This paper focuses on the subject of development and income distribution, and suggests a method whereby economic development can be skewed in favor of the poor. The paper underscores that improvements in the distribution of income can be achieved by applying shadow cost significantly below money cost to determine the social cost of employing members of low-income groups and to use the social consolidation strategy in the choice of technology in the physical construction of projects. The application of this method would result in the more extensive use of labor instead of capital equipment.


This paper focuses on the subject of development and income distribution, and suggests a method whereby economic development can be skewed in favor of the poor. The paper underscores that improvements in the distribution of income can be achieved by applying shadow cost significantly below money cost to determine the social cost of employing members of low-income groups and to use the social consolidation strategy in the choice of technology in the physical construction of projects. The application of this method would result in the more extensive use of labor instead of capital equipment.

Aid-who knows best?

Extract from Escott Reid’s new book Strengthening the World Bank being published in September by the Adlai Stevenson Institute, Chicago, III., U.S.A., $7.50, £3, or Rs. 40. Mr. Reid was director of the South Asia and Middle East Department of the World Bank from 1962 to 1965.

“There is general agreement that the purpose of aid from the World Bank Group and other agencies is to make it easier for the governments of developing countries to pursue sensible development policies. The disagreement is over who is to be the arbiter of what are and what are not sensible development policies. There are two extreme theoretical positions. One is that the government of the poorer country should be the sole arbiter; that it alone can be considered by an international agency or by another government as the interpreter of the country’s system of values and development priorities, its social goals, and the aspirations of its people; that aid agencies must not question that government’s decisions but must assist it to carry them out expeditiously and efficiently. The other extreme position is that the aid agencies know what is best.

“Neither of these two positions will come within the scope of practical politics in the foreseeable future. Both of them are non-starters. Until aid on concessional terms can be financed largely from sources other than taxes imposed by the governments of rich countries on their citizens, these governments will be compelled by the realities of the domestic political process to adopt policies on aid which will enable them to convince the taxpayers that they are making reasonable efforts to ensure that the aid financed out of their taxes is being well used. This applies to their own bilateral aid programs and to the multilateral agencies they contribute to, such as the World Bank Group, the regional banks, and the UN Development Program. As for the other extreme position, sentiment in the poorer countries limits both the willingness and the ability of their governments to accept intervention by aid agencies in their affairs. They are compelled by the realities of their domestic political processes to adopt policies which enable them to assure their citizens that they are not sacrificing the independence of their country in return for aid.

“Proponents of all the schools of thought on international aid are compelled to accept, however reluctantly, the need to apply some system of rationing to the flow of aid money, since this money is scarce, and the softer it is the scarcer it is….

“What is at issue is not the need to establish a rationing system but the nature of the rationing system and, in particular, the extent of intervention in the affairs of aid-receiving countries which it entails. Those, both in the poorer countries and in the rich countries, who favor a relatively high level of intervention… believe, however, that aid agencies should limit their intervention to broad and central aspects of development policy, and express opinions on these only after penetrating investigation. Aid agencies, in striving to come to agreement with the poorer country, should make all reasonable concessions to reach agreement. If a reasonable compromise cannot be reached, the agencies should, in the interest of the poorer country, substantially reduce the flow of aid. Those who favor intervention ask whether it is to the advantage of the people of an aid-receiving country that aid agencies accept the development priorities of the government even when it is obvious that the government is assigning high priority to prestige projects which promise less economic and social returns than other, less ostentatious, projects….

“Many who would most vehemently deny that they are interventionists believe that since international efforts to help developing countries will be of no avail unless those countries make major changes in their political, social, and economic policies and institutions, aid should depend on the extent to which a country meets such performance criteria as equitable income distribution, land and tax reforms, effective trade and exchange rate policies, limitation of military expenditures, and the promotion of social justice….

“Radicals who attack the World Bank Group for using the “leverage” its control of funds gives it to secure changes in the policies of borrowing governments are normally opposed to any aid to governments which pursue policies abhorrent to them. In this they are supported by most liberals …. They believe that the quid pro quo for aid to countries with governments like these is not a mere change in government policies, priorities, or programs relating to development but a change in the regime. This attitude could be described accurately as an extreme form of intervention in the domestic affairs of a sovereign state.”

Developing agricultural technology in the LDCs

Excerpts from a speech by Richard H. Demuth. Chairman of the Consultative Group on International Agricultural Research, to the Association of Directors of International Agriculture Programs in Raleigh, N.C., U.S.A., June 14, 1973.

“In the early days of the postwar development assistance effort, it was the conventional wisdom that what the developing countries needed to modernize their agriculture was not so much additional research as the organization of adequate extension services which could deliver to the farmers of the Third World the scientific expertise already available in the developed world. It was assumed that appropriate technology already existed that could be readily transferred from north to south. Experience has shown that, to a large extent, this was a false assumption—in other words, that appropriate agricultural production technologies for the poorer countries must for the most part be developed within and not outside the ecological zones in which those countries lie.

“This meant emphasizing research and training within the Third World. A good deal of effort was then put, and is still being put, into the development of strong national research programs—and in a few countries notable progress has been made: Mexico, Colombia, Chile, India, and Thailand are outstanding examples. But moving on a country-by-country basis, particularly with the limited human and financial resources available, promised to be a slow procedure, wholly inadequate to the urgency of the world’s food production needs.

“So, under the leadership of the Rockefeller and Ford Foundations, an alternative strategy was developed: namely, to assemble a critical mass of scientific talent in a few places within the Third World to launch a multidisciplinary attack sharply focused upon the most urgent technological problems facing agricultural production in the developin countries. The international agricultural research and training center was the means devised to implement this alternative strategy.

“The family of international centers now numbers six, with one associate member. The full members of the family are the International Rica Research Institute (IRRI) in the Philippines; the International Maize and Wheat Improvement Center (CIMMYT) in Mexico; the International Institute of Tropical Agriculture (IITA), for the lowland tropics of Africa, in Nigeria; the International Center of Tropical Agriculture (CIAT), for the lowland tropics of Latin America, in Colombia; the International Potato Center (CIP) in Peru; and the International Crops Research Institute for the Semi-Arid Tropics (ICRISAT), with special responsibility for sorghums, millets, chick peas, and pigeon peas, in India. The “associate” member of the family is the Asian Vegetable Research Center located in Taiwan.

“The Consultative Group on International Agricultural Research was formed in 1971, when it became clear that the base of both financial and technical support for the centers need to be broadened beyond the Rockefeller and Ford Foundations and the U.S. and Canadian Governments which, up to then, had provided almost all the finance and back-stopping. The basic purpose of the Consultative Group, which is co-sponsored by the FAO, IBRD, and UNDP, is to mobilize such broadened support. Essentially, it seeks agreement among its members as to what agricultural research programs should be considered as having priority in the allocation of scarce development assistance funds, on the extent of the funds which should be provided each year, and on how the burden of financing might be shared. As a result of invitations issued by the three co-sponsors, some 13 donor governments, 7 international and regional development assistance agencies, and 4 private and public foundations have become members of the Group. The Group also has as members 10 developing countries, representing the 5 major developing regions of the world; these 10 LDC’s among them occupy 5 seats at the Consultative Group table. In its mixed composition of public and private organizations, of donor and recipient countries, and of regional and international agencies, the Consultative Group is a unique institution.

“The Consultative Group has no funds of its own nor has it any authority to make decisions binding on its members. Yet, despite these limitations and despite the size and diversity of its membership, the Group has thus far succeeded in reaching very general agreement on the issues with which it has grappled. Perhaps the best indication of this is that funding for the international centers rose from $9 million for 1971 to $15 million for 1972 and to about $24 million for 1973. In addition, ICRISAT was created in 1972 under the aegis of the Consultative Group and this year is likely to see the addition of a seventh member of the family—ILRAD—an International Laboratory for Research on Animal Diseases, to be located near Nairobi in Kenya.

“To the extent that the Consultative Group has been successful thus far, it is due, in my judgment, principally to two factors. The first is the existence of an excellent Technical Advisory Committee, popularly known as TAC, composed of six scientists from the developed countries and six from the developing countries, who meet under the chairmanship of Sir John Crawford of Australia. The TAC, the Secretariat for which is provided by FAO, considers the technical merits and priority of all proposals put forward for Consultative Group financing, and advises the Group on the principal research gaps which it believes need to be filled. The second factor is more elusive to define—but essentially it is that almost all the members of the Group are enthusiastic about the international center approach. The Group’s meeting are therefore singularly free of debate for the sake of debate, and are instead devoted to a common effort to find practical and constructive solutions. Agreement has been reached on such matters as having a single review conducted on behalf of the donors by the Consultative Group staff of the progress of each center in carrying out its approved program and in living within its budget; arranging for each center to have its program of research reviewed periodically by external panels of outstanding scientistis; helping the centers to present their budgets in a more or less uniform manner, so that meaningful comparisons can be made; and arranging for an appropriate division of labor as among the centers, so that there will be no unnecessary or undesirable duplication of work.

Most importantly, of course, the Consultative Group, with the assistance of TAC, must seek agreement on what new or expanded programs should be supported. In addition to the agreement to set up an animal disease laboratory (ILRAD) in Kenya, there is near-agreement on setting up an overall International Livestock Center for Africa (ILCA), probably to be headquartered in Ethiopia, which, if established, would eventually absorb ILRAD as an integral part of its operations. The problems of the Middle East are also receiving attention; a mission organized by TAC has just returned from an investigation of the major constraints on agricultural production in that area and will shortly be reporting to TAC its view on whether an international research center would be an effective way of seeking to remove those constraints. The TAC also has under review, among other things, the desirability of promoting additional research on upland (rainfed) rice, probably as an extension of IRRI’S activities; of establishing relay stations for ICRISAT in the semi-arid zones of Africa; of expanding the research work now being done on food legumes; and of the possible utility of an intenational research center on aquaculture.

Let me conclude with a few words of speculation as to the future. My firm belief is that we are only at the beginning of a very considerable effort. The Chairman of TAC made an informed estimate in 1972 that, by the late 1970’s, total financial requirements for programs which should be supported by the Group might well reach a level of about $70 million a year: $50 million for the core and capital requirements of the centers themselves and another $20 million for outreach. (Outreach is primarily working with national research programs in adapting to local conditions the research findings of a center.) This estimate envisages an international effort about twice its present size. I am inclined to think that, if anything, the estimate may be on the low side, particularly for outreach.

To double the present effort will require a great deal of hard work by the centers themselves; it will require strengthening the Consultative Group and TAC Secretariats; it will require building network linkages among programs which are far more comprehensive and complex than those we now have; and last, but not least, it will require persuading donor agencies to think in financial terms of a different magnitude from those in which they have been thinking. But I see no inherent reason why these difficulties cannot be overcome. Indeed in view of the pontentialities for increased and improved agricultural production—and thus for better standards of life for hundreds of millions of people—which the Consultative Group approach can help to realize, I feel confident that the international community will continue to provide the support that is needed.”

On the reluctance of countries…

Excerpts from an address, given by Pierre-Paul Schweitzer, Managing Director of the Fund, to the American Philosophical Society, in Philadelphia, Pennsylvania, U.S.A., on April 19.

“In a situation in which there are conflicts of views between major countries, the power of an institution like the Fund to deal with such conflicts quickly and flexibly depends to a large extent on the nature of its decision-making process. In an institution which confers financial rights and responsibilities, it is almost inevitable that there will be weighted voting. Not to acknowledge relative economic strength would be patently unrealistic. It is also probably essential to have qualified majorities for certain important categories of decision. The creation of special drawing rights, for example, needs a majority of eighty-five percent.

“The reluctance of countries to accept limitations on sovereignty is not, of course, peculiar to the monetary sphere. Nearly all international institutions find difficulty in preserving their authority in situations where their rules and procedures come into conflict with what their members regard as vital national interests. In the field of international financial relations, the types of problems which began to present themselves in recent years were simply not adequately catered for in the Articles of Agreement. For a while, of course, inappropriate rules can be made to work by constitutional interpretation. But there comes a point when rules cannot be patched up any more, and then they simply stop being observed.

“However, as experience is demonstrating, the vulnerability of a system without clear and accepted rules makes it uncomfortable to live with for any extended length of time. There is always the worrying feeling that unwise policies on the part of individual countries might spark a retaliatory move that could trigger off a vicious spiral of restrictions and declining world trade.

“The desire to have an internationally agreed and accepted new set of rules has been widely voiced, and has found expression in a number of resolutions of international bodies, particularly of the Fund itself. The world community, through the Fund, is presently engaged in what will certainly be the difficult task of drawing up this new set of rules.

“It is possible to see in general terms the conditions, both economic and political, which will have to be met, if the new system is to be successful.

“From an economic point of view it is important to promote the objective of a free trading environment. This means that countries must eschew placing restrictions on certain kinds of trade and payments by unilateral action. Although we cannot expect to move immediately to a world free of all restrictions, whatever restrictions are imposed should be justified on the basis of some internationally accepted criteria, subject to the scrutiny of the international community, and approved by some international regulatory authority.

“The next prerequisite is that traders and investors should be able to use resources which they earn in one currency to make payments or investments in another currency. This is sometimes referred to as the convertibility of currencies. Convertibility is a term that is used with two somewhat different meanings. In a general sense, it means that there should exist a network of markets where traders can exchange currencies, free of administrative restrictions on the currencies or the amounts in which they deal. In the more technical sense in which it is usually used by monetary experts, it means that governments should establish an agreed value for their national currency and stand ready to buy and sell it at the fixed price against some agreed international reserve asset. Now clearly, convertibility in the general sense does not depend directly on convertibility in the technical sense. And since it is convertibility in the general sense that is important for international trade and investment, it could well be asked whether we could not live without convertibility in the technical sense.

“Many economists, it must be admitted, believe we can, and indeed many major currencies are inconvertible in the technical sense at the present time. But if such inconvertibility should be prolonged and should give rise to additional uncertainties and risks, private traders and investors would probably be less willing to engage in international transactions. The monetary system would then have failed in its objective to create the best environment for the international interchange of resources. And if individual countries, having no fixed par value for their currency to which they are committed, try to influence their exchange rates in mutually incompatible ways, we run the risk of sliding back into a destructive spiral of measures which would not only hamper the growth of world trade, but could produce political frictions as well.

“Acceptance of official convertibility as an objective implies the next prerequisite of a new monetary order: agreement on the form in which the international reserves which give effect to convertibility should be created and held. The important initial step of delegating to an international body authority over the creation of purchasing power has already been taken in the establishment of the special drawing right facility within the Fund. This is one area in which there is a strong consensus that there should be international decision making. It is widely agreed that reserve creation should be under deliberate international control, and not subject to haphazard influences such as the supply of gold or the state of the balance of payments of the United States or any other major country.

Limits of international reserves

“Increases and reductions in international reserve assets are the means whereby countries can meet deficits and surpluses in their balance of payments without imposing restrictions or abandoning convertibility. But international reserves cannot be expected to be unlimited. Another prerequisite for the international monetary system, therefore, is that it should have some mechanism to ensure that the relative values of currencies do not get out of line with basic or underlying forces of supply and demand. Since no country can influence the value of its currency in world markets without simultaneously affecting the currencies of its trading partners, this is another area in which international rules or understandings must qualify national discretion.

“We have learned a number of lessons from postwar experience which at least point to the broad lines of how responsibility should be divided in this matter. We know that countries will not accept a system that, in the name of international balance, requires them to follow policies that are seriously at odds with their domestic objectives in the realm of employment or price stability. We know that, by and large, they find it easier to live with some agreed conception of what relative exchange rates should be, rather than to allow currencies to float in an uncoordinated way. And we know that a system in which the burden of adjustment is not equitably shared between surplus and deficit countries produces strains and frictions which may be political as well as economic.

“It is tempting, of course, to make precise rules which specify that if a country experiences such and such a development, e.g., a prescribed deficit or surplus, in its balance of payments, such and such a consequence should follow. The difficulty is that such a system would almost certainly be too inflexible in operation to be either acceptable or appropriate. Given this, I expect that the new rules will provide for a greater degree of consultation and cooperation in the framing of what I have called adjustment policies, with mandatory provision being invoked only after continued failure to reach agreed solutions.

“It should be apparent from what I have already said that a successful reform of the international monetary system will inevitably mean that countries will have to submerge a considerable amount of national sovereignty in an internationally agreed and administered system of rules. But we have reached a stage in our understanding of the nature of economic interdependence where I believe countries are prepared to take a significant step forward in internationalizing decision taking.

“There is a willingness to acknowledge international authority provided it is not exercised in such a way as to come into direct conflict with what individual nations regard as their vital interests. For example, simply to outlaw exchange restrictions would risk being counterproductive unless action is also taken to remove the circumstances in which countries might wish to introduce restrictions. This means that the range of policies permitted to members to deal with balance of payments difficulties must be wide enough to ensure success without recourse to restrictions.

“The international monetary system should be designed to exploit areas of common interest, rather than try to enforce rigid rules in areas where interests come into conflict…. So long as a spirit of cooperation is fostered, I am convinced that countries will be prepared, in a reformed monetary system, to allow internationally agreed rules to play an even greater role in economic relations. This after all, is what interdependence is all about.”

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Finance & Development, September 1973
Author: International Monetary Fund. External Relations Dept.