THE STATE OF THE ART

emphasis has been placed on agriculture. Large agricultural projects
such as dams and irrigation systems require heavy investment, but
many others, such as farming education programs, do not require
large sums of money. Striking a balance between agricultural and
industrial development is now seen as the best development path.
``Import substitution,'' where an LDC sets up industries to produce
goods that replace imported products, is widely believed to have
been a failure. By protecting local fledging industries with high tariffs,
gross economic inefficiencies were created.

MISDIRECTING RESOURCES: PERUVIAN CAR
MANUFACTURING

Peru has a population of 24 million, most of whom cannot afford
to buy a car. In the 1970s the country had six different car
manufacturers, all with low output. These firms were unable to
benefit from economies of scale (see Chapter 7, Ford) and their
cost of production was much higher than world market prices,
making exports impossible. Valuable resources were spent on auto
production that could have been better employed elsewhere.

» Promoting exports has been a more successful approach than import

substitution. Japan's dramatic postwar success in developing into
the world's second largest economy was based largely on exporting
manufactured goods. Other East Asian economies, such as Singapore,
Taiwan, and Korea, have also had success in this approach.

» ``Structural adjustment'' is the effort to reduce the size of the public

sector in LDCs, control inflation, encourage private saving and invest-
ment through tax reform, and reduce national debt. These are all
pro-free market measures that have been strongly promoted by the
IMF and the World Bank during the 1980s and 1990s in response
to the problem that while many LDCs' GDP per head grew in the
60s and 70s, much of the population did not share in the new
wealth.

» Population growth in the 1800s Thomas Malthus, an English

economist, predicted that the population of Europe and America
would grow faster than the food supply, leading to disastrous poverty.