ABSTRACT
COUNTRIES In the traditional static economic theory, allocation of resources is regarded as optimal or efficient when any transfer of resources between different sectors will not raise real national income any further. The principle to obtain such a point of optimality is to equate marginal productivities of different inputs in alternative activities. However, the peculiar characteristics of the LDCs generally account for a separate discussion of the investment criteria. For example, the different markets (product, labour, money etc.) in the LDCs are so imperfect that the market prices of resources, i.e. wages and interest, do not reflect their true social opportunity costs. Thus, market prices may give wrong ‘signals’ for allocating resources and, given the divergences between the marginal private net benefits (net of costs) and marginal social net benefits (net of costs), the use of marginal principles will result in misallocation of resources. Second, the LDCs may not be interested in the static principles of resource allocation.1 Given these principles, the LDCs may wish to maximize immediate rather than future output and consumption. But this may not lead to the attainment of a future optimal level. Third, it is normal in the application of the static principles that the existing distribution of income is assumed to be optimal and remains unaltered by the choice of development strategy. This is questionable if the choice of a strategy leads to maximum output but a more uneven distribution of income. That this can occur in practice has been shown in the process of ‘Green Revolution’ in many LDCs. Fourth, the question of externalities in many sectors could well lead to divergences between social and private costs.
