Social Marginal Productivity Research Articles

Development Accounting: Conceptually Flawed and Inconsistent with Empirical Evidence

Development accounting depends on two simplifying assumptions, that economies can be represented by a common aggregate production function and that aggregate factors of production are paid their social marginal products. An aggregate production function can explain income across countries, but the mathematics of the aggregate production function and the empirical evidence both indicate that aggregate factors are paid a small fraction of their social marginal products. As a consequence, development accounting underestimates the income differences due to human capital and overestimates the differences due to TFP. This error cannot be corrected because human capital’s social marginal product is not observable.

The Economic Commission for Latin America and the 1950s' Debate on Choice of Techniques

The paper investigates how the United Nations Economic Commission for Latin America (CEPAL) fits into the 1950s' international debate about investment criteria and choice of techniques in development planning. In some of their documents, CEPAL economists expressed a preference for projects with low capital-labour ratios, in line with the conclusions of A.E. Kahn and Hollis Chenery's ‘social marginal productivity’ of capital criterion for investment in countries relatively short of capital. However, one may also find CEPAL economists proposing an increasing participation of heavy industries in total investment during the acceleration phase of economic growth, an approach that was supported by Maurice Dobb's and Amartya Sen's argument for capital-intensive projects. This double perspective is explained by the distinction between static and dynamic scenarios in CEPAL's framework, which sheds new light on the treatment of capital accumulation and technology as part of import-substituting industrialization policy in underdeveloped areas.

The Fiscal Stimulus of 2009–2010: Trade Openness, Fiscal Space, and Exchange Rate Adjustment

The global crisis of 2008–2009 focused attention on the role of fi scal policy at times of collapsing aggregate demand. Concerns about experiencing a reincarnation of the great depression induced the Organization for Economic Cooperation and Development (OECD) (highincome group) and emerging market countries to invoke extraordinary policies for extraordinary times. Countries adopted sizable fi scal stimuli, augmented by unprecedented monetary expansions supported by elastic swap lines between the Federal Reserve and the European Central Bank, and between the Fed and four emerging markets. The fl ight to quality and the shortage of dollar liquidity posed a special challenge for emerging markets, inducing them to supplement these policies with both large sales of foreign currencies at the height of the crisis and with sizable depreciations. Yet there has been a remarkable heterogeneity in the magnitudes of the fi scal stimuli, and of the exchange rate depreciation. The differential patterns of response are traced in table 1, summarizing the fi scal stimulus/GDP and the depreciation rate in 32 countries, chosen by data availability. The fi rst three columns overview the crisis related fi scal stimulus / GDP, 2009–2011, in OECD countries and emerging markets. The crisis led to a signifi cant fi scal stimulus in the United States, Japan, and Germany, the magnitude of which increased from 2009 to 2010, refl ecting various lags associated with fi scal policy. The fourth and the fi fth columns report the massive “bailout” transfers to the banking system in the United States, Germany, and the United Kingdom that attempted to stabilize the fi nancial panic. It is noteworthy that the size of

When Economic Reform Goes Wrong: Cashew in Mozambique

Brookings Trade Forum 2003 (2003) 97-151 [Access article in PDF] When Economic Reform Goes Wrong: Cashew in Mozambique Margaret Mcmillan Tufts University Karen Horn Welch Stanford University Dani Rodrik Harvard University [Comments and Discussion] In a case that has become a cause célèbre for the antiglobalization movement, the World Bank prevailed on Mozambique's government in the early 1990s to liberalize the cashew sector and remove restrictions on exports of raw cashews. The World Bank hoped that resources would be allocated more efficiently and cashew farmers' incomes would be boosted. The policy was met with fierce opposition from the domestic cashew-processing industry, which ironically had just been privatized. After a decade of political strife, international controversy, and ongoing (if hesitant) reform, the consequences remain hotly contested. Each side in the debate has its favorite statistics. The World Bank points to the rise in farmgate prices, while opponents point to the processing plants in urban areas that have been shut down and thousands of workers that remain unemployed. Historically the cashew sector has been a significant part of Mozambique's economy, providing income to several million individuals across the country. In the 1960s Mozambique produced as much as half of the world's total. The sector went into a long decline thereafter, as a combination of adverse policies and civil war (1982-92) halted new tree plantings. Following [End Page 97] independence in 1975, the government banned the export of raw cashew nuts to stimulate domestic processing. Mozambique became the first African country to process cashews on a large scale. By 1980 the country had fourteen processing factories. Following World Bank advice, the government began to loosen restrictions on raw cashew production in the late 1980s. The ban on exporting raw cashews was lifted in 1991-92 and replaced with an export quota and export tax. 1 The quota was subsequently removed, and the export tax on raw nuts came down from 60 percent in 1991-92 to 14 percent in 1998-99. From the vantage point of textbook economics, the analysis of the export restriction and its removal is a straightforward exercise. A ban (or tax) on exports depresses the domestic price of raw cashews, effectively subsidizing the domestic processors for whom raw cashews are the chief input. The policy results in an inefficient allocation of resources. Raw cashew production is discouraged, and labor and capital are pulled into cashew processing where, absent externalities, their social value marginal product is lower than in other activities. The relaxation of the restrictions is therefore expected to create a double benefit. The first benefit is an efficiency gain, arising from the reversal of the adverse resource pulls mentioned above, and the second is a distributional gain, resulting from the rise in farmgate prices for the poorest households in Mozambique. This is the sort of analysis that underlies, for example, Paul Krugman's April 19, 2000, New York Times column on the subject, which took the anti-World Bank crowd to task for overlooking the pro-poor bias of the export liberalization. We show that many of the textbook implications of export liberalization were indeed realized. Farmgate prices rose, raw cashew exports increased, and resources were pulled out of cashew processing. However, even under the most favorable assumptions, the magnitude of the benefits generated by these effects were quite small, both in economic terms and in relation to the amount of time and energy that Mozambique's government spent on this question over the years. We estimate that the efficiency gains generated by the removal of the export restrictions could not have amounted to more than $6.5 million annually, or about 0.14 percent of Mozambique's GDP. The additional income accruing to the farmers was probably no greater than $5.13 million, or $5.13 a year for the average cashew-growing household. These [End Page 98] are puny amounts for a policy that was a key plank in the World Bank's reform agenda and became a serious bone of contention between the bank and Mozambique...

Welfare-improving debt policy under monopolistic competition

We analyse the effects of debt policy in an overlapping generations model with monopolistic competition. Debt crowds out capital and raises interest rates but unlike competitive models this is welfare-improving for all generations if the elasticities of substitution in production are low. In a non-competitive model, the social marginal product of capital could be negative while the rate of interest exceeds the population growth rate (the latter two are non-negative), and profits exceed investment.

Socially Optimal Redistribution and Growth: A Further Warning on the Welfare Significance of Representative Consumers' Preferences

Socially Optimal Redistribution and Growth: A Further Warning on the Welfare Significance of Representative Consumers' Preferences, 10.1628/0015221012904986, Jahrgang 57 (2001) / Heft 2, 0015-2218 (1614-0974), Public Finance Analysis

Wage Determination and Efficiency in Search Equilibrium

The concept of a competitive market is a major tool in the analysis of economists. In the simplest version of a market, resource allocation responds instantly to changes in parameters, leaving no room for frictional unemployment. One response to the unreality of this implication has been to introduce spatially distinct markets, with unemployment as workers move between markets. As modeled by Lucas and Prescott (1974), workers who are not moving are not unemployed. An alternative response is contained in the sizeable fixed price equilibrium literature, where it is assumed that prices do not change to clear markets in the short run. In contrast, the conceptual starting place of this analysis is to drop the idea of a market. Rather than markets being the mechanism by which workers and jobs are brought together, it is assumed that there is a search process which stochastically brings together unemployed workers and vacant jobs pairwise. It is taken as axiomatic that the process takes time and so involves foregone output. It is assumed that a worker and a job brought together by the search process negotiate a wage, with instantaneous negotiation. Thus, the only frictions in the model are in the search process, with wages flexible. Actual search and negotiation processes are complicated and would be difficult to model in detail. Here we make numerous simplifying assumptions to permit explicit solution of equilibrium variables and easy analysis of their efficiency properties. The focus of the analysis is the efficiency of the incentive to enter the labour market. That is, we compare the lifetime expected present discounted value of earnings of a new worker with the social marginal product of that worker. The comparison depends critically on the bargaining solution and on the nature of the search technology. Generally, equilibrium is not efficient because of search externalities. The sources of the externalities are easy to see. The presence of an additional worker makes it easier for vacancies to find workers and harder for other workers to find jobs. The wage negotiation, however, reflects the relative bargaining powers of workers and jobs. Only in special cases will the balance of bargaining powers result in a wage which reflects the balance of search externalities as well as the value of output directly produced. The analysis identifies cases where the incentive for entry is too large or too small. This efficiency analysis complements other efficiency analyses of search intensity, job-quitting, and job-taking (Diamond (1981), Diamond and Maskin (1979, 1981), and Mortensen (1979, 1981)). These latter papers have considered markets with equal numbers of jobs and workers. This paper focuses on the implications of unequal numbers

The Determination of National Housing Policies

the social marginal productivity is the highest.2 The estimation of social marginal productivity requires value judgments concerning various social objectives, and the use of shadow prices t The author acknowledges the financial assistance of the Institute for International Studies which made possible the basic research for this study, which was conducted in Santiago, Chile, in 1965. Typing and editorial assistance were provided by the Center for Real Estate and Urban Economics. Octavio Cabello at the Economic Commission for Latin America, Santiago, Chile, aided the author in manifold ways during his residence in Santiago in the Spring of 1965. Robert Dorfman, Visiting Research Professor at the University of California, Berkeley, offered a number of particularly incisive comments and suggestions on an earlier draft. Carlos Frankenhoff, Lowden Wingo, Albert H. Schaaf, Roland Artle, and others also reviewed early drafts of the manuscript. Richard Recht and Stanley Hamilton of the Center for Real Estate and Urban Economics assisted in reviewing the mathematical notation and suggesting changes in the final draft. Mr. Hamilton assisted the author in the revision of an earlier draft. A more detailed version of this article was published in Italian in the Rivista Internazionale, Milan, Italy, November 1967. * Professor of Finance and Chairman of the Center for

Investment Criteria, Productivity and Economic Development: An Empirical Comment

Scarcely any subject in recent literature on development has evoked as much interest and controversy as quest for investment criteria.' The entire theoretical controversy, culminating in Eckstein's synthesis of Kahn's social marginal productivity approach with Galenson-Leibenstein's marginal reinvestment quotient, has been expertly summarized by Chenery.2 Much progress has admittedly been made, but no one as yet stands ready to dispute Chenery judgment (of earlier vintage) that relationship between theory of production and growth remains the most controversial aspect of problem of economic development.3 Least of all Eckstein who admits that the kind of planning horizon which [his] analysis presupposes, requires information of a sort which is never found in underdeveloped countries.4 And chances of a moratorium for policy-makers in such countries remain dim. Much of practical difficulty has centered about relative merits of two major partial equilibrium approaches, one employing static efficiency, in sense of using given resources most effectively, other dynamic efficiency, in sense of permitting a maximum margin for reinvestment. The purpose of this paper is to attempt to shed some light on this issue by bringing related empirical evidence to bear. The restricted nature of our inquiry should be emphasized. We are not concerned here with criteria governing an over-all invest-

Some Notes on the Choice of Capital-Intensity in Development Planning

I. Various criteria and their evaluation, 561; rate-of-turnover criterion, 561; social marginal productivity criterion, 562; reinvestment criterion, 564; an alternative, time series criterion, 568. — II. Application of these criteria to some models, 571; the first model, on the contrast between the criteria; the importance of labor cost, 571; the second model, on the foreign exchange consideration, 577; the third model, on the choice involving time, 582.