Appropriate factor proportions for manufacturing in less developed countries; a survey of the evidence

THEY PROVIDE RELATIVELY FEW NEW JOBS. THIS RAISES A SET OF CRITICAL QUESTIONS: ARE THE HIGH CAPITAL-LABOR RATIOS IN LDC MANUFACTURING NECESSARY? ARE THERE MORE EFFICIENT ALTERNATIVES? IF SO, WHY HAVE THEY NOT BEEN USED? IF NOT, WHAT ARE PROSPECTS FOR CREATING THEM? THIS PAPER PRESENTS A NON-TECHNICAL REVIEW OF THE EVIDENCE CONCERNING THE PROCESSES AND INSTITUTIONS RELATING TO CREATING NEW TECHNOLOGY IN LDCS. THE EVIDENCE INDICATES SUBSTANTIAL POSSIBILITIES FOR LABOR-CAPITAL SUBSTITUTION, PARTICULARLY WHEN POSSIBILITIES FOR INTERNATIONAL TRADE ARE ACKNOWLEDGED. ONE OF THE REASONS CAPITAL-INTENSIVE ENTERPRISES ARE LAUNCHED IN LDCS IS THAT FACTOR PRICES FAVOR THEM. ANOTHER IS THE ABSENCE OF COMPETITIVE MARKETS; THIS ALLOWS THE INSTINCTS OF THE ENGINEER TO PREVAIL. THE ENGINEER DESIGNS A PROCESS THAT IS OPTIMAL IN TERMS OF LABOR EFFICIENCY IN A DEVELOPED COUNTRY. BUT SUCH PROCESSES ARE NOT OPTIMAL IN AN LDC THAT LACKS CAPITAL BUT HAS LOW WAGES AND MUCH UNEMPLOYMENT. THE EVIDENCE SUGGESTS THAT INCENTIVES ARE VERY IMPORTANT. APPROPRIATE FACTOR PRICES ARE AN IMPORTANT INCENTIVE, AS IS EFFECTIVE COMPETITION IN PRODUCT MARKETS. THIS WOULD LEAVE LESS SCOPE FOR ENGINEERING INSTINCTS TO DOMINATE EFFICIENT FACTOR USE. THE SUBSIDIES OF CAPITAL USE MUST BE ENDED. AN IMPORTANT PART OF THIS WOULD BE THE REPLACEMENT OF EXCHANGE CONTROL AND OVER-VALUED EXCHANGE RATES WITH A REALISTIC EXCHANGE RATE. IF WAGES IN THE MODERN URBAN SECTOR CANNOT BE DECREASED, AT LEAST THEIR RATES OF INCREASE MUST BE MODERATED. THEY ARE TOO HIGH IN COMPARISON WITH THE INCOMES OF THE REST OF THE LABOR FORCE IN LDCS. WAGE INCREASES IN THE URBAN SECTOR MUST NECESSARILY REDUCE THE POTENTIAL FOR IMPROVING THE INCOMES OF THE POORER MAJORITY.