27 continue to think of output as one composite good). The wedge between marginal products of the two types can be interpreted as a differential tax that distorts the relative price of the two sectors. The tax may be implicit rather than explicit, as could arise from quantity rationing, price controls, differences in effective protection rates, etc. Relative price data from Summers and Heston (1988) could be used also to assess sectoral relative price distortions.” World Bank data on the sectoral composition of output like that used by Syrquin and Chenery (1989) can be used to examine whether the structure of output (relative to a “normal” structure) is related to such sectoral distortions.° Other direct measures of sectoral distortions could also be used, such as the measures of differential taxation of agriculture developed by Krueger, Schiff, and Valdes (1988). The disaggregated data will be used in the examination of each of the policy areas listed above. The relative price and quantity data will be related to broad measures of the various policies to assess the sectoral implications of policies. For example, one would test whether the existence of financial repression is associated with relatively expensive capital goods, relatively cheap industrial goods, etc. The resulting effects on growth can then be examined in cross-country regressions.

# g. Interactions among resource allocation policies

For simplicity, we have so far presented interaction effects as involving at most two policies together. Of course, in real world applications, there are many policies that affect many types of capital goods in different ways. In particular, some policies may have offsetting effects on growth. For exainple, one policy may penalize one type of capital while another policy subsidizes it, with zero net effect. While such an exact offset is unlikely, the total effect of a set of distortionary policies on growth will be generally less than the sum of the individual policy effects. In the empirical implementation, it is important to include interaction terms among the policies to capture these offsets.

## B. Synthetic issues

# Some issues cut across policy areas:

## 1. Growth and welfare

A major preoccupation of the development literature is the extent to which per capita income growth translates into welfare improvements for the poor and for the population as a whole. There are three elements that will be considered: (1) how the additional income arising from growth is distributed, (2) how much income is correlated with social indicators, and (3) how “An analogous exercise is that of Dollar (1990), who looked at the price of the same consumption basket relative to a benchmark country from Summers and Heston (1988) as a measure of trade policy distortion (including a correction for variation of nontradable prices across countries). De Long and Summers (1990) is also relevant here.

SA well-known regularity discussed by Chenery and Syrquin (1989) is the tendency of the share of industry to rise and agriculture to fall as per capita income rises. The approach of the "patterns" literature associated with these authors is to associate deviations from this path with policy regimes and other factors. We would follow this approach to examine specifically the effect of sectoral distortions. We may also examine the predictions of different models for the trend in the agricultural share. For exampie, Rebelo (1991) presents a model in which some sectors use fixed factors (like agriculture using land), while other sectors use only reproducible inputs. Sustained growth is still possible, and the share of the fixed factor sectors will fall under some parameter configurations.