Public Sector Investment Analysis

Questions and Answers

Which of the following practices was NOT mentioned as an inducement for private investment expansion?

Tariff protection

Cheap loans

Government grants (correct)

Tax holidays

What was one reason the Pearson Commission Report found a weak correlation between aid and growth performance?

High tariffs on imports

Insufficient foreign exchange earnings

Distortions in public-sector investment projects (correct)

Excess capacity in the manufacturing sector

What is a consequence of import substitution policies in developing countries?

Development of internationally competitive industries

Reduction in manufactured goods imports

Increased reliance on primary commodities

Creation of excess capacity in manufacturing (correct)

What was the primary aim of the import substitution policy adopted by developing countries?

To protect domestic producers from foreign competition Signup and view all the answers

What issue did developing countries face in the 1950s that influenced their economic policies?

Dependence on primary commodity exports Signup and view all the answers

Why did some industries in developing countries struggle to become internationally competitive after being protected?

Intensive use of capital and imported goods Signup and view all the answers

Which economic concept describes the policy aimed at promoting local industries by limiting imports?

Import substitution Signup and view all the answers

What form of economic policy did developing countries generally implement to address their trade deficits?

High tariffs and import restrictions Signup and view all the answers

What was a consequence of the extensive controls over private-sector activity?

A focus on procuring government licenses rather than improving productivity Signup and view all the answers

What was required before factories could be expanded?

Investment licenses Signup and view all the answers

Which practice resulted from political pressures on public-sector enterprises?

Employment of more workers than could be fully utilized Signup and view all the answers

What did the experience by the end of the 1950s reveal about developing countries?

Some countries abandoned early import-substitution strategies while others persisted Signup and view all the answers

What was a common view regarding the price mechanism in developing countries?

It had negligible efficiency Signup and view all the answers

What was one of the regulatory measures imposed on private-sector activity?

Maximum permissible outputs through capacity licenses Signup and view all the answers

How did the perception of foreign-exchange shortage influence economic views?

It was thought to create fixed relationships between imported capital and domestic expansion Signup and view all the answers

What was a noticeable trend among farmers in developing countries according to the prevailing beliefs?

General insensitivity to relative prices Signup and view all the answers

What trend is indicated regarding the economic conditions of the 1970s?

The buoyant conditions of the 1970s are unlikely to recur. Signup and view all the answers

Which of the following is a challenge faced by developing countries today?

Lower per capita production compared to developed countries. Signup and view all the answers

What factor is contributing to the difficult economic prospects of developing countries?

Rapidly growing population rates. Signup and view all the answers

What aspect contributed significantly to the spread of modern economic development?

Technological innovations in transportation and communication. Signup and view all the answers

What was the percentage of the world's population belonging to developed countries by the early 1970s?

34% Signup and view all the answers

Which of the following regions is mentioned as still needing to develop?

Africa. Signup and view all the answers

Which policy is suggested for countries needing to restore creditworthiness?

Rapid structural adjustments. Signup and view all the answers

Which country was not part of the early circle of developed nations in the late 19th century?

Brazil. Signup and view all the answers

What is the primary characteristic of the economic growth stage known as the 'take-off' society?

Acceleration of development Signup and view all the answers

According to Colin Clark, economic development progresses through successive domination of which production sectors?

Agricultural, manufacturing, and service Signup and view all the answers

Which factors are often regarded as critical for economic growth according to various theories?

Entrepreneurship and investment Signup and view all the answers

In the context of economic growth, what distinction is made between economic growth and economic development?

Growth typically involves rising per capita incomes, while development pertains to subsistence-level economies. Signup and view all the answers

What notable change occurs in the labor force as economies transition through growth stages?

A decrease in agricultural employment Signup and view all the answers

What is the significance of the urban population trend during economic growth?

It initially concentrates in core cities and later expands to suburbs. Signup and view all the answers

What aspect of investment shifts in importance as economies grow?

Manufacturing investment becomes more significant than utility investment. Signup and view all the answers

In Rostow's stages of growth, which stage directly follows the 'traditional society' stage?

The transitional society Signup and view all the answers

What does the term 'production of knowledge' encompass?

Outlays on all forms of education and research Signup and view all the answers

What effect do large research and development budgets have on firms?

They correlate with rapid technological progress Signup and view all the answers

How does the size of the capital stock affect efficiency?

Quality improvements can increase the efficiency of capital goods Signup and view all the answers

What is the concept of economies of scale?

A greater than proportionate increase in output due to resource increase Signup and view all the answers

Which sector has seen a notable shift of resources towards high productivity sectors?

Agriculture Signup and view all the answers

Why is the growth of capital stock measured with quality improvements important?

It reflects a true picture of output growth Signup and view all the answers

What is implied by a radical change in productive techniques resulting from market expansion?

High productivity due to efficient techniques Signup and view all the answers

What does reallocating resources from low productivity sectors to high productivity sectors indicate?

An increase in economic growth potential Signup and view all the answers

Study Notes

Public-Sector Investment and Economic Growth

Public-sector investment projects often face inefficiencies, evidenced by the Pearson Commission Report (1969) noting a weak correlation between aid received and growth performance.
In underdeveloped countries, both foreign and domestic investment disproportionately expands the manufacturing sector rather than improving overall economic diversity.
Investments are often directed towards domestic markets due to government incentives like tariff protection and tax holidays, leading to excess manufacturing capacity.

Import Substitution Policy

In the 1950s, most developing nations relied on primary commodities for foreign-exchange earnings, adopting import substitution strategies to foster industrialization.
These policies included high tariffs and import quotas, often targeting industries incapable of global competition, resulting in high-cost production.
Private sector controls were extensive, with regulations like price controls, import licensing, and capacity licensing, which stifled efficiency and innovation among entrepreneurs.

Consequences of Government Intervention

Political pressures in public-sector firms led to inflated employment and operational inefficiencies, creating a fiscal burden that hampered investment opportunities.
The belief in market failure justified significant government intervention, but this often resulted in misallocation of resources and slowed economic growth.

Lessons from Development Experiences

By the late 1950s, different developing countries exhibited varying levels of success in transitioning away from restrictive policy frameworks.
There was a recognition that past growth patterns from the 1970s may not be reproducible, necessitating structural adjustments for growth and creditworthiness.
Future foreign lending would focus more on evaluating the economic conditions of recipient countries.

Historical Context of Economic Development

Economic development began in Great Britain during the late 18th century, expanding through technological innovations in transport and communications.
By the early 1970s, developed countries constituted about 34% of the global population but held 87.5% of the world’s GNP, indicating a massive disparity in economic wealth.
Current developing countries face challenges such as low per capita income and rapid population growth, making comparison to earlier developmental phases difficult.

Theories of Economic Development Stages

Economic growth theories suggest stages through which economies progress—ranging from primary (agriculture) to secondary (manufacturing) to tertiary (services).
W.W. Rostow’s theory outlines growth as a transition from traditional to transitional societies leading to accelerated development stages, ultimately reaching maturity.
Entrepreneurship and investment are critical in facilitating movement between these stages, distinguishing economic growth from mere economic development.

Structural Shifts and Urbanization

A notable aspect of economic growth is the significant decrease in the workforce engaged in agriculture, coinciding with urban population concentration in core cities and suburbs.
Early public utility investments were crucial, but over time, manufacturing investments became more significant as economies progressed.

Knowledge Production and Technological Progress

The role of knowledge production—including education and research—is integral to technological advancement and economic growth.
Industries investing heavily in research and development tend to experience faster technological progress, supporting the idea that innovation is vital for growth.
Improvements in capital efficiency and economies of scale also contribute significantly to overall productivity and growth trajectories.

Reallocation of Resources

Economic growth is influenced by shifts in resources from low productivity sectors (like agriculture) to higher productivity sectors, which cannot be captured solely by measuring input growth.
Such reallocations enhance overall output growth, underlining the importance of sectoral development in economic progress.

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Description

This quiz explores the key themes of investment efficiency in public-sector projects, highlighting findings from the Pearson Commission Report. It examines the correlations between aid received and growth performance, as well as the impact of policies on investment direction in both sectors.