Some International Aspects of the Problem of Economic Development

“A country is poor because it is poor.” This seems a trite proposition, but it does express the circular relationships that afflict both the demand and the supply side of the problem of capital formation in economically backward areas. This paper will discuss some international aspects of the difficulties on both sides. It will take up only a few points and cannot even attempt to give anything like a balanced picture.

The inducement to invest is limited by the size of the market. That is essentially what Allyn Young brought out in his reinterpretation of Adam Smith's famous thesis. What determines the size of the market? Not simply money demand, nor mere numbers of people, nor physical area. Transport facilities, which Adam Smith singled out for special emphasis, are important; reductions in transport costs (artificial as well as natural) do enlarge the market in the economic as well as the geographical sense. But reductions in any cost of production tend to have that effect. So the size of the market is determined by the general level of productivity. Capacity to buy means capacity to produce. In its turn, the level of productivity depends—not entirely by any means, but largely—on the use of capital in production. But the use of capital is inhibited, to start with, by the small size of the market.