Pakistan Institute of Development Economics



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

As a model builder, I feel comfortable in analyzing economicdevelopment through the construction and use of 2-gapmathematical-statistical models. This serves as a paradigm for themodelling of developing countries.l All systems have a core, andalthough analysis of developing economies must take many interrelatedprocesses into account simultaneously, the more complex systems canusually be reduced to a simplified core of broad macroeconomicrelationships. The 2-gap model is, of course, only a starting pointbecause the analysis must deal with such sectors as demographics, familybudgets, and the formation of market prices – possibly only relative orreal prices. Such a system looks at the economic development issues inphysical terms, with some real (relative) prices for allocation theory.A great deal of interesting material can be prepared along these linesfor guidance in the development process. The building blocks are: (i)Production functions for introducing technological constraints, perhapsextended to include an input-output component; (ii) Conditions ofmarginal productivity, i.e., optimality in reaching production decisionsboth for output and input; (iii) Population dynamics and more generaldemographic processes extending to labour supply, immigration,emigration, and distribution of income/wealth; (iv) The conditions forconsumer choice, generating ultimately large-scale demand systems,starting with family budget analysis. As in the case of productionanalysis, optimality decisions guide model specification; and (v) Tradesystems showing how exportable surpluses are created andoffset

Lawrence R. Klein

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