Comments on "Problems of Economic Development"

Author(s): Andrew Gunder Frank

Source: The Canadian Journal of Economics and Political Science / Revue canadienne
d'Economique et de Science politique, Vol. 21, No. 2 (May, 1955), pp. 237-241
Published by: Wiley on behalf of Canadian Economics Association
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 NOTES AND MEMORANDA

COMMENTS ON "PROBLEMSOF ECONOMIC DEVELOPMENT"

ANDREWGCNDERFRANK
University of Chicago
THEtreatmentin a recent issue of this JOURNAL of some problemsof economic
development invites further comment on the issues raised.1This is the case
particularly as the discussion by S. G. Triantis in the review article in
is
question one, albeit a more ambitious one, of a host of reviews that have
recently appeared in the literature of reports published by the International
Bank for Reconstructionand Development on the economic development of
a number of countries.These reviews, and especially the more extensive one
in this JOURNAL,offer the reader an outline and evaluation of the treatment
by the World Bank's missions of the problems of economic growth. I shall
discuss in turn the issues raised by Mr. Triantis' evaluation of the reports.
They concernmattersof populationgrowth, public finance,the capital supply,
inflation, education, and allocation of resources. I conclude by raising some
additional issues.
The questions raised by the rapid growth of population today are, in the
opinion of Mr. Triantis, inadequately treated. Some reports do not correctly
determine the rate of income growth required to keep pace with the growth
of population. The reports on Turkey, Guatemala, and Nicaragua fail to
discuss the question. Yet, it is precisely these three countries, among the
seven that come under discussion, in which the Iabour:land ratio is the
smallest. Indeed, in Nicaragua only a fraction of the arable land is under
cultivation, and other resources are plentiful. In selecting these three reports
for criticism, Mr. Triantis appears to share the assumptionI find underlying
the reports, even the Nicaragua report, that rapid population growth con-
stitutes a handicap for an economy anxious to develop.
Instead of the criticismoffered by Mr. Triantis, another may be suggested.
The missions seem unable to divest themselves of the Malthusianassumption
even where it is not applicable. Consequentlythey fail to ask some important
questions. Under what circumstanceswill a growth in the population, and
therewith an increase in the labour force, give increasing returns?How may
these circumstancesbe fostered and the returns reaped by the community?
These questions are not answered.
More attention and space in the reports is devoted to administrativeand
fiscal mattersthan to any other set of problems. For instance, 119 out of 415,
or 28 per cent of the pages (pp. 77-99 and 318-415) in the Nicaragua report
are concerned with "fiscal policy" and "the fiscal system." The emphasis
devoted thereto, particularly in that study and in the one on Turkey, is
1S. G. Triantis, "Problems of Economic Development," this JOURNAL, XX, no. 1, Feb.,
1954, 107-11. This is a review article of the United Nations report on Bolivia, and the
reports of the International Bank for Reconstruction and Development on Ceylon, Cuba,
Guatemala, Jamaica, Nicaragua, and Turkey.
237
Vol. XXI, no. 2, May, 1955

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 238 The Canadian Journal of Economics and Political Science

noteworthy because it is symptomatic of the singular importance attached

by the missions generally to organizationaland administrativechanges. The
establishmentof institutions, already common in the West, for the improve-
ment of the co-ordinationof economic affairs,to use the words of the Turkish
report, constitutes the principal, almost the exclusive, line of attack recom-
mended by the missions to the various countries.Yet Mr. Triantis feels that
the reports, particularly the one on Nicaragua, devote too little attention
to monetaryand fiscal matters. Contraryto this criticism,it may be suggested
that the missions place too great reliance on programmesof public finance
and improvedadministrationto the exclusion of other mattersto be suggested
below. Moreover,in so doing, the missions consider their acquaintancewith
Western economiesto be more useful for the interpretationof underdeveloped
economies than is probably warranted by circumstancesthere.
Mr. Triantis, too, seems to succumb to this temptation when he suggests
that greater reliance should be placed on the "mediumand smaller incomes
of consumersand enterprises"for their potential contributionto the supply
of capital than is accorded them by the various missions. The larger standard
deviation in the distributionof incomes in the less developed countries prob-
ably prohibits such reliance. On the other hand, it may be suggested that
the peasant population in many areas, which Mr. Triantis probably did not
have in mind, already does considerable "saving,"that is, allows others to
save, because of its enforced low consumption.
Mr. Triantis next addresseshimself to ways of mobilizing savings. I am in
hearty agreement with him when he points out that, although the reports
universallycondemn inflation, they make almost no attempt to support their
condemnation. Indeed, in the face of post-war inflations everywhere, they
regard it as an already accepted assumptionthat inflation is detrimental to
economic development. Except for brief discussionsin the studies on Bolivia
and Ceylon, no analytical treatment of the consequences of inflation is
attempted. Although probably not fundamental to economic development,
considerationby such bodies as the World Bank's missions of the questions
posed by Triantis as well as of the following question may be very much
worth while. What is the source, in the country under study, of inflation,
the creation of commercial-bankcredit, central-bankborrowing or issuing of
currency, or a favourable shift in the terms of trade, etc.? What are the
consequences of the various possible causes (and intensities) respectively
of inflation on the incidence of inflation, on the distribution of command
over resources, and on the change in these over time? Can the government
of the country in question, for instance, gain command over resources for
purposes of investment which it could not so gain by some other measure?
What would be the cost of such a policy, particularlyin less favourableterms
of trade and balance of payments for a country in which foreign trade is
important?
More significantthan the assumptionof the reports with regard to inflation
are the assumptions which appear to underlie their recommendationson
education specifically, and those reflected throughout in their discussion
of social and cultural factors. We may or may not lament with Mr. Triantis

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 Notes and Memoranda 239
the sacrifice of liberal to vocational education and the neglect, in some of
the reports, of conditions peculiar to particular underdeveloped areas. But
comment in this sphere ought not to be confined to that, lest the impression
be left with the reader that many of the issues raised by the discussion of the
reportsare settled. Vocationaleducation, whether in school or field, as under-
stood in the reports,only serves to reinforcethe already too prevalentreliance
on demonstrationor example and on expert advice, instead of on training by
participation,by workingwith the teacher, foreign expert, or extension officer.
More important still, the recommendationsdesigned to improve education
and to increase agricultural and industrial production all appear to imply
that the people in the underdeveloped countries must all be somehow re-
educated before they can or will take part in the economic development of
their countries. They must variously be made to reason, to be more enter-
prising,to become freer in thought, to give up their superstitions,etc. In short,
the people (peasants, business men, and all) must be taught to become
(1) rational, (2) economically rational (3) individualistically economically
rational (Talcott Parson's"universalistic"rather than "particularistic").I do
not believe, as the mission members and Mr. Triantis appear to feel, that it
is already established either that people in underdevelopedcountries are less
rationalthan people elsewhere, or that they must be individualisticin making
decisions before economic development can proceed.
The discussion of allocation of resources invites comment. Most of the
countries under considerationhave, compared to the West, relatively little
capital and land. The recommendationsof the missions are based, therefore,
on the stated maxim that under those circumstances investment requiring
relatively much labour and relatively few other resources should be given
preference. Application of this criterion to the situation in Turkey leads, in
the opinion of the mission, to the conclusion that investment in agriculture
should be favoured over investment in industry. "Agriculturaldevelopment
will provide the greatest employment of manpower for the least capital
investment" (p. 264). Both the conclusion and the criterion on which it is
based draw sharp criticism from Mr. Triantis. He recommendsinstead that
the criterion on which to base investment decisions should be the ratio
of economic progress to the increase in capital employed. He suggests that
the use of his criterion would not necessarily lead to the same investment
(say agriculture instead of industry) as would use of the criterion of pro-
viding "the greatest employmentof manpowerfor a given increase in capital
employed," that is, of maximizing the employment of labour. This is true.
However, in attributingto the Turkishreportthe argumentof mere maximiza-
tion of employment,Mr. Triantishas, as can be seen by reading the passage,
misinterpretedthe mission's intent. The mission's recommendationis based
on the originallystated criterionwhich appeals to the familiarlaw of variable
proportions and which, re-phrased, merely states: maximize total product,
keeping marginal product positive and average product falling for both
factors.This is not the same as invokingthe employmentargument,for nothing
at all is said about maximizingthe quantity of labour used. Indeed, this, the
criterionused by the Turkishreport, states the general case which includes as

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 240 The CanadianJournal of Economics and Political Science
a special case the maxim offered by Mr. Triantis. It would read: maximize
income (progress) by maximizingthe marginalproduct of capital, given the
supply of labour (the complement of which is to maximize the marginal
product of labour, given the supply of capital).
So far, then, the criterion used in the reports stands up under criticism.
To take issue with the conclusions reached by the mission we would have
to argue that the criterionhas been misappliedto the circumstancesin Turkey,
or elsewhere. It may be that the mission has merely miscalculatedthe alter-
native costs in concluding, as most advisers do, that emphasis should be
given to agriculture and export industry. Unfortunately, the reports rarely
give the reader sufficientinformationto enable him to check the calculations.
An alternativepossibility deserves a great deal of furtherinvestigation.It may
be that the missions are using the wrong frame of reference; that what is at
issue in economic developmentis really not so much maximizingthe marginal
product of an input or reaping comparativeadvantage as changing the cir-
cumstanceswhich determine the maximumand that comparativeadvantage.
The latter is, in my opinion, the useful interpretationof the Marxianposition
with regard to industrialization.
The definitionof economic development offered by Mr. Triantis may serve
as introduction to my concluding remarks. "Economic growth," he says,
"involves increases in the supply of productive resources or improvements
in the productivity of the existing resources through better allocation and
combination."It may be noted that he speaks only of increases and omits
mention of such matters as continuousgrowth and self-sustainingcumulative
increases, much less of changes in quality of resources. In imposing by ex-
clusion such limits on what economic growth "involves,"Mr. Triantissuggests
that he shares the conception of economic development apparently held by
the InternationalBank'smissionswhose critic he is.
The reports under review suggest throughoutthat in speaking of economic
developmentthe authorshave in mind a snapshotof a developed economy (the
United States) or at best a gap, or deficit, between developed and un(der)de-
veloped economy. The task the missions set themselves is only to recommend
how this gap may be bridged, or from the viewpoint of the underdeveloped
country,the deficit removed. To this purposethey suggest principallythat the
institutions and organizationalong with a little capital be transplantedfrom
the former to the latter countries.
No suggestion is made by the missions, nor by the reviewers, with the
notable exception of Kindleberger,2of economic development as a process of
economic growth in a developing economy. Nor would the reader suspect that
the United States also remains a developing economy, and that the adjust-
ment of Europe'seconomy to post-warworld conditionsconstitutesno less an
economic development.
Such a narrow perspective leads to unfortunate consequences. No con-
siderationis given to the many unansweredquestions arising from the mutual
2C. P. Kindleberger, review of the reports of the International Bank for Reconstruction
and Development on Cuba, Turkey, and Guatemala, Review of Econmics and Stztistics,
XXXIV,Nov., 1952.

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 Notes and Memoranda 241
and dynamicrelationshipbetween the division of labour and the extent of the
market;to the nature and relevance of increasingreturns which may or may
not lend supportto the theory of balanced growth;to the relationshipbetween
the Keynesian argument for diversificationof the economy and the classical
argumentof comparativeadvantage;or to their proper applicabilityto policy
formationin a developing economy.

"PROBLEMSOF ECONOMIC DEVELOPMENT":A REPLY

S. G. TIANIS
Universityof Toronto
A NUMBER of points in Mr. Frank's"Commentson 'Problemsof Economic De-
velopment'" require closer examination.
In his comments on population Mr. Frank does not seem to distinguishthe
relation between certain flows from the relation between certain stocks. He
notes that "it is precisely"in Turkey, Guatemala,and Nicaragua,"amongthe
seven [countries] that come under discussion, in which the labour:landratio
is the smallest."But such snapshots of the economy are very incomplete, for
there are many more than two types of productive resources. What is more
important,they tell us no more about the problems of economic development
than a snapshotof a living organismtells us about its prospects and problems
of growth. For, in the discussion of economic development, it is chiefly the
rates, timing, and interactionof various changes in the conditions of supply
of productive factors, demand for goods and services, and so on, that are
relevant. These changes constitute the composite process of economic de-
velopment or growth. Much of the post-war economic literature on the
problemsof less developed countrieshas failed to take note of this point. Yet,
the treatment"of economic developmentas a process of economic growth in a
developing economy," which, in his concluding paragraphs, Mr. Frank
finds lacking in the World Bank's reports, involves exactly a discussion in
terms of such changes-less in terms of "labour:landratios."The prospects of
development might be better for a country which has a different rate of
growth in population even though it had a higher 'labour:land ratio" than
Nicaragua, just as they are probably better for a six-year old child who at
present may be a few inches shorter than a twenty-five year old dwarf.
Mr. Frank notes that I appear "to share the assumption,"which he finds
underlying the reports, "that rapid population growth constitutes a handicap
for an economy anxiousto develop."But in this and one or two other parts of
his "Comments"Mr. Frank seems to ascribe to me views which I did not ex-
press, nor intend to imply. "Rapidpopulation growth"may or may not "con-
stitute a handicap."In the first place, it depends on the "definition"of growth
itself, and in the second, it depends on the relation of the rate and timing of
this flow to other changes.Therefore,the problem can be consideredonly with
reference to particular countries, not to any "economy anxious to develop."
Vol.XXI,no. 2, May,1955

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