lec09a Palgrave


A linkage is a sequence of investments for economic development.

Backward linkage: inputs

Investment in the manufacturing of final products

generates linkages back to the inputs.

For example, the production of furniture simulates

investment in the input materials.

Forward linkage: Investments in inputs that simulate investment in final products.

Investment in A as an input into B stimulates production of C which also uses A.

Firms seek to increase and diversify their products.

Labor surplus

Two meanings:

1) Q supplied > Q demanded; unemployment.

2) Potential labor not employed because people have an income without labor.

Reduced labor participation rate in US.

In less developed economies, asymmetry between two sectors.

Agricultural sector: abundance of potential labor.

Marginal product of labor is zero.

People get fed while not working.

Such as from sharing.

People will not work for wages below what they get from sharing.

Or people get welfare from charity or government.

Labor surplus gets reduced by an expanding commercial sector.

International migration

To analyze, include both macro- and micro-level elements.

What is the equilibrium in international migration.

When does migration stop?

Not from walls or law enforcement.

When expected returns are equalized.

Migration is a function of wage differentials and employment probabilities.

Exports of labor accelerates urbanization.

In some developing countries, workers who seek to emigrate

must register and contract with recruitment agencies.

These agencies are in cities, so the migrants stay in the city for a while.

A theory of labor migration

Three types of migrants:

1) Rural workers seeking urban jobs.

2) Rural workers seeking foreign jobs.

3) Urban workers seeking foreign jobs.

The decision to migrate is a function of the expected relative income differential

between the place of origin and the foreign destination.

The expected income differential depends on the actual income differential,

the cost of migration, and the probability of employment.

Rural workers seeking urban jobs wait in the informal sector before getting foreign employment.

An increased desire by rural workers to migrate will increase urban unemployment.

Inequality among countries

Gini coefficient among countries is .7

Adjusted for globally non-traded goods, .6

Greater than inequality within countries.


The proportion of national income from manufacturing,

or the proportion of the labor force in manufacturing.

Per-capital income rises.

The first country to industrialize was Great Britain.

UK industry was first powered by steam.

It’s big policy blunder was to enter into World War I.

Chiefs who start wars are often deluded by supremacist thoughts.

Biggest policy blunder of the USA: World War I.

Wilson’s conceit that one could shape the future.

Industrialization was not a pure market process.

Landlords in the UK and elsewhere obtained village land.

The ownership of land became more concentrated.

Industrialization replaced the feudal system with market prices for land and labor.

Industrialization in Japan and Taiwan was promoted by land-value taxation.

There was also land reform in South Korea.

The defeat of Japan made it feasible to reform lands held by Japanese landlords.

Foreign Aid

First major US foreign aid program:

European Recovery Program, or Marshall Plan.

It was the forerunner of aid programs for economic development.

World Bank shifted loans from reconstruction to development.

International aid is measure3d by share of GDP used for aid.

Types of aid: project aid, programme lending.

Foreign aid an instrument of policy.

US foreign aid supports US producers.

The requirement to use US sources reduces the value of aid by 25%.

A political cost to secure Congressional approval.

Aid is also channeled through international institutions.

Fiscal and Monetary Policies in Developing Countries

A person’s economic well-being is measured by his consumption and relationships.

Assessment of development should take into account inequality.

Development banks are authorized to provide cheap loans to selected industries.

Small farmers usually have a low credit rating.

Foreign loans go to the landlords and corporations.

Small farmers borrow from landlords at high rates of interest.

With land reform, they would afford mutual-aid credit unions.


Banks loan money into existence.

Fractional reserve banking.

A non-bank money lender with a good reputation could create

private IOU promissory notes, more than the real money reserves.

Moneylenders rely on their reserves.

Their reputation is spatially bound.

Most are not intermediaries.

They lend, but do not take deposits.

A non-bank lender must obtain a higher return on loans than

one can get from bank savings accounts.

The creditworthiness of a borrower depends on his collateral.

The typical collateral of poor farmers is crops and labor.

Commercial banks do not rely on such collateral.

The borrower is threatened with a capital loss upon default.

The risk is more with the borrower than the lender.

Similar to pawn shops.

A pawn is a collateralized loan.

When a customer pays back the loan,

he gets back the merchandise.

If the customer does not pay it back,

the pawnshop sells the item.

Marketing boards

A marketing board is an institution

that imposes price and quantity controls on agricultural goods.

There are two types.

1) Boards endowed by government with monopoly power in the sale of particular goods.

2) Boards with monopsony power in the purchase of particular goods.

Started in the 1930s, when farm good prices fell.

Marketing boards limited output and raised prices under British rule.

The British Agricultural Marketing Acts.

The boards imposed acreage restrictions,

and restrictions on amounts that coud be sold.

The reduced acreage increased land values.

These boards continued after independence.

Some marketing boards pay producers at less than market prices.

The revenues of the Boards provide a power base for politicians.

The boards have the power to license producers.

Urban political elites control politics and the government,

as well as the mass media and the military.

The governments have reduced

the power and influence of the traditional tribal chiefs.