Financial Options for Economic Development (The Quaid-i-Azam Lecture)

Abstract

As a model builder, I feel comfortable in analyzing economic development through the construction and use of 2-gap mathematical-statistical models. This serves as a paradigm for the modelling of developing countries.l All systems have a core, and although analysis of developing economies must take many interrelated processes into account simultaneously, the more complex systems can usually be reduced to a simplified core of broad macroeconomic relationships. The 2-gap model is, of course, only a starting point because the analysis must deal with such sectors as demographics, family budgets, and the formation of market prices - possibly only relative or real prices. Such a system looks at the economic development issues in physical terms, with some real (relative) prices for allocation theory. A great deal of interesting material can be prepared along these lines for guidance in the development process. The building blocks are: (i) Production functions for introducing technological constraints, perhaps extended to include an input-output component; (ii) Conditions of marginal productivity, i.e., optimality in reaching production decisions both for output and input; (iii) Population dynamics and more general demographic processes extending to labour supply, immigration, emigration, and distribution of income/wealth; (iv) The conditions for consumer choice, generating ultimately large-scale demand systems, starting with family budget analysis. As in the case of production analysis, optimality decisions guide model specification; and (v) Trade systems showing how exportable surpluses are created and offset