Presentation Speech by Professor Erik Lundberg of the Royal Academy of Sciences
Translation from the Swedish text
Your Majesties, Your Royal Highnesses, Ladies and Gentlemen,
Economic development research covers a wide sector of economics. What it is concerned with ultimately is why some countries are rich and others poor, why some countries seem to be caught in a vicious circle of poverty at the same time as others rapidly develop a high degree of industrialization and prosperity. It is not all that long – less than a hundred years – since our own country, Sweden, was poor and backward. It took us a great deal of time to achieve a reasonable standard of wellbeing. But in this modern age the persistent gaps in prosperity between rich and poor countries are a source of considerable impatience.
Economists have at all times concerned themselves with these questions, but it is fair to say that development problems did not become a central field of analytical, institutional and historical research within the science of economics until after the Second World War. It is for their pioneering work in this field, with special reference to the problems of the developing countries, that Professor Sir Arthur Lewis and Professor Theodore Schultz have been awarded this year’s Nobel Memorial Prize in Economic Science.
Arthur Lewis has employed a striking metaphor, referring to the growth of the world economy as an “escalator” moving at a certain speed – corresponding to 1.5 per cent per annum as to per capita national income during the decades preceding the First World War. The escalator was then practically stationary for nearly forty years, between 1913 and 1950, after which it began moving at more than twice its previous rate, corresponding to over 3 per cent perannum. Some countries get on the escalator at an early date, others much later. It looks as though many countries are merely standing on the escalator, while others are walking up it to achieve a very fast rate of development, others again are going down it or fall off.
This metaphor merely serves to illustrate observations made concerning great differences of development of the poor countries of the world. As regards the analysis of causes, Arthur Lewis has come to be known for two explanatory models which with the simplicity of genius mark out the causes of poverty among the population of the developing countries as well as the factors determining the unsatisfactory pace of development.
The first of these models is founded on the “dual” character of a developing country’s economy. There is a traditionally operating agricultural sector, based principally on a subsistence economy and involving a majority of the population, and there is a relatively modern, market-oriented sector aimed primarily at industrial production. The dynamics of the economy relate to the latter sector, which expands with the support of more or less “unlimited” labour resources, owing to the migration of people away from the agricultural sector. Labour will be available at the low wage costs corresponding to the standard of living in an underdeveloped agricultural sector. The profits accruing in the modern sector (“the capitalist sector”) provide the growing volume of savings which finances the formation of capital for expansion.
Professor Lewis’ second main model relates to the determination of the terms of trade between developing and industrialized countries, with the former exporting raw materials and tropical products and the latter industrial products. Two groups of countries – north and south, rich and poor respectively – each produces two kinds of products. One kind – food – is common to both, while the other two – referred to in the model as “coffee” and “steel” – are exchanged. Lewis shows how, subject to certain specified conditions, the terms of trade will be determined by the relationship between labour productivity in agriculture of developing countries and industrialized countries. According to this analytical model, it is the very low productivity of agriculture in the developing countries compared with agricultural productivity in the rich countries which decides the actual terms of trade between the two groups of nations.
The analytical interest of Professor Schultz has focussed on this very imbalance between relative poverty and underdevelopment in agriculture as compared with the superior productivity and the higher level of incomes in industry. It is through his studies of the productivity problems of agriculture – both in the United States and in the Third World – that Professor Schultz has obtained powerful impulses for his pioneering analysis of the importance of human resources in economic and social development.
Professor Schultz was the first scholar to systematize the analysis of the influence of investment in education on agricultural productivity as well as on productivity within the economy as a whole. With a sure eye for the limitations of the method, Professor Schultz has defined and measured the size of educational capital as the cumulative total of investments in education.
Professor Schultz and his disciples have shown that the American economy has long had a higher return on “human capital” than on physical capital and that this tension is one reason why investment in education has grown much faster than other investments. The great width of Professor Schultz’s approach also takes in a number of other factors and relationships with a bearing on the human factor. Thus he and his pupils have investigated into questions concerning health and disease as essential conditions governing the economic development of the LDC:s.
The researches of Professor Lewis and Professor Schultz have several features in common. Both scholars have had a great deal of practical experience concerning development problems, experience which they draw on in their research work. They share a profound historical interest in the nature of development at different times and in different countries. In a major work of economic history, Lewis has described and analysed growth and fluctuations in industrialized and developing countries from 1870 to 1913. He demonstrates similarities and dissimilarities to the post-war era. One chapter describes the “English climacteric” around 1870 in a manner which, unfortunately, is reminiscent of certain aspects of Swedish economic development since 1970.
Another distinguishing characteristic of both scholars is their interest in problems of economic policy. They are both concerned over the distress and poverty in the world today, and they are both committed to the search for ways out of underdevelopment. In this respect they both aim in their research at reaching bold conclusions which can lead to recommendations concerning improvements of economic policy. They are profoundly critical of the type of agricultural policy which has been followed in the developing countries at different times, and of the neglect of agricultural development opportunities which was common during the post-war decades.
There is in fact a kind of potential optimism pertaining to their research. Some distress could be avoided if there were less of bad economic policy, more economic rationality and more knowledge and incentives in reliance on the common sense of the individual farmer and entrepreneur. Despite the cruelties and caprices of nature in the form of drought, bad monsoons, harmful insects and diseases of crops and cattle, Professor Schultz believes the fundamental economic potential of the world’s agriculture to be such that one ought to be able to count on food production growing more rapidly than population. But, to quote a recently published article of Professor Schultz’s: “In view of what is being done politically, the prospects are much less favorable. Meanwhile international conferences produce weak reports, and social thought produces strong ideologies. But reports and ideologies do not produce food. Fortunately, plants and animals do not read reports, nor do they discriminate against the ideology of any government.”
Professor Sir Arthur Lewis and Professor Theodore Schultz, may I ask you to receive the Nobel Memorial Prize in economic sciences from the hands of his Majesty the King.
Their work and discoveries range from the formation of black holes and genetic scissors to efforts to combat hunger and develop new auction formats.
See them all presented here.