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THE
PROBLEM OF FINANCING OF
ECONOMIC DEVELOPMENT
By M.
Kalecki
situation
depend
in under-developed
to a great extent on
and
ture
revenue
are
not
Such
countries.
foreign trade,
less
important
countries
and public
than
in
usually
expendi?
developed
It will
be
seen,
This
happen frequently that some dis-saving takes place.
true
of poorer peasants.
For the sake of
may be especially
we
abstract
this
from
factor and thus
however,
shall,
simplicity
it may
we
shall
assume
that workers
and
small
proprietors
consume
KALECKI
M.
sector we
modities
from
materials
and
the
lowest
fuel will
to the
II.
Department
Investment
be
stage.
allocated
uses
according
tion of final products.
sector as Department
the production
include
shall
We
I
of
shall denote
and
the
between
two sectors
in the produc?
investment goods
them
the
the consumption
goods
sector
as
of
here not only for the production
the
sake
of
and
for
replacement
goods
expansion of
of invento?
equipment,, but also for the accumulation
investment
plant and
ries. We
shall
stands
the production
to the
corresponding
even
of consumption
in
inventories,
goods,
This somewhat artificial classification is introduced
include
of
accumulation
I.
Department
coincide
to make
I
Department
argument.
the basic exchange
interrelation bet?
us
Let
consider these departments
ween
the two departments.
In both depart?
in a given unit period (e.g. in a given year).
ments a part of the value of product will be consumed
and
I.
And
similarly^
be equal
to
production
is of course sup-'
in Department
I, Clt
Consumption
C24-S2.
II.
of
This
out
the
of
Department
production
happens
plied
the
value
as follows.
Department
of
will
Part
I
an assumption
not
that the indebtedness
does
involve
of
an increase may
occur
does not increase,
because
such
proprietors
result ol investment financed by credit.
r. This
small
as a
THE
PROBLEM
OF
FINANCING
OF
ECONOMIC
DEVELOPMENT
small
ment
goods inDepart?
I.
in Department
in Department
II cannot
of unsold goods
(The accumulation
interfere with this equation
because
by definition
lation of inventories is included in Department
I.)
the accumu?
can be
found in the discussion
of
equation
It
Marx.
also
schemes
be
shown
may
expanded reproduction
by
that this equation is equivalent to the equality between
savings
This
and
basic
investment.
if to both
Indeed,
in Department
imagine
that investment
is
I.
part in saving. A part of saving arises directly in Department
second part of saving is the equivalent of the selling of the
II to workers and
surplus of consumption goods of Department
The
in Department
I. These
savings which accrue to entre?
preneurs who profited from the demand
generated
by higher
as deposits.
investment accumulate
If investment is financed out
capitalists
M.
KALECKI
bank
bank credits.
are no financial limits in the formal sense to the volume
There
of
investment.
investment
does
real problem
this financing of
is whether
not create inflationary pressures.
For
of this problem the most convenient is our first
The
or does
the consideration
=
equation, C?
S2.
It is easy to show that the crucial point in the problem of
whether a certain level of investment creates or does not create
I
for consumption
in demand
goods inDepartment
an
cause
in
these
of
The
increase
will
would
goods.
prices
prices
rise up to the point where the saved profits, S2, will be equal to Cx
the increase
in Department
II
real wages will fall.
(Small proprietors
the
in
not
rise
because
the
also
from
will
necessarily profit
prices
on whom
accrue
to
the
i.e.,
may
they depend,
capitalists
profits
case
some?
This
is
the
which
is
etc.).
merchants, money-lenders,
and
times called
of workers
higher
Let us now consider
another
extreme
case.
Let
us
assume
either because
in
as
THE
PROBLEM
OF
FINANCING
OF
ECONOMIC
DEVELOPMENT
II
is equal to Cv
In other words,
the output of Department
increase to such an extent that the surplus in this department
corresponding to the part of profits that is not consumed, S2, will
will
in more
detail
the
We
ment and saving, will hold good ifpublic investment is fully finance
by loans. The process of such financing will indeed not differ from
increase in production of Depart?
that of private investment. The
I on account
of public
investment, will push production or
to
in
II
the
up
point where the increase in con?
Department
prices
will
in
I
be equal to the increase in saving
Department
sumption Cj
II. Public
investment, if financed by loans,
Sz in Department
will thus generate just as private investment its counterpart in
ment
us
assume
Let
loans
and thus will make possible the founding of the loan. If, however,
such securities are not issued, this saving will swell the deposits
or will be used for repayment of private bank credits. Here
again
the problem of inflationary pressure will depend merely on the
conditions of supply of consumption goods.
results are of considerable
These
importance.
trated above on the subject of repercussions upon
We
concen?
the economy
of an
MP
KALECKI
It should be noted,
however, that the
inflationary pressures.
problem of the "danger of inflation" may not arise at all because
the entrepreneurs may for various reasons tend to keep
their
investment at a low level.
Investment may be limited not because
of the difficulties
but
and the fact that its repercussions even when financed by loans
do not generate higher inflationary pressures
than private invest?
ment is highly significant.1
II
We
considered above the two extreme cases of the elasticity
of supply of consumption goods, which are rather simple. Actually
the situation is more complicated
in some sectors of
because
II the supply of consumption goods may be elastic and
Department
this
apparent.
In many
instances
force will frequently come from rural districts.
as
a
not
fall
will
result
of
the
of
existence
agricultural production
in agriculture.
It may be thus surmised that no
labour"
"surplus
the migration
from the
difficulties in supply will arise because
country-side
find its way
1.
It
2.
This
will
leave behind
not be concluded
investment by loans is
that financing
should
public
at a later stage
that financing of
We
shall argue
desirable.
particularly
it helps to
because
investment
by taxes on profits is preferable
public
reduce inflationary pressures.
does
not
under-developed
of agriculture
the possibility
of a quick
exclude
expansion
are eliminated.
obstacles
if the institutional
countries
in
THE
PROBLEM
OF
FINANCING
OF
ECONOMIC
DEVELOPMENT
because
used
It follows
under-utilization
This
goods.
increases in food prices, because then they buy more industrial con?
if the benefits of
sumption goods out of higher incomes. However,
higher food prices accrue to landlords, merchants or money-lenders,
then the reduction in real wages due to the increase in food prices
will not have as a counterpart the increased demand for mass
consumption
goods on the part of the countryside; for increased
In
profits will not be spent at all or will be spent on luxuries.
a
this case the high demand
generated by
rapid development
a market
not create
for
involving large-scale investment will
industrial mass consumption goods.
As
is clearly seen from the
above, two factors will be involved here: (a) the inelastic supply of
food leading to a fall in real wages, (b) the benefit of food price
increases accruing not to small proprietors but to capitalists.
It is of some interest to put this case into a more general
there will
be no
meets
ment
generates demand
for consumption
goods.
M.
KALECKI
of
associated
is of paramount
importance for avoiding
in
Investment
industry,
transportation;
inflationary pressures.
public utilities and even long-run development projects in agriculture
industrial
should
development,
cultural
from
ments
in the method
of cultivation, small-scale
fertilizers.1
an adequate
While
supply of food is of basic importance
in
the course of economic development
for preventing
inflation,
the increases in industrial productivity work in the same direc?
increase
tion. There
is, however, an important difference. An
in the supply of food
tends, to raise
real wages
at a given ,level
of non-agricultural
I.
sector.
OF
PROBLEM
THE
FINANCING
OF
ECONOMIC
DEVELOPMENT
of non-agricultural
Let us now consider the latter
production.
more
in
detail.
process
that there is a significant increase in productivity
Imagine
I and
sector both in Department
throughout the non-agricultural
a
to a
II.
As
Department
result, employment
corresponding
level
of production
in that sector will fall in inverse
This will cause a proportionate
fall of the wage bill
proportion.
at given wage rates. The demand for food will thus be reduced
given
in industrial
rates
thus a rise
? proper
perspective
us
Let
it may
to consider
be useful
two extreme
first assume
that agricultural
production
examples.
remains stationary and that all increases in industrial production
are achieved by using more capital per worker which results in
In such an economy
a rise in productivity.
the problem
of
not
The
industrial goods will
prices of
?f the rise in productivity.
conse?
The
will
increase
in
real
rise
the
demand
for
wages
food, and
quent
that will cause some rise in food prices. But this rise cannot
be so high as to eliminate the increase in real wages, since then
inflation will
tend
arise.
to fall because
the very cause of the higher demand for food would disappear.
the real wages will rise to some extent ; so will peasants'
of higher prices of agricultural products1 and
incomes, because
Thus,
But
shift of population
is one of the main causes
in the course
is not
this description,
because
from the countryside to
be no
the situation
of
the increase
in
of economic
development.
Disguised
unemployment would not be reduced, and the country
would be
split into two sectors of primitive
agriculture and
modern
other extreme is the case where produc?
industry. The
tivity does
i.
Unless
not
this will
increase
benefit
only
at all and
rural
the increase
in industrial
capitalists.
10
M.
KALECKI
is achieved merely
production
through a shift of population
from the rural to the urban districts.
In such a case, disgui?
sed unemployment
would
be diminishing
radically, but at the
same time considerable
inflationary pressures are likely to develop,
it may be difficult to expand agricultural production
because
in industry,
there will be a tendency of increased concentration
a rise in the degree of monopoly may easily take place. More-s
direct investment by,
involves considerable
over, if development
or quasi
foreign capitalists, the practices of industrial monopolies
are
to
from
monopolies'
under-developed
brought
developed
countries. What
will be the repercussions of an increase in the
rise of prices in relation to wages
degree of monopoly ? The
will
reduce
industrial
will
effective demand
facilities.
It
is true
diminish
the pressure
in
food prices cannot be so great as to restore the
ensuing
real wages
because
otherwise
its very cause would disappear.
a shift in the distribution of income
The
final result will be
and agricultural incomes to industrial profits. The
from wages
fall
case
some
lenders.
demand
a
In both
for
the process
tends to keep down the
industrial mass
'as a result of
consumption
goods
shift to profits
the present case
cases,
in the distribution
of
it is the monopolistic
income.
However,
industrialists
in
that will
analysis
the monopolistic
THE
OF
PROBLEM
OF
FINANCING
ECONOMIC
DEVELOPMENT
but
inflationary pressures,
rate at which surplus rural labour
is absorbed
into industry.
Ill
were
considerations
above
The
simplifying assumptions:
and (b) from government
we
abstracted
based
on
(a) from
administrative
the
following
foreign trade
and revenue;
expenditure
financed
by loans. We
public
now shall introduce in our model
foreign trade but we shall
assume for the time being that it is balanced,
i.e., that exports
to imports. We
are equal
shall also
allow for government
investment was
assumed
to be
shall modify
industries
proportionately
and
consumption
exports ; we next
Department
in addition
our model
goods
allocate
as follows. We
to
the imports of
which are obtained
I and
these two parts to Department
II respectively. Thus Department
I will now include,
to the industries producing
investment goods, also
Ql = S2
and
be
I= S
seen
between
employ*
I
and the volume of
in Department
investment will
now not only on the productivity of labour but also
depend
on the terms of trade The better are the terms of trade the
easily
ment
goods
in relation to employment
in Department
II
12
M.
KALECKI
to
be the higher the better are the terms of trade. Thus
there corresponds a higher invest?
the same level of employment
ment and a lower pressure of demand.
It follows directly that
will
to the equilibrium
economic
Indeed
imports and exports.
develop?
rapid
ment is apt to create a strain in foreign balance.
will
tend
Imports
to increase for various reasons:
in
will
the
rise
investment
(a)
between
consumption
goods but this will hardly com?
the
for
demand
due to the above factors especially
higher
pensate
At the same time
in the first stage of the accelerated
development.
to industrial mass
in the balance
mic development.
shall next
We
ture and revenue.
which we assume
the salaries
of officials and
to their salaries.
is equal
Let us denote
T
the
and
both
direct
and indirect,
taxes,
by
I (i.e. by capitalists, small proprietors and
paid by Department
workers of this department) by T2 and all taxes paid byDepart?
ment II by T8. Total consumption of the officials will be, according
THE
PROBLEM
OF
FINANCING
OF
ECONOMIC
DEVELOPMENT
13
+ T=
T2 + S2
Cl + Tt= S2
is equal
to T, +
T2t
If,moreover,
taxes will partly come out of capitalists' saving, and to this extent
for consumption
the demand
goods will not be reduced, and an
additional pressure on the available
supply of consumption
goods,
will be generated.
Thus
lower
administrative
government
and
expenditure
revenue will mitigate inflationary repercussions of rapid economic
and consequently
the reduction of the administrative
development
budget
of
developments
It should
M.
KALECKI
should
are
not
impair
for
necessary
as
said
is equal to the
the import of capital which
F.
the
If
of
deficit in foreign trade by
capital is used for
import
it is clear that the same
investment goods,
abroad
purchasing
Let
us denote
7= S + F
which
shows
d + T = T2 + Sz
C, + T = T2 + S2 + F
From
Q + T^Sa+F
Adding
taxes T
THE
PROBLEM
Cl
Or,
finally,
In
the case
OF
FINANCING
+ Tl +
OF
ECONOMIC
DEVELOPMENT
15
S1-Sr+Sl+.F
I= S + F
abroad
of using the capital
import for purchasing
to
amount
investment
be
of
the
goods
produced
goods,
in order to achieve a given level of total investment is
investment
at home
materials
ments
because
demand.
is, of course, themore acute, the higher the rate of interest. But
even more important is the question of availability of foreign capi?
talwhich would not involve problems of more basic nature.
3The import of capital may take three forms : grants, loans or
It is clear that from the purely economic point
direct investment.
of view
would
the whole
Let us
16
M.
KALECKI
because
business
situation while
should be noticed, however, that this is offset by the fact that the
former rate is usully on the average much higher than the latter.
and political aspects
More
important still are the general economic
of direct investment.
Direct
a considerable
on loan, the repayment of and the interest on which takes the form
of future exports of specific commodities
in the under?
produced
In this way the future balance-of
developed country in question.
payments
payments
difficulties
on
loans
connected with
amortization
and interest
are eliminated
to some extent because
the
countries on acceptable
found in preventing the
to developed countries which
THE
PROBLEM
OF
OF
FINANCING
ECONOMIC
DEVELOPMENT
17
by taxation of
form; by blocking the transfers of
export profits
abroad partly or fully; and in some cases by nationali?
dividends
The
zation of the enterprises concerned.
argument frequently
This
in fact has
been
done
in many
countries
in this or other
is that it discourages
direct foreign
against such policies
investment.
If, however, a rather sceptical attitude is taken, as
above, with regard to the role of direct foreign investment in
economic development, this argument loses much of itsweight.1
used
The
to development
view
without
the difficulties
Any
improvement in
to the import of capital
the latter. This is obvious
accompanying
to
the
all the
regard
supply of foreign exchange, because
amount
additional
of exchange which is obtained
through the
with
are exactly
equal
to the change
in foreign prices,
they
or eliminating
It should
be perhaps
of reducing
noted that the policies
as aiming
dividend
cannot
transfers
considered
be always
solely at
immediate
In many instances
of the balance of payments.
improvement
a manifestation
these policies
be mainly
of the fight of an under?
may
The
influences of foreign companies.
developed
country with the political
retaliation
of these companies
to impair the exports of the
by maneuvers
even temporarily
of the
concerned
lead to the weakening
may
products
balance
of payments
the case when one
Such will be especially
position.
or a few companies
role in the foreign trade of the country
play a dominant
involved.
18
M.
KALECKI
investment
clearly leave the internal situation unaffected, while
increases by the amount of gain in foreign exchange.
The
last stage of the argument leads up to the problem of
the influence of taxation upon the repercussions of investment
undertaken
development.
shall now
We
shall now
level of
investment
amount of additional
for and
supply
abstract from capital import, as follows :
+ T = T2 + T'f + S2
+ T,
T\ + S2
II, or
Cx + Tx + T\ + SX = T\ +T'a + S1 + S2
The
I= T + S
It is easy to show
are taken
It can be
investment will
into conside?
I= V + S 4 F
seen
from this
equation
to finance
that
it in excess
always
of taxation and
the amount
of saving which
is
this will not necessarily
(We have dealt already
THE
PROBLEM
OF
FINANCING
OF
ECONOMIC
19
DEVELOPMENT
with
achieved
reduction of capitalists'
Nevertheless,
consumption
It
by taxation of profits will help mitigating inflationary pressures.
is true that no essential commodities will be released in this way.
The
capitalists will not eat less under the impact of taxation. But
as a result, to a given level of investment there will correspond a
lower level of industrial employment, because
less will be produced
for capitalists'
and
this
will
reduce
consumption,
inflationary
in the longer
pressures caused by rapid development.
Moreover,
run this policy will help to shape the development
in the direction
of the expansion of essential industries.
It is true that this can be
achieved
investment plan
through enforcing an appropriate
by
direct means,
e.g.
a parallel
without
industries which
itmight
of
reduction
will be
also
capitalists'
consumption
of view of balance of payments
point
it will reduce the demand for imported luxuries.
because
It is
true that import restrictions can cope with
this problem but
bebeneficial
from
the
here
In addition
for such
imports will
faci?
to
limiting capitalists'
consumption
financing
public
by taxation presents still another advantage.
It reduces the creation of liquid assets. This may be
unimpor?
tant if there is no tendency towards inflation. If, however, as a
investment
The reduction
in the creation of liquid assets will also facilitate
of the structure of investment by direct means,
e.g. licensing.
the control
20
M.
KALECKI
investment by
In the light of the above, financing public
to be a sound policy.
It should be
taxation of profits appears
noticed that in this way only such profits would be taxed away that
if taxtation in
Indeed,
to public
is
budget
exactly equal
formula will become
investment.
It follows
upon
investment
There will
the demand
from
of workers
for
consumption
goods.
investment by taxation
It follows that while balancing public
not fully ''neutralize"
it
will
a
to
sound
be
of profits appears
policy
It
may be shown that
the inflationary impact of such investment.
such monetary measures as banking restrictions are also inadequate
for dealing with the problem of inflation resulting from a high
level of investment.
Let us consider the significance of banking credit restrictions
The main anti-inflationary influence
as anti-inflationary measures.
the
of credit restrictions is exerted obviously
through depressing
in
fixed
the reduction of investment
level of investment. Now
infla?
Thus
capital will obviously upset the pace of development.
cured
be
would
from
rapid development
tionary pressure resulting
it may
If this is deemed necessary, however,
by slowing it down.
investment
be done by more direct means of either reducing public
I.
in a
is increased
investment
considerably
that if public
It should be noted
to finance it is likely to be
short period the rise in taxes on profits necessary
unless other taxes are reduced.
investment,
less than the increment in public
in economic
the resulting upswing
activity will raise the revenue from
Indeed,
'
in a
is not likely to expand much
old" taxes while the administrative
budget
investment will be cover?
a part of the increase in public
Thus
short period.
ed by tax revenue automatically.
THE
PROBLEM
OF
FINANCING
OF
ECONOMIC
DEVELOPMENT
21
may conclude
selective basis
so as not
to impede
the process
of development
itself.
Such a system, however, may be rather difficult to operate. A
credit given for an essential purpose may frequently be used at least
indirectly for speculative hoarding: indeed such a credit may release
for speculative
the firm's own funds and thus make them available
credit
of
selective
restrictions
The
may have to be
system
activity.
run
could
be
that
it
order
in
very complicated
effectively. For
this reason another way may be preferable for combating tend?
encies for hoarding commodities if an inflationary spiral is in exis?
tence.
This
in Chinese
system was applied for the first time, and with success,
People's Republic, for putting a stop to hyper-inflation
was
inflation. Their
course cope with what we called above "primary"
of
this
the
to
is
aggravation
primary inflation
prevent
only purpose
The
inflationary pressure
primary
hoarding.
by
speculative
I.
cause a fall in
of this measure would
that the application
be noted
the rise
of private securities which would not be ''insured"
against
measures
to all monetary
feature is in fact common
This
against
cause a fall in
In fact5 credit restrictions would
hoarding of commodities.
and private securities.
values of both government
It should
the values
in prices.
22
M.
KALECKl
is, as
development
in
disproportions
productive
economic
Thus