- Email: [email protected]
Agrarian structure and economic underdevelopment
Book
395
reviews
which Williamson favors, the effects on growth are much larger. This is an important distinction, but whether the general equilibrium impact was as large as Williamson’s CGE model predicts (p. 48) remains to be seen. The chapter also includes a novel application of the Harris-Todaro model of rural-urban migration to the interwar United States. Urban unemployment did equilibrate rural-urban migration in the long run, but short-run disequilibria (excessively large or small wage gaps) were very persistent. Chapter Three investigates the historical relationship between inequality and capital accumulation, finding little evidence that the former was a prerequisite for the latter in the case of physical capital. Extending previous work by T. Paul Schultz, Williamson reports some cross-sectional evidence that inequality reduces the amount of human capital accumulation. Chapter Four offers fascinating analyses of the effects of industrialization on poverty and how poverty trends influenced social welfare policy in nineteenth century Great Britain and the United States. Pauperism declined once industrialization was in full swing, although trends during early industrialization are less clear. Industrialization, however, led to a relative increase in pauperism among some groups, particularly the elderly, due to the decline in cottage industry. Seasonality in labor demand declined with development, but in its driven by macroeconomic shocks. place came industrial unemployment, Britain underinvested in ‘social overhead capital’ in her nineteenth century cities, resulting in appallingly high morbidity and mortality rates. Preindustrial ‘safety nets’ for the poor were more generous than welfare policies adopted during the industrial revolution. Criticisms aside, Inequality, Poverty, and History is a well-written accessible survey of an influential body of research in economic history. The distributional issue Williamson studies, as noted in his introductory remarks, are no less important today in developing countries than in nineteenth century Britain or the United States, and many of the lessons of the past are still relevant. Development economists should bear in mind, however, that Williamson’s evidence and methods are the subject of intense (and unresolved) debate among economic historians. Robert A. Margo Vanderbilt University Nashville, TN 37235, U.S.A. Kaushik (Harwood
Basu, Agrarian Structure Academic Publishers, Chur,
and Economic Underdevelopment Switzerland, 1990) pp. x+ 95.
by Kaushik Basu is volume 37 of Fundamentals of’ Pure In the Introduction to the Series, the editors state: ‘There is a risk of “balkanization” in economics’. This is especially the case in the economics of agrarian structure. Economic theories of contracts and This brief book
und Applied
Economics.
396
Book
reviews
institutions developed for advanced economies have been applied extensively to less developed agrarian economies during the last few decades. Examples are theories of land tenure, labor, and credit contracts. While the subject of agrarian institutions is old and controversial, such institutions should no longer be studied in isolation. Given the diversity of economic theories of agrarian institutions, however, a succinct survey of the state of the art is needed to identify the useful theories. As I understand it, the purpose of this book is to do just that. Basu’s focus is on a selective survey of recent theories of agrarian structure and its effect on economic efficiency and development. As a leading theoretical economist in this area, he provides a number of useful insights. The overall outcome, however, is not quite satisfactory, even taking into account the difficulty of the subject. The basis on which the author selects theories for review is questionable. While it is true that our current empirical knowledge on the subject is far from adequate, a great deal of evidence has been accumulated on agrarian structure and institutions. To be useful, the economic theory of agrarian structure should be able to explain, or at least be consistent with, the empirical regularities found by empirical studies. Taken in this light, the relevance of the theories highlighted in this book is unclear. Section 2 (‘Stagnation and Development’) attempts to explain theoretically the slow pace of the adoption of innovations in less developed agrarian economies. The answer is sought in the probability of a tenant choosing to abandon farming after adopting new technology; that would make it unprofitable for both the tenant and the landlord to adopt an innovation in the first place. According to the model, a tenant may leave farming because of the availability of more remunerative jobs outside agriculture. If that is so, I wonder if the adoption of new agricultural technology is slow in a rapidly growing economy in which urban job opportunities increase over time. As far as Asian countries are concerned, owner cultivation dominates. Hence, ‘tenurial insecurity’ caused by a tenant’s occupational choice, if it exists, cannot be a major explanation of slow adoption. More to the point, accumulated evidence shows that it is not tenure and other social factors, but such environmental factors as the availability of irrigation water that decisively determined the adoption of modern rice and wheat varieties in less developed countriies of Asia. Section 3 (‘Theories of Agricultural Land Tenure and Land Markets’) attempts to explain why share tenancy exists and why a land market is inactive. It is already well established that the choice of share tenancy cannot be justified by the so-called Marshallian theory of share tenancy, which posits that, under the assumption of an absence of risk aversion, a share tenant will shirk because of the disincentive effect output sharing has on his work effort. In such a situation, the rational landlord will choose to offer a
Book
reviews
397
fixed-rent contract for its merit of undistorted work incentives. Basu rejects this theory and selects to review, among others, Allen’s screening model of share tenancy at length. Under certain assumptions, it shows that share tenancy arises because, if fixed-rent contracts are offered, some low ability tenants may default on rent payment and abscond to other localities. The most devastating observation against this theory is that advance payment of fixed rent is widely paracticed in Asia: default risk cannot explain the prevalence of share tenancy. Basu explains the inactivity of land sales on the basis of the lack of assurance that sellers can buy back the lands. It is presumably true that some landlords want to sell their lands to finance the temporary needs for money, and want to buy back in the near future. Basu’s own theory postulates that the lower the probability to buy back the land, the lower the probability a landholder will sell. Such behavior may make a land market inactive. We must not overlook, however, the fact that a mortgaging contract, in which the landholder transfers cultivation rights to the lender of money until repayment with no interest charge, is widely practiced in Asian villages. The agreement is sometimes made with the sanction of a third party, to assure the mortgager’s right to ‘buy back’. Basu’s theory seems to explain the prevalence of land mortgaging, but not the inactivity of the land market. Section 4 (‘Labor Market Institutions and Wage Formation’) is devoted to a survey of efftciency wage models. The thrust of the models developed by Shapiro and Stiglitz and others, later extended to the agrarian setting by Eswaran and Kotwal, is that given the difficulty of monitoring a worker’s effort, an employer may find it advantageous to offer wages higher than the competitive (or reservation) wage, with the threat to terminate the contract if employee’s shirking is detected. Under such conditions the worker has an incentive to work hard to maintain the contract, because his current job provides him with a utility higher than his reservation utility. Based on this reasoning, Eswaran and Kotwal explain the co-existence of the so-called permanent (long-term) labor contract and the causal (short-term) labor contract. Permanent laborers perform tasks similar to those of owners and tenant cultivators, but different from those of causal laborers who are engaged for simple, peak season activities. The question immediately arises as to why tenancy contracts are not chosen rather than fixed-wage permanent labor contracts, if the work enforcement is costly. Under a fixed-wage contract, the marginal return to effort for the farm worker is zero. Under the fixed-rent contract, it is identical to the marginal product of effort. It follows that (under certainty) the fixedrent contract can solve the incentive problem without assuring rewards to the farm worker higher than the competitive level (see Yujiro Hayami and Keijiro Otsuka, The Economics of Contract Choice: An Agrarian Perspective, Clarendon Press, 1992). Needless to say, if significant economies of scale
398
Book review
exist, it will be more profitable to operate a large farm by employing a number of fixed-wage workers rather than subdividing the land into small pieces for tenancy contracts. The peculiar and important empirical regularity is that, except for plantation sectors, the permanent labor contract is common in South Asia but not in Southeast Asia. Is this because scale economies exist only in South Asia or is it because tenancy transactions are prohibited by land reform law and social customs more strictly in South Asia than in Southeast Asia? The point is that since land tenancy and labor contracts are alternative arrangements for utilizing land and labor resources, it is misleading to treat them separately. The theoretical literature on informal rural credit market, including interlinked tenancy-credit (or labor-credit) contracts, reviewed in Sections 5 and 6 suffer from the lack of appropriate empirical knowledge. Basu points out that there are a wide range of interest rates, credit shortages, and geographical segmentation in rural financial markets. This simplistic characterization is correct for some areas, but not necessarily so for other areas. As Basu argues, to explain credit shortages, we must explain why interest rates do not adjust upward to clear the market. Among the existing models, the adverse selection model of Stiglitz and Weiss provides the most convincing explanation. As Basu points out, however, the applicability of that model may be limited because information in agrarian economies about risky borrowers would not be as imperfect as the model assumes. Basu also questions the validity of the Stiglitz-Weiss model because of the assumption of perfect competition. He argues that to solve the problem of imperfect information, credit markets tend to fragment; because of fragmentation, the rural credit market is characterized by oligopoly or even by monopoly. Thus, he introduces a monopoly moneylender-landlord model, in which the worker achieves only the utility level without a credit transaction (i.e., reservation utility), and a ‘triadic’ monopoly model, in which the landlord extracts a further surplus from the worker by reducing his reservation utility, using the landlord’s power and influence on another party related to the workers (e.g., a merchant). Basu claims the triadic monopoly model ‘could aid better understanding of such important economic phenomena as bondage and exploitation’. This model may be useful to analyze cases where extremely large landlords control an entire agrarian community, such as large estates and haciendas, and case where social customs (e.g.. caste code) restrict occupational choice and certain economic transactions. The world of the peasant sector in Asia with which I am familiar, however, seems to be better described by the competitive model, with such special features as default risk _ the model criticized as being totally unrealistic by Basu. The economics of agrarian structure is concerned with explaining the elusive empirical facts observed in agrarian economies. Theory is a necessary guide for elucidating the economic functions and efficiency of agrarian
Book
399
reoiews
institutions. While I think this book presents an excellent survey of selected theoretical literature viewed purely from a theoretical perspective, I found that many of the theories reviewed have weak empirical bases. After all, theory provides hypotheses; without empirical tests, statistical as well as casual, its validity cannot be judged. I doubt, therefore, that this book will be truly useful to those interested in this controversial subject.
Tokyo
International
Michael E. Porter, The Competitive York, 1990) pp. xx+855.
Advantage
Keijiro Otsuka Metropolitan University Tokyo, Japan and Rice Research Institute Laguna, Philippines
of Nations
(Free
Press, New
Michael Porter’s Competitive Advantage of Nations, though it is written from the perspective of the business school rather than the economics department, and is primarily focussed on understanding the distribution of leading positions in industries held by the advanced economies, is potentially an extraordinarily important book for the development field. It is the first serious attempt to develop a really original grand theory of national economic development processes since the early years of Postwar development economics, and represents one of the most original ways of thinking about development policy in years. In chapters 3 and 4 Porter presents his ‘determinants’ and ‘dynamics’ of national competitive advantage, which he informally models as centering around four elements, which he calls the ‘diamond of competitive advantage’: (1) factor conditions, (2) demand conditions, (3) related and supporting industries and (4) firm strategy, structure and rivalry. These four elements influence each other, while being influenced by two largely exogenous elements, ‘chance’ historical events and cultural legacies, and government policy. Porter’s key departure from standard neoclassical trade theory is to posit a qualitative difference between ‘basic factors’ and ‘advanced factors’. For the former, which include physical resources and unskilled or semiskilled labor, standard theory applies. But for the latter, which are more specialized, and include highly trained personnel with specific human capital, and ‘knowledge resources’, such as government and private research institutes, leading universities and industry associations, Porter argues that standard theory can
395
reviews
which Williamson favors, the effects on growth are much larger. This is an important distinction, but whether the general equilibrium impact was as large as Williamson’s CGE model predicts (p. 48) remains to be seen. The chapter also includes a novel application of the Harris-Todaro model of rural-urban migration to the interwar United States. Urban unemployment did equilibrate rural-urban migration in the long run, but short-run disequilibria (excessively large or small wage gaps) were very persistent. Chapter Three investigates the historical relationship between inequality and capital accumulation, finding little evidence that the former was a prerequisite for the latter in the case of physical capital. Extending previous work by T. Paul Schultz, Williamson reports some cross-sectional evidence that inequality reduces the amount of human capital accumulation. Chapter Four offers fascinating analyses of the effects of industrialization on poverty and how poverty trends influenced social welfare policy in nineteenth century Great Britain and the United States. Pauperism declined once industrialization was in full swing, although trends during early industrialization are less clear. Industrialization, however, led to a relative increase in pauperism among some groups, particularly the elderly, due to the decline in cottage industry. Seasonality in labor demand declined with development, but in its driven by macroeconomic shocks. place came industrial unemployment, Britain underinvested in ‘social overhead capital’ in her nineteenth century cities, resulting in appallingly high morbidity and mortality rates. Preindustrial ‘safety nets’ for the poor were more generous than welfare policies adopted during the industrial revolution. Criticisms aside, Inequality, Poverty, and History is a well-written accessible survey of an influential body of research in economic history. The distributional issue Williamson studies, as noted in his introductory remarks, are no less important today in developing countries than in nineteenth century Britain or the United States, and many of the lessons of the past are still relevant. Development economists should bear in mind, however, that Williamson’s evidence and methods are the subject of intense (and unresolved) debate among economic historians. Robert A. Margo Vanderbilt University Nashville, TN 37235, U.S.A. Kaushik (Harwood
Basu, Agrarian Structure Academic Publishers, Chur,
and Economic Underdevelopment Switzerland, 1990) pp. x+ 95.
by Kaushik Basu is volume 37 of Fundamentals of’ Pure In the Introduction to the Series, the editors state: ‘There is a risk of “balkanization” in economics’. This is especially the case in the economics of agrarian structure. Economic theories of contracts and This brief book
und Applied
Economics.
396
Book
reviews
institutions developed for advanced economies have been applied extensively to less developed agrarian economies during the last few decades. Examples are theories of land tenure, labor, and credit contracts. While the subject of agrarian institutions is old and controversial, such institutions should no longer be studied in isolation. Given the diversity of economic theories of agrarian institutions, however, a succinct survey of the state of the art is needed to identify the useful theories. As I understand it, the purpose of this book is to do just that. Basu’s focus is on a selective survey of recent theories of agrarian structure and its effect on economic efficiency and development. As a leading theoretical economist in this area, he provides a number of useful insights. The overall outcome, however, is not quite satisfactory, even taking into account the difficulty of the subject. The basis on which the author selects theories for review is questionable. While it is true that our current empirical knowledge on the subject is far from adequate, a great deal of evidence has been accumulated on agrarian structure and institutions. To be useful, the economic theory of agrarian structure should be able to explain, or at least be consistent with, the empirical regularities found by empirical studies. Taken in this light, the relevance of the theories highlighted in this book is unclear. Section 2 (‘Stagnation and Development’) attempts to explain theoretically the slow pace of the adoption of innovations in less developed agrarian economies. The answer is sought in the probability of a tenant choosing to abandon farming after adopting new technology; that would make it unprofitable for both the tenant and the landlord to adopt an innovation in the first place. According to the model, a tenant may leave farming because of the availability of more remunerative jobs outside agriculture. If that is so, I wonder if the adoption of new agricultural technology is slow in a rapidly growing economy in which urban job opportunities increase over time. As far as Asian countries are concerned, owner cultivation dominates. Hence, ‘tenurial insecurity’ caused by a tenant’s occupational choice, if it exists, cannot be a major explanation of slow adoption. More to the point, accumulated evidence shows that it is not tenure and other social factors, but such environmental factors as the availability of irrigation water that decisively determined the adoption of modern rice and wheat varieties in less developed countriies of Asia. Section 3 (‘Theories of Agricultural Land Tenure and Land Markets’) attempts to explain why share tenancy exists and why a land market is inactive. It is already well established that the choice of share tenancy cannot be justified by the so-called Marshallian theory of share tenancy, which posits that, under the assumption of an absence of risk aversion, a share tenant will shirk because of the disincentive effect output sharing has on his work effort. In such a situation, the rational landlord will choose to offer a
Book
reviews
397
fixed-rent contract for its merit of undistorted work incentives. Basu rejects this theory and selects to review, among others, Allen’s screening model of share tenancy at length. Under certain assumptions, it shows that share tenancy arises because, if fixed-rent contracts are offered, some low ability tenants may default on rent payment and abscond to other localities. The most devastating observation against this theory is that advance payment of fixed rent is widely paracticed in Asia: default risk cannot explain the prevalence of share tenancy. Basu explains the inactivity of land sales on the basis of the lack of assurance that sellers can buy back the lands. It is presumably true that some landlords want to sell their lands to finance the temporary needs for money, and want to buy back in the near future. Basu’s own theory postulates that the lower the probability to buy back the land, the lower the probability a landholder will sell. Such behavior may make a land market inactive. We must not overlook, however, the fact that a mortgaging contract, in which the landholder transfers cultivation rights to the lender of money until repayment with no interest charge, is widely practiced in Asian villages. The agreement is sometimes made with the sanction of a third party, to assure the mortgager’s right to ‘buy back’. Basu’s theory seems to explain the prevalence of land mortgaging, but not the inactivity of the land market. Section 4 (‘Labor Market Institutions and Wage Formation’) is devoted to a survey of efftciency wage models. The thrust of the models developed by Shapiro and Stiglitz and others, later extended to the agrarian setting by Eswaran and Kotwal, is that given the difficulty of monitoring a worker’s effort, an employer may find it advantageous to offer wages higher than the competitive (or reservation) wage, with the threat to terminate the contract if employee’s shirking is detected. Under such conditions the worker has an incentive to work hard to maintain the contract, because his current job provides him with a utility higher than his reservation utility. Based on this reasoning, Eswaran and Kotwal explain the co-existence of the so-called permanent (long-term) labor contract and the causal (short-term) labor contract. Permanent laborers perform tasks similar to those of owners and tenant cultivators, but different from those of causal laborers who are engaged for simple, peak season activities. The question immediately arises as to why tenancy contracts are not chosen rather than fixed-wage permanent labor contracts, if the work enforcement is costly. Under a fixed-wage contract, the marginal return to effort for the farm worker is zero. Under the fixed-rent contract, it is identical to the marginal product of effort. It follows that (under certainty) the fixedrent contract can solve the incentive problem without assuring rewards to the farm worker higher than the competitive level (see Yujiro Hayami and Keijiro Otsuka, The Economics of Contract Choice: An Agrarian Perspective, Clarendon Press, 1992). Needless to say, if significant economies of scale
398
Book review
exist, it will be more profitable to operate a large farm by employing a number of fixed-wage workers rather than subdividing the land into small pieces for tenancy contracts. The peculiar and important empirical regularity is that, except for plantation sectors, the permanent labor contract is common in South Asia but not in Southeast Asia. Is this because scale economies exist only in South Asia or is it because tenancy transactions are prohibited by land reform law and social customs more strictly in South Asia than in Southeast Asia? The point is that since land tenancy and labor contracts are alternative arrangements for utilizing land and labor resources, it is misleading to treat them separately. The theoretical literature on informal rural credit market, including interlinked tenancy-credit (or labor-credit) contracts, reviewed in Sections 5 and 6 suffer from the lack of appropriate empirical knowledge. Basu points out that there are a wide range of interest rates, credit shortages, and geographical segmentation in rural financial markets. This simplistic characterization is correct for some areas, but not necessarily so for other areas. As Basu argues, to explain credit shortages, we must explain why interest rates do not adjust upward to clear the market. Among the existing models, the adverse selection model of Stiglitz and Weiss provides the most convincing explanation. As Basu points out, however, the applicability of that model may be limited because information in agrarian economies about risky borrowers would not be as imperfect as the model assumes. Basu also questions the validity of the Stiglitz-Weiss model because of the assumption of perfect competition. He argues that to solve the problem of imperfect information, credit markets tend to fragment; because of fragmentation, the rural credit market is characterized by oligopoly or even by monopoly. Thus, he introduces a monopoly moneylender-landlord model, in which the worker achieves only the utility level without a credit transaction (i.e., reservation utility), and a ‘triadic’ monopoly model, in which the landlord extracts a further surplus from the worker by reducing his reservation utility, using the landlord’s power and influence on another party related to the workers (e.g., a merchant). Basu claims the triadic monopoly model ‘could aid better understanding of such important economic phenomena as bondage and exploitation’. This model may be useful to analyze cases where extremely large landlords control an entire agrarian community, such as large estates and haciendas, and case where social customs (e.g.. caste code) restrict occupational choice and certain economic transactions. The world of the peasant sector in Asia with which I am familiar, however, seems to be better described by the competitive model, with such special features as default risk _ the model criticized as being totally unrealistic by Basu. The economics of agrarian structure is concerned with explaining the elusive empirical facts observed in agrarian economies. Theory is a necessary guide for elucidating the economic functions and efficiency of agrarian
Book
399
reoiews
institutions. While I think this book presents an excellent survey of selected theoretical literature viewed purely from a theoretical perspective, I found that many of the theories reviewed have weak empirical bases. After all, theory provides hypotheses; without empirical tests, statistical as well as casual, its validity cannot be judged. I doubt, therefore, that this book will be truly useful to those interested in this controversial subject.
Tokyo
International
Michael E. Porter, The Competitive York, 1990) pp. xx+855.
Advantage
Keijiro Otsuka Metropolitan University Tokyo, Japan and Rice Research Institute Laguna, Philippines
of Nations
(Free
Press, New
Michael Porter’s Competitive Advantage of Nations, though it is written from the perspective of the business school rather than the economics department, and is primarily focussed on understanding the distribution of leading positions in industries held by the advanced economies, is potentially an extraordinarily important book for the development field. It is the first serious attempt to develop a really original grand theory of national economic development processes since the early years of Postwar development economics, and represents one of the most original ways of thinking about development policy in years. In chapters 3 and 4 Porter presents his ‘determinants’ and ‘dynamics’ of national competitive advantage, which he informally models as centering around four elements, which he calls the ‘diamond of competitive advantage’: (1) factor conditions, (2) demand conditions, (3) related and supporting industries and (4) firm strategy, structure and rivalry. These four elements influence each other, while being influenced by two largely exogenous elements, ‘chance’ historical events and cultural legacies, and government policy. Porter’s key departure from standard neoclassical trade theory is to posit a qualitative difference between ‘basic factors’ and ‘advanced factors’. For the former, which include physical resources and unskilled or semiskilled labor, standard theory applies. But for the latter, which are more specialized, and include highly trained personnel with specific human capital, and ‘knowledge resources’, such as government and private research institutes, leading universities and industry associations, Porter argues that standard theory can