(M)-Examining Development Economics 9/10/2013 11:34:00 PM
The 4 “pessimisms.”
1. Market pessimism - rejection of Smith.
o Made development economics similar to Keynesian economics
o Low-level trap is not self-correcting
o Regulating business cycle
2. Trade Pessimism - rejection of David Ricardo and “comparative
o Orthodox economists accepted the benefits of trade at a basic
o Developing countries dependent on export of cocoa, rubber.
o Defining characteristic of a developing country was limited
exports. Need to expand export sector.
o Most developing countries have a kind of similar structural
o Chenery: No spillover benefits or growth without development
You can get increases in a sector without it having
spillover benefits in terms of increased employment and
wages in another sector.
o 3 key points made by Chenery:
Market pessimism based on market prices
Difference between trade and growth theory. No
Growth is only being experienced in a narrow field.
o Robert Clower - studied Liberian economy and published
“Growth without Development.” Can improve capital into
improving efficiency of rubber trees and still no spillover
benefits to other sectors and people.
No benefits in industrializing this economy. No trigger of
demand in a way that is going to trigger
o Trade theory doesn’t mean that exports would be diversified.
o Falling terms of trade (on world markets)
Saturated markets Ease of entry (among producers) – capital entry
threshold. Easier to install a cocoa factory than it is to
start an automobile factory.
Ease of substitutability (among consumers)
Metaphor: running faster to stand still – real prices for
those goods being exported (cocoa, coffee, tobacco)
were not increasing as fast as the goods that you were
purchasing on world markets.
Somehow increase the output of the agricultural
economy just to be able to afford the same amount of
vehicles and busses as before.
Essence as a developing country you depend on primary
Tendency toward crowding among producers of
Why would you have falling terms of trade?
Markets for agricultural commodities tend to
become saturated very quickly because it is very
easy to enter agricultural markets and world
demand is satisfied at a certain level.
Pumping in more resources just lowers prices
Money falls because of substitutability.
o Doctrine of “Unequal Exchange.”
Developing countries will always get the worse or trade
relationships with developed countries.
Trade actually transfers wealth from the poor countries
to the rich countries. If you are a producer of primary
agricultural commodities the transfer of wealth is
outward rather than inward causes poverty instead of
3. Agricultural Pessimism - low level trap in peasant societies.
o Agricultural sector could not be counted on to provide
sustainable economic growth that would increase per capita
o Falling terms of trade between agricultural an industrial
countries. o Ease of entry among producer countries; low capital entry
o Low marginal productivity of labor.
Resources invested in the agricultural sector would not
be wisely invested.
Means holding other variables constant.
Increasing number of workers doesn’t necessarily
o Last place where you would want to invest capital: agriculture
4. Elasticity pessimism
o Provided the core content of agricultural pessimism.
Low Demand Elasticity (among consumers)
Low Supply Elasticity (among producers).
o Low Elasticity of Demand:
Exporters of primary commodities can’t do the same
thing exporters of industrial commodities can do.
D/P ^%/ ^%
If bottom number goes down than above goes up.
^ are supposed to be squares.
Exporters of primary commodities can’t tap into the
same elasticity mechanism as exporters of industrial
commodities. Former are more limited.
o Low elasticity of supply in response to producer price:
In the short-run was drawn from American labor
If social wage goes up, the incentive to work goes up
and the number of hours that people deliver into that
economic environment goes up to a point until wages
and incentive to work decrease.
o The good of the industrial worker is hours worked and good of
small-holder farmers is the food they produced.
o Target Workers- once target is satisfied they don’t produce
Respond up to a point with added production Backward Bending supply curve – supply of labor goes
down as the prices goes up.
Taxes are the answer to being responsive only up to a
Tax farmers to reduce prices, which will then
incentivize them to produce more.
Policy notion: lower prices by imposing taxing which
wouldn’t have deleterious effect on society and could
hire more workers.
The idea of creating industries for goods that have been imported
has two stages:
o Easy or First Stage: ISI to consist of industries for basic
consumption goods: beverages, textiles, shoes, cigarettes,
o “Second Stage” ISI: emphasis on production and
transportation - bicycles, trailers, motors, pumps, etc…”
*Producing the machinery for production.
What you should try to do as a developing country is create an
industrial sector by taxing agriculture and engaging in protectionism
against foreign competition.
o Early American infant industry approach.
Move from light consumer goods to production of industrial goods.
Low elasticity of demand among consumers.
Create a set of industries that will enable you to build an industrial
economy. Government intervention in a big way through trade
o 1. Rapid industrialization
o 2. Financial Savings on Imports.
o 3. Acculturate a peasant population in rhythms of industrial
o 4. Demand complimentarities across industries.
Don’t happen naturally.
Needed for industrial diversification to occur.
o 5. Backwards stimulus to agriculture. (W)