Problems with development economics - Can labor-capital models predict the responses of agrarian societies to development?, part I

American Journal of Economics and Sociology, The,  Oct, 1995  by David H. Smiley

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Finally, measures of capital efficiency, such as ratios of capital to output and of incremental capital output, may obscure institutional distortions, systems of labor and entrepreneurial disincentives embedded in the institutional structures of landed property. Incentives may change sharply at times of transition, for example of agrarian reform. The concept of capital efficiency reflects these factors but does not delineate them.

The concept of poverty must be dealt with. It increases where capital investment and capital efficiency are inadequate to offset the encroaches of population upon fixed land, leading to falling wages and rising rents. As the point of subsistence is reached, rates of mortality, debt bondage to landlords, and rural to urban migration all increase. What are needed now are new theoretical models which incorporate population, rent, migration, informal economies, and divergence. Some components of these models already exist. Samuelson (1964: 727) has developed an intensive law of rent, after Ricardo, in which increased population crowds onto fixed land, but similarly raising rents and reducing wages. Samuelson's model can easily be inverted, holding population fixed but reducing land area. Wages fall as before, but rent now has two components: imputed rent from the area expropriated and developed, and tenant rent from fewer sites but of increasingly dense occupancy.(1)

All the above models reach equilibrium at subsistence at which point surplus population faces starvation, debt bondage or migration to the urban, informal economy. Todaro's (1989: 278-81) rational basis for rural-urban migration is assumed to follow an assessment of net present value of long-term higher, but uncertain, urban income streams, compared with rural lower, but known, income streams and a (possibly) non-recurring cost of migration. This modern version of "the streets of Bombay are paved with gold" illustrates the "pull" incentive. The basis of a more useful "push" coercion to migrate is to be found in Basu (1994), thus, a small-holder, tenant or laborer runs out of food before harvest. In the absence of rural credit banks, he must borrow food from a landlord or moneylender (usually the same person) at a high price and pay back at a lower, post-harvest price. The high nominal interest rate reflects both risk and monopoly power and the actual interest rate, taking into account the price drop, is very high. The loan is secured by collateral - land, capital, future wages - which upon default is confiscated. And, at the point of subsistence, debt bondage may be seen as less attractive than the escape route of rural-urban migration.

Though migrants may ultimately become absorbed in the urban formal economy, it seems likely that they pass through, and many remain permanently within, an informal, underclass economy. This sector, characterized by unemployment, economic dependence on begging, crime, ambulatory services, rent-free sidewalks, free water and street lighting, charity and social services, defies analysis.(2)