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APPROACHES TO ECONOMIC-
DEVELOPMENT

THE TWENTIETH CENTURY FUND

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.

BOARD OF TRUSTEES

ADOLF A. BERLE, JR. DAVID E. LILIENTHAL

FRANCIS BIDDLE ROBERT S. LYND

BRUCE BLIVEN JAMES G. MCDONALD

ERWIN D. CANHAM ROBERT OPPENHEIMER

EVANS CLARK EDMUND ORGILL

BENJAMIN V. COHEN JAMES H. ROWE, JR.

WALLACE K. HARRISON H. CHR. SONNE

AUGUST HECKSCHER HERMAN W. STEINKRAUS

OSWALD W. KNAUTH CHARLES P. TAFT
W. W. WAYMACK

OFFICERS

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

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

APPROACHES TO
ECONOMIC DEVELOPMENT

NORMAN S. BUCHANAN

and
HOWARD S. ELLIS

NEW YORK - The Twentieth Century Fund 1955

PRINTED IN THE UNITED STATES OF AMERICA BY
WM. F. FELL COMPANY. PHILADELPHIA, PENNSYLVANIA

FOREWORD

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
population?

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

PREFACE

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
whole.

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.

NORMAN S. BUCHANAN
HOWARD S. ELLIS

CONTENTS

Parti: AN ANALYTICAL VIEW OF THE PROBLEM

Is AN UNDERDEVELOPED AREA? 3

DETERMINANTS OF REAL INCOME: RESOURCES AND THEIR
PRODUCTIVITY IN UNDERDEVELOPED AREAS 23

3.*-CAPiTAL ACCUMULATION AND ALLOCATION 51

4. SOCIAL AND CULTURAL FACTORS IN DEVELOPMENT 74

5. DEMOGRAPHIC FACTORS IN DEVELOPMENT 92

Part II: ECONOMIC DEVELOPMENT AS
RECORDED HISTORY

6. INTRODUCTION TO PART Two: PROGRESS IN THE PAST AND PRESENT 119
7T*EARLY ECONOMIC DEVELOPMENT: ENGLAND 126

8. EARLY ECONOMIC DEVELOPMENT IN WESTERN EUROPE AND EUROPE

OVERSEAS 152

w-^

9. THE ECONOMIC DEVELOPMENT OF JAPAN: 1868-1914 175
w. ECONOMIC DEVELOPMENT OF THE U.S.S.R. 190

11. THE PACE OF MATERIAL PROGRESS IN THE PAST 213

Part 111: ACHIEVING DEVELOPMENT IN THE
CONTEMPORARY WORLD

12. AGRICULTURAL DEVELOPMENT FOR INCREASED WELFARE 237

13. COMMERCE AND INDUSTRY IN ECONOMIC DEVELOPMENT 267

14. DOMESTIC FINANCING OF DEVELOPMENT: PRIVATE SAVING 298

15. DOMESTIC FINANCING OF DEVELOPMENT: GOVERNMENT SOURCES

AND THE APPLICATION OF FUNDS 323

16."" FINANCING ECONOMIC DEVELOPMENT FROM FOREIGN PRIVATE

CAPITAL 343

17. PUBLIC LOANS AND GRANTS TO UNDERDEVELOPED COUNTRIES 361

^.^UNDERDEVELOPED COUNTRIES IN INTERNATIONAL TRADE 382

19. A GENERAL VIEW OF ECONOMIC DEVELOPMENT 406

20. INTERESTS AND RESPONSIBILITIES OF THE UNITED STATES 429
APPENDICES 455
INDEX OF AUTHORS 473

SUBJECT INDEX 479

xii Contents

APPENDICES

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

FIGURES

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

TABLES

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

AN ANALYTICAL VIEW OF
THE PROBLEM

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.

THE MEANING AND MEASUREMENT OF UNDERDEVELOPMENT

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.

INDEXES OF DEVELOPMENT AND UNDERDEVELOPMENT

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.

INDEXES ot LIFE AS END PRODUCT

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
areas.

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?

TABLE 1-1. EXPECTATION OF LIFE AT SPECIFIED AGES

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

Country

Period of Data

Age in Year\

Developed Countries

United States

1 900-1 902 b

49.3

55.0

46.8

1909-191 l b

51.0

56.2

48.3

1939-1941

63.8

62.6

53.2

England and Wales

1910-1912

53.4

58.5

50.0

1920-1922

57.6

60.2

51.6

1930-1932

60.8

61.7

52.7

Sweden

1901-1910

55.8

58.6

50.6

1911-1920

58.0

58.3

50.1

1921-1930

62.1

62.2

53.3

1931-1940

65.0

63.8

54.6

1941-1945

68.4

66.1

56.7

Netherlands

1900-1909

52.2

58.9

50.4

1910-1920

56.1

59.9

51.3

1921-1930

62.7

63.3

54.2

1931-1940

66.4

65.0

55.8

Intermediately Developed Countries

Italy

1901-1911

44.5

55.3

47.3

1921-1922

50.0

57.7

49.5

1930-1932

54.9

60.5

51.8

Underdeveloped Countries

Southern North America

Guatemala' 1

1939-1941

36.5

48.8

41.7

Mexico

1929-1933

37.0"

39.4

Panama'

1941-1943

52.0

55 J

Costa Rica"

1927

41.0

Puerto Rico*

1939-1941

44.5

Jamaica 11

1940-1942

53.1

55.2

46^4

South America

Brazil 1

1920

37.4

47.8

40.1

Chile

1930

366

51 1

43.2

1940

38.9

51.5

43.2

Colombia

1939-1941

46.0

Africa

Egypt

1927-1937

30.9

. .

1936-1938

38.6

54.0

46.8

Middle East
(Continued on page 10)

10 Approaches to Economic Development

TABLE 1-1. EXPECTATION OF LIFE AT SPECIFIED AGES Continued

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
specified.

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-
ciable.

Mortality

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?

TABLE 1-2. CRUDE DEATH RATES AND INFANT MORTALITY RATES FOR
SELECTED COUNTRIES, 1938

Country

Africa

Egypt

Mauritius

Central America and West Indies
Costa Rica
HI Salvador
Guatemala
Honduras
Mexico
Panama
Barbados
Jamaica

Panama Canal Zone
Puerto Rico

South America
Argentina
Chile
Colombia
Ecuador
Venezuela
Surinam

Asia
Ceylon

China (Formosa)
India
Korea
Thailand
Federation of Malaya

North America
United States

Europe
Denmark
Norway
Sweden
United Kingdom. England and Wales

Far East
Japan

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

Male
Female

163.4
162.5

123.1
117.2
101 1

128.0

221.3

129.2

36.7

121.0

105.3

235.7
1565
141.5
138.7
58.7

161.4
145.7
167.1
101.0
93.6
149.4

51.0

58.7
37.3
42.5
527

115.0

198.9
163.6

26.3
29.2

17.7
19.1
26.3

22.9
14.2
21.4
16.8

17/7

11.8
23.5
17.3

183
12.6

21.0
20.0

23.7
17.6
15.1
20.4

10.6

10.3

11.5

11.6

17.7

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
well-being.

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?

TABLE 1-3. DEATH RATES BY CAUSE IN SELECTED COUNTRIES
(Deaths per 100,000 Population)

Country

Year

Diph-
theria

Malaria Smallpox

Typhus
Fever

Diarrhea,
Enteritis

Other
Diseases Infectious or
of the Parasitic
Heart Diseases

Mauritius

1949

5.2

204.4

196.5

69.4

39.3

Canada

1947

1.1

0.0

15.8

255.2

4.7

Costa Rica

1947

5.8

100.6

0.3

0.9

214.4

69.0

132.9

United States

1947

0.6

0.1

0.0

0.2

5.6

321.2

5.3

Puerto Rico

1947

4.0

19.6

0.4

172.9

99.8

24.8

Colombia

1948

4.5

27.2

7.1

14.3

143.5

62.5

63.0

Surinam

1948

2.2

10.9

1.6

48.9

126.6

31.5

Ceylon
Japan
Denmark

1947
1947
1947

1.7
4.3
1.2

66.3
0.6

0.0
1.0

0.2

69.8
130.0
9.3

36.6
62.3
244.0

88.8
37.1
11.7

Norway
United

1947

2.5

0.1

7.5

135.6

10.3

Kingdom

1947

0.6

0.0

14.9

338.8

7.3

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

UNITED STATES

CANADA

AUSTRALIA

UNITED KINGDOM

GERMANY
FRANCE

ARGENTINA ..

CZECHOSLOVAKIA

CUBA

JAPAN _
ITALY

HOUSING, 'EDUCATION,) TRANSPORT, BALANCING

CLOTHING RECREATION COMMUNICATION INDICATORS]

10 11 12 13 14 15 16 17 1819/

KEY

Total calories
Nongram calories
Tobacco
Infant mortality
Physicians
Sawn lumber
Cement

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

UNION OF SOUTH AFRICA
SPAIN

FRENCH INDO-CHINA

NETHERLANDS INDIES
FRENCH WEST AFRICA. _

800

1200

1400 1600

1800

FIGURE 1. NONMONETARY INDICATORS OF RELATIVE NATIONAL
CONSUMPTION LEVELS, IN 31 COUNTRIES, AROUND 1934-1938

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 ?

TABLE 1-4. PER CAPITA INCOME, POPULATION AND POPULATION GROUPS OF

53 COUNTRIES, 1939

Per Capita

Population

Country

Income

Rank

Population

Type

[U.S. Dalian

per Year)

(Thousands)

Total

1,836,145

Upper income group (over $200) :

United States

$554

131,416

Germany

520

69,317

United Kingdom

468

47,778

Switzerland

445

4,206

Sweden

436

6,341

Australia

403

6,997

New Zealand

396

1,642

Canada

389

11,368

Netherlands

338

8,834

Denmark

338

3,825

France

283

41,950

Norway

279

2,937

Belgium

261

8,396

Eire

248

2,946

Argentina

218

13,132

Middle income group ($101-$200):

Union of South Africa

188

10,251

Finland

184

3,684

Chile

174

4,940

Austria

166

6,650

U.S.S.R.

158

196,500

Italy

140

43,864

Greece

136

7,200

Czechoslovakia

134

15,239

Hungary

125

9,129

Bulgaria

109

6,308

Lower income group ($100 and below)

Cuba

4,253

Yugoslavia

15,703

Poland

35,090

Japan

72,520

Venezuela

3,650

Egypt

16,650

Palestine

1,502

Costa Rica

639

Colombia

8,986

Peru

7,000

Panama

620

Ceylon

5,922

Mexico

19,380

Uruguay

2,147

Dominican Republic

1,650

Haiti

2,600

(Continued on page 20)

Approaches to Economic Development

TABLE 1-4. PER CAPITA INCOME, POPULATION AND POPULATION GROUPS OF
53 COUNTRIES, 1939 Continued

Country

Per Capita
Income

Rank

Population

Population
Type

(U.S. Dollars

per Year)

(Thousand*)

Nicaragua

883

Guatemala

3,260

Bolivia

3,400

Honduras

1,090

El Salvador

1,745

Brazil

40,900

Ecuador

3,000

Paraguay

970

India

382,000

Philippines

16,300

China

450,000

Indonesia

69,435

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.

WHAT Is ECONOMIC DEVELOPMENT?

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

BASIC DETERMINANTS OF TOTAL OUTPUT

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
output.

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.

LABOR AND ITS PRODUCTIVITY

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.)

TABLE 2-1. AGE DISTRIBUTION OF POPULATION IN
REGIONS OF THE WORLD, 1947

Estimated Percentage of Population

Region

Under
15 Years

75-59
Years

60 Years
and Over

World

Africa

America

United States and Canada

Latin America

Asia a

Near East

South-Central Asia

Japan

Remainder of Far East

Europe 1 '

North- West-Central Europe

Southern Europe

Eastern Europe b

Oceania

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.

QUALITATIVE DIFFERENCES

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.

TABLE 2-2. INDICATORS OF Low AVERAGE PRODUCTIVITY

Country

Tuberculosis
Death Rates
per 100,000
Population
(1939)

Percentage
of Population
Age 10 and Over
Illiterate
(about 1930)

Physicians
per 1,000
Population

Elementary
School Teacher*
per 1,000
Population

United States

below 5

1.37

4.29

Germany

" 5

.69

2.63

United Kingdom

" 5

1.13

4.11

Switzerland

" 5

.84

3.01

Sweden

" 5

.94

4.03

Australia

" 5

.94

3.78

New Zealand

" 5

1.00

4.58

Canada

" 5

.95

5.43

Netherlands

" 5

.83

4.10

Denmark

" 5

1.03

4.51

France

137

.73

3.77

Norway

below 5

.93

3.80

Belgium

.80

5.73

Eire

113

below 5

.67

4.23

Argentina

103

1.05

5.24

Union of South Africa

low

.41

1.28

Finland

190

.45

3.68

Chile

264

.63

2.54

Austria

below 5

1.07

3.99

U.S.S.R.

160

.76

3.65

Italy

.87

3.41

Greece

128

.86

2.17

Czechoslovakia

124

below 5

.76

2.31

Hungary

148

.97

3.50

Bulgaria

138

.65

4.18

Cuba

.63

3.18

Yugoslavia

234

.31

1.52

Poland

195

.32

3.10

Japan

207

below 10

.87

3.47

Venezuela

233

.41

0.94

Egypt

.21

1.58

Palestine

1.38

Costa Rica

172

.25

4.74

Colombia

low

.29

1.41

Peru

high

.19

1.93

Panama

119

.21

3.41

Ceylon

.15

, .

Mexico

.51

2.40

Uruguay

101

.71

2.99

Dominican Republic

medium

.20

1.45

Haiti

high

.09

0.63

Nicaragua

medium

.28

2.15

Guatemala

medium

.11

1.24

Bolivia

medium

.15

1.62

Honduras

low

.11

1.45

El Salvador

high

.16

1.81

Brazil

250

.31

1.97

Ecuador

high

.24

1.03

Paraguay

102

.28

3.34

India

283

.12

1.27

Philippines

298

.26

1.76

China

400-500

.04

1.73

Indonesia

high

.02

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 AND CAPITAL RESOURCES

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.

TABLE 2-3. LAND IN RELATION TO POPULATION, ABOUT 1940

Continent

Land
Adapted to
Agricultural
Produ( tion

Land
Used for Food
Crops, Including
Grain Fed to
Livestock

Acres per Capita

Adapted to
Agricultural
Production

Used for Food
Crops, Including
Grain Fed to
Livestock

Food Crops :
Yield per
Harvested Acre

(Millions of Acres)

(Lbs. Dry Weight)

World

2,580

1,529

1.19

0.70

1,003

Asia
Europe
North America
Africa

600
890
570
240

476
477
317
152

0.52
1.55
3.10
1.53

0.41
0.83
1.72
0.97

1,046
976
1,058
643

South America
Oceania

220
60

83
24

2.47
5.45

0.93
2.18

1,066

740

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

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
countries.

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-
tions.

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

FACTOR COMBINATIONS AND THEIR PRODUCTIVITY

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
disproportionate.

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
directions.

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
incomes.

WAYS TO INCREASE OUTPUT AND REAL INCOMES

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
areas.

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-
missed.

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.

DYNAMIC FACTORS IN DETERMINATION OF REAL INCOME
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
increase.

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-
pines.

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
similar.

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
aristocracy.

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-
pendence.

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
force.

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.

INSTITUTIONAL FORMS IN RELATION TO 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-
tration.

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.

APPROACHES TO THE PROBLEM OF CULTURAL CHANGE

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
realized.

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.

DIRECT APPROACH TO CULTURAL CHANGE

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-
versions.

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
dislodged.

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

INDIRECT APPROACH TO CULTURAL CHANGE

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
depersonalized.

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
together.

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
recognition.

POPULATION AND POPULATION GROWTH IN UNDERDEVELOPED AREAS

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

TABLE 5-1. APPROXIMATE POPULATION OF THE WORLD AND ITS
SUBDIVISIONS, 1700-1949

Country or Region

1700

1750

1800

1850

1900

1949

Total

617

749

919

1,163

1,555

2,368

Europe

115

140

188

266

401

548

Asiatic Russia

Southwest Asia a

India

100

130

157

190

290

439

China major 1 '

205

270

345

430

503

Japan

Southeast Asia,

Oceania

158

Africa

120

198

The Americas

144

321

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
Formosa.

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
decades.

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.

ECONOMIC DEVELOPMENT AND MORTALITY

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

DECLINE IN MORTALITY IN UNDERDEVELOPED AREAS IN MODERN TIMES

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
decreased.

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

FUTURE MORTALITY PROBABILITIES IN UNDERDEVELOPED AREAS

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,

TABLE 5-2. AVERAGE DEATH RATES IN 12 UNDERDEVELOPED COUNTRIES,
1936-1940 AND 1946-1950

(Rate per 1,000 Population)

Country

1 936- 1940

7946-7 950

Puerto Rico

19.1

11.5

Ceylon

21.4

14.6

Chile

23.2

17.0

Mexico

23.4

17.4

Greece

14.1

10.6

Japan

17.3

13.4

Jamaica

16.1

12.9

Poland*

14.0

11.5

Egypt

26.7

22.2

Malaya

20.5

17.1

Yugoslavia 11

15.7

13.4

Guatemala

26.0

23.2

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
large.

FERTILITY AND ECONOMIC DEVELOPMENT

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.

SOME INTERRELATED FACTORS IN FERTILITY CHANGES

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.

Summary

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.

THE DELAYED FALL IN FERTILITY AND ITS IMPLICATIONS

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.

106

Approaches to Economic Development

Rate

Over 3.2
2.8-3.2

2.4-2.8
2.2-2.4

TABLE 5-3. TREND OF GROSS REPRODUCTION RATES, 1880-1925

About 1910 About 1925

About JX8U

Russia

Austria

Germany

Denmark

England

Finland

Norway

About 1895

Russia
Poland

Austria

Finland
Germany

Bulgaria
Russia

Croatia
Hungary

Russia
Japan
Bulgaria

2.0-2.2

Sweden Denmark
Norway

Austria

Poland

1.8-2.0

Baltic Prov.
England
Sweden

Finland
Germany
Norway

1.6-1.8

France

Denmark
Sweden
Australia

Canada
Union of
South Africa

1.4-1.6

France

England
New Zealand

Czechoslavakia
Finland
Australia

1.2-1.4

France

Denmark
Norway
United States
New Zealand

1.1-1.2

France
Germany
Sweden

1.0-1.1

England
Estonia

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
West.

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

TABLE 5-4. CRUDE BIRTH RATES, CRUDE DEATH RATES, NATURAL RATES OF
POPULATION INCREASE IN UNDERDEVELOPED AREAS, 1946-1950

Crude Crude Rate of

Country Birth Rate Death Rate Natural Increase

Africa

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

Asia

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

Europe

Greece (excluding Dodecanese) 27.2 10.6 16.6

Oceania

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

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
writers.

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.

POSITIVE MEASURES TO REDUCE FERTILITY

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
celibacy.

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
position.

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

DEVELOPMENT POTENTIAL AND POPULATION POTENTIAL IN
UNDERDEVELOPED AREAS

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

ECONOMIC DEVELOPMENT AS
RECORDED HISTORY

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

No GENERAL "THEORY OF ECONOMIC DEVELOPMENT" is conveniently at hand
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.

EMERGENCE OF THE MODERN WORLD VIEW IN THE WEST

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.

119

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
widespread.

IDEA OF PROGRESS IN UNDERDEVELOPED AREAS

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.

PAST AND PRESENT SETTING OF THE DEVELOPMENT PROBLEM

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
productivity.

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.

AGRICULTURE AND AGRICULTURAL PRODUCTIVITY

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.

126

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
practice.

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.

Enclosures

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
introduced.

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.

IMPROVEMENTS IN TRANSPORT AND COMMUNICATIONS

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
development.

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.

Cost

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

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.

GROWTH OF INDUSTRY AND MANUFACTURES

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.

TABLE 7-1. STRUCTURE OF MANUFACTURING PRODUCTION IN THE UNITED
KINGDOM, GERMANY AND THE UNITED STATES, MiD-1930s

Percentage Share In:

Net Output

Employment

United
Kingdom

Branch of Manufacturing 1935

Ger-
many

1936

United
States

United
Kingdom

1935

Ger-
many

1936

United
States

1935

1937

1935

1937

Total factory trades

100.0

Iron and steel

9.9

16.5

11.2

13.6

10.6

16.1

12.2

13.6

Engineering, shipbuilding

and vehicles

21.0

21.4

18.3

21.3

21.4

19.4

16.1

18.4

Nonferrous metals

2.5

2.4

3.1

3.4

2.4

1.8

3.0

3.2

Chemicals

7.4

9.9

9.8

9.5

3.8

5.0

5.2

4.9

Textiles

13.3

11.0

8.0

7.2

20.5

15.2

15.1

13.4

Clothing

6.9

4.0

7.7

6.3

10.4

5.6

11.5

10.5

Leather

0.9

1.0

1.4

1.1

0.9

1.5

1.4

Rubber

1.2

1.0

1.7

1.5

1.1

0.9

1.6

1.5

Clay and stone

4.5

6.7

3.2

3.5

4.8

9.5

3.2

3.5

Timber

3.2

4.0

4.7

5.0

3.8

6.1

8.0

8.1

Paper and printing

9.5

5.7

11.8

10.5

7.9

6.4

7.5

7.2

Food, beverages and tobacco 17.0

14.0

16.5

14.6

10.1

10.2

12.3

11.4

Miscellaneous

2.5

2.4

2.6

2.5

2.4

2.3

2.8

2.9

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

TABLE 7-2. INDUSTRIAL OCCUPATIONAL GROUPINGS IN ENGLAND AND
GERMANY, 1851 AND 1855 a

England, 1851 Prussia, 1855

Occupational Gioup

Thousands
of Persons

Percentage
of Total

Thousands
of Persons

Percentage
of Total

Total

Food b
Mines
Leather
Metals
Clay, st<

building)
Woodworl
Paper and
Chemicals

4,808

100.00

id clothing

1,720

35.78

378

7.86

355

7.38

332

6.90

322

6.70

j, etc. (including

)

287

5.97

cing

166

3.45

printing

1.04

.62

>ccupations

1,168

24.29

1,212

417
81

173
113

113
191

124

100.00

34.41
6.68

14^27
9.32

9.32

15.77

10.23

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.

139

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-
tion.

CHANGES IN FOREIGN COMMERCE AND INVESTMENT

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.

144

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.

TABLE 7-3. BRITISH EXPORTS AND IMPORTS, 1800-1910 AND 1913
(Indexes Based on 1880 as 100)

Exports

Net Imports

Year

Current
(Declared)
Value

Absolute
Value
1880
Price

Export
Price
Index

Export
Volume
Index

Current
Value

Absolute
Value
1880
Price

Import
Price
Index

Import
Volume
Index

1800

37.7

9.1

414.1

4.1

51.7

25.6

202.0

7.4

1810

48.4

13.4

362.6

6.0

77.3

37.0

208.9

10.6

1820

36.4

15.0

242.0

6.7

43.8

29.1

150.5

8.4

1830

38.3

24.0

159.6

10.8

50.3

45.9

109.6

13.2

1840

51.4

40.2

127.8

18.0

81.2

67.4

120.5

19.4

1850

71.4

69.9

102.2

31.3

91.0

100.0

91.0

28.7

1860

135.9

124.0

109.6

55.6

181.9

159.2

114.3

45.8

1870

199.6

168.1

118.7

75.3

258.8

224.0

115.5

644

1880

223.1

100.0

347.9

100.0

1890

263.5

304.1

86.6

136.3

356.0

450.1

79.1

129.4

1900

291.2

318.6

91.4

138.8

459.9

634.2

72.5

182.3

1910

430.4

478.6

89.9

208.4

574.5

737.7

79.4

208.0

1913

525.5

542.9

96.8

236.5

659.2

831.8

79.2

239.1

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
imports.

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 AND INDUSTRIALIZATION IN ENGLAND
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
accumulated.

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

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
accordingly.

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.

CONCLUSIONS FROM ENGLISH DEVELOPMENT

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."

INITIATING DEVELOPMENT

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

152

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.

CHANGES IN EUROPEAN AGRICULTURE AFTER 1815

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
catalysts.

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
1858.

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.

THE DEVELOPMENT IN INDUSTRY

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
Huguenots.

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-
tions.

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
process.

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
useful:

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.

FIGURE 4. EUROPE'S RAILWAY NETWORK, 1848 AND 1877

Source /'Varian Fry, Uriels without Mortar (Headline Series), Foreign Policy Association, 1938.

167

168

Approaches to Economic Development

RATIO SCALE

INDUSTRIAL PRODUCTION

-TRADE AND PRODUCTION
ESTIMATED FROM INDUSTRIAL EMPLOYMENT

POPULATION OF GERMANY

INDUSTRIAL PRODUCT ON

TRADE AND PRODUCTION
ESTIMATED FROM INDUSTRIAL EMPLOYM NT

POPULATION OF FRANCE

1860 1870 1880 1890 1900 1910 1920 19 1940

FIGURE 5. INDUSTRIAL GROWTH IN GERMANY AND FRANCE AFTER 1860

Source: Carl Snydcr, "Measures of Industrial Growth and Their Significance," in Beitrage zur Konjunk-
turlehre, Hanseatische Verlagsanstalt, 1936.

THE EXTENSION OF EUROPEAN DEVELOPMENT INTO OVERSEAS AREAS

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
purpose.

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
enterprises.

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-
drawn.

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.

CONCLUDING OBSERVATIONS ON EUROPEAN DEVELOPMENT

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.

175

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

CLEARING THE GROUND FOR ECONOMIC DEVELOPMENT

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
households.

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
freedoms.

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

POSITIVE MEASURES FOR ECONOMIC DEVELOPMENT

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

Financing

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

187

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.)

TABLE 9-1. JAPANESE FOREIGN TRADE, 1868-1920 a

(In Millions of Yen, Annual Averages)

Period

Imports

Exports

1868-1872

Y 23

Y 16

1873-1877

1878-1882

1883-1887

1888-1893

1894-1898

223

139

1899-1903

270

244

1904-1908

442

377

1909-1913

544

496

1914-1920

1,300

2,434

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.)

TABLE 9-2. STRUCTURE OF JAPAN'S FOREIGN TRADE, 1868-1912

Value as Percentage of Total Exports

Period

Food and
Beverages

Raw
Material?

Semi-
manufactured
Goods

Finished
Goods

Others

Exports

1868-1872

25.4

23.1

40.8

1.9

8.8

1878-1882

37.1

11.6

40.4

7.2

3.7

1893-1897

16.8

10.3

43.3

26.2

3.4

1903-1907

11.9

9.J

45.3

31.1

2.6

1908-1912

11.1

9.2

48.1

30.5

1.1

Imports

1868-1872

29.0

4.1

20.2

44.5

2.2

1878-1882

14.8

33.5

29.9

48.6

3.2

1893-1897

20.8

22.7

19.1

35.1

2.3

1903-1907

23.5

33.0

16.7

25.5

1.3

1908-1912

12.0

44.3

18.9

24.1

0.7

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

CONCLUDING OBSERVATIONS ON JAPANESE 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
stages.

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.

ECONOMIC DEVELOPMENT BEFORE 1913

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.

190

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
production.

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-
duction.

Productivity

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
1917.

ECONOMIC DEVELOPMENT UNDER THE FIVE-YEAR PLANS, 1927-1939

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

TABLE 10-1. PERCENTAGE DISTRIBUTION OF INVESTMENTS IN THE U.S.S.R. BY
MAJOR ECONOMIC FIELDS, UNDER THREE FIVE-YEAR PLANS'*

Economic Field

1928-1929
to
1932

1933-1937

1938-1942

Total

100.0

Industry

41.0

37.1

41.9

Agriculture

19.1

19.5

Transport

17.3

15.6

Communications

1.1

0.8

Trade and procurement

1.8

2.0

1.1

Socio-cultural services and administration

19.7

25.4

21.2

Housing b

9.2

9.1

8.2

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.

196

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

TABLE 10-2. PHYSICAL PRODUCTION IN RUSSIAN INDUSTRY, SELECTED YEARS

Industry

Unit

1913

7929

1933

1937

1938

Engineering and

billion rubies,

metal industries

1926-1927 value

1,446

3,054

10,822

27,519

33,613

418

602

941

1,581

1,626

Engines

Goods trucks

thousands

14.8

15.9

18.2

66.1

49.1

Motor cars

thousands

1.4

49.7

200.0

211.4

Electric power

billion kw-h.

1.9

6.2

16.4

36.4

39.6

Coal

million tons

29.1

40.1

76.3

127.9

132.9

Oil

million tons

9.2

13.8

22.5

30.5

32.2

iron ore

million tons

9.2

8.0

14.4

27.7

26.5

Manganese ore

thousand tons

1,245

702

1,021

2,752

2,273

Pig iron

million tons

4.2

4.0

7.1

14.5

14.6

Steel

million tons

4.2

4.9

6.9

17.7

18.0

Rolled steel

million tons

3.5

3.9

5.1

13.0

13.3

Copper

thousand tons

35.5

44.5

99.8

103.2

Aluminum

thousand tons

m f

. .

7.0

37.7

56.8

Cement

million tons

1.5

2.2

2.7

5.5

5.7

Cotton textiles

million meters

2,227

3,068

2,422

3,447

3,491

Woolen textiles

million meters

100.6

86.1

108.3

114.0

Leather shoes

million pairs

48.8

80.3

164.2

213.0

Raw sugar

thousand tons

1,290

1,283

995

2,421

2,519

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.

AGRICULTURE IN RUSSIAN ECONOMIC DEVELOPMENT

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.

Mechanization

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-
limited.

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
10-3.)

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.

AN OVER-ALL VIEW OF RUSSIAN INDUSTRIALIZATION

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.)

TABLE 10-4. PER CAPITA PRODUCTION IN THE U.S.S.R. IN 1937 AND IN
OTHER INDUSTRIAL COUNTRIES AROUND 1929

United
Product Unit U.S.S.R. States Germany England France Japan

Electric power

kw-h.

215

1,160

735

608

490

421

Pig iron

kilo

292

234

183

189

Steel

kilo

105

397

291

279

188

Coal

kilo

757

3,429

3,313

5,165

1,065

643

Cement

kilo

156

173

154

Cotton cloth

sq. me.

Footwear

pair

2.6

1.1

2.2

. .

Paper

kilo

Sugar

kilo

Soap

kilo

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.

Transportation

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
expectations.

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

213

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 AND CAPITAL FORMATION

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
prices.

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.)

218

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
increase.

TABLE 11-1. COAL PRODUCTION IN SELECTED COUNTRIES, 1770-1938

(Millions of Tons)

England United State? France

Germany Belgium

Sweden*

/toss /a

6.2
6A

21 o

440

2.1
7.0

.2
.7
1.0
1.8
3.0
4.4

2.3

3.9
5.8

Year

1770
1787

1780
1811
1816
1820
1826
1830
1836
1840
1846
1850
1856
1860
1870
1880
1890
1900
1913
1923
1933
1937
1938

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.

65.0

80.0

14.6

8.3

16.7

9.6

.35

110.4

33.0

133

34.0

13.6

.64

146.8

71.5

19.3

59.1

16.8

1.18

181.6

157.8

26.0

89.2

20.3

1.96

225.1

269.7

33.4

149.7

23.4

3.5

287.4

570.0

40.8

277.2

22.8

5.7

29.1

658.0

40.1 |J

t 1

> m

, .

76.3

9.1

127.9

13.29

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

TABLE 11-2. AVERAGE ANNUAL PERCENTAGE RATE OF GROWTH IN COAL
PRODUCTION IN SELECTED COUNTRIES, SELECTED PERIODS, 1770-1938

Period

England

United State*

France

Germany Belgium Sweden* Russia

1770-1780

1787-1811

5.4

1780-1816

2.6

1811-1820

3!6

1816-1826

2.8

1820-1830

6.0

1826-1836

3.6

1830-1840

, e

5.2

1831-1840

6.0

1836-1846

3!9

. <

, .

, ,

1840-1850

. .

12.8

3.9

4.1

1846-1856

4.0

1850-1860

7^6

6!6

1 . 5^2

1856-1860

5.3

1860-1870

3.3

8.5

2.4

7.4 3.5 6.2

1870-1880

2.9

8.0

3.9

5.7 2.1 6.3

1880-1890

2.1

8.2

3.0

4.2 1.9 5.2

1890-1900

2.2

5.5

2.5

5.3 1.4 6.0

1900-1913

1.9

5.9

1.6

4.9 -.2 3.8

1913-1923

1.4

1913-1929

!! .. .. 2.0

1913-1937

1.9

1929-1933

17.5

1933-1937

. .

m t

13.8

1937-1938

3.9

Source Calculated from Table 1 1 -I

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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220

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.

THE GROWTH OF POPULATION

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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226

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

TABLE 1 1-8. PERCENTAGE DECLINE IN MORTALITY RATES IN SWEDEN,

1751-1945

Age Group
(Yean)

1751-1800
to
1801-1850

1801-1850
1851-1900

1851-1900
1901-1945

1751-1800
1901-1945

Under 1

14.6

27.9

53.8

71.6

1-4

27.5

15.6

74.5

84.4

5-14

29.1

10.1

65.6

78.1

15-24

11.5

17.9

26.5

46.6

25-44

5.5

29.4

39.7

59.7

45-64

-5.9

31.9

35.2

53.3

65 and over

-7.1

21.5

19.0

31.9

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
11-8.)

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
expectations.

NINETEENTH-CENTURY DEVELOPMENT AND SOCIAL WELFARE

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
mankind.

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 slow.er rate than they did be-
tween 1860 and, say, 1886. 22

TABLE 1 1-9. APPROXIMATE RATIO OF AVERAGE REAL WAGE RATE AT END OF
PERIOD TO ITS INITIAL VALUE, 1860-1913 AND 1919-1939

Country

1860-1913 1919-1939

1860-1939

France

1.6

3.0

Germany
Sweden

1.6
3.0

1.8
5.4

United Kingdom
United States

1.9
1.5

.3
.7

2.5
2.6

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

ACHIEVING DEVELOPMENT IN
THE CONTEMPORARY WORLD

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.

237

238

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
imply.

GENERAL EDUCATION AND TECHNICAL INSTRUCTION IN AGRICULTURE

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.

LAND REFORM

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.

Tenancy

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

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
production.

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.

COMMERCIAL VERSUS PEASANT AGRICULTURE

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

Conclusions

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
imports.

OTHER FACTORS AFFECTING AGRICULTURAL PRODUCTIVITY

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.
71-72.

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-
ment.

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.

POPULATION AND AGRICULTURE

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
disappears.

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
condition.

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
evident.

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
country.

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
areas.

THE ROLE OF AGRICULTURE IN THE ECONOMY

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
industries.

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
manufactures?

PRICES OF PRIMARY PRODUCTS IN THE FUTURE

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
equilibrium.

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 BEGINNINGS OF INDUSTRIALIZATION

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.

267

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
undertakings.

VILLAGE AND RURAL INDUSTRY: PROCESSING FARM PRODUCTS

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 SEQUENCE OF INDUSTRIALIZATION

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.
51.

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.

PROBLEMS OF CAPITAL INTENSITY, SIZE AND TEMPO

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.

CAPITAL INTENSITY

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.

SIZE OF PROJECTS

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
viability.

THE TEMPO OF INDUSTRIALIZATION

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
industry.

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.

FACTORS AFFECTING THE TEMPO OF INDUSTRIALIZATION

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
completely.

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
expansion.

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.

INDUSTRIAL DEVELOPMENT AND THE STATE

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,
1946.

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
industries,

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

PROBLEMS ARISING FROM INDUSTRIALIZATION

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
them.

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
society.

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.

MERITS OF FOREIGN CAPITAL

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,
1947.

2. Alfred Marshall, Industry and Trade, 4th edition, Macmillan, London, 1923, p. 5.

298

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.

MERITS OF DOMESTIC CAPITAL

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-
rogression.

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.

FOSTERING VOLUNTARY SAVING

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.

OBSTACLES TO VOLUNTARY SAVING

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
responsible.

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

METHODS OF FOSTERING VOLUNTARY SAVING

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
resources.

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
purposes.

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.

COMPULSORY SAVING: THE PROBLEM OF INFLATION
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.

DOMESTIC INFLATIONARY FINANCE

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.

INFLATION INDUCED BY EXPORTS

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?

ALTERNATIVES TO EXPORT-INDUCED INFLATION

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 COMPULSORY MEASURES TO INCREASE SAVING

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.

SELECTIVE IMPORT 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.

MULTIPLE IMPORT EXCHANGE RATES

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

FISCAL SYSTEMS AND ECONOMIC DEVELOPMENT

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.

CHIEF SOURCES OF REVENUE: PROS AND CONS

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
taxes.

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

323

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

TABLE 15-1. TAXES ON INCOME AND WEALTH IN SELECTED COUNTRIES,
FISCAL OR CALENDAR YEAR 1950 a

Tax Yield in Local Currency Units

Country

On Wealth or
Income
On Income On Wealth (Vndifferentlated)

Percentage of
Total Tax
Revenue

(Million

Asia

Burma

India

1,154

Indonesia

612

Malaya

North Borneo

Pakistan

Philippines

Singapore

Thailand

Middle East

Egypt

15 7

Iran

Iraq

10 3

Israel

31 6

Jordan

16 4

Europe

Italy b

Latin America

Peru

. .

Cuba

Guatemala

. .

Haiti

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

TABLE 15-2. TAXES ON FOREIGN TRADE IN SELECTED COUNTRIES, FISCAL OR

CALENDAR YEAR 1950 a

Country

Tax Yield in Local Currency

Units

Percentage of
Total Tax
Revenue

On Imports On Exports

On Imports or
Exports
(Undifferentiated)

(Millions)

Asia

Burma

. . . .

113

India

l,247 b

Indonesia

. .

727

Malaya

269

North Borneo

Pakistan

348 b

Middle East

Egypt

. .

Iran

. .

Iraq

. . . .

. .

Israel

. .

Jordan

Latin America

Peru

14" 32

. .

Venezuela

17 d

Cuba

36" 10"

. .

Haiti

58 f 20 f

. .

Guatemala

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
producers.

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

TABLE 15-3. TAXES ON CONSUMPTION, IN SELECTED COUNTRIES, FISCAL OR

CALENDAR YEAR 1950 a

Country

Tax Yield in Local
Currency Units

Percentage of Total
Tax Revenue

(Millions)

Asia

Burma h

Indonesia 11

733

Pakistan 1 *

123

India 6

Middle East

Iraq d

Iran 6

550

Turkey'

406

Europe

Italy"

483,150

Latin America

Peru h

290

Cuba 1

. .

Guatemala 1

9 .

Haiti'

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.

SPECIAL FISCAL DEVICES TO FURTHER DEVELOPMENT

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
expansion.

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-
investment.

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
progress.

GOVERNMENT BORROWING FOR DEVELOPMENT

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.

334

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.

TABLE 15-4. NATIONAL DEBT AS PERCENTAGE OF NATIONAL INCOME IN
SELECTED COUNTRIES, 1950

Relatively Developed Economies

Relatively Underdeveloped Economies

Belgium

93.7

Argentina*

59.0

Canada

117.1

Bolivia"

51.0

France

55.9

Brazil*

18.0

Norway

35.2

Burma

35.1

Sweden

40.6

Ceylon b

15.2

United Kingdom

232.1

Chile

6.8

United States

109.2

India

28.4

Mexico"

10.0

Peru a

21.0

Uruguay*

53.0

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.

GOVERNMENT EXPENDITURES

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

335

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

TABLE 15-5. TOTAL AND PER CAPITA GOVERNMENT EXPENDITURES IN
SELECTED COUNTRIES, 1949-1950

Country

Total
Budget
Expenditure

Total
Development
Budget
Expenditure

Total
Budget
Expenditure

Total
Development
Budget
Expenditure

Total
Expenditure
Per Capita

Development
Expenditure
Per Capita

(Millions,

National

(Millions

Currency)

of Dollars)

of Dollar*)

(Dollars)

India a

3,280

196

692

0.12 b

Philippines

486

243

Egypt

188 d

538

170

Iran'

11,117

1,638

342

Italy*

1,336,915

252,096

2,674

504

Venezuela 1

1,602

550

478

164

Peru

1,500'

255

231

United States

282

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-
ture.

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

336

Approaches to Economic Development

TABLE 15-6. MAJOR COMPONENTS OF GOVERNMENT EXPENDITURE AS PER-
CENTAGE OF TOTAL, SELECTED COUNTRIES, FISCAL OR CALENDAR YEAR 1950 a

Country

Defense

Interest on
Social Public
Services Debt

Other
Current

Total of Social
Services,
Investment,
Invent- Loans and Loans and
ment Advances Advances

Asia

Burma b '

22 5

Ceylon b

India b ' d

13 13

Pakistan 1 '

10 15

Malaya b

Philippines b

20 1

Middle East

Egypt

Iran 6

Iraq

Jordan 8

Europe

.. ..__ ^ ,

Italy 1

Latin America

u _^ ,

Cuba

Peru*

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
undertakings.

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
defense).

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

APPLICATION OF CAPITAL FUNDS TO DEVELOPMENT

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.

COMMERCIAL AND CENTRAL BANKS

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
countries.

AUTONOMOUS CREDIT INSTITUTIONS

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
proviso.

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

CONCLUDING OBSERVATIONS

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.

OBSTACLES TO PRIVATE FOREIGN 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.
289-93.

343

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.

RELATIVE POSITIONS OF PORTFOLIO AND DIRECT INVESTMENT

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

TABLE 16-1. NET MOVEMENTS OF PRIVATE LONG-TERM UNITED STATES
CAPITAL, 1946-1952

Year

Total Capital
Outflow*

Direct

Portfolio

Reinvested
Earnings

Net Additions
in Underdeveloped
Area&

1946

$ 59

$183

-$124

$303

$266

1947

810

724

387

845

1948

748

684

581

832

1949

796

786

436

818

1950
1951

1,168
963

702
604

466
359

443
703

504
629

1952

973

830

143

750'

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
depressions.

14. Indeed, the net movement of foreign private direct investment into public utilities has recently been
negative. See Table 16-2.

348

Approaches to Economic Development

TABLE 16-2. NET ADDITIONS TO PRIVATE UNITED STATES DIRECT
INVESTMENTS ABROAD, 1946-1950

(Millions)

Area or
Industry

Total Value Total Value
as of Net Additions During a? of

31, 1945 1946 1947 1948 1949 1950 31, 1950

Total

Canada

American
republics

ERP countries

ERP dependen-
cies

Other Europe

All other
countries

Total

$8,369
2,527

2,999
1,689

264
329

561

$8,369

By Area

$485 $1,111 $1,241 $1,212 $1,132
136 143 290 263 491

147
79

27
4

559
119

101

185

528
132

107

-13

197

565
114

188

267
139

-3
8

230

By Industry
$485 $1,111 $1,241

$13,550
3,850

5,065
2,272

561
349

1,453

$1,212 $1,132 $13,550

Petroleum

1,538

231

577

635

683

408

4,072

Manufacturing 1 '

2,671 '

183

317

380

280

411

4,242

Distribution

671

103

1,065

Mining and

smelting

1,064

-2

106

1,324

Agriculture

518

654

Public utilities

1,357

-80

1,338

Miscellaneous

550

855

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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350

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

MEASURES TO PROMOTE PRIVATE INVESTMENT

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 INCENTIVES FOR FOREIGN INVESTMENT 20

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.

INVESTMENT TREATIES

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
1949.

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
questionable.

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

GOVERNMENT GUARANTEES OF FOREIGN INVESTMENTS

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

Conclusions

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.

THE ROLE OF PUBLIC FOREIGN FINANCING

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-
takings.

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.

361

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.

MAGNITUDE AND CHARACTER OF PUBLIC FOREIGN FINANCING

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,

TABLE 17-1. LOANS BY THE INTERNATIONAL BANK FOR RECONSTRUCTION
AND DEVELOPMENT TO UNDERDEVELOPED AREAS, FISCAL YEARS, 1948-1953

(Millions)

Total
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.

TABLE 17-2. GRANTS AND LOANS BY THE UNITED STATES GOVERNMENT TO
UNDERDEVELOPED AREAS, FISCAL YEARS, 1949-1953

(Million*)

Commitments

Disbursements

194V

1950

1951

7952

1953

Total

$338

$520

$690

$814

$731

Grants

291

184

142

504

480

Loans

336

548

310

251

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
source.

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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365

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
rearmament.

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

367

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.

TABLE 17-4. UNITED STATES GOVERNMENT FOREIGN GRANTS AND CREDITS,
1945-1952, AND LOANS BY THE INTERNATIONAL BANK FOR RECON-
STRUCTION AND DEVELOPMENT, 1947-1953

(Millions)

United States Government
July 1, 1945-December 31, 1952

Utilized

International Bank
March I 1947

Credit's

November 31, 1953

Net

Export-

Loan

Postwar

Import

Disburse-

Commit-

Areas

Aid

Total

Grants

Total

Bank

ments

menti

Total, all areas

$37,847

$40,805

$28,825

$11,980

$3,667

$1,053

$1,557

Europe

29,229

21,072

21,328

9,744

2,430

621

773

Canada

150

1 t

150

148

Oceania

89*

150**

Latin America

644

952

289

663

628

209

355

Asia

6,979

7,509

6,243

1,267

412

178

Africa

-25

100

International

organizations

687

689

623

. .

Unspecified, all

areas

316

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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371

372 Approaches to Economic Development

tion of dollar debts, plastics plant, rayon and cotton textile machinery,
farm equipment, railroad equipment, cast-iron pipe production; Colombia,
flood control; Mexico, manganese, steel and sulphur production, shipping
facilities, mining development; the Philippines, small-business develop-
ment; Portuguese Africa, railroad and port improvement. 13 In recent years,
the heaviest allocations have accrued to Latin America and, there and else-
where, have gone preponderantly into the public utilities and extractive
industries. Faithful to its name, the Bank strongly emphasized the promo-
tion of certain important imports and exports of the United States.

The Export-Import Bank does not operate under several limitations
written into the charter of the International Bank: the "specific project"
specification; the requirement of foreign government guarantees; and the
exclusion of "local currency expenditures." Furthermore, any country,
whether or not a member of an international organization, may be given a
loan. But against the greater latitude enjoyed by the Export-Import Bank
in these respects is to be set its practice not imposed, however, in its
enabling legislation of requiring the expenditure of its loans for United
States products. 14 The Export-Import Bank seems always to have enjoyed
the confidence of the American business and financial communities, and
Administration requests for expansion of its capital have met with prac-
tically no resistance. Recently there have been indications that Export-
Import Bank lending activities to underdeveloped countries are at a stand-
still and that in the future only short-term credit for United States products
might be available. 15 The drastic reduction or termination of Point Four
in the sense of direct loans for development would involve for the United
States a loss of prestige and confidence throughout the economically under-
developed world quite out of proportion to the budgetary economy which
it achieves. United States aid (of much smaller magnitude) now being
extended through the United Nations might continue, but it is subject to
interference from Soviet and satellite objections or vetoes.

The International Bank for Reconstruction and Development

To many representatives of the relatively less developed countries, the
International Bank has been disappointing. In the first place, its original
capitalization at $8.35 billion was probably only one half or one third of
the magnitude thought suitable in some quarters. Actually, the Bank's
operations at the outset lay well within the original United States sub-
scription plus the relatively small 2 per cent gold subscription of other
members, totaling $734 million. Meanwhile, chiefly through the sale of the

13. Export-Import Bank, Semiannual Reports.

14. See Mikesell, op. c//., p. 215.

15. See New York Times. July 25, 1953, p. 18; September 15, p. 45; September 16, p. 49; September 30,
p. 47.

Public Loans and Grants to Underdeveloped Countries 373

Bank's own bonds and, in smaller amounts, through the accumulation of
profits and availabilities on nondollar subscriptions, the total of disposable
funds has nearly doubled, to $1,454.5 million in 1952. But this sum, how-
ever impressive in absolute terms, falls far below the expectations which
preceded or accompanied the launching of the institution.

Even within these confines, the Bank seemed to some critics to move
with unwarrantable conservatism "as limited in its operations as ...
private investment," in the words of the Food and Agriculture Organiza-
tion. 16 In part, this impression was founded on an erroneous interpretation
of the rules and usages of the Bank; in part, the impression was correct for
earlier practices which were subsequently somewhat modified; and in part,
the conservatism is real and unavoidable in the nature of the institution
itself.

The charter of the International Bank requires that its loans and guaran-
tees, except in special circumstances, "be for the purpose of specific projects
of reconstruction and development." (Art. Ill, Sec. 9.) Some critics as-
sumed that the Bank was thus constrained to apply ordinary commercial
tests of productivity and soundness to a given project that it had to be
profitable in the ordinary sense of a private investment. To this the Bank
replied that, white it must consider a loan on the merits of a specific project
and not merely for some vague and undefined developmental purpose, it
has always judged the merit of a specific project on the broad basis of its
contribution to the productivity of the economy, not its profitability in
isolation. 17 On this score, the Bank's position may have been definite from
the beginning, although it was rather tardily made explicit to the public.

But there seems also to be fairly clear evidence that on this same score,
and in the matter of the so-called "local currency expenditures," the Bank
has gradually moved to a somewhat less conservative position. During 1950
the Bank made several small loans to foreign banks for relending to private
borrowers for development purposes, certainly not a "specific project"
basis so far as the Bank was concerned; and at the same time it stated that
it would "go farther" in considering the merits of a particular project in the
light of general development needs. As for the "local currency expendi-
tures," in the strict sense as well as in the extended sense of the foreign
exchange needed because a given investment from abroad may lead indi-
rectly to additional import demands, the Bank's charter prohibits their
inclusion in loans save in exceptional cases. (Art. IV, Sec. 3c.) The Bank
quite correctly insisted that the general inclusion of these derivative needs
would lead in a spiral process to inflation and a demand for more loans;

16. United Nations, hfcthod* of Financing Economic Development in Under-developed Countries, p. 78.

17. International Bank for Reconstruction and Development, Fifth Annual Report, 1949-1950, Washing-
ton, 1950, pp. 8-10.

374 Approaches to Economic Development

and it laid down specific criteria of cases where an exception would not be
dangerous. 18 In 1951-1952, apparently satisfied that these tests had been
met, the Bank made a loan to Italy to include, for the first time, certain
sums for "local currency costs," and a loan to Belgium to cover certain
costs arising indirectly from the Bank loan to the Congo. 19

Allowing for these changes, however, a basic conservatism remains; and
so long as the institution preserves the character of a bank, this is quite
necessary. In terms of its loans or its guarantees, its operations rest on
repayment of the principal, and accordingly must rest on informed judg-
ments of the prospect of amortization of the loan by the borrower out of a
presumptive increase of productivity, direct or indirect, made possible by
the investment in question. Otherwise, the Bank's resources, instead of
serving as a revolving fund, would become a dwindling source of subsidies
or "gift loans." A strong case can be made for outright grants to impover-
ished countries in the beginning phases of development for the basic "pub-
lic services," and the United States government has itself responded to this
need. But there would seem to be every reason for keeping separate the
institutions and operations concerned with lending and with making grants.

For the less impoverished countries and for projects which directly or
indirectly bid fair to yield a specific product, the capital-receiving country
can, without jeopardizing its present or future welfare, undertake the in-
vestment from a loan at interest. This, it seems, has been the province of
the Bank, beginning appropriately with the most basic categories. Thus in
the fiscal year 1953 its loans were made for the following purposes: Brazil,
highway improvement; Colombia, railroad development; Finland, wood
products; Iceland, fertilizer plant; India, iron and steel production, electric
power, flood control and irrigation; Northern Rhodesia, railway develop-
ment; Peru, agricultural equipment; Yugoslavia, power, mining, transport,
iron and steel. 20 In emphasizing large public service investments, "the Bank
has been working toward the objective of developing conditions under
which private capital could find profitable investment in other activities." 21

Failure to distinguish between circumstances suitable for loans and those
requiring grants, as well as the obvious inadequacy of International Bank
resources for "loans" bordering on the second category, may account for
some of the criticism of its policies and the demand for new development
capital agencies. Thus V. K. R. V. Rao, in proposing a United Nations
Economic Development Agency (UNEDA), defined its field as the financ-

18. Ibid., pp. 10-11.

19. See Gardner Patterson and Jack N. Behrman, Survey of United States International Finance, 1951,
Princeton University Press, Princeton, 1952, pp. 123-25.

20. International Bank for Reconstruction and Development, Eighth Annual Report, 1952-53, Washing-
ton, 1953.

21. National Advisory Council on International Monetary and Financial Problems, Third Special Report,
June 1952, p. 7.

Public Loans and Grants to Underdeveloped Countries 375

ing of projects "not financially productive in a banking sense," though the
financing would be through "loans" on very liberal terms and at nominal
interest rates. 22 Such an institution would compromise the merits of out-
right gifts and the merits of self-liquidating loans by a vague amalgam of
both.

Proposal to Supplement the International Bank

On the other hand, the International Development Advisory Board,
appointed by President Truman under the chairmanship of Nelson Rocke-
feller, recommended the establishment of an International Development
Authority for the explicit purpose of making outright grants. 23 The ration-
ale of such an institution would be the need for grants on the part of im-
poverished countries for "public service" capital requirements, and the
political arguments for international management and participation in the
donation of such funds. Coupled with this, the Rockefeller group recom-
mended also the establishment of an International Finance Corporation
which would make loans; but unlike the International Bank it would
lend directly to private industries without the requirement of a government
guarantee in the receiving country, which has thus far proved to be a
stumbling block for the Bank. 24 The International Finance Corporation
would also be given the important power to make equity investments.

The proposals of the International Development Advisory Board have
special merit in that they contemplate supplementing the International
Bank rather than disrupting this effective going concern. The International
Finance Corporation would be an affiliate of the Bank, and the interna-
tional grant authority would operate under a management contract with
the Bank. Thus one set of technical experts could be called upon in several
contexts, effecting an economy in the number of skilled international
servants and utilizing their powers fully. An institutional division of labor
along the lines contemplated would cover the field more adequately without
disturbing the role which the Bank has evolved for itself in its years of
experience. 25

22. United Nations, Methods of Financing Economic Development in Under-developed Countries* pp.
129-32.

23. International Development Advisory Board, Partners in Progress, Washington, March 1951, pp. 73-
75. The proposed capital was $500 million, of which the United States would give $200 million.

24. Sir Arthur Sailer believes that the chief reason for the International Bank's inability to elicit private
capital through guarantees is its requirement of uniform credit conditions and uniform interest rates for all
borrowers. He recommends that the Bank pattern its loan operations after the successful League of Nations
loans in the 1920s to Austria, Hungary, etc. See Salter, op. cit. t pp. 46-51.

25. An apparently favorable exposition of the possible role of an International Finance Corporation was
presented to the United Nations Economic and Social Council by the president of the International Bank.
Eugene Black, on June 16, 1952. But the United States was reported as opposed to an "international de-
velopment fund" for "grants-in-aid, low-interest and long term loans to underdeveloped countries." Sec
New York Time^ June 17 and 21, 1952. The Rockefeller Committee proposals of two such institutions had
meanwhile been endorsed by the group of economists reporting to the United Nations in Measures for the
Economic Development of Under-developed Countries, see pp. 82, 84-87.

376 Approaches to Economic Development

This role has included, in the first place, a high degree of technical expert-
ness, objectivity and impartiality in the granting of loans which has already
earned for it a considerable degree of confidence, as evidenced by requests
for missions and economic advisers by various countries aspiring to eco-
nomic development. The Bank's studies of national economies are, in gen-
eral, distinct contributions to the statistical and other information concern-
ing less-known areas; and in nearly all cases they are models of common
sense and economic analysis. Finally, the insistence of the Bank on careful
schemes of national investment priorities, its emphasis on other than
financial aspects of the economic problem and its repeated warnings
against extravagant expectations have formed a consistent rationale of eco-
nomic development. Hence, the significance of the International Bank for
the underdeveloped world transcends by far the magnitude of its loans.

PRESENT PROSPECTS FOR DEVELOPMENTAL CAPITAL

Marked differences of conviction underlie the current discussions of
economic development in underdeveloped areas. 26 The older industrial
nations of the West view the process in the framework of an international
economy resting on specialization or division of labor in which underde-
veloped areas will, for some time to come, continue chiefly as primary
producers. Economic progress will unfold gradually for these countries and
will or should follow the lines of maximum productivity as indicated by
the price system. Only as industrial skills accumulate and as literacy, public
health, monetary-fiscal systems, commercial codes, etc., reach higher levels
can these growing economies hope for significant increases in real incomes
per capita. And only after this increase has attained a considerable height
and momentum can the state and the individual escape the necessity of
plowing back a very large part of the increment to income into investment
for further development.

To these tenets, generally speaking, the attitudes of the underdeveloped
areas form direct antitheses; the details can readily be supplied in the
imagination. But on no point, perhaps, is the divergence of conviction more
overt than on the score of the appropriate magnitude, sources and condi-
tions of capital supply. The relatively underdeveloped countries aspire to
speedy change, to all or most of the trappings of modern industrialism, to
"welfare" and social security, to national self-sufficiency or a "balanced"
economy all of which require vast sums of capital. Much of this money,
they believe, must come from abroad, to avoid pressure on domestic living
standards or even to permit some increase in per capita consumption. If the

26. Sec the general analysis of these broad issues by Norman S. Buchanan in Bernard F. Haley (Ed.),
A Survey of Contemporary Economics, Vol. II, Richard D. Irwin, Homewood, Illinois, 1952, pp. 307-50.

Public Loans and Grants to Underdeveloped Countries 377

capital is to be borrowed from abroad, the loans must run at low rates and
on long term. But grants are economically more appropriate for much of
the investment in underdeveloped countries; and it is argued that both
conscience and political expediency would counsel greater liberality on the
part of Western creditor nations, particularly the United States. Capital
flows amounting to several multiples of their present magnitudes are a
"necessity," they believe.

The probability is great that neither of these opposing sets of views will
entirely prevail, and that individual countries will follow widely divergent
patterns. With respect specifically to the financing of development, several
generalizations seem to be possible concerning the outlook for the next
several years.

Prospective Flow of Private Capital

In the first place, the flow of private foreign capital, largely originating
in the United States, does not promise to exceed by far the level of $800
million achieved annually in the years 1947-1949. Some underdeveloped
countries can hardly expect foreign private capital to enter the arena so
long as domestic capital takes refuge from the risks of expropriation, high
taxes, inflation and political upheavals by flight abroad. For other under-
developed countries, where adverse discrimination against foreign capital
has been the conspicuous obstacle, favorable effects would follow from
progress in negotiating investment treaties, removing tax discrimination
and extending the field of government guarantees on private loans. Each
of these, however, even in the most sanguine view, has only marginal
significance in encouraging private investment. An international setting in
which these measures could make substantial progress would also be a
setting favorable to the relaxation of foreign exchange control, including
the limitations imposed on transfer of profits. A fair share of the substan-
tial reinvestment of American earnings abroad must be ascribed to this
compulsion. Investment treaties, tax reform and guarantees would indeed
seem preferable to the compulsions of exchange control. But if the interna-
tional economic policy of the United States succeeds in promoting the one
and attenuating the other, thereby substituting the incentives of free choice
for force, the net outcome may leave the flow of direct investment un-
changed.

Over the long run, no doubt, foreign capital can only be had by attrac-
tion, and as compulsions, such as a capital export embargo, lose their force.
Meanwhile, however, political revolutions and violence exercised on for-
eign investments, such as the seizure of British oil properties by Iran and
the treatment of the United Fruit Company by Guatemala, are likely to
reduce the interest of private investors in the foreign field strongly and

378 Approaches to Economic Development

categorically. A decade or more might elapse during which progress along
the front of investment treaties, tax incentives, guarantees and other de-
vices to encourage private investment would merely compensate for politi-
cal and economic cataclysms. On balance, the Gray report's assumption
of a flow of private investment to underdeveloped areas equaling its recent
magnitude of $500-$800 million annually does not seem far afield. 27

Grounds for a more optimistic prognosis for private investment would
be provided by a combination of political stability, absence of expropria-
tion and inflation, etc., with the gradual creation of a basis of public
services and public utilities from domestic resources or foreign public
loans or grants. But the very rationale of these public undertakings, it must
be remembered, lies in their long-run character; and private investment in a
world of great uncertainties will rather await than anticipate the completion
of most of these large-scale projects.

Public Loans and Grants

The Gray report also contemplates a continuation of United States
government loans and grants (including Export-Import Bank credits) and
International Bank loans to underdeveloped regions at a rate of $600-$800
million annually, and $500 million in United States government grants and
contributions to technical aid. 28 The expansion of International Bank dis-
posable funds by the sale of its own bonds has indeed, over the seven years
of its history, brought a $500 million addition to its originally available
$734 million in dollars and gold. Currently, this process has gathered more
momentum, for during the 1951-1952 fiscal year it augmented the Bank's
resources by $175 million. 29 This sum increases the annual flow of capital to
underdeveloped areas by about one tenth. Further small additions to the
Bank's disposable funds are made through the liberation of the original 18
per cent local currency subscriptions by the respective members. Hence, the
chief methods of increasing the International Bank's resources are confined
to rather narrow limits.

As to the magnitude of United States government loans and grants, it
would be difficult to discover grounds in the present setting of defense
budgets and public opinion for expecting a substantial increase of capital
for development from this source. Even the proposal made in 1949 by a
group of United Nations experts that the United States commit itself over

27. Report to the President on Foreign Economic Policies, Washington, November 10, 1950, p 72. (Gen-
erally called the Gray Report.)

28. Ibid.

29. Each of the following groups holds about one fifth of the Bank's bonds: mutual savings banks; life
insurance companies; pension and trust funds; commercial banks and other investors all in the United
States; and fifth, foreign investors. International Bank for Reconstruction and Development, Seventh
Annual Report, Washington, 1952, p. 39.

Public Loans and Grants to Underdeveloped Countries 379

a period of five years to a constant annual sum of long-term foreign loans 30
met with flat rejection by the United States delegation and with generally
adverse comment by American economists. 31

A fairly convincing case can be established for increasing the proportion
of United States aid to developing countries in the form of grants and
decreasing the proportion of loans. The movement has in fact been in this
direction. But it is more than doubtful whether a convincing case can be
made even abstractly, quite aside from the political mood of the country,
for a vast extension of gifts. As Jacob Viner has observed, the principle of
sharing the wealth internationally does not carry conviction when it is con-
spicuously absent within many of the countries most vocal in espousing it
for the United States. Gifts do not generally have very favorable effects on
the morale of the recipient, and the tax systems of some countries seem to
show that nations are no exception to the rule. On the donor's side, it is
difficult not to cast shame upon the receiver and to refrain from imposing
conditions or implicitly attaching obligations which would really convert
the gift into a bribe. 82 These considerations and the political actualities
indicate that the total of American gifts and loans will not and probably
should not be expected to increase greatly.

Total Investment Probabilities

Tn attempting to estimate the future annual capital flow to underde-
veloped territories, it is probably wise not to count on other sources than
those just reviewed. Contributions by countries other than the United
States to colonial territories and to the Colombo Plan may for some years
be largely offset by the repatriation of private capital to metropolitan areas
in Europe from Southeastern Asia, India and the Near East. Thus the total
amount estimated here is from $1.6 to $2.1 billion annually for the proxi-
mate future, 33 paralleling the conclusions of the Gray report. This estimate
combines $500-$800 million in private capital (including reinvested earn-
ings), largely from the United States; $600-$800 million from the Inter-
so. United Nations, National and International Measure? for Full Employment. New York, December
1949.

31. See C. P. Kindlcberger, "International Disequilibuum," Canadian Journal of Economics and Political
Science, November 1950, pp. 529-37; W. W. Rostow, "The United Nations' Report on Full Employment."
Economic Journal, June 1950, pp. 323-50; Jacob Viner, "Full Employment at Whatever Cost," Quarterly
Journal of Economic*., August 1950, pp. 385-407; H. C. Wallich, "United Nations Report on Full Employ-
ment," American Economic Review, December 1950, pp. 876-83; and J. H. Williams, "International Trade
Theory and Policy Some Current Issues," American Economic Review, May 1951, pp. 418-30.

32. See Jacob Viner, Rearmament and International Commercial Polities, Foreign Service Institute, U.S.
Department of State, 1951, pp. 20-21.

33. This falls far short of the $4 billion annual average which the Food and Agriculture Organization in
1949 gave as the flow of funds to underdeveloped areas which had prevailed since 1945. See United Nations,
Method^ of Financing Economic Development in Under-developed Countries, pp. 65 and 81. The figure of $4
billion, however, includes not only funds for economic development but all other sums going to under-
developed areas, such as lend-lease, U.S. Army civilian supply, U.N. International Children's Fund and
U.N.R.R.A. rehabilitation programs, etc.

380 Approaches to Economic Development

national Bank and the Export-Import Bank; and $500 million in United
States grants and technical aid. Applied to the 1.4 billion inhabitants of the
underdeveloped world outside the areas dominated by the U.S.S.R., these
sums amount to $1.14 and $1.50 per capita per year.

A vast and indiscriminate aggregate of this sort must, of course, be
treated cautiously. Nevertheless, it makes one prospect dramatically clear.
An increase of the annual investment of international capital by several
multiples would still leave most of the burden of providing the wherewithal
for economic progress to the underdeveloped countries themselves.

But this conclusion in no wise negates the strategic importance of present
supplies of capital from overseas. It is the marginal increments from abroad
which may provide the upward fillip to production to lift standards of living
to the point of inducing family limitation. The loans and grants of foreign
public agencies, moreover, are possessed of an importance quite beyond
their mathematical share in the aggregate of national investment. These
funds go chiefly into basic services and utilities which private capital finds
too extensive, too slow in coming to fruition and too risky in their prospec-
tive yields; they supply the sine qua non of progress past the most rudi-
mentary level and pave the way for profitable private investment, both
foreign and domestic. Finally, a major theme of much of the recent discus-
sion of technical assistance has been the promise held forth by improved
but inexpensive agricultural implements and simple equipment for the
handicrafts and village industries. Precisely because a little capital goes a
long way, that little is crucial.

Differences in Borrowing Countries

Naturally, the capacity of individual countries to absorb and effectively
utilize capital varies markedly. India, for example, enjoys several outstand-
ing advantages in this respect most notably a universal language (English)
for the intellectual and civil servant classes and well-established commercial
and mercantile organizations in the larger population centers. In other
quarters, particularly in Southeastern Asia and the Near East and occasion-
ally in Latin America, these elements may be lacking. And by the common
irony of human affairs, absorptive capacity and available capital often
occur in inverse relation. The Sheik of Qatar is to receive from the foreign
petroleum companies an annual royalty of $11.2 to $14.0 million, 34 which
within less than five years would exceed the $57 million of United States
loans and grants extended to the entire continent of Africa in the postwar
period 1945 through 1951. Oil royalties for Iraq will suffice for its develop-
ment program as planned through 1957, 35 and Venezuela's position is

34. New York Times, September 3, 1952.

35. International Bank for Reconstruction and Development, The Economic Development of Iraq, Wash-
ington, 1952, p. 76.

Public Loans and Grants to Underdeveloped Countries 381

scarcely less strong. It does not seem unreasonable to inquire whether these
highly favored countries should not themselves make contributions by gift
or loan to the economic development of their less fortunate neighbors.

There is nothing paradoxical, but on the contrary a solid basis in com-
mon sense and observation, in the position that, however essential the
present flow of foreign resources may be to the progress of underdeveloped
regions, a vastly increased flow would not in present circumstances be
warranted. A subcommittee of the United Nations has declared that "In
practice, it is by no means always true that finance is the major limiting
factor," 36 a view repeatedly affirmed by the International Bank. The Execu-
tive Secretary of the Economic Commission for Asia and the Far East has
recently estimated that from $8 to $10 billion of foreign capital would be
required annually even to maintain present standards of living in Asia; but,
he adds, "Even if this vast sum of money were available, it could not, under
present circumstances, be effectively utilized. To do this Asia would need
more technicians, scientists, machines, etc., and above all, sound adminis-
trative machinery." 37

Economic development proceeds, if at all, along a very broad front which
extends from the relatively rudimentary matters of public health and
literacy, through the introduction of improved techniques and organization
in agriculture, industry, commerce and finance, to commercial morality and
the wisdom, energy and probity of government officials. It does not appear
that the supply of capital lags conspicuously behind wherever these other
forces are advancing vigorously.

36. United Nations, Methods of Financing Economic Development in Under-developed Countries, pp. 9 and
141.

37. P. S. Lokanathan, "The Economy of the ECAFE Region The Measure of Capital Requirements,"
Far Eastern Economist, February 8, 1952, p. 207.

18. Underdeveloped Countries in International Trade

DEFICITS IN THE INTERNATIONAL BALANCE outside the dollar area have been
so nearly universal since World War II that they cannot be considered
peculiar to countries in the early stages of economic development. Indeed,
some of the main causes of foreign deficits in these economies, such as
inflation and overvalued exchange rates, are all too familiar in the experi-
ence of the older economies as well. Some older economies are also under
certain special handicaps in attempting to achieve international balance,
from paying off unfunded foreign debts, maintaining overseas armies and
adjusting to the severance of colonial markets and sources of supply. These
difficulties in the present age appear to be as troublesome as those of the
newer regions.

Any country that earns a substantial portion of its total income from
exports is exposed to the vicissitudes of international trade and finance.
The United Kingdom, Denmark, Holland and Switzerland are just as much
"export economies" as many of the less advanced Latin American coun-
tries. By contrast, among relatively "self-sufficient" countries, there are
almost as many highly developed nations, such as the United States and
France, as there are underdeveloped nations, such as China, El Salvador 1
and numerous primitive economies in Africa and Micronesia. But between
two countries that are export economies to the same degree, the less de-
veloped country will probably encounter greater difficulty in compensating
for a decline in export income by increasing domestic government expendi-
tures, because these expenditures are likely to form a smaller proportion
of the national income.

BALANCE-OF-PAYMENTS PROBLEMS OF UNDERDEVELOPED AREAS

Although no single cause of balance-of-payments difficulties is unique
with underdeveloped areas, four causes seem most common or most power-
ful. First, underdeveloped regions are usually primary producers and as
such are exposed to large fluctuations in their markets and to consequent
disequilibrating effects on their balances of payments. Second, under-
developed regions generally have low incomes, and low incomes are asso-
ciated with several specific causes of difficulties with the foreign balance.

1. H. C. Wallich and John H. Adler, Public Finance in a Developing CountryEl Salvador: A Case Study.
Harvard University Press, Cambridge, 1951, p. 3.

382

Underdeveloped Countries in International Trade 383

Third, developing economies are usually borrowers; the very receiving of
funds, the character of the investment, and the service of the debt may all
produce complications. 2 Fourth, inflation springing from budget deficits is
widespread in the less developed countries.

VARIABILITY OF DEMAND FOR EXPORTS

The disruptive effect of fluctuations in the export markets of primary
producers has long been recognized, and a recent and notable statistical
study of the United Nations reveals the violence of these movements. 3 The
statistics, which cover eighteen important commodities and a large share of
the export trade of the underdeveloped world from 1901 to 1950, show that
the average year-to-year variation of export yield in foreign exchange was
22.6 per cent, while the average cyclical variation, covering a four-year
period or slightly more, was 37.2 per cent. 4 Many individual commodities,
of course, showed much larger variations than average; for some the
average annual variation was 37 per cent. Contrary to the widespread
belief that agriculture tends to compensate in some measure for price de-
clines by increased volume of sales, the report proves that price declines
generally accounted for a smaller portion of the shrinkage in total export
proceeds than did reduced volume. It was the frequent repetition of price
declines of 18-19 per cent annually for two, three and even more years,
coupled with a falling volume of sales, which produced the violent cyclical
contractions of export yields.

The Case of the Primary Producers

If countries are divided into three large categories economies that are
relatively self-sufficient, export economies dependent upon industrial
exports, and export economics dependent upon the sale of primary
products it is the last category that is far and away most subject to annual
and cyclical variations in the total real value of exports. Most of the under-
developed countries are in this category.

In times of prosperity, industrial countries tend to develop heavy im-
ports of industrial raw materials and unfavorable balances of trade. The
loss of gold or foreign currency reserves that these unfavorable balances
involve has, if anything, a braking or restraining influence on the pros-
perity. But for the primary producer countries, prosperity does not have
this effect ; rather the contrary, for export yields increase strongly and gold

2. Countries receiving large revenues from oil royalties probably escape most of the first and the third
kinds of difficulty.

3. United Nations, Department of Economic Affairs, Instability in Export Markets of Under-developed
Countries, New York, 1952.

4. Ibid., pp. 6. 43, 45 and 46.

384 Approaches to Economic Development

or foreign balances pour in. 5 Incomes rise, bank loans are expanded, and
the "prosperity" receives a further impulse. In these circumstances, many
underdeveloped countries, such as Cuba, reveal a propensity to bid up the
prices of existing assets in a speculative fever rather than add to their real
capital equipment. The ultimate destiny of these funds may thus be
sumptuary or even luxury imports and a prodigal waste of prosperity.

To cap the climax, the variations in the trade balances of primary pro-
ducers are accompanied, in general, by variations in lending by foreigners
which intensify boom and depression. Prosperity in the maturer industrial
countries results not only in large export yields for primary producers but
also in a stimulating inflow of foreign capital. Depression abroad reduces
export yields and induces foreign creditors to cease further lending or even
to seek to withdraw their outstanding loans. 7

Export Changes Due to Demand Changes

The United Nations study of export markets makes an important con-
tribution to intelligent policy formation in providing virtually conclusive
statistical proof for the belief, long held on the basis of general observation,
that conditions of demand, and not supply, are the principal explanation of
the variations in the export yields of the primary producing countries. If the
variations were generated on the supply side, lower prices would, through
the increase of quantity demanded, expand sales. The finding of the study
is, however, to the contrary: lower prices and smaller volumes of exports
were associated together.

Factors in Ills of Primary Producers

Variability of export proceeds plays so large a role in the economic ills
of primary producers, most of them underdeveloped countries, that it may
be well to restate the case. In the first place, the severity of these fluctua-
tions is augmented in real terms by the lesser variability of the prices of
imported industrial commodities. Second, primary producers tend to gain
reserves of gold or foreign currencies in good times and to lose them in
depressions, and this monetary factor increases both the upswing and the
downswing of incomes and employment. Third, capital flows from overseas
serve still further to increase the amplitude of these variations since for-
eigners lend in prosperity and cease to lend or even demand repayment in
depression. The rigidity of interest and amortization charges on foreign
loans, causing them to absorb as much as 40 per cent or more of the yield

5. H. C. Walhch, "Underdeveloped Countries in the International Monetary Mechanism," in Money,
Trade, and Economic Growth, Macmillan, New York, 1951, p. 25.

6. H. C. Walhch, Monetary Problems of an Export Economy the Cuban Experience, Harvard University
Press, Cambridge, 1950, pp. 209-16.

7. United Nations, op. cit., pp. 7 and 63-67.

Underdeveloped Countries in International Trade 385

of exports in depression in extreme cases, vastly complicates matters for the
primary producers. Finally, because so large a part of its total income is
earned from exports, the primary producing country may find it much more
difficult to achieve stability by domestic measures than does the more
developed manufacturing country.

In the depression of the 1930s, the general collapse of currency standards
and default on foreign bonds in Latin America revealed the violence of this
complex set of forces. These same forces seem to be no less violent and
wasteful in prosperity. Except in a few Latin American countries such as
Colombia, El Salvador and Nicaragua, and possibly also in India, the raw-
materials boom of 1950 and early 1951 made virtually no contribution to
the economic development of the primary producers. The gains went only
to a negligible extent into imports of machinery, metals and manufactures,
and were instead dissipated in imports of consumption goods, often of
ostentatious types. 8

While the most primitive parts of the underdeveloped world, including
the areas of "subsistence agriculture," are relatively immune to the fluctua-
tions, they fall with concentrated fury on the export sectors. Much of the
otherwise irrational drive for self-sufficiency, exchange controls and even
controlled economies springs from the desire to escape these fluctuations.
Until they are substantially curbed by appropriate national and interna-
tional policies, much of the hard-won wherewithal for economic improve-
ment will continue to be wasted.

LOW PER CAPITA INCOMES

Imitative Consumption

Low incomes can contribute to the balance-of-payments difficulties of
underdeveloped regions in several ways, though of course poverty does not
necessarily or automatically produce foreign deficits. Imitation of stand-
ards of living of wealthier economies increases consumption expenditures,
and the increase may result in domestic inflation and thus indirectly induce
foreign deficits, or it may impinge upon the trade balance directly through
the importation of those goods that particularly symbolize the higher
standards of living abroad. 9 Indigenous populations have probably always
tried to imitate the well-to-do foreign merchants, planters and governors in
their midst. But since the political upheavals of the last decade, extravagant
ideas of consumption, "social security" and economic equality have figured
among the most formidable problems of countries launching development
programs. Since this tendency toward imitative consumption does not de-

8. United Nations, World Economic Report, 7950-57, New York, 1952, pa\iim.

- 9. Ragnar Nurkse has emphasized this factor strongly. See "Some International Aspects of the Problem
of Economic Development,*' American Economic Review, Proceedings, May 1952, pp. 571-83; and Problems
of Capital Formation in Underdeveloped Countries, Black well, Oxford, 1953, p. 63 and passim.

386 Approaches to Economic Development

pend upon the absolute height of incomes but upon their slower rise in
underdeveloped countries as compared with more advanced economies, it
may play a perennial role in contributing to foreign deficits and foreign
currency shortages. 10

If the upward revision of standards of consumption were an isolated
episode, the deficit in the balance of trade would gradually be rectified
through the many channels of international adjustment. 11 But when the
impacts are continually repeated in the same direction, the adjustment
mechanism may prove less powerful than the disturbing forces. It is the
persistent lag of adjustment that explains the "chronic" tendency of under-
developed countries to show deficits, and the "chronic" shortage of dollars.
These tendencies are not chronic in the sense of being inevitable; they
would cease if the disturbing impacts ceased or if the automatic correctives
were reinforced in the deficit countries by tight money policies and in-
creased taxation. They are chronic only in the sense of being persistent and
not being sufficiently offset by appropriate policy. 12

Influence of Foreign Technological Progress

The question arises whether the rapid rate of technological progress in
some Western nations, particularly in the United States, may not be a
cause contributing to the foreign deficits of underdeveloped areas in the
same manner as the high consumption levels in Western nations. A techno-
logical lag tends to result in deficits if it weakens the power of a country's
exports in world markets, or if it causes the home population to substitute
imports for domestic products. Many of the raw material and cheap-labor
exports of underdeveloped areas do not have to meet the competition of
industrial countries. However, technological advance in the production of
consumers' goods may lead the less developed countries into extravagant
consumption and thus into foreign deficits. So far as the import of pro-
ducers' goods is concerned, a more rapid pace of technological advance in
the developed countries cannot impair the foreign balance of the under-
developed countries if they already derive most of their specialized ma-
chinery from abroad. If a rapid rate of technical improvement causes the

10 An early expositor of this factor was Charles P. Kindleberger in his essay on "International Monetary
Stabilization," in Seymour E. Harris (Ed.), Postwar Economic Problems, McGraw-Hill, New York, 1943,
pp. 375-98. In The Dollar Shortage (The Technology Press, Massachusetts Institute of Technology, Cam-
bridge, 1950, and Wiley, New York, 1951), Kindleberger has expanded on both the consumption factor and
the technological factor.

1 1 . A deficit country would be expected to show the following changes, each of which works toward the
elimination of the deficit: a reduction of incomes, employment and the general level of prices; a rise in the
prices of international relative to purely domestic goods; a movement of resources from domestic to inter-
national goods (exports or import substitutes); an inflow of private capital; and, if it is free to move, a fall
in its rate of exchange. Opposite changes in the surplus country, of course, tend to reduce its one-sided
balance.

12. This view is presented in Howard S. Ellis, "The Dollar Shortage in Theory and Fact," Canadian
Journal of Economic and Political Science, August 1948, pp. 358-73, and more lately in Jacob Viner, Inter-
national Trade and Economic Development, The Free Press, Glencoe, Illinois, 1952, pp. llff.

Underdeveloped Countries In International Trade 387

developed countries to increase their demands for raw materials, primary
producers stand to gain.

What the net outcome of all these factors may be is hard to predict. It
would scarcely be adverse to primary producers in all cases.

Meager Reserves

A further factor associated with low per capita incomes is the small
amount of international currency reserves (gold and foreign balances) that
poorer countries hold as a buffer against variations in export yields.
Whether these reserves are large or small is not a matter of their absolute
size but of their size relative to the swings of the country's trade balance.
Underdeveloped areas, being subject to great variations in export proceeds,
should require larger international currency reserves relative to the volume
of their foreign trade than do the maturer economies exporting manu-
factured products. Yet most of the primary producing countries have very
small international reserves.

This fact can be attributed largely to their reluctance, as low-income
countries, to forego much-needed imports, as they would have to do to
build reserves. 13 But this "reluctance" is not a matter of the choices of
private income recipients, a factor very frequently difficult for governments
to ignore, but a matter of government policy itself. Furthermore, interna-
tional currency reserves do not usually tie up a very large fraction of a
country's capital, even if they are adequate to meet most normal contin-
gencies and it is futile to expect to provide for every contingency in the
balance of payments. By taking thought, most governments could provide
reserves for normal contingencies even in relatively poor countries. The
abnormal contingency, such as a severe world-wide depression or a sudden
disaster to a particular country's exports, has to be faced by measures of
international cooperation : currency reserves held by individual countries
are not, in isolation, appropriate for meeting these adversities.

Even international cooperation in the form of stabilization loans by
international agencies or loans by an individual country will not cure the
shortage of reserves of underdeveloped countries if these reserves simply
disappear in every cyclical depression. Domestic measures to control infla-
tion are essential if the period of prosperity is, through the accumulation
of reserves, to provide for the rainy days of recession.

CAPITAL MOVEMENTS

Long-term loans and investments from abroad, if applied productively,
eventually result in an increased flow of output, including exports and im-

13. See League of Nations, Economic, Financial and Transit Department, International Currency Ex-
perience, Geneva, 1944, pp. 88-94.

388 Approaches to Economic Development

port substitutes. Foreign capital thus helps a developing country to prevent
inflation, to maintain equilibrium in its foreign balance and to avoid de-
preciation of its currency. This fundamental fact must not be forgotten in
considering certain inflationary potentialities of an inflow of foreign capital
in the short run.

How Inflation Arises

If the government of an underdeveloped country utilizes the proceeds of
foreign borrowing for imported tools or other capital goods and then sells
these to domestic companies, and if the domestic companies make the
purchases from previously idle funds or from new bank loans, domestic
inflation equal to the foreign loan will result. Over the course of a year,
other things being equal, money incomes will rise by the amount of the
foreign loan multiplied by the "income velocity" of the possibly augmented
stock of money. Only if the private purchasers substitute the outlay for
other purchases which they had been making thus making new savings
equal to the foreign loan, which seems unlikely would the inflation be
avoided. Otherwise, the government must tax its citizens, or the central
bank must induce banks to contract credit, or the treasury must set aside,
as "counterpart funds" in the language of the Economic Cooperation Ad-
ministration, sums equal to the foreign loan, to prevent inflation.

The same generalizations hold for foreign borrowing by governments or
private parties if the loan proceeds are used, not for imports, but for hiring
or buying domestic resources to construct capital equipment. They hold
also for expenditures of foreign capital by foreign companies within the
underdeveloped country, whether for imports or for domestic resources. In
all these cases, deflation by taxation or credit policy is necessary if the
inflationary effect of the foreign funds is to be countered. 14 The inflationary
impact of foreign capital, it should be noted, does not depend upon a
possible multiple expansion of credit by domestic banks on the basis of an
inflow of gold or foreign balances. 15

When eventually the capital equipment begins to turn out products, the
amount of money can safely be increased, provided, of course, the product
is vendible. Alternatively, if the underdeveloped economy receives foreign
loans in a more or less even flow, it can after the earlier loans have begun
to yield a flow of product offset the inflationary effects of the new loans
by the deflationary effects of the new production. A preponderance of one

14. Domestic inflation is not engendered, at least not independently, by a foreign loan to a government
that uses the proceeds to buy foreign equipment which it then continues to hold and "operate" and does not
sell. Reinvested profits by foreign companies are similarly noninflationary, since the disbursements pro-
ceed from new savings made in domestic money.

15. Foreign loans have been assumed to be "lines of credit" utilized only for the command of imports; or,
if the loan was made for or included outlays on domestic resources, it has been assumed that imports were
immediately made necessary in order to release these domestic resources for capital purposes.

Underdeveloped Countries in International Trade 389

over the other can be met by appropriate increases or decreases in the stock
of money.

It may safely be assumed that the entire proceeds of a foreign loan are
devoted to imports, either directly in the purchase of foreign capital equip-
ment or indirectly, if the loan is spent first on domestic resources, in pur-
chasing imported food and consumers' goods to permit the diversion of
labor from necessary consumers' goods to the production of plant and
equipment. But the original outlay of loan proceeds may not exhaust the
demand for imports flowing from the loan. Income receivers presumably
spend a part of their expendable funds on imports, and these "induced
imports" are additional to the primary import demand arising from the
foreign loan.

How to Prevent Inflation

Consequently, a country financing part of its development by means of
foreign capital must limit its expansion of domestic money incomes to what
the primary plus the induced demand for imports will permit, with the
basic consideration of the country's export capacity and any inflow of new
loans as the limiting factors. But the same rule also applies to internally
financed development, since purely domestic investment also may give rise
to both primary and induced import demands. It is not the source of
capital which may cause excessive imports but the rise of domestic incomes
and prices relative to those abroad.

Induced imports are not a peculiarity of foreign loans, and least of all
are they a peculiarity of foreign private loans and foreign private invest-
ment. 10 A foreign capitalist takes no account of how his investment may
affect imports; the problem must be solved by appropriate monetary and
fiscal policy. But the very same measures must be taken in order to hold
within bounds the induced imports from foreign public loans and invest-
ments, as indeed from domestic investment, both public and private.

Furthermore, induced imports constitute no case against a "project
basis" for development loans of the kind the International Bank has
generally insisted upon. The total import demand from a given investment
project will not exceed the original loans if the monetary-fiscal authorities
in the receiving country do not allow money incomes to rise excessively.
Obviously, no amount of supplementary foreign loans designed to "cover
induced imports" will suffice if incomes in the borrowing country are
progressively inflated.

Questions of Policy

There is no given proportion of total domestic investment that must be
financed at home by an underdeveloped country, or any other country, in

16. Contrary to what Kindlebci ger seems to imply in The Dollar Shortage, pp. 33-34.

390 Approaches to Economic Development

order to avoid balance-of-payments deficits, so long as the investment is
financed by voluntary saving or by the several forms of compulsory saving
other than inflation. Even more obviously, there is no given proportion of
domestic factors other than capital, such as labor, managerial services and
materials, that must be employed in order to avoid deficits in the foreign
balance. 17

What is required to steer clear of balance-of-payments difficulties if de-
veloping countries borrow from abroad is a monetary and fiscal policy that
offsets the inflationary impact of the original expenditures on capital equip-
ment as well as that of the imports induced by subsequent expenditures of
the additional income. Import and investment controls are not necessary
to achieve these ends. Certain countries have shown a decided predilection
for direct controls, and for such countries the inflationary potential of
foreign borrowing offers a welcome excuse for more "planning" and more
interference in trade. If the basic cause of balance-of-payments difficulties
is inflation, however, these direct controls are likely to be mere palliatives.
The pressure on the country's exchange rates is not removed but only
restrained; and the restraints of direct controls on the deficit tend to con-
tribute to an all-around shrinkage of international trade.

Stipulations by Foreign Lenders

Countries that are underdeveloped economically are often perhaps
even generally underdeveloped also in institutions of monetary and fiscal
control. It may therefore be necessary for foreign lending authorities to
refuse to lend without stipulations concerning the achievement of balanced
budgets, restraint of credit, and so on, unless they are prepared to see the
economic fruition of their loans blighted by inflation and adverse foreign
balances in the borrowing countries. The Bell Mission recommended this
procedure in any further United States aid to the Philippines. In the 1930s,
the League of Nations secured stable financial policies in countries receiv-
ing the League loans through a system of financial advisers. Arrangements
of this sort have been made quite informally in connection with some of the
International Bank's more recent loans. The practice might well be given
wider recognition and use.

PRINCIPLES OF INVESTMENT IN DEVELOPING ECONOMIES

As with the more mature economies, so also for the younger ones the
avoidance of inflation by proper credit and budgetary measures is the
primary prescription against foreign deficits. The "necessity" for extensive
controls then disappears, as well as the "necessity" of observing largely

17. Alfred E. Kahn in his article "Investment Criteria in Development Programs," Quarterly Journal of
Economics, February 1951, pp. 45-46, is correct in his criticisms.

Underdeveloped Countries in International Trade 391

self-evident rules, such as taking account of induced imports, or quite
spurious ones, such as gauging the proper extent of foreign borrowing by
the import content of capital improvements.

With regard to the appropriate character of investment in a developing
country a simple prescription also suffices: investment that seems best from
the standpoint of the country's domestic economy is also best from the
standpoint of its balance of payments with the outside world. Unfortu-
nately, this simple rule would be regarded as anything but self-evident in
some quarters.

Infant Industries

The proposition must be modified, of course, for genuine cases of "infant
industries" that can be built up eventually to a position of effective import
substitutes or competitive exports only by virtue of state subsidies or tariff
protection. But the number of such industries is limited. For the validity
of the "infant industries" argument rests on two conditions: first, that the
legislatures which impose the tariffs have superior knowledge or insight
regarding future economic development, as compared to private capitalists
and their experts; second, that the subsidy or protection will be withdrawn
once a period of not indecently prolonged infancy has elapsed. If these
conditions are met, as they probably rarely are, there is then an instance of
an investment that will eventually prove wise for both the national produc-
tivity and the balance of payments though not immediately optimal for
either.

Productivity as the Criterion

The proposition that investment which maximizes domestic productivity
also makes the maximum contribution to balance-of-payments equilibrium
is a direct corollary to the principle of free trade and the principle of maxi-
mizing total returns through the allocation of capital so as always to secure
a rate of return as good as or better than what it might secure elsewhere.
But the proposition, applied to developing economies, or others, requires
two qualifications.

First, some investments, particularly those in the public services and
utilities, have a productivity not directly revealed by the market value of
their vendible product. If "productivity" is measured by direct product, the
general principle of maximum return becomes subject to corresponding
qualification. If productivity is measured broadly, the qualification is slight:
public services of the sort here envisaged usually make important indirect
contributions to export capacity.

Second, expenditures for consumption out of foreign loans are not
usually regarded either as investment or as increasing the capacity to pro-

392 Approaches to Economic Development

duce goods for home consumption or export. Thus the use of a foreign loan
for foodstuffs or housing falls outside the principle except to the limited
degree to which these outlays can really be regarded as productive invest-
ment. To this limited degree, however, they increase both domestic produc-
tivity and export capacity.

Productivity thus asserts itself as the criterion of correct investment for
capital derived from abroad, just as it is for capital from domestic sources.
In Polak's words, "foreign exchange troubles are not created by the fact
that expenditure for 'unproductive' purposes is financed from abroad, but
by the fact such expenditure is made at all." 18

The general rule that, for regions of capital scarcity and abundant labor,
investment should be "capital-economizing" represents neither a modifica-
tion of nor an addition to the productivity rule. Costs are minimized and
profits are maximized; that is, capital instruments are most productive
when they employ the most economical combination of factors in view of
their prices; this procedure also maximizes national income. The same rule
of investment will make the largest contribution toward eliminating a
deficit in the trade balance. 19

Special Types of Projects

Balance-of-payments deficits can be caused by investment in projects
that take excessively long periods for completion. No productive facility
yields a flow of goods, an addition to national income, until it is completed.
It is the function of the saved-up purchasing power of the investment
capital to provide the necessary real resources that come to be embodied
in the final machine or improvement. If the capital provision is adequate
for the undertaking, its gestation period, the period required to complete
it, will not be excessive. This is true whether the project is financed locally
or from abroad. In general, the high rates of interest and low rates of wages
in underdeveloped regions will dictate an economical use of capital, and
gestation periods will be correspondingly short. But, more specifically, it is
only necessary, in order to avoid balance-of-payments difficulties, that the
person or government undertaking a project be assured that enough do-
mestic or foreign capital is available, or during the gestation period will
become available, to complete the undertaking.

Observation of substantially the same principles will prevent under-
developed areas from committing their capital to forms which have a too
slow turnover, that is, a too low ratio of annual gross receipts ("sales") to

18. J. J. Polak, "Balance of Payments Problems of Countries Reconstructing with the Help of Foreign
Loans," Quarterly Journal of Economics, February 1943, p. 228.

19. In other words, as Ohlin explained, a country gains most by exporting products in which its relatively
cheapest resources form a large component. See Bcrtil Ohlin, Interregional ana" International Trade, Harvard
University Press, Cambridge, 1933.

Underdeveloped Countries In International Trade 393

investment. If the capital is invested with due regard to the general rules of
productivity, the net returns to capital will cover interest charges. In gen-
eral, in a capital-poor economy, the most economical ratio of capital to
labor will be a low ratio, and this means a high turnover or gross return
rate in the sense that replacement charges are high in relation to interest
charges. However, if the person or government undertaking the project
constructs it in a sufficiently capital-economizing fashion to be able to meet
the schedule of debt amortization agreed upon in the loan contract, there
will be no reason for balance-of-payments difficulties. Naturally, however,
the foregoing rule of financial prudence will have to be observed for domes-
tic as well as for foreign borrowing, if any of the actual investment involves
imports.

Some techniques admit of few or no variations in the size of investment
or in the proportion of capital and labor utilized. There may be types of
investment unavoidably entailing excessively long periods of gestation,
projects involving a larger capital provision than the developing economy
has at its disposal from prospective domestic or foreign sources. In this
situation, the authorities cannot avoid the uncomfortable choice between
not launching the project at all and going ahead with the hope of securing
the necessary additional funds as the work proceeds. Purely technical re-
quirements may also impose the necessity for a capital instrument of
greater durability than would seem warranted in a cheap-labor country.
Here again the choice is between foregoing the project and constructing an
instrument that requires heavy initial capital outlay with subsequent low
outlays for maintenance labor in a capital-poor, labor-abundant economy.
There is no general solution to these dilemmas. But the great changes
occurring in a rapidly developing economy make investment risks corre-
spondingly great, and caution in launching large-scale capital-intensive
projects would seem to be the better part of valor. 20

Timing and Size of Projects

Thus several of the hazards to which the balance of payments of a de-
veloping country has been considered to be exposed are avoidable by ob-
serving the ordinary principle of investment according to productivity and
ordinary financial prudence. But, it may be asked, even if a particular
investment meets the test of competitive productivity that is, if the present
discounted value of the total foreseeable future income from a particular
project equals or exceeds the present cost of production of the projected
instrument cannot foreign deficits arise from a lack of coincidence in the
time of the receipts and the schedule of interest and amortization? If a
country intent on development were to launch simultaneously a substantial

20. See pp. 277-79, above.

394 Approaches to Economic Development

number of heavy investment projects, foreign deficits could undoubtedly
appear even though the investment were highly productive and domestic or
foreign finance were adequate to cover the cost of the projects. Returns
might still not at times cover the service of the debt. The very function of a
foreign loan, if it suffices for the total construction cost, is to accommodate
the total foreign deficits during the unproductive period from inception to
completion of the project.

The danger of deficits from the lack of coincidence of the "time-shape"
of returns with the schedule of the debt service is great only (1) if a large
portion of the total foreign borrowing is committed to one particular
project; (2) if, with a large number of projects, all or most of them have
similar "time-shapes" of returns and if they are launched simultaneously or
in rapid succession; or (3) if often a serious possibility there are long
delays in the execution of construction plans. The probabilities are some-
what against the first two of these contingencies. A large succession of
foreign borrowings together with an equally large succession of relatively
small investments tends to produce an even flow of both amortization and
investment yields. Furthermore, the developing country may possess mon-
etary reserves sufficient to bridge over temporary deficits. But if not, and if
the productivity of the investment has been clearly established, it would
appear to be one of the primary responsibilities of the International Mon-
etary Fund to care for these purely temporary deficits. To sacrifice the
productivity of investment and hence its aggregate benefits in real income
and in the balance of payments because of temporary sources of deficits
would be an act of desperation.

Loans versus Grants

A borrowing economy invites disaster for its balance of payments if it
utilizes a foreign loan in such a way that the direct or indirect increment to
real income resulting from it is smaller than the interest charge, that is, if
the productivity of the capital is less than interest. For this reason, the use
of foreign capital for consumption or for low-productivity purposes re-
quires outright grants or low-interest loans. And the international agencies,
including the International Bank, and governments, chiefly the United
States, have in recent years recognized this need of capital for the establish-
ment of low-yield basic utilities for welfare purposes.

Overborrowing

If interest and amortization charges do not exceed the long-run produc-
tivity of the projects, developing countries may still run afoul of balance-
of-payments difficulties because of autonomous variations in the balance of
trade in the relation of exports to imports independent of loans. It is from

Underdeveloped Countries in International Trade 395

this angle that "overborrowing" assumes real meaning, for there is other-
wise no definable proportion of the total foreign exchange receipts of the
borrowing country that must not be exceeded by the foreign debt service.
Overborrowing does not consist in a possible interest or profits slavery to
exploitative foreign capitalists, for typically these sums, computed as a per
capita charge per year, have been very small. It consists, rather, in so large
a charge on the balance of payments and dividends, while not a fixed
charge, are nevertheless a charge that cyclical or episodic variations in
export yields may leave an insufficient margin for necessary imports. In
Australia, for example, the "investment service ratio," defined as the "pro-
portion of foreign exchange receipts absorbed by the service of foreign
investments," having ranged from 14.8 to 26.0 per cent from 1904 to 1929,
suddenly rose from 26.0 to 43.8 per cent from 1929 to 1931. 21

For primary producers, whose export yields characteristically fluctuate
in a wide arc, the investment service ratio is occasionally dangerously high.
In 1949 the countries with the highest values for investment service in Latin
America were Costa Rica and Venezuela, at 22.4 and 26.0 per cent of
foreign exchange receipts; in Asia, Iran and Iraq, at 53.1 and 17.7 per cent;
and in Africa, Northern Rhodesia, at 34.3 per cent. But 1949 was a year of
recession in the developed industrial countries and hence the figures stood
at high levels even for them. In that year the countries with the lowest
investment service ratios were, in Latin America, Ecuador, Puerto Rico and
El Salvador, at 5.6, 3.8 and 2.3 per cent; in Asia, India, the Philippine
Republic and Ceylon, at 5.0, 5.0 and 3.2 per cent; and in Africa, Southern
Rhodesia and Egypt, at 8.1 and 6.5 per cent. Most countries lay closer to
the lower than to the higher limits. 22 Thus, with notable exceptions, the
investment service ratios of underdeveloped countries are not in general
perilously high. Where they are, the danger exists chiefly because of the
variability of export yields.

Capital Flight

Many problems are involved for underdeveloped countries in the inflow
of foreign capital, the utilization of these funds, and the service of the debt.
But an outflow of funds, usually called a "flight of capital," is a still more
serious matter. The repercussions of foreign borrowing may occasionally
be adverse; but for a capital-poor country the fact of borrowing is generally
favorable. By the same token, for a capital-poor country, a capital out-
flow is itself an unfavorable fact. The complications of borrowing belong to
what mathematicians call the "second order of smalls," whereas the loss of
capital to foreign countries is a first-order evil.

21. David Finch, "Investment Service Ratios of Underdeveloped Countries," International Monetary
Fund, Stuff Papers, September 1951, pp. 60-85.

22. Ibid., p. 84.

396 Approaches to Economic Development

Guatemalan private deposits in the Uriited States amounted to 14 million
quetzals (1 quetzal = $1 U.S.) in 1950, a sum almost equivalent to the
annual volume of private capital formation. 23 In three months prior to the
national elections of July 6, 1952, Mexican businessmen and investors sent
$50 million to the United States for safekeeping or speculation, 24 an amount
equal to one half the unfavorable balance of that country for January-
June 1952. The abrogation of the Anglo-Egyptian treaty in October 1951
led to the establishment of several banks in Beirut that specialized in the
transfer of capital from Cairo to the West at 12 to 15 per cent discount. 25
In the first six months of 1951, foreign private capital was withdrawn from
Ceylon to a total of 33.9 million rupees, whereas new private foreign invest-
ments in Ceylon amounted to 14.9 million rupees during the same period. 26

Clandestine capital exports on private account largely elude official
estimate. It may be partly the lack of anything more than sporadic figures,
such as those just cited, that has deterred economists from giving more
attention to the problem of capital flight from the less highly developed
economies. But it seems fairly certain that in some cases a large part of the
new capital funds coming in from abroad is lost to domestic development
in this reverse flow. Little has been said about this possibility in the various
financial studies of the United Nations or in the International Bank's re-
ports on countries.

COPING WITH BALANCE-OF-PAYMENTS PROBLEMS

The foreign deficit of an underdeveloped country in large measure merely
reflects its domestic deficit it parallels the excess of domestic investment
over domestic saving, voluntary and forced. In other words, inflation-
cither absolute or relative to the trading partners is perhaps the most
common cause of the balance-of-payments difficulties of underdeveloped
countries, just as it is with the more mature industrial economies. Basically,
inflation can be prevented, rather than merely concealed or suppressed,
only by monetary and fiscal policies. If developing countries possess only
rudimentary monetary controls or inadequate tax systems, they have the
choice of improving these institutions or resigning themselves to open or
suppressed inflation. The widespread need for such improvement as well as
the most basic remedies against uncovered foreign deficits arising from
inflation have already been discussed in Chapter 15.

23. International Bank for Reconstruction and Development, The Economic Development of Guatemala,
Washington, 1951, pp. 290-91.

24. New York Times, August 11, 1952.

25. The Economist, May 3, 1952, pp. 299-300.

26. Economic Weekly, April 26, 1952, p. 428.

Underdeveloped Countries in International Trade 397

Other factors, besides inflation, that may cause deficits or make them
hard to manage for the less developed economies include: large swings in
export yields; imitation of foreign standards of living, and the small pro-
vision of international monetary reserves, both of which are closely asso-
ciated with low per capita incomes; the troubles that may develop from a
foreign capital inflow, from specific forms of investment, and from the
payment of interest and repayment of principal; and finally, the flight of
capital. What are the means for coping with these problems?

Capital Flight

The flight of capital, to begin at the end of the list, is one of the least
tractable of modern economic ills; to effect a cure, treatment must be
directed toward the whole constitution of the suffering economy. However
severe the penalties for evasion, the history of exchange control reveals a
general lack of success in enforcing prohibitions of capital export. Even in
the case of the United Kingdom, which enjoys a high level of civic respon-
sibility and commercial ethics, capital export either by way of "avoid-
ance" or violation of the regulations has at times played a predominant
role in the development of payments deficits. 27 All of the countries cited
previously as illustrations of recent severe flights impose embargoes on
capital export. Not only do these prohibitions frequently fail in their pur-
pose, but they also have the perverse effect of deterring new capital from
entering the country. 28

The phenomenon of capital flight from underdeveloped economies re-
inforces more powerfully than almost any other evidence the contention
that domestic conditions favorable to the saving and investment of home capi-
tal are absolute prerequisites if foreign capital is to be attracted, and, if
obtained, not then offset by a reverse flow of funds.

It is unnecessary to embroider on the necessity of political stability and
freedom from political reprisals against savers and capital suppliers. But it
may be desirable to add that taxation cuts two ways: while high taxes com-
bat inflation and thus contribute to the safety of the home currency, they
also drive capital abroad. In developing economies, monetary methods of
avoiding inflation thus take on an added significance. The historical record,
particularly in the more rapidly developing nations of Latin America,
shows that the avoidance of inflation is one of the most difficult achieve-
ments.

27. See Lionel Robbins, "Inquest on the Crisis," Lloyds Bank Review, October 1947, pp. 1-27; Roy F.
Harrod, The Pound Sterling (Essays in International Finance, No. 13), International Finance Section.
Princeton University, February 1952.

28. The easing of exchange controls by Colombia during 1951 was immediately followed by an increased
.nflow of foreign capital. See New York Times, January 4, 1952, pp. 41 and 59.

398 Approaches to Economic Development

Capital Inflow

To escape the inflation and the foreign deficits that may attend an inflow
of foreign capital, on the other hand, should be feasible. For, fundamen-
tally, the importation of long-term capital is disinflationary and favorable
to the borrower's exchange rate. But the utilization of foreign loans, except
for certain cases previously pointed out, sets inflation afoot. 29 It may be
counterbalanced by credit contraction or an increase of taxation equal to
the loan. Or, alternatively, sums equal to the sales of imported goods or the
purchases of domestic resources from the loan may be rendered inactive by
deposit in a "counterpart funds" account maintained by the government.

If foreign loans are used in consumption or for low-productivity projects
without correspondingly low interest and amortization charges, the de-
veloping country's balance will deteriorate. To maximize the disinflationary
effect of foreign long-term capital and its improvements of the balance of
payments, high-productivity lines of investment must be placed first. For-
eign and domestic private investors will certainly strive to achieve maxi-
mum returns, and their investments will maximize the balance of payments
unless the state (that is to say, its civil servants) should possess superior
knowledge or information concerning better lines of investment.

No departure from the rule of productivity, and therefore no further
complication for the developing economy, is involved in selecting such
investments as do not have excessively long gestation periods or excessively
long turnover periods. Ordinary financial prudence on the part of the state
or the private investor will preclude ventures that cannot be finished with
the available domestic and foreign capital and ventures yielding returns at
an average rate that lags behind the contractual rate of debt service. Com-
plications may arise, it is true, even with high-productivity investments if
their returns at times fall short of the debt service. But this difficulty may be
avoided by launching a large number of smaller ventures so that their
yields overlap and thus produce an approximately even flow in the aggre-
gate. Or, alternatively, if a single large capital venture is the most produc-
tive, the government may accumulate reserves or borrow on short term to
bridge the gap. The government will be loath to forego productivity in
order to avoid the possibility of a temporary adverse balance, and foreign
public lenders should presumably take the same position.

From the standpoint of the borrower's capacity to service the debt,
foreign borrowing is, of course, excessive for any and all sums that are not
invested in such a way as to yield the contemplated interest and amortiza-
tion payments. Even with the successful investment, it may also be exces-
sive at times in terms of yield over the lifetime of the venture, if the total

29. See n. 14. Naturally, also, so long as a loan stands merely as an unutili/ed line of credit in favor of the
underdeveloped country, it has no inflationary force The magnitude of these unutih/ed credits possibly
through no "fault" of the borrowing countries is large. See Table 17-3.

Underdeveloped Countries in International Trade 399

of debt service charges forms a large proportion of the foreign exchange
yields of exports and if these yields from exports are highly variable. Some
underdeveloped countries appear to be in this unfortunate situation, but
their number is not large.

Thus examination of the pitfalls that may await developing countries as
a result of the transfer of foreign capital into their economies for investment
purposes and the consequent servicing of foreign debts does not reveal
much danger that cannot be avoided by good private and public manage-
ment. And most of the good management consists in following ordinary
rules of maximizing returns from investment, in exercising ordinary finan-
cial prudence, and in pursuing fiscal and monetary policies that will pro-
mote stability of prices and employment.

Low Incomes

The situation is different with the causes of balance-of-payments diffi-
culties that are associated with low average incomes most notably the
imitation of the levels of personal or family outlay of the more prosperous
nations. A sufficient degree of austerity can, of course, be imposed by
taxation, exchange controls or direct limitation of imports. But the develop-
ing country may face something of a dilemma in that, for a populace suffi-
ciently sophisticated to know and to wish to imitate foreign consumption
standards, one of the chief psychological drives toward economic progress
may be withdrawn if the impulse remains unsatisfied. Some degree of com-
promise that induces or forces a certain amount of domestic capital forma-
tion for future higher incomes and still permits some increased consumption
would seem to be the necessary solution for any but totalitarian states.

Also associated with low incomes is the tendency of underdeveloped
countries to hold too small reserves of gold and foreign balances to protect
their currencies from collapse with each major downswing in export mar-
kets. This difficulty is largely unsurmountable except by measures directed
toward the stabilization of world commodity markets. In the absence of
such a basic improvement, stabilization loans from foreign sources are
likely to be dissipated at the first whiff of adversity.

Swings in Export Demand

Economic development probably carries with it some tendency toward
diversification of exports and self-sufficiency on the side of imports. But
this tendency is altogether too slight to affect trade problems significantly.
For a long time to come, the less developed countries will continue to be
primary producers so far as concerns export markets; and they will con-
tinue to suffer from periodic crises in their foreign accounts unless world
commodity markets become more stable.

400 Approaches to Economic Development

Thus an early theme of this chapter recurs the vulnerability of export
economies to swings in export yields. It is difficult to believe that any other
factor has a stronger disruptive effect on the foreign balances of under-
developed countries. The pressure of the younger economies toward higher
consumption levels is probably fairly constant; the operation is secular
rather than cyclical. And while this unremitting pressure complicates the
attainment of balance in their international accounts, it does not present a
crisis phenomenon. Partly for this reason and partly for others, it should
be amenable to control. Even capital flights would be less serious if the
currencies of the underdeveloped countries were not undermined in each
major depression by unfavorable trade balances.

Diversification

An idea that has found rather wide support in underdeveloped countries
and has been championed by an occasional economist is that diversification
of the primary producer's economy is desirable as a defense against fluctua-
tions in international markets. 30 In order to make a conscious policy of
diversification effective, it would have to involve a readiness to sacrifice
productivity in favor of security, since otherwise no issue of diversification
versus concentration would arise. The solution, in any event, must be one
of degree. Proponents of diversification would rarely advocate the policy
to its extreme, that is, no exports or imports; and opponents would rarely
deny that reduction of risk is properly a part of economic arithmetic for
individuals and nations alike. However, diversification that is not auto-
matically the outcome of economic progress along lines of maximum
productivity entails a loss of efficiency, of output and of the rate of progress
itself.

The Basis of Stabilization

The responsibility for bringing about a tolerable degree of stability in the
international markets for primary products rests chiefly where the demand
for these products arises with the economically advanced nations. To
come to the root of the trouble, domestic production and employment must
be stabilized in the principal industrial and commercial countries. In de-
fault of this, what can be accomplished by international commodity stabi-
lization schemes would seem to be doubtful, despite the judicious support
given them in the Angell report to the United Nations. 31 In any event, it is

30. See, for example, S. G. Triantis, "Cyclical Changes in the Balance of Trade," American Economic
Review, March 1952, pp. 69-86.

31. United Nations, Department of Economic Affairs, Measures for International Economic Stability
(report by a group of experts appointed by the Secretary-General), New York, 1951. An earlier report, by
a different group of experts, under the title National and International Measures for Full Employment (United
Nations, New York, 1949), encountered much adverse criticism because of the "automatic," i.e., non-
discretionary, obligations it would impose, particularly on creditor countries.

Underdeveloped Countries in International Trade 401

clear that the Western nations, especially the United States, have, through
the alternations of hectic prosperity and deep depressions which their mar-
kets have induced in other nations, wasted a good deal of the substance of
their well-meant loans and grants. Greater stability of international de-
mand is a primary requisite for economic development, even aside from the
requirement that defense policies shall not injure the actual or potential
friends of the North Atlantic Pact.

Responsibility for restraining popular demands for higher levels of liv-
ing, for maintaining adequate international reserves, for offsetting the
initial inflationary effect of foreign loans, for the productive use of capital
and for the service of foreign debt all these responsibilities rest primarily
on the countries aspiring to development. Advice, expert assistance, and
even the attaching of conditions to loans by the other countries have their
place; but they cannot supplant responsible management in the receiving
economy. Adequate taxation and monetary controls are the first require-
ments of this responsible management. Inflation fosters excesses of con-
sumption and foreign deficits; it wastes away reserves of foreign exchange;
it thwarts the allocation of scarce capital to maximum-productivity ven-
tures; and it undermines the maintenance of foreign debt service. How far
direct controls and exchange controls may be substituted for monetary and
fiscal measures is the next question to be considered.

EXCHANGE CONTROL AND ECONOMIC DEVELOPMENT

The main purposes of exchange control are (1) to obtain protection from
foreign competition; (2) to encourage or compel saving; (3) to obtain more
favorable terms of trade; (4) to prevent capital flight; and (5) to obtain
protection from foreign depressions. The term "exchange control," as used
here, means, at the very least, a government monopoly of all dealings in
foreign exchange, an embargo on the export of capital, and an official price
on foreign exchange that usually but not invariably overvalues the domestic
currency.

A decade ago exchange control was rather widely regarded as an espe-
cially powerful instrument of economic development. On the whole, there
has been a retreat from this position, though it still has adherents. Exchange
controls are in effect, to be sure, in nearly all of the less developed coun-
tries; but they are almost universal in the other countries as well. What are
the gains that have been expected specifically by underdeveloped countries
from exchange controls, and to what degree are these hopes likely to be
realized? Perhaps a careful scrutiny of the five purposes of exchange
controls will answer these questions.

402 Approaches to Economic Development

Protection from Foreign Competition

An overvalued rate on the home currency maintained by means of ex-
change control automatically affords domestic industry some shelter from
foreign competition, though this fact may not be immediately apparent. An
overvalued rate discourages exports but, on its initial impact, encourages
imports. How then can it be protective? The answer lies in the plain fact
that a country cannot long continue to buy without delivering goods in
payment; imports usually decline to the reduced level of exports imposed
by the overvaluation. By appropriate adjustments, the same degree of pro-
tection may be secured by import quotas and by import taxes or import
license fees as by exchange control with overvalued rates both in the
aggregate for all commodities or for one good separately.

Part of the political appeal, and part of the danger, of the exchange
control type of protection is its covcrtness. The risks of protecting "infant
industries" by tariffs are great enough. But if the original decision to pro-
tect is concealed and is imposed, not by legislation, but administratively, as
it is under exchange control, clearly, additional risks are involved over
tariff protection.

Whether protection comes by one way or another, its dangers are great.
Writing with particular reference to Latin America, John S. de Beers of the
United States Treasury Department says:

Drastic direct import controls have cut the trade deficit, but they do not auto-
matically bring into play self-corrective processes which would eventually correct
the basic maladjustments and make possible removal of the controls. On the
contrary, their influence appears to be in the opposite direction. Import quotas,
for example, reduce customs revenues without reducing total consumer demand
or limiting the increase of prices, and thereby tend to intensify inflation, making
it progressively more difficult to administer the direct controls unless anti-
inflationary measures are taken. Furthermore, they may produce an "aspirin
effect"; i.e., by taking care of immediate balance-of-payments headaches, they
may divert attention from the basic maladies. Reform in matters such as tax and
fiscal policy, central banking policy, and government policies affecting private
capital formation may then be postponed, with resulting further deterioration
in underlying economic and financial conditions. 32

Each of these dangers is inherent in protection through exchange control,
to which other dangers are peculiar because of its administrative and
covert nature.

Inducement or Compulsion to Save

A state wishing to limit individual consumption in order to obtain desir-
able rates of economic progress may accomplish something toward this

32. John S. de Beers, "Some Aspects of Latin America's Trade and Balance of Payments/ 1 American
Economic Review, Proceedings, May 1949, p. 390.

Underdeveloped Countries in International Trade 403

objective through selective import controls directed against consumption in
general or luxury consumption, whether by means of tight import quotas,
reduced exchange allocations, discriminating and high exchange rates or
high tariffs. All such selective import controls, however, leave two prob-
lems untouched. Domestic consumers may simply deflect their sumptuary
or luxury expenditures to other domestic goods. Domestic producers may
begin to turn out substitutes for the foreign import, but at a cost equal to or
greater than the original import, with a corresponding drain on domestic
resources. Income, sumptuary or luxury taxes would thus appear superior
to selective import controls of all varieties since taxes reduce all consump-
tion expenditure and not merely expenditure on imports. 33

Favorable Terms of Trade

As one of several devices, including state trading, exchange control can,
under favorable circumstances, secure to a given country an extra margin
of gain in international trade by reason of monopolistic selling or monop-
sonistic buying, with or without discrimination among sellers or buyers.
The less developed economies probably cannot appreciably affect the
prices of their imports, mostly of an industrial character, because each
country accounts for too small a portion of the international demand. On
the export side, however, as primary producers, these countries may occa-
sionally control a large enough portion of the world supply to make mo-
nopoly exaction possible. In a sellers' market, such as followed World
War 11 and the aggression in Korea, primary producers can raise prices
even without monopoly power.

This securing of more favorable terms in times of cyclical or episodic
sellers' markets for such staples as tin, rubber and wool has a general
stabilizing effect provided the price to the foreign buyer is abated in down-
turns and it yields the primary producers substantial revenues on their
exhaustible resources. Favorable arguments have already been presented
for export taxes on these grounds. 34 Export taxes appear superior to differ-
ential export exchange rates in avoiding the necessity of an exchange con-
trol apparatus and the breaching of a uniform exchange rate.

How far primary producers could go beyond securing the full benefits of
a sellers' market, in attempting a more or less consistent and persistent
monopoly levy is, perhaps, questionable. By these tactics one seller invites
undercutting from other sellers. And monopoly exaction by one or more
sellers may invite retaliation on the part of the buyers. Occasionally, buyers
among the advanced industrial nations have large shares of the market
(e.g., the United Kingdom) and can meet monopoly with monopsony.

33. But if the primary objective were to close a balance-of-payments gap, the best measure would be de-
valuation, which bears on all foreign expenditures and not merely on "necessities."

34. See pp. 316, 328.

404 Approaches to Economic Development

They are, furthermore, the lenders, whose good will is not to be too lightly
set aside. 35

Prevention of Capital Flight

If the political or economic conditions of a developing economy cause a
flight of capital into foreign currencies, a capital export embargo may be
the only recourse. This move usually entails full-fledged exchange control
the checking over of every individual export transaction and every indi-
vidual outward payment, as well as inspection of the mails and of persons.
Even if completely enforced upon a country's own nationals, exchange
control cannot eliminate inequalities in the balance of payments caused by
an uneven flow, generally cyclical, of new investment by foreigners. Fur-
thermore, the very existence of exchange control undoubtedly reduces the
inflow of foreign private capital on the average over a term of years.

Despite these serious disadvantages, a country with an overvalued ex-
change rate cannot usually escape a capital export prohibition, because
such capital movements intensify the overvaluation and the motive for
flight. The only escape from the unhealthy necessity of policing capital
exports is to bring to an end the fundamental causes of disequilibrium
inflation, overvalued exchange rates, excessive consumption and the like.

Protection from Foreign Depressions

As primary producers, the less developed regions are highly vulnerable
to cyclical or episodic reductions by the industrial countries in their demand
for raw materials and, to a lesser degree, foodstuffs. Quotas, import li-
censes, exchange allocation and other barriers to imports can, if applied
with sufficient severity, prevent the appearance of adverse trade balances
and currency depreciation for the primary producers. But even if they were
to allow their reserves of international currencies to ebb away, and even if
they were to accept large declines in the foreign value of their own cur-
rency, the mere restriction of imports might not in extreme depressions
counteract the shrinkage of domestic income from falling export yields.
Fundamentally, their currency and income can be stabilized only by the
stabilization of domestic economies in the rest of the world.

In conclusion, exchange control and direct quantitative controls afford
the most feeble kind of support to economic development. Potentially, the
protection of infant industries could make a positive contribution ; but the
risk of protecting infants that prove not to be viable or to be viable only

35. It may be remarked that nothing in the situation of a monopolistic seller justifies even from the
standpoint of self-interest the maintenance of an overvalued exchange rate. The contrary may be implied
by Walhch, in "Underdeveloped Countries in the International Monetary Mechanism," he. '/., p. 30. If, by
whatever device, a government has advanced the prices of exports in terms of foreign currency to yield the
maximum monopoly returns, overvaluation cannot be said to exist, unless an explicit comparison is being
made to equilibrium under competition.

Underdeveloped Countries in International Trade 405

with continued cost to consumers and the risk of political logrolling with
protective measures may put the contribution on the negative side. In the
furthering of economic development by forced saving, such fiscal devices
as income, sumptuary and luxury taxes are superior to import controls
because these taxes cannot be evaded by a transfer of consumer and pro-
ducer expenditure to domestic goods. And export taxes can be used in
place of exchange control avoiding the costs of a separate administration
to capture the windfalls of booming export markets as fiscal income.
Exchange control has seldom coped very successfully with pressures toward
capital flight; security of life and property, freedom from inflation and
expropriatory taxation, and favorable treatment of home savers and inves-
tors are not only the general prerequisites of economic development itself
but also the specific remedy and the only true remedy against capital
flight. Finally, exchange control cannot ward off depressions of any sig-
nificant strength if they are the result of collapsing export markets.

Disadvantages of Exchange Controls

Not only do exchange controls and similarly oriented direct controls
generally fail to secure the benefits to economic development expected of
them, but they often entail actual losses or handicaps. Against any gains,
in the first place, must be offset not only the sizable direct costs of operating
the system, but also the costs to business firms of filling forms and arguing
their cases, and the adverse effects on private enterprise of arbitrariness,
discrimination, complexity, delay and uncertainty in administration. 30 By
interfering with purchasing in the cheapest foreign markets and selling in
the dearest, exchange control produces an allocation of consumption and
production that is generally inferior to the allocation secured by prices
without these controls. Its adverse effect on private capital inflows has
already been emphasized. 37 By supporting overvalued rates on the home
currency, exchange control limits exports and perpetuates the balance-of-
payments disequilibrium. 38 Finally, the bilateral clearings, that is, the set-
tling of accounts by direct dealings of one nation with another, that usually
accompany exchange control inevitably produce further distortions of
trade, both in terms of commodities and of regions, and a shrinkage of its
aggregate value; thus they impose a corresponding toll on development. 39

1 36. See P. T. Ellsworth, Chile- An Economy in Transition, Macmillan, New York, 1946, pp. 7 1-73; Inter-
national Bank for Reconstruction and Development, The Baw of a Development Prow am for Colombia,
Washington, 1950, pp. 328-31.

37. Sec Ellsworth, op. cit.; Report of the Joint Brazil-U.S. Tcthnical Comnu\\ion, Publication 3487, U.S.
Department of State, June 1949, p 297; Report to the President of the United States bv the Economic Survey
Minion to the Philippines, V S. Department of State, October 9, 1950, p. 77.

38. G. E. Britncll, "Problems of Economic and Social Change in Guatemala," Canadian Journal of
Economics and Political S( fence, November 1951, p 477; de Beers, he. cit , p 390.

39. International Bank for Reconstruction and Development, The Economy of Turkey, Johns Hopkins
Press, Baltimore, 1951, pp. 240 and 242; Ellsworth, op. cit., p, 73; Report of the Joint Brazil -U.S. Technical
Commission, pp. 580-81.

19. A General View of Economic Development

BY DEFINITION, an underdeveloped country affords its inhabitants a poor
end product from its economic system. At any point in time, the quality
and texture of the end product is a function of the productive resources
available to the country, how efficiently these are used in production, and
the whole socio-cultural environment within which all economic activity is
carried on. But more significant than the currently poor end product of the
economic systems of underdeveloped areas is the fact that, in contrast to
the developed countries, the product has continued to be poor over long
intervals. In other words, the distinguishing feature of underdeveloped
areas, even more than their current poverty, is the persistence of this
poverty over time. This persistent poverty implies that whatever growth in
aggregate output has occurred has been matched, or more than matched,
by a growth of numbers in the population. Yet if one asks why total output
has not grown more rapidly than population the basic answers seem to be
outside the economic sphere. In an important sense, then, the really funda-
mental problems of economic development are noneconomic.

THE DYNAMIC FACTORS IN ECONOMIC GROWTH

The remarkable growth of total output in the developed countries since,
say, 1800 seems attributable to four basic factors that have operated
powerfully and persistently: entrepreneurship; innovations and technical
change; capital accumulation; and increasing specialization and exchange
between persons and regions nationally and internationally. All four were
of course linked together in complex patterns rather than in a simple,
linear cause-and-effect relationship. Without innovation and technical
change, certainly capital accumulation would have been far less than it was.
Without entrepreneurs actively to mobilize, recombine and reorient exist-
ing productive resources, innovation and capital accumulation would not
have augmented total output as they did. Indeed, they might not have
occurred at all. Without the spread of the market that permitted specializa-
tion and exchange, the effects on output of the other three factors would
have been much diminished. Finally, even the fact that population growth
tapered off in the developed economies seems to be explainable only in
terms of complex socio-cultural factors that induced a fall in birth rates.

406

A General View of Economic Development 407

Cultural Barriers in Underdeveloped Areas

Just why, in the now underdeveloped countries, the basic factors that
elsewhere have made for a secular rise in total output have operated with
so little force, or why birth rates have not appreciably declined, must
presumably be explained by the dominant socio-cultural values, with their
accompanying institutions, that still predominate in those countries. Why
Indian or Arabic mathematicians, for example, have so rarely applied their
talents toward raising the material well-being of their own people; why
entrepreneurs are scarce in the underdeveloped countries; or why produc-
tive real capital formation has been so trifling all such questions seem
answerable only in terms of the value scales that guide and motivate people
in those societies.

If this is true, merely providing more capital equipment from abroad or
demonstrating superior techniques of production will not create an envi-
ronment from which innovations are bound to appear, or in which the
entrepreneurial spirit and point of view are certain to flourish. If these could
be assured, internal productive capital formation would almost certainly
follow. Only in a very limited and comparatively trifling sense can economic
development be "imported.'* In nearly all its important essentials it must
be generated from within. A people whose standard of living is not above
its level of living is not likely to achieve much material progress. There
must be a desire for economic progress coupled with a determination to
achieve it.

To contend that the really substantive barriers to development are
mainly noneconomic is not to deny, however, that these barriers are most
surely and easily crumbled from the economic side. Historically, the most
powerful factor in reorienting and reshaping the socio-cultural environ-
ment seems to have been the spread of trade and commerce.

'TRADE AND THE SOCIO-CULTURAL ENVIRONMENT

A predominantly agricultural economy with numerous local village mar-
kets that are largely self-sufficient and have few trade relations with one
another or with the world abroad offers little scope for entreprcneurship
and little likelihood of generating innovations from within. Furthermore,
it has few channels through which innovations might filter in from the
outside. Consequently, its value patterns tend to be impermeable and its
institutional structure unvarying. Such was the situation of many now
developed countries a century or more ago, and such is the position of
many underdeveloped areas today.

The growth of trade relations within such an economy and between it and
the outside world has a dual effect: first, it offers other outlets for local
products and nontraditional uses for human and nonhuman productive

408 Approaches to Economic Development

resources; second, trade by its very nature filters in new products, new
techniques, new ways of doing things and new points of view. In short,
trade disrupts traditional relations between products and productive factors
because it introduces new outlets for products, and hence new demands for
productive factors. But, equally important, the economy is no longer
insulated from ideas and techniques that are common currency in the
outside world.

The merchant-trader, who has usually been the active agent in the
expansion of trade and commerce, becomes the initial source of innova-
tions, and he provides the first visible manifestations of the entrepreneurial
spirit in the villages and the countryside. By offering new market outlets,
and thus a reason for new patterns of resource use, he weakens the eco-
nomic base that supports the old values and the traditional social structure.
Because he is widely imitated, the merchant-trader tends to spread the
entrepreneurial attitude far beyond his immediate contacts. He fosters the
commercialization of agriculture, for example; by extending the range of
products he deals in, and perhaps also by advancing the necessary working
capital from his own funds, he promotes the development of local handi-
crafts and local manufactures.

An oft-repeated sequence in economic development has been the growth
of trade with increased interconnections between markets, an increasing
shift to a money nexus within the economy, greater capital accumulation,
growth of credit and banking facilities, expansion of nonagricultural pro-
duction and general economic development. Development becomes an
ongoing process. 1 Throughout this sequence which of course has often
been spread over several decades or even longer the shift has been toward
values that rate economic accomplishment more highly and toward a social
environment that expects, accommodates and perhaps even welcomes
change and innovation. The noneconomic blocks to development are
pushed aside or submerged. 2

Transport and Foreign Trade

Historically, no two factors have done more to promote internal trade
with the social and cultural changes favorable to economic development

1. Historians now seem inclined to believe that the economically important inventions of the agricultural
and industrial revolutions in the eighteenth and nineteenth centuries probably resulted more from the acute
pressure on existing means and methods of production than from the timely, if unexplamable, appearance
of ingenious inventors. This position tends to accord with contemporary experience, as witness the remark-
able technical progress that wartime conditions seem to have produced under the pressure for greater output.

2. The process whereby commercial development undermines the peasant-type, static economy with its
heavy overlay of aristocratic values has, however, sometimes come to a halt or even been partially reversed.
Gerschenkron mentions the case of Russia after the emancipation of the serfs in 1861 as an example. Accord-
ing to his account, despite considerable vigorous commercial development, the nobility, the intelligentsia
and the peasants so despised the traders and heaped such abuse upon them that the old value systems held
firm. See Alexander Gerschenkron, "Social Attitudes, Entrepreneurship and Economic Development"
(mimeographed), Round Table on Economic Progress, International Economic Association, Santa Mar-
gherita Ligure, Italy, 1953, pp. 8-10.

A General View of Economic Development 409

that expanding internal trade brings in its train than improved transport
and communications and intimate contact with foreign markets. During
the nineteenth century, these two went hand in hand: drastic declines in the
"cost of distance" greatly stimulated foreign trade; cheaper and better
internal transport gave the hinterland access to tidewater and fostered
internal trade as well. If the last half of the nineteenth century may be
called, with pardonable exaggeration, a gigantic boom chiefly built around
the steam engine and the steamship, perhaps the most far-reaching conse-
quence of this boom was the astounding growth of internal trade and com-
merce in many countries. Manufacturing and industrial development sub-
sequently followed along, if not at equal remove or to the same degree in all
countries, nevertheless perceptibly and at an increasing pace down to 1914. 3

If this telescoped analysis is reasonably accurate, and if it points up some
of the more important difficulties that the underdeveloped countries now
face, then it suggests that a country that would push its economic develop-
ment within a price-market economy should also push its participation in
foreign trade and commerce. It will not, then, adopt a policy of economic
isolation, of avoiding external influences, or of government monopoly of
those international exchanges into which it feels itself reluctantly driven. On
all counts, its policy will be just the reverse.

Full participation in the international economy, as a means of stimulat-
ing domestic trade and commerce with all their desirable consequences,
however, is only part of a sound approach to development. No less im-
portant is improvement of internal transport and communication facili-
ties. Historically, these came slowly in the now developed countries, and
in part they had to await technical advances. But this is no longer true. The
road, the canal, the railway and the airplane, along with the telegraph, the
telephone and the wireless, are accomplished facts. By deliberately widen-
ing the coverage and improving the efficiency of transport and communica-
tion facilities, a developing country can greatly hasten and extend the
spread of specialization and internal trade with all their concomitant con-
tributions to development.

To summarize: the chief barriers to economic development in a dynamic
sense appear to be a cultural environment that is inhospitable to change;
that lacks entrepreneurs; that does not generate innovations from within or
borrow them from without; and that makes use of far too little specializa-
tion for high productivity. An effective way to overcome these difficulties is
to increase the flow of domestic trade because it will force new value rela-
tions, new patterns of resource use, greater specialization and efficiency in

3. The economic development of the Scandinavian countries during the late nineteenth century seems to
illustrate well the closely knit sequence of expanding foreign tiade impinging upon domestic trade, improve-
ments in internal transpoit, further growth in domestic and foieign tiade, followed, in turn, by industrial
development.

410 Approaches to Economic Development

production, more commercialization of production and other important
changes. To promote internal trade a country needs to link its economic
life to the world market and simultaneously to improve the facilities for
internal transport and communication.

OTHER FACTORS AIDING DEVELOPMENT

To stress the importance of the commercialization of economic activity
and the spread of specialization and exchange within the price system is not
to contend that nothing more can or need be done to foster and achieve
development. Neither historical experience nor good judgment supports
this view. Everything need not be left to the gradual spread of the price
system. The development process can be stimulated in other ways.

The government can promote development by deliberately modifying the
socio-political environment, both by permissive legislation and by more
positive measures. 4 Historical examples of the first are the abolition of
serfdom, removal of restrictions on choice of occupation and elimination
of nuisance taxes and tolls in Prussia and Japan ; of the second, the require-
ment by Japan that land titles be established and that taxes be paid in
money. Property rights, especially land titles, are often not of a kind to
foster development because they hamper, rather than facilitate, new com-
binations of productive factors. The government could also reform the
monetary and fiscal system in many underdeveloped areas with good effect.
Only the state, moreover, can promote literacy and general education. In
Germany, Japan and Russia, government efforts in the educational field
paid large returns. The state may also take more than a passive attitude
toward labor mobility, both geographical and occupational, not only by
abolishing restrictive rules concerning entry to trades and occupations but
also by fostering trade schools and technical education.

If a country is impatient for the development of private industry, the
government can help directly to foster it in various ways, even though it
puts its primary emphasis on specialization and exchange within the price
system. The government may underwrite many of the costs of borrowing
technology from abroad, of pilot plants and similar experimentation, of
industrial and agricultural research. Both Germany and Japan offer many
examples of successful government efforts of this type. Government credit
can be employed where projects are too large or too risky to be undertaken
by private enterprise unaided. Railway construction is an obvious case in
point; other examples are communication facilities, roads and harbors.

For much of this "social overhead capital" the government will probably
have to supply the necessary financing, that is, the purchasing power neces-

4. Obviously, development will not go forward in a'country torn by civil strife or lacking a stable govern-
ment; but a stable government by itself does not assure development.

A General View of Economic Development 411

sary to command productive factors. But this does not mean that the state
itself must build the highways or railways or telephone system. The state
may provide the funds, but private contracting firms may do most of the
actual construction. Although highways are a public responsibility in the
United States, most of them are built by private construction firms under
a system of contract bidding. An underdeveloped country that proceeded
in this way would multiply the number of its entrepreneurs, managers,
supervisors and foremen, and generally foster development in a manner
that would give it its own generative power in new directions.

Greater specialization and exchange between persons and regions with
their salutary effects on output, technical progress and socio-cultural insti-
tutions need not of course be effected through the institution of the price
system with its emphasis on the money calculus. As in Russia, the degree
and types of personal and regional specialization may be prescribed and
integrated by a central planning authority. In such a system the planning
authorities determine the composition of output; they introduce the inno-
vations and prescribe the form they must take ; they devise the financial and
fiscal arrangements necessary to carry out their plans; and they substitute
other drives for productive activity than those of personal gain. But many
of the necessary developmental changes are essentially the same: people
must be shifted about, new productive activities requiring new skills must
be introduced, capital must be accumulated. Despite the contrasts between
development through central planning and development through the price
system, the similarities are more than superficial.

Labor Mobility

A striking feature of economic development in nearly all countries is the
necessary occupational and geographical redistribution of the labor force.
In an underdeveloped country most of the labor force is in agriculture;
development involves new tasks outside agriculture, new concentrations of
population in urban areas and, almost invariably, important changes in the
relative economic importance of the various geographical regions of the
country. The shift of the center of population northward in England, with
the appalling growth of Birmingham, Manchester, Liverpool and other cities,
illustrates one of the most important concomitants of development wher-
ever it has occurred. Similar shifts took place in Germany, France, Bel-
gium, the Netherlands, Japan, Russia and elsewhere. 5

5. The rapid rise of new urban areas has usually been the major cause of the human misery and suffering
which have so frequently accompanied the growth of industry in development. Usually the growth of cities
was so rapid that overcrowding, bad sanitation and a generally unhealthy environment were inevitable.
Moreover, during much of the nineteenth century, governments had no previous experience with such urban
concentrations and the social costs they entailed, and therefore had no knowledge of how to deal with them
Social conditions in the new towns and cities growing up with the spread of industrialism usually have been
strikingly similar in the early stages in all countries.

412 Approaches to Economic Development

The means by which people were "drawn into" industry and the towns or
"driven out" of agriculture in different countries are perhaps more remark-
able for their similarities than for their differences. In price-market econo-
mies, it was the changed relationship of agricultural and industrial prices
in turn, mostly resulting from better transport and technical changes that
displaced workers in agriculture and opened up jobs for them in industry.
Whether it was the agricultural revolution, as in England with its later
enclosure movements, or new crops and growing commercialism in agricul-
ture, as in eastern Germany, the result was much the same: people moved
off the land into urban industrial employment. In Japan, the substitution of
a highly regressive tax system requiring money payments in place of ar-
rangements requiring payments in kind forced the small farmers to accept
piece work on manufactures in their households and to send their daughters
to take jobs in factories in the towns. In Russia, collectivization and mech-
anization of agriculture, requiring greater specialization and greater use
of capital, freed workers for industrial employment, although the drift to
the towns was already appreciable before this policy was introduced. In
Russia, however, better rations and amenities, that is, higher real wages,
also pulled people off the land.

Thus the redistribution of the labor force in economic development
seems to have been accomplished by factors that "pushed" and "pulled"
toward the same result. Both pushing and pulling were necessary in the past
and both presumably will be equally necessary in the future. Little good
will come from driving people out of agriculture if there is no industrial or
other development to absorb them. Similarly, forcing industrial develop-
ment without also revamping agriculture so that people are driven from the
land into industry will probably be ineffective. Both are necessary because
one complements and reinforces the other.

The somewhat delayed industrial development of France in the nine-
teenth century before the railroads broke down the traditional farm prac-
tices and types of crops seems to illustrate this idea, at least in part. Peasant
agriculture is likely to follow tradition indefinitely unless forced to change
by outside factors, such as significant changes in relative prices or the
dictates of the central planners. Until the railways came in France, there
was little to push people out of agriculture and efforts to stimulate industry
were only moderately successful. Admittedly, other factors also contributed
to the slow development of industry in France.

Perhaps the slow pace of industrial development in Latin America
despite government support through Fomento corporations, subsidies,
highly protective tariffs and similar measures can be partly explained by
the fact that agriculture has never had to undergo a drastic reorganization
that would disgorge workers and give them little choice but to accept

A General View of Economic Development 413

industrial employment. Cities have grown in Latin America, but not mainly
because of rising industrial employment; for reasons that are not clear, too
many in the urban population seem to be engaged in service industries and
too few in manufactures.

The Acquisition of Skills

Both the increased specialization and the growth of industry which are
inherent in economic development make it necessary for the labor force to
acquire new skills. An agricultural population is usually made up of persons
who have essentially similar skills and economic capacities, most of which
can be acquired by trial and error or by imitation. But development re-
quires many skills and many of these have to be formally learned. The
labor force of a developed country, with its variety of technical skills,
analytical abilities, scientific knowledge and specialized experience, differs
markedly from that of an underdeveloped country.

The rank and file of the labor force acquired their new knowledge and
new skills by "on-the-job" training and little else during the early phases of
economic development in all countries. Agricultural laborers became fac-
tory operatives in much the same way in England or Germany as they did
in Japan or Russia: they learned by doing. In the beginning, they were
inept and often illiterate; but the factory broke down handicraft skills into
a succession of simple operations, each of which could be easily mastered.
Moreover, price-market economies tend to give a free rein to the ambitious
and to bring those with initiative to the fore. Many workers saw clearly the
personal rewards of literacy and special knowledge and trained themselves
accordingly. The self-made, self-educated man is a familiar figure in
nineteenth-century history and fiction. His example stimulated others to do
likewise, with the result that skills and abilities were diffused throughout
the labor force. Compulsory, rudimentary education for all was a late
development; it came only long after economic development had made its
most important strides forward. The bulk of the labor force in most coun-
tries got its necessary skills more or less automatically as economic develop-
ment progressed. They were neither ready to hand nor planned for in
advance.

ENTREPRENEURSHIP, INNOVATION AND CAPITAL ACCUMULATION

The crucial problem with respect to entrepreneurship, innovation and
capital accumulation in development is to determine their most probable
and logical sequence. This is obviously a large and difficult topic on which
only a few tentative comments can be essayed here. Yet economic experi-
ence seems to suggest several related points that are worthy of mention.

414 Approaches to Economic Development

Capital Accumulation and Increased Income

The rate of growth of total output and real income per person is not
determined by the rate of capital accretion alone. Mere increments to the
capital stock do not suffice as an explanation of the growth of output in the
Western world. Specialists believe that the rate of increase in total output
in the developed countries over long periods has probably averaged about
2 to 3 per cent a year. Yet a calculation based on plausible (even generous)
assumptions, first, concerning the probable yield on increments to the
capital stock, say, 5 to 10 per cent a year, and, second, concerning the pro-
portion of total income that goes to capital formation, say, 10 to 15 per
cent, yields a rate of increase in total output well below the 2 to 3 per cent
increase that in fact seems to have occurred. 6 In and of itself, therefore,
capital accumulation cannot account for the realized secular growth in
aggregate income. Moreover, the fraction of the national income that is not
consumed, the part that goes into capital formation, includes certain types
of capital that are more a manifestation of a higher income than an explana-
tion of why the national income secularly increased. Among these, houses
and many public buildings are only the "leading species of a large genus."

Consequently, the secular rise in national incomes in the developed
countries (the rise per person will, of course, depend upon the population
changes occurring simultaneously) must be partly attributable to other
factors. Of those that are conceivably pertinent, none seems equal in
importance to technical progress.

Requirements for Technical Progress

Observation and economic history alike suggest that, in order for techni-
cal progress to take concrete form in capital goods of improved produc-
tivity, some link is necessary between the possibilities of more productive
capital equipment, on the one hand, and their actual realization, on the
other. In price-market economies this link has been the entrepreneur and/or
business manager. In his quest for greater profits, he was able to bring
superior capital goods into existence and new combinations of productive
factors into use because he had access to funds that enabled him to redirect
the uses to which existing labor, capital equipment, land and other re-
sources were put. Thus, in market economies, entrepreneurs, with access to
credit to carry out their plans, have been the most important activators of
technical progress. Through them, advances in technology have been ap-
plied in such a way that greater output could be realized. In this fashion,
capital formation has been combined with technical progress.

6. For example, if total income were 100 and if 10 per cent of this were capital goods output on which the
average yield was 10 per cent, then the increase per period in total output would be 1 per cent. With a yield
rate of IS per cent the figure would be 1.5 per cent. With capital formation 15 per cent of output and an
average yield rate of 15 per cent, a figure which is almost certainly too high, the resulting increase in total
output would be only 2.25 per cent.

A General View of Economic Development 415

As used here, technical progress is, of course, a broader concept than
invention. It includes all those improvements, small and large, which make
it possible to produce the same product with fewer productive resources or
an improved product with the same resources. Inventions, in the ordinary
sense of the term, are only a small part of the process. What fosters the
appearance of these "improvements" and, more important, their applica-
tion in practice? No very satisfactory answer seems to be available to this
question. Adam Smith was certainly correct in emphasizing that specializa-
tion increased the likelihood of their occurring because it broke complex
operations into their simpler components. Pressure on existing facilities of
production also seems to have been a frequently powerful spur to their
improvement. In recent times and in advanced countries, scientific research
and applied science have been consciously directed toward the search for
improvements. Nowadays, the translation of scientific progress into pro-
ductive plant and equipment is a business undertaking with entrepreneurs
in charge.

Viewed from this range of considerations, the problem of economic
progress in underdeveloped areas is essentially one of overcoming an unfor-
tunate combination of deficiencies. Their cultural patterns and institutional
arrangements are not productive of technical progress. They lack entre-
preneurs who might borrow and apply the technical progress that has
already occurred elsewhere. Moreover, the entrepreneurs who are to be
found there are not generally held in high esteem, nor have they access to
the funds necessary to command factors of production into the formation
of productive capital or new patterns of resource use. To remedy these
deficiencies will inevitably take time.

Problems of Capital Formation

The main inference to be drawn from the foregoing is that, at least over
the near future, the underdeveloped areas must expect to improve their
aggregate output mostly by means of additions to their productive capital
stock and only to a negligible degree by means of technical progress that
they generate from within their own socio-cultural environment. Since,
however, the gap between the technology generally in use in the more
developed countries and that generally found in the underdeveloped coun-
tries is so large, the latter can, for some time to come, raise their produc-
tivity performance appreciably simply by technological borrowingpro-
vided they can devise ways and means to effect it. All the same, techno-
logical borrowing necessitates some solution to the problems of capital
formation peculiar to the underdeveloped areas.

Productive capital formation in these areas need not necessarily be at the
expense of consumption, in the sense that consumption must decline if

416 Approaches to Economic Development

capital formation occurs. If idle resources can be utilized or if resources can
be diverted from nonproductive uses from ceremonial activities, from
nonproductive capital formation or from the maintenance of nonproduc-
tive capital goods then productive capital formation can go forward
without appreciably affecting consumption. 7 In order to achieve these
results, however, the institutional arrangements in the developing society
must solve two problems: first, provide means by which productive re-
sources can be drawn into capital goods production; second, assure that
those engaged in producing capital goods will share in the current flow of
consumption goods. What appear to be the institutional means by which
these problems were solved in the economies that developed earlier, and
what bearing has this experience on the capital accumulation problems of
the now underdeveloped areas? 8

Past Solutions

In a centrally planned, authoritarian society such as Russia, resources
can be compelled to enter capital goods production. Once the Party de-
cided, as it did, to concentrate on capital goods production, the authorities
used a battery of direct economic controls to make certain that these goods
would be produced and that others would not. They also established differ-
entials in real wages to pull workers into the industries they were deter-
mined to expand.

Higher real wages, as against higher money wages, however, necessitated
effective arrangements to bring food and other consumption goods to those
workers who were thrust into the capital goods industries. This was accom-
plished primarily by the collectivization and mechanization of agriculture.
Collectivization combined with direct levies even on output not produced
collectively assured food supplies for those who were no longer producing
food because they were making capital goods instead. Thus the established
policy was not to* allow the rural population to consume as much as it
wished nor to permit it to invest in herds, farm structures, fences and so on
as it saw fit. If the capital formation program in heavy industry was to
succeed, the proclivities of the peasants to consume or to improve their
plots through investment had to be checked by siphoning off a substantial
part of the total agricultural output. Another variant was to force some of
the land and labor into the production of crops that the peasants could not
directly consume, such as flax and cotton. Moreover, after the very earliest
stages, it was possible to feed back some of the output of the capital goods

7. The necessity for inserting the qualifier "appreciably" is that the ceremonial activities and nonproduc-
tive capital goods yield a flow of services that can only be reckoned as consumption But they are services
that do not aflect the material welfare of the population or services that are supplied only to a favored few.

8. Historical literature may not throw these two problems to the forefront of the discussion, certainly not
in so bald a form. Nevertheless, analytically, them seem to be problems that must have arisen and, somehow
or other, must have been solved.

A General View of Economic Development 417

industries into the mechanization of agriculture and so sustain or increase
food production while releasing still more labor for industry. 9

How were these two problems solved in England, Western Europe, Japan
and other countries where economic development was not centrally planned
but moved forward within the institutions of a price-market economy?
Either private entrepreneurs motivated by profits, or the state, for reasons
of national policy, drew factors of production into the production of capital
goods. What was done in either case was simply to bid for them in the
market by offering a money price for their services. If, for example, private
entrepreneurs believed that railroads would be profitable or the state pro-
claimed that they must be built, then a money economy with credit institu-
tions could provide, through a variety of means, the purchasing power
necessary to bid factors of production into the construction of railroads. 10
Credit creation, either through the state or through the banking system,
played a major role in real capital formation; without it, there was no
means by which labor and other productive resources could be brought
together initially to make capital goods. The fact that important technical
changes in agriculture and other trades were also driving people from the
land and from other customary occupations made it all the easier.

The problem of ensuring a food supply for workers shifted to capital
goods production seems to have raised no real difficulty in England,
Western Europe and Japan. In contrast to Russia, where the emphasis was
so much on heavy industry as opposed to consumers' goods industries, the
capital goods produced in the market economies soon yielded a flow of
consumption goods or of such intermediate goods as textiles, iron and coal.
These goods were exchanged for food and other supplies from the rural
areas and from overseas. The market mechanism sufficed to keep the towns
supplied without resort to direct levies or collectivization. In Japan, heavy
money taxes forced the small farmers to sell some of their produce. As
transport improved, the market area over which this exchange was prac-
ticable steadily widened at home and extended into overseas areas. In all
the market economics, increased capital formation and increased consump-

9. Undoubtedly the changes in agriculture combined with the stimulus to heavy industry made it easier
to absorb much underemployed labor in agriculture In other words, the arrangement was not entirely a
transfer mechanism but also a means of using previously idle resources. While disguised unemployment on
a big scale is not impossible in industry or in collective farming, it is probably easier to identify and correct.
10 The me ins actually employed differed from industry to industry and from country to country. This is
essentially a financial problem of ways and means. In England, banks, credit institutions, speculators, stock-
jobbers and the like were adequate in combination to create purchasing power and to draw it from those
who already had it so that the promoters of the railways were able to bid factors of production into railway
construction. In other countries, the state used its own credit. In Japan, as already noted, a rather ingenious
means was used to finance industrial development. If a country has the rudiments of a banking and credit
system, little difficulty should arise in providing the purchasing power necessary to bid factors of production
into capital goods production. For an interesting recent discussion of the importance of the banks in
nineteenth-century European economic development, see Alexander Gerschenkron, "Economic Backward-
ness in Historical Perspective," in Bert F. Hosehtz (Ed.), The Progress of Underdeveloped Areas, University
of Chicago Press, Chicago, 1952, pp. 9-14.

418 Approaches to Economic Development

tion went hand in hand. Each reinforced the other. And technical progress,
especially better and cheaper transport, combined with greater specializa-
tion and exchange, were causal and permissive factors in both. 11

Basic Problems

What had to be solved in past instances of capital formation in develop-
ment, then, was the twofold problem of devising means for getting factors
of production, mostly labor, into the production of capital goods and of
making certain that people would not starve while they were so engaged.
Russian experience exhibits the problem in its most naked form : get some
people off the land and into making capital goods and prevent those who
remain from consuming any more than they did before so that those in the
industrial towns can keep on making capital goods. Given the determina-
tion to push industry, the direct assignment of labor and the mechanization
of agriculture solved the first problem of getting labor and resources into
capital goods production. The collectivization of agriculture solved the
second problem of ensuring a food supply for that labor. In the price-
market economies, entrepreneurs or the government used credit to solve the
first problem; the market-exchange system solved the second in that the
towns had consumers' goods to give the agricultural producers in exchange.
The fact that an agricultural revolution had gone before was enormously
helpful, as were the technical advances in industry. But in its crudest form
the economic problem was not essentially different from that facing the
Russian planners or the government of an underdeveloped country today.

THE USE OF REAL RESOURCES

Economic history seems to show that progress turns chiefly on the
operation of three major forces technological innovation that improves
productive efficiency, the breaking up of the traditional economic and
social mold by the impact of innovations, and the opening of new and
broader markets inside and outside the country. Do the problems of coun-
tries aspiring to rapid economic development today lie in the same areas?
If so, what measures and policies appear to be favorable to economic
progress?

Transfer of Techniques

The future of genuine innovation cannot be foretold, and there would
be little to say about it if we were concerned with the broad theme of

11. Economic development in Russia after 1927 and in underdeveloped areas today has differed from
early nineteenth-century development in that modern technology could be imported from abroad. Hence,
there was no doubt that if factors of production were used to produce certain types of capital goods these
would be highly effective; they had already been tried and proved. This was not true in, say, 1850. In those
days capital formation, in part, had to await technical advances.

A General View of Economic Development 419

economic progress in general. However, what is needed today in the under-
developed areas of the world is for the most part not genuinely new innova-
tions but rather transfers of known techniques with appropriate modifica-
tion from the countries with high per capita incomes. Thus we do not
move in the dark regions of undiscovered methods of production, but on
the familiar terrain of techniques already in use in the industrial nations
of the West.

The less developed areas could establish a firm foundation for the intro-
duction of techniques from abroad if they initiate the process of develop-
ment by utilizing the real resources they now possess, by using them well,
and, so far as possible, using all of them. Since the existing endowments
of underdeveloped countries are chiefly in resources for primary produc-
tion, including the manpower adapted to this end, it follows that agricul-
ture and other primary pursuits should be the objects of the first transfers
of improved techniques.

Utilizing resources which underdeveloped countries now possess is im-
portant in giving an immediate impetus to higher incomes without the
hazards and delays that would result from concentrating on industrializa-
tion, particularly on heavy industry. The use of existing resources is im-
portant also in increasing exports of primary products and thus supplying
the purchasing power for imports of capital equipment from the industrial
West, which are an essential ingredient of progress.

Utilizing resources well means producing with the relatively abundant
factors. Development begins, and indeed must for some time continue, on
the basis of large masses of unskilled labor, with a paucity of managerial
and technical skills, and with a general scarcity of capital and entrepreneur-
ship. Agriculture and the extractive industries make relatively modest
drafts on these scarce factors.

But in those vast regions of the underdeveloped world where population
is so great that manpower is not merely relatively abundant but chronically
unemployed or in surplus, the necessity of using all available resources to
achieve development is a pressing one. To some degree and in certain
senses, the utilization of surplus agricultural labor involves "industrializa-
tion"; but it is not necessarily, and most frequently necessarily not, indus-
trialization similar to that of the Western nations.

Utilizing Surplus Agricultural Labor

The evils of urban congestion, nowhere more appalling than in the great
cities of the Orient, the loss of social values when native populations are
uprooted, and the pecuniary costs of new or larger cities may well incline
the newly developing countries to try to provide profitable employment for
surplus agricultural labor without extensive urbanization.

420 Approaches to Economic Development

To some degree, the introduction of new techniques may permit more
intensive agriculture and thus absorb labor directly. Colin Clark points out
that, with its highly intensive agriculture, Denmark can export 45 per cent
of its net product, using ten men per square kilometer, the "highest product
at the highest density of settlement." 12 Improved fertilizers, irrigation,
drainage, new crops and rotations, as well as new strains of plants and
farm animals may greatly enhance the productivity and labor absorption
of primitive agriculture. This source of demand for labor is distinct from
that which may be occasioned by various forms of land reclamation. Public
health projects, community improvements, roads, waterways, and the back-
and-brawn jobs connected with many other local utilities may draw on the
same pool of manpower.

Finally there is the whole congeries of cottage industries, rural coopera-
tives, self-help projects, and local industries processing food and other
agricultural products, which do not entail the moving of laborers "off the
land." Only as incomes rise considerably does there appear a definite
necessity of reducing the proportion of persons engaged in agriculture (as
in the United States), and within certain limits this may proceed without
involving an absolute reduction in the number of farm workers.

In some countries, such as Brazil and India, with coal and iron deposits
and with extensive domestic or regional markets, heavy industry naturally
appears early in the growth of national income. But this is by no means
either the eventual or necessary solution to effective utilization of the sur-
plus agricultural labor for economic progress.

Land Reform and Other Improvements in Agriculture

When "innovation" is assigned a crucial role in the development process,
it correctly conveys a considerable emphasis on new products and new
methods of physical production. But improvements in the use of real re-
sources, indeed, some of the most crucial innovations, need not pertain to
physical processes at all but to management, organization, marketing and
the like. In most of the underdeveloped world, increased efficiency in agri-
culture depends upon improvement in the conditions surrounding land
ownership and tenancy. Frequently, ancient tribal practices or traditional
religious-social structures have disintegrated, leaving property rights in
chaos. Economic motivation cannot be effectively directed toward increased
production until rewards are reasonably certain, and this means that the
title to land, water rights, and the tenure, obligations and privileges of
tenants must be clear. Furthermore, where the fragmentation of holdings
into small and often widely separated plots has gone far, the consolidation
of holdings is a necessary prelude to the use of modern techniques.

12. Colin Clark, "Population Growth and Living Standards," International Labor Review, August 1953.

A General View of Economic Development 421

In some countries, land ownership amounts to an entrenched political
system and economic reforms await a gradual or violent displacement of
the landlord class. Similarly, rack-renting, absentee landlordism, and the
virtual peonage of agricultural labor may rest basically on political factors.
Tenancy itself, which is more common in Europe and the United States
than in many underdeveloped countries, cannot be categorically con-
demned. Cataclysmic change, such as the collectivization of land, carries
with it certain risks, as for example that a ruthless central government may
exploit it to appropriate "surplus" to the point of starvation. The history
of Western Europe and North America shows many examples of successful
economic change by a gradual process of correcting the evils besetting
agriculture, carried on within the framework of private enterprise. Besides
land reforms, these measures include improvements in the taxation of
agriculture, in credit institutions and in marketing, and measures to stabi-
lize the international demand for primary products.

A flourishing state of agriculture or other primary production can carry
development far, as the position of Australia and New Zealand testifies.
Private producers and government officials need have no fear that primary
production is generically inferior to other economic activities. Nor should
misgivings concerning the secular drift of agricultural prices relative to the
prices of manufactures deter action for immediate improvements on farms
and plantations; for expert opinion is about evenly divided on these
prospects. Here, as elsewhere, resources must be committed with only the
assurance that changes in demand can be countered by varying the current
allocations of resources as the future unfolds.

Sequence of Industrialization

Certain useful generalizations as to how real resources are most effec-
tively marshaled for economic progress through industrial production can
readily be inferred from the analysis of the similar problem in agriculture.
Making the optimum use of what they already have, the underdeveloped
areas would be expected to inaugurate industries, such as textile produc-
tion, which require light capital equipment relative to labor; to prefer
small-scale operations involving small risks and equipment; to exploit the
existing primary production through processing industries intimately re-
lated to food and raw materials; and, finally, to encourage village handi-
crafts and local industries, provided efficiency is not too low and no better
alternative employments exist. Heavy industry would appear only with ex-
ceptionally fortunate combinations of coal and iron resources and large
domestic or regional markets. Otherwise, from food and raw material
processing and local handicrafts, the normal progression in industry would
be to the less highly differentiated types of industrial and agricultural in-

422 Approaches to Economic Development

struments and materials fertilizers, standard varieties of machine tools,
pumps, mixers, certain basic chemicals and the like.

Meanwhile, much effort will necessarily be channeled into enterprises
which constitute the indispensable underpinning of development: general
utilities railways, highways, harbors, electric power, multipurpose water
developments and so onand, not least, public health programs and gen-
eral facilities. The indirect character of the benefits accruing from them, the
sheer magnitude of the necessary investment, or the extent of the risks
involved make these undertakings the natural bailiwick of government. But
the role of government in these projects, as indeed in industry generally,
can vary from mere general planning to loans to private enterprisers, to
subventions, to construction with subsequent lease or sale into private
hands, to outright ownership and operation. It is by no means clear that
even rapid industrialization entails state socialism.

Tempo of Industrialization

Except in outright totalitarian regimes, the growth of industry depends
far more than is commonly recognized upon the first factor stressed in the
historical analysis of progress the number and vigor of genuine innova-
tors and entrepreneurs. But it depends almost as intimately upon the avail-
ability and quality of managers, businessmen and foremen. People with
these various capacities are perhaps scarcer even than skilled labor, which
in a modern economy can be rapidly trained, and scarcer also than capital
resources. As a strategic factor in economic development this scarcity of
genuine entrepreneurial and managerial talent is probably equaled only by
the complex of cultural factors and the extent of the market.

Abstract arguments can provide little or no guidance as to the desirable
or achievable tempo of industrialization in underdeveloped countries.
Countries differ markedly, and even for a single country the factors in-
volved are numerous and complex. Technical assistance from the industrial
West should vastly augment the purely physical efficiency of production,
but the effect of this on the rate of growth of the economy may be partly or
wholly offset by imitation of Western standards of consumption and "social
welfare" which impede capital accumulation. External economies and the
complementarity of industries may argue for the possibility of rapid growth,
but the interdependence of parts also creates vast risks of incorrect plans
or forecasts by governments and businesses. Cultural factors may limit the
advance of industry more than purely economic factors.

All in all, the tempo of industrialization will probably fall far short of the
aspirations voiced in many regions during the past decade. And this leaves
aside the questions of the fate of per capita income as conditioned by popu-
lation growth, and of human welfare as distinct from per capita income.

A General View of Economic Development 423

FINANCING ECONOMIC INNOVATION

If the innovating entrepreneur is the prime mover in economic progress,
it is equally true that it is the provision of capital for the innovator, without
inflation, which sustains development once it has begun. Mere frugality and
accumulation on the part of the general public is not likely to break through
traditional ways of producing and consuming. But once a wave of wanting
to do things in new and better ways has begun to swell, savings must be
forthcoming if the potential force of innovation is not to be dissipated in
consumption and inflation.

It is extremely unlikely that foreign governments or international agen-
cies will ever supply a substantial part of the capital required for develop-
ment in the underdeveloped world. They have not done so in the past; and
with the current emphasis on "welfare" legislation in the Western world-
even if the burden of military outlays should ever be lightened the govern-
ments of one third of the world's population can scarcely tax their elec-
torates heavily enough to supply the requisite capital for the other two
thirds. Capital supplied by metropolitan powers, such as England, France
and Belgium, or by the United States, or by the International Bank for
Reconstruction and Development may indeed have quite powerful effects
in providing examples of improved facilities and superior techniques. Reck-
oned as a capital investment per capita, however, the annual sums available
to the underdeveloped world from these sources are quite paltry. They are
quite insufficient, in themselves, to make appreciable differences in income
levels.

This leaves foreign private investment and domestic sources of capital-
both public and private as the bearers of progress. In the nineteenth
century, foreign private investment sometimes provided a foundation for
development. But whether this foundation was built on or not depended
upon many factors in the receiving economy. Large British investments did
not result in rising levels of living for the masses in India, but they did in
North America, in Australia and New Zealand. Unless the receiving econ-
omy generated indigenous forces which raised per capita income, foreign
private capital while it may have earned attractive profits did not even-
tuate in development.

But the twentieth century differs from the nineteenth in a critical respect:
private capital in some measure following the first world war, increasingly
after the Great Depression, and markedly after another world war has
not found the profits of foreign investment commensurate with the risks,
except perhaps in the oil industry.

Thus, from any angle, domestic sources of capital are indispensable for
development. Foreign private investment cannot be evoked unless the risks

424 Approaches to Economic Development

peculiar to the twentieth century (at least since 1931) can be eliminated.
But even if they are eliminated and private capital does enter from abroad,
it is unlikely to raise average incomes appreciably unless the receiving
economy itself saves and invests substantial fractions of its own income.
Perhaps a sufficient concentration of foreign capital on a limited area might
produce an exception, as it has in Israel. A comparison of Israel's popula-
tion with that of the underdeveloped world will show arithmetically its
necessarily favored and unusual position.

Once a country is well advanced in the process of development, it can
make large drafts on foreign private capital, as Canada does. Private capital
will flow as the political instabilities and economic handicaps characteristic
of young republics and beginners in development are overcome. But this
signifies that these countries are demonstrating their viability by good
economic performance. Foreign government and international loans may
be the wet nurse of infancy; foreign private loans become available as
adolescence proves its powers, and they are easily had by a healthy adult
breadwinner. For the process of development itself, past the faint beginning
stages, the finance is provided by domestic government revenues and pri-
vate saving. And it would scarcely require much argument to establish that
voluntary private saving in most instances cannot become significant in
volume until a groundwork has been laid by domestic public investment.
Tax systems are thus the ultimate foundation of development finance. They
are essential to the curbing of inflation, for only with the prospect of a
reasonably stable currency will domestic and foreign private savers entrust
their capital to a country aspiring to development.

Government Provision of Development Capital

Since a large and critical fraction of the substance of development comes
from state revenues, tax systems in the underdeveloped countries must be
enormously improved from their present state, which varies from rudi-
mentary and unproductive to complex and ineffective. The ordinary canons
of taxation productivity, simplicity, certainty of enforcement, and equity
provide the natural starting point of improvement. But cultural and
economic differences among countries will inevitably necessitate large dif-
ferences in the practical application of intelligent fiscal policy.

Illiteracy and poverty undoubtedly mean that income taxation will gen-
erally play a less important role in the underdeveloped areas than in Europe
and America. Hut and other simple capitation taxes are unavoidable at the
beginning, and consumption excises, while only approximating propor-
tional taxation at best, may long be indispensable. The limits to direct
taxation of income may partly be compensated for by property taxes,
especially by improved forms of land taxes. Much is to be said for levies

A General View of Economic Development 425

on exports by primary producers, as a means of appropriating some of the
yield of wasting natural resources for purposes of national development,
and no less important as a flexible device for stabilizing the net return
to domestic producers of raw materials which suffer from the instability of
international markets.

National differences make it impossible to go into much more detail
concerning desirable revenue systems, but certain negative indications may
be equally useful. Excises on imports, in order to screen out items of
luxury consumption or to reduce consumption in general, may fail because
they encourage substitution from domestic sources. Tax exemptions, or
favorable tax discrimination to encourage investment in certain industries
considered essential to national development, enjoy a considerable vogue
in Latin American countries. But the standard objections to these pro-
cedures as inequitable, prolific of official corruption and demoralizing for
the taxpaying public arc not easily answerable.

In addition to tax income, governments may obtain funds for develop-
ment projects by domestic borrowing. Here the chief problem is to avoid
the use of central and commercial banks as mere money factories and in-
stead to cultivate a solid market for government securities in private and
business saving. Banking systems can contribute development capital to the
degree to which they absorb government securities and create credit without
inflationary consequences. In the more advanced phases of economic de-
velopment, an active government security market also provides the central
bank with the opportunity of exercising monetary control through open-
market operations. But effective monetary policy need not await this junc-
ture, since bank lending can be regulated effectively through reserve
requirements.

Official inquiries into the revenue systems of underdeveloped countries
generally show that improvements in tax structures and above all in the
efficiency and honesty of tax administration can substantially increase gov-
ernment income without added hardship to the population. Effective fiscal
systems assume significance not only for the revenue they yield for develop-
ment; they are essential in combating inflation, for encouraging private
saving and investment, for attracting foreign capital and for permitting the
relaxation of foreign exchange controls.

Development Capital from Domestic Private Saving

Voluntary saving on the part of the broad masses seldom if ever supplies
a dynamic driving force in economic development, particularly in its early
phases. It is the foreign trader or, perhaps as frequently in the contempo-
rary scene, the local government that introduces technical innovations,
opens up new lines of production and consumption, and supplies most of

426 Approaches to Economic Development

the capital. But even if ignorance, inertia or sheer poverty sorely limit the
amount of capital formation which can be financed by it, domestic personal
saving plays a very essential role, at least as a passive, permissive or back-
ground factor. Throughout the early and arduous phases of development,
small increases per capita in consumption can easily wipe out the material
basis of further progress. Alternatively, with given monetary outlays by
firms and governments on capital equipment, small individual increases in
consumer outlays may produce considerable inflation and undermine the
results achieved.

The means of encouraging voluntary individual saving are probably not
greatly different for underdeveloped and developed countries. Perhaps the
advantages the individual may expect as the fruits of saving need to be
propagandized more in societies where personal saving is something of a
novelty. But for the rest the course would follow familiar lines: political
stability, security of property, monetary stability, the spread of savings
institutions, government regulation of banking, development of investment
institutions, avoidance of expropriatory taxation, and the like. There are
few if any short cuts in this route.

Development Capital from Abroad

The great examples of rapid economic development England during the
industrial revolution, Japan after the Meiji restoration, Russia under the
Soviet regime have been cases of almost complete self-financing from
domestic resources from the beginning on. Western Europe in general con-
formed to this pattern, but notable cases can be brought to mind of par-
ticular industries in which the capital, particularly the original investment,
came from the outside. In still larger measure, North America, Australia,
New Zealand and the Union of South Africa, to consider only areas now
regarded as "developed" made drafts on foreign capital throughout their
economic evolution. But even in these cases, domestic sources of capital
rapidly overtook the inflow from abroad.

Aside from England, where the combination of resources, geographic
position, cultural traits and technological advances was exceptionally
favorable, it is probably safe to say that most countries that have recorded
striking periods of economic progress have borrowed from abroad if they
have preserved liberal institutions. This may be one of the more important
lessons of history for nations concerned with the economic progress of
underdeveloped areas today. It signifies that the nations of Western culture
have a political interest in the economic development of low-income coun-
tries only if this development is accompanied by the growth or preservation
of political and economic freedom. An inflow of foreign capital may help
these countries avoid resort to the direct controls and compulsions which

A General View of Economic Development 427

are characteristic of totalitarian regimes and their particular version of
"progress."

The onus of inducing this fructifying inflow of foreign capital rests, how-
ever, with the developing nations themselves. Partly this is a matter of
morale, but it is also partly a matter of simple arithmetic and simple eco-
nomics. As for morale, it has repeatedly been said within these pages and
elsewhere that, unless progressiveness becomes part of the very character of
a nation, any forward movement in average incomes comes to a standstill
as soon as foreign aid ceases. And among the more important elements of
progressiveness is the habit of accumulation, investing, and thus providing
the wherewithal of development.

The simple arithmetic embraces two fundamental facts. First, foreign
government grants and loans, and international agency credits, when
divided out over the vast populations of Asia, Africa and Latin America,
cannot do more than provide occasional examples of modern techniques
and isolated pieces of capital equipment. Second, foreign private capitalists,
engaging in the simple arithmetic of profit and loss, do not now find condi-
tions sufficiently attractive for investment in most of the underdeveloped
world.

This brings us then to the economics, which are also relatively simple and
straightforward. Governments of the higher-income countries cannot in-
duce a much larger flow of private investment for development abroad
except by inequitable discriminations or by guarantees and subsidies which
would in effect convert private loans into public loans and grants. Some-
thing may indeed be accomplished by treaties, guarantees and tax measures;
but the consensus is clearly that these measures make only marginal con-
tributions to the flow of private investment.

Fundamentally, it is not the conditions within the chief potential lending
countries but the conditions within the borrowing economies that need to
be reformed. It is not the relatively high productivity of capital within the
United States, for example, that should be attacked, but the low yields and
high risks of investment abroad that require remedy. Marginal contribu-
tions of capital by outright gifts or by low-interest loans have their place in
enlightened foreign policy of the Western nations, but these are as they
are correctly labeled aid and not the substance of development.

Opening up Markets

The last great impelling force in economic development, in addition to
entrepreneurship, technical innovations and the breaking down of ancient
traditions in the ordinary processes of earning and spending, is the widen-
ing of markets both within the national boundaries and outside them. The
division of labor, economic efficiency, the receptiveness of the economy to

428 Approaches to Economic Development

change and its capacity to adapt itself to alterations in demand depend in
large measure on the extent of the market. The continental free-trade area
of the United States seems to illustrate these qualities quite clearly.

So far as concerns the domestic market within each of the relatively
underdeveloped nations, this is peculiarly its own problem, to be solved
in some measure with the help of foreign capital. Important factors are
fostering the construction of rail, water and air transport facilities; im-
proving communication, increasing literacy, disseminating information;
and furthering the internal mobility of labor and capital and the diffusion
of particular skills.

So far as concerns the international markets for the great staples of the
primary producers and the quantitatively less important fabricated goods,
a large measure of responsibility rests on the leading commercial nations.
This responsibility consists in ensuring that the world trading system
expands and thus affords the developing areas the opportunity to earn their
way by increasing exports; that the direction of their development is not
distorted by trade barriers, exchange controls and preferences; and that
these economies enjoy a tolerable degree of stability in the demand for
their exports. Economic progress in the underdeveloped world over the
long pull depends more heavily upon a favorable international setting for
ordinary production, sale and purchase than upon such initiating factors
as the transfer of techniques and capital from foreign shores.

20. Interests and Responsibilities of the United States

THE UNITED STATES HAS VITAL INTERESTS at stake in the course of events
in those vast areas now stirring with social unrest and resentment of their
impoverished material state. First and foremost in the present international
scene comes its political interest. The United States cannot stand idly by
and witness the recruitment of the populous countries of Asia and perhaps
even of Africa and Latin America to Communism. Not that the United
States can purchase friendship or political allies by its loans, grants or
technical aid; for the gratitude of the recipient countries may be strongly
tinged with injured pride or suspicion, and at best will be only transitory.
Rather, the guiding fact is that a country of satisfactory material well-being
is rarely, if ever, a voluntary convert to the ranks of Communism. Even if
the level of living is painfully low, if there is a reasonable chance of better-
ment, if the way to economic progress seems to lie open, if, in short, there
is hope of satisfying national and personal feelings of worth and dignity,
it is unlikely that these cravings will impel a country to sacrifice its inde-
pendence to a foreign monster. It is vitally necessary to the United States
to offset the "quick and easy" remedies of Communism through violence
and expropriation by creating the external conditions under which an im-
poverished people may, by its own efforts, raise its levels and standards of
living and yet maintain its political independence.

In addition to this political interest in the present international scene, the
United States has strong economic interests in the development of nations
comprising two thirds of the world's population. Many of the members of
the North Atlantic Alliance, most conspicuously perhaps Great Britain and
Western Germany, and in addition Japan, as a potential political ally in
the Orient, require expanding markets for their industrial output and ex-
panding sources of supply for foodstuffs and industrial raw materials. As
allies, their economic interest is that of the United States; their economic
weakness or vulnerability throws upon the United States a heavier share of
the burden of military defense.

Other economic interests of the United States in economic progress in
Southeast and South Asia, in Africa and in Latin America are, however,
more direct. These regions have traditionally supplied the United States
with some of its most indispensable imports, such as sugar, wool, tin and
nonferrous metals; but within the past decade, certain great industrial raw
materials, among them copper, lead and petroleum, have passed from the

429

430 Approaches to Economic Development

export to the import category, and the prospects are that iron ore and other
indispensable elements of industrial civilization in the United States will
make the same shift. 1 Moreover, foreign markets have always constituted
an important part of the demand for American food and raw material
exports, and at present they account for a significant part of the demand
for many manufactures. Higher incomes in the developing areas may well
come to be the critical factor in the prosperity of these exporting industries
of the United States.

Finally, it cannot be denied that the United States has a purely humani-
tarian interest in the relief of starvation, disease and ignorance in other
parts of the world. This concern was one of the animating forces of the
American missionary movement; and it seems inevitable that the wealthiest
nation of the world should continue to feel some measure of moral respon-
sibility for the way the "other half" in fact by far the larger portion--
lives and thinks.

THE NUMEROUS INTERNATIONAL INTERESTS OF THE UNITED STATES

Any realistic analysis of the interests of the United States for raising the
economic level of the less advanced nations must recognize at the outset
that these interests are not all in one direction. The existence of the United
Nations and the North Atlantic Treaty Organization has not relieved the
United States of an individual national responsibility for peace and war
which parallels the role of the United Kingdom in the nineteenth century as
custodian of the Pax Britannica. It is not national conceit but a chorus
of voices from Western Europe and elsewhere which insists that the United
States must be the chief defender today of parliamentary government,
individual civil liberties and other heritages from the Magna Charta. For
two decades the United States has been told by English and continental
friends that its primary duty in the international scene is to preserve full
employment at home, and by its enemies that the next great depression will
sweep capitalism into justly deserved oblivion. Since World War II, and
particularly since the Korean conflict, the United States has been charged
with bringing disaster upon Europe by raising the international prices of
raw materials through its military procurements: the United States must
beware of inflationary pressures. But this country must at the same time
import in large volume to relieve the world shortage of dollars. It is the
responsibility of the United States, it is said, to shape the international
scene in such a way as to permit other countries to achieve stable and
convertible currencies and to relax or abandon their exchange controls.

1. The President's Materials Policy Commission, Resources for Freedom, Vol. I, Foundations for Growth
and Security, June 1952, passim.

Interests and Responsibilities of the United States 431

These are all genuine and grave responsibilities and interests. Although
other nations may sometimes be too ready to permit their share of the
burden to rest on American shoulders, the size and affluence of its economy
make the United States inevitably the Atlas holding up the modern firma-
ment. If, in one quarter of the earth, Japan, with the potential industrial
might of 90 million frugal and hardworking people, feels the pull of trading
eastward, who is to offset this attraction aside from the United States with
its vitalizing military procurements and its shipments of coal and food-
stuffs? If, in another quarter, Berlin is threatened as a bastion of the West,
who is to provision it by means of a fantastically expensive airlift? If
Pakistan experiences a famine, who can make up the deficit? And so one
might continue, for the Near East, Indochina and other points of jeopardy.

Economic development in all low-income countries seems to be firmly
established among the great ideals of the present age, and rapid improve-
ment in those regions most exposed to Communist inroads is most urgent.
But the United States has many other urgent responsibilities and interests,
and meanwhile it must preserve the health and vigor of its own economy.
As in all economic problems, therefore, alternative needs and opportunity
costs have to enter the final calculation.

How Can These Interests Be Made Compatible ?

An expanding system of free international trade affords the one really
great means of reconciling the numerous and potent interests of the United
States which compete in the sphere of international economic affairs. More-
over, such a system provides the only reliable guide for United States
policy toward the developing countries.

Economic progress is fundamentally a native product. But, it has been
argued in previous chapters, an economy based on primitive subsistence
agriculture has seldom, in isolation from other countries, generated the
driving forces necessary for economic advancement. It requires the presence
of the foreign trader to introduce entrepreneurship, to generate innovation,
to break the crust of the traditional pattern of resource use, and through
the impact of economic change to weaken those elements in the cultural
environment which inhibit progress. Foreign traders furnish a modicum of
capital also; but, more important, once a process of development has
begun, the entrepreneurs and the innovations in both production and con-
sumption begin to evoke capital from the domestic economy itself. Thus
development usually has its beginnings in the first articulation of the
country in the world trading system.

There are good reasons for believing that integration into this system is
continuously necessary if all the various efforts at development in the
various countries are to eventuate in a workable pattern. For one thing,

432 Approaches to Economic Development

the young developing economy will need to earn its imports of essential
capital goods through its exports to the industrial countries. Its economy
must be linked with the world economy so that, as change occurs in the
world pattern of resource use and flow of products, it can adapt itself to
these changes. The most effective and, indeed, almost the only means by
which these changes can be known, their magnitude assessed and their
devious influences appreciated is the operation of the price system. While
it may theoretically be possible to plan development for a completely closed
economy, it would seem to be both futile and a contradiction in ideas to lay
autarchic plans for a country that hopes to accelerate its development by
drawing in from the outside the techniques, the impulse toward genuine
entrepreneurship and the capital equipment which its exports can com-
mand. The United States should neither implicitly nor explicitly encourage
autarchic plans which run counter to the spread of a network of world
trade based on a high degree of international specialization and exchange.
Countries that plan to pattern their economies in greater or lesser degree
on the Russian or other authoritarian models are, by that choice and to
that degree, turning their backs on a rational international division of labor.

Beyond the imports of equipment and materials necessary to economic
development which its exports can command, the young developing coun-
try will want to draw in additional capital through foreign investments. But
it is only within the framework of a favorable world trading system that
foreign investments will flow in the volume and kind most needed in the
process of development. Public loans and grants will not be available in the
foreseeable future in sufficient volume to finance the development of the
low-income areas. A healthy system of multilateral trade and currency
convertibility would most certainly lead to a revival of private international
investment which carries with it technical and business know-how and an
intimate knowledge of costs and market outlets in the world at large. Even
at its best, foreign public investment cannot be expected to carry along
these advantages.

On three major grounds, then, the arguments seem particularly strong for
linking economic development with a vigorous international trading sys-
tem. Commercial contacts nurture the beginnings of economic progress in
breaking traditional techniques and patterns of resource use, in introducing
an aggressive class of entrepreneurs, and in inducing social change and a
weakening of the noneconomic barriers to higher productivity. Second, it
is foreign trade which enables the developing countries to purchase with
their exports the material basis of further progress through imports of es-
sential capital equipment. Finally, only a flourishing state of international
trade will encourage the financing of development in underdeveloped
countries by foreign private capital.

Interests and Responsibilities of the United States 433

Thus it appears that the interests of the United States in the under-
developed world rest largely on the same foundation which the United
States has proclaimed for its foreign economic policy in general: that im-
provement in levels and standards of living everywhere in the world de-
pends upon the removal of barriers to trade, upon opening the United
States market, as the most important part of the world market, to interna-
tional supply and demand, upon currency convertibility and nondiscrimina-
tory commercial policy, upon stability in world commodity markets and
upon the revival of private international investment.

Loans, Grants and Technical Aid

These should be the lodestones of United States policy concerning the
economic development of the low-income countries. To them should be
added the significant contributions which the United States can make
through government loans, grants and technical aid. But these should be
regarded as marginal contributions of a strategic character, and not as the
core of the responsibility. Foreign loans, grants and technical aid are rather
in the nature of catalysts: they may activate and temporarily sustain the
prime movers of progress, but the process must get its continuing force
from the developing economy itself. The basic contribution of United
States policy, however, lies in trying to provide an auspicious international
setting in which the developing economies can make their own way.

PRIMARY PRODUCTION OR BALANCED DEVELOPMENT?

As part of this pattern of policy, should the United States seek to build
up the underdeveloped countries as sources of supply for its consumers and
industries? Or should it subordinate such interests to a policy of helping
these countries attain a broad and diversified basis of development? Is this
a clear choice between selfish and altruistic motives? Does primary produc-
tion serve the interests of the industrial West but retard the economic
growth of the other three quarters of the earth? These are real issues, and
their reality is perhaps most vivid to the inhabitants of those countries and
areas that are not yet very far advanced in the economic scale. As one
writer has stated:

The Middle Easterner observes the continuing tendency of some Western enter-
prises and even governments to "use" the Middle East as a source of raw mate-
rials, a market for manufactured products or a place for profitable investment,
instead of working with the countries of the area as co-equals. 2

2. Peter Franck, "Economic Nationalism in the Middle East," Middle East Journal, Autumn 1952,
DD. 429-54.

434 Approaches to Economic Development

Is Primary Production Exploitative ?

The revolt of peoples in the underdeveloped world against imperialism,
colonialism, and Western paternalism is, of course, in large measure justi-
fied. But also in large measure the onslaught was misdirected, particularly
at the hands of Marxists. Exploiting natural resources and other business
opportunities does not necessarily involve exploiting people, and it can
scarcely be taken as evidence of moral turpitude if European and American
"capitalists" and business ventures in foreign lands paid no more than the
market rates of wages and sold their products for what the market would
bring. Moral guilt and the crime of exploitation lay rather at the door of
metropolitan governments, usually with the strong support of privileged
cliques in the underdeveloped areas, in denying to the people of their
colonies the same political and economic freedom and equality which they
proclaimed at home as universal principles. The evils of imperialism did not
inhere in the type of production carried on in the colonies, but in the
undemocratic social and political institutions which surrounded economic
activity.

Oppression and exploitation are not inventions of Western civilization.
Indeed, the European powers were responsible for introducing ideals of
equality, human rights and democracy into many regions. But they un-
doubtedly failed to nurture ideals of national self-determination. Even in
the case of the United States in the Philippines, where independence was
long contemplated as the eventual outcome, local government was not
sufficiently encouraged in preparation for this event.

The pursuit of the profit motive by foreign corporations and foreign
nationals is now coming to be recognized in the new republics of the Near
East and Asia as potentially very useful in economic development. Capital-
ism need not be conjoined with exploitative political and social institutions,
and least of all need the extraction of minerals and the production of food-
stuffs and industrial crops be exploitative. The bases of mutually profitable
economic exchange in nonexploitative political and social institutions are
now being haltingly and laboriously worked out by the former colonial
powers and the newly developing countries.

Elements of Mutually Satisfactory Exchange

What the configuration of the new institutions and usages will be is
difficult indeed to discern in the midst of the turmoil of their creation.
Eventual political independence supplies the necessary cornerstone, though
independence for some colonial areas without the prior development of a
trained civil servant class and without prior schooling of the people them-
selves in political responsibility has in some cases produced national dis-
aster. The accomplishment of some political revolutions was rather less the

Interests and Responsibilities of the United States 435

riddance of nefarious foreigners and rather more the deposing of oppres-
sive native castes or classes which colonial powers, as a matter of conven-
ience or necessity, had used to make their own positions secure. Another
cornerstone of peaceful economic relations has been laid in the United
Nations and its many specialized agencies, in the International Bank for
Reconstruction and Development and other institutions for international
cooperation.

On the plane of day-to-day economic affairs, one of the main elements of
workable economic interchange appears to be the right of the newly devel-
oping country to deny foreign enterprise access to some types of production
considered appropriate for nationalization or suitable only for entry by
nationals because of military considerations. Stipulation of majority owner-
ship by nationals and requirements as to the employment of nationals are
more questionable prerogatives, and may indeed discourage foreign invest-
ment completely. If these countries desire to attain economic equality with
the West, they will have to learn to make the conditions for the private
foreign investor equally attractive with the opportunities he enjoys at home.
No doubt some part of the earlier "exploitation" by colonial powers repre-
sented an effort to secure by force this sort of equality for the European
investor and entrepreneur.

Reasons for Compatibility of Interests

Once the political conditions for dealings between foreigners and natives
have been reasonably well elaborated, there is no reason why the "procure-
ment" motive of the Western nations and the development motive of Asia,
Africa and Latin America should not be compatible. And the same applies
to the export interest of the West and the desire of the rest of the world to
progress economically. This is true for several reasons.

For one thing, the wherewithal for development, including also even-
tually heavy industries, will have to come for a long time into the future
from exports of raw materials. Mexico is a particularly illuminating case
because it has already developed to the point where a larger share of the
national income comes from industry than from agriculture, and still it
must depend upon its raw material exports in order to command the neces-
sary imports of machines and heavy-industry products from abroad. These
exports are necessary despite extensive foreign investments, which amounted
in 1951 to 70 per cent of all investment in new industry in the country.
Exports of lead, zinc, copper, petroleum and, in lesser measure, silver and
cotton furnish the material basis for domestic expansion. 3 Thus the foreign
procurement and marketing interests further the domestic development

3. "Mexico's Industrial Drive," Financial Time*, October 20, 1952, pp. 4 and 6.

436 Approaches to Economic Development

interest, and the situation is paralleled in most of the underdeveloped
world. 4

This generalization holds also for the vital sphere of foodstuffs. Although
the less developed nations are net exporters of most industrial raw materials
and will advisedly remain so during a protracted phase of their evolution,
the situation with foodstuffs is more complex. Argentina, Brazil, certain
other Latin American countries and New Zealand and Australia will prob-
ably continue to be exporters of foodstuffs in the aggregate; and some other
less developed countries will, for the discernible future, continue to be ex-
porters of certain foodstuffs. But some regions with poor, overcrowded or
insufficiently developed agricultural resources may change quickly from net
exporters to net importers of food, if indeed like Egypt they have not
already lived on foreign supplies. The shift may be caused by war and
political upheavals, as in parts of Southeast Asia; or it may result from the
mere increase of population.

But net import of foods may also be a natural accompaniment of de-
velopment. When highways, dams, factories and the like cannot be con-
structed by mobilizing surplus agricultural labor, men and resources must
be diverted from food production. Thus the more highly developed primary
producers, and even such industrial nations as the United States and Can-
ada, may contribute their "surplus" grains and other foodstuffs to foreign
development. If present pricing policies stand in the way of such a move-
ment, this does not necessarily signify that, with the requisite internal
adjustments in the producing countries, this fundamentally rational inter-
national exchange cannot take place on a profitable basis.

The question of the relative merits of peasant and plantation agriculture
in the economies of the underdeveloped nations should yield to similar
solution. Again internal political, economic and social reforms may first be
necessary: the dethronement of governments resting on an oligarchy of
landowners, clarification of land titles, reforms of tenure systems and of
water rights, and so on. All of this, however, would still leave unresolved
the main economic issues between small peasant holdings and large commer-
cial farms the merits of more diversified food production, presumably for
domestic consumption, as against a few staples for export, and the question
of small versus large units. On precisely these central economic issues, the
answers in the main may be left to the arbitrament of the market. Whether
farms should be large or small, and whether they should produce for
foreigner for home consumption, should depend mainly upon which method
of production has the lower costs and which brings the higher incomes. 6

4. Densely populated countries like India and China will, of course, be the first in the course of their
economic development to reduce the proportion of raw materials in their exports in favor of their use in
domestic manufactures.

5. See Chapter 12.

Interests and Responsibilities of the United States 437

U.S. Policy and Balanced Development

The upshot of these considerations for the foreign economic policy of
the United States is that, so long as private businesses or government
procurement agencies are conducting their purchases in an open and
reasonably competitive market, the material wherewithal for economic de-
velopment is being supplied to primary producers. Monopoly practices on
the part of buyers and sharp fluctuations in demand can reduce or obliter-
ate the possible gain to suppliers. But the fact of this demand, aside from
such drawbacks, is favorable. So long as the underdeveloped countries are
predominantly raw material producers, their balanced development which
has been stressed so much in recent discussions requires that they earn the
means for economic progress by large exports of primary products. The
United States is not confronted with a choice between furthering the de-
velopment of foreign sources of supply or foreign markets for its own ex-
ports and furthering the development of the economic potential of low-
income countries.

For the rest, the United States through its technical aid advisers, the
direction of its grants and loans, and through its substantial influence in
the United Nations and the International Bank can help developing coun-
tries to maintain balance in their investment programs. This task is much
less formidable today than it was in the first flush of enthusiasm for "indus-
trialization." Ceylon, India, Pakistan and the United Kingdom territories
in Asia, containing together half the population of Asia outside China,
have formulated programs within the general framework of the Colombo
Plan which reflect a major revision of views since the ill-conceived Bombay
Plan was broached a decade ago for the rapid industrialization of India. 6
The new programs rest on the conviction, voiced by a former president of
the United Nations Economic and Social Council, that the development of
agriculture "would show quicker results than any other field," and that
investing in industry "can only be done economically if small and simple
units of machinery are installed in villages throughout the East." 7

PROVISION OF CAPITAL BY THE UNITED STATES

A decade ago, there can be little doubt, discussion of conditions for
economic development in the low-income countries overstressed the role to
be played by the provision of capital. It overestimated the amount forth-
coming from the international agencies and the United States; and it un-

6. The current allocation of the projected costs in the Colombo Plan involves one third for agriculture,
another third for transport and communication, 6 per cent for fuel and power, 10 per cent for mining and in-
dustry, and 18 per cent for social services.

7. S. Amjad AH, in the Summary of Discussions (Pacific Coast Conference on Private Investment in
International Development, International Development Advisory Board), Publication 4795, U.S. Depart-
ment of State, December 1952, pp. 16-17.

438 Approaches to Economic Development

duly depreciated the potentialities of creating the conditions for capital
accumulation in a rising crescendo within the developing countries them-
selves. Capital was assigned too prominent a role relative to other economic
factors, such as skilled laborers and managers; and all the economic factors
took on an excessive emphasis relative to good government and favorable
cultural elements.

Nevertheless, the flow of investment funds to the underdeveloped coun-
tries is insufficient today. Tn the words of the president of the International
Bank for Reconstruction and Development:

Granted that the underdeveloped areas do not yet have the capacity to make
productive use of any huge inflow of resources, we must still admit that the
present magnitude of international investment for development is clearly in-
adequate. 8

How can that flow of capital be augmented? And what responsibilities,
interests and opportunities does the United States have in the provision of
funds for economic development?

Outlook for U.S. Grants and Loans

Chapter 17 concurred in the general conclusions of the Gray report con-
cerning grants and loans of the United States government to underdevel-
oped areas. These sources of capital cannot be expected under present
conditions to exceed the level, attained in the recent past, of $500 million
annually in grants and technical aid, and $600 to $800 million in loans
through the Export-Import Bank and the International Bank. These sums
must be viewed in the light of the categorical imperatives of present and
future United States military expenditures, both direct and indirect through
aid to Europe and other regions. If, for the time being, this country is
obliged to pour resources into preparations against military aggression, a
time may come when it can devote a larger proportion of its budget to the
war against want and misery in the less fortunate countries.

U.S. Private Investment

The flow of American private investment into the underdeveloped parts
of the world has been running within the limits of $500 to $800 million
annually. The United States can help lay the groundwork for a larger
volume of private investment in foreign countries, including the low-income
areas, by working toward the reduction of tariffs, exchange controls, quota
restrictions and other barriers to the operation of the price and profit
system in international trade. Something more, but probably only a mar-

8. International Bank for Reconstruction and Development, Proceedings, Seventh Annual Meeting (held
at Mexico City), Washington, 1952, p. 11.

Interests and Responsibilities of the United States 439

ginal contribution, can be achieved by this country through its commercial
treaties, its information services, its guarantees, and the elimination of
double taxation on foreign investment. In considerable measure, however,
it depends upon the developing countries whether sufficiently attractive
conditions will prevail to equal the opportunities open to the private in-
vestor in the United States. When these countries come to regard foreign
private capital as important, the attractions will not be long in materializing.
What proportion of capital from the United States should be supplied
privately and what proportion through public agencies is probably not sub-
ject to generalization; but the complementary nature of the two sources
should not be ignored. Public loans and grants can best provide basic
services such as public health projects and large ventures with uncertain
and indirect benefits over long periods into which private capital might not
be attracted. Private capital, on the other hand, is probably superior in
those ventures in which technical know-how, skilled managers and super-
visors, and the spirit of innovation count heavily. 9 Too frequently private
and public loans from the United States have been thought of as alterna-
tives rather than complements.

National or International Auspices ?

Regarded abstractly, international agencies offer many advantages for
public investment in developing countries. The receiving countries are less
likely to regard these investments suspiciously as the bribes of capitalistic
imperialism. In addition to relieving the United States of these charges,
international loans and investments may evoke contributions from other
creditor countries, such as Switzerland, Belgium and Canada; and it is not
inconceivable that the more affluent governments in the underdeveloped
world might be persuaded to join in helping the lowest-income countries.
The joint-guarantee aspect is also attractive. International organizations,
such as the International Bank, can draw on the personnel and experience
of many countries besides the United States; some of these have a long
background of experience in Asia and Africa, for example. There are im-
ponderable gains in the promotion of international cooperation in con-
crete working matters.

International agencies can impose conditions of domestic reform as a
requirement for loans or grants more successfully than national agencies.
Political pressure is less likely to be brought to bear on international agen-
cies than on national agencies. Action through international bodies, more-
over, insulates the United States from ill will when loans must be refused
or when more aid is given to one country than to another.

9. 'See John M. Hunter, "Long-Term Foreign Investment and Underdeveloped Countries," Journal of
Political Economy \ February 1953, pp. 15-24.

440 Approaches to Economic Development

These abstract merits are, however, attenuated by some contemporary
facts: first, the United States supplies most of the finance whether the
agency is national or international; second, the international political situa-
tion may require some Realpolitik on the part of the United States. The
bland internationalism of the Economic Commission for Europe on the
subject of East-West trade may not correspond to what the government of
the United States regards as the essential conditions for guarding supplies
of strategic goods. Some United States loans may have to be strategically
placed; and when it comes to outright grants for which much can be said
even on purely economic grounds the same consideration applies with
stronger reason.

Both national and international organizations have their place. August
Maffry and others would be glad to see the Export-Import Bank expand
into the field of loans to American corporations which have extensive
direct investments abroad and into equity investments and loans to foreign
corporations without government guarantees. Others have envisaged
similar functions as the basis of a new International Finance Corporation,
to operate in spheres closed to the International Bank. 10 Just where to draw
the line on principle is hard to say. Particular decisions will probably be
determined by varying degrees of confidence in or mistrust of international
agencies on the part of Congress. At any rate, there seem to be no grounds
for a sharp revision of recent American policies.

Attaching Conditions to Loans

"Give, hoping for nothing in return" cannot be the rule for the United
States in making grants or loans to underdeveloped areas. It is legitimate
for this country to choose to aid its friends or potential friends in a world
of bipolar power where the possibility of peaceful survival is doubtful.
Moreover, the funds granted or loaned must actually serve the purpose of
economic development and serve it well, since all such allocations of capital
must be compared with other intensely competitive claims in the federal
budget or in the calculations of private firms or persons. Government loans
or grants should therefore be made contingent upon clear evidence con-
cerning not only the useful employment of the funds but also the satisfac-
tion of essential conditions for healthy development, such as a workable
fiscal system and reasonably effective monetary control, and upon the
assurance that the funds will not be dissipated by political corruption.

Where overvalued exchange rates, exchange controls and quotas can be
reduced, the objectives of United States policy and the developing country's

10. See August Maffry, Program for Increasing Private Investment In Foreign Countries (mimeographed),
report prepared for Technical Cooperation Administration (Department of State), U.S. Department of Com-
merce and Mutual Security Agency, December 18, 1952, pp. 16-21.

Interests and Responsibilities of the United States 441

welfare can be furthered by making these reforms a necessary condition of
financial aid. Some of these stipulations have been made, either implicitly
or explicitly, by the International Bank, which enjoys the advantage of
being able to put financial consultants into semiofficial positions, after the
pattern of the very successful League of Nations advisers, to see that the
required reforms are worked out in detail.

At any rate it is clear, as the Economist writes, that "the idea that all poor
countries have a natural and inalienable right to its [Point Four's] benefits
needs to be corrected." 11 On the political side, the Economist continues,
there must be the assurance that "development plans [will] not be nullified
by revolution, disorder, corruption, or incompetence." On the economic
side, the country seeking aid should produce a practicable plan and show
that it can mobilize domestic capital to finance a good part of the plan.
A further essential part of the sound financing of development is the
"project" basis, which the International Bank has insisted upon. Whether
a loan or grant is justified depends upon its particular use or, in the lan-
guage of economic theory, its marginal productivity, not merely on some
vaguely expressed need. However, the project and its productivity have to
be broadly conceived, and indirect and intangible benefits have also to be
considered.

Making loans or grants conditional upon sound economic and financial
policies and upon effective use of the funds need not and should not imply
interference with political "self-determination" in the countries to which
capital is supplied. The record of Marshall Plan aid in Europe is enviable
on this score, and the International Bank has earned an equally good
reputation. 12 These examples should be emulated in United States foreign
loan policy generally.

Other Types of Contributions

The importance of United States capital for economic progress in the
underdeveloped world must be assessed in a perspective which includes all
the manifold elements involved in the great problem of development.
Within this broad scene, noneconomic forces cultural, political and
demographic may play a more crucial part than purely economic forces.
Of these in turn, labor and entrepreneurial skills often limit expansion more
narrowly than does the supply of capital.

The economic assistance which the United States can extend to low-
income countries, moreover, goes far beyond supplying capital. The judg-
ment has been expressed that the value of the technical aid program alone

11. "Self-help for Developing Nations," Economist, January 31, 1953, pp. 261-62.
12.' According to the testimony of Ramon Betata concerning Mexico; see International Bank for Recon-
struction and Development, Proceeding*, Seventh Annual Meeting, loc. cit., p. 14.

442 Approaches to Economic Development

outweighs that of loans and grants. Whether this is so or not, the United
States can make valuable contributions to foreign development by stabiliz-
ing its own economy, by reducing its import barriers, by promoting free
multilateral trade throughout the free world, by helping to stabilize the
incomes of raw material export lands, and not least by supplying expert
guidance for the investment programs and the fiscal and monetary systems
of developing countries. The creditor role is important, but it does not
merit the exclusive emphasis it once received.

TECHNICAL AID

In his inaugural address on January 20, 1949, President Truman said:
"I believe we should make available to peace-loving peoples the benefits of
our store of technical knowledge in order to help them realize their aspira-
tions for a better life." Although this statement puts the matter of tech-
nical aid on a high plane of altruism, and although altruism may be a
particularly appropriate motive in view of the nonpecuniary benefits and
immeasurable material gains which accrue from it, the rationale of tech-
nical aid includes no less than the whole gamut of political, economic and
humanitarian interests which this country has in the general material
progress of low-income countries.

Whenever a more efficient technique can be substituted for a less efficient
one, something is being got "for nothing"; 13 and this fact supplies the com-
pelling reason for a technical aid program.

Yet, if a nation divulges its superior techniques for political or other
purposes, does it not run the risk that these very techniques will eventually
be used to undercut its products in world markets? The theoretical possi-
bility cannot be denied that in given lines of production a given country
may feel precisely this effect. In practice, however, the United States would
seem to have nothing to fear. Technical aid under Point Four is mostly
concerned with the simple fundamentals of public health and the humblest
sorts of agricultural methods, with which the competitive capacity of the
United States in foreign markets is most remotely connected. Even where
techniques are more advanced, the underdeveloped countries have at
present so great a handicap that their competition is distant. In time, nearly
any technical process can be imitated by other lands; but meanwhile the
United States presumably will have advanced further and created new
techniques. The ultimate defense against competition is not secrecy but
progressive excellence. Fear of losing out to foreigners should be the least

1 3. Aside, that is, from obsolescence costs and the costs of transferring the new technique to the user.
However, the paucity and primitiveness of capital instruments in the case of newly developing countries make
obsolescence costs relatively unimportant. The costs of supplying the superior methods from the technically
more advanced nation are also presumably small compared to the eventual returns.

Interests and Responsibilities of the United States 443

of all deterrents to the furthering of present United States interests in aiding
development.

U.S. Technical Assistance Activities

In 1953 it was estimated that by the end of the 1954 fiscal year the United
States would have expended approximately $400 million on technical
cooperation and that this sum would have been more than matched in
contributions of $490 million by the beneficiary countries themselves. 14 In
addition, the United States contributed to the Technical Assistance Admin-
istration of the United Nations in fiscal 1951, 1952 and 1953, $13 million,
$12.4 million and $9.2 million, respectively. Total outlays on technical as-
sistance have never exceeded 0.2 per cent of the federal budget or slightly
over 2 per cent of the annual foreign aid appropriations. At the close of the
1953 fiscal year it was estimated that, of the total United States technical
cooperation program, about 49 per cent had been devoted to Asia and the
Pacific, 37 per cent to the Near East and Africa, and 14 per cent to Latin
America. Over this period (1951-1953) the allocation of funds by principal
categories was as follows: 37.2 per cent to agriculture, forestry and fisheries;
15.7 per cent to industry, handicrafts and housing; 15.6 to natural resources
and public utilities; and 13.5 per cent to health and sanitation. 15

The matching contributions of the receiving countries demonstrate that
technical aid has, on principle, not been conducted as a "give away" pro-
gram. Another sound principle has been its emphasis on agriculture, small
industries and handicrafts, and on public health. It has also apparently
been conducted on the basis of a tapering off of the United States share and
a complementary increase of the local contributions.

Future Directions of Technical Assistance

The broad aggregate outlays cover a myriad of activities and accomplish-
ments ranging from the marked reduction of deaths by malaria and other
endemic diseases and dramatic declines in infant mortality to improved
strains of agricultural stock and grains and technical advice on such varied
matters as educational systems and multipurpose development of water-
ways. There have undoubtedly been occasional cases of obvious waste and
other cases of misconceived means and ends. Generally speaking, however,
Point Four, in the present sense of technical aid, has stood as a symbol of
hope throughout the impoverished areas of the world and as concrete
evidence of the benevolent intentions of the United States. Its cost has been
relatively small in budgetary terms and the returns though difficult to
evaluate precisely have apparently been large. It should continue, without

14. -New York Timc^ September 26, 1953.

15. Hearings on Mutual Security appropriations for 1953, U.S House of Representatives.

444 Approaches to Economic Development

serious impairment of financial resources or skilled personnel. Any marked
curtailment of technical assistance, it has been said, "would leave the world
from Indonesia to Libya strewn with unfinished projects, each a monument
to the broken promises of the West." 16

In the future, more attention could profitably be given to the use of third
countries as bearers of technical aid. Experts from Japan, for example,
could probably introduce improved methods of rice culture into Southeast
Asia better than experts from the West. The dissemination of superior but
relatively inexpensive industrial methods and equipment is another field in
which other countries could be of assistance.

As a matter of principle, the United States should maintain its own
technical aid program but continue also to participate in the United Na-
tions Technical Assistance Administration. Its own program ensures it
against sabotage by unfriendly nations, while participation in the United
Nations program ensures that the beneficial work can proceed even in
countries that might be sensitive to the presence of agents from the United
States.

STABILITY AND PROGRESS

The furtherance of economic progress in the underdeveloped countries
is by no means limited to grants, loans and technical aid. The United
States might make an even greater contribution by helping to create an
international economic setting in which the newly developing countries
could earn the wherewithal for their own development. But progress re-
quires stability.

Variations in the foreign-exchange yield of exports by primary producers,
according to evidence presented in Chapter 18, have been extreme for a
half century at least. These alternations of good and bad times are inimical
to economic progress for several reasons. In the first place, income earned
from exports frequently bulks large in the national income of primary
producers; the population usually holds small cash balances, and hence
increased income immediately boosts expenditures, and decreased income
cannot be cushioned by drawing on balances. These forces cannot readily
be offset in the less developed countries by contracyclical fiscal and mon-
etary measures. In the second place, the high incomes of the lush years are
likely to be squandered on consumption, and in the lean years the where-
withal for development is simply lacking. Third, the knowledge of their
vulnerability to depressions in world markets leads the underdeveloped
countries to try to insulate their economies by protectionist devices

16. Hamilton Fish Armstrong, "The Grand Alliance Hesitates," Foreign Affairs, October 1953, pp. 48-49,
quoting a United Nations official.

Interests and Responsibilities of the United States 445

quotas, exchange controls and tariffs all of which reduce the strength they
might derive for development from the industrial nations.

Possibilities of Self-Help for Primary Producers

Against the vicissitudes of demand in international markets, the primary
producers have some recourse, though even their best efforts would still
leave them exposed to excessive instability. Export taxes offer one avenue.
When foreign exchange yields of exports are abnormally favorable, export
taxes can be used to divert income into inactive funds to be held by the
government against the day of sagging demand and falling prices.

The accumulation of foreign-exchange reserves through export taxes is a
particularly useful device, but any device to appropriate part of the high
incomes of boom years, even if only in domestic currency, and to pay them
out in years of dearth, works in the right direction. Two English econo-
mists, Bauer and Paish, have presented a plausible scheme for reducing
instability for primary producers through compensatory withholdings of
part of the sales price or extra payments over the price, depending on the
state of the market. 17 By employing a floating-average price index as the
basis of operations, such schemes could avoid chronic divergence of the
prices they pay to producers from the international level. Stabilizing opera-
tions of this sort require a government export monopoly, exchange control
or drastic tax powers.

The shortcomings of efforts by individual primary producing countries
will readily be apparent. The government may itself not be able to resist the
temptation to spend the levies on exports in boom times perhaps on
developmental activities hence the restraint on inflation is lost. Other
countries exporting similar products, by not levying a charge on exports in
boom times, can divert a portion of the demand to themselves, thus under-
cutting the system. Finally, no amount of alternate taxing and subsidizing
of exporters in the producing countries can remove the variations of de-
mand in international markets. A primary producer could conceivably keep
its balance of payments in equilibrium by severe enough measures, but the
impact of varying foreign demand on the domestic economy would still be
a problem. It is this fundamental source of disturbance that requires
remedy.

The stabilizing efforts of the producer nation can, however, form a valu-
able counterpart to other, more inclusive, schemes. And since a particular
country may suffer from ups and downs peculiar to its chief export or
exports, national commodity stabilization systems if they do not lose

17. * P. T. Bauer and F. W. Paish, "The Reduction of Fluctuations in the Incomes of Primary Producers,"
Economic Journal, December 1952, pp. 750-81.

446 Approaches to Economic Development

their compensatory character to ulterior objectives can play a role which
general international systems cannot assume.

"Charity Begins at Home"

The economic, political and humane interests of Western nations in the
progress of the underdeveloped world should impress these countries with
the truth that stability of domestic employment in the great industrial coun-
tries is theirs/ ingredient of stability elsewhere. Economists have harped on
this theme for a decade or more, 18 and its truth has not diminished with
time. Other approaches to the problem are at best palliatives.

In its own interest, in the first place, the United States could demonstrate
its capacity to stabilize output and prices at home. From the standpoint of
international politics and ideologies it is a practical necessity for this coun-
try to prove that capitalism need not fall into suicidal swings between de-
pression and inflation. In so doing it would remove one of the chief bar-
riers to currency convertibility by allaying the fears of other countries,
including the developing areas, of recurrent deficits in their foreign bal-
ances. To this end, the philosophy of compensatory public finance and
monetary policy long since the common property of the professional
economists and that part of the business community represented by the
Committee for Economic Development must permeate to the electorates
and legislators throughout the country. To this end, also, the exigencies of
Treasury finance must not be allowed to prevail over monetary control; the
Federal Reserve must not again on some future occasion engender inflation
by its support of the government security markets.

Having set its own house in order to far greater degree than it has during
the postwar years, the United States could then demand that other coun-
tries refrain from inflation if they are to receive grants or loans from it or
from the international agencies. Two of Britain's leading economists have
recently come to the conclusion that "The first desideratum for all coun-
tries affected with difficulties with their balance of payments is to stop
inflation." 19

International Measures for Stability

But since the countries of Western Europe and North America so im-
perfectly achieve the objective of domestic stability, other remedies against
international instability command attention. Within the past decade in-

18. Perhaps its most notable exposition is to be found in 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.

19. The words are Lionel Robbins*; see "The International Economic Problem," Lloyds Bank Review,
January 1953, pp. 1-25; but James E. Meade also places the avoidance of inflation as the first of eight pre-
requisites for a viable international economy; see The Three Banks Review, December 1952, pp. 1-22.

Interests and Responsibilities of the United States 447

numerable articles, books and reports of government inquiries, and the
publications of three major international commissions have embodied the
best efforts of economists and statesmen to describe how nations can co-
operate to promote economic stability, including the more limited objective
of stability in the markets for primary products. Only a brief reference can
be made to some of these plans here.

One proposal, which was advanced in a League of Nations study and
has weathered time and much criticism, is to establish international buffer
stocks of industrial and agricultural staple commodities. 20 Another League
proposal involved contracyclical lending by creditor nations. Both pro-
posals, with modifications in detail, have been revived in the Angell report
by five economists for the United Nations. 21 In addition to buffer stocks of
important international staples and contracyclical lending to primary pro-
ducers, nearly all recommendations include extension of the magnitude and
availability of centrally managed funds of international means of payment
to be used for countries experiencing temporary balance-of-payments dif-
ficulties.

All these proposals involve formidable problems of application. But the
dangers of economic instability for the underdeveloped and the industrial
nations alike are still more formidable. Properly conceived systems of com-
modity stabilization should be able to avoid both rigidity of relative prices
and resource use and monopolistic tendencies toward restriction of supply.

REDUCTION OF U.S. BARRIERS TO IMPORTS

Although the liberation of international trade from its trammels in all
quarters of the earth would bring advantages to countries aspiring to
development, these countries would realize particularly conspicuous gains
from the sharp reduction of protection by the United States. Each of the
gains accruing to them would be accompanied by gains and not losses to
the American economy and to the position of the United States in interna-
tional politics. These mutual interests in the reduction of this country's
import barriers arise from five sources.

1 . As the greatest creditor of underdeveloped and economically more
advanced countries alike, the United States must accept imports if the bor-
rowers are to be given the opportunity to behave as honest debtors and to

20. League of Nations, Economic Stability in the Post-War World, Geneva, 1945, pp. 265-71, 313. Indi-
vidual proposals of this general sort have been made by Keynes, Hayek, and by Benjamin Graham supported
by Frank D. Graham. See, however, the analysis of Graham's plan in M. K. Bennett and Associates,
International Stockpiling as an Economic Stabilizer, Stanford University Press, Stanford, 1949.

21. United Nations, Department of Economic Affairs, Measures for International Economic Stability,
New York, 1951. An earlier international report on this subject was also made to the United Nations, viz ,
National and International Measure* for Full Employment, New York, 1949; its proposals for automatic com-
pulsory action by creditor countries aroused much opposition, particularly in the United States.

448 Approaches to Economic Development

maintain the schedules of amortization and interest on their loans. Amer-
ican interest in imports from this angle is that loans shall not turn out to be
donations. Imports into the United States condition the debtors' ability to
pay and the ability of the United States to receive, whether the loan or
investment has been made on government or private account, and whether
it has come from the United States government or an international agency,
since in the latter case also this country is ultimately the chief creditor.

2. As the largest importer of many primary products and the list is
bound to grow with the further depletion of domestic resources the
United States supplies underdeveloped countries with the purchasing power
for essential equipment which they cannot, or cannot as cheaply, produce
at home or purchase elsewhere. This is an aspect of the "trade not aid"
avenue to higher incomes for the underdeveloped areas. The interest of
American manufacturers in raw material supplies needs no elaboration.

3. As the chief producer within the North Atlantic Treaty Organization,
the United States requires imports in general, and imports of strategic
goods in particular. The same economic interests are involved here for
American manufacturers and for foreign suppliers of materials as in 2
above.

4. As the chief exporter of industrial equipment to developing countries,
the United States must import to the degree to which these exports are not
financed by American loans, grants or private investment abroad. The
interest of underdeveloped areas in United States imports from this stand-
point (the obverse side of 2) is to have available a sufficient supply of dollar
exchange to meet demand at current prices and exchange rates. The interest
of the American manufacturer in export markets again needs no explana-
tion.

5. As an importer of raw materials, the United States forms one side of
a triangle of international trade which affects the interest, not merely of
exporters of raw materials in the underdeveloped areas, but of European
exporters of manufactured goods. Part of the dollar proceeds of United
States imports of primary products has in the past been used by the newly
developing countries to cover their purchases of European manufactures. 22
Again this is an import interest of the United States, and it corresponds to
export interests in Europe and both export and import interests in develop-
ing countries.

Special Interests and the National Interest

From these several standpoints, a strong case can be made for this coun-
try's departing, perhaps completely, from its traditional protectionist posi-
tion. Many free-traders will delight in the fact that the case can now be

22. Bank for International Settlements, Twenty-Second Annual Report, Basle, 1952, pp. 148-49.

Interests and Responsibilities of the United States 449

argued in "hard-headed" terms of the special economic interests of Amer-
ican creditors, exporters and importers. It is true, of course, that the vir-
tually unanimous conviction of economists since the time of Adam Smith
in the general welfare gains of free trade has not overwhelmed the Congress
of the United States, or the legislatures of most other countries. The eco-
nomic interest of the protected group of domestic producers has very often
been more convincing, partly because its spokesmen the tariff lobbyists
have been well paid, vociferous and armed with specific "hardship" cases,
and partly because the costs of protection have been diffused, concealed
and not even comprehended. Nowadays, however, the shoe is on the other
foot: the strongest vested interests are rapidly changing from the protected
manufacturers for the home market to the producers for export and the
manufacturers requiring imported raw materials.

Nevertheless, good causes have to beware of some of their friends, or at
least to recognize that friendship is sometimes disingenuous. It must be
granted that lowering tariffs and other import barriers is bound to injure
some agricultural producers, some manufacturers and some other domestic
interests, such as maritime shipping. Some gain, some lose. In the end, the
issue has to be resolved in the good old-fashioned way of Adam Smith, in
terms of the general welfare. 23 It is gratifying, therefore, to find the Public
Advisory Board for Mutual Security taking the position that United States
trade and tariff policy should be "based on the national interest, rather
than the interest of particular industries or groups." 24

If, then, the creditor, export or import interests of the United States
argue for an abandonment of its protectionist position, it is because the
gain of these sectors would not be canceled by losses in other sectors of
the economy. American producers in the aggregate and American con-
sumers in the aggregate would gain, just as they now gain in domestic
commerce from the large free-trade area of the United States itself.

Liberalization of imports by the United States would necessitate some
internal readjustments. But one of the outstanding traits of the tariff-free
domestic economy of this country is its flexibility. It has taken in its stride
such revolutions as the change from horses to automobiles and tractors,
from bulk to package retailing, from household drudgery to the mechanical
conveniences of the modern home. One commentator believes that gradual
tariff reduction would cause less dislocation than the ordinary processes of

23. By stressing the possible effects on the distubutton of income, "welfare economics" has worked itself
into a virtually nihilistic position on the free-trade issue. What seems to be needed is a careful quantitative
analysis to see whethei these income efiects may really be large enough to offset the gains in productive
efficiency and the lower costs to consumers with given incomes "I his would seem to be highly improbable,
just as it is improbable that net gains would accrue to any one region m the United States by its being walled
off by tariffs from the rest of the country.

24. Public Advisory Uoatd for Mutual Security, A Trade Policy anil Tariff Policy in the National Interest.
February 1953.

450 Approaches to Economic Development

technical innovation. 25 Another has estimated that the "abolition of all
tariffs would not displace more than 300,000 U.S. workers and none of the
liberalizations proposed could displace more than 90,000 at the most." 2t
Adjustments of this or even greater order are a small price to pay and it
is a "one-time" or nonrecurring price for the achievement of the national
interest in enabling people to buy what they want from abroad without lei
or hindrance.

The National Interest and the International Interest

Even more significantly the national interest of the United States tc
admit imports without artificial impediments conforms to the economic
requirements of other countries, whether they are the Western European
nations, hoping for "recovery" or "progress," or the low-income nations
elsewhere, hoping for "development." To achieve this concord of interest,
the wise policy for the United States is to increase American imports and
thus increase exports, rather than to stifle imports and thus stifle exports,

International organizations such as the United Nations, the Organization
for European Economic Cooperation and the Economic Commission foi
Europe have, of course, repeatedly proclaimed the importance of United
States imports for the survival of the free world. The ostensible policy oi
the Roosevelt, Truman and Eisenhower administrations has accorded with
this position. But there are two policy-making branches of government in
the United States the executive and the legislative particularly on for-
eign affairs. 27 While the Administration may favor "trade not aid," Con-
gress may only falteringly extend the Reciprocal Trade Agreements Act foi
one more year.

The free-trade cause in the United States has been notably advanced in
recent times in public pronouncements by Lewis Douglas, Eugene R,
Black, Henry Ford, the Chamber of Commerce of the United States,
speakers at the Chicago World Trade Conference, the president of the
Elgin Watch Company and the Committee for Economic Development.
Fortune magazine in its March 1953 issue asserted that "Free trade is
inevitable." These are not declarations of special vested interests within the
national interest, but of the general welfare; and they are also not declara-
tions of national versus international interest. They recognize that the
alternatives to exporting to the United States by which other countries can
command imports vital for their economic survival or progress are either
inadequate or undesirable. American private foreign investment does not

25. Meyer Kestnbaum, president of Hart, Schafiher and Marx, quoted in Time, November 9, 1953, p. 95,

26. Boris Shishkin, Research Chief, American Federation of Labor, in Time, he. cit.

27. Harry D. Gideonse, The Economic Foreign Policy of the United States (Fiftieth Anniversary Commem-
oration Lectures), National Bank of Egypt, Cairo, 1953, pp. 6-13.

Interests and Responsibilities of the United States 451

cover this need, and government grants and loans in anything like the
amounts thought desirable by foreign governments would certainly not be
desirable from the viewpoint of the American taxpayer.

What the United States Should Do

Mr. Ford's statement of the necessary steps is direct and explicit. 28 The
law providing for drastic unilateral reductions of tariff duties should have
no exceptions or loopholes, although it should make provision for gradual
reductions in some "hardship cases." The United States should abandon
the quota system and the Buy America Act which compels the federal and
some state and local governments to give first preference in their procure-
ments to domestic sources. American customs procedures should be im-
mediately simplified. 29

These steps are clearer and bolder than those recommended in the report
of the Public Advisory Board for Mutual Security. The time has passed for
the mild procedures of the Reciprocal Trade Agreements Act. What Amer-
ican national and international interest requires is a unilateral, incisive and
unambiguous abandonment of protection in all its forms, whether explicit
or concealed.

The significance of a bold free-trade policy on the part of the United
States would not be limited to its direct effect on the "dollar gap," that is,
the excess of demand over supply in international trade for New York
balances aside from United States foreign aid. It has been estimated that
abolishing all barriers to imports would, in itself, reduce that gap by only
one third or one fifth, depending upon certain assumptions. But the indi-
rect influence of this policy would be much greater. If the United States
were free of protectionist blemishes, it could firmly insist that other coun-
tries reduce exchange controls, quota restrictions and similar barriers as a
condition of foreign aid. This reduction, in conjunction with vigorous
monetary-fiscal policies to stabilize the American economy, would lay the
foundations of an open international standard, in contrast to the closed-
nation standards of the present scene. Parallel action in other countries
would of course be equally important. Import liberalization by the United
States is not a panacea, but it is an indispensable step toward creating the
kind of international setting in which the underdeveloped nations can
finance their own development.

Currency Convertibility

In an international system which is conducive to economic development,
freely convertible currencies play a particularly strategic role. As Chapter 16

28. New York Times, February 18, 1953.

29. Legislation to this end has already been enacted, but it is limited in scope.

452 Approaches to Economic Development

has pointed out, private capital will not flow into exchange control coun-
tries except perhaps to exploit exceptionally profitable opportunities for
direct investment. Even this exception has a somewhat limited significance
for general domestic development, because as recent history has demon-
strated investment of this sort is concentrated heavily in extractive indus-
try (chiefly in petroleum), where profits can be withdrawn merely by export-
ing the raw material. If underdeveloped countries are to obtain direct
private investments for production for the domestic market and private
portfolio investment for general development purposes, currencies have to
be convertible on current account and for the withdrawal of profits by
foreigners.

Probably the best initial steps toward achieving currency convertibility
in the underdeveloped countries themselves would be indirect: policies
directed toward the convertibility of the key European currencies. If the
pound sterling were convertible, the problem would be immeasurably
simplified for all members of the sterling area; and the same would hold
for the Belgian and French franc and for these spheres of economic and
political influence in the underdeveloped world.

All measures initiated by the United States to liberalize its own imports
or to break down quota and other trade barriers elsewhere contribute
toward convertibility. But measures directed specifically toward converti-
bility are essential. Perhaps the best initial move might be a series of ad hoc
stabilization loans by the United States to support the actual introduction
of convertibility, once a particular country had set its domestic finances in
order and had achieved general balance-of-payments equilibrium. Cur-
rently this goal appears to be within striking distance for the United
Kingdom, Belgium and Western Germany, and to be within the realm of
possibility for France and Italy. As one currency after another became
convertible, the task would become simpler and more imperative for the
remaining countries. Once currency convertibility was achieved in Western
Europe and this means, of course, conversion into gold or dollars the
commercially peripheral countries of the world would no longer find justi-
fication for exchange controls in the "dollar shortage." In place of this
general categoric reason or excuse for exchange controls, there would
remain, as there should, only the temporary balance-of-payments difficul-
ties of a particular country at a specific time.

As an alternative to direct Treasury loans for convertibility, the United
States could act through the International Monetary Fund. There would
in any case seem to be little point in protracting for long such intermediate
steps toward convertibility as the European Payments Union, or in creating
new ones such as a North Atlantic Payments Union. Only if no further

Interests and Responsibilities of the United States 453

progress toward general convertibility were possible would such institu-
tions have any particular reason for existence.

Unitary Character of International Economic Problems

The United States acts in its own self-interest if it helps to develop
primary producers as sources of industrial raw materials and strategic
military supplies, and as markets for its industrial and other exports. This
interest, it has been shown, corresponds to the interests of the developing
areas themselves, though purely economic measures must be complemented
by cultural change and political and social reforms. It corresponds also to
the intense need of the United Kingdom, Western Germany and Japan
countries the United States prizes or hopes to win as friends for overseas
supplies and markets. Indeed, it is difficult to see any long-term hope for
the economic viability of these countries, dependent as they are on inter-
national trade, except in a setting of sustained economic development in
Asia, Africa and Latin America. 30 For these objectives to be realized, how-
ever, international trade must be vastly expanded. This implies its liberation
from such barriers as prohibitive tariffs, quotas, exchange controls and
inconvertible currencies.

Free multilateral trade is extolled by nearly all nations and practiced by
few. Is this divergence between professed aims and deeds mere hypocrisy?
It would be difficult to draw this conclusion for other countries without
putting the shoe on our own foot, for the United States is scarcely without
shortcomings, such as its subsidy of agricultural exports and the special
favoring of American shipping. A more plausible interpretation would be
the bewildering interdependence of all phases of the problem of achieving
freer and more abundant trade and movements of capital. Each country
would be pleased to expand its trade, but none knows where to begin.

Currency convertibility can scarcely be realized without relief from the
shortage of dollars, but private American capital will not move into ex-
change control countries in any noteworthy volume. Foreign quotas and
tariffs keep out dollar imports, but these imports may be necessary to
build up the productive power of developing countries and reduce the
balance-of-payments deficits which gave rise to the protective devices.
Fluctuations in the foreign exchange yields of exports impel primary pro-
ducers toward a goal of self-sufficiency; but true self-sufficiency would halt
economic progress in these areas in its tracks. Everything depends upon
everything else.

30. Howard S. Ellis, The Economics of Freedom the Progress and Future of Aid to Europe, Harper, New
York, 1950, Chapter 20 and pp. 518-28.

454 Approaches to Economic Development

To the fatalist, this realization may readily bring despair; but, in fact, the
endless interdependence of all parts of the international problem may as
legitimately be given an optimistic reading. Each part holds forth an oppor-
tunity for improvement. And while one of them, as for example currency
convertibility, cannot be pressed indefinitely and in isolation, it can never-
theless be carried forward somewhat, while forces are being marshaled for
an advance in another salient.

The United States can encourage economic progress in underdeveloped
areas by continuing its technical aid and by making marginal contributions
of funds. A more basic kind of help, both now and in the long run, would
be the creation of an expanding system of international trade based on
comparative prices and profits. In such a world, the newly developing
countries would be able to work out their own salvation.

APPENDICES

APPENDIX 1-1. ESTIMATED PROPORTION OF PER CAPITA CALORIE INTAKE
DERIVED FROM VARIOUS SOURCES, SELECTED COUNTRIES, PREWAR YEARS

Country

Percentage of

Calorie?
jrom Cereah
Calories per Day* and Potatoes

Percentage of Calories

Crops

Japan

Egypt

Palestine

Uruguay

Brazil, etc. h

India

China

Turkey

Spain

Group III

Livestock

Group I

United States

3,249

30-40

60-65

35-40

Germany

2,921

40-50

75-80

20-25

United Kingdom

3,005

30-40

55-60

40-45

Sweden

3,036

30-40

60-65

35-40

Australia

3,128

30-40

55-60

40-45

New Zealand

3,281

30-40

50-55

45-50

Canada

3,109

30-40

60-65

35-40

Denmark

3,215

30-40

60-65

35-40

France

2,714

50-60

70-75

25-30

Norway

3,117

40-50

60-65

35-40

Eire

3,155

40-50

65-70

30-35

Argentina

3,164

40-50

65-70

30-35

Group II

Union of South Africa

2,300

70-80

75-80

20-25

Chile

2,353

50-60

80-85

15-20

U.S.S.R.

2,827

70-80

Italy

2,471

60-70

85-90

10-15

Greece

2,437

50-60

85-90

10-15

Bulgaria

2,788

70-80

85-90

10-15

2,268

70-80

85-90

10-15

2,199

70-80

90-95

5-10

2,570

60-70

80-85

15-20

2,845

30-40

60-65

35-40

2,300

50-60

70-75

25-30

2,021

60-70

90-95

5-10

2,201

70-80

95-100

1-5

2,619

60-70

85-90

10-15

2,678

50-60

85-90

10-15

Source John D. Black and Maxme E. Kiefer, Future Food and Agriculture Policy, McGraw-Hill, New
York, 1948, p. 42.

a. Excluding wine, beer, etc.

b. Includes Central America, Caribbean, Venezuela, Colombia, Ecuador and Peru.

457

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464 Approaches to Economic Development

APPENDIX 5-1. MEASUREMENT OF POPULATION GROWTH

In the simplest possible terms, any change in a population over time
barring migration is determined by the relation between deaths and
births. If deaths exceed births, population declines; if births exceed deaths,
population increases. This simple arithmetical relation, however, tells very
little about the probable future changes in a particular population, because
the same excess of births or deaths could occur in countries having quite
different demographic and ecological characteristics. Since many under-
developed areas differ appreciably in these respects from already developed
countries, these factors must be examined before the probable relation
between development and population growth can be assessed.

Crude Birth Rates an Imperfect Measure

The crude birth rate the number of live births per 1,000 population-
gives only a rough indication of the fertility of a given population. If the
proportion of women to men is small the women may be exceedingly
fertile even though the crude birth rate is unusually low. To borrow an
illustration from Robert R. Kuczynski:

If, for example, in the State of Colorado, in the year 1 860 every second female
between 15 and 50 years had borne a child (which would have implied a fertility
such as never has been observed in the world) the birth rate of that year would
still have been only 16 per 1,000 because the females between 15 and 50 years
constituted only 3.2 per cent of the total population. 1

One reason, then, why the crude birth rate is not sufficiently informative is
that it is affected by the sex composition of the population, which cannot
be assumed to be always or everywhere the same.

But the age composition of the population, especially the female popula-
tion, will also affect birth rates. Hence, misleading inferences and com-
parisons cannot be avoided merely by expressing the number of births as a
fraction of the total number of women in the population. For example, if
two populations were identical in size and in sex composition but differed
in the age distribution of their females, the same ratio of births to females
would have different implications in the one case than in the other. Since
the childbearing period is shorter than a woman's life span, the percentage
of women of childbearing age in the population must be taken into account
in interpreting a ratio such as the number of births per 1,000 women.

One way out of this difficulty is to consider the "age-specific fertility
rates" of the females in the population the number of births per 1,000

1. Robert R. Kuczynski, Fertility and Reproduction, Falcon Press, New York, 1932, p. 4.

Appendix 5-1 465

women of specified ages in conjunction with the proportion of the females
in each age group. In 1948 in New Zealand, for example, 5.8 percent of
the females were in the age category 45-49 years and this group produced on
the average 1.9 live births per 1,000. In Spain (1940) 5.2 per cent of the
females were 45-49 years old but they produced 8.2 live births per 1,000
more than four times as many as New Zealand women of the same age
range. Or, again, women in Iceland aged 15-19 years produced 51.7 live
births per 1,000 while those in Norway produced only 15.7; moreover, 8.7
per cent of all Icelandic women were in this age group but only 6.5 per cent
of Norwegian women. (See Table A.)

The measures most commonly used nowadays to circumvent these diffi-
culties, and yet give in a single figure some indication of fertility patterns
in different populations, are gross and net reproduction rates. 2

Gross Reproduction Rate

The gross reproduction rate is computed from two sets of data: first, the
number of females born in a given year to females of specified ages; second,
the number of females of each age. By dividing the first by the second it is
possible to compute the number of females born per female at age 15, 16,
17, 18 and so on, until, at some age, the figure becomes zero because the
women have passed the childbearing age. The final step is merely to add
together the figures so obtained for each age to get the total number of
females born per (average) female throughout her lifetime. This total is the
gross reproduction rate.

As the Population Division of the United Nations has pointed out, the
gross reproduction rate

... is a rate "per woman," not "per 1,000 women" . . . [It] indicates the
average number of daughters who would be born to a group of girls beginning
life together, in a population where none died before the upper limit of child-
bearing age (and where there was no migration) and where the given set of
fertility rates was in operation. 3

In other words, the gross reproduction rate shows how many daughters
that is, potential future motherswill be born per woman if birth patterns
stay the same as they are in the year for which the rate is computed. Of
course it does not say they will remain the same; it only shows what will
happen if they do.

2. At present it is impossible to calculate gross and net reproduction rates with accuracy for most of the
underdeveloped areas. Furthermore, for some time to come these areas are likely to be bothered by popula-
tion growth rather than imminent decline, the kind of situation for which gross and net reproduction rates
are particularly revealing. For the most part, therefore, crude birth rates and death rates, with the derivative
rate of natural increase, are used in discussing the population problems of underdeveloped countries.

3 United Nations, Demographic Yearbook. 1949-50, New York. 1950, p. 24.

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Appendix 5-1 467

Net Reproduction Rate

The net reproduction rate, which is derived from the gross reproduction
rate, takes into account the fact that some women will die before they pass
beyond the age of reproduction and therefore will not produce their full
complement of daughters. The net reproduction rate is simply the gross
reproduction rate modified by the prevailing age-specific mortality rates of
the females in the population. Of 1,000 females aged 15, for example, a
certain number will die before age 16 and of those remaining some will die
before age 17 -and so on for each year up to the end of their years of
fertility. The net reproduction rate merely "corrects" the gross rate by al-
lowing for these deaths. As the Population Division of the United Nations
expresses it:

Net reproduction rates are obtained by multiplying the specific fertility rates
of each group by the proportion of survivors to that age in a life table and adding
up the products. The net reproduction rate may be interpreted, in analogy with
the gross rate, as the average number of daughters that would be produced by
women throughout their lifetime if they were exposed at each age to the fertility
and mortality rates on which the calculation is based. 4

Relation between Gross and Net Rates

Gross and net reproduction rates can be highly informative, both in
comparisons between countries and in their relation to one another for
any particular population. A net reproduction rate of 1 would mean that
with existing fertility and mortality rates among females the population
was exactly replacing itself: every female would produce, net, only one
female. A rate of 1 .50 would mean a 50 per cent increase in population each
28 to 30 years, this being the time it takes for a generation of women to
pass through the childbearing years. If the gap between the gross and net
reproduction rates is small, then the inference is that even economic devel-
opment or improved health conditions will not increase population growth
much, because the gross rate already indicates the limit in this direction
under the prevailing age-specific fertility conditions. For the gross rate shows
what births would occur, granted the proviso in italics, if no females died
before they ended their productive period.

The proviso is important, since the prevailing age-specific fertility condi-
tions may be due to special factors which can be expected to disappear.
Perhaps the most important variable is the marriage pattern, that is, the
proportions of women in the various age groups who are married. In
Western Europe after World War I, for example, an unusually high pro-
portion of women in the productive age groups remained unmarried as a

4. /bid.

468 Approaches to Economic Development

TABLE B. GROSS AND NET REPRODUCTION RATES, SELECTED COUNTRIES,

1938 AND 1948

Gross Reproduction Rate Net Reproduction Rate

Country

1938 1948

Canada

1.314 1.667

1.163

United States

1.113 1.542

1.011 1.462

Chile

1.983

1.147

Belgium
Finland

.188
1.220 .666

0.996
1.011 .403

Norway
Sweden

0.914 .233
0.879

0.832 .126
0.802

England and Wales
Portugal
Australia

0.897 .158
.667
1.069 .451

0.810 .070
.216
0.984 .326

France

1.040

0.910

U.S.S.R.

2.190

1.540

1931 1941

India

2.99 2.76

1.25 1.30

Egypt

3.1

1.4

Sources: United Nation;,, Demographic Yearbook, 1949-50, New York, 1950, Table 24, pp. 366-70;
figures for the U.S.S.R., India and Egypt from Population Index, April 1952, pp. 165-72.

result of the war casualties. The gross reproduction rate was therefore
lowered. The same situation in aggravated form has prevailed in Western
Germany since the end of World War 11. In comparing gross reproduction
rates for different countries and periods, therefore, it is important to make
sure that no special factors of this kind have influenced the results. 5

Notwithstanding these possible qualifications, the differences among
countries in their gross and net reproduction rates remain striking. For
example, in the United States in 1938 the gross rate was 1.113 as against
a net of 1.01 1, but in the U.S.S.R. in that year the gross rate was 2.190 and
the net rate 1.540, and in Chile the rates were even further apart 1.983
gross as compared with 1.147 net. (See Table B.) In both Chile and the
U.S.S.R., therefore, any drop in the mortality of women in the productive
ages would substantially increase the rate of population growth.

Paucity of Data for Underdeveloped Countries

Most underdeveloped countries do not have the statistical data necessary
to compute gross and net reproduction rates for their populations. All the
evidence, however, points to high gross reproduction rates and a large
spread between the gross and net rates. Egypt in 1931 had a calculated

5. Development itself, of course, may modify the social and cultural factors that determine the gross re-
production rate.

Appendix 5-1 469

gross rate of 3.1 and a net of 1.4. One calculation for India shows a gross
rate of 2.99 for 1931 as against a net rate of only 1.25, which is lower than
the net rate for Australia in 1948. By 1941 the gross rate in India had fallen
to 2.76 but the net had risen ominously to 1.30.

If data were available for other underdeveloped countries, they would
almost certainly show a relation between gross and net rates similar to those
for India and Egypt. Consequently, any drop in mortality in the under-
developed areas such as can reasonably be expected with improved pro-
ductivity, higher living standards and better health conditions will pro-
duce sharp increases in their rates of population growth, unless their gross
reproduction rates should fall proportionately. But gross reproduction
rates, given the sex and age composition of the populations, seem to depend
upon a variety of economic, social and cultural factors which are neither
easily specified much less subject to quantitative measurement nor
quickly altered.

INDEX OF AUTHORS

Index of Authors

ABELSON, Milton, 346/i

Abramovitz, Moses, 25n

Adler, John H., 303, 324/7, 33 in, 382/7

Ady, P., 316/7

AH, S. Amjad, 437/1

Allen, G. C, 179-80, 181, 183/7, 184,

187(t), 294/7

Antsiferov, Alexis N., 192/7
Armstrong, Hamilton Fish, 444/7
Aubrey, Henry G., 269/7, 277, 278

BALFOUR, Marshall C, 95-96, 107/7,

111/2

Barnes, Harry Elmer, 135/7, 137/7, \66n

Barton, Glenn T., 281/7

Baster, James, 242n

Bauer, P. T., 316/7, 445

Baykov, Alexander, 190/7, 191/7, 194,

196(t), 203/1, 204/7, 206/7, 218(t)
Beal, Edwin G., 101/7, 107/7
Bean, Louis, 260
Becker, Carl, 77-78, \2\n
Behrman, Jack N., 352/7, 354/7, 356/7,

374/1

Bell, Sir Lowthian, 140//
Belshaw, H., 270/7
Bennett, M. K., 14, 15, 16(t), 18/7,

93(t), 240, 447/7
Bernstein, E. M., 311/7, 324/z
Betata, Ramon, 44 In
Black, John D., 265/7, 280, 457(t)
Blaisdell, Thomas C., Jr., 249n
Boeke, J. H., 246
Boudreau, Frank G., 112/7
Bowden, Witt, 140/7, 162/7, 164/7, 165,

192/7

Brinkmann, Carl, 156
Britnell, G. E., 285/7, 333, 405/7
Brown, William A., 355/7
Buchanan, D. H., 287//
Buchanan, Norman S., 225(t), 298/7,

376/7

Buck, John L., 244, 245, 253
Bury, J. B., 119/7, 120

CALHOUN, C. H., 289/7
Carr-Saunders, A. M., 93(t), 224
Clapham, J. H., 128/7, 130, 133, 135/7,

138, 140, 151,154/7, 157,218(t)
Clark, Colin, 199, 263-64, 420
Cleland, W. Wendell, 77/7, 78/7
Clement, Ernest W., 175/7

Clyman, Bernard, Yin
Cohen, Jerome B., 351/1
Condliffe, J. B., 24/7, 163
Converse, Elizabeth, 243/7
Copeland, Morris A., Yin
Copland, Douglas B., 316/1
Currie, Lauchlin, 285, 320

DAVIS, Joseph S., 240/7, 265

Davis, Kingsley, 10(t), 93/7, 96, 97,

101/7, 109, 112
Deane, Phyllis, Yin
De Beers, John S., 321/7, 402
Dernburg, H. J., 344/7, 350(t)
Deutsch, M. J., 272/7
De Vries, Egbert, 45/7, 274/7, 277
Dobb, Maurice, 193/7, 195/7, 201/7, 204,

276, 280, 283/7, 284, 309
Dominguez, Loreto M., 15/7
Dowson, Sir Ernest, 84
Duesenberry, James S., 56/7, 75/7
Dupriez, L. H., 140/1

ELDRIDGE, Hope T., 93/7, 109/7
Ellis, Howard S., 293/7, 386/7, 453/7
Ellsworth, P. T., 85, 321, 324/7, 405/7
Erlich, Alexander, 276/7
Evans, Roger F., 95-96

FAY, C. R., 40/7
Fellner, William, 293/7
Finch, David, 395/7
Finkelstine, Lawrence S., 285/7
Firth, Raymond, 86/7
Fliigel, Felix, 135/7, 137/7, 166/7
Folsome, Clair E., 111/7
Fong, Shan-Kwei, 17/7
Fosdick, Raymond B., 89/7
Franck, Peter G., 24/7, 433
Frankel, S. Herbert, 69, 282
Fry, Varian, 167(f)

GERSCHENKRON, Alexander,
191/7, 192/7, 193,408/7,417/7
Gideonse, Harry D., 450/7
Gilbert, Milton, 215/7
Gille, H., 109/7
Glass, D. V., 8/7, 106/7, lll/i
Graham, F. D., 293/7, 447/7
Gras, N. S. B., 129/;, 130/7
Grossman, Gregory, 198/?, 210
Grove, David L., 309/7, 312/1
Gunn, J. M., 352/7, 356/1

156/7,

473

474

Index of Authors

RAINES, Charles G., 82/j

Haley, Bernard F., 25/7, 28/7, 376/1

Halley, Edmund, 8

Hansen, Millard, 112/7

Hanson, Simon G., 41 n

Harris, Seymour, 314/7, 386/7

Harrod, Roy F., 397/7

Hart, Hornell, 230

Hatt, PaulK., 112/7

Hauser, H., I54n

Hayes, Samuel P., Jr., 84-85

Heaton, Herbert, 154, 162//, 164, \65n

Hecht, Reuben W., 28 In

Helleiner, Karl F., 124/7

Henderson, W. O., \l\n

Hertz, Hilda, 230

Hicks, Ursula K., 324/7, 326

Hildebrand, George, I2\n

Hilgerdt, Folke, 141, 221, 223(t)

Hinton, Harold B., 285/7

Hogben, Lancelot, 106(t)

Hopkins, John A., 28 lw

Hopkins, Sheila V., 231, 232(t)

Horie, Yasuzo, 176/?, 177, 185

Horoth, V. L., 344/7

Hoselitz, Bert F., 142/?, 4lln

Hsakawa, K., 177

Hsieh, C, 243/7

Hubbard, G. E., 287*, 294/2

Hull, George H., 220(t), 222(t)

Hunter, Holland, 199/7, 200/7

Hunter, John ML, 439/7

IMLAH, Albert, 143, 144(t), 145
Issawi, Charles, 93/7, 96n

JACKMAN, W. T., 132/7, 133-34
Jacobson, Jerome, 17 n
Jacoby, Erich H., 272/7
Jasny, Naum, 204/7, 205, 247
Jenks, Leland, 145/7, 146, 165/7
Jevons, W. Stanley, 140/7
Johnson, Sherman E., 281/7
Jurkat, Ernest, 1 10/7

KAHN, Alfred E., 274/7, 390/7
Kaplan, Norman M., 194/7, 195(t),

284/7

Karpinos, Bernard D., 103
Karpovich, Michael, 140/7, 162/7, 164/7,

165, 192/7

Kershaw, Joseph A., 314/7
Kiefer, Maxine E., 457(t)
Kindleberger, Charles P., 310, 379/7,

386/7, 389/7
Kiser, Clyde V., 103, 112/1

Knight, Melvin M., 135/7, 137/7, 166/7

Koffsky, Nathan, 18/7

Kriz, M. A., 339/7

Kuczynski, R. R., 104, 105, 106(t), 221,

224, 464
Kuznets, Simon, 15/7, 126/7, 198/7, 214-

15, 216/7, 21 8(t), 282

LAMBERT, Sylvester M., 89/7

Lange, Oskar, 63//

Lary, Hal B., 349/7, 446/7

Lenin, V. I., 247

Lewis, W. Arthur, 44, 45/7, 82/7, 241/7,

254-55, 264, 272, 277, 361/7
Lippincott, Benjamin E., 63/7
Liu, Ta-Chung, 17/7
Lockwood, William W., 186/7
Lokanathan, P. S., 381/7
Lorimer, Frank, ll(t), 101, 201
Lutz, Friedrich A., 225(t), 298/7
Lyashchenko, Peter, 192
Lyle, Allan, 286/7

MAFFRY, August, 359-60, 440
Mair, G. F., 112/7, 113/7
Malthus, Thomas R., 75, 116
Mandelbaum, K., 56/7, 276/7, 280, 283/7
Manoilesco, Mihail, 260
Marshall, Alfred, 243, 293/7, 298
May, Stacy, 272/7
Meade, James E., 446/7
Mikesell, Raymond F., 356/7, 369/7
Mill, John Stuart, 68, 69, 243
Moberg, Sven, 102-03
Montgomery, G. A., 128/7, 218(t), 224/1
Moore, W. E., 45, 112/7, 255, 286/7
Mosk, Sanford A., 89/7, 124/?, 248/7,
268, 271, 273/7, 284, 285/7, 291/7, 306/7,
308, 309/7, 321, 324/7, 331, 338, 340

NEVILLE, Robert, 246
Nicholls, William H., 276-77
Norman, E. Herbert, 176, 178/7, 179,

183, 184/7

Northrop, F. S. C., 76, 78/7
Notestein, Frank W., 95-96
Nurkse, Ragnar, 310/7, 385/7

OHKAWA, Kazushi, 215/7
Ohlin, Bertil, 392/7
Okuma, Count, 186/7
Oshima, Harry T., 183/7

PAISH, F. W., 316/7,445
Patel, I. G., 311/7, 324/7
Patterson, Gardner, 352/t, 354/t, 356/7,
374/7

Index of Authors

475

Pazos, Felipe, 314, 319/i

Pearl, Raymond, 100/7

Peller, S., 227n

Perera, N. M., 343/7

PerlofT, Harvey S., 324/7

Phelps Brown, E. H., 231, 232(t)

Pigou, Arthur C., 293/7

Pirn, Sir Alan, 251, 255, 272/7, 305/7

Plumptre, A. F. W., 339/7

Polak, J. J., 392

Powell, Raymond P., 313/7

Pratt, Edwin A., 133/7, 135/7

Prebisch, Raul, 261, 262

Prien, Charles H., 243/7, 269/7

RAO, V. K. R. V., 312/7, 374
Redford, A., 127/7, 15 in
Rhoad, Albert, 242/7
Robbins, Lionel, 397/7, 446/7
Roberts, Lydia J., 101/7, 103/1
Robertson, D. H., 251/z
Rosenstein-Rodan, P. N., 280
Rostas, L., 138, 139(t)
Rostow, W. W., 25/7, 140/7, 169/7, 379/7

SALTER, Sir Arthur, 343, 361/7, 375/7

Sammons, Robert L., 363/7

Samuelson, Paul A., 257/7, 299/7

Saward, F. E., 140/7

Schlesinger, E. R., 321//

Schultz, Theodore W., 265/7

Schumpeter, Elizabeth B., 179/7, 287/7

Scrivenor, Harry, 141/7

Senior, Clarence, 1 1 3/7

Sharp, Samuel L., 290/7

Singer, H. W., 60/7, 115/7, 257/7, 262,

263, 273/7, 300/7
Smith, Adam, 58/7, 243
Smith, Dan Throop, 360/7
Smith, Thomas C., 177/7
Snyder, Carl, 168(f)
Solomon, Morton, 270/7, 292//, 308
Sosnovy, Timothy, 198/7
Soule, George, 254
Sovani, N. V., 113/7
Spengler, Joseph J., 12/7, 13, 25/7, 28/7,

33, 283/7

Spiegel, H. W., 309/7, 324/7
Spry, Graham, 254
Staehle, Hans, 18/7

Stepanek, Joseph E., 243/1, 269n
Stigler, George, 292
Stokes, William S., 19n
Sullivan, Helen, 233/z
Sundborg, Gustav, 225(t)

TAEUBER, Irene B., 95-96, 101/7, 107/7,

112/7

Tawney, R. H., 124/7

Taylor, Fred M., 63/7

Thaer, Albrecht, 1 28

Thornburg, Max W., 254

Triantis, S. G., 255/7, 400/7

Triffin, Robert, 314/7

Tsuru, Shigeto, 176/7, 215/7, 287/7

USHER, Abbott P., 135, 138, 139(t),
140/7, 162/7, 164/7, 165, 192/7

VINER, Jacob, 259-60, 261, 379, 386/7
Volin, Lazar, 204/7, 206/7, 247

WALLICH, H. C, 309/7, 312/7, 313/7,

315/7, 319/7, 321, 324/7, 339, 344/7,

379/7, 382/7, 384/7
Warriner, Doreen, 45/7, 129/7, 244/7,

344/7

Watkins, F. M., 76
Weber, Adna Ferrin, 129/7, 224/7
Weber, Max, 124/7
Wells, David A., 230/7
Whelpton, P. K., 101/7
Wilcox, Clair, 291-92
Wilhelm, Warren, 73/7, 273
Willcox, Walter F., 93(t), 120/7
Williams, J. H., 379/7
Williamson, James A., 169/7, 170/7
Wolf, A., 8/7, 119/7, 127/7
Woytinsky, E. S., 34(f), 35(f), 238(f),

245/7
Woytinsky, W. S., 34(f), 35(f), 238(f),

245/7

Wright, Quincy, 119/7, 121
Wu, Yuan-li, 356/7, 357, 360

YAMANAKA, Tokutaro, 179/7, 180/7,

276/7

Young, Arthur, 128
Yugow, A., 210(t)

SUBJECT INDEX

Subject Index

ABBINK, John, 288

Administrators, 24

Afghanistan: Export-Import Bank
loans to, 371(t)

Africa, 3; agriculture: land and labor,
33, 34(f), 35(f), 460(t); population
growth, 93(t); partition of, 170/t;
land tenure, 244; U.S. grants and
credits and loans by International
Bank, 367(t); Export-Import Bank
loans, 371(t), 372; indicators of
capital inputs, 463(t)

Agricultural cooperatives, see Coop-
eratives

Agricultural Industry Service (UNR-
RA), 278

Agriculture: efficiency, 23, 24; land
suitable for, 34(f); natural fertility of
land, 35(f); land-labor ratios, 36,
256-59, 458-60(t); capital resources
in, 38, 39-40; peasant vs. plantation
farming, 40//, 45, 96, 249-52, 436;
productivity, 44-46, 237-40, 238(f);
disguised unemployment in, 44, 45;
technological improvements, 1 26-3 1 ,
157-60, 240-43, 252, 253, 267^, 270,
271-72, 280/?; 419^; developments:
in England, 126-31, 149; in France,
154, 172-73; in Germany, 154-56,
172-73; in Japan, 177, 178, 179-80,
183, 188; in Russia, 190-92, 195(t),
204-08, 207(t), 247, 416; reforms in
taxation and land tenure, 243-47,
253-54, 330, 41 9//'; in world economy,
255-56, 259-66, 41 Iff; processing of
farm products, 271-72; private U.S.
direct foreign investment in, 348(t)

Albania: agricultural area and labor
force, 458(t)

Alsace-Lorraine, 162

American Red Cross: U.S. grants and
credits to, 364(t)

Angell Report, 400

Anglo-Saxon law, 82

Animal units: as capital-input indica-
tor, 461 -63(t)

Argentina: crude death and infant
mortality rates, 1 l(t); Export-Import
Bank loans to, 370(t); agricultural
area and labor force, 459(t); indica-
tors of capital inputs, 463(t)

Art, 4

Artisans, I79n

Asia, 3; agricultural land in, 33, 34(f),
35(f); population trends in, 93(t),
109; income taxes, 325(t); taxes on
foreign trade, 327(t); consumption
taxes, 330(t); attitudes toward for-
eign capital, 344; U.S. postwar aid
to, 367; government grants and
credits and loans by International
Bank, 367(t); Export-Import Bank
loans, 371(t); see also under names of
individual countries

Australia, 3; price stabilization, 3\6n;
agricultural area and labor force,
459(t); indicators of capital inputs,
462(t); gross and net reproduction
rates, 468(t)

Austria: pig iron production, 220(t),
222(t); population growth, 225(t);
Export-Import Bank loans to, 370(t) ;
agricultural area and labor force,
458(t); indicators of capital inputs,
462(t)

Autarchy, 267

BACON, Francis, 121

Bakewell, Robert, 129

Balance of payments, 66-67 ; problems
of, in underdeveloped areas, 382-401 ;
see also International trade

Bank of Japan, 184

Banks and banking systems : Japanese,
184-85; savings banks, 305-06;
commercial banks, 306-07, 308, 312,
337-38; central banks, 308, 313, 338-
40; see also Investment; Public
finance; Savings

Barbados: crude death and infant
mortality rates, ll(t)

Belgium: land-labor ratios, 37, 458(t);
manufacturing, 141, 223(t); early in-
dustrialization, 165-66; output: of
coal, 218(t), 219(t); of pig iron, 219,
220(t), 222(t); population growth,
225(t), 226(t); Export-Import Bank
loans to, 370(t); indicators of capital
inputs, 462(t); gross and net repro-
duction rates, 468(t)

Bell Mission (to the Philippines):
recommendations, 271-72, 289, 333;
evaluation of import controls, 320;
fiscal and monetary stipulations, 390

479

480

Subject Index

Birmingham Bureau of Research on
Russian Economic Conditions, 197/1

Birth prevention, 111-13

Birth rates: in underdeveloped areas,
108(t); as measurement of popula-
tion growth, 464-65; live births per
1 ,000 women in specified age groups,
selected countries, 466(t)

Black, Eugene, 375w, 450

Bolivia: Export-Import Bank loans to,
370(t); agricultural area and labor
force, 459(t); indicators of capital
inputs, 463(t)

Bombay Plan, 437

Bonds, Japanese, 183, 184

Brazil: life expectancy, 9(t); potentially
productive land in, 36; Technical
Commission recommendations, 271-
72, 277; inflation and investment
rates, 311; government bonds, 316;
import controls, 320; Export-Import
Bank loans to, 369, 370(t), 372; in-
ternational Bank loans to, 374;
agricultural area and labor force,
459(t); indicators of capital inputs,
463(t)

Bulgaria: life expectancy, 10(t); agri-
cultural area and labor force, 458(t);
indicators of capital inputs, 462(t)

Burma: potentially productive land in,
36; labor distribution, 38/i; govern-
ment expenditures, 336(t); agricul-
tural area and labor force, 460(t)

CAJA Colombiana de Ahorros, 305
Calorie intake, 14jf, 16(f), 457(t)
Canada: death rates by cause, 13(t);
land-labor ratios, 36, 459(t); manu-
facturing, 141, 233(t); pig iron pro-
duction, 219, 220(t), 222(t); popula-
tion growth, 225(t), 226(t); private
U.S. direct investment in, 348(t);
U.S. grants and credits and loans by
International Bank to, 367(t); Ex-
port-Import Bank loans to, 371(t);
indicators of capital inputs, 462(t);
gross and net reproduction rates,
468(t)
Canals, 133
Cancer, 12/i

Capital: as factor of production, 37-
41 ; innovations to improve utiliza-
tion of, 46; savings as source of, 58;
importance of, 67-69; England as
net exporter of, 147; foreign invest-

ments in Russia, 191; concepts of,
216/z; intensity of investment, 275-
77; size of projects, 277-79; tempo
of industrialization, 279-89; foreign
vs. domestic, 298-301; applied di-
rectly to development, 337^; ob-
stacles to private foreign investment,
343^T; movement of private long-
term U.S., 346(t); additions to
private U.S. direct investments
abroad, 348(t) ; net decline in private,
348-51; advantages of private in-
vestment, 351; use of private, in
public undertakings, 361; present
prospects for developmental, 376//;
flow of private capital, 377-78; pub-
lic loans and grants, 378-79; long-
term loans to, and investment in,
underdeveloped areas, 387-90; flight
of capital, 395-96, 397, 404; impor-
tation of long-term capital, 398-99;
provision of, for economic innova-
tion, 423-28; provision of, by U.S.,
431ff; indicators of capital inputs, in
selected countries, 461-63(t)

Capital formation, 37; productive and
unproductive, 51-54; in underde-
veloped areas, 54-60, 64-70; in de-
veloped economies, 60-64; rate of
accretion, 70-73; industrialization in
England, 147-48; Japanese develop-
ment, 181J7; 187(t), 189; under
Russian Five- Year Plans, 193JJ] 208-
12, 210(0; national income in rela-
tion to, 214-21 ; problem of accumu-
lation, 283^; savings and living
standards in relation to, 303; use of
self-help local work projects, 304-05 ;
savings institutions, 305-06; com-
mercial banks and securities ex-
changes, 306-07; government se-
curities, 307-08; direct compulsory
measures to increase saving, 317-22;
relationship to entrepreneurs and in-
novation in process of economic
development, 4\3ff; see also Eco-
nomic development

Capital gains tax, 329

Capitation taxes, 324

Caribbean area, 3; population trends,
109; development problems, 285;
agricultural area and labor force,
selected countries, 459(t); indicators
of capital inputs, selected countries,
463(t)

Catholic Church, 79

Subject Index

481

Central America, 3; agricultural area
and labor force, selected countries,
459(t); indicators of capital inputs,
selected countries, 463(t)

Central banks, see Banks and banking
systems

Cereals: percentage of per capita
calories from, 457(t)

Ceylon: crude death and infant mor-
tality rates, ll(t); death rates, 13(t),
98(t); population trends, 93; govern-
ment expenditures, 336(t); flight of
capital from, 396; agricultural area
and labor force, 460(t); indicators of
capital inputs, 461(t)

Chamber of Commerce of the United
States, 450

Chapultepec Conference (1945), 290

Chile : life expectancy, 9(t) ; crude death
and infant mortality rates, ll(t),
98(t); domestic inflationary finance,
309; investment rates, 311; import
controls, 321; Export-Import Bank
loans to, 370(t); agricultural area
and labor force, 459(t); indicators of
capital inputs, 463(t); gross and net
reproduction rates, 468 (t)

China: crude death and infant mortal-
ity rates, ll(t); population trends,
93(t); treaty ports, 170/f ; land tenure,
244-46; cooperative farms, 255;
small-scale industries, 269; U.S.
grants and credits to, 364(t); Export-
Import Bank loans, 371(t); agricul-
tural area and labor force, 460(t);
indicators of capital inputs, 461(t)

Clothing, 13, 16(f)

Coal: production of, 217, 218(t),
219(t); in England, 138^; in Ger-
many, 162; in France, 164; in
Russia, 190, 196

Cochin-China, 170/1

Collectivization of agriculture, 204/F,
247,416

Colombia: life expectancy, 9(t); crude
death and infant mortality rates,
1 l(t); death rates by cause, 13(t); de-
velopment program for, 268; devel-
opment problems, 285; inflation and
investment rates, 311; import con-
trols, 320; income taxes, 326; tax
exemptions, 331; Export-Import
Bank loans, 370(t), 372; Interna-
tional Bank loans, 374; agricultural
area and labor force, 459(t); indi-
cators of capital inputs, 463(t)

Colombo Plan, 343, 379, 437

Colonialism, 95-96

Commerce: expansion of, 130; devel-
opment of British foreign, 143-47;
its role in economic development,
409^; its importance in economic
progress, 432; see also Industry;
International trade

Commercial banks, see Banks and
banking systems

Committee for Economic Develop-
ment, 446, 450

Commodity credits, 365(t)

Common law, 82#

Communication facilities: as produc-
tive capital resources, 37; improve-
ments in, 131-37; contributions to
economic development, 166, 169,
409^; initiated by government in
Japan, 182^; U.S.S.R. investments,
under Five- Year Plans, 195(t); num-
ber of telephones as capital-input
indicators, 461-63(t); see also Trans-
port facilities

Communist party (U.S.S.R.): decision
to industrialize country, 194^; dis-
tribution of labor force, 201-02;
agricultural aims, 204

Community Development Employ-
ment for the Utilization of Idle Man-
power (Greece), 304

Complementarity of industry, 219ff

Consumption : nonmonetary indicators
of level of, 16(f) patterns of, 43; of
labor-using products, 47 ; Keynesian
theory, 52; ratio of consumers'
goods to capital goods, 54; regula-
tion of, 56-59; of consumer goods in
Russia, 194, 195(t), 206^, 209,
210(t); portion devoted to capital
formation, 303; taxation, 329,
330(t), 402-03; imitative, 385

Convertibility, see Foreign exchange

Cooperatives, agricultural, 255, 272,
305

Costa Rica : life expectancy, 9(t) ; crude
death and infant mortality rates,
ll(t); death rates by cause, 13(t);
agricultural area and labor force,
459(t); indicators of capital inputs,
463(t)

Cottage industries, 185-86, 269

Cotton: English imports and exports,
138, 144; in early industrialization,
146-47, 173

Counterpart funds, 388, 398

482

Subject Index

Credit: regulation of, 312-13; govern-
ment-supported institutions, 34O-41

Crop rotation, 24, 128

Cuba: recommendations by economic
survey, 272; import controls, 321;
government expenditures, 336(t);
Export-Import Bank loans, 371(t);
agricultural area and labor force,
459(t); indicators of capital inputs,
463(t)

Cultural environment, see Socio-cul-
tural environment

Currency convertibility, see Foreign
exchange

Customs unions, 161-63, 173

Czechoslovakia: Export-Import Bank
loans, 370(t); agricultural area and
labor force, 458(t); indicators of
capital inputs, 462(t)

DAIMYO, 183, 184

Damodar River Development Author-
ity (India), 340

Death rates, ll(t), 13(t), 94, 95, 98-99,
108(t), 224, 227, 228(t), 229

Defaults, 344, 356

Deflation, 308, 312

Demand: for labor-using products, 47;
export changes due to changes in,
383, 384, 399-400; stabilization of
international demand, 400-01; see
also Consumption

Denmark : crude death and infant mor-
tality rates, ll(t); death rates by
cause, 13(t); Export-Import Bank
loans to, 370(t); agricultural area and
labor force, 458(t); indicators of
capital inputs, 461(t)

Developed economies: comparative
nature of concept, 3ff; indexes of de-
velopment, 5-21, 16(0; capital ac-
cumulation and allocation, 60-64;
productivity, 68; idea of progress,
119 ff; economic development in
England, 126-51 ; in Western Europe
and Europe overseas, 152-74; in
Japan, 175-89; in the U.S.S.R., 190-
212; pace of material progress, 213-
33; estimated population, selected
countries, 225(t), 226(t); commerce
and industry, 267-97; national debt
as percentage of national income in,
334(t); private foreign investments,
343-60; public loans and grants,
361-81 ; international trade relations,
382-405; factors contributing to

growth, 406jf ; interests and responsi-
bilities of U.S., 429-54

Development programs: use of domes-
tic raw materials, 271-72, 273; prob-
lems of capital intensity, size and
tempo, 275-89; government partici-
pation vs. state ownership, 294

Diarrhea, 13(t)

Diet: as measure of well-being, 13//;
as index of labor efficiency, 30;
changes in consumption pattern,
230-31 ; effect of rising incomes on,
251 ; per capita calorie intake, 457(t)

Diphtheria, 12, 13(t)

Disease: incidence of, 12; death rates
by cause, selected countries, 1 3(t) ; as
index of labor efficiency, 30; in co-
lonial areas, 97; conquest of infec-
tious, 229

Distribution, 348(t)

Dominican Republic: agricultural area
and labor force, 459(t); indicators of
capital inputs, 463(t)

Donbas area, 196

Douglas, Lewis, 450

Drake, Sir Francis, 121

EAST India Company, 148

Economic Commission for Latin
America, 277

Economic Cooperation Administra-
tion, 356

Economic development: potentialities
of improvement, 4ff, 2\ff; indexes of
development and underdevelop-
ment, 5-21 ; by capital accumulation
and allocation, 5 Iff; theory of, 1 19^;
past and present setting of problem,
123-25; implications of agricultural
improvement, 126-31, 217ff, 419-21 ;
of transport and communication
facilities, 131-37, 407-13; impor-
tance of trade and investment, 146-
47, 314jf, 390-96, 431^, 427-28; in
England, 126-51 ; in Western Europe
and Europe overseas, 152-74; in
Japan, 175-89; in the U.S.S.R., 190-
212; basic factors, 213ff, 407^; na-
tional income and capital formation
as factors, 214-21; population
changes in relation to, 224ff, 256-59;
social welfare, 229, 232-33, 267^;
improvement of real wages, 231,
232(t); motivation, 240; problems of
capital intensity and tempo of indus-
trialization, 275-89, 42lff; role of

Subject Index

483

government in contemporary, 287,
289-95, 333, 334(t), 335(t), 336(t);
trends in nationalization and private
enterprise, 29Q#; foreign develop-
mental capital, 298-300, 343ff, 352-
60, 361-76, 36Sff t 376-81, 423-28,
429, 431; domestic developmental
capital, 300-01, 301-08, 308-17,
317-22; primary production, 314^,
433ff 9 437; fiscal and banking sys-
tems, 323-33, 337-42, 401-05; imita-
tive consumption as obstacle to, 385 ;
international aspects, 400^, 429ff,
444ff, 453-54; see also Development
programs

Economic Report of the President
(1952), 367

Economic resources, see Productive
resources

Economic stability: U.S. contributions
toward, 431 ff; international cooper-
ation for, 446ff

Economic Survey Mission to the
Philippines, see Bell Mission

Ecuador: crude death and infant mor-
tality rates, 11(0; Export-Import
Bank loans, 371(t); agricultural area
and labor force, 459(t); indicatois of
capital inputs, 463(t)

Edinburgh, University of, 130

Education: correlation between fertil-
ity and, 102; public and technical
schools in Japan, 186; U.S.S.R. in-
vestments in, 197, 202; agricultural,
240-43; private vs. public invest-
ment, 36l/f

Efficiency : in utilization of productive
resources, 24ff; measurement of, 29-
32; marginal, 61, 63; importance of
spcio-cultural factors, 14ff; coopera-
tive aspects, 85-86; in agricultural
productivity, 240; industrial vs.
agricultural, 260; in peasant indus-
try, 270-71

Egypt: life expectancy, 9(t); crude
death and infant mortality rates,
1 l(t); age distribution of population,
28; ratio of arable land to agricul-
tural labor force, 36, 460(0; labor
distribution, 38>i; population growth
92; death rates, 98(t); government
expenditures, 335(t), 336(t); Export-
Import Bank loans, 371(0; flight of
capital from, 396; indicators of
capital inputs, 461 (t); gross and net
reproduction rates, 468(t)

Eire (Ireland): agricultural area and
labor force, 458(t); indicators of
capital inputs, 462(t)

Electric power, 195, 196, 270-71, 278

El Salvador: crude death and infant
mortality rates, ll(t); government
role in economic development, 289;
agricultural area and labor force,
459(t); indicators of capital inputs,
463(t)

Employment, 53, 138, 139(t), 179; see
also Labor; Unemployment

Enclosures, 127-28

Energy, consumption of, 39 ; as capital-
input indicator, 461-63(0

England (United Kingdom): life expec-
tancy, 9(t); crude death and infant
mortality rates, 11(0; death rates by
cause, 13(1); agricultural improve-
ments, 128^; improvements in trans-
port and communications, 131-37;
industrial employment, 138, 139(t);
index of manufacturing, 141, 142;
foreign commerce and investment,
143-47, 144(t), 169jf, 343, 361; capi-
tal accumulation and industrializa-
tion, 147-48; role of the state, 148-
49; conclusions from economic de-
velopment in, 149-51; per capita
production and income, 210(t), 214-
15; development of industry and
manufacturing, 211 ff, 218(t), 219(t),
220(t), 222(t), 223(t), 286; population
changes, 224, ;;<{#, 226(0; diet,
230-3 1 ; wage rat J-^J 1 , 232(t) ; farm
tenancy, 245; custom, duties, 326;
consumption taxes, 329; U.S. grants
and credits to, 365(t); agricultural
area and labor force, 458(t); indi-
cators of capital inputs, 461(t); gross
and net reproduction rates, 468(t)

Enteritis, 12, 13(t)

Entrepreneurs: as productive factors,
24; relationship to innovation and
capital accumulation in process of
economic development, 49, 50, 413^;
in early industrial era, 142; contribu-
tions to Belgian development, 166;
Japanese government in role of,
181jf; uniqueness of Russian, 208;
activity in foreign investments, 346

Environment, see Socio-cultural en-
vironment

Ethiopia: Export-Import Bank loans,
371(t)

484

Subject Index

Europe : developed and underdeveloped
economies in, 3 ; agriculture, 33, 34(f),
35(f), 153-60; population trends,
93(t), I04ff 9 22\ff; early economic
development, 152^, 160, 165-68,
171-74; expansion to overseas areas,
168-71; railway network (1848 and
1877), 167(f); social legislation, 232-
33; rate of industrialization, 286;
consumption taxes, 330(t); private
U.S. direct investment in, 348(t);
share in U.S. postwar aid, 366,
367(t); Export-Import Bank loans,
370(t); repatriation of private capital
to, 379; agricultural area and labor
force in selected countries, 458(t);
indicators of capital inputs, selected
countries, 461-62(t); see also under
names of individual countries

Europe overseas, see Overseas areas

European Cooperation Administra-
tion, 366

European Recovery Program: U.S.
grants and credits to, 364(t); share of
U.S. foreign aid, 366

Expenditures: consumption and non-
consumption purposes, 52; per cap-
ita and government expenditures,
334, 335(t), 336(t)

Export economies, 313, 382

Export-Import Bank: request for in-
vestment-guarantee powers, 356-57;
U.S. credits to, 365(t), 366; loans to
underdevelopec^reas, 368^; func-
tions and oj^.-tions, 369-72, 370-
71(t); expansion of its activities, 440;
see also International Bank for Re-
construction and Development

Exports: British, 143, 144(t), 145;
Japanese, 186-87, 187(t); quality of,
261-62; inflation induced by, 313j7V
taxes on, 316-17, 327(t), 328; pri-
mary products, 383, 399-400, 444;
see also International trade

Expropriation, 344, 356, 358

External economies, 263, 279^, 292-94

FACTORS of production: productive
combinations, 41-50; "investment
multiplier" analysis, 53, 54; under-
and overpopulation, 257^; tempo of
industrialization affected by, 282-89;
mobility of, 310

Factory buildings: as productive capi-
tal resources, 37

Far East: agricultural area and labor
force, selected countries, 460(t) ; indi-
cators of capital inputs, selected
countries, 461(t); see also under
names of individual countries

Farms and farming, see Agriculture;
Labor

Federal Reserve Act (U.S., 1913), 313

Fertility: economic development and,
99-104; implications of delayed fall
in, 104-10; positive measures to re-
duce, 110-13; demographic patterns
in underdeveloped countries, 107,
108(t); crude birth rate as indication
of, 464ff; age-specific fertility rates,
selected countries, 466(t)

Fertilizers, 39

Feudalism, 154, 156, 175, 183, 188

Finland: population trends, 225(t),
226(t); Export-Import Bank loans,
370(t); International Bank loans,
374; agricultural area and labor
force, 458(t); indicators of capital in-
puts, 462(t) ; gross and net reproduc-
tion rates, 468(t)

Fiscal monopolies, 328-29

Five- Year Plans (U.S.S.R.), I91ff

Ford, Henry, 450, 451

Foreign aid, 298-300; developmental
capital, 343/T, 352-60, 368/T, 376-81 ;
U.S. government programs, 362-76,
364-65(t), 429Jf; see also Grants and
credits; Investment; Loans; Techni-
cal assistance

Foreign exchange: controls, 315-16,
397, 401-05; multiple rates, 321-22;
currency convertibility, 356^T, 451-
53; export yields, 383; currency re-
serves, 387, 445

Foreign investment, see Investment

Foreign loans and grants, see Grants
and credits; Investment; Loans

Foreign Operations Administration,
356

Fortune (magazine), 450

France: index of manufacturing, 141,
142; agricultural changes, 154, 157-
58; development in industry, 160,
163-65, 168(f), 171-73; per capita
production and income, 210(t), 215;
coal production, 217, 218(t), 219(t);
pig iron, 219, 220(t), 222(t); manu-
facturing growth, 223(t); population
trends, 224, 225(t), 226(t); wage
rates, 231, 232(t); land tenure, 245;
Export-Import Bank loans, 370(t);

Subject Index

485

agricultural area and labor force,
458(t); indicators of capital inputs,
461(t); gross and net reproduction
rates, 468(t)

Frederick the Great, King of Prussia,
154, 158, 159/7, 160

French Revolution, 150, 154-56

French West Africa: indicators of
capital inputs, 463(t)

Friendship, Commerce and Naviga-
tion, treaties of, 354

GERMANY: industrial employment, 138,
139(t); index of manufacturing, 141,
142; agricultural changes, 154-59,
245; development in industry, 160-
63, 168(f), 171-73, 223(t), 286; per
capita production, 210(t); coal pro-
duction, 217, 218(t), 219(t); pig iron,
219, 220(t), 222(t); population
trends, 224, 225(t), 226(t); wage
rates, 231, 232(t); Export-Import
Bank loans, 370(t); role of govern-
ment, 410; agricultural area and
labor force, 458(t); indicators of
capital inputs, 461(t)

Gewerbe Institut, 162

Gifts, see Grants and credits

Gold standard, 186-87

Government: regulation of consump-
tion, 58, 329Jf; economic role in de-
veloped countries, 61-64; its con-
tribution to economic development,
67, 161, 287, 289-95, 4lOff; as entre-
preneur, 70, 182, 290; institutional
forms of, BOff; in British economic
development, 148-49; in agricul-
tural development, 158-59, 254-55;
measures to promote private invest-
ment, 170j/f, 352-60; positive role in
Japanese development, 18 iff, 188;
fiscal and monetary policies, 309ff;
provision of developmental capital,
333-36, 424-25; role of U.S. in pub-
lic foreign financing, 362-76

Government securities, 307-08

Grants and credits: by U.S. govern-
ment, 363(t), 364(t), 366, 367(t);
authorized by Export-Import Bank,
370(t); proportion of U.S. foreign
aid going to underdeveloped areas,
367jf; future U.S. government
grants, 378^; as U.S. aid policy,
394, 433, 438, 440; see also Foreign
aid; Loans

Graunt, John, Bn

Gray Report, 344w, 378, 379

Great Britain, see England

Greece: life expectancy, 10(t); death
rates, 98(t); work projects, 304;
Export-Import Bank loans to,
370(t); agricultural area and labor
force, 458(t); indicators of capital
inputs, 462(t)

Greek-Turkish aid: U.S. grants and
credits to, 364(t)

Guarantees of foreign investments,
356-60

Guatemala: life expectancy, 9(t); crude
death and infant mortality rates,
11(0; death rates, 98(p; develop-
ment problems, 2B5n; import con-
trols, 321 ; tax exemptions, 331 ; atti-
tude toward foreign capital, 344;
flight of capital from, 396; agricul-
tural area and labor force, 459(t);
indicators of capital inputs, 463(t)

HAITI: Export-Import Bank loans to,
371(t); agricultural area and labor
force, 459(t); indicators of capital
inputs, 463(t)

Hansen stagnation thesis, 310

Harrod, Roy, 265

Havana Charter (I.T.O.), 290-91, 354

Heart disease, 12, 13(t)

Holland, see Netherlands

Honduras: crude death and infant
mortality rates, ll(t); agricultural
area and labor force, 459(t); indica-
tors of capital inputs, 463(t)

Housing: Soviet Five- Year Plans,
195(t), 198

Hudson's Bay Company, 148

Hungary: agricultural area and labor
force, 458(t); indicators of capital
inputs, 462(t)

Hypothec Bank (Japan), 185

ICELAND: International Bank loans,
374; birth rates, 465; age-specific
fertility rates and percentage dis-
tribution of females by age, 466(t)

Immigration, 87

Imports: British, 143, 144(t), 145; of
capital goods by Japan, 186-87,
187(t); quotas, 291; selective con-
trols and taxes, 317-21, 326, 327(t),
328; reduction of U.S. barriers to,
447jjT; see also Exports; International
trade

486

Subject Index

Income, per capita: measurement of,
15, 17-18, 19(t); factors determining,
23ff, 42ff 9 92ff, 414; distribution in
underdeveloped areas, 23n; long-run
growth, 214-15; voluntary saving
impeded by low, 301; balance-of-
payments problems in relation to,
385, 399; see also National income

Income tax, see Taxation

India: life expectancy, 10(t); crude
death and infant mortality rates,
ll(t); agricultural area and labor
force, 36, 3Sn, 460(t); population, 92,
93(t), 94; birth rates in, 101 ; British
rule, UQn; manufacturing, 223(t);
pilot development projects, 243;
land tenure, 245; cottage industries,
269; imports of capital goods, 303;
work project program, 304; income
taxes, 323-24, 325(t); consumption
taxes, 329, 330(t); agricultural in-
come tax, 331 ; government expendi-
tures, 334, 335(t), 336(t); attitude
toward foreign private capital, 344;
International Bank loans, 374; indi-
cators of capital inputs, 461 (t); gross
and net reproduction rates, 468(t)

Individualism, 76

Indochina: agricultural area and labor
force, 460(t); indicators of capital
inputs, 461(t)

Indonesia: agricultural area and labor
force, 36, 460(t); indicators of capital
inputs, 461(t); small-scale industries,
269; shortage of technicians, 285;
imports of capital goods, 303 ; Ex-
port-Import Bank loans, 371(t)

Industrial Bank (Japan), 185

Industrialization: as specialization, 41,
46; beginnings of, 137 ff, 267-69; re-
sults of, 142-43, 296-97; capital
accumulation, 147-48; small-scale
industries, 269-72; sequence of de-
velopment, 272-75, 279-89, 42\ff;
state intervention to obtain external
economies, 292-95

Industry: in underdeveloped areas,
38n; small-scale, 64; complementary
and external economies, 66, 263,
279 ff; early development, 137-43,
139(t), 160-65, 168(f), 171-73, 181jf,
189, 193-204; physical production,
by industry, 196(t); agriculture in
relation to, 206-08, 259ff, 268-69;
per capita production, 210(t); large-
scale, 212; village-rural, and process-

ing of farm products, 269-72; devel-
opment programs, 273^ 277-79;
financing by banks, 338 ; distribution
of U.S. private direct investment,
347, 348(t) ; changing patterns, 41 Iff;
heavy industry in growth of national
income, 420

Infant industries, 290, 291, 391

Infant mortality rates, 1 l(t), 227, 228(t)

Infectious diseases, 13

Inflation, 55/7 ; in periods of increased
capital accumulation, 63 ; bank pur-
chases of bonds, 308; domestic in-
flationary finance, 309-13; induced
by exports, 313-17; in all types of
economies, 382; causes and control,
387-90; as cause of balance-of-pay-
ments difficulties, 396^T; control of,
as condition of loans from U.S.,
446; international measures for
stability, 446ff

Innovation: as productive factor, 24;
in underdeveloped areas, 46, 50; re-
lationship to entrepreneurs and
capital accumulation in process of
economic development, 413#; see
also Entrepreneurs; Technological
progress

Interest rates, 302-03

International Bank for Reconstruction
and Development: annual reports,
288; "planning" concept, 294-95;
loans, 363(t), 366, 367(t), 368; func-
tions and operations, 372-76, 378;
as source of public investment capi-
tal, 439, 441 ; see also Export-Import
Bank

International Children's Emergency
Fund: U.S. grants and credits to,
364(t)

International cooperation, 439

International Development Advisory
Board, 375

International Development Authority,
375

International Finance Corporation
(proposed), 360, 375, 440

International loans, see Foreign aid;
Grants and credits; Loans; Techni-
cal assistance

International Monetary Fund, 291, 452

International trade: expansion, 130;
effects of transport improvements,
136-37; changes in British foreign
trade, 143-47; European develop-
ment and overseas trade, 168-74;

Subject Index

487

foreign trade of Japan, 186, 187(t);
Soviet investments, 195(t); protec-
tionist policies, 290-91; indirect
taxes on, 326-28, 327(t); balance-of-
payments problems, 382j7V variability
of demand for exports of primary
producers, 383-85; as a basic factor
in economic development, 407jf,
43 Iff; U.S. policies, 43 \ff\ 447ff; free-
trade policies, 447ff; see also Com-
merce; Industry

International Trade Organization : pro-
posed charter for, 290-91, 354/1

Investment: in underdeveloped areas,
21, 22, 438; capital goods, 40; con-
cept of, 52; marginal efficiency, 61,
63; inflationary, 63, 308, 309-13,
446; criteria for, 64-69, 273^, 390-
96, 398#V British, 143-47, 169; dis-
tribution by economic fields,
U.S.S.R., 194, 195(t), 197, 198;
village industries, 269-70; capital-
intensity, 215ff; government borrow-
ing, 333^7; private capital, 343^,
351-61, 377-78, 423^; portfolio vs.
direct, 345ff; private U.S. foreign,
346(t), 348(t), 350(t), 438^; govern-
ment guarantees, 356-60; U.S. gov-
ernment loans and credits, 362-76,
378-79; national vs. international
auspices, 439-40; see also Foreign
aid; Grants and credits; Loans; Pub-
lic finance

Investment multiplier, 53, 54

Iran: fiscal monopolies, 328; agricul-
tural income tax, 331; government
expenditures, 335(t), 336(t); Export-
Import Bank loans, 371(t); agricul-
tural area and labor force, 460(t);
indicators of capital inputs, 461(t)

Iraq : land tenure, 84, 244 ; work project
program, 304; government expendi-
tures, 335, 336(t); oil royalties, 380;
agricultural area and labor force,
460(t)

Ireland, see Eire

Iron manufactures, 139(t), 140, 164,
217, 219, 220(t), 222(t)

Israel: Export-Import Bank loans,
371(0

Italy: life expectancy, 9(t); index
of manufacturing, 141; population
growth, 225(t), 226(0; income taxes,
325(t); consumption taxes, 330(t);
government expenditures, 335(t),
336(t); Export-Import Bank loans,

370(t); agricultural area and labor
force, 458(t); indicators of capital
inputs, 462(t)

JAMAICA: life expectancy, 9(t); crude
death and infant mortality rates,
11(0; death rates, 98(t)

Japan, 3; death rates, ll(t), 13(t),
98(t); agricultural area and labor
force, 36, 460(t); population trends,
93(t), 107; birth rates, 101; back-
ground and early economic develop-
ment, 175^; government role, 182-
89, 294, 410, 417; banking, 184, 185;
foreign trade development, 186-87,
187(t); per capita production and
income, 210(t), 215; sequence of in-
dustrialization, 223(t), 276, 286-87;
farm tenancy, 245 ; small-scale indus-
tries, 269, 278; development of elec-
tric power, 270-71; attitude toward
foreign capital, 344/?; Export-Import
Bank loans, 371(t); indicators of
capital inputs, 461(t)

Joint Brazil-U.S. Technical Commis-
sion, 271-72, 277, 307, 333

Jordan : government expenditures, 335,
336(t)

KESTNBAUM, Meyer, 450

Keynes, J. Maynard, 52, 283

King, Gregory, Sn

Kiev, 201

Korea: life expectancy, 10(p; crude
death and infant mortality rates,
11(0; agricultural area and labor
force, 460(t); indicators of capital
inputs, 461(t)

LABOR : as basic resource, 23 ; mobility,
24, 32, 299, 411^; productivity of,
27-32, 41 , 44-46, 47, 64ff; land-labor
ratios, 33-35, 251, 258, 458-60(t);
disguised unemployment, 56, 258,
419-20; Soviet policies, 200-04, 210-
11; skilled, 284jf; self-help local
work projects, 304-05; see also
Productivity

Laissez-faire policy, 294

Land: productivity, 32-37, 33(t), 34(f),
35(f), 41; land-labor ratios, 33(t),
458-60(0; improvement of, 46, 158,
252-53; developing industry based
on use of, 268-69; ownership and
tenure: diversity of laws, 84, 177Jf,
183, 188, 191, 329; reforms in, 243-
49, 420/T; see also Agriculture

488

Subject Index

Landschaft, 160

Latin America: socio-cultural environ-
ment, 78ff, 85; population trends,
109; infant industries, 290; exports,
314; taxation, 325(t), 327(t), 330(t),
331 ff; attitudes toward foreign pri-
vate capital, 344; private U.S. direct
investment in, 348(t); U.S. grants
and credits to, 364(t), 367(t); Export-
Import Bank loans, 366, 370-7 l(t),
372; inflation, 397; see also under
names of individual countries

Law, John, 148

Legal systems, 82-84

Lend-lease program: U.S. grants and
credits, 364(t)

Leningrad, 201

Liberia: agricultural area and labor
force, 36, 460(t); agricultural educa-
tion, 242; Export-Import Bank loans,
371(t)

Life expectancy, 8, 9(t), 29

Life insurance, Sn

List, Friedrich, 162, 163w

Literacy: as index of labor efficiency,
30; in U.S.S.R., 202; improvement
in, 233/1, 241

Liverpool- Manchester Railway, 165

Livestock: percentage of per capita
calories from, 457(t)

Loans: financing of Japanese state
enterprise, 182-83; economic rea-
sons for, 299-300; vs. grants, 299,
394; U.S. government, 363(t), 364(t),
367^, 378ff, 433, 438, 440; stipula-
tions by foreign lenders, 390, 398;
overborrowing, 394-95 ; see also For-
eign aid; Grants and credits; Invest-
ment; Public finance

London Missionary Society, 170/1

MACHINERY and equipment, see Tech-
nical assistance; Technological prog-
ress

Machine-tractor stations, 205

Malaria, 12, 13(t)

Malaya: death rates, ll(t), 98(t); gov-
ernment expenditures, 336(t)

Manufacturing: in underdeveloped
areas, 38/i; rate of growth, 137-43,
139(t), 221, 223(t); private U.S.
direct foreign investment in, 348(t);
see also Industry

Manufacturing class, I19n

Market economy, see Price-market
economy

Marshall Plan, 366, 441

Material welfare: social organization,
4, 77, 142-43; measurement, 5, 7, 10,
13 ff, 16(f), 26; varying concepts, 81,
229, 232-33 ; population growth and
productivity, 213; savings, 303; so-
cial security taxes, 324; private vs.
public investment, 361jf

Mauritius: death rates, ll(t), 13(t)

Medical science, 229

Meiji restoration, 175

Merino sheep, 158

Mexico: life expectancy, 9(t); death
rates, ll(t), 98(t); land-labor ratios,
36, 459(t); labor distribution, 38/i;
population trends, 109; economic
development in, 268, 284-85; export
taxes, 316/z; import controls, 321;
tax exemptions, 331; government-
credit agency, 340; Export-Import
Bank loans, 370(t), 372; flight of
capital, 396; exports of raw mate-
rials, 435; indicators of capital in-
puts, 463(t)

Middle class, 124,301

Middle East, 3; land-labor ratios, 36,
460(0; religious values, 78; popula-
tion trends, 109 ; income taxes, 325(t) ;
taxes on foreign trade, 327(t); con-
sumption taxes, 330(t); indicators of
capital inputs, selected countries,
461(t); see also under names of indi-
vidual countries

Migration, 87, 169, 171

Mining and smelting: private U.S. di-
rect foreign investment in, 348(t)

Missionary movement, 170

Molotov, V. M., 278

Monetary policies, see Foreign ex-
change; Inflation; Public finance

Monnet Plan, 245

Monopoly: in agricultural processing
industries, 272; in early phases of
industrial development, 292; fiscal,
328-29; sellers' market for primary
producers, 403

Monroe Doctrine, 170

Mortality rates, see Death rates

Moscow, 201

Motion pictures, 90, 241

Mutual Security Act (1951), 356

Mutual Security Administration : grants
and credits by, 364(t), 366

Subject Index

489

NACIONAL Financiera (Mexico), 340

Napoleonic wars, 150

National Bank for Economic Develop-
ment (Brazil), 341 n

National debt: Japanese, 182-83, 184;
as percentage of national income,
333, 334(t); see also Inflation; Public
finance

National Extension Service (India), 304

National Foreign Trade Council: rec-
ommendations, 353

National income: development poten-
tialities, 21, 22, 23ff, 46-48, 5\J}\
214-21; savings in relation to, 41 n,
303 ; factors in determination of, 48-
50, 54, 55; correlation between fer-
tility and, 102; as a measure of eco-
nomic development, 126; in U.S.S.R.,
210; national debt in relation to, 333,
334(t); see also Income, per capita

Nationalism, 122

Nationalization, 290, 356, 357

Natural resources, 4/7, 21, 362ff, 434ff;
see also Productive resources

Near East, 3; work attitudes, 84-85;
land tenure, 244, 245; attitudes to-
ward foreign capital, 344; see also
under names of individual countries

Netherlands: life expectancy, 9(t); land-
labor ratios, 37, 458(t); entrepre-
neurs, 161 n; population trends, 224,
225(t), 226(t); Export-Import Bank
loans, 370(t); indicators of capital
inputs, 461(p

New Economic Policy, 193-204

New Zealand, 3; appreciation of ex-
change rate, 315/;; agricultural area
and labor force, 459(0; indicators of
capital inputs, 462(t); birth rates,
465; age-specific fertility rates and
percentage distribution of females by
age, 466(t)

Nicaragua: agricultural area and labor
force, 36, 459(t); Export-Import
Bank loans, 371(0; indicators of
capital inputs, 463(0

Nigeria: indicators of capital inputs,
463(t)

Norfolk system, 128

North Africa: population trends, 109

North America, 3 ; agricultural land in,
33, 34(f), 35(f)

Northern Rhodesia : International Bank
loans, 374

Norway: death rates, ll(t), 13(t); pop-
ulation trends, 224, 225(0, 226(t);

rate of industrialization, 286; Export-
Import Bank loans, 370(t); agricul-
tural area and labor force, 458(t);
indicators of capital inputs, 461(0;
birth rates, 465 ; age-specific fertility
rates and percentage distribution of
females by age, 466(t); gross and net
reproduction rates, 468(t)

OCEANIA: agricultural land in, 33,
34(f), 35(f); population trends, 94;
U.S. grants and credits and loans by
International Bank, 367(t); see also
Australia; New Zealand
Orient: small-scale industries, 269
Overseas areas: extension of European
development into, 168-71; impor-
tance of, 173-74

PAKISTAN: population trends, 92; gov-
ernment expenditures, 335, 336(t)

Palestine: land tenure, 244; agricul-
tural area and labor force, 460(t);
indicators of capital inputs, 461(t)

Panama: life expectancy, 9(t); crude
death and infant mortality rates,
11 (t); Export-Import Bank loans,
371(t); agricultural area and labor
force, 459(t); indicators of capital
inputs, 463(0

Paper money, 1 84

Paraguay: shortage of skilled labor,
285; agricultural area and labor
force, 459(t); indicators of capital
inputs, 463(t)

Paris- Rouen Railway, 165

Paternalism, 96

Peasantry, 154, 155, 156, \llff, 183,
188, 192, 249, 270-71

Perry, Matthew C, 175

Peru: government expenditures, 335(t),
336(t); Export-Import Bank loans,
371(t); International Bank loans,
374; agricultural area and labor
force, 459(t); indicators of capital
inputs, 463(t)

Pesticides, 39

Petroleum: U.S. private direct invest-
ment in, 347, 348(t)

Petty, Sir William, 8/1

Philippines: Bell Mission recommenda-
tions, 271-72; government role in
economic development, 289, 340;
imports of capital goods, 303; im-
port controls, 320; government ex-
penditures, 335(0, 336(t); U.S. grants
and credits, 364(t); Export-Import

490

Subject Index

Philippines (continued)
Bank loans, 371(t), 372; agricultural
area and labor force, 460(t); indica-
tors of capital inputs, 461(t)

Pig iron, see Iron manufactures

Pilot-plant projects, 182, 185, 243, 255

Planned economies, 60-64, 68-69, 90,
294; see also Developed economies

Point Four program, 46, 273, 363,
364(t), 372, 441,442-44

Poland: death rates, 98(t); Export-
Import Bank loans, 370(t); agricul-
tural area and labor force, 458(t);
indicators of capital inputs, 462(t)

Population: early censuses, 8/*; per
capita income, 19(t); development in
areas of increasing, 22, 108(t), 114-
16; demographic contrasts in de-
veloped and underdeveloped areas,
27-29, 225(t), 226(t); age distribu-
tion, 28(t) ; cultivable land in relation
to, 33(t); trends, 92,$ 93(t), 464-69;
ratio of, to resources, in present
underdeveloped countries, 123-24;
changes in England, 150-51; Japa-
nese changes, 179; changes in Rus-
sia, 201 ; in relation to productivity,
213, 221.$ 230, 239$; agriculture
and, 256-59; misconceptions about
pverpopulated areas, 257; geograph-
ical shifts of, in economic develop-
ment, 411 ff

Portugal: agricultural area and labor
force, 458(t); gross and net repro-
duction rates, 468(t)

Potatoes, 157; percentage of per capita
calories from, 457(t)

Preobrazhenski, Evgeni, 276, 280

Price-market economy: disposition of
savings, 61-62; economic relation-
ships, 90; marketing of agricultural
products, 254; economic develop-
ment in, 411 ff'; domestic and foreign
markets, 427-28

Prices: effects of capital formation on,
55; declines in, 138, 140, 383; of
primary products, 263-66; inflation-
ary tendencies in underdeveloped
countries, 308.$; general price index,
314-15

Primary producers: balance-of-trade
problems, 382.$; impact of tech-
nological progress on, 386-87; over-
borrowing by, 395; in a sellers'
market, 403; exports, 383-85, 444;
possibilities of self-help, 445.$

Primary products: in labor-using out-
put, 47; assumptions of inferiority
of, 259-63; price developments, 263-
66; inflation induced by exports of,
313.$; export taxes on, 316-17; pri-
vate vs. public investment, 362$;
stabilization of international mar-
kets for, 400-01 ; U.S. aid policy for
development of, 433$

Processing industries: in development
programs, 271

Productive efficiency, see Efficiency

Productive resources: economic devel-
opment as effective use of, 21 ff,
418.$; quality and quantity, 23.$;
labor and its productivity, 27-32;
land and capital, 32-41 ; factor com-
binations, 41-46; ways to increase
output and real income, 46-48 ; capi-
tal accumulation, 51-54; capital for-
mation, 54-60; capital accumulation
and allocation in developed econo-
mies, 60-64; see also Factors of pro-
duction; Natural resources

Productivity: basic determinants of
total output, 5$ 23-27, 31(t); labor
as factor in production, 27-32, 44;
land, as economic resource, 32-37;
productive capital resources, 37-41,
51-54, 54-64; factor combinations,
41-46; ways to increase output, 46-
50; criteria for investment, 64-73,
273.$ 300/j, 390-96, 398$; value
systems in underdeveloped areas,
74-80; population and population
growth, 92.$ 114-16, 213; impact of
colonialism and traders, 95.$; nine-
teenth-century rise in, 124-25, 126//V
development in England, 1 26$ 1 39(t) ;
industrial growth in Germany and
France, 139(t), 168(f); economic de-
velopment in Western Europe and
Europe overseas, 152.$; in Japanese
economy, 175$ 183.$ 188; agricul-
tural, 192, 207(t), 237-40, 238(t),
249-54; in Russian economy, 190$
196(t), 207(t), 210(t); industry and
manufacturing, 218(t), 219(t), 220(t),
222(t), 223(t); relative efficiency of
industrial vs. agricultural, 260; peas-
ant-industry efficiency, 270-71 ; labor-
intensive vs. capital-intensive, 275//V
see also Economic development;
Factors of production ; Industry

Progress, idea of, 119-23

Protectionism, 173, 290-91, 319, 402

Subject Index

491

Protestant Reformation, 79, 119

Prussia, see Germany

Public Advisory Board for Mutual
Security, 449, 451

Public finance: methods of financing
early Japanese industrialization, 1 82-
86, 188; monetary policies, 283-84,
312-13, 323, 331-33, 387^; foreign
vs. domestic capital, 298-301; sav-
ings, 301-08; problems of inflation,
309-13, 388^; chief sources of rev-
enue, 323ff; government borrowing
and expenditures, 333^, 334(t), 335(t),
336(t); functions of commercial and
central banks, 337-40; autonomous
credit institutions, 340-41 ; public
foreign financing, 361-76; loans and
investments, 387^; exchange con-
trol and economic development,
4Q\ff; see also Banks and banking
systems; Capital; Foreign exchange;
Investment; Savings

Public health: measurement of, 12^;
death rates, 97, 229; U.S.S.R. invest-
ments in, 197; private vs. public in-
vestment, 361 ff

Public utilities: private U.S. direct for-
eign investment in, 348(t)

Public works: in Japan, 186; U.S.S.R.
investments in, 197; planned to re-
lieve seasonal unemployment, 269

Puerto Rico: life expectancy, 9(t);
death rates, ll(t), 13(t), 98(t); popu-
lation trends, 101, 103; "propor-
tional profit" farms, 255; agricul-
tural area and labor force, 459(t)

Purchasing power, 268

QATAR : oil royalties, 380

RADIO, 90, 241

Raiffeisen, 160

Railroads, 135; German, 162, 167(f),
173; French, 164-65, 167(f), 173;
European network, 167(f), 172-73;
Japanese, \82ff; Russian, 190, 193,
198-200, 211; see also Transport
facilities

Rationing, 55

Raw materials: in labor-using prod-
ucts, 47; domestic agricultural, 271;
private vs. public investment, 362ff;
financing development through ex-
pojrts of, 435^

Reciprocal Trade Agreements Act, 450

Refugee assistance, international: U.S.
grants and credits to, 364(t)

Religion, 4, 74jff

Renaissance, 119

Report to the President on Foreign
Economic Policies, see Gray Report

Reproduction rates: gross rates, 105,
106(t), 465^, 468(t); net rates, 467^,
468(t)

Resources, see Natural resources; Pro-
ductive resources

Revenue, see Public finance; Taxation

Rice production, 179, 316, 328

Rockefeller, Nelson, 375

Roman law, S2n

Royal Institute of International Af-
fairs, 78/i, I46n

Rumania: agricultural area and labor
force, 458(t); indicators of capital
inputs, 462(t)

Rural areas: fertility rates in, 101

Russia, see U.S.S.R.

SAMURAI, 177, 180, 181, 183, 185, 186

Saudi Arabia: Export-Import Bank
loans, 371(t)

Savings : in relation to national income,
41 n; through capital formation, 55;
as source of capital accumulation,
58; voluntary, 59n, 301-03, 304-08;
disposition of in developed econo-
mies, 61, 62; forced character of, in
Soviet industrialization, 208; local
investments in village industries,
269-70; compulsory, 208, 308^, 317-
22; social security taxation as in-
ducement for, 324; developmental
capital from domestic private, 425ff;
see also Investment

Savings banks, see Banks and banking
systems

Scandinavian countries : pattern of eco-
nomic development in, 409/i; see
also under names of individual coun-
tries

Scarcity, theory of, 264

Schools: as productive capital re-
sources, 37

Sea transport, see Transport facilities

Securities exchanges, 306-07

Serfdom, 191

Shelter: as measure of well-being, \3ff 9
16(f)

Shishkin, Boris, 450/1

Siam, see Thailand

Silk, 158

492

Subject Index

Smallpox, 13(t)

Smith, Adam, 292, 415, 449

Social Science Research Council, 74n

Social welfare, see Material welfare

Socio-cultural environment: produc-
tivity dependent on, 25ff; labor mo-
bility, 32; capital-goods consump-
tion, 37; productive and unproduc-
tive capital accumulation, 51 ff; eco-
nomic efficiency influenced by, 74^;
the individual in relation to, 76-78;
value systems in underdeveloped
areas, 74-80; institutional forms, 80-
86; problems of cultural change, 86-
91; market system and economic
planning, 91; demographic factors,
92-116; idea of progress, H9ff;
English attitudes, 126^; in early
economic development in Western
Europe and Europe overseas, I52ff;
Japanese conditions, 115ff; conflict-
ing ideologies in Russia, 19Q#V im-
pact of commerce and industry,
261 ff, 4Qlff; changing patterns essen-
tial to economic development, 408^

Socio-cultural services: U.S.S.R. in-
vestments, under Five- Year Plans,
195(t), 197-98

South America, 3; agricultural land,
33, 34(f), 35(f); domestic inflationary
finance, 309; agricultural area and
labor force, selected countries, 459(t) ;
indicators of capital inputs, 463(t);
see also under names of individual
countries

South Sea Bubble, 148

Sovereignty: concept of, 80

Spain: population growth, 224, 225(t),
226(t); Export-Import Bank loans,
370(t); agricultural area and labor
force, 458(t); indicators of capital
inputs, 462(t); birth rates, 465; age-
specific fertility rates and percentage
distribution of females by age, 466(t)

Standard Vacuum Oil Company, 344

Statistics : indexes of development and
underdevelopment, 5-7; indexes of
life as end product, 7-21, 16(f);
measurement of productivity, 126;
national income indexes as indica-
tors of economic development, 2\4ff

Steam power, 270

Stolypin, P. A., 192

Subsidies, 291^, 332

Suez Canal, I70n

Sugar beets, 157

Surinam: crude death and infant mor-
tality rates, ll(t); death rates by
cause, 13(t)

Sweden: life expectancy, 9(t); death
rates, ll(t), 227, 228(t); population
trends, 102-03, 224, 225(t), 226(t);
indexes of manufacturing, 141, 217,
218(t), 219(t), 220(t), 221, 222(t),
223(t); agriculture, 156; per capita
income, 214-15, 231, 232(t); budgets
for current and capital outlays, 333;
Export-Import Bank loans, 370(t);
agricultural area and labor force,
458(t); indicators of capital inputs,
461(t); gross and net reproduction
rates, 468(t)

Switzerland: agricultural area and la-
bor force, 37, 458(t); indicators of
capital inputs, 461(t)

Syria: potentially productive land in,
36; land tenure, 244, 246; agricul-
tural area and labor force, 460(t)

TARIFFS: Prussian act of 1818, 161;
possible abuse of, 291; as indirect
taxation, 326^; protectionist policy
of United States, 345

Taxation, 55; in Japan, 182-83, 188;
agricultural, 253-54; introduction of
progressive type in underdeveloped
countries, 299; foreign trade, 316-22,
326, 327(t), 328; direct, 323-26,
325(t), 329, 331; indirect, 326-31;
consumption, 329, 330(t), 403; dis-
criminatory, 33 Uf, 341, 345, 352^;
incentives to promote private for-
eign investment, 352j7; improvement
of, in underdeveloped countries,

Technical assistance: capital-saving
and land-saving innovations, 46;
as means of modifying cultural
values and institutions, 88; foreign
experts in early Japanese develop-
ment, 182; U.S.S.R. use of foreign
specialists, 203; in agriculture, 241-
42; transfer of industrial techniques
to underdeveloped areas, 281-82; as
U.S. aid policy, 364(t), 433, 442-44;
see also Foreign aid

Technological progress : machinery and
equipment, 37, 253, 270-71 ; in agri-
culture and industry, 172; in the
sequence of industrialization, 212 ff;
small-scale industries made possible
by, 278; contrasting rates in industry

Subject Index

493

and agriculture, 2SQff; transfer of
techniques to underdeveloped areas,
386-87, 418^; relationship to entre-
preneurs and capital accumulation in
process of economic development,
41 W

Tenancy, 245-46, 248

Textiles: French protectionist policy,
164; Belgian policies, 166; impor-
tance of cotton, 173

Thailand: life expectancy, 10(t); crude
death and infant mortality rates,
ll(t); rice monopoly, 316, 328; Ex-
port-Import Bank loans, 371(t);
agricultural area and labor force,
460(t); indicators of capital inputs,
461(t)

Three-field system, 127

Tokugawa family, 175

Townshend, Charles, I29n

Trade, see Commerce; Industry; Inter-
national trade

Transjordan: land tenure, 244

Transport facilities: as productive
capital resources, 37, 39; improve-
ments, 131-37, 165, 166, 167(f); role
in development of world economy,
169, 408J7; U.S.S.R. investments,
195(t), 198-200, 211 ; peasant indus-
try dependent on improvement in,
270; freight carried, railroad mileage,
number of motor vehicles : as capital-
input indicators, 461-63(t)

Treaties: to promote private foreign
investment, 353-55

Treaty ports, 170

Tull, Jethro, I29n

Tunisia : potentially productive land in,
36; agricultural area and labor force,
460(t)

Turkey: land-labor ratios, 36, 460(t);
pace of industrialization, 276-77;
social security taxes, 302; Export-
Import Bank loans, 370(t); indica-
tors of capital inputs, 461(t)

Typhus fever, 13(t)

UNDERDEVELOPED areas, see Economic
development

Unemployment: agricultural, 44, 45,
242-43, 269; as source of capital
formation, 56, 69; monetary expan-
sion as remedy for, 283-84; techno-
logical, 296; see also Labor

Union of South Africa, 3; Export-
Import Bank loans, 371(t); agricul-

tural area and labor force, 460(t);
indicators of capital inputs, 463(t)

United Fruit Company, 272

United Kingdom, see England

United Nations : U.S. grants and cred-
its to, 365(t)

United Nations Economic Develop-
ment Agency (proposed), 374-75

United Nations Technical Assistance
Administration, 443

UNRRA: U.S. grants and credits to,
364(t)

United States: life expectancy, 9(t);
death rates, ll(t), 13(t); population
trends, 28, 103, 225(t), 226(t); indus-
try and employment, 139(t), 141,
142, 218(t) f 219(t), 220(t), 222(t),
223(t); per capita production and
income, 210(t), 214-15, 232(t); farm
tenancy, 245; foreign aid, 287,
362^, 363(t), 364(t), 367(t), Wff;
private investment as percentage of
gross national product, 311-12;
foreign trade policy, 326, 345, 447^;
taxes, 329, 332, 352^; government
expenditures, 334, 335(t); public and
private foreign investments, 343,
346(t), 348(t), 350(t); negotiation of
treaties to promote private foreign
investment, 353-55; government
guarantees of foreign investments,
356^; international interests, 43Q#V
foreign economic policy, 433, 437,
444^; technical aid under Point
Four, 442-44; agricultural area and
labor force, 459(t); indicators of
capital inputs, 462(t); gross and net
reproduction rates, 468(t)

United States Technical Cooperation
Administration: grants to India, 304

Urbanization, 100, 101, 41 In

Uruguay: U.S. trade and investment
treaty with, 354; Export-Import
Bank loans, 371(t); agricultural area
and labor force, 459(t) ; indicators of
capital inputs, 463(t)

U.S.S.R. (Russia): death rates, ll(t);
population trends, 93(t), 101, 225(t);
manufacturing growth, 141, 223(0;
rate of industrialization, 190-93,
193-204, 208-12, 210(t), 286-87; in-
vestment, 195(t); geographical dis-
tribution of industry, 195-97; pro-
ductivity, 196(t); agriculture, 204-08,
207(t); per capita production, 210(t);
coal and iron production, 217,

494

Subject Index

U.S.S.R. (Russia) (continued)
218(t), 219(t), 220(t), 222(t); capital
formation, 284; role of government
in economic development of, 410,
411, 416; agricultural area and labor
force, 458(t); indicators of capital
inputs, 462(t); gross and net repro-
duction rates, 468(t)

VAINE pature, 154

Value judgments: well-being in terms
of, 6; economic activity as social
behavior, 17; economic achievement
inhibited by, 25; socio-cultural fac-
tors in economic efficiency, 74//; in-
stitutional forms, 80-86; impact of
immigration and migration on, 87^

Venezuela: death rates, ll(t); land-
labor ratios, 36, 459(t); government
expenditures, 334, 335(t); attitude
toward foreign capital, 344; Export-
Import Bank loans, 371(t); oil royal-
ties, 380-81; indicators of capital
inputs, 463(t) '

WAGES, 231, 232(t); see also Income,
per capita

West African Marketing Boards, 316
Western Hemisphere: population

trends, 93(t)

Weston, Sir Richard, I29n
Wilberforce, William, llOn
Wool, 158
Work animals, 39
Work attitudes: institutional aspects

of, 84 ; need of improved incentives

in agriculture, 24Qff'
Work projects: as method of capital

formation, 304-05
World economy, 169, 186
World Trade Conference (Chicago),

450

YAWATA Iron Works, 182/z
Yokohama Specie Bank, 185
Yugoslavia: death rates, 98(t); U.S.
grants and credits, 364(t); Export-
Import Bank loans, 370(t); Inter-
national Bank loans, 374; agricul-
tural area and labor force, 458(t);
indicators of capital inputs, 462(t)

ZOLLVEREIN, 161-63, 173

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