralleled by inflation at home, there are 
better alternatives at hand. 

Is Inflation Inevitable ? 

At least passing attention should be given to the thesis that developing 
economies inevitably run inflations, accompanied by deficits in their foreign 
balances. Charles Kindleberger divides countries into four quasi-historical 
categories: primitive undeveloped countries, and economically senescent 
countries, both of which types have balanced international accounts and 
domestic stagnation; early development countries, which run deficits and 
internal inflations; and countries in the later stages of development, which 
show tendencies toward deflation and capital export. After repeating sev- 
eral of the more commonplace reasons for expecting inflation in the early 
development stage, Kindleberger adds that borrowing is itself inflationary 
according to all theories of international economic adjustment; that plan- 
ning may be more inflationary than private enterprise; and that technical 
assistance plus direct private investment as in the Point Four program is 
also inflationary because it fails to cover the necessary fundamental invest- 
ment in highways and other utilities, thus swelling the budgetary deficit of 
the state. 31 

30. International Bank, The Bans of a Development Program for Colombia, p. 293; Spiegel, op. ciY., pp. 
51-52; Grove, Objectives and Potentialities of Monetary Polky in Underdeveloped Countries, pp. 36-37. 

31. Charles P. Kindleberger, The Dollar Shortage, Wiley, New York, 1950, Chapter 6, especially pp. 127, 
129, 130, 133, 142 and 143. Like the Hansen stagnation thesis and the Balogh-Kindleberger idea of a 
"chronic" dollar shortage, this position is imbued with an atmosphere of inevitability : development meant 
inflation. This idea may not seem categorically different from the common observation that the effort to 
achieve rapid development results in "an inflationary bias at home and a persistent tendency towards dis- 
equilibrium in the balance of payments" (Ragnar Nurkse, "Some International Aspects of the Problem of 
Economic Development," American Economic Review, Proceeding?, May 1952, p. 580). But the difference 
may be quite significant. If an inflation wastes most of the forced saving which it is supposed to create and 
besides inhibits domestic saving and foreign investment, the development may fail to materialize. Those who 
speak of a "persistent tendency" toward inflation probably imply that it impairs development by just so 
much, rather than characterizes it. 

Domestic Financing of Development : Private Saving 31 1 

Costs of Inflation 

With rare exceptions, the consensus prevails that the economic, political 
and social costs of inflation are such that public policy should be designed 
to achieve development without it. Inflation discourages voluntary saving 
and induces conspicuous consumption by those who benefit from it. To 
achieve a certain amount of forced saving, several multiples of that sum 
must be transferred to higher income brackets, because the propensity to 
save is only a fraction of income. Income distribution is distorted from the 
results either of a price system or a rational interventionist system. Wind- 
falls from inflation go less into industrial investment than into land values, 
ostentatious apartment and office buildings, hoards of foreign exchange and 
inventories, and speculative ventures. With any substantial degree of infla- 
tion the number of people engaged merely in trade grows out of all propor- 
tion. The natural process of selection among firms is held in abeyance all 
firms including the most inefficient survive. Cost and price relations are dis- 
torted, resources are misapplied and business and government planning 
becomes impossible. Continuous inflation induces a flight of capital abroad 
and repels foreign capital. Imports are subsidized and exports are penal- 
ized; pressure develops on the balance of payments, necessitating devalua- 
tion, direct controls or exchange control. The small man loses small 
farmers, petty tradesmen, unorganized industrial labor and the civil servant 
class. Inflation creates social antagonisms, undermines the individual's 
sense of responsibility, reduces incentives for honest work and entrepre- 
neurial effort, creates labor unrest and occasions government interventions 
which are inimical to private initiative. 

Aside from all this social disruption and economic waste, inflation in- 
creases saving slightly if at all, according to a recent staff study of the 
International Monetary Fund. 32 This conclusion seems to be borne out by 
the following figures on investment rates in Brazil, Chile and Colombia 
during years of very large expansion of bank credit: 33 

Gross Private Investment as Percentage of 

Gross National Product 
1946 1947 1948 

Brazil 10.22 11.22 8.39 

Chile 12.2 11.2 10.5 

Colombia 12.1 12.8 12.1 

Whatever stimulus may have been given to investment, it declined as the 
inflation progressed. With less inflation, private investment in the United 

32. E. M. Bernstein and T. G. Patel, "Inflation in Relation to Economic Development," International 
Monetary Fund, Staff Papery November 1952, pp. 363-98. 

33. /#</., p. 377. 

312 Approaches to Economic Development 

States during the same three years formed higher proportions of gross 
national product 13.1, 12.9 and 16.1 per cent. 

The monetary authority of a developing country has an almost categoric 
duty to avoid inflation; but it should be emphasized that its obligation 
extends equally to offsetting deflationary forces. In the present context, an 
important part of this activity is to make certain that all voluntary saving 
goes into investment. As previously pointed out, if people hoard or if they 
set afoot a deflationary force upon other prices by bidding up the prices of 
existing assets such as land or urban real estate, the central bank could 
extend credits to the government for development purposes without inflat- 
ing the price of current output. The same is true of monetary expansion to 
parallel population increases and increases in national product. 34 Further- 
more, inducements or compulsions to prevent the conversion of domestic 
savings into foreign investment would be justified to avoid the deflationary 
or contractive effect of capital exports. 

It scarcely needs to be said that without an "anti-inflationary" govern- 
ment budget, monetary control alone cannot be effective. Not every budget 
deficit need be inflationary, because a certain expansion of the money 
supply is required in a developing economy to parallel the increase of 
domestic trade and the increasing number of people who wish to hold 
money balances. The combination of fiscal and monetary policy which does 
not allow the increase of money to exceed these limits may be called "anti- 
inflationary." Dollar for dollar, money created through budget deficits is 
likely to be more inflationary than money created through the loans of 
commercial banks because it increases the reserves of commercial banks 
and because it is less likely to give rise to an equal flow of marketable 
product. 35 Thus the importance of budget policy for effective monetary 
control is apparent. 

The Need for Monetary Controls 

The history of economically developing countries has been bedeviled by 
inflation because, on the one hand, certain peculiarities of these economies, 
already noted, make them vulnerable and because, on the other hand, 
monetary controls have been weak or nonexistent. Commercial banking 
has characteristically grown up on the basis of the "commercial loan" 
theory of banking that the quantity of credit cares for itself automatically 
if banks confine their loans to first-class commercial paper. The prevalence 
of this philosophy of banking, which is bound to lead to inflation, is the 

34. See H. C. Wallich, Monetary Problem* of an Export Economy: The Cuban Experience, Harvard 
University Press, Cambridge, 1950, p. 295. The central bank must take account of velocity; see Grove, 
Objectives and Potentialities of Monetary Policy in Underdeveloped Countries, p. 38. 

35. See V. K. R. V. Rao, "Deficit Financing, Capital Formation, and Price Behaviour in an Under- 
Developed Country," Indian Economic Review, February 1953, pp. 55-91. 

Domestic Financing of Development : Private Saving 313 

more readily understandable when it is recognized that it imbued even the 
Federal Reserve Act of 1913 in the United States, and that it still dominates 
official theory and practice in Russia. 30 

The unregulated creation of credit has often proceeded in complete 
absence of central banks, as in Puerto Rico, Egypt, the United Kingdom 
dependent territories and in many other places until the recent wave of 
creating central banks. In other countries, as in Cuba, Mexico and Brazil, 
a central bank has existed for a longer period, functioning, however, "not 
so much as a mechanism for monetary regulation, but as an engine for 
credit creation." 37 Even if these institutions had been animated by a strong 
desire to combat inflation, in the absence of an organized market for gov- 
ernment securities they would have been unable to utilize what is com- 
monly regarded in Europe and North America as the most potent mon- 
etary restraint upon inflation the sale of government securities. 

The potentiality of monetary control is, however, rapidly being created 
in the numerous central banks founded in underdeveloped areas during the 
past decade. 38 India and Egypt already enjoy fairly adequate markets for 
government securities, and this complement to central banking will follow 
in other quarters as development proceeds. Meanwhile, central banks, 
where they exist and desire to combat inflation, can make use of the other 
chief weapons: the availability and cost of rediscounting, and armed with 
the necessary legal authority varying the reserve requirements for com- 
mercial banks. Or, if the commercial banking system has not yet progressed 
far, the central bank may need to establish its authority by direct lending 
to the public or to the various development organizations of the govern- 
ment. In the latter event, central bank decision as to the availability and 
cost of credit must prevail if monetary control is to prevail. 


By all odds the one most formidable obstacle to the effective control of 
inflation in those underdeveloped countries that are heavy producers of 
primary products for export in "export economies," to employ Wallich's 
descriptive term is that the share of national income generated by exports 
exceeds the shares generated by government expenditures or by investment 
from domestic and foreign sources. Primary products are notoriously un- 
stable in both price and demand, and the resulting variations expose the 
export economies to uncontrollable variations of the total yield of exports, 

36. This is the finding of Raymond P. Powell in Soviet Monetary Policy (doctoral dissertation deposited 
in the Library of the University of California, Berkeley, 1952). 

37. Wallich, Monetary Problem? of an Export Economy, p. 284; see also United Nations, Domestic 
Financing of Economic Development, pp. 67-70; Mosk, op. cit. t p. 252: Report of the Joint Braztt-U.S. 
Technical Commission, pp. 49 and 163. 

38. Cf. p. 338 below, n. 18. 

314 Approaches to Economic Development 

and through this channel to enormous variations of domestic incomes, 
prices and employment. 39 It is, of course, true that even economically de- 
veloped countries such as New Zealand and Australia experience these 
difficulties as primary producers. The emphasis in the present context, 
however, is on fluctuations of export yield in their bearing upon economic 
development. This subject will be considered more fully in Chapter 18; for 
the present, a single example will suffice: 

From 1938 to 1947 total exports of Latin America increased from 1,936 to 
6,622 million dollars, or more than a three-fold increase in value. Responding to 
this primary stimulus and to domestic private investment and official develop- 
ment programs, monetary income has expanded more than fourfold, and despite 
restrictions imports have increased from 1,925 million dollars in 1938 to 6,668 
million dollars in 1947. Prices and costs of living have risen sharply but real 
income probably has increased by 30 to 40 per cent. 40 

Economic development under these circumstances is sorely impaired by 
the alternating profligacy of inflation and devastation of recession; the 
situation obviously requires intervention. Those economists who advocate 
a domestic monetary policy of allowing the home price of exports to 
parallel the rise on international markets implicitly accept the full impact 
of the inflation. What are the alternatives to this policy, not by way of 
permanent insulation of these economies from the outside world, but by 
way of compensating for or reducing the impact of cyclical or episodic 
booms and depressions coming from abroad? 


Stabilizing a General Price Index 

One alternative to inflation of prices would be a policy, implemented by 
domestic monetary and fiscal measures, of stabilizing a general index of 
product prices. Import prices, presumably being unaffected by the upward 
movement of export prices, would probably remain at about their old level. 
The prices of purely domestic goods would have to be contracted to offset 
a certain rise in export prices. In the absence of direct controls, the decline 
of domestic prices and the rise of export prices relative to one another 
would be determined by the relative magnitude of these two segments in 
the domestic economy and hence in the composition of the index. The 
absolute level of all prices taken together export, import and domestic 
is determined by domestic monetary and fiscal policy. 

39. See Robert Triffin, "Central Banking and Monetary Management in Latin America," Chapter 4 in 
Seymour Harris (Ed ), Economic Problems of Latin America, McGraw-Hill, New York, 1944. See also: 
Joseph A. Kershaw, "Postwar Bra/ilian Economic Problems," American Economic Review, June 1948, pp. 
328-40; and Felipe Pa/os, "Inflation and Exchange Stability in Latin America," American Economic Re- 
view, Proceeding*, May 1949, pp. 396-405; United Nations, Department of Economic Affairs, Instability in 
Export Markets of Under- Developed Countries, New York, 1952, p. 41; plus the publications by Wallich 
and by Grove already cited. 

40. Pa/os, he. cit , p. 398. 

Domestic Financing of Development : Private Saving 315 

But since export prices are only one component of the three, stabilizing 
a general index would mean that exports would not rise in domestic cur- 
rency as far as in foreign currencies. The country would develop a favorable 
balance and feel a certain stimulus through the higher incomes of exporters. 
But this stimulus would be confined to the direct and indirect impact of the 
foreign balance; it would not be augmented by a further factor as would 
be the case if the prices of domestic goods, instead of falling within the 
stabilized price level, were also allowed to rise sympathetically with export 
prices. Under the policy of price-level stabilization, any desired degree of 
offsetting of the export boom by restriction in the domestic sphere could be 
achieved by the rigor with which it was applied. Thus a tendency toward 
general contraction could be offset by permitting a mild upward movement 
of the general index. 

If the export segment of the economy is a large part of the whole, this 
would probably be unnecessary. Prices, it is true, would not rise as high 
in that sector as they would in the absence of a general price-level stabiliza- 
tion policy. But money incomes from exports would be high, and in an 
export economy their sustaining influence on the rest of the economy 
would be very great and thus would probably offset the influence of lower 
domestic prices on output as a whole. 

An obstacle to the successful prosecution of this variety of anti-inflation 
policy might be the resistance of labor unions and other "price-administer- 
ing" units to a reduction of prices of domestic goods. In the underdeveloped 
world, however, this limitation is not widespread. 41 

Exchange Appreciation 

A second alternative to which countries threatened by inflation through 
a favorable balance-of-payments position have resorted is appreciation of 
the exchange rate. 42 Presumably, the price differentials between exports and 
purely domestic goods would be the same as in the first alternative, which 
rested on the old rate of exchange. But an appreciation of exchange would 
remove the necessity of a decline in the prices of domestic goods. It would 
thus offer less resistance to an inflation induced by the income increases in 
the export sector, but might recommend itself over the first alternative in 
those countries in which labor unions and industrial and agricultural 
monopolies resist a reduction in money income. The history of the Inter- 
national Monetary Fund would seem to give evidence of the desirability 
not of free rates of exchange but of considerably greater mobility of rates 

41. See Wallich, in Money, Trade, and Economic Growth, pp. 20-21 

42. Illustrated recently in the case of a primary producer by New Zealand, which allowed its exchange to 
appreciate in August 1948 from N.Z. 125= U.K. 100 to parity in order to combat inflation. See C. G. F. 
Simkm, "New Zealand and International Economic Equilibrium," Economia Internazionale, February 1951, 
p. 128 

316 Approaches to Economic Development 

at least than was contemplated at its initiation. But it is doubtful whether 
many countries will, as a matter of fact, resort to exchange appreciation in 
order to curb excessive booms, because this implies devaluation to meet 
depressions. Whether rightly or wrongly, most countries reject this degree 
of instability in their foreign exchange rates. 

Export Taxes 

A third alternative to foreign-induced price inflations and a particularly 
promising one for the economically underdeveloped countries is presented 
by export taxes. Alternatives one and two, involving the stabilization of a 
general commodity index and of an index of purely domestic commodities 
respectively, imply effective monetary-fiscal control of the flow of expendi- 
tures. But many underdeveloped countries lack a sufficiently inclusive and 
flexible tax system or a sufficiently strong central bank to carry on what is 
in effect "compensatory finance." In these situations, export taxes recom- 
mend themselves on the basis of ability to pay, ease of administration, 
flexibility and the absorption of inflationary purchasing power at its source. 
Furthermore, they can be applied by one country without the necessity of 
international consultation and without damage to the economic position 
of other countries. 

Export taxes have been utilized extensively in primary producing coun- 
tries for general revenue purposes and, in some instances, to offset infla- 
tion. 43 A variant of the export tax appeared in the compulsory purchase of 
government bonds imposed on Brazilian exporters, an effective anti- 
inflationary device but one ill designed to further the marketability of gov- 
ernment securities and consequently poorly suited to developing economies. 
Still another variant is the government monopoly of a particularly im- 
portant export or exports or the government-producer stabilization agency. 
The rice export monopoly of Thailand has as its objective "to insulate 
internal rice prices from the inflationary influence of the world market, but 
at the same time to provide growers with a return sufficient to stimulate 
production." Moreover, its operations in 1948 and 1949 provided 10 and 17 
per cent, respectively, of total budgetary revenues for the Treasury. The 
West African Marketing Boards represent a somewhat similar effort for 
cacao, palm oil, palm nuts, peanuts and cotton. 44 

Through various devices, it is apparent that primary producers can very 
substantially mitigate the severity of inflationary and, to a lesser degree, 

43. Australia has made use of stabilization funds financed by levies on exports of wool and wheat and a 
voluntary price stabilization system for dairy products. See Douglas B. Copland, "Australia and Interna- 
tional Economic Equilibrium," Economta Internazionale, February 1951, pp. 49-50. Mexico introduced a 
15 per cent export tax in 1948. For a systematic review of countries, see International Monetary Fund, 
Exchange Restrictions, Second Annual Report, Washington, 1951. 

44. See P. T. Bauer and F. W. Paish, "The Reduction of Fluctuations in the Incomes of Primary Pro- 
ducers," Economic Journal, December 1952, pp. 750-80, and comment on same by P. Ady, ibid., September 
1953, pp. 594-607. 

Domestic Financing of Development : Private Saving 317 

deflationary impacts from world markets. But it would be overly sanguine 
to imagine that the action of individual countries will result in general 
stability. It would carry the discussion too far afield to attempt to assess the 
merits and weaknesses of international commodity agreements. With the 
proper safeguards of the consumer interest, they could take over part of the 
burden of adjustment from the shoulders of the primary producers. 

In concluding this discussion of inflation as a device for financing de- 
velopment, it may be well to add that the "large-project approach" to 
economic development augments the forces making for inflation. The dep- 
rivation of consumers has to be protracted and may pass the bounds of 
political tolerance in any but authoritarian regimes; and the risks of misap- 
plication of investment also grow the longer a plan has to be projected into 
the future. This does not, of course, mean that all large projects are neces- 
sarily mistaken, but it does imply caution. The opportunity costs must be 
carefully assessed. 45 


Direct measures to deflect expenditure from consumption into capital 
formation include selective import controls; the rationing of consumer 
goods; domestic licensing systems which discriminate against consumer 
goods or particular consumer goods such as luxury apartments and amuse- 
ment facilities; allocation priorities for labor and materials; and in social- 
ist economies the direct conduct of production by the state. Perhaps one 
might add to this list the collectivization of agriculture as a method of 
extracting the "surplus" output of farms for general fiscal purposes or for 
providing the wherewithal for industrialization. 

For developing countries, great significance has traditionally been at- 
tached to selective import controls. Other kinds of direct measures involve 
about the same pros and cons for the underdeveloped as for the more 
advanced economic regions. The less developed countries undoubtedly 
encounter greater difficulty in obtaining capital by alternative means 
domestic saving, taxation and foreign borrowing than do the more highly 
capitalistic economies. But they also find greater difficulty than the ad- 
vanced economies in extracting capital by direct measures. It is, of course, 
possible that the comparative disadvantage of this route to capital forma- 
tion will appear less. Much will depend upon the values set on the workings 
of the price system and on individual freedom of choice, on the actual and 
potential efficacy of financial and fiscal institutions and on many other 
factors, including cultural traits. Generalization does not seem to be pos- 
sible. Most of these considerations also permeate the problem of import 

45. Cf. Hesmat Ala'i, "How Not to Develop a Backward Country," Fortune, August 1948, p. 76. 

318 Approaches to Economic Development 

controls; and the background of actual experience and theoretical discus- 
sion is much more extensive for these controls. 


Since the present chapter is concerned with the domestic financing of 
economic development, the focus here is chiefly on selective import con- 
trols, that is, the imposition of controls on certain chosen items, because 
they can be used to reduce or exclude consumers' goods or luxury con- 
sumers' goods and to favor the importation of producers' goods or neces- 
sities. Disposable income within the country is thus forced into capital 
formation or "productive consumption." It will contribute substantially to 
clarity of thought if this objective is sharply distinguished from general 
import controls designed to reduce deficits in the balance of payments. 
There are several reasons for differentiating these purposes, even though a 
given set of import controls could conceivably partly serve both. The ideal 
selectivity differs for the two purposes; the policy alternatives to import 
control are only in part the same for the two purposes; but, most impor- 
tant, closing a balance-of-payments deficit is not a source of domestic 
finance for development. In another connection, the problem of balance-of- 
payments deficits for developing economies will require attention. 

The Rationale for Import Controls 

Ultimately, as in most matters of policy, the merits and demerits of 
import controls to secure savings depend not only upon the abstract 
rationale but also upon the probable working out of the device in practice. 
There is some advantage in beginning with the theoretical case in order 
first to see the question in the large. On this plane, then, the logic would be 
simple: if intervention by government is accepted as appropriate to secure 
savings, then the taxation of consumption, including the taxation of im- 
ported articles of consumption or of luxury consumption, is appropriate. 
Furthermore, the same degree of restriction on the consumption of imports 
can be achieved by appropriate import tariffs, by direct import controls 
such as licensing and quota systems, by exchange control and the allocation 
of foreign exchange and by multiple exchange rates on the various cate- 
gories of imports. These devices differ among themselves considerably from 
the administrative point of view and in their various economic repercus- 
sions. For the time being, these differences must be overlooked in order to 
concentrate on the main objective of all of them, the furthering of capital 
accumulation for economic development. Provisionally, then, in this argu- 
ment a system of import taxes discriminating against luxury consumption 
or against consumption as a whole represents all selective import controls. 46 

46. The taxes could be levied on exchange devoted to certain imports (foreign exchange tax), on the goods 
themselves (excise tax on imports) or by charging discriminatory exchange rates (multiple exchange rates). 

Domestic Financing of Development : Private Saving 319 

Let us first contrast, for clarification rather than argument, such a system 
of import taxes with the export taxes discussed earlier. Export taxes, it was 
said, can absorb an inflationary impact from abroad. The occasion for 
introducing such taxes was the war and postwar boom in raw materials, 
but they would be equally appropriate normally to absorb the inflationary 
effect of sales of petroleum or other natural assets. The important thing to 
observe is that their primary reason for being is to take advantage of a 
large differential, temporary or permanent, between domestic costs and the 
world selling price, that is, to absorb excess profits. If the rate does not 
exceed this limit, exports are not reduced; any taxation of exports beyond 
this limit has no distinct merit over the taxation of normal business profits. 

But the purpose of import taxes is to decrease imports, at least in the 
categories that are taxed. Export taxes are levied on different items from 
import taxes; the criteria of discrimination are quite different excess or 
monopoly profit being the criterion for exports, lack of "essential" char- 
acter for imports; the primary purposes are absolutely distinct; and the 
alternative policies are only partly the same. 47 Acceptance of export taxes 
as a useful measure against inflation carries with it no justification of im- 
port taxes as a measure to secure compulsory savings. 48 The case must be 
considered quite separately. The general positive argument has already 
been stated. 

Objections to Import Controls 

On the plane of theory still, import controls by whatever device are sub- 
ject to two major objections. First, unless accompanied by equally severe 
taxes or quantitative limitations in the domestic economy, they encourage 
the domestic production and consumption of the imported items dis- 
criminated against, and they discourage the domestic production and con- 
sumption of the items favored by the import discrimination. To the degree 
this happens, they fail to achieve their purpose of compulsory saving. How 
important this negative offset may be depends, of course, upon the com- 
modity and the country. Jamaica would probably not soon produce its own 
Rolls Royces even with a high import tax, and the absence of the protection 
afforded by an import tax will probably not do much to discourage the 
beginning of a domestic automobile-truck industry. But the latter could 

47. Both taxes yield revenue and are thus, other things being equal, deflationary, and if the government 
uses the proceeds for investment, they may be regarded as sources of savings. 

48. Hence it is misleading, and partly incorrect, to say that "Multiple rates are, in fact, selective devalua- 
tions, which at the same time operate as export-import taxes and raise badly needed government revenue." 
(Pazos, loc cit., p 402 ) An export tax docs not take the place of devaluation but of appreciation of the ex- 
change rate. Furthermore, there is no such thing as an "export-import tax" ; and Pazos' identification of a 
uniform surcharge on the import rate plus devaluation with a general export tax in itself correct misses 
the point that to the degree that either tax is uniform it loses its character as a tax and its suitability for its 
pufposes. Discrimination, on different bases, makes these mean something as taxes which the merely nominal 
exchange surcharge plus devaluation completely lacks. Pazos' passage is roughly paralleled by Wallich, 
Monetary Problems of an Export Economy, p. 268, n. 9. 

320 Approaches to Economic Development 

conceivably be a wrong guess for India. Furthermore, even for Jamaica, if 
luxury consumption is cut off in one direction by import controls, it may 
take a quite new direction. 

The second major objection to import controls as a means of enforcing 
saving is that its objective would be better served by domestic sumptuary 
taxes. Frequently, import controls against luxuries or against consumers' 
goods in general are defended on the grounds that the local tax system in 
underdeveloped countries is not equal to providing a substitute. But con- 
sumption taxes are among the most easy to collect, whether on minor 
luxuries by revenue stamps on cigarettes and alcoholic beverages, or by 
license fees on automobiles or use taxes on apartments and office space. 
Furthermore, sumptuary taxes can be imposed on nonimported consump- 
tion items, some of which would spring up as substitutes for the taxed 
imported goods. On the plane of generality, it would scarcely seem that the 
tax authority would be less efficient, more corruptible or less flexible than 
the foreign trade and exchange organization. 

The Record of Experience 

On the score of actual experience, the record for import controls has not 
been reassuring. The Bell report on the Philippines, despite its conclusion 
that for the immediate future import controls cannot be dispensed with, 
finds them 

needlessly complex, costly, and dilatory. To the difficulties caused by inefficiency 
are added those attributable to favoritism and even corruption, the inevitable 
accompaniments of a detailed system of controls in countries with inadequate, 
inexperienced, and underpaid staff. 49 

In Colombia, according to the Currie report, the complexities are illus- 
trated by the six laborious stages of processing through which each applica- 
tion must pass; in addition, evasion has been widespread. 60 

Still more damaging is the evidence in recent detailed studies of several 
countries that import controls have affected the composition of imports 
very little. Thus in Colombia the categories especially significant for eco- 
nomic development, "metallic manufactures" and "machinery and appara- 
tus," accounted for about the same fraction of imports in 1945-1947 as in 
1937-1940, after a decade of controls. 61 In Brazil, capital goods declined 
from 33.2 to 31.5 per cent of imports from the 1937-1939 average to 1947, 
while consumption goods rose from 15.1 to 23.1 per cent. 62 The Joint Com- 

49. The Bell Report, pp. 41-42. 

50. International Bank, The Basis of a Development Program for Colombia, pp. 327 and 333. 

51. Ibid., p. 330. 

52. Report of the Joint Brazil-U.S. Technical Commission, pp. 26-27 and 34-35. 

Domestic Financing of Development : Private Saving 321 

mission observes: "The severity of the import restrictions suggested by this 
analysis would handicap efforts to make early progress in the economic 
development of Brazil. Consequently, every means of solving the balance- 
of-payments problem in other ways must be explored." Ellsworth believes 
that, for the entire period of exchange control in Chile until 1945, when he 
completed his study, the importance of articles in the workingman's budget, 
supposedly favored by the multiple import exchange rates, was minor; the 
disadvantages of exchange control were "unquestionable and consider- 
able." 53 The International Bank study on Guatemala, however, recom- 
mends luxury import taxes, though the head of the mission, writing in an 
economic journal, charges the import restrictions with having reduced com- 
petition and impaired incentives. 54 Mosk looks favorably on import con- 
trols for Mexico; but Wallich merely mentions them as a possibility for 
Cuba, and in general hesitates to recommend exchange control. 65 Thus, 
despite the enthusiasm of some theoretical treatments of the subject, few 
of the studies of specific countries are able to give import controls more 
than a highly qualified recommendation. 


Among the various specific devices of selective import control designed 
to promote saving and investment for development there can be little doubt 
that multiple import exchange rates or discriminatory import tariffs (which 
can be devised to have identical results) are superior to the quantitative 
controls such as prohibitions, licenses and quotas. 56 The main points are 
that multiple rates and tariffs, being cost devices instead of restrictions 
based on absolute quantity, disrupt the price system less; and that they 
transfer to the government the windfall gains of import restriction, in place 
of leaving them in the hands of possessors of quotas and licenses. This 
transfer might be accomplished at least theoretically by auctioning the 
exchange bills for imports that are under quota restriction to the highest 
bidders. 57 Alternatively, the exchange authority can fix import exchange 
rates which would approximate the same results. Multiple import rates, 
being set administratively, show greater flexibility than tariffs or quotas; 

53. P. T. Ellsworth, Chile, An Economy in Transition, Macmillan, New York, 1945, pp. 69-71. 

54. International Bank, The Economic Development of Guatemala, p. 271; G. E. Britncll, "Problems of 
Economic and Social Change in Guatemala," Canadian Journal of Economics and Political Science, Novem- 
ber 1951, p. 477. 

55. Mosk, op. cit. t pp. 292-93; Wallich, Monetary Problems of an Export Economy, Chapter 14. 

56. The case has been set forth most judiciously and exhaustively by Schlesinger, though earlier treat- 
ments made some of the same points. See E. R. Schlesinger, Multiple Exchange Rates and Economic De- 
velopment (Princeton Studies in International Finance, No. 2), Princeton University Press, Princeton, 1952; 
John S. de Beers, "Some Aspects of Latin America's Trade and Balance of Payments," American Economic 
Review, Proceedings, May 1949, pp. 384-95; Pazos, loc. at., pp. 396-405; Triffin, loc. cit., and Wallich, in 
Money, Trade, and Economic Growth, p. 31. 

57. In fact, the danger would seem to be that the bids would cease to be competitive in the course of time 
as importers adopted a "live and let live" policy. 

322 Approaches to Economic Development 

but to the foreign seller this is a risk and a disadvantage. The main ad- 
vantages as compared to quotas are, as stated, their compatibility with a 
price system and their absorption of the windfall profit of protection. Al- 
though they capture this profit, or the larger part of it, they still protect by 
raising the prices of foreign goods to the consumer without raising the 
domestic cost of production of the good in question. It is to be feared that 
this fact, rather than the public gains described above, accounts for the 
adoption of the multiple exchange rate device in eleven or twelve Latin 
American countries, and in Greece, Indonesia, Israel, Spain and Thailand, 
among others. 

Conclusions Regarding Private Saving 

The upshot of the foregoing analysis is that, outside of taxes, direct com- 
pulsory measures to increase private saving do not seem well designed to 
further economic development. One of the main preoccupations of gov- 
ernments in countries aspiring to development must therefore be the en- 
couragement of voluntary saving, but the requirements for success are 
manifold and their attainment is uncertain. The following statement would 
apparently be valid for the whole of the underdeveloped world : 

The task of mobilizing savings in Asia and the Far East is difficult even when 
there is security of life and property, political stability, freedom from fear of 
external aggression, and confidence in the solvency of the government and in 
stability of the local currency . . . Moreover, many factors including low levels 
of income, growth of population, its density and age composition, with attendant 
pressure on resources, social factors, the limited number of persons interested in 
and able to develop concrete plans for capital investment, and relatively low 
levels of production and foreign trade, have added to the limitation on savings 
and investment. 58 

Monetary institutions to encourage and mobilize savings have to be 
perfected and expanded in the directions that have been indicated. But in 
addition the political atmosphere must be favorable to the private accumu- 
lation of savings, and adverse folkways and religious beliefs, such as the 
Islamic objection to interest, must be modified or compensated for. All of 
this is, however, a laborious and uncertain process. Meanwhile much of 
the wherewithal for economic development will have to be provided from 
government revenues. 

58. United Nations, Economic Commission for Asia and the Far East, Mobilization of Domestic Capital 
in Certain Countries of Asia and the Far East, Bangkok, 1951, p 224. 

15. Domestic Financing of Development: 
Government Sources and the Application of Funds 


A LOW LEVEL OF INCOME PER CAPITA is so generally characteristic of the 
economically underdeveloped world that the first has often been used to 
define the second. But the definition might be made almost as accurately in 
terms of government expenditures per unit of population. The contrast 
between the "haves" and the "have-nots" is enormous. The United States 
through its various units of government spent 168 times as much on its 
average citizen in a representative recent year as did the government of 
Haiti. But to make matters worse, so far as inequalities go, the government 
of New Zealand spent over a hundred times as much per capita on eco- 
nomic development as did Haiti. These are extreme cases, but the contrast 
between the economically advanced and retarded nations is as general as it 
is appalling. The hopeful side of the picture is the large percentage of total 
expenditure devoted to economic development in some countries. But let us 
not forget the absolute levels of per capita income nor the absolute amounts 
of the governments' contribution to development. Decided improvement 
may still mean near starvation. Some countries cannot spend much on the 
relief of poverty because their citizens are so poor. 


Direct Taxation 

The relevance of poverty to revenue problems in underdeveloped areas 
is nowhere more striking than in the case of income taxes or, more gen- 
erally, direct taxation. Direct taxes include taxes levied on personal and 
business income, undivided profits, excess profits, capital gains, gifts and 
bequests, some property taxes, and capitation taxes such as poll and hut 

In India, where the income tax was introduced as early as 1860, though 
its effective use dates from 1936, and despite the inclusion not only of 
personal incomes but of all forms of business profits, only 500,000 to 
600,000 persons pay this tax out of a population of 358 million one fifth 


324 Approaches to Economic Development 

of one per cent! 1 In addition to the fact that any reasonable exemption 
level excludes millions of persons in so poor an economy, income taxes are 
difficult to levy on peasants who are generally illiterate or, if literate, 
seldom keep records. Another major difficulty is that so much of income 
in such economies is income in kind, the value of which is difficult to fix. 
Some countries in the underdeveloped category, for example India and the 
United Kingdom colonies, have apparently reached the practical limit of 
direct taxation, and have in the past few years turned more extensively to 
the alternative of indirect taxes. 

Nevertheless, underdeveloped countries at somewhat higher levels are 
able to derive considerable amounts of revenue from direct taxation, 
although the differences among them are great. Direct taxation of wealth 
and income accounts for about a third of tax revenue at the upper limit, and 
usually for much less. (See Table 15-1.) By comparison, in 1950 these taxes 
constituted 78 per cent of federal and 68 per cent of federal plus state tax 
revenue in the United States and 57 per cent in the United Kingdom. 

While capitation taxes head taxes and fixed levies on each hut or dwell- 
ing are a rather crude form of direct taxation and are not progressively 
related to income as other direct taxation usually is, they cannot readily 
be dispensed with in primitive societies. If they are coupled with the oppor- 
tunity to "work the tax off" on roads, land improvement and the like, 
they afford a desirable fiscal device for increasing the social capital, fre- 
quently out of seasonally unemployed or other forms of surplus labor. 

When income taxation is possible, and when the political and social 
structure favors it, the introduction of social security taxation may induce 
saving. During an initial period, particularly, income from social security 
taxes may exceed outlay and thus result in considerable net saving on 
balance. 2 One particular advantage of these savings, which accrue to a 

1. United Nations, Department of Economic Affairs, Public Finance Surveys: India (by Ursula K. Hicks), 
New York, November 1951, pp. 39-43. This study and the following are the sources of all fiscal data for the 
relevant countries in the present section unless specific reference is otherwise made. United Nations, Depart- 
ment of Economic Aflairs, Public Finance Surveys: Venezuela, New York, January 1951; Public Finance 
Information Papers, No. 1: Egypt, New York, January 1950; No. 2: Colombia, New York, March 1950; 
No. 3: Italy, New York, June 1950; No. 4: Iran, New York, March 1951; No. 5: Iraq, New York, April 
1951 ; No 6: Peru, New York, October 1951. International Bank for Reconstruction and Development, The 
Basis of a Development Program for Colombia, Washington, 1950; The Economic Development of Guatemala, 
Washington, 1951; The Economic Development of Iraq, Washington, 1952; The Economy of Turkey, The 
Johns Hopkins Press, Baltimore, 1951 ; Report on Cuba, Washington, 1951 ; Report of the Joint Brazil-U S. 
Technical Commission (Publication 3487), U.S. Department of State, June 1949; Report to the President of 
the United States by the Economic Survey Mission to the Philippines, U.S Department of State, October 9, 
1950 (the Bell Report); P. T. Ellsworth, Chile, An Economy in Transition, Macmillan, New York, 1945; 
Sanford A. Mosk, Industrial Revolution in Mexico, University of California Press, Berkeley, 1950; Harvey 
S. Perloff, Puerto Rico's Economic Future, A Study in Planned Development, University of Chicago Press, 
Chicago, 1950; H. W. Spiegel, The Brazilian Economy, Chronic Inflation and Sporadic Industrialization, 
Blakiston, Philadelphia, 1949; Henry C. Walhch and John H. Adler, Public Finance in a Developing Coun- 
try El Salvador: A Case Study, Harvard University Press, Cambridge, 1951. 

2. In the United States, the social security system accounted for $27 billion in saving from 1936 to 1952. 
See E. M. Bernstein and 1. G. Patei, "Inflation in Relation to Economic Development," International 
Monetary Fund, Staff Papers, November 1952. 

Government Sources and the Application of Funds 325 


Tax Yield in Local Currency Units 


On Wealth or 
On Income On Wealth (Vndifferentlated) 

Percentage of 
Total Tax 















North Borneo 















Middle East 


15 7 






10 3 



31 6 



16 4 



Italy b 



Latin America 


. . 





. . 





Sources- Publications of the United Nations as follows: Department of Economic Affairs, Economic 
Survey of A Ma and the Far Ea\t, 1950, New York, July 13, 1951, Table 127, p. 437; Review of Economic 
Conditions in the Middle East, Supplement to World Economic Report, 1949-50, New York, March 1951, 
Table 49, p. 82; Public Finance Information Papers (ST/ECA/SER.A), No. 3, Italv, New York, June 1950, 
Table 10, p. 25; No. 6, Peru, New York, October 1951, Table 14, p. 27. Also John H. Adler, Eugene R. 
Schlesmger and Ernest C. Olson, Public Finance and Economic Development in Guatemala, Stanford Uni- 
versity Press, Stanford, 1952, Table 18, p. 59; International Bank for Reconstruction and Development, 
Report on Cuba, Washington, 1951, Table 129, p. 669. 

a. Fiscal year 1950 is August 15, 1949 to March 31, 1950. Figures are regarded as estimates only by the 
relevant sources except for Malaya, Philippines, Israel, Jordan, Peru, Italy, Cuba. Data here are rounded. 

b. Includes direct but nonrecurrent taxes on capital levies and other emergency taxes. 

c. Figures are for fiscal year 1948, the latest data available. 

government fund, is that they may be invested in enterprises of basic 
significance to economic development, such as public utilities, electric 
power and communications. 

So long as the specific obstacles to effective and equitable direct taxation 
persist, it cannot be pressed by underdeveloped countries. Thus one of the 
chief merits commonly ascribed to income taxation in the industrial West 
its progressiveness is lacking in Iran and Iraq, for example, where it falls 

326 Approaches to Economic Development 

heavily on the salaried classes because agriculture is excluded. But its 
potential merits in progressiveness, collection at the source, withholding 
and the possibility of offsetting losses against gains for net income calcula- 
tion would recommend continuation of the present general movement in 
underdeveloped areas toward adopting income taxation or improving its 
operation. Colombia, for example, moved from a situation in 1937 in which 
customs duties provided one half and direct taxes one fourth of total 
revenue, to a reversal of these proportions in 1948. 

Criteria of Taxes 

From the particular angle of economic development, taxes may be ap- 
praised by three further criteria. One is simply their productiveness or 
yield, since much development requires government outlay; and on this 
basis the income tax is, of course, potentially the best. Another criterion is 
the economic repercussions of the taxes whether they are favorable to 
saving, to investment, to productive use, etc. Income taxes, generally speak- 
ing, are probably neutral in most of these respects but avoid the adverse 
effects of some alternative sources of revenue. However, income tax rates can 
of course be so high as to discourage saving. Ursula Hicks reports in her 
public finance survey for the United Nations that this consideration, along 
with an increased emphasis on private enterprise, accounts for India's de- 
cision to reduce income taxes and make them less progressive. Finally, 
some taxes and some features of taxes are designed particularly to further 
economic development, but this is not true of direct taxes. 

Indirect Taxation: Foreign Trade 

Whatever deficiencies in tax revenue remain after direct taxes must, of 
course, be made up by indirect taxes. In the economically underdeveloped 
countries a large share of this remaining burden falls to taxes on foreign 
trade. The proportions of tax returns obtained from foreign trade in these 
countries show a wide dispersion, but in those for which adequate data are 
available the range is from 30 to 80 per cent. (See Table 15-2.) Customs 
duties for the United Kingdom lie somewhat below the lower extreme of 
this range, at 22 per cent (1950), and in the United States the share of fed- 
eral and state tax revenue obtained from this source is 0.9 per cent. 

The division of taxes on foreign trade as between import tariffs and 
export taxes has in recent years shown a decided preponderance of the 
former, both in number of countries levying them and in yield in most 
countries. 3 Both types of taxes can be made to yield substantial revenues; 

3. For 1946 figures see Wallich and Adler, op. cit., p. 84. In 1950 the percentages of total revenue coming 
from import and export taxes were, respectively, 16.6 and for Venezuela, 14.1 and 32.4 for Peru, 35.7 and 
9.9 for Cuba; and in 1948, 57.6 and 19.6 for Haiti, and 41.9 and 8.5 for Guatemala. 

Government Sources and the Application of Funds 327 




Tax Yield in Local Currency 


Percentage of 
Total Tax 

On Imports On Exports 

On Imports or 




. . . . 




l,247 b 



. . 






North Borneo 





348 b 


Middle East 


. . 



. . 

. . 



. . . . 

. . 



. . 

. . 






Latin America 


14" 32 

. . 



17 d 



36" 10" 

. . 



58 f 20 f 

. . 



42 f 8 f 


Source* ' Publications of the United Nations as follows: Department of Economic Affairs, Economic 
Survey of Asia ami the Far East, 1950, New York, July 13, 1951, Table 127, p. 437; Review of Economic 
Conditions in the Middle Ea\t, Supplement to World Economic Report, 1949-50, New York, March 1951, 
Table 49, p. 82; Public Finance Information Paper* Peru (ST/ECA/SER.A/6), New York, October 1951, 
Table 14, p. 27; Public Finance Survey* Venezuela, New York, January 1951, p. 38. Also International Bank 
for Reconstruction and Development, Report on Cuba, Washington, 1951, Table 129, p. 669; John H. Adler, 
Eugene R Schlesmger and Ernest C. Olson, Public Finance and Economic Development in Guatemala, Stan- 
ford University Press, Stanford, 1952, Table 18, p. 59. 

a Fiscal year 1950 is August 15, 1949 to March 31, 1950. Figures for Burma, India, Indonesia, North 
Borneo, Iran and Iraq are regarded as estimates only by the relevant sources. Data here are rounded. 

b. Customs are shown net of refunds. 

c. The column labeled "Imports" is actually entitled "Customs Duties" (largely imports) in the original. 
Export duties on agriculture and mineral products. 

d. Figure does not include stamped paper, postal, harbor, consular fees in per cent of 9.4 and alcohol 4.1, 
cigarettes 2.8, and taxes on matches, petroleum consumption and telecommunications in amount of 0.6. 

e. Cuba technically has no export taxes. Taxes on sugar production have been hsted as export taxes here. 

f. Figures are for fiscal year 1948. 

and they have in common the disadvantage that revenue varies greatly with 
the ups and downs of world trade. But further appraisal must distinguish 
sharply between import and export taxes. 

Import Levies 

In general, import tariffs are regressive; but this unwelcome feature can 
be considerably reduced by levying high duties on articles of luxury con- 
sumption and admitting the necessities of life on the free list or at low rates. 

328 Approaches to Economic Development 

This remedy, however, may involve a considerable loss of revenue. If the 
main purpose were to reduce luxury consumption or consumption as a 
whole, domestic sumptuary taxes as we have argued in the case of multi- 
ple import exchange rates would be less subject to tax evasion and to tax 
avoidance through the use of substitutes, without sacrifice of ease of ad- 
ministration. But the aim of protection to domestic producers in most cases 
must be assumed to be paramount. Little can be added to the age-old pros 
and cons of the infant industry argument for protection, which has already 
been touched upon. 4 

Export Levies 

The taxation of exports avoids most of the objections to import taxes. 
It appropriates the excess profits or rents arising from differentials between 
domestic costs and the international market, whether this excess be caused 
by conscious monopoly restriction, by lags in the international adjustment 
mechanism or by the existence of valuable soil or mineral properties in 
their natural state. 5 By appropriating monopoly or windfall profits, export 
levies, in contrast to import tariff's, are progressive in their effect. If export 
tariffs are not raised beyond the cost-price differential, they yield revenue 
without reducing sales and without impairing the international division of 
labor. They represent, in the case of irreplaceable natural assets, a reim- 
bursement to the nation for the exhaustion of these resources. In particular 
cases, they are fantastically profitable and may, if properly managed, be 
sufficient to finance economic development. 6 Finally, export tariffs can be 
raised in boom times and lowered in depressions, thus maximizing revenue 
and contributing to domestic stability. Export taxes are well suited to the 
fiscal and economic needs of "export economies," particularly primary 
producers; and most, though not all, underdeveloped countries fall into 
these categories. 7 

Fiscal Monopolies 

Fiscal monopolies represent, in effect, a combination of domestic excise 
and export taxation. This is true especially of the Thailand rice monopoly 
because substantial quantities of its sales are domestic. 8 Occasionally, the 
major emphasis is on domestic sales, as with the Iranian fiscal monopoly 
of tobacco, opium, cotton piece-goods, sugar, tea and matches, which 

4. See pp. 290-92, above. 

5. It must be in this sense that Wallich and Adler (pp. cit., p. 107) argue that export taxes are borne by 

6. In Venezuela, royalties on petroleum exports contribute 34.2 per cent of government revenues; income 
and other taxes included, the industry supplies 60 per cent of total revenues; and petroleum exports supply 
80 per cent of the country's available foreign exchange. 

7. Only a small fraction of India's production is for export. 

8* This monopoly provided 10 and 17 per cent of total government revenues in 1948 and 1949. 

Government Sources and the Application of Funds 329 

provides about one third of total government revenues. In the case of oil 
royalties in Iraq, Iran, Venezuela, etc., the foreign market is overwhelm- 
ingly more important. The economic appraisal of fiscal monopolies will 
depend upon the preponderance of the export tax element relative to the 
excise tax element, that is, upon the preponderance of foreign or domestic 
sales, taking into account any price discrimination which may exist. This 
weighting is not necessary to arrive at the conclusion that fiscal monopolies 
are suitable instruments of taxation for underdeveloped areas, for both the 
export tax and excise tax elements offer distinct advantages. But the nature 
of the advantages differs as between the two. 

Consumption Taxes 

In the fiscal systems of most undeveloped areas domestic consumption 
taxes are among the three or four leading sources of revenue. In a sample 
of eleven countries the portion of total tax revenue from this source in 1950 
ran from one fifth to one third with only two exceptions. (See Table 15-3.) 
In the United States in 1950, consumption taxes yielded one quarter of 
total federal and state tax revenue, and in the United Kingdom about one 
fifth. Because it is a staunch producer of revenue and not easily evaded, 
taxation of consumption plays a considerable role in most countries. But 
the less advanced fiscal systems, as the percentages in the table illustrate, 
rely on it heavily as the counterpart to the limited use of income and other 
direct taxes. 

Sumptuary taxation can be made mildly progressive if, as is commonly 
the case, it is confined to liquors, tobacco and other luxuries; if levied on 
articles of common consumption such as salt, matches, and even food and 
raiment, it becomes regressive. But the case of India seems to show dra- 
matically how the combination of high excises on expensive luxuries and 
low rates on minor luxuries, if they are consumed by millions of persons, 
can tap levels of income perhaps those somewhat above the lowest levels 
which income taxation cannot exploit. 

Taxes on Capital and Property 

A number of observers recommend the capital gains tax to appropriate 
part of the windfall which may come with rapid development. 9 As in a good 
share of the "advanced" countries, the taxation of real property seems to 
leave ample latitude for improvement, and this is particularly true of taxes 
on agriculture in the Far East. A besetting defect of rural land taxation is 
the inequitable assessment of values, sometimes the result of cadastral 
surveys long since outdated, sometimes the outgrowth of official corruption 
or inertia. 

9. Its use in India is said to have been not very successful. 

330 Approaches to Economic Development 




Tax Yield in Local 
Currency Units 

Percentage of Total 
Tax Revenue 



Burma h 



Indonesia 11 



Pakistan 1 * 



India 6 



Middle East 

Iraq d 



Iran 6 










Latin America 

Peru h 



Cuba 1 

. . 


Guatemala 1 

9 . 




Sources Publications of the United Nations as follows: Department of Economic Affairs, Economic 
Survey of Asia and the Far East, 1950, New York, July 13, 1951, Table 127, p. 437; Public Hnance Surveys: 
India, November 1951, Table 6, p 48; Public Finance Information Papers (ST/FCA/SER.A), No 5, Iraq, 
New York, April 1951, Table 3, p 39; No. 4, Iran, New York, March 1951, Table 4 (a), p 31 ; No. 3, Italy, 
New York, June 1950, Table 6, p. 70; No. 6, Peru, New York, October 1951, Table 13, p 27. Also Overseas 
Economic Surveys Turkey, April 1950, H M S O , London, 1951, Appendix IT, p 128 International Bank 
for Reconstruction and Development, Report on Cuba, Washington, 1951, Table 129, p 669, John H Adler, 
Eugene R. Schlesinger and Ernest C. Olson, Public Finance and Economic Development in Guatemala, 
Stanford University Press, Stanford, 1952, Table 18, p 59. 

a. Fiscal year 1950 is August 15, 1949 to March 15, 1950. Figures for Burma, Indonesia, Pakistan and 
Peru are regarded as estimates only by relevant sources Data here are rounded. 

b. In some instances, license taxes, stamp duties and "other" taxes have been included in consumption 
taxes. However, only those countries for which such amounts are very minor have been included in this table. 

c. States of Indian Union only. Consumption taxes include sales and excise. 

d. Excise, animal and Istihlak taxes. Istihlak is a tax on agricultural produce collected at the time of sale 

e. Excise tax only. 

f. Transaction and consumption (including petrol tax). 

g. General turnover tax and excise tax. 

h. Figure here refers to excise and transaction (Transaction tax [60] includes stamp duties ) 
i. Refers only to consumption taxes 
j. Figures are for fiscal 1948 

One alternative to taxes based on land values is the levying of taxes on 
agricultural produce as it is brought to market. This has the merit of cer- 
tainty, but the trouble is that the peasant comes to bear a heavier tax load 
than the city dweller, whose product is less visible to the tax collector. So 
it has seemed in Japan and parts of India. 10 Moreover, the taxing of farm 
produce as it reaches the market is expensive and subject to considerable 

10. United Nations, Economic and Social Council, Land Reform Defectun Agraiian Structwes as 
Obstacles to Economic Development, New York, 1951, pp. 43-48. 

Government Sources and the Application of Funds 331 

evasion. During the fiscal years 1943/44 and 1944/45, Iran tried another 
alternative in the form of a special agricultural income tax, but without 
success; it reverted to taxing the land. The Indian provinces are in the 
process of revising the agricultural income tax, which forms the chief 
source of provincial revenue. 

The opinion has often been voiced that improved property taxes may 
work better in relatively primitive economies than the attempt to apply 
income taxes to the land. 11 First and foremost, the improvement would 
imply full and equitable assessment and the adjustment of rates to equality 
with the tax burden in other parts of the economy. As a part of a general 
reform of agricultural taxation, attention might well be given to numerous 
suggestions for a special tax on uncultivated land. In virtually no country 
do property taxes form an important part of central government revenue; 
but their improvement would substantially aid the various units of local 
government. However, bad systems of land tenure have probably been a 
greater obstacle to progress than have defective systems of taxation. 


Certain fiscal measures, in contradistinction to types of taxes, have been 
designed specifically to further economic development. A number of coun- 
tries, including Colombia, El Salvador, Guatemala, Mexico and Puerto 
Rico, have granted more or less complete immunity from taxation to new 
industries in certain stipulated categories for various periods, ten years 
being fairly typical. In Guatemala the results are said to be moderately 
successful; but in commenting on tax exemption in both Guatemala and 
Colombia, reports of the International Bank warn that it is no less im- 
portant to discourage uneconomic and speculative investment than to 
encourage new productive ventures. In Mexico, tax immunity was first 
applied in 1926 to a very few new industries for short periods; but since 
then, the number of industries and the period of exemption have grown, 
the granting of exemptions has been made partly a matter of administrative 
discretion, and a number of states have joined in the fun. Sanford Mosk, 
who devotes careful study to this phenomenon in Mexico, discovers that 
small firms have not been especially favored, that the concept of "new" 
industry has been interpreted with increasing generosity, and that vested 
interests have been created in perpetuating the exemptions. Despite these 
drawbacks, it is said, tax exemption has successfully stimulated industrial 

11. John H. Adler, "The Fiscal and Monetary Implementation of Development Programs," American 
Economic Review, Proceedings, May 1952, p. 594. 

332 Approaches to Economic Development 

Tax Exemption versus Subsidies 

Against this background it would seem that direct subsidies or loans 
would be preferable to tax exemptions on the same grounds that subsidies 
are frequently advocated by economists in preference to tariffs. The overt 
nature of the subsidy and the fact that it must be subjected to comparison 
with other demands on the budget argue in its favor. Problems might of 
course arise since specialized government institutions would probably be 
entrusted with the detailed allocation of subsidies or loans. 12 

Tax Discrimination: Earmarking 

Tax discrimination favorable to the reinvestment of profits offers a milder 
form of persuasion in regard to which there can be only minor misgivings. 
In the United States, tax discrimination in the opposite sense has been 
supported frequently by argument and occasionally in practice by special 
penalties on undivided profits. In this country the danger is that several 
factors, including tax considerations and mere self-esteem, may induce a 
firm to excessive reinvestment in its own venture. But in the underdeveloped 
world, the temptations to export capital, to venture into speculative activ- 
ities and to consume may justify some tax discrimination to induce re- 

A substantial number of countries have sought to guarantee the financing 
of economic development by earmarking certain sources of revenue for 
specific development projects. This procedure has been rather persuasively 
supported by the argument that revenue derived from the sale to foreign 
countries of irreplaceable natural assets should be devoted to an equal 
upbuilding of the home country's productive equipment. But, of course, 
this desirable result can be achieved through the effective investment of 
government revenue from any source or, quite possibly, through private 
investment. The aggregate amount and the direction of investment matter, 
but the source is secondary. A more important purpose of earmarking has 
been to protect funds for development from incursions by corrupt govern- 
ments or pressure groups. Where this precaution is not necessary, it would 
be better to avoid earmarking because of the budgetary rigidity it entails. 

More important to economic development than the inventive novelty of 
devices such as these is a soundly conceived, effectively organized and 
honestly administered revenue system. Most commentators, both official 
and unofficial, complain of the needless proliferation of taxes, particularly 
in the Orient. The five or six taxes reviewed here usually produce nine 
tenths of the tax revenue even as matters stand. Unproductive nuisance 
taxes should be abolished and the main taxes should be simplified and 

12. United Nations, Department of Economic Affairs, Domestic Financing of Economic Development, 
New York, 1950, pp. 44-45. 

Government Sources and the Application of Funds 333 

codified. Still more important, methods of administration in many cases 
require a general overhauling to prevent laxity on the one hand and whole- 
sale evasion on the other. In some cases the elimination of corrupt officials 
is the prime requisite. The Bell report on the Philippines was able to suggest 
improvements in the revenue system which would increase its yield by over 
one third; the Abbink report on Brazil, by one tenth; the Britnell report on 
Guatemala, by about one fourth. These reports would accomplish increases 
of these amounts despite a general shifting of the tax systems toward 
greater progressiveness through increased use of personal and business 
income taxes, capital gains and excess profits taxes, etc. While neither ideal 
equity nor optimum yield may be expected of tax systems in many coun- 
tries, the improvement of revenue systems throughout the underdeveloped 
world offers one of the greatest unexploited instruments of economic 


Insofar as government outlays for development go into well-conceived 
long-term investments, there is nothing adverse to borrowing. Indeed, in 
Sweden and a number of other countries this logic has led to a dual budget 
system, one budget being devoted to current and another to capital out- 
lays. In Sweden, the system seems to be more the immediate outgrowth of 
the idea of deficit financing in depressions than related to economic de- 
velopment; but the ultimate rationale is the same. 

Chief Problems of Borrowing 

In the present context of domestic finance, the chief problems of borrow- 
ing for the governments in underdeveloped areas are the absence in some 
cultures of any habit of saving, the lack of organized markets for govern- 
ment securities and of demand on the part of commercial banks and insur- 
ance companies, together with the leaning of the governments themselves 
toward inflationary finance and the public fears of inflation. 13 Most of these 
matters have been touched on already, but one important aspect must be 
mentioned. Compared to the capitalistic nations of the West, countries in 
the rest of the world usually have much smaller national debts relative to 
their national income. Belgium's national debt in 1950 was equal to nearly 
94 per cent of her national income, Canada's to 117 per cent, while in 
Brazil (1949) and India the percentages were 18 and 28. (See Table 15-4.) 
This better debt position is somewhat offset by higher interest rates. Never- 
theless, relative freedom from debt is in itself an advantage from both 

13. Thus in Turkey less than 10 per cent of the public debt has been purchased by the public out of 
savings; see International Bank, The Economy of Turkey, p. 21 1. 


Approaches to Economic Development 

fiscal and monetary angles. If the increase of debt can be managed without 
inflation, economic development can be partly financed without bearing too 
heavily on the poor man. 


Relatively Developed Economies 

Relatively Underdeveloped Economies 



















Ceylon b 


United Kingdom 




United States 






Peru a 




Sources. Computed from United Nations, Statistical Yearbook, New York, 1952, except 1949 data, which 
are from United Nations, Economic and Social Council, Public Finance Developments in Latin America, 
Mexico City, 1951. 

a. Debt and national income for 1949. 

b. Gross national product instead of national income. 


Some of the most important aspects of government expenditures have 
already been examined : the roles of private and of state expenditures in 
development, priorities in government spending for this purpose, and the 
problem of inflation. 14 But certain aggregative aspects of public spending 
are quite significant, and none more so than the enormous disparities 
obtaining among the underdeveloped countries in per capita government 
expenditure for all purposes. In 1949-1950 the United States spent $282 
per capita while India spent $2; even Venezuela, despite the fabulous 
yields of petroleum in royalties and income and other taxes, spent only 
34 per cent as much on each inhabitant as the government of the United 
States. (See Table 15-5.) 

Data on per capita government expenditure for development are difficult 
to secure and still more difficult to evaluate. The gap between the poorer 
and richer underdeveloped countries in dollar outlays by government for 
development is abysmal. Per capita, India spent $0.12 for this purpose in 
1949-1950 and Venezuela $33. (See Table 15-5.) When government expend- 
itures are broken down into their major components, as in Table 15-6, 
"investment" presumably represents the chief development item, though 
not all investment is necessarily developmental. Unknown parts of "loans 
and advances" and "social services" should probably also be allocated to 

14. See pp. 289-95 and 308-13. 

Government Sources and the Application of Funds 


development. It is evident that "national defense" cuts into development 
heavily in India and Pakistan ; and "other current" mostly the overhead 
cost of government takes a startlingly heavy proportion in Iran, Iraq and 
Jordan. Perhaps the best indicator of the proportion of government outlay 
devoted to development in a broad sense is the combined total of social 







Per Capita 

Per Capita 









of Dollars) 

of Dollar*) 



India a 






0.12 b 









188 d 




















Venezuela 1 














United States 


Source*: Calculated from following publications of the United Nations: Department of Economic Affairs, 
Public Finance Surveys India, New York, November 1951, Table 1, p. 33; Venezuela, New York, January 
1951, Table 1, p. 81 and Table 2, p. 82; Public Finance Information Paper* (ST/ECA/SER.A), No. 1, Egypt, 
New York, January 1950, p. 5; No. 4, Iran, New York, March 1951, Table 3 (a), p. 25; No. 3, Italy, New 
York, June 1950, Table 3, pp. 61-63; No. 6, Peru, New York, October 1951, Table 5, p. 13; Philippines, 
Economic Survey of Asia and the Far East, 1950, New York, July 13, 1951, Table 125, p. 420; conversion 
based on Federal Reserve Bulletin, exchange rates for December 1949. 

a. Singapore not included. 

b. State development expenditure in 1949-1950 was 1,065 million rupees, so that per capita expenditure 
on development by federal and state units would amount to roughly $0.77. This, of course, ignores the 
interstate variations both in expenditure and population. 

c. Financial year ending February 28, 1950. 

d. Figure is for "total expenditure (including gross expenditure of public undertakings) " 

e. Figure includes "public works" and "new works (including five-year plan)." Item "gross expenditure 
of public undertakings" is not included since "renewal of railways" is included as a five-year plan expendi- 

f. Arithmetic mean of buying and selling rate was used in converting to dollars. 

g. Figure includes "capital and development expenditure," which "includes 910 million rials as a part of 
the expenditure of the Seven-year Development projects." 

h. Conversion based on mean daily exchange rate. 

i. Includes expenditures of Department of Economic Development; contributions of capital to autono- 
mous institutions by the Department of Agriculture; expenditures by the Department of Public Works; and 
capital contributions by the Department of Labor and Communications. 

j. Estimate for 1950. 

services, investment and loans. Again the dispersion is very marked; and 
high proportions going to development purposes bear no definable relation 
to development "needs," at least so far as these are measurable by the usual 
criteria of income, health, housing and the like. 

' Government expenditures of certain sorts, as for example on public 
health, are generally made directly. But investment outlays may involve a 


Approaches to Economic Development 




Interest on 
Social Public 
Services Debt 


Total of Social 
Invent- Loans and Loans and 
ment Advances Advances 


Burma b ' 





22 5 


Ceylon b 







India b ' d 





13 13 


Pakistan 1 ' 





10 15 


Malaya b 







Philippines b 





20 1 


Middle East 








Iran 6 













Jordan 8 







.. ..__ ^ , 

Italy 1 







Latin America 

u _^ , 













13 4 


Source*: All United Nations sources with exception of Cuba: Department of Economic Affairs, Eco- 
nomic Survey of Asia and the Far East, 1950, July 13, 1951, Table 126; Review of Economic Conditions in 
the Middle East, Supplement to World Economic Report, 1949-50, New York, March 1951, Table 48, p. 81 ; 
Public Finance Information Papers (ST/ECA/SER.A), No. 3, Italy, New York, June 1950, Table 5, p. 17; 
No. 6, Peru, New York, October 1951, Table 6; International Bank for Reconstruction and Development, 
Report on Cuba, Washington, 1951, Table 131, p. 679. 

a. Figures are estimates of varying degrees of accuracy. All figures are rounded. 

b. Defense expenditure of military department plus capital outlay for defense purposes. Social Services : 
education, public health and public assistance (in some countries those services provided primarily by local 
government). Investment: public works expenditure on a gross basis, capital outlays of government enter- 
prise and grants to local authorities. Loam and Advances, net basis and granted mainly to provinces for 
capital expenditure. 

c. Burma current expenditure includes the net results of government sales and purchase of supplies. 

d. Interest on public debt is given on a net basis, e.g., after deduction of interest received from public 

e. Data refer to expenditure of central governments, the net results (loss) of public undertakings. The 
distribution of expenditure among the different categories is somewhat arbitrary because of the nature of 
available data. Defense: capital outlays for military purposes as well as current expenditure. Social Service**. 
includes education, public health and social welfare. Public Works ascertamable expenditures of capital 
nature. Public Debt, includes interest and redemption payments Other Current, civil administration, such 
as outlays to various ministries and departments and transfer payments. 

f. Other Current the classifications "other," "general administration" and subsidies. Subsidies refer to 
grants to state enterprises to meet current deficits, including wheat subsidy. Defence: defense and expendi- 
tures arising from war and peace treaty. Investment and Loans, classified as capital expenditure (other than 

g. Social Services: pensions are included in amount of 4.1. Interest on Public Debt: debt service and 
amortization. Other Current: deficit of public enterprise and food subsidies. Investment and Loans: includes 
public works and capital contribution to government-controlled banks. 

variety of intermediaries, as is true also of private investment. Indeed, the 
quality of these intermediaries forms an important element in the financing 
of economic development. 

Government Sources and the Application of Funds 337 


Capital funds may at times be applied directly, without intermediaries, 
by the economic agents who originate them as capital, to the purchase or 
fabrication of capital goods. This may be the case with the maintenance 
and improvement of farms, shops and business property, with the reinvest- 
ment of corporate earnings and with projects carried on directly by the 
state. But generally, financial and administrative organs intervene, whether 
the capital funds originate in taxation, domestic saving, foreign borrowing 
or credit creation. Economic development depends heavily upon the func- 
tioning of these intermediaries, which are sometimes also creators of 
capital funds. 


Aside from the usurious village moneylender, commercial banks are the 
oldest of these intermediaries. Historically, they made their appearance in 
the port or capital cities of the underdeveloped countries and were devoted 
to financing the exports and imports of primary producers, generally with 
funds supplied by foreigners. Since the principal traders were often few and 
concentrated in the largest towns or cities, commercial banks dealt with a 
restricted and favored clientele, rarely having contact with industrial pro- 
ducers or the agricultural back country. 

Even today in parts of Southeast Asia, the Near East and Africa, com- 
mercial banking answers to this description. In other parts of these regions 
and in numbers of Latin American countries where commercial banking 
has developed and spread to the smaller cities, it nevertheless still bears the 
marks of these early origins; and these characteristics limit its role in 
economic development. 

Limitations of Commercial Banks 

But other considerations signify that the commercial banks should not 
finance economic development past a certain limit. In the first place, com- 
mercial banks are custodians of demand deposits, and if they become 
heavily committed in their loan portfolios or investments to long-term 
industrial or agricultural requirements, their solvency, and hence the finan- 
cial liquidity of the country, is put in jeopardy. 15 

Nevertheless, it is clear that commercial banking should play an integral 
role in development. The financing of trade and of the short-term inventory 
needs of industry and agriculture is itself important. Furthermore, there 
seems to be considerable agreement that, if the regulatory authority speci- 

15. See United Nations, Domestic Financing of Economic Development, pp. 60-63. 

338 Approaches to Economic Development 

fies limits, a certain proportion of the banks' assets can safely go into 
medium- and long-term financing of industry. 16 Again, if commercial banks 
do not absorb government bonds to an inflationary extent, they can, as 
Mosk points out, contribute to the establishment of an effective govern- 
ment bond market. 17 And such a market is highly desirable for the pro- 
vision of "social capital" undertakings by the state and as a prerequisite of 
monetary control, at least through central bank open-market operations. 
The ancillary activities of commercial banks in maintaining savings ac- 
counts and time deposits and in the clearing of checks, although these 
services can be supplied by other means, also justify their existence and 
geographic expansion. Finally, organized domestic capital markets are al- 
most inconceivable without commercial banks ; only completely controlled 
economies can advance far without them. 

The Growth of Central Banks 

Central banks, on the other hand, are a relatively recent phenomenon 
even in some of the modern industrialized nations of the West. Their 
number has grown in two great waves, one following the first world war 
and the recommendation of the Geneva conference in 1922, and the other 
during and after the second world war. In the less developed regions, the 
first wave included South Africa (1920), Colombia (1923), Australia (1924), 
New Zealand (1933), India (1935), Costa Rica (1937) and Venezuela (1939). 
The second wave has been even larger and has left practically no country 
without either a central bank or a dominant commercial bank carrying on 
central bank functions. 18 

Relationship of Commercial and Central Banks 

In relatively primitive financial communities, it is perhaps natural for 
commercial and central banking to be undifferentiated; moreover, an 
orthodox central bank can scarcely antedate the emergence of a domestic 
capital market. 19 Often the central bank has evolved from a commercial 
bank, but in this evolution the bank usually allowed its commercial opera- 

16. Ibid., p. 63; Report of the Joint Brazil-U.S. Technical Commission, p. 573; International Bank, The 
Basis of a Development Program for Colombia, p. 165. 

17. Mosk, op. cit., p. 233. 

18. Other central banks include those of Argentina, Chile, Cuba, Bolivia, El Salvador, Ecuador, Korea, 
Mexico, Turkey and China. The central bank of Afghanistan was established early in World War II (1941). 
Others followed in Ceylon (1942), Paraguay (1944), Albania (1945), Guatemala (1946), the Dominican 
Republic (1947), Pakistan (1948), the Philippine Republic (1948), the Belgian Congo and Ruanda-Urundi 
(1951), Egypt (1950), Honduras (1950), Indochina (including the states of Laos, Cambodia and Viet Nam) 
(1952), Israel (1952), Libya (1951) and Peru (1951). Banks have been proposed for the following: Brazil, 
Haiti, Indonesia, Nicaragua, Southern Rhodesia and Surinam. Data from International Monetary Fund, 
International Financial News Survey, various issues. 

19. In Saudi Arabia the lack of a central bank and of conditions auspicious for establishing one led to the 
creation of the Saudi-Arabian Monetary Authority on April 10, 1952. Sec International Monetary Fund, 
International Financial News Survey, May 30, 1952. 

Government Sources and the Application of Funds 339 

tions to fall into desuetude, since it appeared improper to risk compromis- 
ing public functions by private profit activities. This process of divorcement 
was vastly accelerated by another postwar wave, the spate of nationaliza- 
tions of central banks, which still continues. 20 Nevertheless, the central 
banks of Australia, Finland, Egypt, Brazil, and even the Banque de France 
carry on commercial banking, though in some of these cases there is a 
movement afoot toward reform. In Chile, of recent years, the central bank 
has not been permitted to deal with the public. 

Chief Functions of Central Banks 

The main argument against allowing the central bank itself to participate 
directly in financing economic development is that this would deflect its 
attention from and undermine its devotion to the primary responsibility it 
has for credit control and economic stability. 21 This is essential if economic 
development is not to undergo disastrous cyclical reversals. During the 
1930s and the early 1940s, central banking suffered an eclipse in both theory 
and practice relative to this function, first because of the preponderant 
importance of fiscal measures to combat depression and subsequently be- 
cause of the sacrifice of monetary stability to the maintenance of govern- 
ment bond markets. But in Western Europe and to some degree in the 
United States and England the past two or three years have witnessed a 
return to monetary orthodoxy which may in some measure be reflected in 
the economically less developed countries. Whether nationalized or not, it 
would be valuable if central banks preserved intact the reputation which 
Wallich believes they have acquired in many countries "as the defender of 
long-time viewpoints vis-a-vis the frequently short-time viewpoints es- 
poused by the government." 22 

In addition to its responsibility for avoiding inflation and deflation, the 
central bank of a developing economy has two further major duties: main- 
taining equilibrium in the international balance of payments (discussed in 
Chapter 18); and purchasing or, preferably, through the provision of 
loans or rediscounts, enabling the commercial banks to purchase govern- 
ment bonds or the paper of government development agencies, in amounts 
compatible with the objective of stability. In terms of the division of labor 
and functional responsibility, it seems best for central banks to concern 
themselves with the daily administration of domestic and external stability, 

20. See M. A. Kriz, "Central Banks and the State Today," American Economic Review, September 1948, 
pp. 565-81; A. F. W. Plumptre, Central Banking in the British Dominions, University of Toronto Press, 
Toronto, 1940. 

21. United Nations, Domestic Financing of Economic Development, p. 67; International Bank, The Basis 
of a Development Program for Colombia, pp. 571-73; Report of the Joint Brazil-U.S. Technical Commission, 
pp. 163-65. 

22. Henry C. Wallich, Monetary Problems of an Export Economy, The Cuban Experience, Harvard Uni- 
versity Press, Cambridge, 1950, p. 283. 

340 Approaches to Economic Development 

leaving the financing of economic development to commercial banks and 
to the specialized credit institutions which have sprung up in all developing 


Specialized credit institutions supported by government funds boast 
several conspicuous advantages. Unless a country has progressed rather far 
in the process of development, the brunt of financing will probably have 
to be borne by the* state. An impossible administrative load would be put 
on the conventional central government departments if the detailed admin- 
istration of development projects, loans and grants were not delegated. The 
specialized bank or authority may foster professional expertness and esprit 
de corps. Furthermore, it is often able to cut across the conventional lines 
of government jurisdiction to expedite action; this was said to be one of the 
chief gains of the Damodar River Development Authority in India. On the 
other hand, though a certain degree of autonomy is desirable for these 
industrial banks, rural banks, development corporations, and the like, the 
central bank or national treasury must retain general control over their 
loans, investments and grants, not only through the power to refuse redis- 
counts or funds, but also through specific policy directives. 23 Moreover, the 
proliferation of special government corporations can lead to confusion and 
inefficiency; and they can become ridden with corruption. 

Experience with Special Credit Agencies 

No point would be served by a lengthy review of these institutions. It 
will suffice to point out that experience with them has not always been 
fortunate. The Bell report on the Philippines found that the twenty-four 
government corporations had reached a sad state of ineffectiveness and 
proposed a reduction in their number and the establishment of a Philippine 
Development Corporation to hold the stock of all government corporations 
and to carry through a general housecleaning. 24 The widely known Nacional 
Financiera (National Finance Institution) of Mexico has been the largest 
source of funds for industrialization in that country, according to Mosk, 
but has failed to care for the needs of small firms and furthermore has not 
succeeded in educating the public to invest in industrial securities. 25 But the 
Nacional Financiera operates to better effect than do the hundreds of 
private Mexican financiera, which form an approximate analogue to 
United States investment banking houses. In the case of Iraq, the Interna- 

23. Wallich (op. cit., p. 298) recommends the establishment of these institutions for Cuba, only with this 

24. The Bell Report, p. 67. 

25. Mosk, op. ctt., pp. 253-55. 

Government Sources and the Application of Funds 341 

tional Bank has proposed extending the operations of the Industrial Bank 
by a substantial increase of its capital. In Brazil and Turkey similar institu- 
tions have already been established, and for Ceylon, the Bank has recom- 
mended that one be created. 

The merits of the government-supported specialized corporation differ 
from country to country, relative to both central government lending and 
private underwriting. The case for the government-financed bank is prob- 
ably strongest in agriculture, because of the tenuous financial resources of 
the small farmer or peasant; and most of the less developed countries have 
established such institutions. 26 There can be little doubt that, despite occa- 
sional weakness and failures, autonomous government corporations are 
destined to play a large role in future economic development of the less 
advanced countries. Some of these corporations are the outgrowth of 
recommendations by international advisory commissions and have drawn 
upon their well-informed personnel. 27 


Financial measures taken by the state to promote economic development 
range from steps designed to further private enterprise in certain especially 
desirable lines of production to direct operation by the government. De- 
velopment banks, even in the most liberal economies, will exercise some 
selection in the purposes of their loans, or in the types of loans which they 
underwrite. It is no far cry from this to the laying down and rationing of 
maximums on commercial bank loans for purposes regarded by the state 
as unessential, to discriminatory reserve requirements and to other sorts 
of selective credit controls. Tax exemption would seem to be more far 
reaching as a measure of favoring certain types of production because of its 
protracted duration. From this point, the range of variation to some form 
of socialism includes direct controls, such as material allocations and the 
rationing of finished products, state undertakings in the field of public 
utilities, the launching of new industries by the government itself, collec- 
tivization of agriculture and the nationalization of existing industries. All of 
these may, of course, exist side by side in the same economy, together with 
private enterprise. 28 

This inquiry into the domestic sources of capital for economic develop- 
ment has led through many complex matters: numerous institutions to 

26. United Nations, Land Reform Defects in Agrarian Structure as Obstacles to Economic Development, 
pp. 37-43 and 74-77. 

27. This appears to be the case with the newly created National Bank for Economic Development in 
Brazil. See New York Times, July 11, 1952. 

28. In connection with the present theme of financing, it may be worth while to observe that the sale of 
industries once they are established, following the pattern of Japanese industrialization, sets free the capital 
resources of the state, though not of the economy, for new projects. 

342 Approaches to Economic Development 

increase voluntary saving; various direct compulsions; the gamut of tax 
and other revenue sources for capital formation by the state; and an array 
of institutions to transmit accumulated capital funds to actual use. In all 
of these problems of detail there are examples enough of superior and 
inferior ways of doing things. 

It must be amply evident that there is no royal road to economic 
progress. The salvation of the millions whose lives are "poor, nasty, 
brutish and short" by reason of low incomes will not be achieved by a few 
brilliant insights or miraculous policies. If at all, it will come through the 
patient improvement of human institutions, including, in a prominent 
place, the domestic institutions of finance. Among the royal roads which 
have proved to be only detours is inflation. As the British economist Joan 
Robinson has pointed out, monetary expansion offers little or nothing to 
underdeveloped economies in which idle plant and equipment scarcely 
exist. Finally, a scrutiny of the problems of domestic finance suggests 
strongly that "technical assistance" should not be conceived solely in 
physical terms. Native intuition will no more supply good fiscal and finan- 
cial practices than good strains of cattle or well-designed machines. The 
several "joint technical commissions" of creditor and borrower member- 
ship have supplied essential elements from both sides for good economic 
government in countries aspiring to development. This fact should be 
given wide recognition, as wide as the more obvious contributions of the 
physical sciences. 

16. Financing Economic Development 
from Foreign Private Capital 

DURING THE SEVEN AND A HALF YEARS from mid- 1945 to the end of 1952, 
the United States government transferred nearly $41 billion in capital 
abroad, while private investment totaled about $5.5 billion. The combined 
total of $46.5 billion amounts to $6.2 billion annually, which represents in 
some ways a notable achievement. 1 But in the decade preceding the first 
world war, Great Britain made foreign investments at an annual rate of 
150 million, which, as Sir Arthur Salter has pointed out, would equal $2 
billion annually at price levels in the United States after World War II. 2 
Had the United States sent capital abroad after 1945 at a comparable rate, 
it would have transferred annually $8 billion (allowing for the difference in 
populations) instead of $6.2 billion. And the $6.2 billion was, of course, 
reached only by an extraordinary effort at postwar reconstruction, the 
launching of international lending agencies and economic aid, whereas the 
British investment was largely private and spontaneous. 

What has changed the scene so vastly? For a variety of reasons, much of 
the spirit has gone out of private international investment. 


In part this decline of private foreign investment results simply from 
inadequate rates of return ; but it has been due also to hostile ideas and 
ideologies, including Marxian doctrines, in the capital-poor nations. Thus 
the Colombo Plan is roundly condemned because it "deliberately" devotes 
so large a portion of planned expenditures to agriculture and a small 
portion to industries which, it is said, could compete with the output of the 
lenders. "It proves once again the Marxist contention that finance capital 
dominates the world." 3 Suspicion of foreign capital, particularly of direct 
investments, is sometimes linked with the conviction that developing coun- 
tries need have no worries concerning a sufficiency of funds from abroad 
because the United States must export capital to prevent wholesale unem- 

1. A substantial part of this sum merely replaced war damages to foreign productive capacity or sustained 
consumption during the reconstruction. 

2. Sir Arthur Salter, Foreign Investment (Essays in International Finance, No. 12), Princeton University 
Press, Princeton, February 1951, p. 3. Conversion based on pound-dollar rate prevailing before 1914. 

3. N. M. Perera, "Some Observations on the Colombo Plan," Ceylon Economist, February 1951, pp. 


344 Approaches to Economic Development 

ployment at home. 4 Xenophobia in economic matters sometimes keeps 
foreign investment out of such basic national projects as the utilities, rail- 
ways and harbors, exactly where capital needs are most vital. 5 If private 
foreign capital is encouraged by the government of the borrowing country, 
the young nationalists accuse it and the foreign investors of being the 
stooges of colonialism and repression. 6 Among the peasants of the Near 
East, foreign investment in agricultural facilities may merely stiffen re- 
sistance to progress, because they believe the benefits accrue only to the 
landlords. 7 The political atmosphere of Guatemala currently is hostile to 
foreign capital and enterprise. 

But a substantial number of cases could be cited of countries that wel- 
come foreign private capital without any substantial reservations. The 
government of India has taken this position lately and its recent agreement 
with the Standard Vacuum Oil Company concerning the erection of re- 
fineries bears out its declarations. 8 Where American private investment in 
the underdeveloped world is greatest, the opposition seems to be least, that 
is, through most of Latin America. For example, it was reported to the 
United Nations Economic Commission for Latin America with respect to 
Venezuela that "in spite of the fact that it operates with foreign capital, 
the oil industry is national, not only in a geographic sense, but also by 
virtue of its economic effects on the country." 9 Thus ideological obstacles 
to foreign capital are by no means universal, but distinct impediments 
do exist in certain Latin American countries and in some of the newer 
republics of Southeast Asia. 

The chief impediments to the flow of international investment, however, 
are to be found not on the demand but on the supply side. Of these, the 
greatest are the fear of expropriation of direct investments or default on 
bonds, 10 and fear of the suspension or delay of profit or interest remittances 
through moratoria or exchange controls. Misgivings as to the stability of 
governments pertain fundamentally to these two contingencies, which are 

4. The present writer ha<r observed that this attitude is widely held in Japan. H. C. Wallich's similar 
impressions in Cuba are reported in Monetary Problem? of an Export Economy: The Cuban Experience, 
Harvard University Press, Cambridge, 1950, p. 26. 

5. H. J. Dernburg, "Prospects Tor Long-Term Foreign Investment," Harvard Business Review, July 1950, 
p. 45. 

6. V L. Horoth, "Can Africa Replace Asia as a Source of Raw Materials?" Magazine of Wall Street, 
June 30, 1951, pp. 351-53 and 377-78. 

7. Doreen Warnner, Land and Poverty in the Middle Eait* Royal Institute of International Affairs, 
London. 1948, p. 139. 

8. "Government and Business --Agreement with the U.S. Oil Company," Indian Finance, December 15, 
1951, p. 1025. 

9. "The Boom That Never Burst," The Economist, June 28, 1952, pp. 901-06. 

10. The defaults eventually proved to be less serious than sometimes imagined. Of the bonds issued by 
countries in the underdeveloped areas from 1920 to 1931, 40 per cent were not defaulted on; 45 per cent, 
though defaulted, have been refunded and are now serviced ; and 1 5 per cent are still in default. See Report 
to the President on Foreign Economic Policies, Washington, November 10, 1950, p. 62 (hereafter called the 
Gray Report). But the psychological shock outlasts the defaults 

Foreign Private Capital 345 

fatal to foreign investment, whether of the direct or portfolio kind. Further- 
more, in contrast to the golden age of private investment before the first 
world war, the controlling stockholding interests cannot always be relied 
on to conduct the affairs of the firm equitably for foreign bondholders. 
Geographic proximity to the U.S.S.R. and its spheres of influence is a 
factor that makes a region unattractive to the private investor. In the 
creditor countries much capital is concentrated in institutions such as life 
insurance companies, investment trusts and savings banks, which cannot 
appropriately or cannot legally take the risks of foreign investment. One 
of the great potential capital-exporting countries, the United States, is still 
itself undergoing rapid development, and returns on domestic investment 
are very attractive. 

In addition, direct investment in plant and equipment is subject to certain 
further risks, among which export and import quotas, multiple exchange 
rates and exchange controls, and extensive government regulation prob- 
ably head the list. Foreign owners of plant may be the object of discrimina- 
tion or of special requirements: to pay special taxes, to hire a certain quota 
of native employees, to reinvest certain proportions of profits, etc. Foreign 
participation in ownership may at times be limited to a minority share. 11 
Finally, there may be general factors in the economic setting which are 
unfavorable such as a shortage of trained personnel, inadequacy of the 
basic utilities, uncongenial business laws or business ethics, high taxation, 
inflation and the like. 

Because most of these risks arise fundamentally out of the absence of 
international government or at least of an enforced code of international 
law, they are nothing new. But by contrast with the era of international 
investment extending over the half century preceding the first world war, 
they appeared with sudden intensity in the Great Depression and its after- 
math. The results have been to eliminate portfolio investment almost com- 
pletely and to reduce the total volume of private investment. 

Moreover, the protective tariff policy of the United States has worked 
indirectly but powerfully against her overseas private investment. High 
protection in one of the world's greatest markets has made it more difficult 
for other countries to earn dollars. And this, in turn, has led to legal 
limitations on the transfer of profits and to inconvertibility of currencies, 
both of which deter investment from abroad. 


The virtual disappearance of portfolio investment is not explicable on 
the basis of greater risk than direct investment. Typically, the reverse is 

. 11. See League of Nations, Economic and Financial Organization, Conditions of Private Foreign Invest- 
ment, Columbia University Press, New York, 1946; and United Nations, Economic and Social Council, 
Survey of Policies Affecting Private Foreign Investment (mimeographed), New York, February 1950. 

346 Approaches to Economic Development 

true, for foreign manufacture is exposed to all the hazards of investment 
in bonds together with a whole set of additional risks. But the bond buyer 
usually wants safety, and this quality melted away rapidly in the 1930s and 
has not yet been restored. Foreign investment was left to the professional 
risk-bearer the entrepreneur who for sufficiently high profits takes a cal- 
culated risk in establishing foreign plants. Furthermore, direct investment 
abroad has several distinct advantages over producing within the United 

CAPITAL, 1946-1952 


Total Capital 




Net Additions 
in Underdeveloped 


$ 59 



































Source?: Survey of Current Busmen, December 1951, p. 12; June 1952, p. 21; September 1952, p 8; and 
June 1953, p. 4. 

a. Includes direct and indirect investment but not reinvested earnings. 

b. Includes reinvested earnings. 

c. Estimated from information in National Advisory Council on International Monetary and Financial 
Problems, Semiannual Report to the President and to the Congress, March 31, 1953, p. 5. 

d. Not available. 

States for export. Firms are able to escape the import duties, quotas and 
licenses which repress their markets as exporters, to manufacture under 
local brand names and thus to build up "good will," and frequently to 
produce more cheaply. These considerations apply to direct investment 
which caters to the foreign domestic market. For the foreign direct investor 
in export industries, the prime consideration is and always has been the 
availability of a natural resource, a consideration which seems likely to 
increase greatly in importance for the United States. 12 

Implications of Shift to Direct Investment 

Over the seven-year period 1946-1952 United States portfolio investment 
averaged $143.4 million annually as against $644.7 million for direct invest- 
ment. (See Table 16-1.) Over the decade 1919-1929, by contrast, portfolio 
investment averaged $650 million and direct investment $350 million. 13 

12. See The President's Materials Policy Commission, Resources for Freedom, Vol. I, Foundations for 
Growth and Security, June 1952. 

13. Milton Abelson, "Private United States Direct Investments Abroad," Survey of Current Business, 
November 1949, pp. 18-23. 

Foreign Private Capital 347 

What will this reversal of the roles of portfolio and direct investment, if 
it continues, mean for underdeveloped countries? Since public utilities have 
sometimes been financed by private or state bond issues but seldom by 
direct investment, capital from either domestic or foreign government or 
international agencies must now assume the burden of supplying the where- 
withal for these basic prerequisites of development. 14 Another disadvantage 
of private direct investment is its current tendency to concentrate on 
petroleum. In the past, this concentration was less conspicuous. In 1945, 
for example, petroleum accounted for considerably less private direct in- 
vestment abroad than did manufacturing industries and for not very much 
more than public utilities or mining and smelting. By 1950, however, 
petroleum investment nearly equaled manufacturing investment and had 
far outstripped public utilities and mining and smelting. (See Table 16-2.) 

In terms of its distribution among industries, American business invest- 
ment has by no means shown the "exploitative" nature which has some- 
times been ascribed to it. In 1945, extractive industries formed only 31 per 
cent of the total investment; and manufacturing, public utilities and agri- 
culture, presumably the backbone of economic progress for the borrowing 
economy, absorbed 54 per cent. This type of investment was heavily con- 
centrated in North and South America. But from 1946 to 1950, the 
petroleum industry took just under 49 per cent of private American direct 
investments and reinvestments in foreign countries. An intensifying of 
geographic concentration in specific countries has accompanied this recent 
tendency of petroleum to dominate direct investment. 

Against these drawbacks of direct investment relative to portfolio invest- 
ment stand several noteworthy advantages for underdeveloped regions. 
Direct investment induces the reinvestment of earnings, while portfolio 
investment probably has a negligible influence in this direction. Reinvested 
earnings were equivalent to 80 per cent of the net outflow of private direct 
investment in the years 1946-1952 and made up approximately 42 per cent 
of the net addition to United States direct investments abroad during 
1946-1950. Of course, a large part of this reinvestment might not take place 
if the withdrawal of earnings were not so widely subject to severe exchange 
controls. Direct investment undoubtedly also helps further the transfer of 
techniques, particularly business and managerial techniques, to under- 
developed countries. Finally, since the economic return to direct investment 
occurs in the form of profits instead of fixed interest charges on bonds or 
dividends on stocks, which corporations usually attempt to maintain de- 
spite adversities, it helps the primary producing countries to weather 

14. Indeed, the net movement of foreign private direct investment into public utilities has recently been 
negative. See Table 16-2. 


Approaches to Economic Development 



Area or 

Total Value Total Value 
as of Net Additions During a? of 

31, 1945 1946 1947 1948 1949 1950 31, 1950 




ERP countries 

ERP dependen- 

Other Europe 

All other 







By Area 

$485 $1,111 $1,241 $1,212 $1,132 
136 143 290 263 491 



















By Industry 
$485 $1,111 $1,241 





$1,212 $1,132 $13,550 









Manufacturing 1 ' 

2,671 ' 















Mining and 

















Public utilities 
















Sources- Survey of Current Business, January 1951, p. 22, and December 1951, p. 13, as reported by 
Gardner Patterson and Jack N. Behrman, Survey of United State* International Finance, 1951, Princeton 
University Press, Princeton, 1952, p. 116. 

a. The small differences between "net additions" and the sum of "net outflows" plus "reinvested earn- 
ings," as given elsewhere in the Survey, 1951, is due to "other factors," including some allowance for revalu- 
ation of assets due to changes in exchange rates. 

b. Includes paper and pulp enterprises. 

c. Includes fishing enterprises. 

Net Decline in Private Capital 

Weighing the gains against the adverse aspects would be difficult indeed 
if the shift to direct investment had involved merely a change of propor- 
tions in a constant total. Unfortunately, however, the shift has actually 
meant the disappearance of portfolio investment without a sufficient in- 
crease in direct investment to maintain earlier levels of American foreign 
private investment. The annual average of total private investment of 
$788.1 million for 1946-1952 falls sadly below the annual average of 

Foreign Private Capital 349 

$1 billion for 1919-1929. 15 If the figure for 1919-1929 is adjusted to the 
price level of 1948, the annual average becomes $1.62 billion, 16 which is 
twice the rate for the later years of 1946-1952. 

But is the decline in private international investment really to be la- 
mented, in view of the many charges which have been leveled against "fi- 
nance capitalism" in the underdeveloped regions, and in view also of the pres- 
ent-day alternatives of loans and investments originating with governments 
and international organizations? One particularly insistent complaint 
is that private capital involves excessive costs. There can be no doubt 
that, relative to its earnings in the United States, foreign private capital 
brings high returns in the underdeveloped areas. Direct investment in such 
areas yielded considerably higher returns in nearly all sectors in 1945-1948. 
(See Table 16-3.) But high rates of return do not necessarily mean exces- 
sive profits, as shown by the reluctance of private capital to enter the inter- 
national investment field. The risks of such investment are not simply the 
product of morbid capitalist fantasy. And if the risks are not assumed by 
private capitalists but by a national government or international lending 
agency, they devolve ultimately upon the taxpayers of creditor countries. 

Private capital probably encounters more formidable problems in certain 
countries because of legal and de facto complications for the ownership and 
management of foreign firms than does capital from foreign government or 
international sources. Sometimes the native population is less suspicious of 
foreign governments than of private firms; but more often it is the other 
way around since government loans usually have political implications. 
Private capital has betrayed a notorious penchant to follow the waves of 
prosperity and depression of the creditor countries, a fact set forth lucidly 
a decade ago. 17 The sensitivity of primary producing countries is already 
great because of their export-based economies; they can ill afford to be- 
come still more vulnerable to foreign-induced booms and depressions by an 
intensifying movement in capital accounts. 

Finally, because private capital naturally seeks the optimum combination 
of safety and yields, it has a perverse tendency, from the viewpoint of 
countries standing low in the scale of economic advancement, to move first 
into the stronger regions and the more solid and lucrative industries. At the 
end of 1945, Canada had the lion's share proportionally to population; 
Latin America came next; and the entire Asian and African continents drew 
less than 10 per cent of American private direct investments. 18 By the end 
of 1950, this share had risen to 15 per cent; but this gave cold comfort to 

15. Both figures refer to new transfers, i.e., they exclude reinvested profits. 

16. See Dernburg, he. c//., p. 48. 

17. Hal B. Lary, The United States in the World Economy (Economic Series No. 23), U.S. Department 
of Commerce, Bureau of Foreign and Domestic Economy, 1943. 

18. See Table 16-2. The addition of portfolio investment would make these disparities still more marked. 



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Foreign- Private Capital 351 

most of the underdeveloped world, since a substantial part of the new 
capital and reinvested earnings poured into the four or five chief petroleum- 
producing countries. Public utilities and agriculture, the foundations of 
development in the most needy economies, claimed only 22 per cent of 
American private direct investment in 1945 and had receded still further to 
less than 15 per cent by the end of 1950. 

Advantages of Private Investment 

Private capital has its merits, however. For one thing, and this probably 
supplies the chief motive of the original proclamation of the Point Four 
program in terms of private capital, it takes some of the burden from the 
taxpayers' shoulders no small consideration in view of present defense 
expenditures. If private capital shies away from some of the basic fields for 
development, it nevertheless exploits the immediately productive lines of 
investment and it would be difficult to dispense with these contributions to 
the current product of underdeveloped economies. Private capital invest- 
ment, being nowadays in the foreign field almost altogether direct invest- 
ment, brings with it managerial and technical talents not adhering to public 
capital. The significance of what has been called "private Point Four" has 
not been adequately recognized in most discussions. 19 Most importantly, 
private capital moves on a sound business basis of mutual profit without 
involving moral problems concerning the duty of a creditor country to 
supply capital. It therefore provides a firmer foundation for long-run 
economic relations than does public capital. Last but not least, despite its 
decline from the heyday of the 1920s, new private American capital plus 
reinvested earnings has shown a surprisingly large ratio to the principal 
allocations of public moneys to the underdeveloped areas. In short, private 
capital is indispensable. 

The tendency of private capital to seek the best profit opportunities can 
be compensated for only by general measures to raise the productivity of 
the most underdeveloped countries and the most ailing departments of 
production. But this therapy may require many years to show pronounced 
effects; meanwhile, the poorest economies may require a blood transfusion 
in the form of grants and loans of foreign public funds. Another of the 
characteristics of private international investment that it flourishes in 
prosperity and withers in depression when most needed by the borrowing 
countries can be mastered only by preconcerted schemes, national and 
international, to stabilize economic activity. In this the United States bears 
a heavy weight of responsibility. It would be difficult to believe that this 
perversity cannot be successfully compensated or eliminated. 

19. See Jerome B. Cohen, "Private Point Four in Japan," Fortune, April 1953, pp. 148-49. 

352 Approaches to Economic Development 


Because the supply of capital is sometimes among the immediate factors 
limiting development, and because it will remain so despite national gov- 
ernment and international agency loans, policies designed to stimulate 
private investment in the underdeveloped areas are urgently needed. 


Tax measures to stimulate private investment from abroad fall into two 
categories according to whether they aim merely to eliminate adverse 
discrimination against foreign (mostly direct) investment income, or seek 
to secure positive favorable discrimination through lower tax rates. The 
chief creditor countries have already progressed far toward realizing the 
first objective through eliminating double taxation on foreign income. Some 
countries simply ignore income from this source, while others, including 
the United States, give credit for taxes paid abroad. To prevent complete 
evasion of taxes through the crediting device requires, however, a tax con- 
vention between the two governments concerned. Since 1939, the executive 
branch of the United States government has pressed forward the negotia- 
tion of these conventions, though Congress has often long delayed ratifica- 
tion. 21 In addition to the tax credit, foreign investment earnings of subsidi- 
aries are taxed only when remitted to the United States, so that reinvest- 
ment abroad incurs no liability for United States taxes; and net losses are 
deductible. Furthermore, American citizens resident abroad are exempt 
from the federal personal income tax. 22 

The administration of tax credits could be made more liberal by allowing 
foreign losses to be offset against domestic profits, applying the credit to 
cases in which the American corporation owns less than a majority share 
of the stock, extending the same tax privileges to foreign branches as to 
foreign subsidiaries, and for personal taxation allowing for foreign 
death duties and shortening the period required to establish foreign resi- 
dence. 23 But such measures have only a marginal influence on the decision 

20. For the special privileges extended to United States foreign investors in the Western Hemisphere, see 
United Nations, Department of Economic Aflairs, United States Income Taxation of Private United States 
Investment in Latin America, New York, 1953. 

21. Tax exemption conventions existed with eleven countries up to July 1, 1953 Canada, Denmark, 
France, Ireland, the Netherlands, New Zealand, Norway, Sweden, Swit/erland, the Union of South Africa 
and the United Kingdom. Negotiations with Colombia, Israel and Uruguay have not yet resulted in the 
signing of conventions, and these negotiations have not been mentioned in the State Department Bulletin 
for at least a year. Conventions with Finland and Greece have been ratified but not yet entered into force. 
Ratification of a convention with Belgium is pending. See Gardner Patterson and Jack N. Behrman, Survey 
of United State? International Finance, 1951, Princeton University Press, Princeton, 1952, pp. 86, 87 and 
Appendix, Table IX; Gardner Patterson and J. M. Gunn, Survey of United States International Finance, 
1952, Princeton University Press, Princeton, 1953, pp. 119-20. 

22. U.S. Department of State, Point Four, Publication 3719, January 1950, pp. 69-71. 

23. Ibid., pp. 70-71 ; "Point Four: A Re-examination of Ways and Means," Yale Law Journal, June 1950, 
p. 1294. Some of these measures were recommended to Congress by President Truman. 

Foreign Private Capital 353 

whether or not to invest abroad, or to live abroad, possibly as a technical 
consultant in an underdeveloped country. 

Going much further than the elimination of adverse discrimination, the 
National Foreign Trade Council has recommended the complete exemption 
of foreign-earned income from American taxation. 24 This proposal is some- 
what less extreme than the words may suggest because the United States 
already gives credit for taxes paid abroad. The proposal means specifically 
that the Treasury would lose the revenue it now derives from the difference 
in business taxes abroad, where rates are generally lower, and the tax in the 
United States. But the proposal has generally met with strenuous objections 
on the score of equity, that it would favor first the American firm which 
invests abroad, and second the large corporation, which more probably 
possesses foreign branches than the small concern. In order to avoid 
discrimination, moreover, already existing investment abroad would have 
to be included, but this exemption from taxes would serve no useful pur- 
pose. Along with the proposal that the government guarantee foreign in- 
vestments against certain significant risks, this measure raises the general 
issue concerning overt or concealed subsidies. Tax exemption is a particu- 
larly distasteful form of subsidy and it is not likely to evoke the enthusiasm 
of national legislatures. 


The possibility of double taxation in some cases or of unfavorable tax 
discrimination pales into relative insignificance as a deterrent to foreign 
private investment compared with the various direct restrictions frequently 
imposed on businesses by foreign governments. The risk of imposition may 
be as constraining as the actual fact. These restrictions are numerous, but 
they can be put in six main categories. 25 (1) Foreign firms may be denied 
entry into certain lines of production because they are "strategic" or re- 
garded as especially suitable for domestic enterprise; or foreign ownership 
may be restricted to a minority share. (2) The conduct of business may be 
subjected to stipulations that a certain number of the employees be na- 
tionals, and that all employment be subject to the local minimum-wage 
laws and other types of welfare legislation. These benefits to employees 
sometimes appear to be excessive. (3) Maximum rates of earnings are 
occasionally set for foreign businesses, and steeply progressive taxes on 
profits or excess profits seem sometimes chiefly designed to catch the 
foreign concern. (4) Still more deadly to foreign investment are the limits 
imposed by exchange controls on the transfer of earnings or of capital 

24. National Foreign Trade Council, Private Enterprise and the Point Four Program, New York, May 

25, The sixfold division follows that of the article in the Yale Law Journal cited above, pp. 1304-1 1, with 
some amplification. 

354 Approaches to Economic Development 

sums. (5) Equally serious is the threat of nationalization, expropriation or 
the establishment of directly competitive undertakings by the state. (6) 
Finally come a number of involved questions pertaining to the jurisdiction 
of the local courts and the status of the foreign investor before the law. 

It has several times been proposed to deal with these restrictions, at least 
so far as they seem discriminatory, by international multilateral agree- 
ments. 26 But the complexities of multilateral negotiation have thus far pre- 
vented action. Meanwhile, since the end of World War II, the United 
States has proceeded with bilateral negotiations in order to modernize its 
treaties of Friendship, Commerce and Navigation, some of which origi- 
nated a century or more ago, and to establish them where none existed 
previously. As the Princeton survey points out, however, progress on this 
program has been retarded by the growth of nationalism, particularly in 
the newly developing countries; by the lack of any assurance for the foreign 
country that it would obtain capital from the United States even after the 
conclusion of a treaty; and by the general realization abroad that foreign 
capital enjoys nondiscriminatory treatment in this country even without a 
treaty. 27 

The treaty with Uruguay 28 has frequently been regarded as a model. 
Nationals and companies of the United States are accorded free entry into 
and equal treatment in practically all lines of production with few excep- 
tions, several of which, such as resource exploration and air transport, can 
be ascribed to the inability of the United States to grant reciprocal rights. 
In certain other cases which preclude equal treatment, most-favored-nation 
treatment is granted. American companies are not limited in the hiring 
of personnel, may not be subjected to higher taxes than local businesses, 
and have the same access to the courts and the same property rights. The 
treaty contains a "development clause" stipulating that neither party 
shall be impeded in obtaining "on equitable terms the capital, skills, mod- 
ern technology and equipment it needs for economic development." 
In case of nationalization, a business is to be given prompt and just com- 
pensation; and the transfer of earnings and capital in dollars is assured 
save for the emergency imposition of exchange control by either party to 
give priority to "goods and services essential to the health and welfare of 
its people." 

26. For example, the Havana Charter for an International Trade Orgam/ation, April 1948; Ninth Interna- 
tional Conference of American States, Bogota, Colombia, May 1948; code proposed by the International 
Chamber of Commerce, cited below, in footnote 29. 

27. Gardner Patterson and Jack N. Behrman, Survey of United State? International Finance, 7950, Prince- 
ton University Press, Princeton, 1951, p. 114, and Survey, 1951, p. 87. See Survey, 1951, p. 309 for a con- 
venient list of Friendship, Commerce and Navigation treaties by date of their becoming effective, including 
two in 1948, two in 1949, but none in 1950 or 1951. Others have been signed but not yet ratified by the 
legislatures. The only major negotiations in 1952 were with Japan, and the only new agreement signed was a 
protocol to the 1934 treaty with Finland. Treaties with Poland and Hungary were terminated. Patterson and 
Gunn, Survey, 1952 % pp. 119 and 173. 

28. As of September 1954 not yet ratified by the Uruguayan General Assembly. 

Foreign Private Capital 355 

More inclusive rights than those embodied in the proposed Uruguayan 
treaty have sometimes been demanded, as for example: complete freedom 
of entry for foreign capital into any industry; an unqualified commitment 
to transfer in dollars earnings, capital and compensation for nationaliza- 
tion; or at the least a qualification only for exchange priority for food, 
shelter and medical supplies; reimbursement for adverse effects of govern- 
ment competition and the like. 29 But the wisdom of these demands is 

While it is doubtless in the interest of developing countries to admit 
foreign capital to most spheres of economic activity, preclusive regulations 
in favor of domestic capital may in some cases be warranted. Whether they 
are or not, it would be difficult or impossible to deny this prerogative to 
foreign governments. Unqualified, or virtually first-priority, commitments 
to transfer foreign earnings and capital in hard currencies may be next to 
impossible to fulfill in certain adverse circumstances; they could entail set- 
backs to economic development in underdeveloped areas incompatible 
with the proclaimed purposes of United States policy. For the same reason, 
American business abroad cannot expect immunity from steeply progres- 
sive taxation, social service charges or government competition; indeed, it 
cannot be assured of such immunities even in the United States. 

It is reasonable to expect the American government to seek to gain as 
broad a field of entry for American capital as possible, and to insist on 
national and nondiscriminatory treatment once it is admitted. It is unrea- 
sonable to expect that underdeveloped countries will admit foreign capital 
to all fields, or accord it better than national treatment. It is reasonable to 
obtain pledges of transferability of capital, but not without reservation for 
emergency periods if they are not chronically protracted. Finally, it is rea- 
sonable to seek the negotiation of investment treaties with potential debtor 
countries but unreasonable to prescribe by law that no United States aid 
will be forthcoming until such a treaty is consummated, as the Herter Bill 
proposed. To employ the power of the purse as a bargaining weapon, 
even in defense of commercial principles of the highest type, would en- 
gender resentment and increase the likelihood that the treaty would be 
circumvented. It has been very wisely stated that "such treaties are in- 
valuable if they reflect an already formed intention on the part of under- 
developed countries to welcome the aid of American private capital. . . . 
They are the second and not the first step in the creation of a favorable 
climate." 30 

29. See the "Herter Bill," H.R. 6026, introduced by Representative Herter on August 17, 1949; Inter- 
national Chamber of Commerce, International Code of Fair Treatment for Foreign Investments (Brochure 
r29), New York, 1949; National Foreign Trade Council, op. cit. 

30. William A. Brown, "Treaty, Guaranty, and Tax Inducements for Foreign Investments," American 
Economic Review, Proceedings, May 1950, p. 492. 

356 Approaches to Economic Development 


In the past, private investment from abroad has been nurtured by govern- 
ment guarantees against default of individual firms. But nowadays the 
default of firms has declined in significance as portfolio investment has 
assumed a constantly smaller role; and as direct investment has increased, 
so have the risks peculiar to it. The latter-day risks for foreign businesses 
are, perhaps not surprisingly, the risks of foreign government action which 
may adversely affect the situation. When the disturbing factor shifts from 
the foreign firm to the foreign government, the latter inevitably loses caste 
as a guarantor; the American investor then looks to his own government 
for help. What he most fears are, first, the nationalization, expropriation 
or extensive regulation of his business and, second, the inconvertibility of 
his earnings or capital into his own currency. Ordinary business risks, 
including even the default of foreign firms, do not nowadays enter into the 
discussion of guarantees. Times have changed. 

If the foreign investor could be relieved of these two great risks of ex- 
propriation and inconvertibility, private foreign investment might again 
assume an importance comparable to the days before the first world war. 
Indeed, in view of the great movement toward economic development, 
there might be prospects of an even greater field for investment abroad. 

The government of the United States has taken a few hesitant steps to- 
ward foreign investment guarantees; but obstacles and complications are 
nearly endless. 31 The Economic Cooperation Administration (later the 
Foreign Operations Administration) was given authority to extend guaran- 
tees to stipulated total amounts. But until 1951 the guarantees pertained 
only to new investments in countries participating in the Organization for 
European Economic Cooperation and they still do not include devaluation 
risks. 32 These limitations and the relative novelty of the measure have pre- 
vented its use to any significant extent. The Administration sought, both in 
1949 and 1950, to secure congressional authorization of guarantee powers 
for the Export-Import Bank specifically for the "improvement and growth 

31. Yuan-li Wu, "Government Guarantees and Private Foreign Investment," American Economic Review, 
March 1950, pp. 61-73; Raymond F. Mikesell, United States Economic Policy and International Relations, 
McGraw-Hill, New York, 1952; "Point Four: A Re-examination of Ways and Means," Yale Law Journal, 
June 1950; Brown, he. cit., Salter, op. cit. 

32 The maximum figures were $300 million, $150 million and $200 million in the E.C.A. acts of 1948, 
1949 and 1950. The Mutual Security acts of 1951 and 1952 continued the $200 million maximum but opened 
the way to guarantees for underdeveloped countries by extending the geographic limits to include any area 
in which assistance was authorized by the Mutual Security Program. 

During 1952 there were only eight new guarantees, totaling $5.9 million. As of March 31, 1953, 46 indus- 
trial investment guarantees, totaling $39.6 million, had been issued. Of this sum, $38 million was insurance 
against inconvertibility of foreign receipts and $1.6 million insurance against loss from expropriation or 
confiscation. AH countries for whom aid is authorized under the Mutual Security Act of 1951, as amended, 
are eligible, but so far Turkey is the only non-European recipient. As of March 31, 1953, there had been no 
disbursements and $696,000 had been collected in fees. Cf. Patterson and Behrman, Survey, 1950, pp. 107-09; 
and Survey, 1951, pp. 84-86; Patterson and Gunn, Survey, 1952, pp. 1 18-19; National Advisory Council on 
International Monetary and Financial Problems, Semiannual Report to the President and to the Congress, 
March 31, 1953, p. 16. 

Foreign Private Capital 357 

of underdeveloped areas"; but no legislation appeared and in 1951 the 
President omitted mention of investment guarantees. 33 

The International Bank also has the power to guarantee private loans 
and investments; but the requirement of a guarantee by the government of 
the capital-importing country, the expense of the operation to the borrower 
and other barriers have thus far prevented its use. 34 

Problems Inherent in Guarantees 

Guarantees by national governments hold forth considerable promise 
but a number of objections on principle cannot be ignored. No practical 
purpose would be served by including already existing investments in the 
underwriting, and yet they would encounter a type of unfair competition 
from the new guaranteed ventures. American business interests have shown 
faint enthusiasm for guarantees, possibly because the government would 
require access to corporation records and possibly because the guarantees 
might involve extensive regulation of overseas operations. From a more 
general viewpoint, misgivings have been expressed, even in a United Na- 
tions report, that guarantees by creditor countries might lead to an atrophy 
of incentive on the part of the borrowing countries to establish conditions 
in their own economies favorable to foreign investment. 35 

Other difficulties may arise from the fact that creditor countries will 
scarcely be inclined to underwrite private foreign investments unless guar- 
antees are forthcoming from the capital-importing countries. Thus concern 
for future flows of private capital for development did not prevent the 
Second Committee of the United Nations General Assembly from adopt- 
ing, with the United States casting the sole opposing vote, the Uruguay 
resolution calling upon member states "to respect the right of each country 
to nationalize and freely exploit its natural wealth." An amendment to 
provide just compensation in case of nationalization was rejected. 36 

In order to make the execution of a guarantee manageable if occasion 
should arise, the debtor country may take a precautionary measure in 
simply excluding foreign private capital from certain domestic fields; and 
this works counter to the real aim of guarantees. Fulfillment of converti- 
bility guarantees may impose sudden distortions of trade for underde- 
veloped countries if the guarantee extends to capital withdrawal (in con- 
trast to gradual amortization). And, as Yuan-li Wu also points out as a 
representative of the borrowers' viewpoint, guarantees may invite interfer- 

33. Detailed provisions under present legislation appear in the Investment Guaranty Manual, Mutual 
Security Administration, June 1952. 

34. Salter, op. cit. t p. 43. 

35. United Nations, Department of Economic Affairs, Methods of Financing Economic Development in 
Under-developed Countries, New York, 1949, p. 34. 
36. Patterson and Gunn, Survey, 1952, pp. 122-23. 

358 Approaches to Economic Development 

ence by creditor countries in the domestic affairs of the capital-importing 
country. 37 

Quite aside from matters of principle, however, vexing problems of 
definition complicate the question of investment guarantees. If, for ex- 
ample, firms are to be protected against expropriation, at what point do 
high tax rates amount to confiscation? Does a government-owned or 
government-subsidized competitive undertaking virtually mean expropria- 
tion sometimes? If the guarantee is made good in a particular case, how 
shall the business be valued as a going concern for the purpose of reim- 
bursement? Does the guarantee of investment imply a right to withdraw 
the capital even if the foreign government has imposed no adverse meas- 
ures; and if so, does it mean immediate liquidation or only gradual with- 
drawal? Should guarantees apply only to the original foreign-exchange 
investment or extend also to subsequent increases of capital through re- 
invested earnings? 

Equally as many difficulties surround the problem of conversion of funds 
into the home currency of the lender or investor. At what rate of exchange 
shall the reimbursement be calculated? If the foreign country has devalued 
after much of the investment has been made, marked windfalls or losses 
could accrue to the foreign owner depending upon the relation of the de- 
valuation to the behavior of the price of capital equipment in the devalued 
currency. Multiple export and import rates present further complexities. 
Finally, if the creditor country comes into possession of large amounts of a 
soft currency from the operation of its guarantee system, how can it utilize 
them to avoid "bear" movements on this currency, use them effectively for 
its own purposes, and expend them without favoritism among foreign 
suppliers of exports? 

An important question relates to the inclusiveness of the guarantee as to 
type of investment. Shall the United States underwrite, for example, an 
American-owned amusement concession or a luxury hotel, or shall only 
"developmental" or "productive" investments be covered? It is clear also 
that a line must be drawn on the recency of investment, since otherwise the 
guaranteeing government would find itself underwriting mere current trade 
credits. The setting of the guarantee fee would surely present difficulties 
because of the unpredictability of many risks, some of them arising from 
the downfall of governments, depressions and wars. 

The manifold complications of investment guarantees by national gov- 
ernments or international agencies need not mean that the idea is ill- 
conceived. They do, however, imply that any system must be elaborated 
with great care, and that experimentation is desirable at the beginning. It 
is necessary also to bear in mind that wisdom cannot consist merely in 

37. Yuan-li Wu, he. cit., pp. 65-68. 

Foreign Private Capital 359 

limiting the coverage of guarantees, for the more limited the guarantee, the 
less it will influence the private investor to commit his capital abroad, 
particularly to new and underdeveloped countries. It must not be forgotten 
either that these guarantees do not eliminate the risks of investment but 
merely transfer their cost from the investor to the general taxpayer. Guar- 
antees are not an open sesame enabling underdeveloped nations to draw 
upon the vast yearly capital accumulation of such a country as the United 
States; but they can play a useful role in conjunction with tax measures and 
treaties designed to reduce adverse discrimination against foreign capital. 

Maffry' s Proposals 

In a recent official report, August Maffry offers a long list of extraordi- 
nary measures and radical inducements to increase the flow of private 
capital. 38 He believes that great emphasis should be put on promoting 
American portfolio investment in Europe and Japan as areas much better 
understood than others by our private capitalists; Europeans and Japanese 
would then send venture capital to Asia, Africa and Latin America. 

Mr. Maffry would press vigorously the program of bilateral treaties for 
the fair treatment of American foreign investors. He advances a large 
number of proposals for reorganizing federal government activities in 
Washington and in the consular and diplomatic service to encourage 
private investment. In addition he offers several specific financial induce- 
ments: (1) The Export-Import Bank should "aggressively extend its activi- 
ties" by making loans on attractive terms to domestic corporations for 
their foreign operations, and lending to foreign corporations without guar- 
antees by their governments. (2) "Tangible inducements" should be offered 
to secure the establishment of private international mutual investment 
trusts and to induce the purchase of foreign securities by investment trusts 
and insurance companies in this country. (3) Congress should extend the 
coverage of the investment guarantees to include losses from wars and civil 
disorders; and it should drastically reduce the cost of the guarantees. 
(4) The Treasury and the executive branch should explore the possibility of 
tax exemptions for qualified corporations operating anywhere in the free 
world, possibly after the pattern of present exemptions granted to Western 
Hemisphere trade corporations. Tax exemptions could be offered to 
private and institutional purchasers of foreign securities. 

Mr. Maffry's proposal for seeking to make of Western Europe and Japan 
a kind of financial entrepot of American private capital on its way to the 
underdeveloped countries has attractive qualities. Likewise his ideas seem 
promising with regard to more effective coordination and more vigorous 

38. August Maffry, Program for Increasing Private Investment in Foreign Countries (mimeographed), 
report prepared for Technical Cooperation Administration (Department of State), Department of Com- 
merce, and Mutual Security Agency, December 18, 1952. 

360 Approaches to Economic Development 

activity in departments of government concerned with gathering and dis- 
seminating information about foreign investment opportunities. 

But many of his proposals involving especially attractive lending, "tangi- 
ble inducements" and tax exemptions to promote private foreign invest- 
ment run into the overriding objection against most "incentive taxation." 
If corporations making new investments abroad are to be the objects of 
favorable discriminations, why not also give tax relief in varying degrees 
for corporations that maintain "full" employment through depressions, or 
show excellent records of labor relations or of public service, or refrain 
from monopolistic practices, and so on? Once begun, discrimination can 
endanger equity and objectivity in tax matters; it can corrupt politics; and 
it is no friend of a market-controlled free enterprise economy. Fortunately 
the principal tax adviser to the Secretary of the Treasury has said that 
expectations of a tremendous outflow of American private capital asso- 
ciated with hopes of extensive tax exemptions will prove to be illusory. 39 


Tax, treaty and guarantee methods of encouraging private investment for 
development offer promising channels, but they cannot be carried much 
further and their quantitative effect is probably not large. Several of 
Maffry's proposals deserve further exploration. In addition, codes of fair 
business practice and the limitation of monopoly power in the international 
sphere, such as contemplated in the proposal for an International Trade 
Organization, would seem to be a desirable complement. The proposal for 
an International Finance Corporation, closely linked with the International 
Bank for Reconstruction and Development, also merits attention for its 
possibilities in furthering private foreign investment. 

Meanwhile, the encouragement of private sources of capital by the 
underdeveloped world depends in large measure upon how these countries 
govern their own affairs. It may well be that specific measures in the fields 
of taxes, treaties and guarantees are less important means of attracting 
foreign private capital than more fundamental measures to improve the 
general climate for private enterprise. An economist sympathetic to under- 
developed nations, not an American, has written: 

The establishment of the rule of law in the economic field and the pursuit of a 
stable and intelligent policy of promoting competitive enterprise in the true sense 
would probably do more in encouraging the inflow of foreign capital than any 
initiative on the part of the investor countries. 40 

The applicability of such a point of view to unilateral devaluations, com- 
plex and arbitrary exchange controls and inflations is at once apparent. 

39. Dan Throop Smith, speaking before the Fiscal Commission of the United Nations Economic and 
Social Council; see New York Time^ April 29, 1953. 

40. Yuan-li Wu, loc. clt. t p. 71. 

17. Public Loans and Grants 
to Underdeveloped Countries 

APART FROM THE GENERAL INSUFFICIENCY of private funds, there are other 
specific reasons for assigning to public sources of foreign capital a crucial 
role. Chapter 13 has explained why the fields of public health and educa- 
tion, public communications and public utilities in underdeveloped econo- 
mies are peculiarly the bailiwick of public investment, although they are 
not exclusively so. 


Conceivably, of course, while the undertaking might be public in the 
capital-receiving country, the source of funds might be private in the lend- 
ing country. Indeed, prior to the first world war and even as late as the 
onset of the Great Depression, the great bulk of British investment, belying 
the Marxian idea that private capital is mainly interested in stripping a 
primitive economy of its mineral and soil resources or exploiting the native 
labor in these activities, was devoted to roads, railways, power plants and 
harbors. 1 But these social upheavals gave rise to political and economic 
risks which, as previously emphasized, have very nearly eliminated private 
portfolio investment and have limited private direct investment to the 
highest-profit fields which do not include public services and public 
utilities. 2 Thus either the home government or a foreign public authority 
becomes the residual legatee for the bulk of investment in these under- 

So large are the capital requirements in these fields and so low their 
prospective earnings relative to the risks, that they have repeatedly been 
declared better suited to outright gifts than to investment in any true sense. 3 
This position is probably more warranted for public health and education 
than for power and transport. Be that as it may, a large share of United 
States government grants to underdeveloped countries undoubtedly went 
for these purposes. Practical expediency, as well as the wisdom of main- 

1. See Sir Arthur S alter, Foreign Investment (Essays in International Finance, No. 12), Princeton Uni\er- 
sity Press, Princeton, February 1951, p. 18. 

2. See pp. 345-48, 350, above. 

3. For example, W. Arthur Lewis, "Food and Raw Materials," District Bank Review, September 1951, 
pp. 1-11; United Nations, Department of Economic Affairs, Methods of Financing Economic Development 
In Under-developed Countries New York, 1949, pp. 100-01; United Nations, Department of Economic 
Affairs, Measures for the Economic Development o} Under-developed Countries, New York, 1951, p. 84. 


362 Approaches to Economic Development 

taining the integrity of genuinely productive investments, probably make it 
advisable simply to transfer certain funds from the "gift loan" category to 
the more honest category of gifts. In any case, "social capital" or "social 
overhead capital" is the chief type of development capital which must come 
largely from public sources abroad. 

From the point of view of the capital-supplying economies, the chief 
economic argument for public investment in the underdeveloped world 
aside from ideological and political factors is the threat of food and raw 
material shortages. The meagerness of private foreign investment in agri- 
culture appears both in the relative value to which it had arrived by 1945 
not more than 6 per cent of the total of U.S. private capital abroad and 
in the small increments since then. 4 Even mining and smelting, which in 
1945 accounted for twice as much of the existing U.S. private investment 
as agriculture, has also declined in new investments relative to nonextrac- 
tive production. The direction of international private investment reflects 
the basic fact that primary production on a global basis has fallen from 
3 per cent to 1.2 per cent of total production since 1913/ J 

Until fairly recently, economists regarded this evolution as a natural and 
not unwelcome outgrowth of higher standards of living; but since the 
second world war the shortage of food has been an acute problem in Asia 
and by no means unknown to the United Kingdom and other European 
countries. The United States has in the past remained relatively untouched 
by such shortages, but the progressive reduction of certain domestic min- 
eral resources has recently caused apprehension and even alarm. 6 It is pos- 
sible, of course, that private capital might move into foreign primary pro- 
duction, especially in the underdeveloped countries, in great volume if 
acute shortages of food and raw materials in the Western world should 
make it sufficiently profitable to do so. Unless political and economic risks 
were to be notably reduced, however, the costs would be high to the con- 
sumer; and the military defense of the West might be exposed to unwel- 
come limits and uncertainties. 

The needs of the underdeveloped world for capital in the public services 
and utilities and the needs of the developed economies for raw materials 
thus constitute a strong positive case for foreign public loans to the coun- 
tries in the early phases of development. 


The provision of capital for development, insofar as it depends upon 
sources outside the less developed countries themselves, has chiefly fallen to 

4. See Table 16-2. 

5. Lewis, /or. ctt. 

6. The President's Materials Policy Commission, Resource* for Freedom, Vol. I, Foundations for Growth 
and Security y June 19 52. 

Public Loans and Grants to Underdeveloped Countries 363 

the United States, either directly or through the International Bank for 
Reconstruction and Development. 

Over the five years following the announcement of Point Four, the flow 
of funds for development from the United States and from the Interna- 
tional Bank doubled. 7 It is, unfortunately, impossible to obtain data for 
United States grants and loans to underdeveloped areas on the same basis 
for 1952 and 1953 as for 1949-1951. Comparing commitments, United 
States grants alone (without loans) exceeded International Bank loans in 
1949 and 1950 but fell to one half in 1951. Comparing disbursements, 



1948-1953 1948 1949 1950 1951 1952 1953 

Commitments $980 none $125 $152 $297 $227 $179 

Disbursements 521 20 77 72 169 183 

Source International Bank for Reconstruction and Development, Annual Reports. 




























S<mice\ Survey of Current RusincM, October 1953, pp. 16-17; The Economic Report of the President, 
January 1952, p. 127. The totals of U S. grant and loan disbursements for 1952 and 1953 are given in the 
Survey, the division as between these two categories for these years is estimated from information in this 

United States grants (without loans) greatly exceeded International Bank 
loans in 1952 and 1953. With respect to United States loans alone (without 
grants), commitments greatly exceeded those of the International Bank in 
1950 and 1951; and United States loans disbursed in 1952 and 1953 also 
greatly exceeded International Bank disbursements. Taking United States 
loans and grants together, they have exceeded by several multiples the loan 
commitments or disbursements of the International Bank in each year. 
(See Tables 17-1 and 17-2.) 

7. The analysis of United Stales foreign investment both private and government m the present chapter 
is largely confined to the postwar period since, by the latter part of 1944, the net amount was probably 
negative. See Robert L. Summons, "International Investment Position of the United States," Foreign Com- 
merce Weekly, January 27, 1945, pp. Sff. 



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366 Approaches to Economic Development 

Where U.S. Postwar Aid Went 

In fiscal 1949, 1950 and 1951 the total of U.S. economic assistance avail- 
able to underdeveloped areas represented only 5.7, 11.5 and 15.4 per cent 
of total U.S. foreign aid; and net utilizations of U.S. aid to underdeveloped 
areas amounted to 17.7 per cent of total foreign aid in 1952 and 11.5 per 
cent in 1953. The brutal fact is that no sooner had the United States come 
reasonably close to dealing with the economic aftermath of World War II 
than it was overtaken with the necessity of providing the wherewithal for 

During the years 1948-1951, the European Recovery Program absorbed 
nearly 50 per cent of foreign aid, while a multiplicity of kindred undertak- 
ings elsewhere Greek-Turkish aid, Philippine rehabilitation, refugee as- 
sistance, etc. absorbed a further significant share. By the end of 1951, 
when the Economic Cooperation Administration expired administratively, 
Mutual Defense assistance already claimed one third of the annual grants, 
and the proportion going for this purpose amounted to 58 per cent during 
1952. (See Table 17-3.) 

If the sums available for strictly economic development seem small, the 
total assistance of nearly $41 billion over the seven and a half years follow- 
ing the war represents a draft upon the resources of one nation for the 
benefit of others unparalleled in history at least in its absolute magnitude. 
Grants of $29.1 billion were nearly two and a half times the loans of $11.8 
billion. The utilized portion of total loans and grants as of December 31, 
1952 considerably exceeded the portion unutilized ($41 billion utilized to 
$16.7 billion unutilized). Of Export-Import Bank credits, 37 per cent were 
as yet not utilized at the end of 1952. 

The preoccupation of the United States with European economic re- 
covery, political allegiances and rearmament resulted in its giving to Europe 
77.2 per cent of net postwar aid, though Europe's share in grants amounted 
to somewhat less (74.0 per cent) and its share in credits to somewhat more 
(81.3 per cent). Of total utilized Export-Import Bank credits, a somewhat 
smaller proportion (66.3 per cent) went to Europe, partly because, during 
the period of E.R.P. aid when the International Bank suspended operations 
in that area, the Export-Import Bank continued to make loans to Latin 
America. Almost the same ratio of European aid to total credits obtained 
in the loan disbursements of the International Bank (59.0 per cent), its 
inactivity in Europe during the Marshall Plan aid having been compensated 
by its initial loans for European reconstruction. Recently, as revealed by its 
loan commitments, the International Bank has turned its attention more 
extensively to non-European countries. 8 (See Table 17-4.) 

8. For more detailed statistics showing the allocation of United States government grants and credits by 
individual countries, see National Advisory Council on International Monetary and Financial Problems, 
Semiannual Report to the President and to the Congress, October 1, 1952-March 31, 1953, pp. 48-50. 

Public Loans and Grants to Underdeveloped Countries 


By far the largest part (64.6 per cent) of utilized grants and loans to 
Asia in the postwar period, which amounted to $7.5 billion, has to be 
almost completely excluded or discounted as "investment" in underde- 
veloped areas. The largest share (30.3 per cent) went to Japan, a country 
not usually regarded as underdeveloped ; and the funds which had gone into 
China (14.2 per cent), the Philippines (10.7 per cent) and Korea (9.4 per 
cent) by the end of 1952 can scarcely be imagined to have contributed 
much to the productive equipment of these countries. 



United States Government 
July 1, 1945-December 31, 1952 


International Bank 
March I 1947 


November 31, 1953 
















Total, all areas 



















1 t 













Latin America 






























. . 

. . 

Unspecified, all 





Source National Advisoiy Council on International Monetary and Fiscal Problems, Semiannual Report 
to the President and to the Congress, October 1, 1952-March 31, 1953; for U.S. government, pp. 48-50; for 
International Bank, p. 31. 

a. Australia. 

Proportion of U.S. Aid Going to Underdeveloped Areas 

The direction of the larger part of United States postwar foreign aid to 
Europe and the probable waste of nearly half of the portion going to Asia 
together account for the relatively small sums shown in Table 17-2 as having 
been made available for real economic investment in underdeveloped areas. 
Total commitments to these areas from 1949 through 1951, according to 
the Economic Report of the President (January 1952), amounted to $1.548 
billion. This represents only 8.7 per cent of total net U.S. foreign aid 

368 Approaches to Economic Development 

utilized ($17.68 billion) during 1949, 1950 and 1951, 9 but in 1951 and 1952 
the amounts actually utilized were 17.7 and 11.5 per cent of total net aid. 

In the aggregate for the years 1949-1953, U.S. foreign aid in grants and 
loans utilized amounted to 2.0 per cent of national income in the United 
States. The funds made available during 1949-1951 and the funds utilized 
during 1952-1953 for economic development of underdeveloped areas 
amounted to 0.24 per cent of U.S. national income. Although these per- 
centages may not seem large, unutilized aid at the end of 1952 was never- 
theless nearly half as large as the amount utilized. 

How much capital has been supplied to or withdrawn from underde- 
veloped areas by other countries than the United States is unknown, 
though with laborious research an estimate might be derived from the scat- 
tered statistics of the various creditor countries. The United Nations 
hazards the guess that for the period 1946-1950 the flow of net capital for 
investment after allowance for the service on old debt from all countries 
in the aggregate was negative, for most underdeveloped countries. 10 

Only about one tenth of United States government foreign aid had been 
extended in the postwar period to the end of 1952 in the form of loans by 
the Export-Import Bank. This fact is explained primarily by the large 
amount of outright grants and of loans made directly by Congress. But 
despite their small share in the total of United States foreign aid, Export- 
Import Bank loans to underdeveloped areas were more than double those 
of the International Bank from mid-1945 to March 31, 1953, as the follow- 
ing figures (in millions) indicate: 11 

Export-Import International 
Bank Bank 

Total net authorizations, all areas $4,194 $1,557 
Total net authorizations, underdeveloped 

areas 1,910 933 

Utilizations, underdeveloped areas 1,252 475 

Thus, while the Export-Import Bank authorized nearly 46 per cent of its 
loans in these years for underdeveloped areas, the International Bank 
authorized 60 per cent for these areas. This rather surprising ratio for the 
International Bank, which is nowadays generally regarded as a develop- 
ment institution, is explained by its preoccupation with reconstruction in 
1947, the first year of its operation, when nearly $500 million was lent to 

9. The ratio of aid to underdeveloped areas to total aid in these years would be even smaller if, in place 
of the $1.548 billion "made available" for the former, the amount actually utilized during these three years 
were to be used. This figure does not appear to be obtainable. 

10. United Nations, Department of Economic Affairs, Instability in Export Markets of Under-developed 
Countries, New York, 1952, pp. 7 and 67-73. 

11. National Advisory Council, Semiannual Report, March 31, 1953, pp. 21, 31 and 57. 

Public Loans and Grants to Underdeveloped Countries 369 

France, the Netherlands, Denmark and Luxembourg. But in subsequent 
years loans to developed countries have been greatly attenuated: 1948, $12 
million; 1949, $24.8 million; 1950, $100 million; 1951, nothing; 1952, $7 
million (to Belgium). This decline has been attended, of course, by a rapidly 
increasing proportion of loans to the newly developing regions. 

The Export-Import Bank 

Since its inception in 1934, the Export-Import Bank has, at the con- 
venience of United States domestic and foreign economic policy, served a 
number of unrelated ends. 12 Initially, no doubt, the Bank's operations were 
gauged rather narrowly to export promotion as a part of New Deal employ- 
ment expansion policy. But as American involvement in war became in- 
creasingly inevitable, Congress in 1940 increased the lending authority 
of the institution from $200 million to $700 million to develop the strategic 
resources of Latin America and strengthen its economy generally. When 
the end of the war approached, Congress again increased the lending 
authority, this time to $3.5 billion, primarily for the purpose of postwar 
reconstruction loans of an emergency character pending the launching of 
the International Bank for Reconstruction and Development. Since 1947, 
as already noted, the two institutions have devoted increasingly large pro- 
portions of their resources to economic development. In the most recent 
phase, again reflecting its role as the primary foreign economic organization 
of the United States government, the Export-Import Bank has extended 
many loans to augment the supplies of imported strategic materials. Virtu- 
ally all of the purposes of its operations acquired over its two decades of 
history still persist; and their multiple importance persuaded Congress to 
increase the Bank's resources again on October 3, 1951 to $4.5 billion. 

Of net credits authorized by the Export-Import Bank from July 1, 1945 
to June 30, 1953, Europe accounted for 54 per cent, Latin America for 27 
per cent and the entire continents of Asia and Africa for 15 per cent. For 
Europe, wartime and postwar drafts on the Bank's resources formed two 
thirds of the total, and development loans only 13 per cent. But for Latin 
America and for Asia and Africa together, development loans made up 63 
and 72 per cent of the continental totals. These higher proportions result 
primarily from emphasis placed on economic development in the acts of 
1945 and 1951 to increase the Bank's lending authority. Nevertheless, the 
relative shares going to individual countries indicate that political consid- 
erations still play an important role. (See Table 17-5.) 

Export-Import Bank loans during the fiscal year 1953 covered a wide 
range of economic activities in underdeveloped countries: Brazil, liquida- 

12. On the historical evolution of both the Export-Import Bank and the International Bank for Recon- 
struction and Development, see the excellent accounts in Raymond F. Mikesell, United States Economic 
Policy and International Relations, McGraw-Hill, New York, 1952, Chapter 12. 





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