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Issues in Development Economics/
Abba P. Lerner and His Critics
Volume 47 No. 2 (Summer 1980)

Arien Mack, Editor
Harvey Leibenstein, Guest Editor


Introduction   
Table of Contents Notes on Contributors Ordering information


Hans Staudinger 1889-1980

On February 25th of this year, a few months after his 90th birthday, the Nestor and for three decades the guardian spirit of the Graduate Faculty of the New School succumbed to a long illness. It is never easy to present an eminent personality and his achievements in the limited space and the pale words of an obituary. In the case of Hans Staudinger it is outright impossible.

Should one speak of the scholar who as a young man startled social scientists and politicians alike with his novel views of the structure and spirit of the labor movement, as he did in Individuum und Gemeinschaft, his doctoral dissertation? Or who worked almost to his dying day on his memoirs, a book that in fact is a political and economic history of the Weimar Republic as seen by one of its protagonists?


In thus calling attention to his political life I also point to quite another field of activity in which this uniquely versatile mind distinguished himself. From 1917 to 1932 he was a civil servant in the Weimar government, rising from a modest position in the Ministry of Food to the rank of Secretary of State in the Prussian Ministry of Commerce. It was there that his organizational talents came to full fruition in the restructuring of large sections of the German economy. Of lasting importance was the establishment of a comprehensive network of electrical power that has survived the Nazi regime and the Second World War. What Staudinger demonstrated in this undertaking was the fact that public enterprises, far from deadening initiative, can be pioneers in technical and social progress and yet yield good dividends--a thesis he himself elaborated in his widely known book Der Staat als Unternehmer.


Or, to turn another leaf, should one speak of the academic administrator as which he is perhaps best known in this country? During a decade of permanent deanship in the Graduate Faculty he not only guided its transformation from a University in Exile to a genuinely American institution, but more than once preserved its existence by his exceptional gift for rallying financial supporters.


But no image would be accurate that did not bear the features of a passionate teacher, equally devoted to his topics and to his students. Perhaps the enthusiastic response to his teaching was due to the fact that, contrary to a tradition of academic inbreeding where the professorial son succeeds to the professorial father or even grandfather, here was a man whose political and economic ideas were pervaded with practical experience.


And yet how misleading it would be to cram Hans Staudinger into the confines of professional activity, scholarly, pedagogical or administrative. From a feeling of deep responsibility to his fellow victims of Nazi persecution he and his late wife Else founded, first, Selfhelp for Emigres from Central Europe and, later, the American Council for Emigres in the Professions, both of them flourishing to this day. Equally characteristic of Staudinger was that he never forgot that there was also another Germany. He made it his business to initiate political, economic, and cultural relations with the new Federal Republic, an endeavor to the success of which the Heuss Chair in the Graduate Faculty and the New York German Theater testify. His so-far-unfulfilled wish was to found at the New School an American-German Research Institute for the study of intercontinental relations.


I may confine myself to these incidental remarks because there is hope that the full story will soon be generally available when his memoirs will be published. But what I, blessed with his friendship for more than sixty years, cannot omit is a word about Hans the person. Mindful of the immense variety of his activities, his engagement in more than one civilization, his absorption not only in politics and economics but also in nature and art, one may well wonder what was the underlying impulse that unified those diverse strands.

To find an answer we must go back to his early years and to the influences that molded his character. He was born into an exceptional family, with a father who was a noted social philosopher and an early champion of the rising cooperative movement--with an elder brother who won a Nobel Prize--with a sister who was a renowned sculptress. Listening to him speaking about those days one sensed a spiritual atmosphere in which devotion to the good and the beautiful was more than a pious pretense. However, what ultimately placed its stamp on Staudinger's personality was the German youth movement, of which he became one of the most popular leaders.

It is significant that this youth rebellion that preceded the First World War, though opposing the philistine spirit of middle-class society, by no means repudiated the values of traditional ethics. It protested against the cant that made people forget during the week the lesson of the Sunday sermon.


Even those who knew Hans only superficially detected this idealistic heritage. It made him an active socialist though never a Marxist revolutionary. It made him the model civil servant totally devoted to the public interest. It made him laugh at Goering's invitation to join the Hitler regime, but it also kept him calm under the beatings of his jailers. Above all, it inspired his unbreakable optimism in the search for solutions, when others had long resigned themselves to letting the problems take care of themselves.


On the occasion of his 80th birthday I quoted a passage from Schiller's Don Carlos in which the Queen sends her final message to the departing Prince: "Tell him that he should cherish the dreams of his youth when he will be a man." That Hans did cherish those dreams gave him the courage to persevere in adversity. That he could make so many of them come true was the ultimate reward of a long and happy life.


Adolph Lowe


Issues in Development Economics: An Introduction

Development economics as an academic discipline appeared after World War 11. Of course, it existed earlier, in a sense, since the writings of some of the nineteenth-century classical economists are very much concerned with aspects of development--a long-run problem. But during the last third of the nineteenth century economics changed its focus. The intellectual frontier shifted to the problem of price determination--a short-run problem. This interest persists into the twentieth century as one of the central elements of economic analysis. Concern with unemployment in the 1920s and early 1930s led to the development of macroeconomic ideas with no special concern for the problem of growth. Thus no body of knowledge was developed which was of special use in considering long-run economic-development issues.

A case could be made for the position that when economists shifted their concern to development their chest of analytical tools was not specifically suited, for the most part, to that particular set of problems. In the first place, the tools available were mostly designed for static modes of analysis (i.e., price theory and Keynesian theory). In addition, the problems for which they had been fashioned, the explanations of price and Keynesian unemployment, were not really the central problems of the less-developed countries. However, this view probably overstates the case since, it could be argued, there is nothing unique about the problems of developing countries, and development economics is nothing more than the application of economic analysis to countries with low per-capita incomes. Regardless of how we feel about the nature of these arguments, one thing is certain: the intellectual tools that were applied were, for the most part, the tools that were available. These were the analytical tools of price theory and of macroeconomics. Whatever the deficiencies of these tools, we must keep in mind an important strength that they possess: they contain a well-worked-out, consistent language which permits scholars to discuss the problems of economic development in a careful way. At least some of the major confusions due to fuzzy or inconsistent terminology, so often a plague in other fields, have been avoided.


The relationship of the standard tools of the economist and those required for the analysis of developing economies are considered in the paper by Philip W. Bell. Clearly, the simplifications of standard economics can create difficulties for the development economist. There is more to the problem than complexity. Standard economics has worked out well the polar cases of competition and monopoly. But many sectors in developing economies involve imperfect markets and partial monopolies. Should we force the competitive model onto areas where it ceases to fit properly? No general answer can be given. It depends on the degree to which the intellectual model fits the reality.


Another problem is that of focus. Standard theory will suggest a focus on certain variables and not on others; for example on prices, and not on conditions of work or the nature of contracts. Bell considers the difficulties created by the problems of welfare and equity. My own work has dealt with the issues and explanations that arise if we relax the maximization assumptions of standard theory, as well as the assumptions associated with employment contrasts. Once we do this, new possibilities for the explanations of low productivity levels in developing countries come to the fore. Poor organizational arrangements, and contexts (e.g., monopoly) in which the need for internal efficiency is low, help us to see why fairly good investment rates sometimes yield disappointing results.


Some have argued that very little has been learned about economic development in the last three decades. This, I believe, is not quite the case. I want to indicate at least three areas about which we have learned some significant things through the study, by economists, of the development experience. These are areas about which there are frequently serious differences of viewpoint between educated laymen and development economists.


It is common to be told that the essential problem of development has to do with population. If we cannot handle the population problem we cannot expect development to take place. The experience of the last three decades shows that this is not the case. Pessimistic extrapolations about the consequences of rapid population growth have not proven true. The matter is primarily factual. Experience has shown that it is possible for developing countries to have rates of national income growth which are considerably greater than the high rates of population growth. For a number of decades average rates of population growth in less-developed countries were less than 2.5 percent while rates of national income growth were, on the average, between 4 and 5 percent. Of course, in the case of some countries the rate of national income growth was considerably above 5 percent per year.


Experience, in fact, suggests that rapid population growth is not an insurmountable obstacle to economic development. At the same time it is true that countries would find the path to high per-capita-income levels easier with lower rather than higher rates of population growth. We should also keep in mind that to some degree development carries within it the seeds of fertility decline. This fertility decline is especially evident in urban areas, although it also occurs in agricultural areas. This is the topic of Samuel S. Lieberman's article in this issue.


There is a tendency for noneconomists to look at resources as a critical variable that determines prospects for development. No doubt more natural resources are better than less. However, countries such as Japan and Switzerland, with extremely limited natural resources, have achieved very high rates of growth. Both have now reached very high levels of per-capita income as well. Thus a lack of resources, above some minimal level, is not a deterrent to rapid growth. The process of development is sufficiently complex so that no single factor explains the lack of it, nor is the availability of any one factor sufficient for development to take place. In general there appears to be a principle of substitutability at work here. A deficit or partial deficit in one dimension can be made up by greater effort in other dimensions.


The essential explanation for the achievement of rapid growth rates by countries facing considerable obstacles such as high rates of population growth or limited resource bases lies in the fact that all countries may borrow from the huge store of technological knowledge developed in the last two or three centuries--especially knowledge developed in the Western world. In some sense there is an advantage to a late start in the use of technology. Late starters do not have to live through the technological mistakes made by those who experimented with technologies earlier. They can, as it were, choose from that subset of techniques that have proven themselves.


The possibility of borrowing from a large and growing stock of available technological options that exists outside the country in question is probably the central fact of economic development of less-developed countries. It contains both the promise of high rates of development as well as problems involved in choosing options sometimes ill adapted to the resources of the country in question. Continuing to focus on the optimistic aspects, we should keep in mind that there is a sense in which the possibilities for growth improve all the time as the stock of knowledge increases. In other words, highly developed countries which can only use technology currently being invented face greater growth limitations than those who can borrow from the huge stock of techniques built up in the past. The development problem may be viewed as the problem of borrowing techniques in a sensible manner.


On the negative side, it has probably become clear that
existing standard economic theory is not as helpful as it might be in understanding development problems and in fashioning development policies. The theory of price is concerned with how markets operate. Its lessons teach us how to achieve equilibrium prices and to appreciate the virtues of such equilibria. No doubt these considerations are also significant in developing countries. Markets matter in LDCs as well as in advanced countries. However, the theory does not tell us how we may generate and marshal the resources to expand the capacity of the economy to produce goods and services. How to increase the stock of entrepreneurial talent is still a mystery. How to generate high rates of saving, especially in the private sector, is not really well understood. There are a number of similar questions having to do with increasing capacity that can be raised. Basically, we seem to understand much better how to run an economy of a given capacity than how to change that capacity. The main lesson of the conventional theory suggests that we need high rates of investment to achieve high rates of growth.

Are high rates of investment sufficient for rapid growth? In some quarters it may have been believed that, if only the rates of investment could be raised to a high enough level, economic development would be assured. Some of the earliest models of the development process focused on the determinants of the investment rate. Furthermore, investment seemed the variable most amenable to change. In addition, the possibility of grants, or borrowing from abroad, as a means to augment domestic investment was emphasized as a policy in various quarters. Hence it is not surprising that this should have been a major focus of a good deal of development theory. However, it is probable that this view no longer holds sway.


A little reflection suggests that the outcome of investment must also depend on how investment funds are used. For some time now this was taken to mean how investment funds were allocated among projects. Obviously it is possible in extreme cases for less investment of higher productivity to yield greater results than more investment of lower productivity. Hence the development literature reflects considerable concern about how to assess alternative projects. A great body of work exists on the cost-benefit analysis of development projects. While the results of this work were unquestionably useful, there was something that was generally left out. The writers usually did not consider the "who" and the "how" of carrying out the projects.


By the "who" and "how" we refer to the interests of those in charge of projects and the organizational forms used. For example, does it make a difference if a given project is carried out by a private entrepreneur within the environment of a highly competitive industry or if it is carried out by a private monopolist or state enterprise? In a sense this is a complex organizational question. We can separate it into two components: the nature of the environment (e.g., competition or a lack of competition) and the nature of the organizational form (e.g., wholly owned private enterprise, state enterprise, or government ministry). This is a difficult question for economists because intrafirm organizational matters have not been carefully considered by the profession. It is a question that involves differential incentives for doing different things. Part of the problem has been the standard theoretical assumption that firms minimize costs. Clearly, this too is a matter of the incentives contained in the environment. While competition involves an environment that emphasizes a high degree of cost containment, this does not necessarily hold for other environments such as state enterprises.


In general, private monopolies and state enterprises need not be cost efficient (or what the present writer has referred to as X-efficient) in their production activities. In other words, the survival of such enterprises is not threatened by relatively high costs of production compared to possible minimal costs. They can pass through cost inefficiencies in the form of higher prices to consumers or other buyers. In fact, in some cases the enterprise may have no idea of the extent to which its production costs could be lower.


An extreme case is that of some types of state enterprises. Here all of the incentives may, under some circumstances, favor high costs. Costs per unit may, in some cases, even be greater than the selling price per unit. Of course such a firm will lose money. However, it is frequently possible for such enterprises to be subsidized by their governments for social or political reasons. For instance, arguments are sometimes made to the effect that the economy or polity could not stand the increase in unemployment that would occur if such enterprises were not subsidized. A variety of other reasons are frequently put forth for governments to absorb these losses. One might argue that state enterprises lack the incentives both from "below" or from "above." The incentives for low costs from below usually do not exist because consumers or buyers have no alternatives but to purchase from the state monopoly. The incentive from above does not exist as it would with a private monopoly wanting to keep costs low in order to reap higher profits from the enterprise. An inefficient private firm faces the prospect of bankruptcy, but this prospect is not necessarily faced by the state enterprise. We are not trying to argue that state enterprises are necessarily highly inefficient. A brilliant administrator with the right political support may operate a state enterprise in a fashion superior to its private-enterprise counterpart. Furthermore, some administrative arrangements may put pressure from "the top" on state enterprises. What we are trying to suggest is that the greatest possibility for variations in cost exist with the state-enterprise mode of operation. These concerns are especially important since a great deal of new investment, as well as investment that comes through international borrowing, are for projects which are carried out by state enterprises. Obviously, the study of such enterprises is extremely important. From this viewpoint the paper by Malcolm Gillis contained in this issue is of special interest.


To what extent should development planning or development policy emphasize agriculture? Economists have gone back and forth on this issue. In the early period there was a tendency to emphasize industrialization. It seemed that it was in the new industries established in urban areas that most change took place. Thus industrialization was viewed by some as the cutting edge of the development process. Of course, it is really a matter of balance. However, it is now felt that we have to understand change within the agricultural setting much more than we do. In addition, agricultural changes ought to receive much more emphasis in fashioning overall policy. I believe that these current trends are in the right direction. The papers by Lieberman and Thorbecke in this issue seem especially useful from this viewpoint.


An extremely thorny issue in the development debates of the last three decades has been the question of income distribution. This is in part a matter of values. But is it entirely a value problem? The question that arises is whether we want growth if it means less equality. However, equality is a relative term. After all, we can have less equality while everyone receives a higher income as a consequence of growth. Of course, some growth processes may mean lower absolute incomes for some, but it is hard to see that this extreme outcome cannot be corrected for by some types of direct redistribution. Thus the relative-income question without a long-run absolute worsening income for some is really the critical question. From this point of view, the paper by Irma Adelman is especially interesting. To what extent can we change income distribution? The Adelman paper suggests that we can do something but not very much. Hence the problem is not entirely one of values. Economic systems are not, apparently, infinitely malleable. Something gives if we try to change the income distribution too much. One thing which may give is the strength of the incentive system. It appears that income distributions can be altered only within a limited range. How we try to change the income distribution also matters. For the most, it seems, economic growth is the best road to human betterment.


A great many more issues than those considered here can be discussed. In fact, economic development is a field plagued by too many issues. This problem is further aggravated when we add political considerations to our economic concerns. Since we cannot cover all issues we have chosen to focus, in the essays that follow, on a few important ones and hope that they indicate to some degree where the field is "going."



Harvey Leibenstein
Guest Editor

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