Two theories emphasized the existence of surplus resources in developing countries as the central challenge for economic policy. The first concentrated on the countries with relatively abundant natural resources and low population densities and argued that a considerable amount of both surplus land and surplus labour might still exist in these countries because of inadequate marketing facilities and lack of transport and communications. Economic development was pictured as a process whereby these underutilized resources of the subsistence sector would be drawn into cash production for the export market. International trade was regarded as the chief market outlet, or vent, for the surplus resources. The second theory was concerned with the thickly populated countries and the possibility of using their surplus labour as the chief means of promoting economic development. According to this theory, because of heavy population pressure on land, the marginal product of labour (that is, the extra output derived from the employment of an extra unit of labour) was reduced to zero or to a very low level. But the people in the subsistence sector were able to enjoy a certain customary minimum level of real income because the extended-family system of the rural society shared the total output of the family farm among its members. A considerable proportion of labour in the traditional agricultural sector was thus thought to contribute little or nothing to total output and to really be in a state of disguised unemployment. By this theory, the labour might be drawn into other uses without any cost to society.
It is necessary to clear up a number of preliminary points about the concept of disguised unemployment before considering its applications. First, it is highly questionable whether the marginal product of labour is actually zero even in densely populated countries such as India or Pakistan. Even in these countries, with existing agricultural methods, all available labour is needed in the peak seasons, such as harvest. The most important part of disguised unemployment is thus what may be better described as seasonal unemployment during the off-seasons. The magnitude of this seasonal unemployment, however, depends not so much on the population density on land as on the number of crops cultivated on the same piece of land through the year. There is thus little seasonal unemployment in countries such as Taiwan or South Korea, which have much higher population densities than India, because improved irrigation facilities enable them to grow a succession of crops on the same land throughout the year. But there may be considerable seasonal unemployment even in sparsely populated countries growing only one crop a year.
The main weakness in the proposal to use disguised unemployment for the construction of major social-overhead-capital projects arises from an inadequate consideration of the problem of providing the necessary subsistence fund to maintain the workers during what may be a considerably long waiting period before these projects yield consumable output. This may be managed somehow for small-scale local-community projects when the workers are maintained in situ by their relatives. But when it is proposed to move a large number of surplus workers away from their home villages for major construction projects taking a considerable time to complete, the problem of raising a sufficient subsistence fund to maintain the labour becomes formidable. The only practicable way of raising such a subsistence fund is to encourage voluntary saving and the expansion of a marketable surplus of food that can be purchased with the savings to maintain the workers. The mere existence of disguised unemployment does not in any way ease this problem.
Role of governments and markets
In earlier thinking about development, it was assumed that the market mechanisms of developed economies were so unreliable in developing economies that governments had to assume central responsibility for economic activity. This was to be done through economic planning for the entire economy (see economic planning: Planning in developing countries), which in turn would be implemented by active government participation in the economy and pervasive controls over all private-sector economic activity. Government participation took many forms: Public-sector enterprises were established to manufacture many commodities, including steel, machine tools, fertilizers, heavy chemicals, and even textiles and clothing; government marketing boards assumed monopoly power over the purchase and sale of many agricultural commodities; and government agencies became the sole importers of a variety of goods, and they often became exporters as well. Controls over private-sector activity were even more extensive: Price controls were established for many commodities; import licensing procedures eliminated the importing of commodities not given priority in official plans; investment licenses were required before factories could be expanded; capacity licenses regulated maximum permissible outputs; and comprehensive regulations governed the conditions of employment of workers.
The consequence, frequently, was that indigenous entrepreneurs often found it more financially rewarding to devote their energies and ingenuity to the task of procuring the necessary government import licenses and other permits and exploiting the loopholes in government regulations than to the problem of raising the efficiency and productivity of resources. For public-sector enterprises, political pressures often resulted in the employment of many more persons than could be productively used and in other practices conducive to extremely high-cost and inefficient operations. The consequent fiscal burden diverted resources that might otherwise have been used for investment, while the inefficient use of resources dampened growth rates.
Related to the belief in market failure and in the necessity for government intervention was the view that the efficiency of the price mechanism in developing countries was very small. This was reflected in the view of foreign-exchange shortage, already discussed, in which it was thought that there are fixed relationships between imported capital and domestic expansion. It was also reflected in the view that farmers are relatively insensitive to relative prices and in the belief that there are few entrepreneurs in developing countries.
