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Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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Growth and development

William Easterly’s article, “Economic Policy and Economic Growth” (Finance & Development, September 1991) is a very well-reasoned and written article. Nevertheless, the thesis, as well as the growth concept used, deserve examination.

The article employs the common practice of using “per capita growth” and “per capita GDP growth” as representative of economic growth. If one accepts that development is embodied in the distribution of output/income, then per capita output/income growth is the most readily available and usable proxy of development, but not of growth, which total output (i.e., economic) growth represents well. This distinction is important given the fact that while many LDCs have experienced growth during the past three decades, few have also experienced development. Cote d’lvoire, for example, has undergone significant growth, but per capita income has grown insignificantly; the reverse holds in the case of Burkina Faso.

Easterly argues for long-run growth through increasing production capacity (like virtually the entire literature). But the economic growth challenge of developing countries is primarily short term—that is, how to generate more output from the existing, usable production capacity. The most realistic and feasible strategy for meeting this challenge is the removal of constraints on market allocation of scarce production supplies, as well as institutional and infrastructural services, since this would enable greater utilization of existing capacity. Once capacity is utilized more efficiently, an LDC will have created the necessary condition for longer-term “self-sustaining” growth.

In fact, the structural adjustment programs—the economic restructuring—being undertaken in LDCs with the support of the World Bank and the IMF have had the effect primarily of increasing capacity utilization. But the framework and theory that describes this phenomena, which would enhance the teaching and understanding of growth and development, is missing.

Kwamena Essilfie Adjaye Resident Scholar, George Washington University

Washington, DC, USA

Mr. Easterly replies:

I agree with Mr. Adjaye that increased utilization of existing productive capacity through more efficient resource use can be a significant source of higher output in the short run. However, I would argue that efficient resource use acts even more powerfully by raising the growth of productive capacity in the long run. Increased efficiency frees up resources that can be reinvested in ever-rising production and consumption. The efficient operation of markets—and the provision of infrastructure services that Mr. Adjaye mentions—also make the private sector want to invest more. The effect on the growth rate is more important for long-run welfare than the one-time increases in output that Mr. Adjaye discusses.

Caution on military debts

The article “Military Expenditures in the Developing World” (Finance & Development, September 1991) by Daniel P. Hewitt, and the companion piece by Robert S. McNamara, underscore the subversion of economic development caused by purchases of military equipment by less developed countries threatened by no other country. What is not brought out with sufficient force is the cost that many of these purchases impose on the governments—and therefore the taxpayers—of the supplying industrialized countries.

Within the last year, the US Government has forgiven the debt incurred in buying military equipment by both Egypt and Senegal, hence transferring the burden of repayment to the American taxpayers. Surely it would make more sense for governments not to participate in these transactions, so that in the event of nonpayment it is the weapons manufacturer who bears the burden. While it is true that such losses may become tax deductions for the manufacturers, and therefore borne by the public, it might encourage the manufacturers to assess more carefully their overseas buyers’ creditworthiness before shipment. Although military exports help the trade balance, unless they are paid for, they provide no benefit to the balance of payments. Obviously, this is as true for other industrialized countries as it is for the United States, many of which are experiencing budgetary constraints.

A two-step proposal would have the United Nations serve as a clearing point for developing countries’ weapons purchases, and include such merchandise in the understandings of the Export Credits Group of the Organization for Economic Cooperation and Development, with the proviso that there be no mixed credits for such transactions.

Albert H. Hamilton

Arlington, VA, USA

Voice of experience

After reading Robert McNamara’s article on “Reducing Military Expenditures in the Third World” (Finance & Development, September 1991), I cannot conceal the fact that I was pleasantly surprised by the statements of the author, who speaks with the voice of experience in the two areas involved—military and financial power.

Having lived for half a century in Argentina—a country in which the military has been idolized—the truth of what Mr. McNamara says comes as no surprise. Our burgeoning external and internal debt arose, to a large extent, under military governments, leaving our people virtually unprepared for a democratic government. It is refreshing to read views which depart from the area of strictly technical studies to deal directly with national life and progress, especially in the poorest and neediest countries.

Nicolas Pavicich

Rosario, Argentina

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Kwamena Essilfie Adjaye Resident Scholar, George Washington University

Albert H. Hamilton

Nicolas Pavicich

Rosario, Argentina

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