HLA MYINT 105 Neoclassical Development Analysis: Its Strengths and Limitations 107 Comment Sir Alec Cairn Cross 137 Comment Gustav Ranis 144
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Public Disclosure Authorized pi9neers In Devero ment Public Disclosure Authorized Second Theodore W. Schultz Gottfried Haberler HlaMyint Arnold C. Harberger Ceiso Furtado Public Disclosure Authorized Gerald M. Meier, editor PUBLISHED FOR THE WORLD BANK OXFORD UNIVERSITY PRESS Public Disclosure Authorized Oxford University Press NEW YORK OXFORD LONDON GLASGOW TORONTO MELBOURNE WELLINGTON HONG KONG TOKYO KUALA LUMPUR SINGAPORE JAKARTA DELHI BOMBAY CALCUTTA MADRAS KARACHI NAIROBI DAR ES SALAAM CAPE TOWN © 1987 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Manufactured in the United States of America. First printing January 1987 The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. Library of Congress Cataloging-in-Publication Data Pioneers in development. Second series. Includes index. 1. Economic development. I. Schultz, Theodore William, 1902 II. Meier, Gerald M. HD74.P56 1987 338.9 86-23511 ISBN 0-19-520542-1 Contents Preface vii Introduction On Getting Policies Right Gerald M. Meier 3 Pioneers THEODORE W. SCHULTZ 15 Tensions between Economics and Politics in Dealing with Agriculture 17 Comment Nurul Islam 39 GOTTFRIED HABERLER 49 Liberal and Illiberal Development Policy 51 Comment Max Corden 84 Comment Ronald Findlay 92 HLA MYINT 105 Neoclassical Development Analysis: Its Strengths and Limitations 107 Comment Sir Alec Cairn cross 137 Comment Gustav Ranis 144 ARNOLD C. HARBERGER 151 Reflections on Social Project Evaluation 153 Comment Partha Dasgupta 189 Comment Deepak Lal 193 v vi CONTENTS CELSO FURTADO 203 Underdevelopment: To Conform or Reform 205 Comment Vittorio Corbo 228 INDEX 237 Preface THE FIRST VOLUME in this Pioneers series focused on the initial interest in economic development during the 1940s and 1950s. This volume examines the changing contours of the subject during the 1960s and 1970s-a period known for the "resurgence of neoclassical eco nomics." The World Bank invited five pioneers in the subject to undertake a retrospective view of their specialty: Nobel Laureate T. W. Schultz, agriculture; Gottfried Haberler, international trade; Hla Myint, trade and development; Arnold Harberger, project appraisal; and Celso Furtado, structuralism and dependency. Each was asked to revisit his own contribution and to write a substantive review of his special area, interpreting its evolution during the 1960s and 1970s and emphasiz ing its policy implications and impact on development economists' thinking. Other prominent economists in the respective fields were asked to serve as commentators: Sir Alec Cairncross, Vittorio Corbo, Max Corden, Partha Dasgupta, Ronald Findlay, Nurul Islam, Deepak Lal, and Gustav Ranis. The pioneers and commentators offered oral presentations to World Bank audiences, and their contributions here-printed in the order in which they were first given-retain this informal character. Together, they provide a unique intellectual history of what is the world's most pressing economic problem. By looking back, they also lead one to ask in what directions future pioneering in the subject might lead. An expression of gratitude is due to the many members of the World Bank who offered their services in the arrangement of the lecture series at the Bank and in the preparation of this book. Special thanks must be given to F. Leslie C. H. Helmers for overseeing the details of the entire endeavor. The support of Jose Botafogo G., Shahid Husain, Anne O. Krueger, and Christopher R. Willoughby was much appreciated. For vii viii PREFACE their careful attention in processing the typescript, I am grateful to the editorial staff of the World Bank and to Richard J. Carroll of the Economic Development Institute. G.M.M. Introduction On Getting Policies Right Gerald M. Meier IN THE EVOLUTION of development economics over the past four dec ades, the two outstanding features have been the resurgence of neo classical analysis and, as a derivative, the prescription of appropriate policies for development. The essays in this volume focus on these features and indicate how they have been most effective in analyzing agricultural and trade policies and in project evaluation. As a set, the papers provide considerable insight into how development thought has evolved in response to the development experience since the 1950s. Together with the preceding Pioneers in Development,l this volume allows a definitive retrospective assessment of development thought and policymaking by economists who played a major role in the evolu tion of the subject. And in sharing their retrospection, the reader may gain greater awareness of where development economics should go from here. In the first essay, Nobel Laureate T. W. Schultz lays down a major theme of the volume by emphasizing the lessons from standard neoclas sical economic theory in order to counter "misleading ideas, false concepts, and invalid theoretical fragments." Focusing on agriculture, Schultz claims that it has been the "victim of more than its share of bad economics." Industrialization has been promoted to the detriment of agriculture, agriculture has been squeezed, disguised unemployment has been accepted, the farmers' responsiveness to incentives has been ignored, and the declining economic importance of land has not been perceived. As a result of inadequate economic analysis, there have been economic policy mistakes, especially in distorting agricultural incentives. Schultz" also criticizes the "new development economics" for over burdening the public sector with economic functions that governments 1. Gerald M. Meier and Dudley Seers, eds., Pioneers in Development (New York: Oxford University Press, 1984). 3 4 GERALD M. MEIER are incapable of performing efficiently. Correlated with this argument is Schultz's criticism that the new development economics wrongly presumed that standard economic theory is inadequate for analyzing the economic behavior of people in low-income countries and that a different economic theory is required. To improve the performance of agriculture, Schultz emphasizes the need for economic opportunities that are rewarding to farmers, proper emphasis on investment in human capital, and recognition of the eco nomic value of agricultural research. It should also be realized that modernization is inherently a disequilibrium process and that conse quently entrepreneurial actions are important in dealing with dis equilibria. Schultz would now give more weight than in the past to the economic function of international trade in promoting specialization and in getting rid of price distortions within countries. The subject of international trade receives concentrated treatment in Gottfried Haberler's paper. In a comprehensive fashion, Haberler emphasizes the contribution of trade to development. The trade theory that he elaborates is founded in neoclassical economics, and he too stresses the value of neoclassical analysis. Although he believes that Keynesian economics had prepared the way for a belief in "duoeco nomics," Haberler submits that there is really only a "monoeco nomics" and that development economics and development policy are "part and parcel of growth policy": there is "only one economics, neoclassical economics in the broad sense, including the theory of international economic policy." According to Haberler, development economics initially acquired a dirigiste, anti-free market, anticapitalist bias as a result of the decline of liberalism and misconceptions of the Great Depression. Haberler forcefully criticizes the earlier views of development economists who believed in disguised unemployment, secular deterioration of the terms of trade, pernicious demonstration effects, and export pessimism, and who attributed only a minor role to the market price system while advocating "balanced growth," a "big push," and programming of the economy. To Haberler, the neoclassi cal paradigm explains, and is vindicated by, the success stories of East and Southeast Asia. Also considering the potential for development through trade, Hla Myint examines the strength and limitations of neoclassical analysis in relation to international trade theories and policies. Although he accepts the neoclassicists' free market and free trade prescriptions, Myint does not derive these recommendations from formal neoclassical economic theory. As a framework for studying economic development, neoclassical trade theory has not been able to explain why the export oriented countries have grown as rapidly as they have. Instead of the "perfect competition" model used in standard trade theory, Myint ON GETTING POLICIES RIGHT 5 utilizes a "dualism" model of the domestic economy of the developing country. Such a model goes beyond the neoclassical concern with the removal of trade distortions and the achievement of direct static gains from free trade and includes factors outside the formal neoclassical theory. Beyond the distortions introduced by governmental policies that artificially encourage industrialization is the "substratum of 'natu ral dualism'." Even if all policy-induced distortions could be