Economic Structure and Performance PDF
Preview Economic Structure and Performance
Hollis Β. Chenery Economie Structure and Performance Essays in Honor of Hollis Β. Chenery Edited by Moshe Syrquin Research Center for Latin American Development Studies Bar-Ilan University Ramat-Gan, Israel Lance Taylor Massachusetts Institute of Technology Cambridge, Massachusetts Larry E. Westphal Development Research Department The World Bank Washington, D.C. 1984 ACADEMIC PRESS, INC. (Harcourt Brace Jovanovich, Publishers) Orlando San Diego New York London Toronto Montreal Sydney Tokyo COPYRIGHT © 1984, BY ACADEMIC PRESS, INC. ALL RIGHTS RESERVED. NO PART OF THIS PUBLICATION MAY BE REPRODUCED OR TRANSMITTED IN ANY FORM OR BY ANY MEANS, ELECTRONIC OR MECHANICAL, INCLUDING PHOTOCOPY, RECORDING, OR ANY INFORMATION STORAGE AND RETRIEVAL SYSTEM, WITHOUT PERMISSION IN WRITING FROM THE PUBLISHER. ACADEMIC PRESS, INC. Orlando, Florida 32887 United Kingdom Edition published by ACADEMIC PRESS, INC. (LONDON) LTD. 24/28 Oval Road, London NW1 7DX Library of Congress Cataloging in Publication Data Main entry under title: Economic structure and performance. Includes index. 1. Economic development—Addresses, essays, lectures. 2. Chenery, Hollis Burnley—Addresses, essays, lectures. I. Chenery, Hollis Burnley. II. Syrquin, Moshe. III. Taylor, Lance. IV. Westphal, Larry E. HD74.E25 1984 338.9 83-25 844 ISBN 0-12-680060-X (alk. paper) PRINTED IN THE UNITED STATES OF AMERICA 84 85 86 87 9 8 7 6 5 4 3 2 1 Contributors Numbers in parentheses indicate the pages on which the authors' contributions begin. Irma Adelman (45), Departments of Economics and Agricultural and Re- source Economics, University of California, Berkeley, California 94720 Edmar L. Bacha (263), Departmento de Economia, Pontificia Universi- dade Catolica, CEP 22453 Rio de Janeiro, Rio de Janeiro, Brazil Bela Balassa (317), The World Bank, Washington, D.C. 20433 J ere Behrman (295), Department of Economics, University of Pennsylva- nia, Philadelphia, Pennsylvania 19104 Clive Bell (451), The World Bank, Washington, D.C. 20433 Samuel Bowles (103), Economics Department, University of Massachu- setts, Amherst, Massachusetts 01003 Michael Bruno (363), Department of Economics, Hebrew University, Mt. Scopus, 91 905 Jerusalem, Israel Paul Clark (179), Department of Economics, Williams College, Williams- town, Massachusetts 01267 Jacques Cremer (543), Department of Economics, Virginia Polytechnic Institute and State University, Blacksburg, Virginia 24061 Carlos Diaz-Alejandro (341), Department of Economics, Yale University, New Haven, Connecticut 06520 Richard S. Eckaus (477), Department of Economics, Massachusetts Insti- tute of Technology, Cambridge, Massachusetts 02139 Albert Fishlow (235), Department of Economics, University of California, Berkeley, California 94720 Victor Gins burgh (429), Centre d'Economie Mathématique et d'Econo- metrie, Université Libre de Bruxelles, 1050 Bruxelles, Belgium John Gurley (115), Department of Economics, Stanford University, Stan- ford, California 94305 xiii xiv CONTRIBUTORS Anne O. Krueger (135), The World Bank, Washington, D.C. 20433 Shirley W. Y. Kuo (217), Department of Economics, National Taiwan University, Taipei, Taiwan, Republic of China Stephen R. Lewis, Jr. (157), Department of Economics, Williams College, Williamstown, Massachusetts 01267 Alan S. Manne (409), Department of Operations Research, Stanford Uni- versity, Stanford, California 94305 Edward S. Mason (3), Cambridge, Massachusetts Amr Mohie-Eldin (477), Department of Economic and Political Science, Faculty of Commerce, University of Kuwait, Kuwait Cynthia Taft Morris (45), Department of Economics, Smith College, Northampton, Massachusetts 01060 Paul V. Preckel (409), Department of Operations Research, Stanford Uni- versity, Stanford, California 94305 Gustav Ranis (23), Economic Growth Center, Yale University, New Ha- ven, Connecticut 06520 J0rn Ratts0 (493), Institute of Economics, University of Trondheim, Trondheim, Norway Sherman Robinson (429), Department of Agricultural and Resource Eco- nomics, University of California, Berkeley, California 94720 Raaj Kumar Sah (295), Department of Economics, University of Pennsyl- vania, Philadelphia, Pennsylvania 19104 Hire η Sarkar (493), National Council of Applied Economic Research, New Delhi 110002, India Dudley Seers1 (515), The Institute of Development Studies, University of Sussex, Brighton BN1 9RF, England Shuntaro Shishido (391), The University of Tsukuba, Sakura-mura, Ibaraki-ken, 305 Japan T. N. Srinivasan (451), International Institute for Applied Systems Analy- sis, 2361 Laxenburg, Austria Richard Stone (535), Cambridge, England Moshe Syrquin (75), Department of Economics, Bar-Ilan University, 52- 100 Ramat-Gan, Israel Lance Taylor (493), Massachusetts Institute of Technology, Cambridge, Massachusetts 02139 Jan Tinbergen (205), Den Haag, The Netherlands Jean Waelbroeck (281), Centre d'Economie Mathématique et d'Econo- metrie, Université Libre de Bruxelles, 1050 Bruxelles, Belgium Larry Ε. Westphal (543), Development Research Department, The World Bank, Washington, D.C. 20433 1 Deceased. Preface This preface briefly reviews the work of Hollis Chenery and indicates how his major concerns are reflected in the book's organization and content. Hollis's name is associated with many concepts and areas in economics. Included among them are: • Engineering and CES production functions. • Investment criteria and shadow pricing. • Input-output analysis. • Programming models for development planning. • Economies of scale and the timing of investment. • Dynamic comparative advantage. • Patterns of development and sources of growth. • International economic trends and shocks. • Income distribution and development strategies. The integrating element in Hollis's work for the past quarter century has been a structural approach to problems of economic policy. In this ap- proach, structure imposes constraints on economic performance, but it may also contribute to growth. To explore the implications of initial con- ditions and resource constraints for medium-term planning, Hollis pio- neered the application of multisectoral investment programming models in the 1950s. He later developed the two-gap model and its subsequent refinements to focus attention on constraints central to foreign assistance policy and its effectiveness. Constraints on national performance can be traced to external factors, production relationships, behavioral modes, and resource endowments, including size of the economy. Over his career Hollis has investigated XV xvi PREFACE various aspects of each of these underlying elements. But much of his work reflects a particular concern with production relationships, specifi- cally with factor substitution, intermediate input use, and economies of scale. His efforts to model factor substitution anticipated the recent inno- vation of computable general equilibrium models. His analysis of econo- mies of scale, using illustrative models that emphasize the tradeoffs be- tween the scale and the timing of investment, spawned the application of more complex models in industrial investment analysis. If all economies face the same external factors, have identical produc- tion relationships, and are subject to similar behavioral modes, and if structural change is itself constrained, a natural question is whether the patterns of development of different economies should be congruent, once allowance is made for resource endowment. Motivated by this rea- soning, Hollis has devoted much of his research to estimating develop- ment patterns. The type of change of most concern to him is the apparent tendency for countries to converge toward similar levels of industrializa- tion at relatively high levels of per capita income, whatever their initial conditions. But Hollis has not been blind to possible incongruencies over the course of the "transition" from a traditional to a modern economic sys- tem. In analyzing the sources of structural change, he has focused on the role of trade and resource endowments in differentiating among strategies of industrialization. This has led him to devote as much attention to alternative paths and sequencing as to the uniformities in the process. Several themes underlie Hollis's work: a sectoral focus on industry; a continuing emphasis on the balance of payments as a central constraint on development performance; and, more recently, an explicit concern with issues of income distribution and equity. Moreover, throughout his ca- reer, Hollis has been committed to practical involvement in development policy. This has been expressed in work on specific economies as well as in his work for bilateral and multilateral aid agencies. All these elements came together in his activity at the World Bank, especially in his analyses of international economic trends and shocks in a perspective of global interactions, as typified by the series of World Development Reports that began under his direction in 1978. The papers in this book generally cut across one or several of the underlying themes in Hollis's work. Somewhat arbitrarily we have grouped them in four sections: structure, strategy, adjustment, and models. Hollis views economic development as a set of changes in the structure of an economy, changes that are required for an economy's continued growth and that define the transition from a traditional economic system PREFACE xvii to a modern one. The first three papers look at the patterns of structural change and their relation to growth. Mason argues that it is necessary, in linking structure and performance, to go beyond the universal factors underlying those patterns. It is also necessary to consider the objectives, measures, and implementation of policy, as well as administrative capabilities and cultural characteristics. Ranis compares Hollis's econometric analysis of development patterns with the historical analyses of Fei-Ranis and others—and suggests that the two approaches complement each other and have been converging over time. Adelman and Morris apply the Chenery-Syrquin approach to nine- teenth-century development, expanding it to include several processes deemed important for historical analysis. The study highlights the value of the approach, when suitably augmented, to periods other than that after the Second World War. A recurring theme in Hollis's work is the persistence of disequilibrium in segments of the economy, which makes disaggregation important when analyzing growth. With disequilibrium, structural change emerges as an essential component in accounting for growth. These are the themes of the next three papers. Syrquin focuses on the contribution of intersectoral resource allocation to the growth of output and aggregate factor productivity, when factor returns are not instantaneously equalized across sectors. Bowles presents a conceptual framework for analyzing class conflict and alliances. He also urges disaggregating, although not by sectors but by classes, and focuses on the possible distributional consequences of economic change. Gurley attempts to define a transition toward communism in two di- mensions—relations of production and level of output. His discussion of alternative ways (paths) to effect such a transformation links this section with the next one on strategy. The papers in the second section deal with strategies related to trade, equity, and liberalization of controlled economies. Krueger takes off from Hollis's celebrated paper on "Comparative Ad- vantage and Development Policy" and goes on to argue that an outward- looking strategy leads to superior performance because it can better capi- talize on dynamic factors stressed by Hollis: scale economies, learning, and specialization, plus greater competition and healthier policy dy- namics. Lewis argues that a specific pattern of development can be identified for mineral-rich countries. It resembles Hollis's pattern of primary speciali- zation in small countries, but only somewhat. xviii PREFACE Clark builds a case that the most practical strategy for liberalizing a heavily controlled economy is a gradual, step-by-step liberalization. He uses his experience in Egypt to offer some guidelines for deciding on the sequence of liberalizing policies. Incomes policies as a tool to combat inflation is the subject of the short paper by Tinbergen. He suggests that decisions on wage setting should incorporate considerations about "social marginal productivity." Kuo shows from the experience of Taiwan that rapid industrialization and urbanization can go hand in hand with a more equitable distribution of income. Fishlow restates the structuralist case for integration in a two-gap con- text, incorporating debt into the analysis. He concludes that the disap- pointment with integration efforts in Latin America is partially the result of exaggerated promises, premised on a structuralist perception of the importance of the balance of payments constraint. His contribution links the sections on strategy and adjustment. Structural imbalances and external shocks are not instantaneously re- solved by automatic self-correcting mechanisms. They are dealt with by adjustment policies and mechanisms, which figure prominently in Hollis's work. The two-gap model increased understanding of foreign assistance policy and its effectiveness under various constraints. The shocks and instability of the last decade turned Hollis's attention to problems of "restructuring" the international economy and "reallocation" of eco- nomic activity, adding to his continuing interest on structural change in semi-industrialized countries. The papers in the third section address these issues. Bacha and Waelbroek deal with two-gap models. Bacha reinterprets the two gaps in terms of trade theorists' internal and external balance, and discusses adjustments to equalize the gaps. Waelbroeck compares the implications about the impact of aid on growth in a simple two-gap model and in a simple version of the labor-income-floor model (a two-regime system with an infinitely elastic labor supply up to full employment). Behrman and Sah ask whether equity plays any role in donors' alloca- tions of aid across countries. Their estimates suggest that donor countries are inequality-averse and that aid flows are to some extent directed in an egalitarian direction. Balassa and Diaz-Alejandro deal with policy responses to external shocks and subsequent performance in groups of countries. Balassa con- cludes from Africa's experience in the early 1970s that the more inward- oriented the regime, and the greater the degree of state control, the less satisfactory the development performance measured by the growth of PREFACE xix GNP. Diaz-Alejandro looks at supply shortages and other disturbances generated by the international economy during the 1940s in Latin Amer- ica, contrasting their effects and policy responses to them with the experi- ence of the preceding decade. The last two papers in this section—by Bruno and Shishido—go be- yond a region or a group of selected countries, and consider global inter- dependency. Bruno compares the differential performance of high-in- come and middle-income countries after the oil shock. He explains the fall in interest rates after the first oil shock, which benefited middle-income countries that relied on foreign debt during the late 1970s. Shishido presents a global multisectoral econometric model for short-term and medium-term analysis, capable of considering key commodities in some detail. Hollis's work on multisectoral planning models and his efforts to model factor substitution greatly influenced the development of price endoge- nous or computable general equilibrium models (CGEs). Five of the pa- pers in the fourth section analyze or apply CGE models. Manne and Preckel set up a two-region model to analyze North-South trade in the context of capital flows prompted by different profit rates. They draw conclusions about the international effects of changes in capi- tal flows. Ginsburgh and Robinson address methodological issues. They examine the relationship between programming-planning models that involve economywide optimization (as in various studies by Hollis) and CGE models that simulate interdependent markets among maximizing agents. This paper is complemented by the rather critical evaluation of Bell and Srinivasan, who argue that CGE models are as yet inadequate tools of analysis for many policy issues. The next two papers present country applications of CGE models to specific problems. Eckaus and Mohie-Eldin study the effects of changes in subsidy policies in Egypt, addressing issues of equity and resource allocation. Taylor, Sarkar, and Ratts0 report on a CGE macro model applied to India, focusing on differing price and quantity adjustment mechanisms by sector. Seers offers a new tool of social analysis as a partial remedy to the deficiencies of income measures of human welfare: the study of active life profiles for different social groups. Stone, in an appendix to the paper by Seers, shows how life profiles and transition matrices are related as meth- ods for organizing sociodemographic data. Finally, Westphal and Cremer elaborate on Hollis's analysis of the allocative consequences of economies of scale in "Interdependence of
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