World Bank Reprint Series: Number Twenty

Hollis B3. Chenery

The Structuralist Approachto 1 evelopment -.-olicy

Reprinted from The American Economic Review 65 (May 1975)

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Patterns of Development, 1950-1970 by Hollis Chenery and Moises Syrquin withHazel Elkington, published by Oxford University Press, 1975

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(continued on inside back cover)

The Structuralist Approach toDevelopment Policy

By HOLLIS B. CHENERY*

Several approaches to the analysis of de- importance of structural rigidities has beenveloping economies have evolved over the reemphasized by several new phenomena:past twenty-five years. From a method- the limited ability of economies to absorbological standpoint, they can be grouped the growing labor force, the worsening ofunder three main headings: neoclassical, the income distribution in several develop-neo-Marxist, and structuralist. The first ing countries, and-most recently-thetwo attempt to adapt systems of thought disruption to world trade caused by in-that were initially formulated for the study creased oil and food prices, which will re-of industrial societies to the less developed quire a substantial adjustment in produc-countries. The structuralist approach at- tive structures. In short, developmenttempts to identify specific rigidities, lags, policy again seems to be constrained by aand other characteristics of the structure number of structural factors that requireof developing economies that affect eco- a more explicit analysis of the possibilitiesnomic adjustments and the choice of de- for short-term adjustment and for longervelopment policy. term changes in the economic structure

The initial set of structural hypotheses itself.was formulated in the 1950's by writers In this brief survey, I will try to presentsuch as Paul Rosenstein-Rodan, Ragnar an overview of structuralist methodologyNurkse, W. Arthur Lewis, Paul Prebisch, and to compare some of its policy conclu-Hans Singer, and Gunnar Myrdal. They sions to those of the other main ap-explain phenomena such as balance of pay- proaches. Since there is not yet a unifiedments disequilibrium, unemployment, and theoretical framework for structural analy-worsening income distribution on the basis sis, I will sele'-,c formulations that seem toof particular properties of demand and provide a promising basis for futureproduction functions and other specifica- research.tions of economic behavior. A common 1. Mtheme in most of this work is the failure ofthe equilibrating mechanisms of the price The methodology of structural analysissystem to produce steady growth or a de- has evolved over the past twenty-five yearssirable distribution of income. from a set of rather intuitive hypotheses to

The success of a number of developing models of increasing empirical validity andcountries in accelerating their rates of analytical rigor. This evolution can begrowth in the 1960's casts some doubt on summarized in three slages: formulationi ofthe significance of the structural problems hypotheses, empirical testing, and thethat had been identified in the previous elaboration of more complete models. Thisdecade. However, in the past few years the sequence can be illustrated for two of the

basic elements of structuralist systems: the*Vice President for Development Policy, World concept of a dual economy and the concept

Bank. I am indebted to Bela Balassa, Helen Hughes, of complementarity in demand, whichGraham Pyatt, and Wouter Tims for helpful comments. urnderlies theories of balanced growth.

310

VOL. 65 NO. 2 DEVELOPMENT ECONOMICS 311

The concept of a dual economy stems A. Powell provide some support for thefrom the observation that developmeint generalized version of Engels' law under-takes place unevenly both within and be- lying the theory of balanced growth, sincetween sectors of an economy. Although they show most price elasticities to be lessthis concept has had many different formu- than unity. Among the basic structuralistlations, the most influential is that of assumptions listed, only the assumed in-Lewis. He makes three basic assumptions elastic demand for exports needs to beas to the structure of a developing econ- seriously qualified.omy: (1) that technology can be divided The third stage of theoretical refinementbetween capital-using (capitalist) and non- and policy application has proved morecapital-using (subsistence); (2) that the difficult. In the first place, it has beenlabor supply is elastic at a conventional shown that the structural relations positedwage; anc, (3) that saving is done largely are not sufficient to lead to some of theby the recipients of nonwage income policy ccnclusions suggested in the original(capitalists). These assumptions, or vari- formulations. As in the case of the Keynes-ants of them, have been incorporated in ian assumptions, a more complete formu-models that explain the acceleration of lation of models that can be statisticallygrowth, the allocation of the labor force, estimated has proved necessary in order toand changes in the distribution of income. reach useful policy conclusions. Much cur-

The early formulations of concepts of rent work consists in developing a secondbalanced growth by Nurkse and Rosen- generation of models in the structuraliststein-Rodan also relied on a simple set of tradition that are designed for statisticalstructural hypotheses: (1) a generalized application in individual countries, ratherversion of Engels' law, specifying that con- than for deriving broad generalizations.sumer demand for food, clothing, shelter, The structuralist approach has had aand other major commodity groups is substantial impact on both internal andmainly a function of income and little af- external development policies. In both in-fected by relative prices; (2) a similar as- stances it focuses on identifying the con-sumption as to the limited price elasticity sequences of various kinds of structuralof demand for exports; and (3) in Rosen- disequilibria. In domestic policy, the prin-stein-Rodan's formulation, the impQrtance cipal phenomena examined have been theof economies of scale in overhead facilities effects of surplus labor on resource alloca-and basic industries. The first two assump- tion and more recently the interpretationtions make it necessary to expand output of worsening irncome distribution as result-and allocate investment in close relation to ing from a set of disequilibrium conditions.the pattern of domestic demand. They also In international policy, analysis has fo-provide an explanation for structural dis- cused on the nature of structural disequi-equilibrium and slow growth in countries librium in the balance of payments and itsthat fail to do so. effect on trade and aid policies. The follow-

Both sets of assumptions have in general ing sections examine some of the relation-stood up well to subsequent empirical ships between the methodology employedtests. The acceleration of population and the policy conclusions reached in thesegrowth has probably made the surplus two areas.labor assumption more generally valid to-day than when it was initially formulated I Internal Development Policyfor underdeveloped countries. Econometric Unlike the neoclassical assumptions, thetests by R. Weisskoff and '". Lluch and structuralist alternatives do not lead auto-

312 AMERICAN ECONOMIC ASSOCIATION MAY 1975

matically to policy conclusions. To pro- to expand agriculture at a rate that isduce such conclusions, they must also be largely determined by the income elasticityembodied in an explicit general equilibrium of domestic demand for foodstuffs becauseframework. For this purpose, most ana- of the limited possibilities of expandinglysts have used one of two simple models: nonagricultural exports to offset a short-either a neoclassical nod f - ith particulair fall. Failure to meet this condition has re-structural rellatioins added or some A ersion tarded growth in a number of coulntries.of a linear Leontief input-output mo(lel, This conclusion does not apply when in-which e'Kclu(Ids most forms of substitution. dustry is disaggregated to individual sec-The neoclassical framrework minimizes the tors such as steel or fertilizer, however, ineffects of the specific rigidities in the eco- which the optimal investment allocation tonomic system, while the input-output sys- sectors having economies of scale is char-tem tends to exaggerate tlhem. acterized by the alternating pattern of ex-

Mlost elaborations of the dual economy panision of production and imports de-and surplus labor concepts have been scribed by T. Scitovsky and by Chenerymlade in a two-sector neoclassical system. and L. Westphal.as in the work of J. C. Fei and G. Ranis, The elaboration of structuralist hypoth-L. Lefeber, and A. C. Kellty, J. G. Wil- eses in planning models has also focusedliamson and R. J. Chtialian. One policy attention on the value of flexibility inresult from this type of model is to deter- adapting resource allocation to changingmine the shad(low% price of labor, which cani circunistances. 'I[lis p)rol)lL'il does not arisetheni be used in p)rojectt evaluation and in in the neoclassical systemi, which assunmesestalblisling the need for lal)or subsidies. perfect foresight and a high degree of sub-Empirical applications of these ino(lels stitutability. When these assunmptions arehave been liniitcd by the lack: of data on abandonced, flexibility can be prov,ided bydifferent aspects of (uLlism. It will require increased exports or capital inflows and bysome expansion of the two-sector frame- planning some excess capacity in p)hysicalwork before statistical estinlationl of the and human ci)iptal stocks. Although a for-unc:erlv-ing, structural relations he(conmes mal treXatmiient of the benefits of flexibilityfeasible, and the ways of achiev inlg it has not been

The balanced growth hypotheses have develop' d, this is an important problembeen widely used in cllpirical analysis aind for developing countries which cannot beare usually incorl)porated in input-outpuit analysed in the neoclassical system.models which incluele f(oligni trade. These The revival of interest in incomiie distri-aire applied to the foirm-lulatitoni and testing bution has added a new dimensioni toof deV(l()npent plhins, as illustrated in sur- structural analN'sis. The traditional apveys by (helnery (1971) and A. Mannc. proa)ch focuses orn the division betwetniAI)art from its use in coantry planning, wage and nonwage intcomile anid is ill suitedthis type of mo110del cani aliso be used to de- to dcevclop)ing cOuntrius, in which mo(lerniduce more general propositions through sector wage earncrs are in the nmiddle-systemiatically varying the StruLIctul pa- incoeic groups. Recent studies by M. S.raimetC r s and (dctcr nining a set of IsolutionIs Ahluwalia have brought out the fact thatbased oni either sinulation or optiinization. the bulk of the poorest groups in dce"elop-

This form of sen-sitivity analysis lends ing counitries are self-enmployed and largelyconsiderable sLu)p)orL to sonic of the con- rural. Their incomiies depend more on theclusions of ba: inccd growth theorists. For availability of land and, cal)ital and accesscxanp)lc, it is necessary in larger countries to public facilities than on wages. Since

VOL. 65 NO. 2 DEVELOPMENT ECONOMICS 313

each of the main poverty groups-small limit economic adjustments requires anfarmers, landless laborers, urban self- analytical framework in whfTh externalemployed-has a different set of produc- policy is more closely linked to domestictive possibilities and constraints, a new resource allocation than does the neo-form of structural analysis based on identi- classical view, which minimizes these re-fication of these groups is necessary for strictions. Attempts to formalize these re-distribution-oriented policies. lationships started from simple two-gap

This recognition of the importance of models, which incorporate explicit limitsasset distribution does not necessarily lead on the rate of increase of domestic saving,to the Marxist conclusion that the redis- investment, and exports. These modelstribution of existing assets is the only alter- were elaborated by including optimizingnative. Measures to redistribute incre- procedures and shadow prices, the dis-ments in income and new asset formation aggregation of productive sectors, andare more likely to be acceptable to the more explicit treatment of structuralmajority of the population and less dis- change over time, as in the work ofruptive of development in most countries. Chenery and A. MacEwan, M. Bruno, andDevelopment strategies based on this S. D. Tendulkar. Experiments with theseapproach are elaborated by Ahluwalia and types of models in a number of countriesChenery. The neo-AMarxist policy recom- have led to several general conclusions asmendations suffer from the same defects to development analysis and policy, theas the neoclassical in that they are implicit most significant of which are: (1) the en-in the initial assumptions rather than being hanced value of increased exports andderived from an analysis based on em- capital inflows in bottleneck situations, inpirical estimates of the underlying struc- which the trade limitation is more restric-tural relations. tive than supplies of capital and skilled

labor; (2) a restatement of the empiricalIII. ESxternal Policy basis for assessing comparative advantage

The conflict among the three analytical over time in relation to the factors limitingapproaches is perhaps most acute in the development; and (3) clarification of thearea of external policy. The neoclassical relation between internal and external con-approach tends to exaggerate the benefits straints in the evaluation of individual in-of trade in an open economy when it does vestment projects.not explicitly consider the effects of un- During the 1960's a number of countriescertain export prices and the difficulties of progressed from an initial strategy of im-shifting resources to meet changing market port substitution to the promotion of man-conditions. Coiriersely, the neo-Marxist ufactured exports after they had developedapproach exaggerates the costs of "de- a sufficient industrial base to do so. Aspendence" on external trade and invest- countries achieve a more diversified pro-ment and tends to ignore the benefits-of ductive structure and reduce their concen-the technological transfers that accompany tration on a few exports, the (liffTerence be-them. The early structuralist views have tween the neoclassical and structural pre-also proved to be excessively pessimistic as scriptions diminishes because some of theto the possibilities and benefits of non- conistrainits that had previously limitedtraditional exports of manufactures and growth are no longer significant. An assess-services. ment of the experience of some of the in-

The structuralist concept of develop- dustrializing countries that have made thisment as characterized by rigidities that transition-Taiwan, Israel, Korea, Brazil,

314 AMERICAN ECONOMIC ASSOCIATIOAr MA.Y 1975

Mexico-suggests that earlier conclusions and Brazil, which appear to he able to ab-as to the high cost of the initial stage of sorb large increaseis in importcoss tlhroughimport substitution need to be reexamined a combination of increased exports andin light of the subsequent ability of the borroN'Iug, while still inaintaining sub-country to shift to manufactured exports stantial rates of growth. Conversely, theand break out of the phase of trade countries most severely affecte(l by thelimited development. This evaluation sug- rise in oil and food prices are those whichgests that the dichotomy between inward- are dependent on primary exports, whioseoriented and outward-oriented policies has prices kept up with world inflation for onlyperhaps been overdrawn, and that these a brief period, and which do not have thepolicies can be more usefully viewed as flexibility to shift readil) to other exports.sequential elements of a strategy designed Unless oil prices are drastically reduicedto bring about changes in the structure of (which seems unlikely), substantial in-both production and trade. creases in capital flows to these couIItries

The basic issues of the relations between will be nieeded over the next few years iftrade and growth have been reopened in a they are to sustain eveii nmoderate rates ofnew form by the substantial changes in growth.relative prices that have taken place overthe past two or three years. The main IV. Conclusionsbeneficiaries have been the oil-producing The preceding discussion has illustratedcountries, which now have a structural the relations between theoretical premnisesproblem of unprecedented magnitude in and policy implications in several fields ofincreasing their capacity to utilize their development. The simnplifying assumptionsgreatly increased export revenues. Most of of the models currently in use tend tothe rest of the world has the opposite prob- exaggerate the diff erences between neo-lem of adjusting its economic structure- classical and structuralist prescriptions. Asthrough import substitution, increased ex- statistically determined relations replaceports, and redirecting trade-so as to ac- a priori hypotheses, it is predictable thatcommodate a substantial worsening in its these differences will be reduced. A similarterms of trade. Not only has world income process can be hoped for when neo-distribution been made worse by the pres- Marxist theorists turn their attelitioll toent and prospective reduction in growth of verifying their hypotheses.the poorest countries, but within these Although better knowledge of elasticitiescountries the policies to improve income of substitution in demand and productiondistribution are also being weakened. 'or would do quite a bit to reduce the con-most developing countries, increased im- flicts in policy guidance, several real differ-port prices mean a return to a condition of ences in basic concepts remain. Neoclassi-a dominant trade gap and large capital in- cal policy consists essenitially in removingflows for the next few years. They need to impediments to the funictioniing of marketsgive highest priority to reallocating re- so as to make the real Avorld as much likesources so as to expand exports and gradu- the abstract model as possible. However,ally reduce capital inflows over a reason- it will never be possible to achieve perfectable period. knowledge or instantaneous adjustment

This shock to the system of world trade to market signals. It is therefore necessaryhas emphasized the advantages of the more to incorporate these "imperfections" intoflexible economies, such as Taiwan, Korea, the model itself. Once this has been done

VOL. 65 NO. 2 DEVELOPMENT ECONOMICS 315

it will become possible to take account of - and H. Chenery, "A Model of Dis-the existence of internal or external dis- tribution and Growth," in H. Chenery etequilibria and to devise more realistic poli- al., Redistribution weith Growth, Londoncies to cope with them. In the theoretical 1974.literature, these policies are misleadingly M Bruno, "Optimal Patterns of Trade andreferred to as "second best" in relation to Development," Rev. Econ. Statist., Nov.the neoclassical model. It would be more H. Chenery, ed.,accurate to characterize the model itself as PlaHeningr, Cambridge, Mass, 1971.overly simple and "first best" policies - _ and A. MacEwan, "Optimal Patternsas simply unattainable. More attention of Growth and Aid: The Case of Paki-should be given to improving the realism stan," in I. Adelman and E. Thorbecke,of basically neoclassical models instead of eds., The Theory and Practice of Eco-discarding them in favor of equally over- nomic Developmient, Baltimore 1966.simplified structuralist formulations. and L. Westphal, "Economies of

In minimizing or ignoring the advan- Scale and Investment Over Time," in J.tages of market adjustments, structuralist Margolis, ed., Public Economics, London(and Marxist) policy prescriptions usually 1969.put too much weight on the limited ad- J. C. Fei and G. Ranis, Developmnent of the

mi v a u of d n cLabor Surplus Economy, Homewood 1964.ministrative apparatus of develo,ping coun- A. Wrc n Th taey fEooitries. As A. Hirschman has stressed, this is DeAzHilopshmen,Tt, New Haven 1958.one of the main limitations to develop- A. C. Kelley, J. G. Williamson and R. J.ment; it should be allowed for by not seek- Cheetham, Dualistic Economic Develop-ing too much fine tuning of development inent, Chicago 1972.policy. Difficulties in implementing a com- L. Lefeber, 'Planning in a Surplus Laborplex set of policies may prove much more Economy," Almer. Econ. Rev., June 1968,costly than the allocative inefficiency of a 58, 343-73.simpler program that can be more readily W. A. Lewis, "Economic Development withcarried out. Unlimited Supplies of Labor," Manchester

Finally, it must be recognized that the School, May 1954, 22i, 132-91.task of development has been made much C. Lluch and A. Powell, International Com-more difficult for most countries by the re- parisons of Expenditure and Saving Pat-cent changes in the world economy. Vir- terns, Int. Bank for Recon. and Dev., Res.tually every country is currently suffering Cent., dis. pap. no. 2, 1973.tualy vey cunty s crretl suferng A. Manne, "Multi-Sector Models for De-from more or less serious disequilibria velopment Planning: A Survey," J. of De-in its economic structure. Despite our de- 'elopnzeuit Econ., June 1974, 1, 43- 0.sire to give greater weight in development G. Myrdal, Economic Theory an7 d nderde-policy to distributional considerations, this veloped Regions, Londonl 957.cannot be achieved without giving equal R. Nurkse, Problems of Capital Formation inpriority to acljustments in external trade Underdeveloped Countitries, Oxford 1953.and capital flows. R. Prebisch, "Commercial Policy in the Un-

derdeveloped Countries," Aimer. Econ.REFEREN'CES Rev. Proc., May 1959, 49, 251-73.

M. S. Ahluwalia, "Income Inequality: Some P. Rosenstein-Rodan, "Problems of Indus-Dimensions of the Problem," in H. trialization of Eastern and South-EasternChenery et al., Redistribution with Growth, Europe," Econ. J., June-Sept. 1943, 53,London 1974. 205-16.

316 AMERICAN ECONOMIC ASSOCIATION MAY 1975

T. Scitovsky, "Growth-Balanced or Un- mestic and Foreign Resources in Economicbalanced," in M. Abramovitz et al., The Al- Growth: Some Experiments for India," inlocation of Economic Resources, Stanford H. Chenery, ed., Studies in Development1959. Planning, Cambridge, Mass. 1971.

H. W. Singer, "The Distribution of Gains R. Weisskoff, "Demand Elasticities for aBetween Investing and Borrowing CouIi- Developing Economy: An Internationaltries," Amer. Econ. Rev. Proc,, May 1950, Comparison of Consumption Patterns," in40, 473-85. H. Chenery, ed., Studies in Development

S. D. Tendulkar, "Interaction Between Do- Planning, Cambridge, Mass. 1971.

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The Philippires: Priorities and Prospects for Development by Russell Cheetham,Edward Hawkins, and others, distributed by The Johns Hopkins UniversityPress, 1976

Senegal; Tradition, Diversification, and Economic Development by HeinzBachmann and others, distributed by The Johns Hopkins University Press,1974

Turkey: Prospects and Problem;s of an Expanding Economy by Edmond Asfourand others, distributed by The Johns Hopkins University Press, 1975

Yugoslavia: Development with Decentrailzation by Vinod Dubey and others,published by The Johns Hopkins University Press, 1975

World Bank Staff Occasional Papers

Coffee, Tea, and Cocoa: Market Prospects and Development Lending byShamsher Singh and others, published by The Johns Hopkins l!niversityPress, 1977

Malnutrition and Poverty: Magnitude and Policy Options by Shlomo Reutlingerand Marcelo Selowsky, published by The Johns Hopkins University Press,1976

Economic Evaluation of Vocational Training Programs by Manuel Zymelman,published by The Johns Hopkins University Press, 1976

A Development Model for the Agricultural Sector of Portugal by Alvin C. Egbertand Hyung M. Kim, published by The Johns Hopkins University Press, 1975

The Future for Hard Fibers and Competition from Synthetics by Enzo R, Grilli, dis-tributed by The Johns Hopkins University Press, 1975

Public Expenditures on Education and Income Distribution in Colombia by Jean-Pierre Jallade, distributed by The Johns Hopkins University Press, 1974

Tropical Hardwood Trade in the Asia-Pacific Region by Kenji Takeuchi, dis-tributed by The Johns Hopkins University Press, 1974

Methods of Project Analysis: A Review by Deepak Lal, distributed by The JohnsHopkins University Press, 1974

Other Publications

World Tables 1976, published by The Johns Hopkins University Press, 1976The Tropics and Economic Development: A Provocative Inquiry into the Poverty

of Nations by Andrew Kamarck, published by The Johns Hopkins UniversityPress, 1976

Size Distribution of Income: A Compilation of Data by Shail Jain, distributed byThe Johns Hopkins University Press, 1975

Redistribution with Growth by Hollis Chenery, Montek S. Ahluwalia, C.L.G. Bell,John H. Duloy, and Richard Jolly, published by Oxford University Press, 1974

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No. 30. Bela Balassa and Ardy Stoutjesdijk, "Economic Integration among Develop-ing Countries," Journal of Common Market Studies (also available inSpanish as published in El Trimestre Econ6mico)

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No.39. ShamsherSingh, "The International Dialogue on Commodities," ResourcesPolicy

No. 40. Gary Kutcher and P. L. Scandizzo, "A Partial Analysis of the SharetenancyRelationships of Northeast Brazil," Journal of Development Economics

No.41. Bela Balassa, "The Income Distributional Parameter in Project Appraisal,"Economic Progress, Private Vatues and Public Policy (North-Holland)

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Journal of Development Economics 3No.45. Clive Bell and Pinhas Zusman, "A Bargaining Theoretic Approach to

Cropsharing Contracts," The American Economic Review