Title: Economic development and integration
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 Material Information
Title: Economic development and integration a conceptual framework
Physical Description: vii, 107 leaves : ill. ; 28 cm.
Language: English
Creator: Carter, Denis George, 1947-
Publication Date: 1976
Copyright Date: 1976
 Subjects
Subject: Economic development -- Social aspects   ( lcsh )
Economic integration -- Developing countries   ( lcsh )
Economics thesis Ph. D
Dissertations, Academic -- Economics -- UF
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Thesis: Thesis--University of Florida.
Bibliography: Bibliography: leaves 97-106.
Statement of Responsibility: by Denis G. Carter.
General Note: Typescript.
General Note: Vita.
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Bibliographic ID: UF00098111
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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Resource Identifier: alephbibnum - 000180372
oclc - 03182798
notis - AAU6903

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ECONOMIC DEVELOPMENT AND INTEGRATION:
A CONCEPTUAL FRAMEWORK















By

DENIS G. CARTER

















A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY







UNIVERSITY OF FLORIDA

1976
















CONTENTS PAGE




ACKNOWLEDGMENTS................................................. ii

PREFACE.... .................................................... iv

LIST OF TABLES..................................... ........... v

ABSTRACT....................................................... vi

CHAPTER I ........................ ................................ 1

INTRODUCTION...............................................

CHAPTER II .................................................... 11

CONCEPTS OF DEVELOPMENT AND THE ROLE OF INTEGRATION....... 11

CHAPTER III ................................................... 60

ECONOMIC INTEGRATION...................................... 60

CHAPTER IV..................................................... 77

AN INSTITUTIONAL FRAMEWORK FOR ECONOMIC DEVELOPMENT........ 77

CHAPTER V....................................................... 93

CONCLUSION............................................... 93

BIBLIOGRAPHY ................................................... 97

BIOGRAPHICAL SKETCH ............................................ 107



















ACKNOWLEDGMENTS


The author is most grateful to Dr. Blaine Roberts, chairman of

his Supervisory Committee, for his generous and learned assistance.

Special thanks is extended to the other members of his committee,

Dr. William Carter, Dr. Ronnie Davis, Dr. Paul Koefod, and Dr. William

Tyler.

His deepest affection and appreciation go to his wife, Stella,

children, Monique and Sean, and typist, Yvonne Robertson.


iii














PREFACE


It is not often that one writes a dissertation which is probably

fortunate. The major stumbling block is not the want of burning issues

of inquiry nor is it the innumerable hours of preparatory work. Rather

it is the overwhelmingly awesome nature of the essay, itself. This is

aptly presented by Dr. Paul Koefod in The Writing Requirements for

Graduate Degrees:

A dissertation is more dignified and formal than the
usual literary essay. Its point of view is non-per-
sonal and its penetration is deeper. Its treatment
is profound, not cursory; full, not brief; and weighty
rather than light.
...It may attempt refinement of knowledge or establish-
ment of a point of view. In the latter sense, a dis-
sertation may be critical, normative, conjectural, even
speculative.
(Koefod, 1964, pp. 31-32).

It is against this background that this inquiry into the economic

development of societies with respect to socio-cultural integration

begins. This quest to unlock the mysteries of economic development

began in childhood perceptions of human beauty among a mass of social

misery and injustice. Enthusiastic and intelligent Carribean boys grew

into disillusioned young men whose fierce eyes and anemic bodies gave

voice to the need for social development. The disappointing results of

the First United Nations Development Decade, despite the utilization of

sophisticated techniques and large quantities of resources, have demon-

strated the need for alternative approaches. It is the intention of this

essay to provide one such alternative. If this effort should benefit

at least one of the less fortunate members of Caribbean society then it

would have been worthwhile.


















LIST OF TABLES PAGE



TABLE I-1 INCOME, GROWTH, HEALTH AND NUTRITION INDICATORS.... 4

TABLE II-i PIN PRODUCTION...................................... 14

TABLE 11-2 LABOR PRODUCTIVITY I................................ 18

TABLE 11-3 LABOR PRODUCTIVITY II............................... 9

TABLE 11-4 LABOR PRODUCTIVITY RATIOS........................... 20
















Abstract of Dissertation Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of the Requirements
for the Degree of Doctor of Philosophy



ECONOMIC DEVELOPMENT AND INTEGRATION:
A CONCEPTUAL FRAMEWORK

by

Denis G. Carter

August, 1976

Chairman: R. Blaine Roberts
Major Department: Economics

Major conepts of economic development are presented and two obser-

vations are made: one, there is a trend in the literature towards struc-

turalism but a framework and taxonomy are lacking. Two, there are elements

of socio-economic integration in most of these concepts but their roles

are not explicitly analyzed.

The conventional concept of economic integration is contrasted with

a socio-cultural integration concept. An adaptation of the latter is

utilized in the construction of an institutional framework for the analysis

of the economic development of societies. The framework is founded on the

rationality, interdependency and fallibility of secular Man. As the devel-

opment process is presented, integration in the form of integrative insti-

tutions, is shown to play a crucial role. This is extended to various

levels of social organization.

The analysis is first applied to simple two-person society and

then to homogeneous and pluralistic societies. Its implementation is








discussed, including the descriptions of required empirical studies.

Finally, economic development policy alternatives and implications are

presented with respect to homogeneous and pluralistic societies.














CHAPTER I

INTRODUCTION


The economic development of societies is undoubtedly of major con-

cern to persons in a variety of professions. Economists and other social

scientists have for several decades analyzed phenomena associated with

economic development in an attempt to discover the causative factors.

Many have met with something less than success. The purpose of this

essay is not to add to this list but to examine economic development

from an institutional perspective. Simultaneously, the importance of

integration as an institutional factor of economic development will be

demonstrated.

Specifically, the first objective of the dissertation is to review

the conventional concepts of economic development with particular em-

phasis on the role of integration. In those cases where the integra-

tive element is implicit to the developmental concept, it will be brought

to the fore. The second objective is to review the conventional concepts

of economic integration. The third objective is to construct a frame-

work for developmental analysis based on the concept of economic de-

velopment as being the occurrence of social change such that the economic

well-being of society is improved. The fourth objective is to state

some implications of the analysis, particularly those relevant to de-

velopmental policy-making.

The task, as stated above, is enormous because of its interdisci-

plinary nature as well as the strong lack of both theoretical and







statistical work on the issue. Complicating this are the ambiguities in-

volved in the concepts of economic growth and development. An all too

often held belief is that economic growth and economic development are

different concepts but in the long-run they are the same. The origin of

such a belief may be traced back to eighteenth and nineteenth century

economic thought. The long-term growth of the economy (in terms of the

accumulation of wealth) was measured (and still is) by an increase in

income per capital over time. The question of economic development, as an

universal concept, never really received the study it deserved. Between

that time and the present, economic development generally became indenti-

fled with economic growth more by default than by deliberate informed

thought.

Since the dramatically disappointing results of the Green Revolu-

tion (Wharton, 1973) and the First United Nations Development Decade

(Adiseshiah, 1970) many social scientists have focused on the "growth-

development" problem. In addition, the recent outcry concerning the

social disadvantages of economic growth (Adelman, 1975; Chenery, 1975)

has called forth further investigation of the problem. There is abundant

impressive evidence to discourage the identification of economic growth

with that of economic development. In all probability, the pyrmaids of

Egypt and the pagodas of India, Burma and China were products of societies

with relatively low per capital incomes, yet they are expressions of major

developmental achievements. Today, these societies are regarded as

"underdeveloped" becuase their average incomes are (US)$240, (US)$110,

(US)$90, and (US)$170 (1972 statistics from World Bank Atlas, 1974). As

A. K. Cairncross states,

Anyone who looks at the pyramids, cathedrals and





3

pagodas that other civilizations have bequeathed can
hardly regard the construction of railways, dams and
power stations as imposing an unprecedented burden on
a poor community.
(Cairncross, 1962. p. 251).

Certainly, one cannot correctly say that the remaining peoples of the

Peruvian Incas, the Mexican Aztecs and the Central American Mayas are

"underdeveloped" because (for most part) they are poor. Rather, one

should state that their civilizations have been destroyed by one factor

or another and that their remnant have integrated with other societies which

are (incorrectly) regarded as "underdeveloped" because they are compara-

tively poor. Table I-i presents other similar inconsistencies. The

table gives statistics for 31 countries. The countries are ranked in

descending order of their gross national product per capital (GNP/C) in

1972. The second column (GR/C) reports the annual growth rate of the

gross national product per capital. The third and fourth columns report

the average number of years of life expectancy at birth for males (MLE)

and females (FLE) as of 1974. The fifth column reports the average num-

ber of inhabitants per physician (POE/P) as of 1970. The sixth column

reports the percentage average dietary energy-supply requirements avail-

able (ADESR) in the period 1969-1971. This statistic is based on the

average requirements of a moderately active man whose body weight is re-

presentative of the prevailing norm of each particular region.

Often, some poverty line is drawn on a table of this sort to dif-

ferentiate between the "developed" and "less developed" countries. Such

a line is entirely arbitrary and is really useful only for expository

purposes. Besides mental comparisons of the numbers in Table I-1,

three graphs are offered for visual comparison. Figure 1-1 plots gross

national product per capital on the horizontal axis and years of male

and female life expectancy on the vertical axis. The scatter of points,















TABLE I-1

INCOME. GROWTH. HEALTH AND NUTRITION INDICATORS


COUNTRY

U. S.

Sweden

Canada

France

W. Germany

U. K.

Japan

U.S.S.R.

Panama

Chile

Saudi Arabia

Peru

Nicaragua

Algeria

El Salvador

Ivory Coast


GNP/C (US$):


GNP/C
(US$)

5,590

4,480

4,440

3,620

3,390

2,600

2,320

1,530

880

800

550

520

470

430

340

340


GR/C
(%)

2.0

2.5

3.2

4.8

4.1

2.0

9.7

5.9

4.5

2.2

6.8

1.1

1.5

3.5

1.2

4.1


FLE POP/P

75 600

77 700

75 700

76 800

72 600

74 800

74 900

400

61 1,600

66 2,000

10,000

55 1,900

2,000

7,900

60 4,000

12,100


ADESR


ADESR
(%)

126

104

129

127

121

126

107

131

112

109

94

99

109

72

84

105


Gross National Product per capital in 1972. Estimates for
centrally planned economies may differ widely due to
problems of conversion from net material cost and into
U.S. dollars.


--







TABLE I-1 (CONT'D)


GNP/C GR/C ADESR
COUNTRY (US$) (%) MLE FLE POP/P (%)

Ghana 300 1.0 46 13,000 101

Liberia 250 4.0 46 44 10,000 94

Bolivia 200 1.4 50 55 2,300 79

Kenya 170 4.1 50 51 7,800 102

Nigeria 130 5.4 56 62 20,000 96

Pakistan 130 1.7 54 49 3,800 93

Haiti 130 1.3 45 13,200 77

Tanzania 120 2.9 40 41 21,600 98

India 110 1.4 42 41 4,800 94

Indonesia 90 4.3 48 48 27,600 93

Burma 90 1.0 48 9,000 102

Guinea 90 -0.3 25 28 49,700 88

Chad 80 1.6 29 35 62,900 89

EOtiopia 80 1.2 39 74,600 93

Rwanda 60 2.1 41 57,900 84

GR/C (%): Average annual growth rate of GNP per capital, 1965-1972.
MLE: Male life expectation (years) from birth. Estimates based on
mortality rates between 1960 and 1970.
FLE: Female life expectation from birth (years) where available.
ADESR (%): Percentage average dietary energy-supply requirements avail-
able. Based on average requirements of a moderately active
reference man whose body weight represents the prevailing
norm for the particular region, 1969-1971.
POP/P: Average population per physician, 1970.
SOURCE: World Bank Atlas, World Bank, 1974
Demographic Yearbook, United Nations, 1974.
World Health Statistics Annual, World Health Organization, 1970.












FIGURE I-i


MLE, FLE (years)



80 L


o
+ i


+



Go
+


1-
oO


SI I I J I


2 3 4 5 6 GNP/C
(thousands US $)
are represented by o.

are represented by +.


GNP/C, MLE

GNP/C, FLE


points

points







seem to indicate the possibility of a non-linear relationship between

the per capital output and life expectancy variables. However, this is not

evident in the income range from $0 to $1,000 per annum. In this low

range, there does not appear to be a pronounced relationship. Such is

the case also in the range of incomes above $2,000.

Figure 1-2 relates gross national products per capital and the number

of inhabitants per physician. Overall, it is possible to detect a rec-

tangular hyperbola functional relationship between the two variables.

However, as in the case of figure I-1, if the information is split into

two gross national product per capital groups, below $1,000 and above

$1,000, there is really no evident pattern. Graph 1-3 relates gross

national product per capital and the percentage of average dietary energy

supply requirements available (ADESR). The relationship, if any, appears

non-linear, as infigure I- and 1-2. Here again, if the data is split

into two income groups, below $1,000 and above $1,000, there appears to

be only a slight possibility of a non-linear relationship in the former

case and none in the latter case. Despite these observations,.most

economists would argue that some of these variables (and perhaps all)

are aspects of development.

The preceding demonstrates the enormity of the proposed task.

Not only must an empirically workable framework be established within

which developmental relationships may be conceptualized and tested, but

also fundamental concepts must be explicit stated and unambiguously

defined. Simon Kuznets sums it up in this manner with respect to eco-

nomic growth:

Can we hope to formulate a theory of economic growth
that would indicate the factors in the development
of the more industrially advanced nations and thus
illuminate the problem of their possible secular
stagnation; to frame the factors so that a testable






a


FIGURE I-2


POP/P


75,00 L


65,000




55,000




45,000




35,000




25,000




15,000




5,000

0


2 3 4 5 GNP/C
(thousands, US $)













FIGURE I-3



ADESR(%)



140




120 +




100 i+

+


80




60




40




30






1 2 3 4 5 GNP/C
(thousands, US $)




10


analysis of obstacles to economic growth of under-
developed nations and hence a basis for intelligent
development policy become possible; to consider the
operation of these factors under a system of free
enterprise, as well as within the authoritarian sys-
tem, so that their interplay and potentialities in both
become clear; and to distinguish the factors that make
for peaceful and for warlike behavior, so that the
bearing of each on economic growth can be clearly per-
ceived? ... Such a theory of economic growth of nations
may never be within our reach.
(Kuznets, 1965. pp. 4-5).














CHAPTER II

CONCEPTS OF DEVELOPMENT AND THE ROLE OF INTEGRATION


Many attempts have been and are still being made to unravel the

mysteries of economic development. Such attempts have encompassed a multi-

plicity of explanatory factors, ranging from highly measurable production

variables to unobservable psycho-social behavior. Many of these theories

have implicitly included some concept of economic integration however,

its true character and contribution to economic development is often ig-

nored or attributed to "technological" change.

The objective of this chapter is to examine the major schools of

thought in the field of economic development and to call attention to

the various references made to economic integration. In many instances

it is necessary to bring forth these references from a rather obscure

background of other theoretical material. Economic integration is in-

terpreted more broadly than it is customarily treated in standard inter-

national economics texts. This is discussed in detail in Chapter III.

Beginning in the sixteenth century, economic development was identi-

fied with the acquisition of wealth. Wealth, as conceived by the Mer-

cantilists of this period, was primarily bullion and precious stones.

The body of informal theory, which later became known as Mercantilism,

postulated that the regulation of trade in order to bring about a sur-

plus of exports over imports, would lead to an inflow of specie and the








accumulation of wealth. It also postulated that the importation of re-

latively inexpensive primary products should be encouraged in order that

they may be used as inputs in goods manufactured for export. This was one

of the reasons behind the international expansion of the European powers

in the Colonial era.

The flaws in such thinking have been adequately critiqued (cf.,

Viner, 1953). However, contained in these ideas are, perhaps, the earli-

est thoughts concerning economic integration as a factor in economic

development. It was recognized that integrating two economies by trade

would allow the economy with the favorable balance of trade to "develop."

There was not much concern about the "development" of the trading part-

ner. Furthermore, as long as the trading partner happened to be a colo-

nial possession, there was really no need to "develop" it providing it

kept the metropolitan country's income flowing.

In the late eighteenth century, Adam Smith systematized much of the

economic thought of this period in his celebrated "An Inquiry Into The

Nature and Causes of The Wealth of Nations". Economic development was

prominent in his work and as Mark Blaug states,

In his Introduction to the book, Adam Smith makes
it clear that his leading theme is economic de-
velopment: the long-term forces that govern the
growth of the wealth of nations.
(Blaug, 1968 p. 39).

Smith immediately follows his introduction with a discourse on the

"division-of labor". He uses the term broadly to encompass speciali-

zation in single and multi-product economic units (firms). Although this

concept has frequently been categorized as a change in production tech-

nique, it really is a form of economic integration. The "division of

labor" process is an increase in the degree of specialization of the

factors (in Smith's case, labor) of production. But from a more general








perspective, this is an increase in the degree of economic interaction

or integration of the factors involved.

Adam Smith had observed that ten men, specializing in different

aspects of pin-making, produced 48,000 per day. He deemed this to have

been a far greater output than the few pins per day which would have been

produced if each man made the entire pin. Simplifying this example for

purposes of exposition, assume that there are four workers, A, B, C, D.

Assume also that the pin-making process is divided into four phases -

stretching the wire, cutting it, pointing it, capping it. In the case

where workers are not integrated and they each produce the complete pin,

it is reasonable to expect each man to produce a maximum of 15 per hour.

So the four men together may produce 60 pins per hour. On the other

hand, if the workers integrate their efforts through "division of labor,

then A should be able to stretch 20 pin lengths per minute, B should be

able to cut as many per minute, C should be able to point at least half

as many per minute, and D should be able to cap 10 per minute. The

group, as a whole, should be able to produce 600 pins per hour. Table

II-1 illustrates these results.

Adam Smith did not thoroughly explain this phenomenon but he did

hold the view that the "division of labor," functional specificity, leads

to increased labor productivity and greater output. This in turn leads

to an increase in the size of the population and an expanded market. If

the socio-economic institutions fulfilled their roles, then the larger

market would encourage capital formation, new productive techniques,

new products and more production. Thus, Smith differed in his thinking

with many of the political economists of his era. He envisioned the

economy as being capable of developing beyond a subsistence level, sta-

tionary equilibrium by means of specialization (economic integration).








14














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o a

a .; 4 Qc
M ,C










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I 0p



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eM 4 0 *H 1p 0

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0c




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0 0 0 0 0)
0 0 0 C
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3 t o
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-e E I








The predominant concept of economic development by the classical

economists was that through a process of capital accumulation, the econ-

omy would approach a state of subsistence level equilibrium. Income

gained prominence as a measure of wealth, and the increase of wealth was

regarded as economic development. The means of developing was to be

found in production, which was regarded as dependent on the size of the

labor force, the stock of the capital, the availability of "land" and the

level of technology. This last factor, the tool of the entrepreneur,

was regarded as highly sporadic and so was not given the attention it

deserved.

The crux of this dismal developmental concept was the "iron law of

wages". This Ricardian concept was determined by the availability of

capital. If capital accumulation occurred then the "wage fund", the sum

of wages, would increase above the conventional subsistence wage level.

This relative prosperity would encourage an increase in the size of the

population. In time, this would increase the labor force and lower real

wages to the subsistence level once again. Should the process have

started with an arbitrary increase in population, then the farmers would

have been forced to bring less productive land into use. This would

give rise to diminishing returns in the agricultural sector. The owners

of fixed factors would experience a decline in the returns to such fac-

tors and; accordingly, reduce their investment.- This would lead to a

decrease of the "wage fund" and the average wage. This lowering of the

wage rate would prompt labor to reduce the population growth rate in an

attempt to return real wages to the subsistence level.

Adam Smith held that the wealth of a country could be increased

through trade. Trade would occur where trading partners had an "ab-

solute advantage" in the production of one commodity. In other words,







a commodity would be produced by (and exported from) the country ex-

periencing the least real cost under conditions of free trade. An example

is given in Table 11-2. Assume a two-country (A,B), two-commodity (Q1'

Q2), one-factor (labor) world. Country A requires 90 and 100 units of

labor to produce one unit of Q1 and Q2, respectively. Country B requires

108 and 90 units of labor to produce one unit of Q1 and Q2 respectively.

Country A has an "absolute advantage" in the production of Q1 since its

labor is 1.2 times more productive than B's. Country B has an "absolute

advantage" in the production of Q2 since its labor is 1.1 times more

productive than A's.

The implication of this is that A would export Q1 and import Q2

from B, while B would export Q2 and import Q1. This economic inter-

action between countries would result in each country improving its so-

cial welfare providing welfare is not a function of the exported commodity

alone. Figure II-1 illustrates the case of Country A. The commodity

exchange ratio before trade is ab. Postulating some welfare function

(W1) yields a social optimum point, C. Because of trade with B, A in-

creases its commodity exchange ratio to be. This yields the socially

optimal point d on the higher welfare function, W2.

In the situation where one country, A, has the "absolute advantage"

in both commodities then trade between the countries would not occur.

The belief was that such a situation would yield no gains to A. This

case is shown in Table 11-3. It is clear that A has the "absolute

advantage" in the production of both Q1 and Q2. Furthermore, A is 1.2

and 1.1 times more productive than B in Q1 and Q2, respectively.

It became increasingly obvious that "absolute advantage" was in-

sufficient in explaining why a significant volume of trade was conducted

among countries other than the least cost producers. This must have






17























0 0 0 01 -
. o o o
0 O C'
-4
r3
0




0 ,
0
Jl0 0 c' 0

0-' 0
oo



H
0



El 0


n~ o- -
c o3
0 0
0 0 0





) ,C *HI *H
oo >

,0 ,0 0 0
00 0




0 0
0a a ~ .
.0 0 cc c
crl ~












FIGURE II-1


Commodity Q2


el


b Commodity Q1






























44
0* H


o ,-
S 0
3,-C .e-I







4 H
0





o
H o c


0 0 C.- 0








1 0' 0 CO C


a< a










oH H 0 .
0 c0
0 0 0 0
o c) *.-( Ho

00 0















Ci Cl iCl 1C
-__ -_


H
H

I-4
H 0
H 3
0




0







given rise to the "comparative advantage" concept long before David

Ricardo formalized it (Brandis, 1967). Ricardo, using his famous

Portugese-wine English-cloth example showed that what is important in in-

ternational trade are cost-ratio comparisons and not cost comparisons.

Returning to the example in Table 11-3, it was stated this represented

a '!no trade" situation under "absolute advantage" conditions. However,

under the "comparative advantage" concept, Country A would export Q1 and

import Q2 from Country B.

Table 11-4 is a conversion of the information in Table 11-3. It

is obvious that Country A is the more efficient producer of Q1 and Q2.

Within its boundaries, Country A exchanges one unit of Q1 for .9 units

of Q2 and one unit of Q2 for 1.1 units of Q1. Country B's domestic

exchange rates are one unit of Q1 for .98 units of Q2 and one unit of

Q2 for 1.02 units of Ql. Therefore, if A exports Q1 to B, where .it is

exchanged for 0.98 Q2, then A realizes a gain of 0.08 Q2 the difference

between the foreign trade exchange rate and the domestic exchange rate.

This "comparative advantage" result is quickly discerned from the Labor

Productivity Ratio, Table 11-4. The I-1 figure for Country A reveals it

is relatively more efficient .than B in producing Q1. Likewise, the .98

figure for Country B reveals it is relatively more efficient than A in

producing Q2
2. 2
The "comparative advantage"concept was a significant breakthrough

but it also was insufficient. More modern approaches have been taken

with respect to this concept (Heckscher, 1919; Ohlin, 1933;

Viner, 1937; Myint, 1958; Linder, 1961; Bhagawati, 1964).

Elimination of the labor theory of value from the concept and incor-

porating other factors of production in the analysis was a major im-

provement. Returning to the two-country (A,B), two-commodity (Q1' Q2)






21
























EO NO

j o o o











H 0
r-H 0 0 0








0



















HOO 0 C U
r> rc


















0000
,-4 H








0:C COO
41 0 0
o o 0.



4J 4-M



o 0 o
0 0 0. 0




0 o
U U -1 I







world, consider the linear transformation curves, bd and gi, and the hypo-

thetical welfare maximization points, e and j, of both countries prior to

any sort of economic interaction (figure II-2 and 11-3). Country A pro-

duces oc of Q1 and oa of Q2. Country B produces o'h of Q2. Total world

production without any economic integration is oc + o'h of Q1 and oa + o'f

of Q2. For analytical convenience, figure II-3 is inverted and placed on

figure 11-2 to form an Edgeworth Box (figure 11-4).

If economic integration begins to take place and Country A specializes

in producing Q2, then total world production of Q1 and Q2 will increase.

Referring to figure 11-4, total Q1 produced in "isolation" from this

yields ch' the increase in world production of Q1 due to specialization

and trade. Total production of Q2equals o'g. Subtracting the total

production of Q2 in "isolation" yields a fa' the increase in world

production of Q2 due to specialization and trade. The benefits of eco-

nomic integration, as opposed to isolation, are demonstrated to a certain

degree by this analysis. However, the actual distribution of these gains

depends on the strength of demand in A and B as it affects the exchange

ratios. Although this analysis assumed constant opportunity cost, which

enabled complete specialization, the general conclusions are the same in

the case of increasing opportunity costs-concave transformation curves.

(Walter, 1968, pp. 62-63).

Eli Heckscher and Bertil Ohlin reworked the "comparative advantage"

concept to emphasize factor endowment and intensity of usage rather than

differing international productivities. Their basic tenet was that the

country with a relative abundance of a particular factor of production

would use this factor more intensively in the production of commodities.

Such commodities would then be exported to countries with a relative

scarcity and high cost of this factor. Thus, the United States, thought













FIGURE 11-2


FIGURE 11-3



Commodity Q2


Commodity Q2


Country A





e



c d

Commodity Q


Country B


hi

Commodity Q1


FIGURE 11-4

ih
i h


c h d,g








to be a capital-intensive country, should export capital-intensive goods

and import labor-intensive products.

The rationale behind this and its economic growth implication are

demonstrated with the aid of figure 11-5. The "double" Edgeworth Box

figure represents a two-commodity (Q1, Q2), two-factor (labor, capital),

two-economy (A, B), world. The curves Qij, are production isoquants of

the i-th commodity at the j-th level of output. The line, CD, is the

Optimum Efficiency Locus and passes through the point of tangency of the

Q1 and Q2 production isoquants. CD represents the case of both goods

utilizing both factors in equal proportions. The curve, EF, represents

the situation where Q1 is capital-intensive and Q2 is labor-intensive.

The curve, GH, represents the case where Q1 is labor-intensive and Q2 is

capital-intensive.

Assume that Country A, the single-edge box, is capital abundant re-

lative to Country B, the double-edge box. Assume also that GH and KL are

the Optimum Efficiency Loci of countries A and B, respectively. The

implication of this is that both countries, before any economic inter-

action produce the labor-intensive good Q1 and the capital-intensive good

Q2. Assume that Country A produces the combination represented by point

N. The relative marginal products (relative returns) of labor and capital

are given by the slopes of the common tangents (OP, RS) to the isoquants

at points M and N. The slope of OP, for instance, is equal to the

marginal product of labor divided by the marginal product of capital in

Country A. In labor-abundant Country B, the slope of RS reveals that

the returns to labor are low relative to that of capital. OP reveals the

opposite about Country A.

Upon engaging in trade with Counrty A, Country B begins to specialize

in and export Q1, the labor-intensive good. Country A moves along its

Optimal Efficiency Locus, GH, to point V. International trade will grow





25











FIGURE II-5


commodity
labor Q2

F

Country A







c
0 / commodity
a Labor Q2
P
p 1 L
Country B
t Y C
a 2P Ta
a p
w
1 i
t
a

C XR N


Commodity labor
QI








until points T and V are reached. At these points, the slopes of the

tangents, WX, YZ, are equal, implying that the prices of Q and Q2 are

equal in both countries. Also, assuming no transportation costs and

technological differences, returns to the relatively abundant factor have

increased while returns to the relatively scarce factor have diminished.

This results in the equalization of the ratios of factor returns and

factor intensities in the production of both goods in A and B.

W. Leontief, I. Kravis and G. MacDougall empirically tested the

Heckscher-Ohlin theory. The results did not verify it. In fact, Leontief's

testing of the theory in the case of the United States showed that this

apparently capital abundant (high captial-labor ratio) country was ex-

porting labor-intensive commodities (Leontief, 1953). The theoretical

expectation is that capital abundant countries would specialize in

capital-intensive exports and labor abundant countries would specialize

in labor-intensive exports. Several explanations have been advanced in

an attempt to explain the inconsistency. One of the better explanations,

which also happened to be most pertinent with respect to development, is

that the theory ignores demand.

In 1961, S. Linder attempted to explain the role of demand in inter-

national exchange. He states that it is the similarity or dissimilarity

of "demand patterns" between countries which determine the direction and

extent of trade. He distinguishes between "internal" and "external"

demand, the former being domestic demand and the latter being foreign

demand. Prior to developing an export industry, a country must develop

a strong "internal demand" for the product. Each country, depending on

its "stage of development", possesses a range and pattern of products.

Countries at the same "stage of development" tend to possess similar

demand ranges and patterns. Based on this, trade will most probably occur








between "similar" countries. Furthermore, the range and quality of

commodities increases directly with per capital income.

Figure 11-6 demonstrates Linder's theory.' Line OB represents a

trend curve which relates quality and range of goods demanded to per capital

income.. The triangular area, OAC, represents the increase in the range of

products demanded as per capital income increases. The line DE is the range

of a Country A with per capital income equal to $1,000. Country B's range

is FG and its per capital income is $2,000. In the lower income country,

A, there is no demand for the quality goods in FH portion of Country B's

range. Likewise, the higher income country, B, has no demand for the

lower quality goods in the JE portion of A's range. Therefore, trade will

occur only in the DJ or HG range of demand. Thus, the greater the income

difference between countries, the narrower the possible range of tradeable

goods. The conclusions to be drawn from these arguments are that demand

does play an important role in determining the gains from economic inter-

action and that such interaction is enhanced as the socio-cultural dif-

ferences between societies' taste-patterns diminish.

Returning briefly to the classical period, there is another theorist

whose work began many a revolution. This is the German, Karl Marx. Marx's

thinking was primarily "classical" and he strongly held to the labor

theory of value. Like Smith, his main concern was development. He re-

garded the entrepreneur as very important to capitalist economic growth

because he, the entrepreneur, was the source of technological change.

Technological change drove the system by providing the opportunity for

profitable investment. Both Marx and the Classicalists viewed techno-

logical change as the means of preventing the rate of profit from falling.

However, Marx held that an increase in investment, brought about by.techno-

















FIGURE II-6


0 1,000
Country
A


2,000 Income per capital
Country
B


Quality
of
goods
demanded







logical change, would temporarily increase employment but each addition to

the stock of capital would tend to swell the "reserve army" of technologi-

cally displaced workers. Further, for investment to be worthwhile, ag-

gregate consumption must increase to absorb it. But Marx points up a con-

tradiction: consumption is a direct function of the Wage Fund which is

being squeezed in order to increase profits.

One way out of the dilemma is, as England, France and others did, to

integrate the economy with others. This was done in such a manner, that

the metropolitan country remained the dominant power in the relationship.

In one word, this escape was colonialism. The mechanism through which

this worked was stated as follows: The decline in profits was due to

diminishing returns to land and fixed factors as Malthus had stated;

capitalists could either squeeze the Wage Fund in order to maintain the

rate of profit or they could seek to improve the availability and quality

of fixed factors; economic annexation of the land and resources of colo-

nial possessions was the application of the second alternative ; diminsh-

ing returns were staved off and the desired rate of profit was attained.

Besides this concrete view of development, Marx did have a more

general view which rose directly from his dialectical materialism. He

perceived history as being determined by the reality of having to produce

to satisfy society's material demands. The actual producers were not

usually the owners of the means of production. This condition placed

the worker in an exploitable and subservient position partician versus

plebian, lord versus serf, capitalist versus proletarian. This social

condition would result in class conflict which would end in a recon-

struction or obliteration synthesis of that society. Marx theorized that

the dialectical process-would lead society on a developmental path

through stages of primitive communism, feudalism, early capitalism,







advanced capitalism, dictatorship of the proletariat and classless

socialist society. Each stage would be marked by increased economic

prosperity.

Marx's concepts have been critiques from a variety of perspectives.

His work has been challenged on the grounds that it fails to recognize

capital-saving technological change and the potential of labor unions.

From an empirical stand point, B. Higgins has stated:

... the countries that have gone Communist have not
been those in which capitalist development has been
most advanced but those in which it has lagged.
(Higgins, 1968, p. 85).

In terms of this essay, it should be noted that Marx makes two connections

between economic integration and development. The first, mentioned

earlier, is the colonialism-trade "escape" mechanism. The second, is the

integration of socio-economic classes within society, culminating in the

fully integrated socialist state. Since integration is usually associated

with the smooth transition from one set of relationships to another, Marx's

dialetical process may appear to be in conflict with this interpretation.

This is not necessarily true according to certain social scientists such

as H. Ian Hogbin (1958). Hogbin has identified social contact as one of the

causes of social change. He theorized that such transitions from one

social form to another occur relatively quickly, which would be in keeping

with the Marxian concept mentioned above.

Thomas R. Malthus viewed economic growth as occurring from increasing

returns to capital, increasing returns to scale and technological change.

The latter, he regarded as spurious and only of temporary effect. The

basic problem stemmed from his belief that the birth rate was influenced

neither by the level of income nor the death rate. Thus, decreasing real

wages did not prompt a decline in the population growth rate. Since there








was a natural limit to the rate of capital accumulation and since techno-

logical change was not dependent on capital accumulation or population

growth, then per capital income would decrease as diminishing returns to

land or labor occurred. The conclusion that Malthus drew from this -

social misery because of decreasing food supply per capital earned

economics.the reputation of being "the dismal science".

H. Leibenstein (1954) developed a theory of economic growth along

similar lines. He theorized that an economy could be divided into an

agricultural and an industrial sector. This dualism was not evident

to Malthus. Technological change was confined to the industrial sector.

Investment in the agricultural sector occurred-until diminishing returns

to land set in. Investors would then shift their portfolios to the in-

dustrial sector which was less land-using. Before long however, diminish-

ing returns to labor would occur, as Malthus theorized, unless there was

technological change in the industrial sector to absorb the increasing

labor supply. Leibenstein concluded that a "big spurt" in the rate of

investment or technology was necessary to raise the economic growth rate

above the population growth rate in order to pull economies out of the

Malthusian trap.

Empirical evidence does not support these theories. R. Nelson

(1960) and I. Adleman (1963) tested these theories and were unable to

find empirical verification of them. However, in the process of doing

this, Nelson rigorously specified the conditions which would result in

an economy being caught in the "Malthusian trap". These conditions

were. The inability to transform additional income per capital into

additional investment per capital; the existence of a preference for pro-

duction mehtods which were relatively less efficient, and the relatively

scarcity of arable land. These last two conditions are alterable in the








Case of international economic interaction, including multinational

corporate expansion and.th" migration of labor.

Between the late nineteenth and early twentieth centuries attention

was focused away from the development question. The Neo-classical school

took root and with it came a renewed emphasis on capital accumulation as

the prime factor in economic growth. Alvin Hansen represented this type

of thinking.

It was held that capital accumulation was necessary to meet increased

labor needs, allowing for no change in production techniques. Physical

capital was distinguished from intangible capital. The former was defined

as the stock of produced goods at a point in time, utilizable in the pro-

duction of other goods. The latter was defined as the enhancement of labor

such as the acquisition of knowledge or skills. Intangible capital was

not calculated in the various measurements of the capital stock. It was

theorized that actual output was a direct function of investment net

additions to the physical capital stock. Investment was regarded as com-

prised of investment by the private sector and investment by government.

Hansen believed that economic growth, defined as an increase in per capital

income over time, could come about in three ways: One, a change in govern-

ment policy to bring about an increase in government investment, two, a

redistribution of income to those with a higher marginal propensity to

consume this would increase the private investment coefficient; and

three, a reduction of taxes this would also increase the private in-

vestment coefficient.

Roy Harrod, very much entrenched in Neo-classical thought, developed

a dynamic model which was so attractive that it was immediately adopted

to development analysis. He attempted to explain the determination of

the optimal and actual rates of capital accumulation. Capital require-







ments (K ) are a proportion of income (Y) that must be saved and invested

in order to maintain a given rate of increase of income. This assumed

that technological change and population growth remained constant, and that

the labor force was a constant proportion of the population. His basic

growth model is derived thus: Capital is directly related to output

(equation II-1);

(equation II-1) K = kY

and differentiating

(equation 11-2) dK = kdY

and by definition, dK equals investment.

Savings (S) is also directly related to income

(equation 11-3) S = sY

Under Neo-classical conditions, ex post savings equals ex post invest-

ment. Therefore, in equilibrium,

(equation 11-4) sY = kdY

And economic growth (g) is

(equation 11-5) g = dY/Y = s/k

Harrod defined the concept of a "warranted growth rate" (gw) as the

rate of growth desired by entrepreneurs. Its derivation is similar to

that of the actual growth rate (g). The major differences are in equations

II-1 and 11-2. The required capital coefficient (k*) may be different

from the actual capital coefficient (k). Thus, the equations may be re-

written,

(equation II-la) k = k*Y

(equation II-2a) dK = k*dY

(equation II-4a) sY = k*dY

Equation II-5a) gw= s/k*

In Harrod's "steady-growth" equilibrium, actual growth and warranted








growth rates are equal. The implication is that the actual and required

capital coefficients are equal in equilibrium. In equation format,

g = gw and k = k* in equilibrium.

In the case of the actual growth rate exceeding the warranted growth

rate, then actual capital is less than desired capital. Entrepreneurs

will react by increasing capital requirements in order to maintain in-

creased output levels. But this only aggrevates the divergence, causing

actual growth to exceed, even more, warranted growth. Without structural

change, this system is explosive once there is a divergence from the

equilibrium path.

Harrod defined the concept of a natural rate of growth (g ) as the

increase in output at full-employment, assuming as constant the rates of

population increase and technological process. If the population growth

rate should decline, then the natural rate of growth would be less than

the warranted rate of growth. Actual capital would be less than required

capital and consequently the economy explodes downwards. In equilibrium,

the three growth rates are identical.

International trade was incorporated in Harrod's theory by a balance

of trade factor, dB/Y,

(equation 11-6) g = dY/Y + dB/Y

So in the case of underemployment, where the natural rate of growth is

less than the warranted rate of growth, a favorable balance of trade

would aid in reducing the deflationary gap. An adverse balance of trade

would aggravate the explosive trend, and a zero balance of trade would

have no effect on the system, all else being equal. This is the most im-

portant role of economic integration in Harrod's model. There is also the

possibility that stability would be less tenuous if economic integration

fostered more flexible capital-output and labor-output ratios.







Harrod's name is usually associated with that of Evsey Domar. The

fact is that the implications of their work were similar but not identi-

cal. Harrod's emphasis was on the conditions which would satisfy entre-

preneurs' investment portfolios so that they would not be changed. Domar's

emphasis was on the required growth rate of income which would guarantee

stable prices and the full employment of capital and labor.

Domar theorized that aggregate demand was equal to investment times

the inverse of the marginal propensity to save. Aggregate output was

equal to capital times the incremental output-capital ratio, a constant.

In equilibrium, aggregate demand is equal to aggregate supply which re-

sults in the growth rate of income being equal to the growth rate of in-

vestment. Investment accomplishes two things, it increases output as well

as grants a certain level of income.

Domar's model is identical to Harrod's when the warranted and natural

rates of growth are equal in the latter. This is primarily because Domar

did not incorporate a population growth rate in his model. In terms of

development, Kurihara and Hamburg have pointed out that these models are

analytically weak. They do not account for disguised unemployment, for

entrepreneurs satisfied with a less-than-full-employment situation, and

for flexible capital-output ratios. Furthermore, their "steady-growth"

reasoning is tenuous because wages may be significantly higher or lower

than interest rates and so affect factor-utilization, entrepreneurial pro-

fit expectations may be inconsistent, and technological change may not be

constant and neutral.

The nineteenth century saw three major "stages" theories put forth

by List, Hildebrand and Schmoller. List theorized that society progressed

through four socio-economic stages. The first stage is that of a typical







"pastoral" life-style with each individual family unit fairly self-suffi-

cient. The second stage is that of a "peasant" life-style marked by an

attachment to the land and basic subsistence agriculture. The third stage

is the introduction of light manufacturing and large scale agriculture. A

significant portion of agricultural production is marketed at this stage.

The fourth stage is the occurrence of largescale and well organized agri-

cultural production, light and heavy manufacturing, and a rapid develop-

ment of commercial activity. This schema, among other things, shows that

each developmental stage is marked by increased economic interaction be-

tween households or individuals in the economy. The final stage particu-

larly emphasizes the development of commercial institutions (markets,

banking, etc.) which facilitate the economic integration of the society.

Bruno Hildebrand proposed a three-stage theory. The first stage con-

sisted of a socio-economic system marked by "natural exchange" or barter.

The second stage was the monetization of the system. This is theorized

to be a natural result of increased exchange activity. The third stage,

is marked by the development of credit and credit institutions. Although

it is difficult to see this stage in the light of increased economic

integration, it is clear that such a stage is conditioned by the degree of

economic integration within society.

Gustav Schmoller believed that development takes place in four stages.

The first stage is illustrated by a manorial or village type of social

organization. Economic interaction is rigidly fixed along traditional

socio-cultural patterns and is usually coordianted by central figures.

The second stage marks the transition from the village society to the

urban society. Here, agricultural pursuits decrease, and people become

more specialized occupationally. This leads to increased economic inter-







dependence. The third stage is marked by regional or "territorial" organi-

zation of political and economic institutions. The fourth stage is that

of "national" political and economic organization. Specialization is ex-

tended to the regional and national levels very similar to Ricardian

thought. As this occurs, economic interdependence, and therefore economic

integration, develops within a nation-state and within the world.

Clark, Sombart and Rostow were the major twentieth century "develop-

mental-stage" theorists. Colin Clark postulated a three-stage process.

The first stage is the pre-capitalism stage. In this stage society is

primarily agrarian and manorial. Technological change is minimal and

dominated by tradition. Production is generally small-scale and of a

handicraft nature. Economic interaction is limited to socially estab-

lished patterns, the control of which is in the hands of local institu-

tions. Regional and national economic institutions are generally

lacking. The second stage, early capitalism, occurs as light manufac-

turing and non-farm enterprise grows relative to agriculture. Increased

urban economic activity takes place encouraging non-farm investment as

well as technological change. The third stage, full capitalism, is the

occurrence of a competitive economy with Smithian attitudes of profit

motivation, laissez-faire and specialization. The "service" sector of

the economy develops. Generally, economic interaction is the most intense

in this stage as economic integration barriers are broken down on a

national basis.

Werner Sombart, writing in 1927, proposed a similar "developmental

stages" theory. His first stage is feudalistic in nature with local

guilds, cultural institutions, and manorial lords determining the pace

and scope of economic activity. He theorizes that it is not until the

lords (or owners) of rural and urban land begin to accumulate capital








that larger-scale enterprise develops. This is the secondstage. Its

chief characteristics are increasing rates of capital accumulation and

technological change. This change in the rate of capital accumulation

occurs not on the local level of social organization, but rather on the

nation-state or international level. Sombart uses the Holy Roman Churbh,

the Medicis, and Fuggers as examples.

His third stage is the occurrence of a capitalistic society driven

by its own spirit of capital accumulation. This closely parallels Weber's

thesis. In this stage, the economy approaches a national system, capable

of supporting investment and continuous technological change but lacking

an attitude of social concern. In other words, there is increasing

probability of a divergence between private and social costs. Like

Clark, Sombart shows evidence of development (as he defines it) being

associated with increasing economic integration.

W. W. Rostow, stimulated by Simon Kuznets' Secular Movements in

Production and Prices (1930), developed a five-stage theory of economic

growth. The five stages are: the traditional society, the preconditions

for take-off, the take-off, the drive to maturity, and the age of high-

mass-consumption. The first stage, the traditional society, is character-

ized by "pre-Newtonian" science and technology, low productivity, rigid

social structure and a predominantly manorial socio-economic system.

The second stage, the preconditions for the take-off, is charac-

terized by the following: The increasing application of modern science

in agriculture and manufacturing; the widening of markets both nationally

and internationally, the acceptance of the idea that economic progress

is a means of obtaining socio-cultural ends, the appearance of entrepre-

neurs, increasing investment in infrastructural pursuits, and the politi-

cal centralization of the country. It is evident that this stage is







distinguished from the previous one by increased socio-economic integra-

tion. "Localized economies" begin to. fuse into larger national entities.

The individual components of the system begin to interact with a greater

proportion of the total components of the system.

The third stage, the take-off, is characterized by a complete change

in social structure with the modernization of agriculture being prominent.

As Rostow states,

The take-off is the interval when the old blocks and
resistances to steady growth are finally overcome. The
forces making for economic progress, which yielded
limited bursts and enclaves of modern activity, expand
and come to dominate thesociety. Growth becomes its
normal condition.
... During the take-off, the range of effective invest-
ment and savings may rise from, say, 5 percent of the
national income to 10 percent or more; although where
heavy social overhead capital investment was required
to create the technical preconditions for take-off
the investmentrange in the preconditions period could
be higher than 5 percent, as, for example, in Canada
before the 1890's and Argentina beofre 1914.
(Rostow, 1970. pp. 7-8).

Apparently, economic integration does not increase in this stage but

the velocity or speed of flow of economic activity seems to increase.

This is particularly evident in Rostow's frequent reference to the

"compound-interest effect" which capital accumulation and technological

change seem to exhibit during this period.

The fourth stage, the drive to maturity, is characterized by the

following: An investment-output ratio of 10 percent to 20 percent, an

overall maintenance of the progressive-modernization drive begun in the

previous stage, the take-off of new enterprises and the levelling-off of

older ones, the adjustment of older socio-economic institutions or the

establishment of new ones to support the growth process, and the spread

of modern technology throughout the economy. Rostow estimates the length

of this stage to be about forty years. The degree of economic integration








increases in this stage as sectors of the economy are linked together in

order that the diffusion of technology takes place. Institutions are

integrated to the extent that they are able to function together for the

attainment of the society's growth objective.

The final stage, the age of high-mass-consumption, is marked by

relatively high per capital income, increased urbanization, increased

social welfare services, decreased proportion of the labor force engaged

in manual labor, and increased consumption (and production) of commodities

which transcend basic food, shelter and clothing. Rostow says, concern-

ing his fifth stage,

The emergence of the welfare state is one mani-
festation of a society's moving beyond technical
maturity; but it is also at this stage that resources
tend increasingly to be directed to the production
of consumers' durables and to the diffusion of services
on a mass basis, if consumers' sovereignty reigns.
(Rostow, 1970, p. 11)

Although no direct reference is made to economic integration in this

stage, it implicitly assumes a fair degree of cultural and economic

integration in order to exhibit mass consumption and production as well

as socially acceptable welfare schemes.

Certain institutional approaches have also been taken regarding the

economic development problem. Weber and Tawney's approach is perhaps

the most prominent. Max Weber, in 1904, put forth the thesis that the

Reformation provided the atmosphere for the sixteenth century development

of captialism. He held that the acquisition of wealth was an innate

desire of Man which was restricted by Thomistic laws on usury, profit

and wealth. It was not until Martin Luther redefined the concept of

"vocation" that material prosperity and profit-seeking became respectable

in Western Society's eyes. Weber concludes that it is the rise of this








new secular society which brought about the development of capitalism

and the rapid growth of Western economies.

R. H. Tawney reworked Weber's thesis so that it would give more

prominence to Calvin because he preached that by predestination the

capitalist was ordained to accumulate wealth. Luther, on the other hand,

never went that far and, in fact, did avow frugality despite his re-

formist stance. Tawney also viewed Calvin as justifying the profit-

motivated squeeze on wages when he preached that the laborer, if his pre-

destined vocation be such, was to seek salvation in work and poverty.

Thus, any increase in the productivity of labor would accrue to the

owners of capital. Tawney added that the development of Capitalism and,

one might add, the development of capitalist economies,was a process

which was long in the making and the Reformation merely provided the

availability of large scale commerce and finance.

Although there are no explicit references to economic integration

it is possible to deduce that Weber and Tawney, particularly the latter,

did have integrative concepts in mind. With the coming of the Reforma-

tion, the realm of the "sacred" was fully integrated with that of the

"secular". The wealth of the "chosen ones" could be integrated with the

sweat of the "less fortunate" to amass more wealth. In other words, the

craftsman became far more productive because he could utilize the capital

of the wealthy, even though he would have to pay dearly for this privi-

lege. In previous times he would have had to rely on his father's capital

(tools, etc.) or start from scratch to make his own.

Joseph Schumpeter's Theory of Economic Development (1911), although

couched in Neo-classical terms, is primarily of the "institutional"

variety because of its reliance on the entrepreneurial factor. The entre-

preneur is the driving force behind economic development for it is he who








recognizes and seizes opportunities for introducing new techniques, pro-

duction systems, commodities and productive resources. He.need not be

inventor, investor or discoverer but he initiates and organizes new eco-

nomic ventures.

The rate of technological change (as well as innovation) and natural

resource utilization is a direct function of the supply of entrepreneurial

ability within the economy. This supply, in turn, is dependent upon the

"social climate" and rate of profit. Schumpeter used the distribution

of income as a proxy or indicator of "social climate". He believed that

the more equally distributed income was, the more amenable would be the

educational system, social attitude and class structure toward economic

activity. Given such conditions, entrepreneurs would seize opportunities

motivated by the initial existence of monopoly profits. Gradually, others

would enter the market, thereby reducing economic profits to zero but

spreading the "innovative" change throughout the economy. Schumpeter

theorized that such activity would have been initially financed through

monetary expansion but subsequent investment would have been financed

by income generated savings.

Schumpeter was careful to distinguish between the latter type of

investment, which he called induced investment, and autonomous investment.

Induced investment was specified as a function of profit, income and

interest. It varied directly with profits and income, but inversely with

the interest rate. Autonomous investment, he theorized, was dependent

upon technological change, natural resource discovery and the entrepre-

neural climate. Economic integration is not considered, except as far as

it would enhance the entrepreneurial climate, placing more resources and

fewer barriers at the entrepreneur's disposal.








Morris and Wood (1971) reiterated Schumpeter's theory, except that

they placed it in an updated framework. Clifford Geertz (1963) supported

Schumpeter's arguments but broadened it to include more socio-cultural

features. He stated that a wide range of cultures can generate "entre-

preneurship" and economic development. He defined the important factors

as the following: One, entrepreneurship or innovative economic leader-

ship occurs in any well defined and socially homogeneous group in other

words, any socio-culturally integrated group; two, such homogeneous groups

ought to have crystallized out of larger traditional groups with a history

of extra-village status and inter-local orientation; three, the tradi-

tional groups underwent (and are undergoing) integrative changes with

respect to their social milieu; four, the homogeneous groups individually

view themselves as exemplary within the context of a degenerating society,

five, the major function of the entrepreneur is organizational rather

than technical, adaptive rather than inventive. Thus economic develop-

ment is viewed as a socio-cultural phenomenon with integration playing

a central role.

Charles Erasmus and Norton Ginsburg would disagree with Geertz..

Erasmus views economic development as dependent on technological and

economic factors, and only secondarily dependent on cultural factors.

He explains away a lot of the so-called cultural effects of manifestations

of technological lags production techniques lagging behind changes in

concepts of improving social welfare.

Norton Ginsburg, the geographer, views economic development as pri-

marily a function of natural resource endowment. He argues that such en-

dowment not only enables development in its own right, but also fosters

the accumulation of capital. He states,

The significance and functions of natural resources








in economic development will differ markedly with
the stages in the developmental process. Under
normal circumstances the role of the resource en-
dowment is most important in the earlier stages of
economic development, when it acts as a means for
capital accumulation and an accelerator for eco-
nomic growth if abundant, and as a depressant upon
that growth if niggardly.
(Ginsburg, 1957. p. 212)

Although Ginsburg falls into the trap.of viewing only the supply side of

the problem, he does seem to indicate that access to natural resources,

whether by territorial integration or technological improvements, does

play an important role in development.

The foregoing does not exclude Geertz's thesis. In fact, recent

work in the area of economic development grants increasing importance

to the socio-cultural factors. The Harvard University Program on Tech-

nology and Society made the following statement in reference to this

matter:

The answer would seem to lie in some sort of 'soft'
determinism: To be sure, which technologies are
developed and applied depends on institutions and
values prevalent in society at any given time; but
technological innovation provides society with new
capabilities, and not all of its consequences can
be foreseen at the time the decision to develop
the technology is made.
(Harvard University Program on Technology and
Society, 1972, p. 27).

J. L. Sadie holds a similar view, conceiving economic development

as the transformation of a society's economy as well as its structural

institutions. He theorizes that the developmental process is initiated

exogenously: when cultural contact is made with an industrialized system

or society. As mentioned previously, this is a form of integration. The

less developed society imitates the advanced one in much the same manner

as Duesenberry postulated in his "demonstration effect" (Duesenberry,

1948). The process continues with the expansion of monetary and trading








institutions and the emergence of a class of businessmen. Here, a greater

degree of inter-society integration takes place.

Cultural traditions still prevade the society and force failure

upon innovative changes. A strong dependence upon government grows as

well as the trend toward "white-collar" education. Sadie sees this as

a socio-psychological process which, if development is to take place,must

be broken quickly and systematically.

Ralph Linton (1964) also emphasizes the socio-psychological factor

and the importance of cultural contact. Perhaps, the more important work

to date in this area is that by McClelland and Hagen. McClelland theorizes

that societies with high levels of "n-achievement" will produce more ener-

getic entrepreneurs, who, in turn, will produce a faster rate of economic

development. His "n-achievement" score of an individual is the summation

of the number of instances of achievement "ideas" (or images) and their

sub-types. The group score is obtained from a measure of central tendency

of the individual scores. He tested the correlation between these scores

and a kilowatt hour production growth rate (electricity) and discovered

that the correlation was significant.

McClelland's thesis has several failings, the most prominent are that

he fails to estabilsh the relationship between "n-achievement" and "entre-

preneurship", and that his correlation "n-achievement" and electricity

production does not define the relationship. In other words, develop-

ment could be the cause of increased electrical output rather than the

other way around. One point not to be overlooked is the growth of elec-

tricity output as an indicator of economic integration in two ways: The

first is that electrical output represents an increase in industrial

potential which would lead to increased specialization and economic inter-








action; the second is that increased electrical output may represent an

urbanization trend with increased travel and communications, which is none

other than the internal integration of society.

Everett Hagen approaches the development question from a multi-

disciplinary point of view. He utilizes McClelland's "n-achievement"

psychological measure (McClelland, 1962) and Riesman's thesis (Riesman,

1950) that society consists of two basic personality types.

Hagen's primary premises are that societies are dual peasants and

elites or plural peasants, elites and trader-financiers; and that

... economic theory has rather little to offer
towards an explanation of economic growth, and
that broader social and psychological consider-
ations are pertinent.
(Hagen, 1962. p. 8)

economic development, which he equates with social changes dependent

upon changes in material culture (technology) and "personality". He

makes it clear that "personality" and social structure are related in

such a way that social change will not occur without "personality"

change. A traditional society, prior to entering upon economic develop-

ment, is uncreative, for its members perceive the world as an arbitary

place and are dependent upon ascriptive authority. This builds into the

society an "authoritarian" social structure and the ethic of the perpetu-

ation of the status quo.

However, as some powerful social disturbance arises, anxieties give

rise to social tensions which, over generations, incite social change.

Social symbols and institutions are challenged and."status respect" is

withdrawn. The society's personality undergoes change from authoritarian

to retreatist to innovational and then to reformational. At the same

time, such changes spur on and are spurred by the discovery, acceptance

and implementation of new knowledge. Such technological change is viewed








as cumulative. Thus, as "personality" and technological" changes occur,

society develops. Furthermore, such changes must be indigenous although

the initial may be exogeneous.

Concerning integration, Hagenappears to imply that integration of

the type which occurred under European colonialism merely perpetuated

the status quo of the underdeveloped areas of the world. The economies

of the colonial power and her possessions were integrated but development

did not occur because indigenous personality and technological changes

were stifled. This latter statement may be interpreted to mean that the

various socio-cultural groups comprising the colonial economic complex

were deliberately not integrated with the result the status quo was pre-

served socially culturally and economically.

Hagen's work leads rather well into the "dualism" theories of develop-

ment. One of the early researchers in this area was J. H. Boeke. He

claims,

Social dualism is the clashing of an imported social
system with an indigenous social system of another
style. Most frequently the imported social system is
high capitalism. But it may be socialism or communism
just as well or a blending of them.
(Boeke, 1953. p. 4)

Dualistic economies will remain in such a state despite foreign and

domestic intervention because they have limited needs, a lack of organi-

zational and business talents, relatively immobile labor and other re-

sources, an aversion to capital, and because they are motivated by social

prestige rather than profit. In other words, dualistic economies are

permanently "disintegrated" or segregated and will not develop beyond

such a state.

Hla Myint views the problem of dualism differently. Due to in-

creased socio-economic integration, the more developed countries in the







world exploit the natural resources (particularly primary products) of

the less developed countries. Such resoucres are usually exported.

Simultaneously, social changes, such as monetization of the economy, are

forced upon the people of the less developed country who are connected

with the export sector. The society then becomes split between those in

the "modernized" enclave, who reap benefits and investments of the foreign

economies, and the remaining sector which stagnates or degenerates as the

poor laboring masses cannot earn the means to increase their skills. Two

biases are thus built into such disintegrating societies: One, foreign

and domestic investment generally go to the more lucrative and skilled

export sector; two, industries tend to be capital intensive because of

lack of skilled labor despite a superabundance of labor.

B. Higgins adds to this a vicious circle argument. He states that

the way to overcome the problem in the "rural" or non-modernized sector

is to increase the land-labor ratio to the point where agricultural

mechanization is profitable. In countries with high population densities

this may be done only by transferring labor from the "rural" sector to

the "modernized" enclave. But this results in an increase in the marginal

product of capital which encourages the export or modernized sector biases

mentioned above.

H. Singer sees "vicious circle" aspect of the dual economy as

one of the most serious obstacles to economic development. It is also

enhanced by the ethnocentric argument that the less developed countries

are characterized by a low savings-income ratio which retards future

growth, and so the cycle continues. R. Nurske (1953) and Singer (1953)

propose that these obstacles can be overcome only by a "big push", co-

ordinated in both sectors, to transform the economy from an eighty percent

to a fifteen percent agrarian-based economy. As such transformation








occurs, productivity and real demand increases, regenerating further

productivity and domestic market expansion. Involved is the integration

of the two segments of the economic system and the resulting increase

in industrial and agricultural specialization.

Albert Hirschman agrees with Singer's thesis that a "big push" is

necessary to break out of the "vicious circle" of underdevelopment. He

also places as much emphasis on complementarity as a vital aspect of the

developmental transition as does Nurkse. However, he theorizes that,

The ability to invest is acquired and increased pri-
marily by practice; and the amount of practice depends
in fact on the size of the modern sector of the economy.
In other words, an economy secretes abilities, skills
and attitudes needed for further development roughly
in proportion to the size of the sector where these
attitudes are being inculcated.
(Hirschman, 1985. p. 36)

Hirschman concludes that the development "big push" must occur in

deliberately selected sectors because of a scarcity of savings and a

lack of growth-oriented social-psychology. These "leading" sectors are

to be selected on the basis of the number of "backward" linkages associ-

ated with them on an input-output matrix. The greater the number of

linkages an individual sector possesses, the more prominent it is with

respect to receipt of investment funds. This approach places heavy em-

phasis upon the assumption that in a dual or plural economy, once the

initial "push" is underway, economic integration will occur by means of

functional relationships between productive segments of the economy.

Such integration will thus create the fabric of the economy upon which

further productivity will take place, generating future growth.

From the dualism concept came the celebrated thesis of W. Arthur

Lewis (Lewis, 1954). Lewis bases his theory upon three assumptions:

The first is that the economy is dual with wages in the agricultural







(traditional) sector being at the subsistence level because of a relative

abundance of labor. At the same time, the marginal product of labor is

higher in the industrial (modernized) sector which is reflected in a higher

industrial wage. In general, the supply of labor is perfectly elastic.

The second assumption is that the rate of capital accumulation in the

industrial sector is not larger than the rate of population growth. The

third assumption is that the cost of training labor is constant. This

reduces the problem of obtaining skilled labor to a "quasi-bottleneck"

situation in Lewis' own words.

Figure II-7 is used to illustrate Lewis' thesis. WI and WA are the

wage levels in the industrial and agricultural sectors, respectively. The

curves, MPL1 and MPL2, are marginal product of labor curves in the in-

dustrial sector. As labor moves from agriculture to be employed in in-

dustry, a surplus accrues to the owners of capital this is because of

the perfectly elastic labor supply. This surplus is represented by the

shaded areas in the diagram. Capitalists reinvest a portion of this

surplus which brings about a shift in the MPL curve to MPL2. More labor

is employed and more surplus accrues to the owners of capital. Providing

wages in both sectors remain relatively unchanged, growth occurs but the

benefits primarily go to the owners of capital.

Lewis postulates three ways in which this pattern of growth may be

broken. The first is the case of population growth being less than eco-

nomic growth in the industrial sector. This situation would result in

increased productivity in the agrarian sector and wages would rise in both

sectors. Should a "population multiplier", defined as the relative change

in population, be in operation, then this case would fail to break the

growth pattern. The second case is the occurrence of technological change

















FIGURE II-7




Output


Employment of
labor








in the agrarian sector due to increased socio-economic integration of the

two sectors. Should agricultural wages exceed industrial wages then the

labor flow pattern would be broken. The third case of the breakdown in

the pattern of growth occurs as a result of the internal terms of trade

turning against the industrial sector. As non-industrial prices increase

relative to industrial prices, minimal wages in all sectors of the economy

rise. This would slow down the growth rate and possibly stop it should

agricultural wages exceed industrial wages. This third case emphasizes

the occurrence of increased sectoral interdependence (integration) as

growth takes place.

Lewis' theory has several implications with respect to internal

trade. Technically modernized enclaves in less developed countries are

generally export oriented (Levin, 1960). Because of the structure of the

economy, the wage rate in this sector is maintained at a level just above

the (subsistence) agricultural wage. This, coupled with monopoly ele-

ments in international markets, results in the international terms of

trade favoring the more developed importer and being against the less

developed exporter. Thus, such trade may increase employment in absolute

terms in the modernized sector of the economy but simultaneously decreases

labor's relative share in the economic growth which takes place. By de-

sign, the agrarian sector is not fully integrated into the foreign and

domestic aspects of the nation's economy. The result is that many less

developed countries appear to possess a comparative advantage in capital-

intensive industrial products.

One of the most prominent statements on the "big push" theory of

economic development is that of Paul Rosenstein-Rodan (Rosenstein-Rodan,

1957). He states that economic development is primarily a function of








capital accumulation. This function is made complex by three indivisibili-

ties associated with investment. These are: One, indivisibility of

social overhead capital lumpinesss); two, indivisibility of demand

(complementarity); three, indivisibility of the supply of savings (kinky

savings supply curve). These indivisibilites arise because of imperfec-

tions in the financial markets and the state of technology. These indi-

visiblities necessitate a "big push" or a concentrated effort on the part

of the entire economic system if development is to begin and take root.

In other words, internal economic integration is necessary to some degree

because of these externalities. The degree to which this is necessary

depends on the quality of resources available and the extent to which

foreign trade reduces the range of complementary industries.

C. Kindleberger views economic development similarly (Kindleberger,

1965). He holds that a major portion of production in traditional

societies is geared to a local market area (10 to 15 mile radius). As

the society undergoes internal integration through improvements in trans-

portation, communications, marketing institutions, (among others), these

"local markets" expand and positively alter production incentive. In

other words, large infrastructuralinvestment, a "big push", is required

to set off development.

Ragnar Nurkse as mentioned above, regards this problem as a "vicious

circle" in that small markets (in the sense of low demand) discourage

capital formation which results in low productivity. Low productivity

maintains small markets either by lack of incentive (Bator, 1958) or by

Say's Law. To overcome this problem in the less developed countries,

Nurkse advocates coordinated developmental planning on a system-wide

basis (Nurkse, 1953). A synchronized or integrative investment plan

over a wide range of "complementary" industries may sufficiently reduce

the risk factor to encourage future investment.







John Fei and Gustav Ranis conceptualized the development of the

labor surplus economy in much the same manner as W. A. Lewis (Fei and

Ranis, 1964). Their theory, represented in figure 11-8, is based upon

the following assumptions: ultivable land is limited; wages in the

industrial sector (Wi) exceed wages in the agricultural sector (W ); the
a
"institutional" industrial wage is constant; labor is redundant in the

agricultural sector; the production isoquants (Qo' Q1) in the industrial

sector are "well behaved"; technological change occurs only in the indus-

trial sector; as labor migrates from the agricultural to the industrial

sector the internal terms of trade do not change; capital accumulation

in the economy increases employment only in the industrial sector since

landowners prefer, by assumption, industrial investment.

Figure 11-8 shows that as the stock of capital is increased from

K to K the marginal product of labor (MPL) shifts from MPL to MPL .

Industrialists maximizing profits will set real wages equal to the mar-

ginal product of labor. Thus, as capital increases to K., output and

employment (in the industrial sector) increases to Q1 and L1 respectively.

This process continues until the surplus labor is absorbed this occurs

at the "turning point" on the labor supply curve. When the MPL curve

shifts to the extent that it intersects the labor supply curve at a

point to the right of the "turning point" then real wages must be raised

in order to attract labor away from the agricultural sector. In such a

case, capital accumulation must proceed at an even faster rate in order to

maintain the same labor absorption rate, assuming that technological change

does not alter the shape of the MPL curve.

This theory involves the same economic integration factors as Lewis'.

Integration of the two sectors with regards to labor and capital are

essential. Other areas of integration are the markets for agricultural














FIGURE 11-8


Capital

Expansion path




K1



K----------------
K0


QO
0
labor


:put, i labor supply


MPL0








and industrial products. International integration, which usually omits

the agricultural sector of the less developed country, may encourage

growth of the industrial sector and increased employment. On-the other

hand.it may introduce technology with a high capital-labor ratio which

would aggravate the problem. This issue of foreign investment and assis-

tance was dealt with rather thoroughly by H. B. Chenery.and A. M. Strout

in their "two-gap" model analysis (Chenery and Strout, 1966).

As was mentioned above, the developmental processes of these

"dualism" theories may be broken or dampened by changes in the internal

terms of trade between agricultural and industrial products. A similar

concept was applied on an international basis by Paul Prebisch and Hans

Singer. They theorized that in trade between the more developed and less

developed countries of the world, the terms of trade tend to move in

favor of the former (Prebisch, 1959, 1962; Singer, 1964). Explanations

of this thesis have been based on Engel's Law, monopoly power and income-

elasticities of demand. The empirical evidence appears inconclusive,

especially when the argument is based on the concept of the less developed

countries being exporters of primary products (Ellis and Wallich, 1961).

The implication of the Prebisch-Singer thesis, with respect to develop-

ment, is for less developed countries to diversify their output and to

move away from purely primary goods production. In other words, these

countries should practice "import-substitution".

Relatively recently there has evolved a school of developmental

thought known as "dependency economics". Development, in this context

is defined as follows:

Real development involves a structural transformation
of the economy, society, polity and culture of the
satellite that permits the self-generating and self-
perpetuating use and development of the people's








potential. Development comes about as a consequence
of a people's frontal attack on the oppression, ex-
ploitation and poverty that they suffer at the hands
of the dominant classes and their system.
(Cockcraft, Frank, Johnson, 1972. p. xvi).

The dependency theorists hold that the economics of the world exist in

various integrated groupings. The integrative structure of these groups

is one of dependency. Dos Santos defines three types of dependency re-

lationships. These are "colonial'', "financial-industrial", and "techno-

logical-industrial". The "colonial" type is the case where,

... commercial and financial capital in alliance
with the colonialist state dominated the economic
relations of the Europeans and the Colonies by mono-
polization of land, mines and manpower in the colo-
nized countries.
(Dos Santos, 1970. p. 232).

The "financial-industrial" type is the case of,

... domination of big capital in the hegemonic centers,
and its expansions abroad through investment in the
production of raw materials and agricultural produc-
tions for consumption in the hegemonic centers.
.Dos Santos, 1970. p. 232).

The "technological-industrial" type is the case of,

... multinational corporations which began to invest
in industry geared to the internal market of under-
developed countries.
(Santos, 1970. p. 232).

The general structure of the dependency relationship is illustrated

in a figure 11-9. There exists certain metropolitan centers which are

politically dominant and highly industrialized. Associated with these

centers in an unilateral dependency relationship are underdeveloped

satellite states. These relationships, as described above, are often

political and are almost always economic. The "metropoles" compete with

each other on an equal basis in international markets. However, the

satellites are restricted from such activities unless under the sanctions

of their respective metropoles. Thus, the economic development of those















FIGURE II-9








satellites with.comparatively large foreign sectors, is determined by the

dominant metropolitan country. Further, as Levin states,

The existence of foreign factors, remitting their in-
come abroad, casts serious doubt upon the validity of
several widely accepted fundamental assumptions, the
most important of these being the identity between pro-
duction and income within a geographic area.
... It may be appropriate for this purpose to view the
national frontier of an export economy as running not
along its geographical boundaries but through the ex-
port production process itself, separating the domestic
factors from the foreign factors, and marking as an ex-
port only the product of domestic factors which crosses
the line toward the outside world.
(Levin, 1960. p. 173).

The satellite's economy itself is far from being an integrated

structure. It is viewed as being dualistic(Beckford, 1972). The

dominant industrialized sector is the metropole-oriented encla e to which

Levin refers (above). The "backward" sector is generally agrarian, a

source of factors of production for the modernized enclave and of an

indigenous socio-cultural structure. The hatched area in figure 11-9

represents the metropole-oriented enclaves within the satellite countries.

It is the strong linkage between the enclave and its respective metropole

which effectuates the rigid dependency structure. The structure regener-

ates itself in one of Dos Santos' three forms (or a combination of them)

until it is politically or economically no longer feasible.
















CHAPTER III.

ECONOMIC INTEGRATION


In light of Chapter II, it should be clear that socio-economic

integration was and is not explicitly considered as a causative factor

of economic growth or development. This is perhaps because of the

narrow and sterile definition usually given to socio-economic inte-

gration. However, from the simple demonstration in Chapter II, a

broader concept of integration plays an important role in many of the

developmental theories. In order to pursue this, it is necessary to

explicitly define the conventional concept of socio-economic integration

and its more realistic extension more realistic because it neither

attempts a total abstraction of the integrative institutions from

its socio-cultural milieu, nor confines integration to arbitrary

political units at the nation-state level of social organization.

This is the objective of this chapter.

Generally, economic integration may be defined as the cooperation,

harmonization or unification of units of production or consumption.

Such units may be households, nation-states, or any other form of

socio-economic organization. However, the conventional definition

of economic integration is of much narrower scope. For example,

Ingo Walter refers to it as,

...attempts by groups of nations, which may or may not
be regionally cohesive, to eliminate or reduce restrictions
to trade, payments, and factor mobility among themselves,
while at the same time retaining most or all of these









restrictions on transactions with respect to the rest
of the world.
(Walter, 1968. P. 536).

Accordingly, the integrative process begins at a stage of "non-integra-

tion" (as opposed to a state of disintegration), and possibly proceeds

through stages of "free-trade agreements", "custom unions", "common

markets", and "economic communities".

Figure III.1 represents three countries, A, B, and C, in a "non-

integrated" situation. Economically, they are three totally separate

sets. That is, there is no economic interaction between any of them.

If trade should occur between all three countries then they would be

integrated at a very basic level. Such a situation is depicted in

figure 111.2. The differing number of rings bordering each country

is utilized to illustrate the differing trade conditions, particularly

tariffs and quotas, existing in each country.

The next major integrative stage would be the establishment of a

"free-trade area". This is an agreement by participating nation-states

to trade with each other (in each others' commodities) with no trade

restrictions such as tariffs. This is illustrated in figure III-3

where countries A and B have formed a "free-trade area". The trade

channel between A and B is unrestricted while the channels between C

and A, and C and B are still subject to trade restrictions. In many

instances, "free-trade agreements" are "limited", in that they may

apply only to select products or may allow certain trade restrictions

to remain for specified periods. This often occurs in the case of

"infant" industries and less developed economies where it is believed

that protective tariffs are vital in the early stages of growth.

The establishment of a "custom union" is the next stage. This













FIGURE III-l


FIGURE III-2





63






FIGURE III-3


FIGURE III-4








is the case where participating countries not only conform to the

conditions of a "free-trade agreement" but also enact a common external

tariff and quota system. Figure III.4 illustrates the establishment

of a "customs union" by countries A and B. Countries A and B engage

in free-trade with each.other but conduct trade with country C under

identical trade restrictions both A and B are now bordered by double

rings.

Generally, "customs unions" allow commodity markets to function

efficiently as an allocative and distributive device. This has been

discussed above with respect to the theory of "comparative advantage".

The implication is that the real income of member-countries (of a

"customs union") will increase. This increase in aggregate demand

will result in the widening of existing markets and the establishment

of new ones. This will result in further economic growth providing

Say's Law and the availability of productive resources do not falter.

On the other hand, "customs unions" may cause world or regional trade

to shift from a more efficient (lower cost) non-member country to a

less efficient (higher cost) member country. In a global sense, this

is not optimal. From the point of view of "customs unions" members,

they would be obliged to purchase such commodities at non-competitive

prices.

The following example shows some of the possible results of the

formation of a "customs union". In figure III-5, line x2 x

represents the international terms of trade facing a country A when

it trades with a country B. It is assumed that country A specializes

in the production of commodity X2, country B is the world's lowest

cost producer of commodity Xl, country A has in effect an ad valorem
















FIGURE III-5


Commodity X2









tariff on X1, and the curves Wi are the welfare curves of country A

(Wi greater than W for i greater than j). Country A, in this case,

will be at its welfare maximization point F.

If a ''customs union" is established consisting of countries A and

B, then the relative price of commodity X1 will be reduced to its pre-

tariff, free-trade level. This will cause the terms of trade to change

to some level represented by the line X2'X11", ceteris paribus. Country

A's welfare maximizing point would now be G on the greater social

welfare function W3. Thus, country A would gain from a "customs

union" under these circumstances.

If country B was to be excluded from the "customs union" and in

its place, a higher cost producer of X1, country C, was to be included,

then the relative price of X1 would be higher thereby making the terms

of tradesome line X2'X1'. In this case, country A's welfare maximizing

point would be E at the lower welfare level W1. Thus country A would

not benefit from a "customs union". (Further demonstrations of this

type are performed by Franz Gehrels, 1956-57).

Further, if country A's tariff on commodity X1 was even greater

prior to the establishment of the "customs union" then there is a

greater probability of country A benefiting from a "customs union"

irregardless of the cost of production levels of the other member

countries. One reason for this is that country A's terms of trade

under tariff conditions would approach or even surpass the terms of trade

line X2' X1' (figure III.5). In this case, whether country B or C

is included in the union, country A would not lose much and could even

gain a lot. A second reason for this likelihood has been offered by

Ingo Walter '(Walter, 1967). He theorized that a condition of









relatively high tariffs in international markets tend to restrain the

volume of trade. The establishment of a "customs union" would lead to

a growth in trade among members providing trade diversion does not take

place. Such growth may foster high expectations for future growth

and such expectations, of themselves, may lead to trade creation.

With respect to "customs unions", several other factors should be

taken into account: One, it is held (Viner, 1950; Tinbergen,

1959) that the larger the economic size of the union, the greater is

the probability thatit will be beneficial. The reasoning behind this

is that the more countries and the larger the economies, the greater

is the likelihood that the low-cost producers are included. Two,

economic distance, which may be approximated by some measure of trans-

portation cost such as the difference between a commodity's cost upon

arrival (c.i.f.) and its cost at departure (f.o.b.), tends to vary

inversely with the volume of trade (Balassa, 1961). This should

be taken into account when projecting expected benefits.

Three, the economic structure of the member countries may

significantly affect the success of a "customs union". If the economies

are similarly structured with considerable overlapping in the range

of commodities they produce, then they are "competitive". "Competitive"

economies may politically be reluctant to integrate since benefits from

intra-union trade may be small (Viner, 1950). However, S. Linder

(Linder, 1961) shows that these conditions are necessary for these

economies to successfully integrate. This theory is analyzed in

Chapter II, above. On the other hand, Viner holds that a "customs

union", whose member countries have differing production ranges

("complementary" economies), is most likely to succeed. The rationale









is that such conditions provide greater specialization and market-

creation opportunities. Other factors which may aid or hinder the

success of "customs unions" are national or international subsidization

of industries, foreign ownership of domestic industries, international

mergers and licensing agreements.

The next degree of economic integration is the establishment of a

"common market". A "common market" is a "customs union" with the

additional feature of unrestricted factor-mobility among the member

countries. Figure III-6 illustrates the case of a "common market"

between countries A and B. Both countries engage in "free-trade"

with each other but exhibit a common external tariff wall when engaged

in trade with country C. In addition, the factors of production of

either country A or B may freely migrate from one country to the other

as illustrated by the '!common market" factor channel in the diagram.

The benefits to be gained from the establishment of a "common

market" are similar to those mentioned above in respect to "customs

unions". Furthermore, the factor mobility feature of a "common market"

should lead to production optimality. The reasoning is that the factors

would migrate to places and usages where their returns (marginal revenue

product) were highest. Under perfect competition assumptions, this

would assure the most efficient use of these factors and the optimization

of production for a given level of technology. (Efficiency is used

here in the Paretian sense Henderson, J.M. and Quandt, R.E., 1971.

Pp. 225-264). Drawbacks would occur where the conditions of perfect

competition are violated either because of natural forces or governmental

policies. Such appears to have been the situation in the case of the

Central African Federation and the Latin America Free Trade Association.













FIGURE III-6


FIGURE III-7


Economic community:
linkage /









On the other hand, the Central American Common Market has been relatively

successful, perhaps because of the complementarity of the products and

the economic policies of Costa Rica, Guatemala, El Salvador, Honduras,

and Nicaragua (Walter and Vitzthum, 1967).

The final stage in conventional economic integration is the

establishment of an "economic community". This is the situation where

the member countries of the community participate in free-trade,

unrestricted factor-mobility, economic policy and monetary harmonization.

Figure III-7 represents the formation of an "economic community"

involving countries A and B, but excluding country C. Interaction

between countries A and B is no longer confined to set channels but

rather is a total linkage of both economies. The major difference

between this integrative stage and those previously mentioned is the

coordination of economic policies to meet the welfare objectives of each

member country. Frequently, this requires the establishment of a

single "supra-national" economic authority and a single monetary auth-

ority. The formation of such a union is of general economic optimality

in a Paretian sense. The possible disadvantages and problems are

numerous. Such a union poses a definite threat to a country's sovereignty

in that it loses immediate control over a significant area of national

power. Furthermore, national economic objectives may be so different

from one country to another that policy harmonization may be an

impossible task. (Meade, 1953 and 1955).

The conventional concept of the economic integration of societies

is clearly narrow in scope and applicability. It deals primarily with

the nation-state level of social organization. It ignores social

organization at other levels and social structure at all levels.









However, it is readily incorporated into the integration concept of

Julian Steward (Steward, 1955) and, to a lesser degree, Robert

Redfield (Redfield, 1941). Redfield and Steward viewed the normative,

patterned and relativistic aspects of culture from the perspective

of levels of integration, beginning with the nuclear family level and

progressing to the more complex community or folk society level.

Redfield used the concept of the modernized city (Merida) to establish

the linkage between the folk society level and the nation-state level.

He emphasized a unilinear, somewhat evolutionary, approach to the

integration and social change question.

On the other hand, Julian Steward takes a multilinear approach.

He defines three major socio-cultural lev. s or strata. These are the

nuclear family, the community and the nation-state levels. These

levels may be extended as was done by Charles Wagley .(Wagley, 1968).

A society (nation-state level) may be culturally analyzed from a schema

of "horizontal" and "vertical" cleavages. Figure III-8 illustrates

this. The rows represent the horizontal cleavages at different levels

beginning with the nation-state and culminating at the family level.

The columns represent the vertical cleavages differentiated along lines

of specific cultural or subcultural patterns. Horizontal cleavages

tend to run along occupational or class lines. Vertical cleavages

tend to appear in such folk achievements as music, arts and crafts,

religion and ideology. These may vary from one vertical cleavage

column to another. A major obstacle in the social scientist's path

today is the failure to recognize that subcultures do exist within

the same society and are significant in the orientation of the society.

The concept of "national culture" is a much abused one. It should


















FIGURE III-8


-- .b.: horizontal cleavages


10. : vertical cleavages









refer to widescale (in terms of a nation) economic, religious and

governing institutions functioning on the national level (confer

figure III-8.. It should also refer to "cultural products". That is,

those achievements in the arts and sciences (or even athletics) which

are nationally or internationally recognized. If the definition of the

national level of socio-cultural integration is constrained to the above,

then it is possible to develop a fairly homogeneous concept of "national

culture" and it would be possible to thoroughly analyze it by consultation

with economists, religious historians, political scientists and legal

experts. But careful observation of shared national behavior will

reveal events which are inexplicable by specialists thinking in the

framework of horizontal cleavages. Such events find meaning only when

viewed in terms of the underlying vertical relationships. Thus, to

understand why cod fish is part of the Caribbean culture at the national

level, one must examine the development of eating patterns of a

subculture existing at a totally different level of integration.

The second level of socio-cultural integration goes by several

names including "multifamily" and "community". The characteristics of

folk socieites are smallness, isolation (relatively speaking),

homogeniety, supernaturalism, an orientation towards implicit goals

and values, and the strong influence of kinship-patterns.. As the

folk society becomes integrated into vertically superior (an ordinal

concept) levels such as the nation-state, it tends to become secularized.

Its members become individualized in terms of occupational, economic

and ethnic categorization. The community loses its homogeniety and

organizational rigor. In his "Folk Culture of Yucatan" (Redfield,

1941), Robert Redfield shows the contrast between the more nationally









integrated modernized city, Merida, and the folk societies of Dzitas,

Chan Kom and Tusik. However, these are no more .than "developmental

levels" within the context of a particular level of socio-cultural

integration. This differs with Redfield's evolutionary transition

view whereby various levels of society gradually change into a more

advanced form.

By all appearance, the biological nuclear family is both

structurally and historically prior to the folk society level. In most

societies, the family forms the central unit of socio-cultural activity.

It is the major reproductive, religious and educational unit. In

previous times, it was the major productive and political unit. This

level of integration is characterized by a fair degree of self-sufficiency

in religion, education, welfare and economic activity. Presently, there

is a trend to transfer many of the socio-cultural functions of the family

to the community or national levels. In fact, it is quite possible to

believe that most, if not all, of the family's functions will eventually

be relegated to the nation-state level (Toffler, 1970).

Besides viewing the levels of socio-cultural integration in a

static model, it is possible to view it in a dynamic one, Julian

Steward refers to this as "developmental levels". He says,

In the growth continuum of any culture, there is a succession
of organizational types which are not only increasingly
complex but which represent new emergent forms. ...In
culture, simple forms, such as those represented by the family
or band, do not wholly disappear when a more complex stage
of development is reached, nor do they merely survive
fossile-like, as the concepts of folk ways and mores formerly
assumed. They gradually become modified as specialized,
dependent parts of new kinds of total configurations.
(Steward, 1955, P. 51).









In the context of socio-cultural integration, development implies a

more complex structure but complexity does not necessarily imply

development. Further, the process of cultural change does not necessarily

move along predetermined steps or any particular evolutionary sequence;

neither does it results in a sequence of identically structured develop-

mental levels.

In general, if one accepts the assumption that the nuclear family

is basic to every modern society, then it is reasonable to deduce that

from it was generated more complex social forms such as the extended

family, tribes, folk society (in its many forms), and so on.

Presently, the most powerful and dominant of the levels appears to be

the nation-state.

In utilizing the concept of levels of socio-cultural integration,

the following factors are important: First, the family's practices

leave permanent imprints on its members' behavior and influence national

culture patterns in the case of child rearing, eating, and recreation,

among other things. These practices generally take root at an early

stage and become ingrained in national culture. Community patterns

generally affect national culture to a lesser degree because they do

not play as significant a role in individuals' subsistence and economic

attitudes.

Second, national culture possesses common behavioral traits which

come about only because of common participation in national institutions.

For instance, all members of the nation conform to a prescribed behavior

set pertaining to matters of law and order. The effects that such

national institutions have upon individuals may vary considerably at the

community level or at the family level. Third, mass communication's




76




development has tended to standardize national ideals of behavior.

Finally, because of such social pressures as poverty and political

representation, national institutions and national attitudes may

undergo significant change in a relatively short period. However,

similar change on the community and family levels may literally take

centuries.















CHAPTER IV

AN INSTITUTIONAL FRAMEWORK FOR
ECONOMIC DEVELOPMENT ANALYSIS


The first objective of this chapter is to provide an institutional

framework for economic development analysis. The review of the develop-

ment literature in Chapter II reveals that there is a cumulative trend in

the work of economic development scholars towards institutionalism or

structuralism. The general reason for this is a dissatisfaction with the

conventional framework, primarily because of its failure to recognize

Economic Man as part of a socio-cultural whole. The conventional frame-

work does not deal sufficiently with institutions. However, institutional

change is a crucial aspect of the developmental transformation of soci-

eties. Knowledge of the process of such change is essential for develop-

mental planning and policy-making.

The second objective of this Chapter is to provide a taxonomy of

concepts relevant to the institutional framework. The need for such is

obvious from Chapter II, which shows that there currently exists a multi-

plicity of definitions of economic development. One group of theorists

views economic development as the rate of accumulation of wealth (variously

defined); a second group views economic development as an increase in

the rate of attainable commodities; a third group maintains that economic

development is progress in the movement towards social equality (variously

defined); a fourth group holds that economic development is the process

of "depauperization"; a fifth group views economic development as the

structural transformation of society; and a sixth group defines economic

77








development as economic growth an increase in real per capital income

per unit of time. Ambiguities exist in terminology with much of the pro-

blem being that terms, such as poverty and wealth, are rooted in the im-

plicit philosophical ethic of their user's culture.

The third objective is to demonstrate the importance of socio-

economic integration to the process of economic development. Chapter III

has shown how restricted the predominant concept of integration is. Its

applicability has been primarily on the nation-state level of social or-

ganization. The alternative concept of integration, based on anthro-

pological research, has far greater significance for the economic develop-

ment of society. Primarily, this is because integration plays a major

role in the process of institutional change. As mentioned above, this

processis involved in the economic transformation of societies.

It is highly probable that a majority of social scientists would

agree that economic development is the occurrence of social change such

that the economic well-being of society is improved. However, the

practicality of this definition, as it stands, is rather limited. This

is primarily because it calls for the definition of a social welfare

function by which to judge changes in the society's well-being. Investi-

gations into the problems of existence and definition of social welfare

functions as well as possible alternatives, are to be found in Bergson,

1938, Scitovsky, 1941-1942, Samuelson, 1948, Arrow, 1951, Bator, 1957,

Rothenberg, 1961, and Roberts and Holdren, 1972.

However, economic development, as defined above, may be approached

from another perspective. Development is concerned with social change

and cannot be abstracted from the concept of society itself. Society is

an interacting aggregate of people (in this case) who share ideas and

behavioral patterns which have been learned or somehow transmitted. The

implication is,








Society to Kroeber and Parsons, constitutes the struc-
.ture of social relationships, whereas culture is the
content of those relationships the material items and
behavioral characteristics and symbolic meanings that
emerge from the relationships that constitute the struc-
ture. Neither culture nor society can exist without the
other, but they can vary independently in that there may
be more than one culture in a single society, and a
single culture can exist in more than one society.
(Berreman, et al. 1971, p. 40).

A proper analysis of economic development must incorporate the socio-

cultural dimension of Man's existence

The basis of human society is the individual. For purposes of this

essay, the individual is defined as a person who conforms to the following

three assumptions: The first, interdependency, is the condition that an

individual's secular existence is dependent upon other human beings as well

as the resources of the universe. That is, a person requires other persons

in order to come into secular existence and to remain in existence. Like-

wise, an individual requires the food from the earth to exist.

The second assumption, rationality, involves conditions of consist

tency and deliberate choice. The individual is consistent in that he

always chooses in accordance with his personal development objectives.

He exercises deliberate choice if he selects with knowledge (even though

limited) from among alternatives. He neither exists in a deterministic

world nor is his existence one of fixed responses to stimuli. He pre-

serves his rationality as long as the above is true, even if he appears

irrational to others. For example, if an individual resides in in a fish-

eating community where he consumes fish once per day but his development

objective is to consume steak once per day, then he is being rational

when he chooses not to consume fish twice per day when the opportunity

presents itself. However, he appears irrational to the community of

fish-eaters whose goal is to eat fish three times per day.








The third assumption, fallibility, is that the individual does not

possess perfect knowledge. Accordingly, each undertaking involves some

degree of uncertainty. The individual, depending on his character,

possesses some level of tolerance of uncertainty. If his level of toler-

ance is significantly above average, he is a "risk lover". If it is

significantly below average, he is a "risk averter".

Economic Man, a general term for one who conforms to the three

fundamental assumptions above, seeks personal economic development. He

achieves such a state when reality coincides with his ideals of secular

existence. He accomplishes this through a process of choice. Basic

to an analysis of this process is the concept of the individual's know-

ledge set, K., where the subscript j refers to the j-th individual. K.

is the aggregate of individual j's cognition of existence as it is and

as it ought to be. It is expanded by primary and secondary experiences

and accompanying intellectual activity. Primary experiences are direct

sensory perceptions and secondary experiences are the communicated per-

ceptions of others. Intellectual activity is a general term for the

understanding of information whether it be founded in experience or

imagination(creativity).

A subset of individual j's knowledge set is his normative economic

set, N.. The elements of N. are j's economic ideals. These are ideals
j* J
whose attainment depends on the resources (including produced goods and

services) available to j. In a sense, the elements of N. are j's economic

objectives. N. is entirely dependent on K.. An example of an element of

N. would be j's having a pool in his yard.

Economic reality for individual j partially consists of the set of

resources that he has at his disposal. This may be represented by Qj the








vector of the matrix Q. The matrix Q is defined as follows:

Q = {qj,i j = 1,...,n. (index of persons)
i = 1,....m. (index of resources)

Q. = {qj,,...,q j,k1 (consumption products)

qj,k" ..'' j,Z-1 '(capital products)

q j, (labor)
qj,+1,.. ,qj,m-_ (natural resources)

q ,m} (time).

By simple deduction, all elements of Q. are also elements of K.. In other

words, resources are not really at j's disposal unless he is cognizant of

them.

Another portion of j's economic reality is the set of economic

activities, A., which he is capable of performing. Activities are econo-

mic if they employ economic resources in their enactment. Individual j's

activity set, A, is the column vector of the matrix A.

A = {a hj h = l,...,. (index of economic
hj. activities)
j = l,..,n. (index of persons)

A. = (a ,,...,a } (individual j's
,J 'aj activity set).

The activity set of individual j is really a transformation set,

mapping the resources available to j into j's economic normative set. This

is illustrated in figure IV-1. By deduction, A. is dependent on K.. The

economic reality of individual j's existence is the combination of his

activity and resoucre.sets subject to institutional and uncertainty con-

straints. The set of institutional constraints applicable to j, I., will

be discussed in detail in conjunction with society. The uncertainty con-

straint applicable to j, U., will be discussed below.




82













FIGURE IV-1








In light of the concepts of economic reality and economic objectives,

it is now possible to conceive of personal economic development as the

reduction in the difference between the two. The process of such develop-

ment is a process of choice. Personal economic development occurs as an

individual chooses from among alternatives a combination of activities

and resources which will minimize the difference between his economic

reality and his economic normative set. Implicit in the use of the term

choice, is the interpretation of it as being effective choice, That is,

an alternative, once chosen, is brought into existence by the decisive

act. Its full realization, in terms of activities and resources, may or

may not be immediate. Such depends on the individual's allocation of the

time resource in the chosen alternative. An activity set in isolation has

little meaning with respect to economic reality and so must find its

meaning in combination with the resource set. The development process

continues as alternatives arise that minimize the difference between

economic reality and the normative set.

A decision rule or function is a crucial aspect of the choice process.

A general concept of such a rule can be derived from the three funda-

mental assumptions. The second assumption, rationality, implies that

the individual freely chooses from among alternatives, that alternative

which has the expectation of accomplishing his economic ideals. In other

words, a condition of individual choice is that the expectation of an

alternative be in the economic normative set. This may be written,

E(A (Q.))ENj (condition 1).

The first fundamental assumption, interdependency, implies that an indi-

vidual interacts with others and, as will be explained below, is con-

strained by socio-cultural institutions. Accordingly, his choice of alter-

natives must fall within the limits imposed by institutions. This alters

condition 1 to the following:







E(Aj(Q) s.t.I.) eN. (condition la)

But the.third fundamental assumption, fallibility, implies that there will

be some distribution of the possible outcomes. Thus, an individual ac-

counts for this in his decision rule and sets some risk-tolerance level.

Condition ia is altered to accommodate this,


E(A.(Q.) s.t. I., U. < U*)eN. (condition lb).

U. is the expected level of risk associated with condition la. U* is j's
J J
risk-tolerance (maximum) level. If the expected level of risk of a par-

ticular alternative is greater than j's risk-tolerance level, then it will

not be selected. U* is an arbitrary trait of the individual. A decision
J
rule which conforms to the general form of condition lb is a valid de-

cision rule.

The process of personal development is then one of subjecting alter-

native combinations of economic activities and resources to a decision

rule and selecting that alternative which is expected to reduce the dif-

ference between economic reality and one's economic normative set.

Because of the fallibility of an individual and the inclusion of time in

the resource set, there is no guarantee that N. will be attained in time.

Further, the development process is dynamic in that the individual's

knowledge set is capable of expanding (or contracting) through the feed-

back information of observing the unfolding of one's decision. This may give

rise to an alternative which performs better under the decision rule than

the one in existence. The new alternative would be chosen nad would re-

place the old alternative. Thus, the process continues in pursuit of a

fully developed economic existence.

This analysis may be extended to a two-person economic society. The

conditions for the existence of an economic society are that there be at

least two interdependent members and that such members conform to the







three fundamental assumptions. This interdependence occurs with respect

to the resources set, Q, and results in external economies or diseconomies.

It is precisely such phenomena that motivate the existence of economic

society and the formation of integrative institutions.

A simple model of a two-person society, i and j, may demonstrate

this. Assume that one aspect of individual i's economic endeavors,

Ai(Qi), is apple growing. Assume also that one aspect of individual j's

economic endeavors, A.(Qj), is beekeeping. Besides producing apples and

honey, individuals i and j also produce nectar and bee pollination ser-

vice, respectively. The nectar is food for the bees and an external

economy. The pollination service is important to the apple orchard's

yield and so it is also an external economy. Individuals i and j are

thus participants in.a positive sum game. The possible outcomes are:

*ne, if they attempt to break up the society and isolate themselves both

will be worse off because of the necessary interdependence. Two, if they

are ignorant of the externalities and maintain the status quo, then there

will be biases built into the individuals' choice processes. In individ-

ual i's case, he is basing his development choice on the expectation of

his economic alternative, A (Q.), being his economic normative set, Ni,

with Ai(Qi) being distributed fi(Ai(Qi)). However, because of his igno-

rance, his choice is really (Ai(Q ,a qjk)) where a jqjk is j's bee-

keeping. Although it may have an expectation of Ni, it will probably have

a significantly different distribution such that

f2 (Ai(Qi, aj qjk) f (Ai(i)).

This is illustrated in figure IV-2.

The result of such a situation is that i may overshoot his objective

and would then be motivated to alter his economic endeavors. At the same

time, j's honey production would have performed similarly, motivating j to










FIGURE IV-2






f(x)


f2(A (Qaj qjk))

2 i'


f(Ai(Qi))
^

_








alter his economic efforts. The result is that both may undershoot their

objectives. If ignorance persists, they would continue to treat the

biases as random,disturbances and act accordingly. Their behavior would

be rational but to an informed observer, it would appear irrational.

Given arbitrary risk-tolerances of i and j, the likelihood of obtaining

the optimal solution is less than in the case where the externalities are

recognized. This is illustrated in Matrix IV-1.

The third possible outcome would be the situation where the exter-

nalities are recognized by one person and not by the other. The informed

person would then incorporate the other's production into his decision

function. The solution would not be the optimal one for this two-person

society unless, by coincidence, the ignorant person did select the optimal

allocation or employment of resources. The fourth possible outcome would

be the case of both persons being informed of the externalities. They

would be able to adjust their combination of economic activities and

resources to optimize the economic development of both. The biases in-

troduced into their choice process would also have been removed thereby

reducing the degree of uncertainty that would otherwise have prevailed

regarding their economic endeavors.

Given the conditions above, it is clear that personal economic

development is enhanced by social cooperation. This cooperation is really

the integration of the members of the society by means of socio-economic

institutions. Referring to the apple growing, beekeeping example, either

i or j realizes the social advantages of cooperating. The individual

establishes a communicative institution, I for the purpose of making the

other member of the society knowledgable of the social alternatives. I

is a structural change. It also integrates the knowledge sets of i and j.


















MATRIX IV-1


i's occupation -
apple growing


Non-cooperation
alternative


j's occupation
beekeeping








The members of the society then subject the alternatives to their

personal decision rule. The social alternative which offers the greatest

expectation of meeting their personal development goal is chosen subject

to social affirmation. Here, the next type of integrative institution

comes into play. This is a social decision institution, Id, which is

merely a social voting rule which is affirmed by the personal decision

rules of the members of the society, and which verifies itself. This

again is another structural change which integrates personal decision

rules. This institution, in effect, reduces all social decisions to

unanimity, whether or not the social decision rule calls for unanimity.

This "unanimity paradox" is developed in Roberts, 1971.

The cooperative alternative is subjected to the social decision

institution and is either affirmed or rejected. If rejected, the status

quo is preserved. If accepted, the cooperative alternative is implemented.

The implementation necessitates broad social contracts or institutions

that integrate the resource and activity sets of the members of the

society. This is another structural change which is expected to result

in the economic development of the society. The entire process of the

economic development of the society is one of personal economic develop-

ment, individual and social choice, and integration.



The analysis of the economic development process is applicable to

homogeneous societies of any size membership. By definition, homogeneous

societies are societies with a single culture. The implication is that

the members of such a society will have highly similar knowledge .sets and

therefore, highly similar economic normative sets. Because of that and

the probability that the resource sets are alike, homogeneous societies

appear to exhibit a social normative set. This however, is only a repre-








sentative individual's economic normative set. The economic develop-

ment process is the same but perhaps with more institutions.

However, in the more realistic case of the pluralistic society

(society containing more than one cultural group) the analysis becomes

more complex. If there are only two cultural groups, then the analysis

is similar to the two-person society except that cultural groups would

replace persons. Each individual, conforming to the fundamental assump-

tions, would seek personal economic development. Further, institutions

would be formed within each cultural group to enhance that group's eco-

nomic development. The economic development process would be similar

to the development of a homogeneous society to this point. However,

whereas the latter is capable of putting the society's resource set to

its most productive use, the former is still faced with two groups vying

for the society's resources.

As in the two-person positive sum game, the economically best alter-

natives arise through cooperation. This comes about by the establish-

ment of a second tier of integrative institutions between the institu-

tions of each cultural group. For example, a bilingual newspaper in

Canada's Quebec province would be a communicative institution linking

the French and English cultural groups. It is clear that in order to.

make optimum use of the society's resource set in the pursuit of economic

development, the pluralistic society has to establish and maintain rela-

tively more institutions than the homogeneous society of the same number

of members. Further, the pluralistic society's social decision institu-

tions will be more complex and costly than those of the homogeneous

society because of the significant difference of economic normative sets.

The social decision institutions in this case are of vital importance







to economic development. A particular decision institution may be

structured so that only one group really makes the social choices. Such

was the case between the American Blacks and The European Americans in

the nineteenth and early twentieth centuries. In the situation where

one cultural group dominates the resources of the society to the extent

that it prohibits further development of another cultural group, then the

dominated group may do the following: If it subjects an economic develop-

ment alternative (which demands the cooperation of the other group) to

the social decision institution and it is rejected, then that cultural

group may choose to change the social decision institution. Such a

decision is made subject to the group's decision institution and must hold

a greater expectation of economic development than the alternative of

preserving the status quo. Note that the probability of having the

original cooperative alternative implemented (once the institutional

change occurs) is also included in the expectation.

Choosing to alter the social decision institution is the commitment

of a particular combination of activities and resources on every mem-

ber's part. If this economic endeavor should meet with success then the

social decision institution is changed and the development process con-

tinues. If the endeavor fails, then the cultural group is faced with this

new information and may again investigate the alternative of committing

a new combination of activities and resources as against preserving the

the status quo. This process continues until either the sought-after

institutional change comes about or the group chooses to preserve the

status quo. This analysis may be extended to societies containing more

than two cultural groups. Of course, in this and all of the above cases,

a cultural group or individual member may withdraw (migrate, commit suicide)

from any society. Likewise, in light of new information (an alteration








of the knowledge set), an individual may alter his economic normative

set in order that it may be in harmony with the others in society. This

alteration of the individual's knowledge set that causes changes in the

economic normative set, may come about through the individual's experi-

ences or intellectual activities.

The economic development process may also be extended to the nation-

state level. When societies become aware of development opportunities

which require the cooperation of other societies, they undertake a

similar process of establishing integrative institutions of communication,

decision and economic activity. The conventional economic integration

concept of Chapter III would be included in the establishment of those

institutions which integrated economic activity at this level.

The economic development process is clearly reliant on integration

as well as the ideals, activities and resources of individuals and soci-

eties. The implications of the analysis for policy making are discussed

in the following chapter.















CHAPTER V

CONCLUSION


The process of economic development in an institutional framework

is not entirely new. Economic development scholars have been turning in-

creasingly towards structualism. However, as was indicated in Chapter II,

these efforts seem to lack an analytical framework. Chapter IV attempted

to provide such a framework. Its empirical performance has not under-

gone a rigorous test but there is no doubt that it is empirically appli-

cable.

The implementation would begin with an assessment of the economic

development of a particular society. This would be accomplished by having

an anthropological study done of the economic normative set the ideals

of material culture. An assessment would then be made of the prevailing

economic reality products and resources. The level of economic devel-

opment would be indicated by the difference between the two. If the

society was pluralistic then this would have to be done for all cultural

groups.

The development picture would not be complete at this point. A

study of the relevant communication, decision and economic institutions

would have to be made and a distinction made as to whether they were

restrictive or not. An estimate of the degree of restriction would be

helpful for ordering them. Such an estimate could be based on the type

of activity and number of people involved. An estimate of the uncer-

tainty factor would complete the required data to evaluate the society.




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