Knowledge that Transforms

B Y the spring of I958 the International Bank for Reconstruction and Development, as a part of its work in aiding underdeveloped countries, had sent major economic missions to fifteen countries: British Guiana, Ceylon, Colombia, Cuba, Guatemala, Iraq, Jamaica, Jordan, Malaya, Mexico, Nicaragua, Nigeria, Surinam, Syria, and Turkey.' published reports of these missions comprise the largest single collection of information extant on the problems and characteristics of underdeveloped economies. A careful reader of these reports is impressed with the wealth of detail and the obviously painstaking care with which the material has been assembled. Since more than seven years have now elapsed since the first report, it is appropriate to review this material and to ask how much has been learned about the process of development and also how successful the mission reports have been in diagnosing the key issues and in establishing development programs. What elements might we look for or expect to find in reports of this kind? First, since programs are dependent on good statistics, both to provide a basis on which to make decisions and to evaluate the effects of decisions once taken, some careful attention to the establishment of an effective social accounting system is to be expected. Second, the major outlines of a development program are required: the targets, the operational policies to achieve the objectives, the calculations of probable outcomes, etc. Flexibility is a virtue, but the outline should be internally consistent and unambiguous in showing the connection between the objectives and the means to those objectives. Third, in order for the programs to be implemented, a priority system for projects must be carefully delineated, and it must be shown that the priorities are consistent with fulfilling the development objectives. Fourth, in terms of the paths to development the real alternatives open to the country should be carefully surveyed, including estimation of the pay-offs and costs from alternative courses of action. Fifth, the price effects of development programs, probable inflationary pressures, and the effects on the balance of payments and the capacity to import require analysis. These are major elements which one might expect to find in a good economic development analysis; the list could be extended. In the remainder of this paper it is argued that the mission reports have covered these points inadequately, not at all, or ambiguously, with the result that the reports are unsatisfactory as economic analyses and unsuitable as guides to development programs. Before proceeding to the substantive argument, however, one qualification must be noted. These reports were prepared at different times, by different groups of people, for different countries. They do not all share the same faults or the same virtues. ensuing discussion should make it amply clear that the above criticisms do not apply in toto to all the reports, nor to any one report in particular. * This is a condensation of a report titled The Failures of the World Bank Missions, RAND Corporation, P-I4II, June 24, I958. I am indebted to my research assistant Mrs. Marjorie Hald for her help in surveying the reports. Dr. H. J. Barnett and Dr. Charles Wolf read the original manuscript and made many helpful comments. 'In chronological order the reports on these countries are: Basis of a Development Program for Colombia (I950); Economic Development of Guatemala (I95I); Economy of Turkey (I95I); Report on Cuba (I95I); Surinam: Recommendations for a Ten Year Development Program (I952); Economic Development of Jamaica (I952); Economic Development of Iraq (I952); Economic Development of Ceylon (I953); Economic Development of British Guiana (I953); Economic Development of Nicaragua (I953) ; Economic Development of Mexico (I953); Economic Development of Malaya (I955); Economic Development of Syria (I955); Economic Development of Nigeria (I955); Economic Development of Jordan (I957). Reports on British Honduras, Uruguay, and Somaliland have been issued in mimeograph form, but they are specialized and are not considered here. In June I957, a mission was sent to Thailand; although somewhat different in intent from previous missions, it will issue a report at some time. A summary of some of these reports appears in J. Spengler, IBRD Mission Economic Growth Theory, American Economic Review, XLIV (May I954), 583-99. Hereafter in this paper the reports will be cited by the country name.

PROBABLY no single feature of monetary policy in recent years has provoked such widespread controversy as the so-called bills only doctrine -the decision taken in I953 by the Federal Reserve System to limit its openmarket operations exclusively to the purchase and sale of short-term government securities. Yet, despite the considerable comment, remarkably little empirical investigation of the subject has appeared in professional journals. The present paper attempts in some measure to fill this void. In general, the method used is to compare the two years after the Accord and preceding bills only with the six years following it.

not to work in a stabilizing fashion over short cycles. Still another example is given in a recent article 6 which suggests that the orthodox notion of municipal finance being fiscally perverse, while correct for major swings in economic activity, is just the reverse for minor ups and downs. Our lists need reexamination in light of the postwar experience. This does not imply that major swings are no longer a problem; rather that lesser swings are different in character and also worthy of the attention of fiscal policy makers.

PpT HE modern theory of employment determination implicitly or explicitly assumes a close positive relationship between changes in physical output and changes in the volume of employment. If we construe employment very generally as referring to increased utilization of any resource (labor, capital, raw materials, entrepreneurship), then it is undoubtedly true in this general sense that to produce more requires more employment: it is impossible to produce more physical output without employing more resources of some kind. But modern employment theory specifically refers to labor employment. It is not quite so certain that employment in this more restricted sense is as closely related to physical output changes as employment in the more general sense. Yet most economists have carried over the equation, or rather, close positive correlation of output and employment in its general meaning to output and labor employment. It is usually conceded that the relationship needs correction for productivity changes (generally construed as 2 to 3 per cent annually), but that labor input and physical output are closely and positively related is seldom questioned. The responsibility for this assumed, and apparently common-sense, relationship rests largely with Keynes' who refused to use a physical production index and adopted the device of measuring output in terms of labor input. For example, he states that he will measure changes in current output by reference to the number of hours of labor paid for.2 That Keynes had some doubt about the precision of the outputlabor-employment relationship is revealed by the following:

A HIGH birth rate, a declining demand for labor in agriculture, and poor educational facilities have traditionally provided the South with a relatively large supply of untrained labor for manufacturing industries. This condition suggests the following hypotheses: i. Average wages in manufacturing will be relatively low in the South because the southern industrial structure will tend to be heavily weighted with low-wage (low-skilled) industries. 2. Because labor and capital are not perfectly mobile, southern wages will tend to be lower than elsewhere for identical work. 3. For the same reasons of excess supply and incomplete mobility, southern wages will be particularly low for work requiring little skill and training. 4. Because of the wage differential, the South should be gaining in manufacturing relative to the rest of the country. 5. Because the differential is greater in lowwage employment, the South should be gaining most in those industries which make the greatest use of low-wage labor. The purpose of this paper is to test these hypotheses and to draw conclusions regarding the balance of forces which tend, on the one hand, to eliminate regional wage differentials, and on the other hand, to perpetuate them. In addition to examining shifts in the location of manufacturing, we will consider the influence of population change and minimum wage legislation on the southern wage position.

T HE present study represents an attempt to apportion increases in output per manhour between increases in capital employed per man-hour and a somewhat nebulous constellation of forces referred to as It is hoped that a quantitative estimate of the relative importance of these two factors in contributing to an increase in the average productivity of labor in the past will help policy-makers determine what proportion of our investment resources should be devoted to improving the technology, rather than to expanding existing types of capital equipment and structures. My procedure is to examine the annual increases in output per man-hour of labor in the manufacturing sector of the United States economy between I9I9 and I955. I shall try to determine what proportion of these annual increases can be attributed to increases in capital input per man-hour, attributing the residual to technological change. The classification of causal forces is thus exhaustive, for technological change serves as a catch-all category. The implications of this will be discussed below. As a point of departure, I shall employ the model developed by Robert Solow,' which represents technological change as a shift in the aggregate production function. In its most general form, the production function can be written (using Solow's notation):