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American Economic Association

The Structuralist Approach to Development Policy

Author(s): Hollis B. Chenery
Source: The American Economic Review, Vol. 65, No. 2, Papers and Proceedings of the Eighty-
seventh Annual Meeting of the American Economic Association (May, 1975), pp. 310-316
Published by: American Economic Association
Stable URL:
Accessed: 09/06/2010 05:58

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American Economic Review.
The Structuralist Approach to
Development Policy

Several approaches to the analysis of de- importance of structural rigidities has been
veloping economies have evolved over the reemphasized by several new phenomena:
past twenty-five years. From a method- the limited ability of economies to absorb
ological standpoint, they can be grouped the growing labor force, the worsening of
under three main headings: neoclassical, the income distribution in several develop-
neo-Marxist, and structuralist. The first ing countries, and-most recently-the
two attempt to adapt systems of thought disruption to world trade caused by in-
that were initially formulated for the study creased oil and food prices, which will re-
of industrial societies to the less developed quire a substantial adjustment in produc-
countries. The structuralist approach at- tive structures. In short, development
tempts to identify specific rigidities, lags, policy again seems to be constrained by a
and other characteristics of the structure number of structural factors that require
of developing economies that affect eco- a more explicit analysis of the possibilities
nomic adjustments and the choice of de- for short-term adjustment and for longer
velopment policy. term changes in the economic structure
The initial set of structural hypotheses itself.
was formulated in the 1950's by writers In this brief survey, I will try to present
such as Paul Rosenstein-Rodan, Ragnar an overview of structuralist methodology
Nurkse, W. Arthur Lewis, Paul Prebisch, and to compare some of its policy conclu-
Hans Singer, and Gunnar Myrdal. They sions to those of the other main ap-
explain phenomena such as balance of pay- proaches. Since there is not yet a unified
ments disequilibrium, unemployment, and theoretical framework for structural analy-
worsening income distribution on the basis sis, I will select formulations that seem to
of particular properties of demand and provide a promising basis for future
production functions and other specifica- research.
tions of economic behavior. A common
I. Methodology
theme in most of this work is the failure of
the equilibrating mechanisms of the price The methodology of structural analysis
system to produce steady growth or a de- has evolved over the past twenty-five years
sirable distribution of income. from a set of rather intuitive hypotheses to
The success of a number of developing models of increasing empirical validity and
countries in accelerating their rates of analytical rigor. This evolution can be
growth in the 1960's casts some doubt on summarized in three stages: formulation of
the significance of the structural problems hypotheses, empirical testing, and the
that had been identified in the previous elaboration of more complete models. This
decade. However, in the past few years the sequence can be illustrated for two of the
basic elements of structuralist systems: the
* Vice President for Development Policy, World concept of a dual economy and the concept
Bank. I am indebted to Bela Balassa, Helen Hughes, of complementarity in demand, which
Graham Pyatt, and Wouter Tims for helpful comments. underlies theories of balanced growth.

The concept of a dual economy stems A. Powell provide some support for the
from the observation that development generalized version of Engels' law under-
takes place unevenly both within and be- lying the theory of balanced growth, since
tween sectors of an economy. Although they show most price elasticities to be less
this concept has had many different formu- than unity. Among the basic structuralist
lations, the most influential is that of assumptions listed, only the assumed in-
Lewis. He makes three basic assumptions elastic demand for exports needs to be
as to the structure of a developing econ- seriously qualified.
omy: (1) that technology can be divided The third stage of theoretical refinement
between capital-using (capitalist) and non- and policy application has proved more
capital-using (subsistence); (2) that the difficult. In the first place, it has been
labor supply is elastic at a conventional shown that the structural relations posited
wage; and (3) that saving is done largely are not sufficient to lead to some of the
by the recipients of nonwage income policy conclusions suggested in the original
(capitalists). These assumptions, or vari- formulations. As in the case of the Keynes-
ants of them, have been incorporated in ian assumptions, a more complete formu-
models that explain the acceleration of lation of models that can be statistically
growth, the allocation of the labor force, estimated has proved necessary in order to
and changes in the distribution of income. reach useful policy conclusions. Much cur-
The early formulations of concepts of rent work consists in developing a second
balanced growth by Nurkse and Rosen- generation of models in the structuralist
stein-Rodan also relied on a simple set of tradition that are designed for statistical
structural hypotheses: (1) a generalized application in individual countries, rather
version of Engels' law, specifying that con- than for deriving broad generalizations.
sumer demand for food, clothing, shelter, The structuralist approach has had a
and other major commodity groups is substantial impact on both internal and
mainly a function of income and little af- external development policies. In both in-
fected by relative prices; (2) a similar as- stances it focuses on identifying the con-
sumption as to the limited price elasticity sequences of various kinds of structural
of demand for exports; and (3) in Rosen- disequilibria. In domestic policy, the prin-
stein-Rodan's formulation, the importance cipal phenomena examined have been the
of economies of scale in overhead facilities effects of surplus labor on resource alloca-
and basic industries. The first two assump- tion and more recently the interpretation
tions make it necessary to expand output of worsening income distribution as result-
and allocate investment in close relation to ing from a set of disequilibrium conditions.
the pattern of domestic demand. They also In international policy, analysis has fo-
provide an explanation for structural dis- cused on the nature of structural disequi-
equilibrium and slow growth in countries librium in the balance of payments and its
that fail to do so. effect on trade and aid policies. The follow-
Both sets of assumptions have in general ing sections examine some of the relation-
stood up well to subsequent empirical ships between the methodology employed
tests. The acceleration of population and the policy conclusions reached in these
growth has probably made the surplus two areas.
labor assumption more generally valid to-
day than when it was initially formulated II. Internal Development Policy
for underdeveloped countries. Econometric Unlike the neoclassical assumptions, the
tests by R. Weisskoff and C. Lluch and structuralist alternatives do not lead auto-

matically to policy conclusions. To pro- to expand agriculture at a rate that is

duce such conclusions, they must also be largely determined by the income elasticity
embodied in an explicit general equilibrium of domestic demand for foodstuffs because
framework. For this purpose, most ana- of the limited possibilities of expanding
lysts have used one of two simple models: nonagricultural exports to offset a short-
either a neoclassical model with particular fall. Failure to meet this condition has re-
structural relations added or some version tarded growth in a number of countries.
of a linear Leontief input-output model, This conclusion does not apply when in-
which excludes most forms of substitution. dustry is disaggregated to individual sec-
The neoclassical framework minimizes the tors such as steel or fertilizer, however, in
effects of the specific rigidities in the eco- which the optimal investment allocation to
nomic system, while the input-output sys- sectors having economies of scale is char-
tem tends to exaggerate them. acterized by the alternating pattern of ex-
Most elaborations of the dual economy pansion of production and imports de-
and surplus labor concepts have been scribed by T. Scitovsky and by Chenery
made in a two-sector neoclassical system, and L. Westphal.
as in the work of J. C. Fei and G. Ranis, The elaboration of structuralist hypoth-
L. Lefeber, and A. C. Kelley, J. G. Wil- eses in planning models has also focused
liamson and R. J. Cheetham. One policy attention on the value of flexibility in
result from this type of model is to deter- adapting resource allocation to changing
mine the shadow price of labor, which can circumstances. This problem does not arise
then be used in project evaluation and in in the neoclassical system, which assumes
establishing the need for labor subsidies. perfect foresight and a high degree of sub-
Empirical applications of these models stitutability. When these assumptions are
have been limited by the lack of data on abandoned, flexibility can be provided by
different aspects of dualism. It will require increased exports or capital inflows and by
some expansion of the two-sector frame- planning some excess capacity in physical
work before statistical estimation of the and human capital stocks. Although a f or-
underlying structural relations becomes mal treatment of the benefits of flexibility
feasible. and the ways of achieving it has not been
The balanced growth hypotheses have developed, this is an important problem
been widely used in empirical analysis and for developing countries which cannot be
are usually incorporated in input-output analysed in the neoclassical system.
models which include foreign trade. These The revival of interest in income distri-
are applied to the formulation and testing bution has added a new dimension to
of development plans, as illustrated in sur- structural analysis. The traditional ap-
veys by Chenery (1971) and A. Manne. proach focuses on the division between
Apart from its use in country planning, wage and nonwage income and is ill suited
this type of model can also be used to de- to developing countries, in which modern
duce more general propositions through sector wage earners are in the middle-
systematically varying the structural pa- income groups. Recent studies by M. S.
rameters and determining a set of solutions Ahluwalia have brought out the fact that
based on either simulation or optimization. the bulk of the poorest groups in develop-
This form of sensitivity analysis lends ing countries are self-employed and largely
considerable support to some of the con- rural. Their incomes depend more on the
clusions of balanced growth theorists. For availability of land and capital and access
example, it is necessary in larger countries to public facilities than on wages. Since

each of the main poverty groups-small limit economic adjustments requires an

farmers, landless laborers, urban self- analytical framework in which external
employed-has a different set of produc- policy is more closely linked to domestic
tive possibilities and constraints, a new resource allocation than does the neo-
form of structural analysis based on identi- classical view, which minimizes these re-
fication of these groups is necessary for strictions. Attempts to formalize these re-
distribution-oriented policies. lationships started from simple two-gap
This recognition of the importance of models, which incorporate explicit limits
asset distribution does not necessarily lead on the rate of increase of domestic saving,
to the Marxist conclusion that the redis- investment, and exports. These models
tribution of existing assets is the only alter- were elaborated by including optimizing
native. Measures to redistribute incre- procedures and shadow prices, the dis-
ments in income and new asset formation aggregation of productive sectors, and
are more likely to be acceptable to the more explicit treatment of structural
majority of the population and less dis- change over time, as in the work of
ruptive of development in most countries. Chenery and A. MacEwan, M. Bruno, and
Development strategies based on this S. D. Tendulkar. Experiments with these
approach are elaborated by Ahluwalia and types of models in a number of countries
Chenery. The neo-Marxist policy recom- have led to several general conclusions as
mendations suffer from the same defects to development analysis and policy, the
as the neoclassical in that they are implicit most significant of which are: (1) the en-
in the initial assumptions rather than being hanced value of increased exports and
derived from an analysis based on em- capital inflows in bottleneck situations, in
pirical estimates of the underlying struc- which the trade limitation is more restric-
tural relations. tive than supplies of capital and skilled
labor; (2) a restatement of the empirical
III. External Policy basis for assessing comparative advantage
The conflict among the three analytical over time in relation to the factors limiting
approaches is perhaps most acute in the development; and (3) clarification of the
area of external policy. The neoclassical relation between internal and external con-
approach tends to exaggerate the benefits straints in the evaluation of individual in-
of trade in an open economy when it does vestment projects.
not explicitly consider the effects of un- During the 1960's a number of countries
certain export prices and the difficulties of progressed from an initial strategy of im-
shifting resources to meet changing market port substitution to the promotion of man-
conditions. Conversely, the neo-Marxist ufactured exports after they had developed
approach exaggerates the costs of "de- a sufficient industrial base to do so. As
pendence" on external trade and invest- countries achieve a more diversified pro-
ment and tends to ignore the benefits of ductive structure and reduce their concen-
the technological transfers that accompany tration on a few exports, the difference be-
them. The early structuralist views have tween the neoclassical and structural pre-
also proved to be excessively pessimistic as scriptions diminishes because some of the
to the possibilities and benefits of non- constraints that had previously limited
traditional exports of manufactures and growth are no longer significant. An assess-
services. ment of the experience of some of the in-
The structuralist concept of develop- dustrializing countries that have made this
ment as characterized by rigidities that transition-Taiwan, Israel, Korea, Brazil,

Mexico-suggests that earlier conclusions and Brazil, which appear to be able to ab-
as to the high cost of the initial stage of sorb large increases in import costs through
import substitution need to be reexamined a combination of increased exports and
in light of the subsequent ability of the borrowing, while still maintaining sub-
country to shift to manufactured exports stantial rates of growth. Conversely, the
and break out of the phase of trade countries most severely affected by the
limited development. This evaluation sug- rise in oil and food prices are those which
gests that the dichotomy between inward- are dependent on primary exports, whose
oriented and outward-oriented policies has prices kept up with world inflation for only
perhaps been overdrawn, and that these a brief period, and which do not have the
policies can be more usefully viewed as flexibility to shift readily to other exports.
sequential elements of a strategy designed Unless oil prices are drastically reduced
to bring about changes in the structure of (which seems unlikely), substantial in-
both production and trade. creases in capital flows to these countries
The basic issues of the relations between will be needed over the next few years if
trade and growth have been reopened in a they are to sustain even moderate rates of
new form by the substantial changes in growth.
relative prices that have taken place over
the past two or three years. The main IV. Conclusions
beneficiaries have been the oil-producing The preceding discussion has illustrated
countries, which now have a structural the relations between theoretical premises
problem of unprecedented magnitude in and policy implications in several fields of
increasing their capacity to utilize their development. The simplifying assumptions
greatly increased export revenues. Most of of the models currently in use tend to
the rest of the world has the opposite prob- exaggerate the differences between neo-
lem of adjusting its economic structure- classical and structuralist prescriptions. As
through import substitution, increased ex- statistically determined relations replace
ports, and redirecting trade-so as to ac- a priori hypotheses, it is predictable that
commodate a substantial worsening in its these differences will be reduced. A similar
terms of trade. Not only has world income process can be hoped for when neo-
distribution been made worse by the pres- Marxist theorists turn their attention to
ent and prospective reduction in growth of verifying their hypotheses.
the poorest countries, but within these Although better knowledge of elasticities
countries the policies to improve income of substitution in demand and production
distribution are also being weakened. For would do quite a bit to reduce the con-
most developing countries, increased im- flicts in policy guidance, several real differ-
port prices mean a return to a condition of ences in basic concepts remain. Neoclassi-
a dominant trade gap and large capital in- cal policy consists essentially in removing
flows for the next few years. They need to impediments to the functioning of markets
give highest priority to reallocating re- so as to make the real world as much like
sources so as to expand exports and gradu- the abstract model as possible. However,
ally reduce capital inflows over a reason- it will never be possible to achieve perfect
able period. knowledge or instantaneous adjustment
This shock to the system of world trade to market signals. It is therefore necessary
has emphasized the advantages of the more to incorporate these "imperfections" into
flexible economies, such as Taiwan, Korea, the model itself. Once this has been done,

it will become possible to take account of and H. Chenery, "A Model of Dis-
the existence of internal or external dis- tribution and Growth," in H. Chenery et
equilibria and to devise more realistic poli- al., Redistribution with Growth, London
cies to cope with them. In the theoretical 1974.
M. Bruno, "Optimal Patterns of Trade and
literature, these policies are misleadingly
Development," Rev. Econ. Statist., Nov.
referred to as "second best" in relation to
1967, 49, 545-54.
the neoclassical model. It would be more H. Chenery, ed., Studies in Development
accurate to characterize the model itself as Planning, Cambridge, Mass. 1971.
overly simple and "first best" policies and A. MacEwan, "Optimal Patterns
as simply unattainable. More attention of Growth and Aid: The Case of Paki-
should be given to improving the realism stan," in I. Adelman and E. Thorbecke,
of basically neoclassical models instead of eds., The Theory and Practice of Eco-
discarding them in favor of equally over- nomic Development, Baltimore 1966.
simplified structuralist formulations. and L. Westphal, "Economies of
In minimizing or ignoring the advan- Scale and Investment Over Time," in J.
tages of market adjustments, structuralist Margolis, ed., Public Economics, London
(and Marxist) policy prescriptions usually 1969.
J. C. Fei and G. Ranis, Development of the
put too much weight on the limited ad-
Labor Surplus Economy, Homewood 1964.
ministrative apparatus of developing coun- A. Hirschman, The Strategy of Economic
tries. As A. Hirschman has stressed, this is Development, New Haven 1958.
one of the main limitations to develop- A. C. Kelley, J. G. Williamson and R. J.
ment; it should be allowed for by not seek- Cheetham, Dualistic Economic Develop-
ing too much fine tuning of development ment, Chicago 1972.
policy. Difficulties in implementing a com- L. Lefeber, "Planning in a Surplus Labor
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simpler program that can be more readily W. A. Lewis, "Economic Development with
carried out. Unlimited Supplies of Labor," Manchester
Finally, it must be recognized that the School, May 1954, 22, 132-91.
task of development has been made much C. Lluch and A. Powell, International Com-
more difficult for most countries by the re- parisons of Expenditure and Saving Pat-
cent changes in the world economy. Vir- terns, Int. Bank for Recon. and Dev., Res.
Cent., dis. pap. no. 2, 1973.
tually every country is currently suffering
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policy to distributional considerations, this veloped Regions, London 1957.
cannot be achieved without giving equal R. Nurkse, Problems of Capital Formation in
priority to adjustments in external trade Underdeveloped Countries, Oxford 1953.
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