Abstract
This essay will examine distortions in product and factor markets in developing countries, and the interaction of these distortions in respect to the development strategies applied. The analysis will concentrate on policy-imposed distortions, where departures from efficient resource allocation result from policy actions; these contrast with distortions resulting from market imperfections.1
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Notes
The latter have been termed ‘endogenous,’ as opposed to ‘policy-imposed,’ distortions by J. N. Bhagwati, ‘The Generalized Theory of Distortions and Welfare,’ in N. J. Bhagwati, R. W. Jones, R. A. Mundell, and J. Vanek (eds), Trade, Balance of Payments and Growth, Papers in International Economics in Honor of Charles P. Kindleberger (Amsterdam: North-Holland, 1971) pp. 69–90.
B. Balassa, G. Bueno, P. P. Kuczynski, and M. H. Simonsen, Toward Renewed Economic Growth in Latin America (Mexico, DF: El Colegio de Mexico, Rio de Janeiro: Fundação Getulio Vargas, Washington, DC: Institute for International Economics, 1986) Ch. 4.
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This section derives from B. Balassa, ‘Public Finance and Social Policy — Explanation of Trends and Developments: The Case of Developing Countries, ’ in Public Finance and Social Policy (Detroit, Michigan: Wayne State University Press, 1983) pp. 41–58.
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An attempt to measure these effects has been made in the United States. It has been found that the income distributional effects of minimum wage legislation are very weak and ‘even if the elasticity of demand for low-wage labor is as low as 0.2, the reduction in national income is as large as the entire gain to the lower half of the income distribution when marginal taxation effects are ignored, and the reduction in national income is about twice as large as the net gain to the lower half of the income distribution when they are incorporated,’ W. R. Johnson and E. K. Browning, ‘The Distributional and Efficiency Effects of Increasing the Minimum Wage: A Simulation,’ American Economic Review, LXIII (1983) p. 211.
B. Balassa, et al., Turkey: Industrialization and Trade Strategy. A World Bank Country Study (Washington, DC; World Bank, 1982) Ch. 4.
B. Balassa, et al., Morocco: Industrial Incentives and Export Promotion, A World Bank Country Study (Washington, DC: World Bank, 1984) Table 3.3.
C. Leechor, ‘Tax Policy and Tax Reform in Semi-Industrialized Countries,’ Industry and Finance Series, Vol. 13 (Washington, DC: World Bank, 1986) p. 14.
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At the same time, a positive response of savings to interest rates was established in the pre-reform, but not in the post-reform, period. J. de Melo, and J. Tybout, ‘The Effect of Financial Liberalization on Savings and Investment in Uruguay,’ Economic Development and Cultural Change, XXXIV (1986) pp. 561–87
In the case of Mexico, the domestic interest rate variable has been highly significant in explaining changes in capital flight in a time-series investigation. And while this has not been the case for other countries, it should be understood that data on capital flight are subject to considerable error. J. T. Cuddington, ‘Capital Flight: Estimates, Issues, and Explanations,’ CPD Discussion Paper No. 1985-51 (Washington, DC: World Bank, 1986) Table 3.
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H. P. Binswanger, and M. R. Rosenzweig, Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia (New Haven, Conn.; Yale University Press, 1984) Ch. 1.
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© 1989 Bela Balassa
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Balassa, B. (1989). The Interaction of Factor and Product Market Distortions in Developing Countries. In: New Directions in the World Economy. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-10588-5_3
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