Mr. Johnson, economist in the Stabilization Policies Division of the Exchange and Trade Relations Department when this paper was prepared, is now in the Equatorial African Division of the African Department. He is a graduate of the University of California (Los Angeles) and has been a member of the faculty of the University of Sierra Leone and a visiting faculty member of the University of Michigan. His technical writings deal mainly with the economic problems of less developed countries.
Ms. Salop, economist in the Special Studies Division of the Research Department, is a graduate of the University of Pennsylvania and Columbia University. Before joining the Fund, she was on the staff of the Board of Governors of the Federal Reserve System.
Using U. S. and U. K. data, Tait found that people’s responsiveness to inflation, in terms of adjusting their portfolios, rose with wealth. See Alan A. Tait, “A Simple Test of the Re–Distributive Nature of Price Changes for Wealth Owners in the United States and United Kingdom,” Review of Economics and Statistics, Vol. 49 (November 1967), pp. 651–55. While behavior in the United States and the United Kingdom does not establish the point for the developing countries, this evidence provides some support for a hypothesis that is reasonable on a priori grounds.
In general, the hypothesis of a U–shaped relationship between the degree of income equality and per capita income (first proposed in 1955 by Kuznets) has been tested by a number of investigators using cross–sectional international data. Although the evidence is broadly consistent with the U–shaped hypothesis, it is generally acknowledged that there have been large deviations from the regression curve. See Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review, Vol. 45 (March 1955), pp. 1–28. See also Edmar L. Bacha and Lance Taylor, “Brazilian Income Distribution in the 1960s: ‘Facts,’ Model Results and the Controversy,” Journal of Development Studies, Vol. 14 (April 1978), pp. 271–97.
See Hollis Chenery and others, Redistribution with Growth (Oxford University Press, 1974).
For detailed discussion of the individual programs and their distributional impact, see the original, longer version of this paper, Johnson and Salop, “Distributional Aspects of Stabilization Programs in Developing Countries: A Preliminary Study with Special Application to Bolivia, Ghana, Indonesia, and the Philippines” (unpublished, International Monetary Fund, October 17, 1979).
The concept of full employment used here is a macroeconomic one. Thus, it may include substantial amounts of structural and frictional unemployment as well as considerable underemployment in the traditional sector. What is important for our purpose is that a ceteris paribus increase in the production of one good entails a decline in the production of another.
See J. Marcus Fleming, “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates,” Staff Papers, Vol. 9 (November 1962), pp. 369–80.
This ignores intertemporal distributional effects, that is, increased consumption today at the expense of consumption tomorrow.
See Eli Heckscher, “The Effect of Foreign Trade on the Distribution of Income,” Ch. 13 in Readings in the Theory of International Trade, ed. by Howard S. Ellis and Lloyd A. Metzler (Homewood, Illinois, 1950), pp. 272–300; reprinted from Ekonomisk Tidskrift, Vol. 21 (1919), pp. 497–512.
This follows automatically from the usual assumption that the production functions are homogeneous. Accordingly, marginal products depend only on capital/labor ratios. Equating relative marginal products with relative factor rewards produces the cited relationship. See Ronald Findlay, Trade and Specialization (Harmondsworth, England, 1970), for a complete and compact discussion of the pure theory model.
“Wages,” in this paper, should be interpreted in its broad sense as the factor return to labor. Clearly, this return often will not take the form of a payment by the employer to an employee; this is especially likely to be true in the agricultural sector of a developing country.
As long as physical capital is immobile, this result is independent of whether nontraded goods are relatively more or less capital intensive. This result can be understood most easily by considering the traded goods sector. The movement of labor out of the traded goods sector raises its marginal physical product there, and, with a fixed price for exports, its marginal revenue product. Accordingly, the nominal wage rises.
Again appealing to neoclassical marginal productivity theory, the expansion in the nontraded goods activities implies that the marginal physical product of labor declines there. This is equal to the nominal wage divided by the price of nontraded goods.
These will be determined by demand elasticities and the degree of labor mobility.
Except, of course, in the extreme case of perfect labor mobility.
For a discussion of the sustainability of a current account deficit, see Joanne Salop and Erich Spitäller, “Why Does the Current Account Matter?” Staff Papers, Vol. 27 (March 1980), pp. 101–34.
With perfect mobility of labor between industries, the nominal wage in the traded goods sector moves pari passu with the nominal wage in the nontraded goods sector. Hence, the ratio of the nominal wage to the price of nontraded goods and to that of traded goods rises and falls, respectively. With less than perfect labor mobility, nominal wages in the nontraded goods sector and the traded goods sector rise by less and more, respectively, but it is still true that adjustment entails a respective rise and fall in the ratio of the nominal wage to the price of nontraded and traded goods.
For further discussion of these issues, see Omotunde E. G. Johnson, “Credit Controls as Instruments of Development Policy in the Light of Economic Theory,” Journal of Money, Credit and Banking (February 1974), pp. 85–99, and “Direct Credit Controls in a Development Context: The Case of African Countries,” Ch. 5 in Government Credit Allocation: Where Do We Go From Here? Institute for Contemporary Studies (San Francisco, 1975), pp. 151–80.
Without a depreciation, contraction in this kind of environment, which is really a “rigid–real–wage” world, produces unemployment on two counts. First, there is inadequate demand for nontraded goods at current prices. Hence, producers employ fewer workers than would be consistent with their equating labor’s marginal revenue product with the wage. Second, because the real wage is too high, there is excess labor supply even if firms, not being constrained by sales, employ labor in accord with their marginal productivity conditions. Devaluation allows the prevailing price for nontraded goods to be consistent with the smaller demand by raising the domestic price of traded goods. See Salop and Spitäller (cited in footnote 15).
See footnote 4.