This small and relatively nontechnical volume is centered on a plea for a massive increase in capital transfers—1.5% of their gross national product from the wealthy Northern Hemispheric countries to those of the South in order to reverse the widening economic disparity between the two regions. For the area specialist who has not had training in economics, David Horowitz provides a useful, general, and clear statement of some of the more serious economic problems confronting Latin America today: insufficient external capital resources, declining primary product prices, and a demographic crisis. The professional economist, however, will find little that is new, and some points that are debatable.
Following an introduction which eloquently describes the growing disparity among nations and treats the problems of productivity, population, and trade, the author briefly analyzes the factors of agricultural productivity, capital, and labor force in the process of economic growth. In his discussion of population and the labor force, Horowitz suggests, but does not confront, a problem often inadequately grasped by native Latin American social scientists. This problem is not the density of population or the labor force concentration (i.e., the land area/population ratio), but the relation between rates of population growth and economic activity. For example, Brazil may be a relatively unpopulated country (the density ratio), but it is in serious trouble if the population grows as rapidly as economic activity. Of course Brazil has not experienced this form of stagnation because its rates of economic growth have been high, but these have been declining since the early 1960s because possibilities of import substitution have been exhausted, and the incremental capital output ratio has been rising. Nevertheless, a high rate of population increase (3.0 to 3.5%) has made the problem of economic development more difficult than it otherwise would have been, and in any event, there are serious distributional implications for the lower economic classes, since the rate of natural increase is highest among them.
Horowitz devotes most attention to the role of capital and capital accumulation in the process of development. While most economists would agree about its great importance, some of his arguments are posited on theoretical constructs which have not been fully tested. For example, it is not clear that the flow of capital has been diminished by the mild income redistribution that has occurred in the West. In fact the current or absolute income hypothesis of aggregate consumption behavior posited by Keynes, which is Horowitz’ implicit theory, was discredited theoretically and unsupported econometrically as early as the late 1940s. Nor has it been shown that labor unions have reduced the export of capital. These criticisms notwithstanding, Horowitz’ discussion of the role played by capital and the burden of external debt is very cogent if one recognizes that he has excluded many important theoretical topics bearing on his discussion, such as the role of human capital.
Since economists usually pride themselves on being equilibrium analysts, Horowitz grapples with the problem of dynamic economic equilibria in relation to financing capital investment by inflationary processes. However, if the truth be known, many states of equilibrium in economic theory are merely academic tautologies derived from methodology, i.e., from the use of mathematics, especially calculus. They are static and not temporal analyses and consequently are of extremely limited use in analyzing economic development. Horowitz makes the usual comments concerning the distortions in the balance of payments and investment allocation caused by inflation. Nevertheless, while an excess of claims over the supply of resources will generate inflation, it is facile and superficial analysis to speak of optimal” factor (labor and capital) combinations. Since Pareto, optimality has been a useless concept unless it can be related to dynamic considerations of growth. In particular, to condemn capital for intensive technology in the presence of a labor surplus is to ignore questions of investable surpluses, economic interdependencies, and growth. Horowitz’ analysis is shallow and dated.
Finally, he convincingly argues that there is a functional relationship between peace and prosperity, and that the possibilities for democratic processes in the developing world depend on large flows of economic aid to overcome declining prices of primary products, the demographic explosion, and inadequate capital inflow. Otherwise totalitarian measures will be employed. He argues for a reordering of priorities in the West (less armament expenditure) which will free resources in order to confront this very serious economic problem. It is difficult to see that this aid will be forthcoming in sufficient amounts during the next few years.