Structural Change in a Developing Economy: Colombia's Problems and Prospects
338
Structural Change in a Developing Economy: Colombia's Problems and Prospects
338Paperback
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Overview
Originally published in 1971.
The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These editions preserve the original texts of these important books while presenting them in durable paperback and hardcover editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.
Product Details
| ISBN-13: | 9780691620381 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 03/08/2015 |
| Series: | Princeton Legacy Library , #1393 |
| Pages: | 338 |
| Product dimensions: | 6.10(w) x 9.10(h) x 2.30(d) |
Read an Excerpt
Structural Change in a Developing Economy
Colombia's Problems and Prospects
By Richard R. Nelson, T. Paul Schultz, Robert L. Slighton
PRINCETON UNIVERSITY PRESS
Copyright © 1971 The Rand CorporationAll rights reserved.
ISBN: 978-0-691-04163-6
CHAPTER 1
Introduction
To some readers this book is mostly about Colombia. To us, the authors, it is about the development process generally. We do not pretend to have created a new "theory of development." However, the approach is quite different from traditional treatments. We have taken three important themes of the development process, examined and modeled these in some detail, and tried to show how these themes relate to each other. These themes are: the relationship between economic development and rapid growth of population and internal migration; development as a process of structural change in a technologically dualistic economy; and policymaking as a behavioral response by the government to the shifting policy preferences of the governed.
Why did we choose to organize this study around these three themes? First of all, it seemed to us that we could not hope to understand the development process unless population growth and rural-urban migration were built endogenously into the analysis and brought center stage. To be sure, the surge of population growth being experienced in Colombia and almost all other less developed countries is in part exogenous to their own internal developments — the result of widespread application of new public health techniques to control endemic disease. Nonetheless, part of the fall in the death rate must have been related to the sharp improvement in consumption levels coincident with the post-World War II spurt of economic growth. More important, the consequences of decreases in the death rate on the rate of growth of population depend on what happens to the birth rate, in particular, the extent and speed with which it declines, and this is in part a function of changes in economic structure. The pattern of migration is similarly endogenous to the development process, for migration is the reflection of a disequilibrium in the labor market that derives from uneven regional expansion of population, or economic opportunities, or both.
The literature on the determinants of population growth and migration is quite sketchy. The material presented in Chapters II and III aims to carry both theoretical and empirical analysis a considerable distance forward. These chapters develop several models and test them against data in a number of different countries, not just Colombia.
It seemed natural that these chapters should come first. The analysis of population growth and migration provides an extremely useful way to cut into the network of simultaneous dynamic relationships that are involved in the growth process. Population growth at once is a principal determinant of one of the major factors of production — labor — and at the same time strongly influences the magnitude and composition of the evolution of other factors, in particular, the growth of physical and human capital. More generally, the facts of rapid population growth and ruralurban migration are the pivotal ones behind the most dramatic change that has occurred over the last twenty years in Colombia: the transition from a predominantly rural, agricultural, and largely self-contained economy and polity to one that is increasingly urban, industrial, and dependent upon international trade or borrowing for the resources needed to enable the economy to operate and expand.
Thus the analysis of population growth and migration leads us naturally into our second major theme: development as a process of structural transformation. In Chapter IV we begin the elaboration of this theme. In attempting to develop an endogenous analysis of population dynamics, a major research problem was the limited amount of prior work. The literature on structural changes in a developing economy is, of course, vast and diverse. Here our problem was that prior empirical studies within the most broadly employed framework, that of neoclassical growth theory, indicated the need for some major rethinking and theoretical restructuring. A detailed look beneath industry aggregates led us in the direction of trying to model industrial development as a structural transformation process — a process by which modern technology is in part grafted onto and in part replaces an older craft technology — rather than as a simple neoclassical process of factor augmentation. Chapter IV constructs a model of such a "dual" industrial structure and describes and "explains" in detail certain of the characteristics of Colombia within that analytic frame.
In Chapter V the demographic and structural transformation themes are woven together. The focus is on urban unemployment and the dual income distribution. More specifically, the chapter is concerned with the relationships among the following variables: the rate of migration, overt unemployment, relative employment in the craft and modern sectors, and the distribution of income. The migration model of Chapter III leads us to expect that overt urban unemployment tends to be self-limiting to an extent. A rise in unemployment dampens migration; a fall in unemployment speeds it up. The structural transformation model with its emphasis on duality suggests that employment in the craft sector also serves as a buffer for overt unemployment, declining as employment grows rapidly in the modern sector, increasing when the modern sector slows down. This hypothesis is strongly confirmed. These phenomena, together with the fact that there is a significant and growing wage differential between the modern and craft sectors, carry interesting and important implications for changes in income distribution over the development process. These are examined in some detail.
The study of unemployment and income distribution of Chapter V pertains to developments over the past decade, a period that has seen a marked slowdown of growth of employment and also of output in the modern sector of Colombian industry. Chapter VI examines the reasons for this and, in so doing, sets the stage for the third major component of our analysis: a behavioral treatment of policymaking. The analysis in this chapter divides into two parts. The first is an attempt to explain the composition of the modern sector of the Colombian economy, a composition that implies dependence upon imports for operation and expansion. The problem here is to sketch the outlines of a theory of dynamic comparative advantage. But the central analytic core of the chapter is a reconsideration of the "two-gap" model of the constraints on the growth of the modern sector in terms of a model that encompasses prices — in particular, the effective exchange rate — as variables. The slowdown of the rate of growth of the modern sector since 1961 and consequent rise in employment and resurgence of the craft sector is shown to be the lagged consequence of a tightening import constraint which, in turn, is the result of the fall in coffee prices of the mid-1950s and the inadequacy of the Colombian policy response to this shift in the foreign exchange supply curve. A policy of gradual devaluation of the "real" exchange rate would almost certainly have reduced the magnitude of Colombia's difficulties, but no such policy was adopted.
Chapter VII attempts to understand why. It considers the structure and legacies of Colombian politics at the time of the coffee crisis, and how these constrained and molded the kinds of policies that could be considered in the 1960s. In this chapter we try to break from two traditions: that of treating policymaking exogenously, and that of explicitly or implicitly assuming that policy is, or can be, determined by "optimality" considerations. This chapter, probably more than any other, is specific to the Colombian scene. We are obviously unable to present any general model of policymaking, but we hope we have made a small contribution by showing that, in some cases at least, policies are largely predictable, that they are the outputs of decisionmaking systems where incentives and constraints are known and fairly stable.
The main conclusion of Chapter VII is that Colombian foreign exchange policy — a somewhat extreme version of the "disequilibrium system" of an overvalued currency, quantitative controls, and administrative pricing that is employed in some form or another by most of the less developed world — is not simply the creature of a technical bureaucracy that holds an ideology of growth demanding such a policy. Our argument is that the disequilibrium system is the policy that maximizes the electoral support of the government, given the electorate's perceptions of the effects of foreign exchange policy. It is politically "legitimate," and we suggest that many of the reasons why it is are deeply rooted in the behavioral characteristics of democratic government and hence are applicable to a wide range of less developed countries.
Chapter VIII considers policy changes we think would significantly enhance Colombia's growth performance. The principal components of an active population policy are discussed, both birth control policies and policies that would act on the family size goal. We explore various aspects of educational policy, attempting to identify areas where returns seem to be high. We also consider higher technical education where, in recent years, the "returns" signal has been ambiguous. An attempt is made to link, in terms of both justification and policy reinforcement, policies to higher education and to building an indigenous Colombian technical and scientific capability. Yet the key requirement would appear to be major reform of foreign exchange policy, rather than a relaxation of skill bottlenecks. We simply do not see how a country of Colombia's size and resource endowments can hope to achieve rapid economic growth unless stronger incentives are provided for export, the high and variable walls of protectionism are reduced, and market mechanisms are used to ration foreign exchange to a far greater extent than at present.
The positive arguments for these policy changes are neither particularly new nor subtle. The more interesting question is whether they are politically feasible. To approach this question we must first ask, "If these policies are so desirable, why have they not been adopted?" The message of Chapter VII is that the Colombian policymaking system gives — and, to maintain itself, must give — higher priority to income distribution goals than to the goal of rapid economic growth. We conclude by briefly considering the likelihood of modifying this scale of priorities through political innovation.
CHAPTER 2Population Growth: Investigation of a Hypothesis
Introduction
The population explosion is integral to the economic development problems and processes of most of today's less developed countries. Colombia is no exception. Indeed, in recent years she has experienced one of the world's most rapid population growth rates, more than three percent a year in the 1960s. Because of the population explosion, almost all features of the Colombian economic, political, and social scene have changed, are changing, and will change dramatically.
In later chapters we trace through some of the consequences of these changes. Suffice it to say here that because of the population explosion there are more children to be educated, more mouths to be fed, more hands to be employed. Rapid population growth has fueled massive rural-urban migration. Growth of labor demand in the urban modern sector has proceeded more slowly than has the growth of the migration-fed urban work force, and the urban poor, unemployed or employed at very low wages, are increasingly prominent. Rapid population growth caused by high fertility has manifestly complicated Colombia's problems. Old policies and institutions must be modified.
Under reasonable assumptions it can be shown that this rapid growth of population has retarded the rate of growth of average income in Colombia. Although we have a rough understanding of the mechanism relating changes in population growth to the pace of development and will explore certain facets of this relationship in later chapters, the converse mechanism — that relating changes in the economic and social environment to changes in the rate of population growth — has scarcely been explored. This chapter addresses this second aspect of the population problem: the determinants of population growth.
The proximate cause of Colombia's accelerated rate of population growth was the abrupt decline in death rates following World War II from about twenty-five to fifteen per thousand. But to say this is not to understand the phenomenon, nor to be able to predict its future course, nor to be able to develop public policies that can better cope with it. The most salient issues that require answers are why has the birth rate not fallen more rapidly, what are likely future trends in the birth rate, and what variables (particularly ones that policy might influence) will affect these trends?
Historical experience with regimes in which the death rate has fallen sharply indicates that, almost invariably, the birth rate moves to offset changes in the death rate, sooner or later, and in varying degree. Developed countries experienced a fall in birth rates in concurrence with a series of other fundamental social and economic changes. Urbanization and the extension of universal education, among other changes, have been attributed a role in the reduction of birth rates in developed countries.
A closer look at today's less developed countries reveals that often birth rates are substantially lower among urban than among rural women. Since the population explosion is contributing to a rapid shift of population from the countryside to the cities, this redistribution of population may help to dampen the rate of population growth by instigating a decline in the average birth rate. This sanguine interpretation of the effect of rural-urban migration on the birth rate has been discounted by some observers, but is nevertheless generally accepted. This phenomenon is important enough to probe deeper to learn why rural and urban birth rates differ, and whether rural-urban migration will disturb these traditional differences. Perhaps by exploring this question one can sharpen one's understanding of the general determinants of birth rates and also discover how public policy can influence birth rates. To develop such a model of reproductive behavior is the aim of this chapter.
Can differences in birth rates be interpreted partly as reflecting differences in the number of births parents want, and if so, what aspects of the parents' environment are ultimately responsible for their different wants? Our model rests on the assumption that people tend to adjust their behavior when their environment affords them new opportunities and imposes on them new limitations. This tendency toward "rational" behavioral adjustment may be neither prompt nor complete, but it provides a working hypothesis regarding family planning behavior that is helpful in investigating the local environment for the possible determinants of local birth rates.
The second section of this chapter elaborates the conceptual framework of the family planning hypothesis and explores its empirical implications. In the third section certain facets of the model are evaluated empirically against the unfortunately limited Colombian data. Then, with the aid of two additional case studies, Puerto Rico and Taiwan, for which the limitations of data are less severe than for Colombia, further implications of the model are tested.
The Family Planning Hypothesis and the Economic Causes of Population Growth
The family planning model is built around two basic factors that are assumed to exert a systematic effect on the actual frequency of births in following periods: (1) a family size goal or a number of surviving children that parents want, this being determined by a host of environmental factors modifying the relative attractiveness of few versus many children; (2) the incidence of death, mainly among offspring, which necessitates a compensating adjustment in birth rates to achieve any particular family size goal.
THE FAMILY SIZE GOAL
Parents value children for themselves; but, in less developed countries particularly, children also contribute from an early age to family resources. Balanced against the benefits of having children, there also are costs: opportunity costs of time parents spend with their children, and pecuniary costs of goods and services required to feed, clothe, shelter, and educate a child. Parents' resources, in terms of time and wealth, constrain the activities undertaken, including the number of children they can rear.
It is useful as an introduction to more formal and quantitative analysis to discuss briefly several characteristics of a community that seem likely to affect the subjective or pecuniary net cost of having children and thus affect the number of surviving children parents desire. The following seem central: (1) opportunity income of women and men, (2) the allocation of children's time between school and work, (3) birth control, and (4) institutions.
(Continues...)
Excerpted from Structural Change in a Developing Economy by Richard R. Nelson, T. Paul Schultz, Robert L. Slighton. Copyright © 1971 The Rand Corporation. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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Table of Contents
- Frontmatter, pg. i
- Preface, pg. v
- Contents, pg. vii
- List of Tables, pg. ix
- List of Figures, pg. xii
- CHAPTER I. Introduction, pg. 1
- CHAPTER II. Population Growth: Investigation of a Hypothesis, pg. 8
- CHAPTER III. Internal Migration: A Quantitative Study of Rural-Urban Migration in Colombia, pg. 45
- CHAPTER IV. Manufacturing Development: Factor Endowments and Dualism, pg. 77
- CHAPTER V. Urban Income Distribution in a Dual Economy, pg. 128
- CHAPTER VI. Constraints on the Growth of the Modern Sector, pg. 157
- CHAPTER VII. The Political Determinants of Colombian Foreign Exchange Policy, pg. 215
- CHAPTER VIII. Future Development Policy, pg. 262
- INDEX, pg. 313