Economic Theory and the Developing Countries by Ajit K. Dasgupta (auth.)

By Ajit K. Dasgupta (auth.)

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Given enough flexibility in supply, a rise in population can indeed be a powerful lever of economic growth. During the Industrial Revolution in Britain, where flexibility in supply was ensured by continuous technical change and by international trade and investment, this appears to have been the case. The same is probably true of many of the industrially advanced countries of today, where labour shortage constrains economic growth. It is precisely flexibility in production, however, that underdeveloped countries lack.

However, different social and occupational groups, hence different sectors of the economy, tend to have different savings ratios. Moreover the savings ratio depends also on things other than income. From this point of view, the right starting point for an analysis of savings behaviour is the structure of the economy, and the important question for savings policy is how far this structure can be changed in favour of groups or sectors with a higher savings ratio. The basic dichotomy brought out by models of the dual economy is that between the modern or advanced sector and the traditional or backward sector.

More generally, farmers at near subsistence levels tend to consume a large fraction of transitory income, which contradicts the permanent income hypothesis. The empirical testing of hypotheses on savings behaviour in developing countries is still in its infancy (see Singh and Drost, 1971; and Mikesell and Zinser, 1973). Hence one cannot pick out anyone hypothesis as being clearly 'right' and reject all others as 'wrong'. Certain elements of each of the hypotheses mentioned, however, provide useful insights into the process of saving generation in developing countries.

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