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Resource development planning for less developed countries Casasempere, Alfonso 1984

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RESOURCE DEVELOPMENT PLANNING FOR LESS DEVELOPED COUNTRIES b y ALFONSO CASASEMPERE Ingeniero Forestal, Universidad de Chile, 1967 M.F., University of B r i t i s h Columbia, 1970 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE STUDIES (Department of Forestry) We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA August, 1984 ©Alfonso Casasempere, 1984 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the requ i rements f o r an advanced degree a t the U n i v e r s i t y o f B r i t i s h Co lumb ia , I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s tudy . I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e copy ing o f t h i s t h e s i s f o r s c h o l a r l y purposes may be g ran ted by the head o f my department o r by h i s o r her r e p r e s e n t a t i v e s . I t i s unders tood t h a t copy ing o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l ga i n s h a l l no t be a l l owed w i thou t my w r i t t e n p e r m i s s i o n . Department o f C o ^ g S T The U n i v e r s i t y o f B r i t i s h Columbia 1956 Main Mall Vancouver , Canada V6T 1Y3 Date Oc-ro-e.gv^ S , H g Y . (3/81) i i ABSTRACT A p r a c t i c a l methodology f o r p l a n n i n g resource development in a n a t i o n a l ( r e g i o n a l ) context i n l e s s developed c o u n t r i e s i s formulated. The methodology d e s c r i b e s the p r i n c i p l e s and procedures f o r d e s i g n i n g , a p p r a i s i n g and s e l e c t i n g resource development p r o j e c t s i n accordance with the highest welfare o b j e c t i v e s of a n a t i o n . E a r l y i n the t h e s i s , the need f o r a c h i e v i n g a people's development i s i d e n t i f i e d and p o s t u l a t e d as the s u p e r i o r o b j e c t i v e of a l l economic p l a n n i n g a c t i v i t y . In the context of t h i s p r i n c i p l e the goals of economic development are d e f i n e d and r e l a t e d to a r a t i o n a l e f o r resource a l l o c a t i o n . On t h i s foundation a p p r o p r i a t e c r i t e r i a f o r decision-making and the fo r m u l a t i o n of development p o l i c y are e s t a b l i s h e d . Emphasizing a h o l i s t i c approach to resource p l a n n i n g , the t h e s i s i d e n t i f i e s the nature of development p l a n n i n g , j u s t i f i e s the need f o r undertaking t h i s a c t i v i t y i n l e s s developed c o u n t r i e s and pr o v i d e s g u i d e l i n e s f o r proceeding i n the most e f f e c t i v e way. The r o l e of p r o j e c t p l a n n i n g w i t h i n the process of n a t i o n a l p l a n n i n g i s d e f i n e d and the fundamentals of s u c c e s s f u l p r o j e c t design and a p p r a i s a l are l a i d down. I t i s concluded that a s u p e r i o r p l a n n i n g approach r e q u i r e s a standard method f o r e s t a b l i s h i n g p r i o r i t i e s , a comprehensive a p p r a i s a l of economic consequences, and the use of accounting p r i c e s . Focusing on f o r e s t i n d u s t r y development, the p l a n n i n g methodology e s t a b l i s h e s how to i d e n t i f y the r o l e of resource investments w i t h i n the o v e r a l l development process, how to d e f i n e these investments i n terms of s e c t o r i a l - r e g i o n a l goals, how to t r a n s l a t e them i n t o o b j e c t i v e s and t a r g e t s , and how to a p p r a i s e them as p r o j e c t s w i t h i n a c o n s i s t e n t and comprehensive f ramework. A case study of p l a n t a t i o n f o r e s t r y and a s s o c i a t e d i n d u s t r y development in C h i l e i s used to examine the p r a c t i c a l a p p l i c a b i l i t y of the methodology. The t e s t case proves the e m p i r i c a l v a l i d i t y of the g u i d e l i n e s and p r o v i d e s f r e s h i n s i g h t s i n t o the p o t e n t i a l ( r e a l ) c o n t r i b u t i o n of timber p r o d u c t i o n f o r e s t r y to n a t i o n a l economic development. i v TABLE OF CONTENTS Page ABSTRACT i i TABLE OF CONTENTS . iv LIST OF TABLES ix LIST OF APPENDIX TABLES x i i LIST OF FIGURES xiv LIST OF MAPS xiv ACKNOWLEDGEMENTS xv ABBREVIATIONS x v i i INTRODUCTION 1 PART I RESOURCE ALLOCATION FOR REGIONAL DEVELOPMENT 1. INTRODUCTION 6 2. DEVELOPMENT AND UNDERDEVELOPMENT 10 2.1. Misconceptions of Development 10 2.2. Economics for Development 12 A. Economic Growth and the Condition for Development 12 B. Underdevelopment and Dependency 14 2.3. Economic Development Defined 18 2.4. The Process of Economic Growth 20 3. DEVELOPMENT GOALS AND RESOURCE ALLOCATION 23 3.1. Goals, Development Planning and Resource Allocation 23 3.2. Redistribution with Growth - The P r a c t i c a l Aims of Development 24 4. CRITERIA FOR INVESTMENT AND POLICY FORMULATION 28 4.1. Allocation of Investment Resources 29 4.2. Optimum Investment C r i t e r i a 33 V A. Economic Growth (Efficiency) Goal: National Aggregate Consumption C r i t e r i o n 33 B. Income D i s t r i b u t i o n (Equity) Goal: Employment Versus Relative Consumption C r i t e r i o n 35 C. Merit Wants and Other Developmental Goals: Economic Versus non-Economic C r i t e r i a 40 4.3. Concluding Remarks 43 PART II CONCEPTUAL BASIS OF DEVELOPMENT PLANNING 1. INTRODUCTION 46 2. THE NATURE OF DEVELOPMENT PLANNING 47 3. WHY PLAN DEVELOPMENT? 52 4. FUNDAMENTALS OF DEVELOPMENT PLANNING 55 4.1. The planning Problem 55 4.2. The requirements for success 56 5. THE PLANNING PROCESS AND THE ROLE OF PROJECTS 59 5.1. The State of the Art in LDCs 59 5.2. Elements of Procedure 62 5.3. Stages in Planning 64 5.4. The Role of Projects 69 A. Plans Require Projects 70 B. Projects Require Plans 71 C. Projects and Comprehensive Planning 72 6. PROJECT PLANNING - THE REQUIREMENTS FOR A RATIONAL APPROACH 7 4 6.1. Standard Method for Establishing P r i o r i t i e s ..... 75 6.2. Comprehensive Appraisal of Economic Consequences 77 A. Direct, Indirect, and Secondary Consequences 78 B. Toward a Comprehensive Appraisal Methodology. 81 C. Limitations in Appraising Indirect and Secondary Consequences 84 D. Indicated Procedure 85 6.3. Use of Accounting Prices - The Social Approach .. 87 A. The Case for Accounting Prices in Project Evaluation 87 B. Accounting Prices and Project Implementation. 90 v i PART III RESOURCE DEVELOPMENT PLANNING - STRATEGY, SEQUENCE AND APPRAISAL METHODOLOGY 1 . INTRODUCTION 93 2. IDENTIFICATION OF THE PLANNING PROBLEM(S) 96 2.1. The Regional Resource Base: A Description of the Study Area 97 2.2. Development and Planning Opportunities 99 A. Developmental Role of Forestry A c t i v i t i e s ... 100 B. Planning Opportunities Suggested by Data .... 102 2.3. Problem D e f i n i t i o n 103 3. DEFINITION OF GOALS AND DECISION CRITERIA 106 i 4. DATA COLLECTION AND DEFINITION OF ALTERNATIVE INVESTMENT OPTIONS 108 4.1. Sources and Types of Information 108 A. Resource Surveys 109 B. Technical, F i n a n c i a l , and Economic Surveys .. 111 4.2. Defining and Limiting the Number of Investment Options - Adequacy of a Planning Model 113 5. ANALYSIS AND EVALUATION 117 5.1. Financial Analysis 118 A. Inputs and Outputs - The Basic Predictions .. 118 B. Financial Appraisal 123 C. Financial Impact 131 5.2. Economic Analysis 165 A. The Regional and/or National Welfare Test ... 165 B. Economic Appraisal 173 6. PLAN (PROJECT) SELECTION AND IMPLEMENTATION 195 6.1. Project Choice 195 6.2. Risk and Uncertainty 195 6.3. Financial Considerations and Project Implementation 201 v i i PART IV A CASE STUDY OF FORESTRY DEVELOPMENT PLANNING (IN CHILE) 1 . INTRODUCTION 205 2. FORESTRY DEVELOPMENT IN THE BIO-BIO (VIII) REGION OF CHILE: THE PLANNING PROBLEM 207 2.1. Background 207 2.2. The Study Area 211 A. Geography - Area, Topography, and Climate ... 211 B. Population 215 C. Economy 216 2.3. Regional Forestry Development 219 A. Forest Resources and Forest Land 219 B. Forest Industries 227 2.4. Opportunities for Regional Development 231 3. FORESTRY INVESTMENT OPTIONS 235 3.1. Development Objectives 235 3.2. Simplifying the A n a l y t i c a l Model 236 .3.3. Inputs and Outputs of Alternative Investment Options 240 4. ANALYSIS AND EVALUATION 246 4.1. Financial Appraisal 246 4.2. Financial Impact 252 4.3. Economic Appraisal 252 5. PROJECT CHOICE - POTENTIAL CONTRIBUTION OF FORESTRY TO ECONOMIC DEVELOPMENT 259 5.1. Project Choice 259 5.2. Potential Contribution to Economic Development of the Best Option 263 CONCLUSION 267 REFERENCES 272 APPENDIX A - Committed and Uncommitted Radiata Pine Stocks 284 APPENDIX B - Forest Estate Model - Primary Forest Development Option A 286 v i i i APPENDIX C - Investment Expenditure, Operating Expenditure and Revenue Associated with Forestry Development in Region VIII 301 APPENDIX D - Direct, Indirect, and Induced Factor Requirements in Radiata Pine Forestry 306 APPENDIX E - National Parameters (Shadow Prices and Weights) 313 ix LIST OF TABLES Table Page 1. Direct Expenditure, Revenue, and Net Revenue Associated with an Investment Beginning in Year 1 and Ending in Year n.... 134 2. Cash Flow After Tax Associated with an Investment Beginning in Year 1 and Ending in Year n 134 3. Summary of Direct Financial Impact of* an Investment Beginning in Year 1 and Ending in Year n 135 4. Interindustry Transactions Table (Hypothetical Input-Output Model) 140 5. Table of Direct Requirements (Input or Technical C o e f f i c i e n t s for a c t i v i t i e s in the Intermediate Sector) 143 6. Table of Direct Plus Indirect Requirements (Total Direct and Indirect Effects of an Increase in F i n a l Demand) 146 7. Summary of Indirect Financial Impact of an Investment Beginning in Year 1 and Ending in Year n . 156 8. Summary of Secondary Financial Impact of an Investment Beginning in Year 1 and Ending in Year n . 156 9. Direct, Indirect, and Secondary Financial Impact of an Investment Beginning in Year 1 and Ending in Year n 164 10. Region VIII - Area Di s t r i b u t i o n by Province 211 11. Region VIII - Population in 1977 and Forecast to 2000 215 12. Region VIII - Se c t o r i a l Breakdown of GDP 1970 - 1974. 218 13. Region VIII - Forest Land by Province 220 14. Region VIII - Productive Forest Land by Province and Type of Forest Cover - 1978 223 15. Region VIII - Di s t r i b u t i o n of Radiata Pine Forests by Province and Age Class - 1978 225 16. Region VIII - Timber Stocks in Radiata Pine Forests by Province and Age Class - 1978 226 17. Region VIII - Forest Land Available for Afforestation by Province - 1978 227 X 18. Region VIII - Wood Harvest, Timber Removals and Depletion in Man-Made Forests - 1978 228 19. Region VIII - Instal l e d Capacity, Production and Requirements in Forest Products Manufacturing -1978 230 20. Region VIII - Forest Development Option A, Timber Production by Site Class 241 21. Region VIII - Forestry Manufacturing Development Options I, II, III, and IV; Additions to Ins t a l l e d Capacity, Output, and Timber Consumption 1978 -2002 243 22. Region VIII - Primary and Secondary Development Options A l , A l l , A l l I, and AIV; Output by Product 1978 - 2007. 245 23. Region VIII - Cash Flow Before and After Tax of Forestry Development Option A l , 1978 - 2007 248 24. Region VIII - Cash Flow Before and After Tax of Forestry Development Option A l l , 1978 - 2007 248 25. Region VIII - Cash Flow Before and After Tax of Forestry Development Option AIII, 1978 - 2007 249 26. Region VIII - Cash Flow Before and After Tax of Forestry Development Option AIV, 1978 - 2007 249 27. Region VIII - Total (Direct, Indirect, and Secondary) Financial Impact of Forestry Development Option Al , 1978 - 2007 253 28. Region VIII - Total (Direct, Indirect, and Secondary) Financial Impact of Forestry Development Option A l l , 1978 - 2007 253 29. Region VIII - Total (Direct, Indirect, and Secondary) Financial Impact of Forestry Development Option AIII, 1978 - 2007 254 30. Region VIII - Total (Direct, Indirect, and Secondary) Financial Impact of Forestry Development Option AIV, 1978 - 2007 254 31. Region VIII - Net Social Benefit of Forestry Development Option Al , 1978 - 2007 256 32. Region VIII - Net Social Benefit of Forestry Development Option A l l , 1978 - 2007 256 33. Region VIII - Net Social Benefit of Forestry Development Option AIII, 1978 - 2007 257 xi 34. Region VIII - Net Social Benefit of Forestry Development Option AIV, 1978 - 2007 257 xi i LIST OF APPENDIX TABLES Appendix Table Page A. 1. Region VIII - Committed and Uncommitted Forest Land Suitable for Cul t i v a t i o n with Radiata Pine by Site Class - 1978 285 B. 1. Region VIII - Age Class D i s t r i b u t i o n of the Uncommitted Radiata Pine Forests - 1978 291 B.2. Region VIII - Site Specific C r i t e r i o n Recommended for the Management of Radiata Pine Forests Under Conditions of Unemployment 292 B.3. Region VIII - Estimated F i r e Loss in the Management of Radiata Pine Forests by Age Class, 1978 - 2027 ... 293 B.4. Region VIII - Timber Y i e l d in Radiata Pine Forests by Site Class 1978 - 2027 294 B.5. Region VIII - Estimated Logging and Transportation Losses in the Harvesting of Radiata Pine 295 B.6. Region VIII - Primary Forest Development Option A, Summary of Management A c t i v i t i e s 1978 - 2027 296 B.7. Region VIII - Primary Forest Development Option A, Forested and Bare Land Additions to Fixed Investment 1978 - 2007 299 B.8. Region VIII - Primary Forest Development Option A, Estimated Age Class D i s t r i b u t i o n of the Residual Immature Stands of Radiata Pine in 2007 300 B. 9. Region VIII - Primary Forest Development Option A, Residual Forested and Bare Land Stocks End of 2007 .. 300 C. 1. Chile - Average Salary, Wages and Fringe Benefits of S k i l l e d , Semi-skilled, and Unskilled Labour 303 C.2. Region VIII - Investment Expenditure Associated with the Establishment, Harvesting, and I n d u s t r i a l i z a t i o n of Radiata Pine Forests 304 C.3. Region VIII - Value of Radiata Pine Forests (Land and Trees) in 1978 and 2007 by Site Class 305 C.4. Region VIII - Working Capital Requirement, Operating Expenditure and Sale Price Associated with Production from Radiata Pine Forests 305 D.1. Region VIII - Direct Requirements per Dollar of Fixed Capital Formation in Radiata Pine Forestry .... 307 xi i i D.2. Region VIII - Direct Requirements per Dollar of Output in Radiata Pine Forestry 308 D.3. Region VIII - Direct Requirements per Dollar of Output in Intermediate A c t i v i t i e s Supplying Inputs to Radiata Pine Forestry and in the Economy at Large 309 D.4. Region VIII - Direct Plus Indirect Requirements per Dollar of Output in Intermediate A c t i v i t i e s Supplying Inputs to Radiata Pine Forestry 310 D.5. Region VIII - Direct Plus Indirect Requirements per Dollar of Fixed Capital Formation and Output in Radiata Pine Forestry 311 D.6. Region VIII - Induced (Secondary) Requirements per Dollar of Change in Consumer Income 312 x i v LIST OF FIGURES F i g u r e Page 1 . Stages i n Comprehensive Planning 66 2. I n t e r s e c t o r Flows of Goods and S e r v i c e s i n a One Region Input - Output Model 143 3. T o t a l Timber Pro d u c t i o n 242 LIST OF MAPS MAP 1. C h i l e - Region VIII. 212 2. Region VIII - P h y s i c a l Map 213 3. Region VIII - F o r e s t Land 221 4. Region VIII - Man-Made F o r e s t s 224 X V ACKNOWLEDGEMENTS I wish to acknowledge the a s s i s t a n c e of many people and i n s t i t u t i o n s without which t h i s t h e s i s would not have been p o s s i b l e . In p a r t i c u l a r , I would l i k e to acknowledge the continuous guidance and encouragement provided to me over the years by my s u p e r v i s o r Dr. David Haley. His support, f r i e n d l i n e s s and c o n s t r u c t i v e c r i t i c i s m both i n and out of U n i v e r s i t y i s g r e a t l y a p p r e c i a t e d . Thanks are due to Dr. J.H.G. Smith who suggested the t o p i c f o r the t e s t case used to v a l i d a t e the t h e s i s and l a t e r , as d i d the r e s t of my s u p e r v i s o r y committee, o f f e r e d v a l u a b l e d i r e c t i o n and a d v i c e . The support and f i n a n c i a l a s s i s t a n c e granted by the F a c u l t y of F o r e s t r y of the U n i v e r s i t y of B r i t i s h Columbia, the Vandusen S c h o l a r s h i p , and the Government of C h i l e i s g r a t e f u l l y apprec i a t e d . The o r i g i n a l and unique data base used to c a r r y out the a n a l y s i s was c o l l e c t e d i n C h i l e under sometimes t r y i n g t e c h n i c a l c i r c u m s t a n c e s . S p e c i a l thanks are due to the Corporacion N a c i o n a l F o r e s t a l , O f i c i n a de P l a n i f i c a c i o n N a c i o n a l , and I n s t i t u t o F o r e s t a l which a s s i s t e d with the data c o l l e c t i o n and wholeheartedly supported the t h e s i s . A s p e c i a l acknowledgement i s made of the a s s i s t a n c e p r o v i d e d by Doug W i l l i a m s and Hans Buys who, i n a d i s p l a y of unique p a t i e n c e and i m a g i n a t i o n , programmed the v a r i o u s computer models used i n the a n a l y s e s . I would l i k e to extend my a p p r e c i a t i o n to f r i e n d s and c o l l e a g u e s , e s p e c i a l l y Barry H a l l , Sandy Constable, Yakobo Z.G. M o y i n i , Tim Cooney, my s i s t e r C r i s t i n a , and Rod Beaumont x v i f o r t h e i r i n s p i r a t i o n and the l i v e l y d i s c u s s i o n s we had during the course of the t h e s i s . Thanks a l s o go to C a t h i Lowe and Pat M i l l s who d i l i g e n t l y typed the v a r i o u s d r a f t s of the t h e s i s . F i n a l l y , I would l i k e to express my s i n c e r e g r a t i t u d e to my parents and f a m i l y , but most s p e c i a l l y to my wife K a r i n , f o r t h e i r u n f a i l i n g support throughout the many years of my graduate student l i f e . Without t h e i r constant encouragement my t h e s i s would never have come to be. Thanks f o r always being t h e r e . xvi i ABBREVIATIONS ODEPLAN = Oficina de P l a n i f i c a c i o n Nacional SERPLAC = Secretaria Regional de Pl a n i f i c a c i o n y Coordinac ion BID = Banco Interamericano de Desarrollo CORFO = Corporacion de Fomento de la Produce ion INFOR = Instituto Forestal INE = Instituto Nacional de Es t a d i s t i c a IREN = Instituto de Recursos Naturales MAG = Ministerio de Agricultura CONAF = Corporacion Nacional Forestal ha = Hectares m3 r.w.b. = Cubic Metres Roundwood Inside Bark m3 s.w.b. = Cubic Metres Soli d Without Bark m.t. = Metric Tons US$ of 1978 = United States Dollars of 1978 % = Per Cent GDP = Gross Domestic Product LDCs = Less Developed Countries MDCs = More Developed Countries UN = United Nations UNDP = United Nations Development Program UNIDO = United Nations Industrial Development Organization ECAFE = Economic'Commission for Asia and the Far East OECD = Organization for Economic Cooperation and Development NPV = Net Present Value x v i i i THE AIM ... to f r e e men from p h y s i c a l d i s t r e s s to e x i s t with human d i g n i t y Walter Scheel THE APPROACH ... to s i m p l i f y without l o s i n g e s s e n t i a l f e a t u r e s Jan Tinbergen 1 INTRODUCTION My i n t e r e s t in development p l a n n i n g was f i r s t awakened in 1971 when working as a resource economist i n the j u n g l e s of South East A s i a . At that time, I observed how t o t a l l y dependent a small v i l l a g e had become on the supply of imported products. Indeed, I was struck by the extent to which the d a i l y sustenance of shops, r e s t a u r a n t s , and homes r e s t e d on f o r e i g n technology, m a t e r i a l s , and consumer goods. I n o t i c e d how the l o c a l merchants, blacksmith, and even the town's major i n d u s t r y , a medium s i z e sugar r e f i n e r y , operated mostly on imported machinery, t o o l s , and f u e l . O b l i v i o u s to the surrounding misery and the need f o r c r e a t i n g more g a i n f u l employment, the v i l l a g e people went about t h e i r chores wearing p l a s t i c sandals, and c a r r y i n g t h e i r canned g r o c e r i e s i n p o l y e t h y l e n e bags. A group of c h i l d r e n was busy k i c k i n g around a p l a s t i c soccer b a l l . A Coca-Cola s i g n hung prominently over the door of a l o c a l shop while unsold f i s h , mangoes, and papayas r o t t e d away i n a vendor's basket a c r o s s the s t r e e t . I wondered how much wealth and employment the s a l e of these imported goods had brought, and would continue to b r i n g , to the f o r e i g n i n d u s t r i e s which produced them. I compared t h i s imaginary wealth to the r e s i d u a l v alue of the v i l l a g e ' s exports and i n t u i t i v e l y concluded t h a t , with the exception of the sugar m i l l owners who c o u l d be c a p t u r i n g a h e a l t h y p r o f i t , the v i l l a g e was a net l o s e r . Quite o b v i o u s l y , some e x t r a o r d i n a r y f o r c e s were at work pushing the community i n t o an ever growing c i r c l e of economic dependency and poverty. Over the years I would 2 observe many s i m i l a r s i t u a t i o n s of e x c e s s i v e dependency i n other i n d u s t r i e s and regions of the l e s s developed world. But why would t h i s happen in l e s s developed c o u n t r i e s and not i n Canada? What f o r c e s were at work and c o u l d the process be c o n t r o l l e d ? Unknown to me then, my q u e s t i o n s were touching on the f r i n g e of two of the most germane concepts to development and undevelopment, i . e . , economic ( t e c h n o l o g i c a l ) dependency, and the t e c h n o l o g i c a l - Keynesian income m u l t i p l i e r . My tr e k i n p u r s u i t of a b e t t e r understanding of development economics and some new i n s i g h t i n t o the f i e l d had begun. I t would end twelve years l a t e r , even i f only t e m p o r a r i l y , with t h i s work. The o b j e c t i v e s of the t h e s i s a r e : (1) to r e d e f i n e resource development goals i n terms of welfare c r i t e r i a and to r e l a t e these goals to a r e g i o n a l ( n a t i o n a l ) p l a n n i n g s t r a t e g y that i s people o r i e n t e d , resource e f f i c i e n t , and e q u i t a b l e i n the d i s t r i b u t i o n of economic gains; (2) to s t r u c t u r e a methodology f o r f o r m u l a t i n g , e v a l u a t i n g , and s e l e c t i n g resource development p r o j e c t s i n a r e g i o n a l ( n a t i o n a l ) p e r s p e c t i v e ; furthermore, (3) to t e s t t h i s methodology i n a " r e a l world" case study of p l a n t a t i o n f o r e s t r y i n C h i l e and to assess the p o s s i b l e c o n t r i b u t i o n of these investments to r e g i o n a l and n a t i o n a l development. The c e n t r a l hypothesis i s that the p l a n n i n g of resource development p r o j e c t s i n l e s s developed c o u n t r i e s has been inadequate, and that an improved methodology which w i l l a i d d e c i s i o n makers i n p l a c i n g such p r o j e c t s i n t h e i r true r e g i o n a l ( n a t i o n a l ) p e r s p e c t i v e can be formulated. A secondary h y p o t h e s i s , complementary to the f i r s t , i s that 3 resource development p r o j e c t s i n general and a f f o r e s t a t i o n programs i n p a r t i c u l a r are capable of making a s u b s t a n t i a l c o n t r i b u t i o n to economic development i n many p a r t s of the t h i r d world. If p r o p e r l y e v a l u a t e d , these programs would show that they provide a much wider range of socio-economic b e n e f i t s than are c u r r e n t l y assumed and should, t h e r e f o r e , be given p r i o r i t y over many other development p r o j e c t s . As a p r e r e q u i s i t e to l a y i n g down a framework f o r plann i n g resource p r o j e c t s i n a r e g i o n a l ( n a t i o n a l ) c o n t e x t , Part I undertakes to review the process of resource a l l o c a t i o n f o r r e g i o n a l development. T h i s allows f o r an in-depth assessment of the concept of economic development, the roo t s and c h a r a c t e r i s t i c s of underdevelopment, and p r o v i d e s i n s i g h t as to the best a l l o c a t i o n of resources to f a c i l i t a t e r e g i o n a l development. Part I suggests a p p r o p r i a t e development g o a l s , and pr o v i d e s c r i t e r i a f o r d e c i s i o n making and p o l i c y f o r m u l a t i o n . Part II e s t a b l i s h e s the conceptual b a s i s of development p l a n n i n g . Emphasizing a h o l i s t i c approach to the a c t i v i t y , i t i d e n t i f i e s the nature of development p l a n n i n g , j u s t i f i e s the need f o r pl a n n i n g i n l e s s developed c o u n t r i e s and pr o v i d e s g u i d e l i n e s f o r proceeding i n the most e f f e c t i v e way. The r o l e of p r o j e c t p l a n n i n g w i t h i n the process of n a t i o n a l p l a n n i n g i s d e f i n e d and the fundamentals of s u c c e s s f u l p r o j e c t design and a p p r a i s a l are l a i d down. Part III s t r u c t u r e s a p r a c t i c a l methodology f o r pl a n n i n g resource development in accordance with the p r i n c i p l e s and r u l e s e s t a b l i s h e d i n Parts I and I I . T h i s methodology d e s c r i b e s the fundamental procedure f o r d e s i g n i n g , a p p r a i s i n g , and s e l e c t i n g 4 resource projects in less developed countries. Consistent with the objectives of the thesis, Part IV tests the p r a c t i c a l a p p l i c a b i l i t y of the planning methodology. A case study of plantation forestry and associated industry development in Chile i s used for t h i s purpose. The test case proves the v a l i d i t y of the guidelines and offers fresh insights into the potent i a l (real) contribution of timber production forestry to national economic development. Due to the innovative nature of the appraisal methodology employed, the test case i s b u i l t around much o r i g i n a l information which i s not available from published sources. Furthermore, the approach and mathematics of the analysis require that the data be structured and u t i l i z e d in certain prescribed forms only. For these reasons, the data base (1978-79) used in the example required more than 16 months of f i e l d investigations in Chile and processing in Canada to bring i t up to the desired form. In t h i s l i g h t , and following the delay imposed by the author's tour of duty as a development planning advisor with the Government of Honduras in the early 1980's, i t became impossible to secure the necessary resources and time to es t a b l i s h a more current view. Nevertheless, i t i s maintained that, for the purposes of testing the a p p l i c a b i l i t y of the proposed guidelines and estimating the developmental impact of forestry investments in C hile, the test case i s both v a l i d and s u f f i c i e n t as presented. PART I RESOURCE ALLOCATION FOR REGIONAL DEVELOPMENT 6 1 . INTRODUCTION The a l l o c a t i o n of scarce p r o d u c t i v e resources to competing a l t e r n a t i v e uses determines, perhaps more than any other f a c t o r , the l e v e l of m a t e r i a l w e l l - b e i n g achieved by a n a t i o n . The "economizing of p r o d u c t i v e r e s o u r c e s " , a term used by economists to r e f e r to the act of optimum resource a l l o c a t i o n , i s a major component of the process by which an economy grows and d i s t r i b u t e s wealth amongst i t s p o p u l a t i o n . Much of the development process hinges on the way a n a t i o n uses i t s l i m i t e d means of p r o d u c t i o n . In i t s s i m p l e s t form, wealth i s the supply of goods and s e r v i c e s f o r human enjoyment. These i n c l u d e food, c l o t h i n g , and s h e l t e r , as w e l l as h e a l t h , education, and r e c r e a t i o n . A l l goods and s e r v i c e s are the end product of economic (prod u c t i v e ) a c t i v i t i e s , and a l l economic a c t i v i t i e s depend on p r o d u c t i v e resources f o r the g e n e r a t i o n of wealth. The market system i s f r e q u e n t l y an e f f i c i e n t d i s t r i b u t o r of resources i n more developed economies. P e r v a s i v e market i m p e r f e c t i o n s and c o s t - b e n e f i t e x t e r n a l i t i e s , however, g r e a t l y reduce the market's a l l o c a t i o n a l e f f i c i e n c y in l e s s developed c o u n t r i e s (LDSs). These c o n d i t i o n s of economic i m p e r f e c t i o n make i t d i f f i c u l t to support a p o l i c y of l a i s s e z - f a i r e i n the development of the emerging n a t i o n s . At the same time, they e s t a b l i s h the need f o r p l a n n i n g resource a l l o c a t i o n i n g r e a t e r depth than would be recommended f o r more developed c o u n t r i e s (MDCs). Plans r e q u i r e goals and goals r e q u i r e c r i t e r i a f o r d i s c r i m i n a t i n g between a l t e r n a t i v e p o l i c y o p t i o n s . The goals of 7 development are numerous and oft e n of a complex nature. Confusion about p r i o r i t i e s and the composition of s o c i a l welfare make i t d i f f i c u l t to reduce the competing goals of development to a s i n g l e s u p e r i o r g o a l . A s i m i l a r s i t u a t i o n a r i s e s with regard to investment c r i t e r i a and the e v a l u a t i o n of development o p t i o n s . C a p i t a l occupies a dominant p o s i t i o n in the economic theory of p r o d u c t i o n . T h e r e f o r e , i t i s only n a t u r a l that i t should occupy an e q u a l l y important plac e i n the economic theory of growth. A common assumption by many modern development s c h o l a r s i s that economic growth hinges on c a p i t a l accumulation, and that a d d i t i o n a l c a p i t a l w i l l e i t h e r provoke or f a c i l i t a t e a more r a p i d r a t e of economic development. Yet there i s no reason to suppose that c a p i t a l accumulation by i t s e l f e x e r c i s e s so predominant an i n f l u e n c e on development. A strong counterview has r e c e n t l y emerged that downgrades the r o l e of c a p i t a l i n the development process. Instead, other e q u a l l y important development f o r c e s are assumed to work j o i n t l y with c a p i t a l to b r i n g about economic development. These i n c l u d e income e q u a l i z a t i o n and the d e r i v e d i n c r e a s e i n aggregate purchasing power; e n t r e p r e n e u r i a l a b i l i t y ; t e c h n i c a l i n n o v a t i o n ; " a l l o c a t i o n a l " and "dynamic" e f f i c i e n c y ; m o t i v a t i o n a l change; and l e a r n i n g by doing. The qu e s t i o n of a s i n g l e s u p e r i o r c r i t e r i o n by which a l t e r n a t i v e development o p t i o n s should be eva l u a t e d i s becoming i n c r e a s i n g l y a l i e n a t e d from matters of economic growth. While most economists would agree with a development s t r a t e g y that i n c l u d e s some in c r e a s e i n the ra t e of output, they would not n e c e s s a r i l y p l a c e t h i s goal above a l l 8 other considerations. More l i k e l y than not, they would temper the growth goal with concerns of d i s t r i b u t i o n a l j u s t i c e and merit wants, that may or may not relate to s t r i c t economic c r i t e r i a . The d i f f i c u l t i e s and complexities of development in LDCs are stressed by Watt (1973), Morgan (1975), and Meir (1976). They l i s t the following obstacles to a rapid rate of progress. (1) Limited savings, both absolutely and as a percentage of national income. (2) Lack of technical innovation and considerable reluctance to change. (3) A serious shortage of c a p i t a l for investment, although th i s can be overcome to some extent by the use of foreign c a p i t a l . (4) A rapid rate of population growth and i n f l a t i o n which s i g n i f i c a n t l y reduce the economic gains on a per capita basis. (5) Direct and disguised unemployment of over 15 percent. (6) A precarious foreign trade balance. (7) Population migration from rural areas to urban centres. (8) Large i n e q u a l i t i e s in income d i s t r i b u t i o n ; a large portion of the population with low incomes and, therefore, with l i t t l e purchasing power. (9) A dual economy, consisting of a highly i n d u s t r i a l i z e d , c a p i t a l - i n t e n s i v e sector and a subsistence a g r i c u l t u r a l sector. (10) A shortage of s k i l l e d labour and s k i l l e d administrators. (11) Poorly developed infrastructure. 9 ( 1 2 ) Low l i f e expectancy, rampant d i s e a s e , and m a l n u t r i t i o n among a s i g n i f i c a n t percentage of the p o p u l a t i o n . Should s o l v i n g these d i f f i c u l t i e s be construed as the object of economic p o l i c y ? O c c a s i o n a l l y , perhaps a l l too o f t e n , t h i s has been the ad hoc approach to development taken by many LDCs. On the s u r f a c e , a m e l o r i a t i n g the above d i f f i c u l t i e s would seem to be reasonable because, a f t e r a l l , each and every o b s t a c l e l i s t e d i s r e a l and t h e i r removal would l i k e l y be conducive to development. Deeper down, however, t h i s approach would be i r r a t i o n a l because the l i s t e d o b s t a c l e s i n c l u d e , not only what are development goals i n t h e i r own r i g h t , but a mixture of c o n s t r a i n t s , c r i t e r i a , i n d i c a t o r s , ways and means of development that should not be confused with g o a l s . The issue of the a p p r o p r i a t e g o a l ( s ) of development i s not simple. A l l that can be s a i d at f i r s t hand, and few would d i s a g r e e with t h i s i n t e r p r e t a t i o n , i s that i t i s r e l a t e d to the e l u s i v e t a r g e t of the "maximization of s o c i a l w e l f a r e " . A deeper d e f i n i t i o n may not be l i g h t l y undertaken. S i m i l a r c o m p l e x i t i e s surround the e q u a l l y important matter of development c r i t e r i a . T h e r e f o r e , the purpose of Part I i s , f i r s t l y , to d i s c u s s summarily c u r r e n t i s s u e s of development and underdevelopment. Secondly, to e s t a b l i s h the goals of development and to r e l a t e these goals to a r a t i o n a l e f o r resource a l l o c a t i o n . And t h i r d l y , to d e f i n e a p p r o p r i a t e c r i t e r i a f o r investment d e c i s i o n s , and the f o r m u l a t i o n of development p o l i c y . 10 2. DEVELOPMENT AND UNDERDEVELOPMENT 2.1. Misconceptions of Development In one of his enlightened moments, Stendahl* voiced the opinion that misfortunes come primarily from our false ideas concerning what happens. Never has this statement been more relevant than when interpreting the wants for economic development of the world's poor. The United Nations c l a s s i f i e s countries with low per capita incomes as "developing" and those with high per capita incomes as "developed". Both terms are misleading. It is clear that not a l l low income countries are developing. Many have recently been stagnant and a few have been regressing. Assuming a modest but constant world progress, our descendants 100 years from now w i l l look back on a l l present countries as being t r u l y underdeveloped. No countries today are " f u l l y developed, their best regions could stand much improvement and even the highest-income countries have regions severely backward economically and s o c i a l l y (Morgan, 1975). A d i f f e r e n t terminology often used to refer to poor and r i c h nations is " f i r s t world", "second world", and "t h i r d world" countries. These names indicate both the degree of development as well as the p o l i t i c a l alignment of the country in question. The " f i r s t world" category groups nations of the western block that are more developed; the "second world" i s made up of * Quoted in Morgan T. (1975) 11 nations aligned with the communist bloc that have achieved a reasonable standard of l i v i n g ; and the " t h i r d world" groups the t r u l y less p r i v i l e g e d nations which have been unable to reach a stage of economic take-off and are absolutely or r e l a t i v e l y poor. Less misleading terms are "low income" and "high income" countries or simply "poor" and " r i c h " countries. A better, perhaps more precise terminology i s "less developed countries" (LDCs) and "more developed countries" (MDCs), as in each case the implication is that nations are lower or higher in their standard of l i v i n g , only r e l a t i v e to each other and not in any absolute sense (Maritano, 1970; Morgan, 1975; and Meir, 1976). Another false notion i s the assumption that a r i s e in reported real income is a s u f f i c i e n t condition to prove that economic development is happening. This, unfortunately, is quite incorrect. F i r s t l y , national income, as measured by planning agencies, i s in i t s e l f an inadequate measure of development, for i t omits major portions of real income such as: the work of homemakers, the value of leisure time, volunteer work, and any other a c t i v i t y not d i r e c t l y remunerated. Secondly, national income may r i s e , but, due to progress in only narrow segments of the economy, most people could remain unaffected and consequently continue being poor. Thirdly, while i t may be true that average actual income may be growing, unemployment and hyperinflation could also be increasing, leading to o v e r a l l economic growth but not to s a t i s f a c t o r y development. As we continue to review current issues in economic 12 development, the number of misunderstandings or false notions increases. For example, contrary to general b e l i e f , the LDCs are not a homogeneous group (Tinbergen, 1967). A slope not a c l i f f , separates the LDCs from the more developed. In fact, even the precise d i v i s i o n between the two groupings i s arbit r a r y and implies no absolute d i s t i n c t i o n (Meir, 1976). 2.2. Economics for Development A. Economic Growth and the Condition for Development An easy and simple d e f i n i t i o n of economic development i s not possible. The vast d i s p a r i t i e s in resource endowment, economic structure, and c u l t u r a l , s o c i a l , and p o l i t i c a l heritage among the nations of the world make i t hard to decide on an adequate c r i t e r i o n . As early as 1776, Adam Smith (1784) showed his concern with the growth of national output over the long-term. He noticed that the greater the proportion of annual produce to i t s population, the better off a nation was. While a combination of factors were believed to contribute to augment the rate of output, a main role was reserved for labour s p e c i a l i z a t i o n and increased employment. Above a l l , useful or productive labour was thought of as the main determinant of output. It was the increase in output that was c a l l e d economic growth or economic development. Schumpeter (1912) viewed development d i f f e r e n t l y . Simple economic growth, to him, was not a s u f f i c i e n t condition 13 determinant of development. He held the position that economic systems had a natural tendency to move towards equilibrium and that changes in income, quantity produced, and prices resulting from an attempt by the system to reach equilibrium, did not constitute development. As defined by Schumpeter, development is a " d i s t i n c t phenomenon e n t i r e l y foreign to what may be observed in the c i r c u l a r flow or in the tendency towards equilibrium. It i s spontaneous and discontinuous change in the channels of the flow, disturbance of the equilibrium, which forever a l t e r s and displaces the equilibrium state previously e x i s t i n g " . Some modern authors distinguish two broad categories of economic growth. The f i r s t type is that involved in the s h i f t from a "less developed" to a "more developed" economy, and the second kind i s the growth of the "more developed" economy (Ackley, 1961; Nautiyal, 1967). Hirschman (1963) applied the term "economics of development" to the former and "economics of growth" to the l a t t e r . The essential c h a r a c t e r i s t i c s of a less developed economy have been discussed in d e t a i l by Leibenstein (1963), Viner (1963), Bhagwati (1966), and more recently by Morgan (1975), Samuelson and Scott (1975), and Meir (1976). Nautiyal (1967) viewed underdevelopment as a condition marked by: chronically low income l e v e l s ; c a p i t a l and natural resources sc a r c i t y ; over-population; i l l i t e r a c y ; primitive technologies; lack of stable, advanced forms of national government; very strong regional, t r i b a l , r e l i g i o u s , and other parochial feelings; and worst of a l l , a remarkable resistance to 1 4 change. Not surprisingly, p r a c t i c a l l y none of these t h i r d world c h a r a c t e r i s t i c s exist in the more developed economies. Capital accumulation, technological advance and modest rates of population increase, noted Nautiyal, seem to be the cornerstones of further per capita growth in richer nations. (B). Underdevelopment and Dependency Spearheaded by the works of Andre Gunder Frank in Latin America, and Gunnar Myrdal in Asia, the dependency theory of underdevelopment has presently gained much ground in explaining the r e l a t i v e miser.y of the t h i r d world. While development scholars from a l l p o l i t i c a l a f f i l i a t i o n s have supported the dependency theory, converts have been more numerous among advocates of the s o c i a l i s t ideology. According to the dependency theory, underdevelopment i s a case of imposed development of underdevelopment. It i s maintained that no country has ever been in an o r i g i n a l state of underdevelopment, although i t may have been undeveloped (Cockcroft et a l . 1972). The t h i r d world i s looked upon as being controlled p o l i t i c a l l y and economically by the major growth centres such as the Soviet Union, Japan, Western Europe, and North America. The rest of the nations are, in various degrees, s a t e l l i t e s of the major growth centres (metropoles) (Frank, 1969). The immediate impact of t h i s imposed world hierarchy is socio-economic and p o l i t i c a l dependence. Therefore, e f f o r t s towards growth lead at best, to a lim i t e d or "underdevelopment development" in the more prosperous of the s a t e l l i t e countries 1 5 (Cockcroft et a l . , 1972). In other words, s a t e l l i t e development is not autonomous, rather i s constantly being conditioned by relationships of dependence to the metropole. Whether resulting from a d i r e c t conspiracy or involuntary e f f o r t of the developed countries, i t i s now f e l t that the t h i r d world i s making a substantial contribution to the development of the in d u s t r i a l i z e d nations. As indicated by Samuelson and Scott (1975), i t i s becoming increasingly d i f f i c u l t to deny the urgency of planning for the reversal of the trend of widening income d i f f e r e n t i a l s between LDCs and MDCs. Even i f the MDCs have not purposefully planned the misery of underdevelopment, their role in the world economic order has been largely detrimental to the cause of the t h i r d world. Despite e f f o r t s to^increase international aid to the LDCs, these appear unable to i n i t i a t e strategies, as MDCs do-, that primarily benefit them. For close to four decades, since the end of the la s t World War, the development recipe for advancing the poorer countries has been based almost universally on the premise that economic growth would naturally occur following widespread adoption of the development philosophy of the i n d u s t r i a l i z e d nations, including that of the communist bloc. The consequences of thi s approach have been to spark in the LDCs, a desire to attra c t massive, indiscriminate c a p i t a l infusions, large scale operations, highly advanced technologies and to increase labour productivity at the expense of t o t a l employment. But where, I ask, has the adoption of t h i s modern i n d u s t r i a l philosophy taken the LDCs? Are they now closer to a stage of "economic take-off" 16 than t h i r t y years ago? The d a i l y news from A f r i c a , A s i a , and L a t i n America provide bleak answers to both q u e s t i o n s . In f a c t , i t would not be too d i f f i c u l t to prove t h a t , f o r the vast m a j o r i t y of the world's p o p u l a t i o n , the technology that took men to the moon has brought, more o f t e n than not, i n c r e a s e d r e l a t i v e misery. Plagued by e x c e s s i v e r a t e s of p o p u l a t i o n growth, t h e i r moderate gains i n gross income t r a n s l a t e i n t o i n s i g n i f i c a n t gains on a" per c a p i t a b a s i s . LDCs are not c l o s e r , but r a t h e r f u r t h e r away from a developed stage. Faced with the r e a l i t y of t h e i r s a t e l l i t e c o n d i t i o n , many LDCs have sought to develop by implementing s h o r t - s i g h t e d , inward-looking p o l i c i e s . Other n a t i o n s i n d e s p e r a t i o n have adopted reform r e c i p e s based on r e v o l u t i o n r a t h e r than e v o l u t i o n . These c o u n t r i e s and many more, f e a r f u l of t h e i r dependent c o n d i t i o n i n a metropole c o n t r o l l e d world, prayed r e v e r e n t l y at the a l t a r of import s u b s t i t u t i o n and g r e a t l y r e s t r i c t e d the inflow of f o r e i g n c a p i t a l . For the most part and not w i t h s t a n d i n g s h o r t - l i v e d p e r i o d s of economic independence, the long term r e s u l t s , of what Meir (1976) c a l l s the "economics of d i s c o n t e n t " , have been an encroachment of underdevelopment and a f u r t h e r delay i n the movement of LDCs to economic development. I t i s paramount not to confuse the "economics of d i s c o n t e n t " with the "economics f o r development" as the former supports inward-looking p o l i c i e s t h a t are most l i k e l y to run counter to economic development. Since the e a r l y 1970's, a small but v o c a l group of economists, concerned with the e v i l s of dependency, have spearheaded a new approach to the development of the LDCs. 1 7 Based on the philosophy of intermediate technology advocated by Schumacher (1973), they have suggested a development based on smaller working units, communal ownership, an al t e r n a t i v e technology, and workplaces u t i l i z i n g l o c a l labour and resources. Technology, the systematic application of s c i e n t i f i c or other organized knowledge to p r a c t i c a l tasks (Galbraith, 1967), is now viewed as one of the more important vectors by which dependency i s spread throughout the LDCs. In other words, technology i s the means by which, v o l u n t a r i l y or i n v o l u n t a r i l y , the dominant so c i a l groups of the world promote their interests and maintain the LDCs in a state of underdevelopment. As a r e s u l t , the many so c i a l benefits which imported technology has helped to bring about in the emerging nations are being increasingly counterbalanced by s o c i a l problems associated with i t s use. The problems range from the oppression and manipulation of the individual to the widespread destruction of the natural environment and the depletion of the world's f i n i t e supply of natural resources (Schumacher, 1973). Conventional technologies are designed to maximize the output per man but not necessarily with f u l l labour employment. This i s done to meet the ever-increasing productivity standards demanded by an industry based on highly mechanized and c a p i t a l intensive operations. Labour has been displaced and the number of work places created per unit of c a p i t a l invested has decreased sharply. The need to use an a l t e r n a t i v e , more human technology would appear to be s e l f evident i f the LDCs are to avoid the problems associated with the indiscriminate use of imported technology. 18 2.3. Economic Development Defined . So far, only major issues and concerns of development in LDCs have been discussed; no d e f i n i t i o n of economic development has yet been offered. However, a r e a l i s t i c development philosophy i s an essential prerequisite to e f f e c t i v e development planning and must be established. I s h a l l now attempt to provide t h i s d e f i n i t i o n . But f i r s t , l e t me define development l i t e r a l l y . The Webster Encyclopedic Dictionary provides a good insight as to the meaning of the word, i t mentions in part ... "the act or process of developing; unfolding; a gradual growth or advancement through progressive changes". Myrdal (1968), defined national development as the upward movement of the entire s o c i a l system. In his view, widely supported by other economists, economic development must not be equated simply to economic independence or i n d u s t r i a l i z a t i o n . It i s , rather, the attainment of a number of ideals associated with modernization, such as a r i s e in productivity, s o c i a l and economic equalization, improved knowledge (and technology), improved attitudes and i n s t i t u t i o n s , and a coordinated system of policy measures than can remove a l l conditions that have perpetuated a state of underdevelopment. Morgan (1975) and Meir (1975), emphasized that economic development i s made up of two major ingredients: economic growth plus s t r u c t u r a l change (quantitative and q u a l i t a t i v e - and including new i n s t i t u t i o n s , attitudes and values). A somewhat innovating view of development was expressed recently by Mahbub ul Haq, former chief economist for the government of Pakistan (in Meir, 1976) when he suggested that: 19 "The problem of development must be d e f i n e d as a s e l e c t i v e a t t a c k on the worst forms of poverty. Development goals must be d e f i n e d i n terms of p r o g r e s s i v e r e d u c t i o n and eventual e l i m i n a t i o n of m a l n u t r i t i o n , d i s e a s e , i l l i t e r a c y , s q ualor, unemployment, and u n e q u a l i t i e s . We were taught to take care of our GNP* as t h i s would take care of poverty. Let us re v e r s e t h i s and take care of poverty as t h i s w i l l take care of the GNP. In other words l e t us worry about the content of GNP even more than i t s rate of i n c r e a s e " . I t would appear that the c o n v e n t i o n a l wisdom r e g a r d i n g development i s now s h i f t i n g toward a d e f i n i t i o n t h a t f o r c e f u l l y i n c l u d e s the idea that growth or advancement must mean, above a l l , the growth or advancement of people. Development, i t i s b e l i e v e d , should be u l t i m a t e l y people's development with the many socio-economic, s o c i o - p o l i t i c a l , c u l t u r a l , and i n s t i t u t i o n a l t r a n s f o r m a t i o n t h i s i m p l i e s . I t i s suggested, t h e r e f o r e , that a more a p p r o p r i a t e d e f i n i t i o n of development, which o f f e r s s i m u l t a n e o u s l y a s e r i e s of i m p l i c i t goals and some r e l i e f from the burden of dependency, would be: r e a l r e g i o n a l development i s a g r a d u a l , systematic s t r u c t u r a l t r a n s f o r m a t i o n of the economy, s o c i e t y , p o l i c y , and c u l t u r e of a r e g i o n , that permits the s e l f - g e n e r a t i n g and s e l f -p e r p e t u a t i n g use and advancement of the people's p o t e n t i a l . The aims d e s c r i b e d in t h i s simple but p e n e t r a t i n g d e f i n i t i o n of development should be, i n the most general sense, the only concern of the planner faced with the task of r e g i o n a l development. * Gross N a t i o n a l Product 20 2.4. The Process of Economic Growth C l a s s i c a l , n eo-classical, and modern economics subscribe, in increasing degrees, to the "mainstream" or "big push theory" in which economic growth (periodic increases in output), past a point (threshold) of minimum c r i t i c a l change (and s i z e ) , becomes a natural s e l f - s u s t a i n i n g process. From Adam Smith, Malthus and Ricardo, to Marshall, Menger and Wicksell and ultimately Keynes, economic growth theory evolved to support the p r i n c i p l e of c a p i t a l accumulation as the best means of accelerating growth. Increased c a p i t a l formation led to increased productivity which in turn lead to increased savings (and/or consumption) and eventually to increased c a p i t a l formation, and again to increased productivity. The concept of "optimum propensity to save" developed by Malthus became central to the theory of growth as i t held the key to the relationship between savings and investment. Malthus proved that, up to a certain point, saving was.needed to finance (without i n f l a t i o n ) the investment for which p r o f i t a b l e opportunities existed; beyond th i s point, saving would, nonetheless, reduce consumer spending to such an extent that investment too would be discouraged (Nautiyal, 1967). The law of "increasing returns to scale" and later that of "diminishing marginal returns" provided the tools for determining the optimum mix of land, c a p i t a l , and labour. Karl Marx appears to be the sole exception to the pr e v a i l i n g view of economic growth. He simply did not think of underdevelopment, and of the lack of economic growth in the emerging nations, as an enduring problem, but as a p r e - s o c i a l i s t one. The LDCs would, unfortunately, have to suffer through the 21 c a p i t a l i s t phase before they could reach the b l i s s of communism (Higgins, 1959). The development of marginal analysis and the theory of general equilibrium by the n e o - c l a s s i c i s t s became the cornerstone of present theory of the individual and of the firm. Therefore, the n e o - c l a s s i c i s t s ' influence on modern theories of economic growth i s , at best, i n d i r e c t . Throughout their school, the need for rapid c a p i t a l accumulation remained as a major pre-requisite of rapid economic growth. The mechanisms by which savings and c a p i t a l investment were brought to equilibrium was centered around the movement of the market rate of i n t e r e s t . The rate of interest was discovered as a potential tool for i n t e r f e r i n g with the process of c a p i t a l formation, and ultimately with economic growth. Geographical expansion and technical innovation were also recognized as important factors influencing economic growth. Following the great depression of the 1930's, Keynes (1964) became concerned with the problems of unemployment caused by a lack of demand in an economy with a proven capacity to produce. In a review of Keynesian theory, Nautiyal (1967) concluded that his work cannot be applied d i r e c t l y to the problem of economic growth in LDCs. Keynesian theory, however, does seem to have value for t h i r d world development insofar that i t provides new a n a l y t i c a l tools and i n t e l l e c t u a l stimulation to the interested scholar. The greatest contribution of Keynes to the general theory of economic growth l i e s with his mechanism for determining the rate of interest which, as we know, controls the levers to c a p i t a l formation and economic growth. 22 Singh (1954), in a c r i t i c a l analysis of Keynesian economics, suggested that i n d u s t r i a l i z a t i o n in LDCs is e s s e n t i a l l y a matter of economic organization and refused to accept Keyne's " s p i r a l of saving and investment" as the only explanation. The a l l -important matters, according to Singh, are the means of encouraging economic growth by better u t i l i z a t i o n of underemployed resources. The post-Keynesian theories of economic growth have centered' on the construction of theoretical growth models (Hahn and Matthews, 1964). Problems of optimum saving and the development of LDCs have, by and large, not been considered by them. Building on the Keynes' p r i n c i p l e of economic interdependence between sectors and on the income - output m u l t i p l i e r effect of independent expenditures, input - output analysis has grown to become the central tool of modern econometric modeling. From the c l a s s i c i s t s to the modernists, nevertheless, one pr i n c i p l e of economic growth has remained unchanged; to break out of a vicious c i r c l e of poverty, some c a p i t a l formation is required. Even though labour may be abundant in LDCs, i t is the shortage of c a p i t a l that l i m i t s the l e v e l of output (Meir, 1976). The mobilization of domestic and external resources provides the means to encourage the process of c a p i t a l acumulation in LDCs. Resource mobilization, in turn, requires appropriate programs and p o l i c i e s to ensure e f f e c t i v e ( e f f i c i e n t ) use of the scarce factors. 23 3. DEVELOPMENT GOALS AND RESOURCE ALLOCATION 3.1. G o a l s , Development P l a n n i n g and R e s o u r c e A l l o c a t i o n G o a l s a r e ends t o w h i c h a d e s i g n ( p l a n ) t e n d s . C o m p a r a t i v e l y , o b j e c t i v e s a r e more e l a b o r a t e ( p r e c i s e ) s t a t e m e n t s o f g o a l s , t h e y a r e o f t e n p r e c i s e t a r g e t s t o w h i c h a p l a n a i m s . B e f o r e any p l a n n i n g c an be u n d e r t a k e n , a p r e c i s e d e f i n i t i o n o f g o a l s i s e s s e n t i a l . The aims of d e v e l o p m e n t p l a n n i n g a r e as i m p o r t a n t f o r a n a t i o n ' s economic advancement as i t s p l a n n i n g a p p r o a c h o r i t s d e v e l o p m e n t p l a n ( W a t e r s t o n , 1 9 6 5 ) . The l o n g t e r m g o a l s of t h e LDCs have t r a d i t i o n a l l y been a s s o c i a t e d , and r i g h t l y s o, w i t h t h e e l u s i v e c o n c e p t o f economic d e v e l o p m e n t . But d e v e l o p m e n t b e i n g a r e l a t i v e l y h a r d t e r m t o d e f i n e , has g i v e n many a he a d a c h e t o t h e unwary e c o n o m i s t a t t e m p t i n g t o s e t a d e q u a t e p l a n n i n g g o a l s . Whether p l a n n i n g f o r n a t i o n a l d e v e l o p m e n t , r e g i o n a l d e v e l o p m e n t , o r r e s o u r c e d e v e l o p m e n t , t h e e c o n o m i s t - p l a n n e r must f i r s t d e f i n e h i s g o a l s , t h e n he must d e f i n e a p p r o p r i a t e c r i t e r i a f o r e v a l u a t i o n , and u l t i m a t e l y s e l e c t p r a c t i c a l i n d i c a t o r s f o r d e c i s i o n - m a k i n g . O n l y t h e n i s he r e a d y f o r i n i t i a t i n g t h e p l a n n i n g p r o c e s s . T h i s c h a p t e r w i l l d e a l w i t h t h e f i r s t q u e s t i o n , t h e d e f i n i t i o n of g o a l s , and l e a v e t h e o t h e r two i s s u e s f o r l a t e r d i s c u s s i o n . 24 3.2. Redistribution with Growth - The P r a c t i c a l Aims of  Development It has been said that the ultimate goal of public policy i s the maximization of s o c i a l welfare. Imbedded in the above statement i s the welfare economist's j u s t i f i c a t i o n for the p a r t i c i p a t i o n of government in the planning of economic a c t i v i t y . However, precise, p r a c t i c a l methods for measuring s o c i a l welfare remain to be established. The unfortunate r e a l i t y of welfare economics i s that the maximization of s o c i a l welfare remains a U t o p i a n objective amenable to theore t i c a l economic analysis only. As a result, Pigou (1932), the founder of modern welfare economics limited his work to the study of the more p r a c t i c a l concept of "economic welfare", ... "that part of s o c i a l welfare that can be brought d i r e c t l y or i n d i r e c t l y into r e l a t i o n with the measuring-rod of money". Furthermore, Pigou warned that the precise separation between s o c i a l welfare and economic welfare cannot be a r i g i d one because the dividing l i n e depends on the interpretation of the word "can" and t h i s is necessarily blurred. He concluded that economic welfare w i l l not serve for a barometer or index of t o t a l welfare. Nonetheless, the need remains for having an acceptable indicator of s o c i a l welfare, and while economic welfare i s an extremely crude measure of i t , i t is usually considered the best available (Watt, 1973). Most recently, development economists are quickly a r r i v i n g at the conclusion that economic development cannot be interpreted to mean simply economic progress or an increase in economic welfare as measured by a change in per capita real 25 income. As Meir (1976) pointed out, "per capita real income i s only a p a r t i a l index of economic welfare because a judgement regarding economic welfare w i l l also involve a value judgement on the d e s i r a b i l i t y of a p a r t i c u l a r d i s t r i b u t i o n of income", and consequently i t cannot be said d e f i n i t e l y "that economic welfare has increased, even i f per capita income has risen, unless the resultant d i s t r i b u t i o n of income i s also considered desirable". The development planner must, therefore, avoid l a b e l l i n g an increase in per capita real income, an increase in economic welfare, l e t alone s o c i a l welfare, without prior study of l i k e l y spinoff effects on product composition, and d i s t r i b u t i o n (Deaton and Muellbauer, 1982). The qual i t y of economic development may be considerably masked i f the planner does not at least break up the aggregate measure of growth (GNP) and studies i t s composition and d i s t r i b u t i o n . Notwithstanding the need for achieving, ultimately, a broader goal than maximum economic welfare, two elements of economic welfare, namely increase in output and income d i s t r i b u t i o n , stand out as the most p r a c t i c a l indicators amenable to measurement and rigorous economic analysis (Blang, 1982; Samuelson, 1983). In t h i s l i g h t , i t should not come as a surprise that modern scholars treat the question of economic development as primarily (although not exclusively) a matter of achieving sustained economic growth and improving income d i s t r i b u t i o n . The t i t l e of a study by Chenery et a l . (1974), for the World Bank: "Redistribution with Growth", summarizes the essence of the goals of present day economic development. The Chenery et a l . policy study suggests, among other things, an 26 improved methodology for: (a) Laying down a statement of goals that combine growth and d i s t r i b u t i o n into a single measure (index) of so c i a l welfare. (b) A growth - cum - d i s t r i b u t i o n theory that brings out the linkages between the growth of di f f e r e n t economic groups and defines the scope for policy intervention. (c) A summary comparison of some alternative strategies of d i s t r i b u t i o n and growth, such as maximum growth of GNP, redirection of investment to raise incomes of the poor, and r e d i s t r i b u t i o n of consumption. In a move similar to the World Bank's, the United Nations has begun to explore the p o s s i b i l i t y of using a general development index (G.D.I.) which, by incorporating growth and d i s t r i b u t i o n parameters simultaneously, would serve as a better measure of development than would gross national product (Watt, 1973). The stage would appear to be set for the use of welfare indices in development planning, and most l i k e l y they w i l l be used considerably in future policy analyses. In thi s regard, the past c o n f l i c t s between growth and d i s t r i b u t i o n should no longer haunt the macro-planner seeking a single " i d e a l " c r i t e r i o n by which to measure economic welfare. The matter of economic development is simply reduced to a maximization in present value terms (or overtime) of the indicated welfare function (Samuelson, 1983). The general conclusion stemming from the discussion i s that the best, most p r a c t i c a l goals of economic development in LDCs should be rapid economic growth accompanied by d i s t r i b u t i o n a l 2 7 j u s t i c e , r e g a r d l e s s of the way i n which these are measured or the wel f a r e t r a d e - o f f s between them. If the planner seeks a complete assessment of the development process, merit wants, which may or may not have d i r e c t economic overtones, would need to be i n c l u d e d . S i m i l a r l y , a measure of i n s t i t u t i o n a l or s o c i a l change, such as improved s o c i a l s e r v i c e s and improved a t t i t u d e s may need to be c o n s i d e r e d . P o l i c y and program improvements should be viewed as e x e r c i s i n g more than j u s t p o s i t i v e changes in what are r i g h t l y the s u p e r i o r g o a l s of development but a l s o on the means and ways that a n a t i o n has to achieve these g o a l s . In t h i s regard, i t i s important to c o n s i d e r the p r a c t i c a l i m p l i c a t i o n s to development of problems such as l i m i t e d demand due to t i e d markets, s u p p l i e r s ' c r e d i t and t i e d technology, and the i n f l u e n c e on p r o f i t a b i l i t y of the r i s k of e x p r o p r i a t i o n , l i m i t a t i o n s on f o r e i g n c a p i t a l r e p a t r i a t i o n , and r e s t r i c t i o n s i n imports. 28 4. CRITERIA FOR INVESTMENT AND POLICY FORMULATION So . f a r , S e c t i o n 1.2. has shown that underdevelopment and hence development are dependent on a myriad of s o c i a l , p o l i t i c a l ( n a t i o n a l and i n t e r n a t i o n a l ) , c u l t u r a l , and economic f a c t o r s , which i n t e r a c t to determine a n a t i o n ' s r e l a t i v e and absolute l e v e l of p r o g r e s s . While a l l f a c t o r s should be c o n s i d e r e d by p o l i c y makers, and measures should be taken to enhance t h e i r r o l e p o s i t i v e l y , the socio-economic environment i s perhaps the most c r u c i a l element determing the p o s s i b i l i t i e s f o r development. To f u r t h e r l o c a l , r e g i o n a l , or n a t i o n a l development, the economic planner has a v a i l a b l e , methods and t o o l s of a n a l y s i s which allow him to evaluate a l t e r n a t i v e development options f a r more r i g o r o u s l y and o b j e c t i v e l y than s o c i o l o g i s t s , a n t h r o p o l o g i s t s , or p o l i t i c a l s c i e n t i s t s have. The development economist, t h e r e f o r e , holds the key to the optimum use of the scarce p r o d u c t i v e resources of a n a t i o n , and u l t i m a t e l y (but not e x c l u s i v e l y ) to i t s m a t e r i a l w e l l - b e i n g . There i s , consequently, an important r o l e to be played by the development economist i n the process of n a t i o n a l development i n g e n e r a l , and in the a l l o c a t i o n of resources in p a r t i c u l a r . The main q u e s t i o n which i s being addressed here i s how should investment be planned f o r , and/or how should the resource economist perform to ensure that the maximum p o s s i b l e c o n t r i b u t i o n of a l l resources to economic welfare i s obtained. S e c t i o n 1.3. concluded, that p r i o r to p l a n n i n g p u b l i c p o l i c y (and Programs), the development planner must have a c l e a r statement of g o a l s . The u l t i m a t e aim of economic development must remain as the maximization of s o c i a l welfare (Samuelson, 29 1983). However, s o c i a l welfare cannot be c a r d i n a l l y measured, therefore, the economist seeks to maximize the less perfect but more p r a c t i c a l concept of economic welfare. Additional imperfections inherent in economic welfare make i t necessary to further disaggregate the goal of development u n t i l f i n a l l y the two most p r a c t i c a l goals of investment policy, economic growth and d i s t r i b u t i o n a l j u s t i c e , emerge. I sh a l l now concern myself with the second prerequisite to development planning, the d e f i n i t i o n of appropriate c r i t e r i a for decision-making. 4.1. Alloca t i o n of Investment Resources Resources need to be allocated to f a c i l i t a t e development. But development i s b a s i c a l l y economic growth and income d i s t r i b u t i o n , plus a measure of i n s t i t u t i o n a l and socio- c u l t u r a l change. Therefore, resources must be allocated to encourage rapid economic growth and improve income d i s t r i b u t i o n in balance with other elements of structural change. The general policy regarding i n s t i t u t i o n a l and socio- c u l t u r a l change i s a matter of concern at the highest planning l e v e l and w i l l not normally require, or be amenable to, rigorous investment analysis. On the contrary, a l l i t may need i s an understanding of the developmental forces at work, some p r i o r i t y ranking, and a good deal of common sense. On the other hand, decisions concerning resource investment for growth and income d i s t r i b u t i o n are more amenable to economic analysis and should never (not even when r e s t r i c t e d by data a v a i l a b i l i t y ) be taken without due test of investment c r i t e r i a . Estimate of future events must be made e x p l i c i t l y and l i k e l y consequences must be compared as 30 o b j e c t i v e l y as p o s s i b l e . I t i s with t h i s p a r t of development pl a n n i n g , the r e l a t i o n s h i p between resources investment and r e d i s t r i b u t i o n with growth, that I am p r i m a r i l y concerned. From c l a s s i c a l to modern development theory, economists were q u i t e content to assume the p o s s i b i l i t y of u n r e s t r i c t e d t r a n s f e r s among income groups. As a r e s u l t , they found no c o n f l i c t between the o b j e c t i v e s of d i s t r i b u t i o n and growth. Today, n e v e r t h e l e s s , i t i s g e n e r a l l y r e c o g n i z e d that l a r g e - s c a l e t r a n s f e r s of income are p o l i t i c a l l y u n l i k e l y i n LDCs. T h e r e f o r e , i t becomes necessary to evaluate the r e s u l t s of any development p o l i c y i n terms of the b e n e f i t s i t produces f o r d i f f e r e n t socio-economic groups (Ahluwalia and Chenery, 1974). While t h i s idea has been f a i r l y w e l l accepted i n p r i n c i p l e , i t has found l i t t l e r e f l e c t i o n i n the methodology of r e g i o n a l p l a n n i n g and p o l i c y f o r m u l a t i o n . Having set the p r a c t i c a l goals of development plan n i n g as the achievement of "economic growth" and "income d i s t r i b u t i o n " , i t f o l l o w s n a t u r a l l y that the a p p r o p r i a t e c r i t e r i a f o r e v a l u a t i n g development p o l i c i e s must be s t r u c t u r e d , on the one hand, of "economic e f f i c i e n c y " i n d i c a t o r s , and on the other, of "economic e q u i t y " ( e q u a l i t y ) i n d i c a t o r s . For i t i s a l s o true that a n a t i o n making the most e f f i c i e n t use of i t s p r o d u c t i v e r e s o u r c e s , whether n a t u r a l or man-made, i s by d e f i n i t i o n maximizing the l e v e l of output; and f o r a given stock of res o u r c e s , maximizing the o p p o r t u n i t i e s f o r saving and investment, hence of i n c r e a s i n g c a p i t a l formation and f u r t h e r i n g economic growth. I n t u i t i v e l y , i t would seem that an LDC having a more e q u i t a b l e d i s t r i b u t i o n of income would be i n c r e a s i n g 31 s o c i a l u t i l i t y per head and most l i k e l y , t h e r e f o r e , maximizing aggregate s o c i a l w e l f a r e . The c h o i c e of resource investment i n s e c t o r s , p r o j e c t s , and techniques, i s f u r t h e r confused by the e x i s t e n c e of e x p l i c i t or i m p l i c i t c o n s t r a i n t s imposed on the means f o r m o b i l i z i n g r esources f o r development. In t h i s p a r t i c u l a r aspect, the c o n s t r a i n t of the balance of payments i s , f o r i n s t a n c e , c r u c i a l to the p a t t e r n of resource investment s e l e c t e d . Other c o n s t r a i n t s which have a s i m i l a r c o m p l i c a t i n g e f f e c t are the flow of government revenue, the r a t e of p r i v a t e and p u b l i c saving, and a m u l t i p l i c i t y of s o c i a l and i n s t i t u t i o n a l o b j e c t i v e s which bear upon the development p r o c e s s . The ch o i c e of c r i t e r i a w i l l a l s o depend on the o b j e c t i v e f u n c t i o n being maximized, i . e . , growth or income d i s t r i b u t i o n . A f i n a l c o m p l i c a t i o n a r i s e s from the need to t r e a t temporal investments i n some way so they can be reduced to a common denominator f o r comparison. In other words, i f the d e c i s i o n i s to be made in present terms, a s e l e c t i o n of an a p p r o p r i a t e d i s c o u n t i n g procedure w i l l be r e q u i r e d j o i n t l y with a ch o i c e of a time p e r i o d over which the investment o b j e c t i v e i s to be maximized. The problem of resource a l l o c a t i o n among s e c t o r s i s a matter of great concern f o r macro-economic p l a n n i n g . In t h i s regard, q u e s t i o n s such as the optimum rate of investment between primary s e c t o r s and i n d u s t r y , or import s u b s t i t u t e s and exports, are most important. The main concern of t h i s study l i e s , however, with the problem of p r o j e c t c h o i c e and the c l o s e l y r e l a t e d issue of the extent and q u a l i t y of r e g i o n a l development induced by a p a r t i c u l a r p r o j e c t c h o i c e . I s h a l l , t h e r e f o r e , concern myself 32 only peripherally with issues of optimum i n t e r s e c t o r i a l resource a l l o c a t i o n (macro-economic planning) and technical e f f i c i e n c y , paying instead special attention to c r i t e r i a at the project l e v e l . There are some fundamental d i s t i n c t i o n s to be made in connection with the problem of investment c r i t e r i a and project choice. Meir (1976) warned about the need to dis t i n g u i s h (a) between the s t a t i c and dynamic aspects of the problem, (b) between micro and macro economic e f f i c i e n c y , and (c) between economic and non-economic c r i t e r i a of c a p i t a l a l l o c a t i o n . Some development economists have attempted to solve the question of investment c r i t e r i a by relying on a "shadow" s o c i a l welfare function. The usual approach has been to define what i s assumed to be a representative welfare function and then to maximize thi s function when making the investment choice (Samuelson, 1983). This approach i s p a r t i c u l a r l y true of the " s o c i a l product" school which seeks to maximize the rate of economic growth. The l i t e r a t u r e on resource a l l o c a t i o n for economic development abounds in c r i t e r i a and techniques for evaluating alternative investment options. However, there are wide discrepancies as well as strong s i m i l a r i t i e s in the approach taken by the various scholars. The differences in approach normally r e f l e c t d i f f e r e n t evaluations as regards the objectives of economic development. 33 4.2. Optimum Investment C r i t e r i a A. Economic Growth (Eff i c i e n c y ) Goal: The National  Aggregate Consumption C r i t e r i o n Two main proposals for applying a s o c i a l product c r i t e r i o n have been analysed. One by Tinbergen is c a l l e d the national produce (or consumption) test and another by Kahn and Chenery is c a l l e d the s o c i a l marginal productivity (SMP) t e s t . I s h a l l concern myself only with the national produce (or consumption) test for reason of i t s s i m p l i c i t y . It has been said that the ultimate aim of a l l economic a c t i v i t y i s consumption; production in i t s e l f has no meaning and i t would be i r r a t i o n a l to add to national output for the sake of production. Social product (output) is valued for the s a t i s f a c t i o n derived from the proportion used for consumption and also for the future streams of s a t i s f a c t i o n attributable to the proportion which is invested. Investment per se has no value. Therefore, consumption rather than income changes over time should be the appropriate indicator of welfare changes (Gane, 1969). Tinbergen (1958) f i r s t suggested the application of a s o c i a l product c r i t e r i o n when he developed the national produce (or consumption) test for resource a l l o c a t i o n . The c r i t e r i o n i s based on an assessment of the project's d i r e c t , i n d i r e c t , and secondary consequences, a l l values reckoned at "accounting prices". Indirect consequences being those expected in the absence of further changes in t o t a l national income, and 34 secondary consequences those resulting from changes in production which are the consequences of the changes in national income connected with the new production. A l l changes, both in the short or long term, are included (Meir, 1976). It i s emphasized that maximum consumption should be the goal, since investment, the other part of national product, i s not an end in i t s e l f , but meant to increase future consumption. Maximization of product or consumption, requires a procedure for comparing future with present values. This necessitates application of a discount rate to render values comparable over time. It i s es s e n t i a l , "that the maximum refers to t o t a l national income, i . e . , income to be derived from the programmed sectors as well as from other sectors. This implies that i t is not a matter of indifference whether e.g., a project is chosen which leads to higher savings or one (yielding the same contribution of national income) leading to lower savings. The l a t t e r project would probably somewhat depress development in the other sectors, as compared with the former. An interesting example may be the choice between a large i n d u s t r i a l plant and a set of cottage industry projects. Both projects may produce the same commodity, say t e x t i l e s , in the l a t t e r case by employing many more workers who do not save; in the former by employing managers and technicians who do" (Tinbergen, 1958). A similar but less comprehensive approach to Tinbergen's national produce (or consumption) test i s taken by UNIDO's (1972) "aggregate consumption" test, which seeks to maximize the present value of only the d i r e c t future streams of consumption s a t i s f a c t i o n derived from a given investment. UNIDO's main 35 c o n t r i b u t i o n to s o c i a l product c r i t e r i a l i e s with the step by step method i t o f f e r s f o r e v a l u a t i n g d i r e c t aggregate consumption b e n e f i t s ( s o c i a l product) of a p r o j e c t . B. Income D i s t r i b u t i o n (Equity) Goal ;> Employment Versus  R e l a t i v e Consumption C r i t e r i o n The preceding s e c t i o n d e a l t with the need to achieve economic growth as an e s s e n t i a l goal of economic development. I s h a l l now d i r e c t my a t t e n t i o n to the income d i s t r i b u t i o n g oal and to c r i t e r i a f o r investment d e c i s i o n s which i n c o r p o r a t e the e q u i t y i m p l i c a t i o n s of development o p t i o n s . Chenery et a_l. (1974) suggested that the goal of d i s t r i b u t i o n a l j u s t i c e i s more u s e f u l l y conceived of as a c c e l e r a t i n g the development of the poorer groups in s o c i e t y r a t h e r than i n terms of r e l a t i v e shares of income. Chenery and h i s c o l l e a g u e s , " v i s u a l i z e the r o l e of the s t a t e as using a v a i l a b l e p o l i c y instruments ( i n c l u d i n g the a l l o c a t i o n of investment i n p h y s i c a l and human c a p i t a l ) so as to maximize a welfare f u n c t i o n along t h i s l i n e . S t a t e i n t e r v e n t i o n of t h i s s o r t r e q u i r e s both an a n a l y s i s of the determinants of income i n poverty groups and of the l i n k a g e s between the incomes of d i f f e r e n t groups". The f a c t of income l i n k a g e s i s c r u c i a l as t a x - f i n a n c e d or other t r a n s f e r s from the r i c h to the poor may r a i s e the income of the poor, but i f they reduce savings and c a p i t a l accumulation by the r i c h , they may i n time l e a d to lower income i n the poorer groups. S t r i c t l y speaking, c o n s i d e r a t i o n s of aggregate w e l f a r e (e.g., output, consumption, etc.) cannot be separated from 3 6 questions of income d i s t r i b u t i o n . S i m i l a r l y , objectives of welfare equality cannot be separated from those of saving, investment, and economic growth. When the growth of GNP i s used as an index of performance i t i s i m p l i c i t l y assumed that a unit of additional income creates the same additional s o c i a l welfare regardless of the income l e v e l of the recipient. Put simply, a r i c h man's consumption counts as much a poor man's. On empirical, as well as on s t r i c t theoretical grounds, we know that this i s not true. The law of diminishing marginal u t i l i t y of money (a l t e r n a t i v e l y consumption) dictates that at higher consumption lev e l s the u t i l i t y per unit of consumption is less (Samuelson and Scott, 1975; Samuelson, 1983). At t h i s stage of the discussion, a question of great concern comes to mind. Leaving aside the issue of the role of income d i s t r i b u t i o n in the maximization of soc i a l welfare, one may ask, why pursue d i s t r i b u t i o n a l j u s t i c e by means of resource a l l o c a t i o n at the project level? As suggested by UNIDO (1972) "should not governments seek to bring about the desired d i s t r i b u t i o n of income through taxation, transfers, and other instruments of national f i s c a l policy and l e t projects be judged on the basis of their contribution to aggregate consumption alone?" In the face of the empirical evidence the answer must be no. "To assume that the desired r e d i s t r i b u t i o n of consumption i s to be achieved independently of projects i s to place undue reliance on f i s c a l policy - taxes and subsidies -and on the p r i c i n g p o l i c i e s used in the d i s t r i b u t i o n of the outputs of public- enterprises. In the f i r s t place, tax systems in most developing countries are weak. P o l i t i c a l , 37 i n s t i t u t i o n a l , and administrative obstacles prevent taxation of the r i c h to the point necessary to reduce consumption i n e q u a l i t i e s s u b s t a n t i a l l y . In the second place, there i s a widespread objection to increasing the consumption of the poor through d i r e c t subsidies. C r i t i c s of subsidies, ranging from conservative to r a d i c a l , argue that the enhancement of the s e l f -respect that accompanies active p a r t i c i p a t i o n in the process of increasing one's standard of l i v i n g is worth some s a c r i f i c e of aggregate consumption even i f d i r e c t subsidies would be less c o s t l y " (UNIDO, 1972). Existi n g theories of income d i s t r i b u t i o n are not too helpful in establishing an a n a l y t i c a l framework for comprehensive governmental action. Most theories are too narrowly focused on the functional d i s t r i b u t i o n of income between labour and c a p i t a l . On the whole, the inadequacies of existing theories seem to arise primarily from the vacuum in which they are defined regarding the present conditions of LDCs. While they do not agree as to the determinants of the functional d i v i s i o n of labour, t h i s i s of some importance. The theoret i c a l inadequacy appears to stem from the omission they make of other aspects of the problem. For example, i t i s of no great concern to c l a s s i c a l , n e o - c l a s s i c a l, and Keynesian economists that close to 50 percent of the poor are self-employed and do not enter the wage economy. P o l i c i e s born out of d i s t r i b u t i o n a l theory generally attempt to influence the s p l i t between wages and p r o f i t s . However, many wage earners in some LDCs are already in the middle-income groups and consequently t r a d i t i o n a l , 38 d i s t r i b u t i o n a l p o l i c i e s have the effect of impacting primarily on the upper end of the d i s t r i b u t i o n , leaving the poor unaffected (Ahluwalia and Chenery, 1974). How then should income d i s t r i b u t i o n be analyzed? The d i s t r i b u t i o n a l impact of increased economic a c t i v i t i e s w i l l occur whether we have or not a comprehensive theory that explains the process. In assessing alt e r n a t i v e investment options, the project planner must find ways to discriminate between investment options that have d i f f e r e n t d i s t r i b u t i o n a l e f f e c t s . Otherwise the whole burden of achieving equity goals would f a l l on the weak, regressive tax systems prevailing in LDCs. -- Employment (or Unemployment) - A Non C r i t e r i o n It i s important to note that, among other reasons, employment is valuable because of i t s impact on income d i s t r i b u t i o n . The reasons for encouraging employment creation, e.g., better nourishment, improved education, etc., r e a l l y relate to the fact that employment creates a source of l i v e l i h o o d for the family. In other words, employment increases the family's consumption p o s s i b i l i t y over and above that made possible by a condition of unemployment. But should employment be valued separately in the l i g h t of i t s impact on income d i s t r i b u t i o n , or should income be given a s p e c i f i c value and employment treated as a means to i t ? UNIDO's (1972) answer is that fundamentally i t makes l i t t l e difference which approach i s taken, so long as the link between employment and d i s t r i b u t i o n is e x p l i c i t l y recognized and r e a l i s t i c a l l y calculated. In practice, however, i t appears easier and superior to treat the income leve l s of the poor classes as the 39 relevant item in project appraisal. This way, the project analyst is in a direct position to judge the precise impact of employment and of other factors on income d i s t r i b u t i o n . Employment has t r a d i t i o n a l l y been considered a separate objective of economic po l i c y , as such, employment or unemployment have come to be viewed as fundamental c r i t e r i a for discriminating between investment options. One reason for this attitude is found in the above relationship between employment and income d i s t r i b u t i o n . An equally important reason relates to society's concern with labour as an important economic resource. In this context, i t is only natural to regard the existence of unemployment as a sign that valuable economic resources are being wasted. The objective of employment creation, therefore, may be legitimately related to a goal of f u l l e r exploitation of the productive potential of a nation. When viewed in this l i g h t , employment creation becomes completely subserviant to output (consumption) creation, and as such can be f u l l y incorporated into one of the s o c i a l product c r i t e r i a described e a r l i e r , e.g., a measure of aggregate consumption as advocated by Tinbergen (1958). We see then, that the employment c r i t e r i o n  is r e a l l y not representative of a development goal, but rather  of a development means and should not be considered for i t s own  sake in project evaluation. Rather, i t should be sought for the sake of what i t generates, such as: output for the productive system, income to certain people, opportunities for learning, and generally increased modernization and upward mobility for the people. 40 -- Relative Income (Consumption) Shares - A Superior  C r i t e r i o n The simplest indicator of economic welfare has, so far, been a measure of s o c i a l product. In Tinbergen's•(1958) and UNIDO's (1972) view, the appropriate measure of so c i a l product i s aggregate consumption. The growth goal, accordingly, is evaluated in terms of the project's contribution to discounted aggregate consumption. By the same token, the c r i t e r i o n for evaluating equity e f f e c t s is the d i s t r i b u t i o n of aggregate consumption among di f f e r e n t classes, income groups, and regions. The c r i t e r i o n suggested by UNIDO i s a " r e d i s t r i b u t i o n a l benefit (or cost)" computed with respect to a given group (or groups) in terms of the net aggregate consumption change accruing to that group (or groups). The indicated procedure consists of separating out certain depressed classes or groups and attaching special additional weights to the consumption enjoyed by them. The additional weights attached to the consumption of the poorer classes would originate from a set of national parameters r e f l e c t i n g the r e l a t i v e weights on the r e d i s t r i b u t i o n goal v i s -a-vis the goal of pursuing economic growth (a l t e r n a t i v e l y aggregate consumption) or some other developmental aim (such as merit wants). C. Merit Wants and Other Developmental Goals: Economic  versus Non-economic C r i t e r i a The c r i t e r i a for resource a l l o c a t i o n from the standpoint of non-economic analysis (merit wants), may be quite d i f f e r e n t from that of economic analysis. I have indicated e a r l i e r that 41 development i s more than economic growth and income d i s t r i b u t i o n , and that i t i n v o l v e s i n s t i t u t i o n a l , s o c i a l , and c u l t u r a l change as w e l l . If we seek to optimize resource a l l o c a t i o n with the o b j e c t i v e of changing key values and i n s t i t u t i o n s g e n e r a l l y c o n s i d e r e d a n t a g o n i s t i c to the development process, the investment p a t t e r n s e l e c t e d might be q u i t e d i f f e r e n t from that advocated e.g., f o r a growth o b j e c t i v e . Investment c r i t e r i a , i n these circumstances, may not correspond to r i g o r o u s economic a n a l y s i s . On the c o n t r a r y , the investment t e s t i s u s u a l l y undertaken on the s t r e n g t h of e m p i r i c a l o b s e r v a t i o n s h e a v i l y weighted by the best judgement of the decision-maker. M e r i t wants and developmental g o a l s , other than those c o n t a i n e d i n the measures of s o c i a l product and income d i s t r i b u t i o n , are o f t e n q u i t e important i n p u b l i c p o l i c y . These s o - c a l l e d non-economic development goals are more commonly a s s o c i a t e d with s o c i a l investments than with investments d i r e c t l y connected to a measure of n a t i o n a l output, e.g., GNP, GDP, consumption, e t c . However, i n i n d u s t r i a l and n a t u r a l resource investments, merit wants can be i d e n t i f i e d and may play some r o l e i n p r o j e c t e v a l u a t i o n . In these cases i t i s once again necessary for the p r o j e c t a n a l y s t to i d e n t i f y the non-economic goal pursued and to i n c o r p o r a t e t h i s goal i n t o an o v e r a l l index of performance v i a a set of n a t i o n a l weights i n s t i t u t i o n a l l y e s t a b l i s h e d . Examples of a l l o c a t i n g p r o d u c t i v e resources f o r these g o a l s are: Investment i n p r o j e c t s that transform v i l l a g e l i f e and make i t more amenable to s t r u c t u r a l change. 42 Investment in the c r e a t i o n of work p l a c e s f o r women, or other t a r g e t groups, as a means of i n c r e a s i n g t h e i r exposure to new values and new ideas. Investment i n c e r t a i n types of education or programs f o r i n c r e a s i n g s o c i a l awareness and readiness to change. Investment i n new p u b l i c i n s t i t u t i o n s and the r e s t r u c t u r i n g of o t h e r s . '-- L o c a t i o n of i n d u s t r i a l f a c i l i t i e s i n backward areas as a means of b r i n g i n g i s o l a t e d groups i n t o c o n t a c t with p r o g r e s s i v e ideas and i n s t i t u t i o n s . Investment i n p r o j e c t s that improve on the environment, support s o v e r e i g n t y , or some other higher v a l u e s of the n a t i o n . Some of these non-economic c r i t e r i a may at times c o n t r a d i c t economic c r i t e r i a . N e v e r t h e l e s s , i n view of the development need to f o s t e r s o c i o - c u l t u r a l and i n s t i t u t i o n a l change as w e l l as economic change, these c r i t e r i a cannot be ignored. The p r o j e c t planner i s , t h e r e f o r e , f o r c e d i n t o f i n d i n g o b j e c t i v e means by which to compare the d i f f e r e n t c r i t e r i a i n v o l v e d . T h i s w i l l u s u a l l y take the form of n a t i o n a l weights which when a p p l i e d to the economic and non-economic c r i t e r i a serve to aggregate them i n a s i n g l e i n d i c a t o r of performance. In the absence of an a p p r o p r i a t e set of n a t i o n a l weights, a not uncommon occurrence i n LDCs, the planner may have to l i m i t h i s e v a l u a t i o n to a t e s t of economic c r i t e r i a and present only h i s best r e l a t i v e estimate of p o t e n t i a l "merit want e f f e c t s " . In such circumstances, i t would be l e f t up to the decision-maker to d i s c r i m i n a t e s u b j e c t i v e l y between the economic and non-economic 43 performance of each project and choose the best option. 4.3. Concluding Remarks I have indicated that the question of appropriate c r i t e r i a for investment decisions is extremely complex. There are issues of development goals, development constraints, and development means that obscure the framework for defining investment c r i t e r i a . Furthermore, the rationale for resource a l l o c a t i o n is highly dependent on the kind of economic analysis being undertaken, which may be of the macro, project, or technical kind. In LDCs the choice of optimum resource a l l o c a t i o n is made increasingly d i f f i c u l t by the uncertainties that surround the determinants of development and s o c i a l welfare, and the pre v a i l i n g market imperfections, e x t e r n a t i 1 i t i e s , and disequilibrium prices which are more the rule than the exception. In addition, before a superior c r i t e r i o n can be chosen, the development planner must f i r s t l y and c a r e f u l l y distinguish between the s t a t i c and dynamic aspects of the problem, micro and macro-economic e f f i c i e n c y , and between economic and non-economic investment c r i t e r i a . It may be obvious by now that the issue of investment c r i t e r i a is not a matter of designing appropriate c r i t e r i a , but one of resolving c o n f l i c t s among c r i t e r i a . The main reason for subjecting a set of projects to the test of public investment c r i t e r i a i s to make project choice subject to a consistent set of accepted objectives of national p o l i c y . As stated in the UNIDO (1972) guidelines for project evaluation, "the choice of one project rather than another must be viewed in the context of 44 the i r t o t a l nat ional impact, and th i s impact has to be evaluated in terms of a consistent and appropriate set of ob jec t ives" . The avoidance of a complete dichotomy between project choice and nat ional planning should be a matter of add i t iona l concern when evaluating a l te rnat ive investment opt ions. When one project is chosen over another, "the choice has consequences for employment, output, consumption, savings, foreign exchange earnings, income d i s t r i b u t i o n , and other things of relevance to nat ional ob ject ives" . The purpose of project eva luat ion, that is of test ing with investment c r i t e r i a , is to see whether these consequences taken j o i n t l y are des i rab le in the l i g h t of the object ives of nat ional planning and u l t imate ly in the context of the development goals . PART II CONCEPTUAL BASIS OF DEVELOPMENT PLANNING 46 1 . INTRODUCTION During the last century there has been a rapid evolution from a society dominated by l a i s s e z - f a i r e , to one where state intervention is accepted to varying degreees in many aspects of everyday l i f e . We now see that governments play an undisputed role in the educational and health programs of nations; organize, finance, and control transportation systems; hold majority ownership positions in telecommunications, power, and other industries; and generally steer the economy with unparalleled freedom. The obvious j u s t i f i c a t i o n for this intervention l i e s with the i m p l i c i t goal behind public policy, which i s generally accepted as being the maximization of s o c i a l welfare. It is this need to maximize the well-being of nations that motivate governments to intervene in economic a c t i v i t i e s that, u n t i l recently, were exclusively in the private domain. As i t has been demonstrated, time and time again, the normal interplay of private actions and market forces often results in situations which reduce overal l national welfare, and which can only be improved by means of a control mechanism - planning (Glasson 1974). 47 2. THE NATURE OF DEVELOPMENT PLANNING The verb "to plan" is usually understood to mean the act of making a plan of ground, buildings; or designing a structure to be constructed; or scheming, arranging beforehand a procedure or program. Planning can be meant to refer to physical planning -physical design, or to general planning - the action of taking thought to determine an action or series of actions beforehand (Hall 1970). Major features of general planning include a sequence of actions which are designed to solve problems in the future. Although the planning problems may vary, they tend to be primarily of an economic or s o c i a l nature. S i m i l a r l y , the planning period is not uniform and tends to vary according to the type and le v e l of the planning a c t i v i t i e s . However, a l l general planning follows the same sequential process which, according to Glasson (1974), involves the following stages: - the i d e n t i f i c a t i o n of the problem; - the formulation of general goals and, more s p e c i f i c a l l y , of measurable objectives r e l a t i n g to the problem; - the i d e n t i f i c a t i o n of possible constraints; - the projection of the future s i t u a t i o n ; - the generation and evaluation of alternative courses of action; and - the production of a preferred plan which, in i t s generic form, may include any policy statement or strategy as well as a d e f i n i t i v e plan. This process is relevant not only to economic planning but to problems as personal as organizing one's holidays, choosing 48 the shortest route between two points, or laying a strategy for competitive sports. As suggested by Friedmann (1965), "planning i s primarily a way of thinking about s o c i a l and economic problems, planning is oriented predominantly toward the future, is deeply concerned with the re l a t i o n of goals to c o l l e c t i v e decisions and st r i v e s for comprehensiveness in policy and program. Wherever these modes of thought are applied, there is a presumption that planning i s being done." Within the f i e l d of general planning i t i s possible to include a wide variety of planning a c t i v i t i e s . One of these a c t i v i t i e s i s development (economic) planning. Four essential d i s t i n c t i o n s are necessary for a good understanding of the meaning and scope of development planning. F i r s t , a d i s t i n c t i o n must be made between physical planning and economic planning. The difference between these two types of planning has been a constant source of confusion in regional development planning. It should be clear that while physical planning i s concerned with the development of an area's physical structure, e.g. power f a c i l i t i e s , roads, land use, economic planning i s interested in the economic make-up of an area and i t s o v e r a l l l e v e l of prosperity (Higgins, 1962; Glasson, 1974). Secondly, a d i s t i n c t i o n must be made between a l l o c a t i v e and innovative planning. A l l o c a t i v e planning is primarily concerned with co-ordination, resolving c o n f l i c t s , and ensuring that the existing system is t i c k i n g over e f f i c i e n t l y through time in accordance with evolving p o l i c i e s . Sometimes, i t is referred to as regulatory planning as i t involves the month-to-month regulation of the economy using f i s c a l and monetary po l i c y . Innovative planning, instead, is not merely concerned with e f f i c i e n t functioning of present systems, but with 49 improving/developing the system. It i s , therefore, concerned with introducing new goals and attempting to mold change on a larger scale. This i s what is more appropriately known as development planning which implies a change in welfare from the exi s t i n g situation by means of innovation, induced mutation, or permutation in the socio-economic base. Of course, as with physical and economic planning, there is a great deal of overlap between the two and a development planning action may, and quite often w i l l , involve both a l l o c a t i v e and innovative aspects (Glasson, 1974). Thirdly, a difference exists between multiple or single objective planning. Planning may be undertaken with a single objective in mind or with multiple objectives. While an economic development plan may, and frequently does, include a physical plan, a physical plan never incorporates an economic plan. Physical planning i s often undertaken with a single objective in mind, whereas development planning usually incorporates multiple objectives (Hall, 1970; Hoover, 1975). F i n a l l y , a d i s t i n c t i o n i s necessary between indicative and imperative planning. While indicative planning simply presents guidelines and i s e s s e n t i a l l y advisory in nature, imperative or command planning incorporates s p e c i f i c d i r e c t i v e s (Glasson, 1974). For the most part, development planning w i l l generally include both ind i c a t i v e and imperative c h a r a c t e r i s t i c s . However, from the standpoint of project planning, which i s e s s e n t i a l l y imperative in nature, a command planning approach w i l l usually p r e v a i l . Development planning i s not merely a projection of current 50 trends into the future, nor i s i t budgeting, general programming, or an aggregation of sub-programs. Rather, i t i s a creative act, invention and design, incorporating a system of interrelated decisions for change which must be handled sequentially or in p a r a l l e l within an anticipatory decision process, and demanding simultaneously both an attitude of pessimism and optimism from the planner (Ackoff et a_l. , 1962; Ackoff and Rivett, 1976). The pessimism derives from the calculated and inborn feeling of the planner that i f nothing i s done (planned), s o c i a l welfare w i l l only deteriorate. The optimism, on the other hand, follows the planner's b e l i e f that intervention can prevent things from being as bad as they would otherwise be. Development planning, therefore, is a process with no natural end point. The planner can only try to follow a planning process converging to p r a c t i c a l (temporary) termination points. This concept of planning continuity, unfortunately, has too often been disregarded or lacking e n t i r e l y from the development planning process. Plans have frequently been prepared implying they have long term v a l i d i t y , thus imposing a very i n f l e x i b l e development program, in a situation that i s , by nature, f l e x i b l e (Waterston, 1969a; Vente, 1970). At the most general l e v e l , development planning is a creative a c t i v i t y that encourages a nation's development. To be e f f i c i e n t and r a t i o n a l , development planning must, above a l l , encourage people's development. In accordance with the accepted d e f i n i t i o n of development outlined e a r l i e r in Section I.2.1., this would imply fostering a gradual, systematic s t r u c t u r a l 51 transformation of the economy, soc ie ty , p o l i t y , and cu l ture of a nation to permit the se l f -generat ing and se l f -perpetuat ing use and advancement of the people's p o t e n t i a l . This and no other should be the concern of the planner faced with the task of regional or nat ional development. 52 3. WHY PLAN DEVELOPMENT? Development planning has been practiced for thousands of years. It is tempting to explain i t away by simply stating that human beings have a natural.urge to plan, and that planning is a part of their organizational make-up. This would be the psychologist's approach which, according to Glasson (1974), would set planning up as one of the basic s o c i a l drives of society - a drive which i s not b i o l o g i c a l l y inborn, but which is learned in society, and upon the s a t i s f a c t i o n of which rests the survival of society. However, there are reasons other than psychological for planning development. Amongst these are: - The need to i n t e r n a l i z e the frequent e x t e r n a l i t i e s in our present day economies. The most relevant examples in this regard are found in the e f f o r t s made to minimize the negative environmental impacts of resource development, and to plan p o l l u t i o n abatement. - The need to alloca t e resources for production on the basis of real demand. The free market system of our western societi e s functions according to e f f e c t i v e demand not real demand. This must be controlled i f we are going to avoid the paradox of having a market demanding more luxury items be produced when there i s i n s u f f i c i e n t drinking water for a l l . - Most important of a l l , the need to implement a h o l i s t i c attitude towards development, which stems from the fact that individual human beings working towards their own good, do not necessarily maximize s o c i a l welfare. This pa r t i c u l a r fact i s well i l l u s t r a t e d by the case of a 53 motorist t r a v e l l i n g along a mountainous highway and confronting some rocks blocking his path. Human nature w i l l generally compel this motorist to skip the rocks and continue, in spite of the fact that i t would have required only a few minutes to stop and move the rocks out of the way. By passing through, he has imposed a slowdown equivalent to a t o t a l of several hours on a l l motorists following. Watt (1973) pointed out that the advocates of development planning have a two-fold reason. F i r s t , they wish to achieve a very d i f f e r e n t d i s t r i b u t i o n of consumption amongst the population than would have been possible through a policy of l a i s s e z - f a i r e • It is assumed that, in a complete free market economy, resources and products would be allocated according to individual's preferences, incomes and wealth, and private company's assets, i n i t i a t i v e and technology. But with planning, these influences could be changed to adjust to a higher concept of s o c i a l welfare. Second, they believe that, with planning, superior s o c i a l goals and a better economic performance (more e f f i c i e n t productive a c t i v i t i e s ) could be attained. For this to happen, however, resource use and consumption would need to be co-ordinated and in more dramatic situations s t r i c t l y controlled or r e s t r i c t e d . Current views on development planning are numerous and diverse and by no means i s there a universally accepted approach to carrying out the planning a c t i v i t y . After many decades of intensive research and heated debate on the subject, development economists remain divided as to the best means for inducing 54 development. Among others, famous advocates of planned development are Tinbergen, Lewis, and Waterston. Hirschman (1958, 1967) supported a similar approach, but stresses simple planning that economizes on decision making and the t o t a l duration of the process. Stolper (1966) viewed planning as indispensable for optimum resource a l l o c a t i o n and proposes less elaborate procedures and a new approach when appropriate quantitative data are lacking. Among those c r i t i c a l of planning, Jewkes (1968) was outspoken, emphasizing the time consuming aspects of planning and the i n e f f i c i e n c i e s of bureaucratic centralized decision making. He argued that a f u l l y centralized economy carr i e s out planning on the basis of incomplete information, and by making l i t t l e or no allowance for the wants of the individual is inherently wasteful and r e s t r i c t i v e of the human s p i r i t . The r e a l i t y of the world's current economic make-up i s , nonetheless, one in which every nation u t i l i z e s a mixture of centralized planning and free enterprise to carry out i t s economic a c t i v i t i e s . A l l that varies, and what i s normally open to an east-west debate, i s the optimum composition of the mixture (Cairncross 1969). As far as the LDCs are concerned, the decision seems to have been taken to adopt a largely planned approach to economic development. Furthermore, i t i s now widely accepted that while the many virtues of free enterprise should not be lost to the t h i r d world, a co-ordinated approach to the eradication of structural poverty i s both essential for, and complementary to, an optimum performance of Adam Smith's (1784) i n v i s i b l e hand. 55 4. FUNDAMENTALS OF DEVELOPMENT PLANNING 4.1. The Planning Problem The nature of development planning, in a m a t e r i a l i s t i c sense, is simply a matter of producing more goods and services of the right kind, for consumption and/or further investment at the right time. In thi s admittedly narrow sense of development, governments seeking to improve a nations' welfare by planning, face a dichotomous problem. F i r s t , the primary aspect of development planning is one of iden t i f y i n g the most suitable (productive) opportunities for al l o c a t i n g the country's scarce productive resources, and choosing income d i s t r i b u t i o n p o l i c i e s that maximize present and -future s o c i a l welfare. Investments must be chosen which lead to an expansion in productive capacity either d i r e c t l y or through foreign trade, or through an increase in so c i a l c a p i t a l , i.e. education, t r a i n i n g , and better health (Watt 1973). The second most important question of development planning is that of devising p r a c t i c a l methods for mobilizing a l l available resources to the most desirable a c t i v i t i e s . That i s , to the investment areas selected in the f i r s t step. There may be resources owned by the state and these w i l l have to be mobilized by administrative action. Comparatively, the resources of the private sector w i l l need to be mobilized by means of inducements, including f i n a n c i a l and f i s c a l concessions, and long term agreements which provide the right investment atmosphere (Tinbergen 1967, Waterston 1969a). The strategic 56 factor i s investment or, more precisely, productive investment. Consequently, the problem of development planning is one of ensuring that there w i l l be s u f f i c i e n t productive investment into such a c t i v i t i e s as to provide for the most rapid growth of the productive (al t e r n a t i v e l y consumptive) potential of a nation (Lange 1961). A further requirement is to encourage a f a i r d i s t r i b u t i o n of output amongst the population, and to provide for merit (developmental) wants, which even though they may be economically unmeasurable are, nevertheless, an important part of s o c i a l welfare (UNIDO 1972, Chenery et a l . 1974). 4.2. The Requirements for Success From the discussion in Sections II.2 and II.3 i t should be clear that a development plan, to be successful, must s a t i s f y several important requirements. F i r s t of a l l , there is a need for careful study and analysis. Any action on a large scale requires detailed preparation, and t h i s i s p a r t i c u l a r l y true in the formulation of development plans. Second, great care should be taken to ensure that the component parts of a development program form a coherent and co-ordinated e n t i t y . These precautions are essential for maintaining consistency, avoiding large scale waste and disorganization. It is one of the main purposes of development planning to provide coherence and co-ordination at a l l l e v e l s . Development planning must supply an overa l l view of the pattern of a nation's future development. In doing t h i s , i t must show the possible and most desirable development of the national 57 product and i t s components, that i s , p r o d u c t i o n and imports of the v a r i o u s i n d u s t r i a l groups, as w e l l as t h e i r d e s t i n a t i o n which may be consumption, investment, exports, or p u b l i c expenditure. T h i r d , c e r t a i n s u p e r i o r s t a t i s t i c a l and mathematical techniques developed d u r i n g the l a s t few decades can and should be used i n the p r e p a r a t i o n of the f u t u r e s c e n a r i o s r e p r e s e n t i n g the planned development of the economy. While mathematical techniques such as l i n e a r and dynamic programming, mode l l i n g and s i m u l a t i o n can be u s e f u l , they are not an a l t e r n a t i v e to common sense. They do, however, supplement common sense and i n terms of h a n d l i n g the vast amounts of economic data, o f f e r an expedient way f o r maximizing or o p t i m i z i n g s p e c i a l f e a t u r e s of development. Fourth, development plan n i n g must, above a l l , encourage c o n s i s t e n c y of thought and u n i f o r m i t y of c r i t e r i a . If a s i n g l e most d e s i r a b l e c h a r a c t e r i s t i c of good p l a n n i n g were to be chosen, i t would undoubtedly be c o n s i s t e n c y i n o b j e c t i v e s and means of development. In the simplest terms, t h i s aim of c o n s i s t e n c y would be r e f l e c t e d i n the use of f a c t s and f i g u r e s that are p r a c t i c a l and r e a l i s t i c but, most of a l l , uniform in terms of the n a t i o n a l s i t u a t i o n . For example, the t o t a l p r o d u c t i v e resources - land, l a b o r , and c a p i t a l - to be employed must not exceed the a v a i l a b l e q u a n t i t i e s of these r e s o u r c e s . On the other hand, goods and s e r v i c e s produced must be s o l d ; and i n order that t h i s may happen, t h e i r p r i c e s must be i n balance with market c o n d i t i o n s and, most im p o r t a n t l y , must r e l a t e to f a c t o r c o s t s and f a c t o r p r o d u c t i v i t y . Imports w i l l normally be 58 e s s e n t i a l , but they must be paid for by exports or by the inf lux of foreign c a p i t a l and so f o r t h . On another sphere, taxes co l l ec ted by government, together with loans and d e f i c i t f inanc ing, need to be s u f f i c i e n t to meet a l l publ ic expenditures planned. And, natura l l y , l inkages and other re la t ions between groups of economic a c t i v i t y need to be sorted (balanced) out to ensure that a global input output equi l ibr ium u l t imate ly occurs in the economy. F i n a l l y , there i s an element of d e t a i l and completeness in a development program which good planning must always s t r i v e to provide. Consistency in the absence of completeness would be r e l a t i v e l y useless as the dec is ion maker would be hard-pressed to p o l i t i c a l l y implement a s i m p l i s t i c gross development plan, which poses as many questions as i t answers. 5. THE PLANNING PROCESS AND THE ROLE OF PROJECTS 59 The outstanding c h a r a c t e r i s t i c s of a good development plan are consistency of thought, uniformity of c r i t e r i a and, naturally, f e a s i b i l i t y . The aim of development planning is to arrive at a framework of figures that describes the possible, most desirable development of an economy (Tinbergen 1958, 1967). But, how should t h i s model picture of the economy be drawn? And what p r i n c i p l e s should one adhere to in order not to v i o l a t e the concepts of consistency, uniformity, and f e a s i b i l i t y ? The following section attempts to answer these questions and to provide some insight on the role of project planning within the general programming framework. 5.1. The State of the Art in LDCs In the hope of achieving the major structural changes required by development, most LDCs have opted for some form of national planning. The approach to development planning has not been uniform throughout the LDCs. It has varied with the degree of development, the sociocultural background, and the p o l i t i c a l orientation of each nation. Those with limited planning s k i l l s have undertaken project by project planning only. However, due to a lack of co-ordination among projects, this approach has frequently been wasteful, inconsistent, and generally weak. Further up the scale, in an attempt to carry out more rigorous planning, some LDCs have undertaken sectoral or even regional planning. This approach, while representing an improvement over 60 the previous method, has not been s u f f i c i e n t l y complex to include a co-ordinating mechanism of a l l plans. A few nations, armed with a higher standard of l i v i n g and more experienced planning organizations have attempted comprehensive planning; which aims at the preparation of consistent plans by means of an integrated multi-sectoral strategy that studies development at a national, sectoral, and project l e v e l (Watt 1973). For obvious reasons th i s p a r t i c u l a r approach has proved to be the most sat i s f a c t o r y (Stolper 1962, Waterston 1969a). The general approach in LDCs i s presently to publish long, medium, or short term development plans. These plans normally represent the culmination of the planning e f f o r t and provide development guidelines for ten, f i v e , and one year periods, respectively. The most frequently published are the fiv e year medium-term plans, usually prepared in co-ordination with one year action plans which are revised annually to the end of the planning period. Occasionally, an LDC w i l l prepare a 10 to 20 year in d i c a t i v e or perspective plan, and attempt to implement i t . These plans, however, are not too popular with decision makers. The reason has to do with their long-term duration which, by extending beyond the p o l i t i c a l l i f e of the originating administration sets their completion for the benefit of a d i f f e r e n t r u l i n g group (Waterston 1969b). The propensity to publish development plans in LDCs is usually high, regardless of the q u a l i t y of their planning organizations and the depth of their analysis. The reasons for t h i s special f i x a t i o n on publishing plans can be traced to more complex factors than simply a desire to apply economic theory to development. Vente 61 (1970) suggested that, beyond possible technical aspirations, LDCs prepare these plans f i r s t l y , as a reflex idea of "good housekeeping;" a condition deeply rooted in the minds of the e l i t e by centuries of c o l o n i a l administration. Secondly, there is often a substantial amount of pressure applied by f i n a n c i a l i n s t i t u t i o n s or donor nations on LDCs, to produce these plans. Development plans are required as a prerequisite to credit financing or grant aid. Thirdly, and of major incidence, there is the p o l i t i c a l motivation of governments which use development plans as a means of gaining support for their administration. A development plan i s , in t h i s sense, l i v i n g proof of the government's intention to further national development. The national planning organization varies from country to country, but, generally, i t is centralized in a single powerful o f f i c e d i r e c t l y dependent from the president or chief executive o f f i c e r . While minor levels of sectoral planning may be undertaken by d i f f e r e n t ministries and/or regional organizations, i t i s the central planning agency that completes the process and, usually, has the l a s t word. The role of the planning s t a f f i s , as i t should be, limited to the design and evaluation of alternative development options. Decision making, on the other hand, f a l l s within the realm of the p o l i t i c i a n s (Waterston 1962a, b; 1963; 1969a). 62 5.2. Elements of Procedure I have indicated e a r l i e r that the aim of development planning i s to arrive at a framework of figures that describes the possible, most desirable development of an economy. Economic growth and development i s the aggregate result of the individual performances of each productive sector. Some sectors w i l l have a high potential for growth and for contributing development, and others a low p o t e n t i a l . Total aggregate performance w i l l be dependent on the nation's capacity to employ the resources of each sector productively and in coordination with the rest of the economic system. To achieve development i t w i l l be necessary for resources to be allocated according to s t r i c t welfare and developmental c r i t e r i a , namely economic e f f i c i e n c y , economic equity, and merit wants. At a m a t e r i a l i s t i c l e v e l , considerable and sustained growth in aggregate consumption w i l l be required, and t h i s w i l l be dependent on the extent to which the maximum productive capacity of each sector i s achieved. As far as the planning process i s concerned, th i s must ultimately be done by a systematic i d e n t i f i c a t i o n of opportunities and a careful design and evaluation of these opportunities as "projects." A project being defined as the smallest unit of a c t i v i t y that can be planned, analyzed, and administratively implemented (Watt 1973). The key factor in development planning i s socio-economic change. Therefore, a plan w i l l be more or less desirable depending on how favourable a picture of the economy i t can project. From past experience, the economist planner knows that there are levers available to government by which developmental 63 i n f l u e n c e s can be e x e r t e d . Consequently, p l a n n i n g needs to be concerned, at a very p r a c t i c a l l e v e l , with ways and means of p r o v i d i n g a c l e a r , r e a l i s t i c p i c t u r e of f u t u r e development. T h i s task i s reduced to f i n d i n g an expedient method by which to determine the most l i k e l y socio-economic consequences r e s u l t i n g from the use of a l t e r n a t i v e l e v e r s . In p l a n n i n g development, i t i s o f t e n u s e f u l to conceive the problem of resource a l l o c a t i o n in terms of a l t e r n a t i v e  development options or programs; With more a l t e r n a t i v e s to choose from, the accuracy of the " t r i a l and e r r o r " procedure (used i n l i e u of a s i m u l a t i o n model) n a t u r a l l y i n c r e a s e s , and the p r o b a b i l i t i e s of f i n d i n g a "second best" a l t e r n a t i v e grow p r o p o r t i o n a t e l y . Furthermore, a s t r a t e g y of a l t e r n a t i v e development options o f f e r s undisputed advantages fo r program e v a l u a t i o n , d e c i s i o n making, and implementation. I t permits a comparison of the r e l a t i v e m e r i t s of each o p t i o n and o f f e r s an a l t e r n a t i v e s o l u t i o n i f some of the f a c t o r s turn out to be l e s s , or more fav o u r a b l e , than i n i t i a l l y a n t i c i p a t e d . Each of the a l t e r n a t i v e development o p t i o n s may be d e f i n e d and e v a l u a t e d with the a i d of computerized mathematical techniques or simply by hand. The l a t t e r approach, however, may normally be too l a b o r i o u s , p a r t i c u l a r l y i n view of the advantages of computer data p r o c e s s i n g now a v a i l a b l e world wide. In i t s best form, development p l a n n i n g i s a c o n t i n u i n g process that cannot be p a r c e l l e d up i n t o separate time p e r i o d s . Plans are ends to which the p l a n n i n g process tends. While plans may, and normally w i l l , converge to p r a c t i c a l (temporary) t e r m i n a t i o n p o i n t s , the p l a n n i n g process has no n a t u r a l end 64 point. Development plans must be revised p e r i o d i c a l l y in the l i g h t of new information that may become avai l a b l e . As new data is generated, largely through new surveys and the monitoring of past investment decisions, the future expectations connected with a given plan must be altered accordingly. Revisions in short term plans must be undertaken with due consideration of longer term goals, i f consistency i s to be maintained for a s u f f i c i e n t l y long period of time to affect development. But, above a l l , there must be a feedback of information from projects through to national plans and vice versa "... and this requires f l e x i b i l i t y at every stage of planning to ensure a l l information flows to the correct centres" (Watt 1973). 5.3. Stages in Planning I have mentioned e a r l i e r that the basic problem of development planning is the organization of resources for economic growth and s o c i a l advancement. In short, resources must be used to achieve a maximum of long term s o c i a l welfare (see Section 1.3). In t h i s point, the planning problem in LDCs does not d i f f e r much from that in MDCs except, perhaps, that in the l a t t e r there exists a more sophisticated market and i n s t i t u t i o n a l framework that f a c i l i t a t e s the normal interplay of productive factors. As indicated in Section II.5.1., some LDCs may plan at one l e v e l only, the project l e v e l . Others, with better staff and i n s t i t u t i o n s may plan at two l e v e l s , the project and the sectoral l e v e l . The most advanced, however, follow a "comprehensive" approach which operates at three l e v e l s : project, sectoral, and national. 65 The f i r s t two planning methods, namely the "project-by-project" and the "project-sectoral", suffer from serious technical d e f i c i e n c i e s , i.e. uncoordinated c r i t e r i a ; lack of consistency in terms of l o c a l , regional, and national wants; d i f f i c u l t y in assigning development p r i o r i t i e s ; tendency to implement projects in accordance with the a v a i l a b i l i t y of funds, and easiness of design and appraisal; and impossibility of checking for t o t a l input a v a i l a b i l i t y . Comprehensive planning, on the other hand, offers a much improved alternative for inducing development. The basic approach of thi s most advanced planning method i s to make a rat i o n a l determination of project p r i o r i t i e s with reference to the entire economic framework, and to ensure development consistency and f e a s i b i l i t y . Decisions on alternative development options (projects) are not made in is o l a t i o n but are based on a knowledge of alternative uses to which resources, c a p i t a l , and manpower could be put (Watt 1973). Figure 1 i l l u s t r a t e s the process of comprehensive planning. Stolper (1962) and Watt (1973) describe the main features of comprehensive planning as follows: - Attempts are made to relate projects to one another. The process is e s s e n t i a l l y consistent and uniform throughout. - Direct, i n d i r e c t , and induced projects effects are included. It i s h o l i s t i c and comprehensive. - Attempts are made to integrate a l l projects into a national development plan and to relate public and private investment to a uniform development po l i c y . It employs uniform, consistent means of development, and balances out factor use. Figure 1. Stages In Comprehensive Planning. MACRO PHASE ESTIMATED MACRO ECONOMIC PERFORMANCE DEVELOPMENT PLAN DECISION MAKING DEVELOPMENT CRITERIA APPRAISAL AND TEST FOR CONSISTENCY JL MIDDLE PHASE Discrete A c t i v i t y MICRO PHASE ESTIMATED PROJECT PERFORMANCE ESTIMATED SECTORAL-REGIONAL PERFORMANCE Continuous A c t i v i t y (Planning from Below) (Planning from Above) 67 A requirement that has been stressed, but seldom complied with, i s that long range comprehensive planning should be f l e x i b l e . Many LDCs have often taken the view that a 5 or 10 year program i s a blueprint for the future, which should be applied to the l e t t e r with l i t t l e or no modifications. However, nothing could be more ruinous for a LDC than to lose sight of the need for f l e x i b i l i t y in planning. It i s a p r i n c i p l e of good long range planning to provide primarily a sense of d i r e c t i o n and consistency. But i t must, as far as public expenditures are concerned, be translated annually into the d e t a i l s of a budget. In other words, there i s the requirement to reassess the plan p e r i o d i c a l l y in the l i g h t of the then available information and available resources to fine tune the most suitable approach to development (Tinbergen 1958 and 1967). A p a r t i c u l a r l y interesting approach to comprehensive planning, which has been succesfully adopted by some LDCs, i s Tinbergen's (1967) idea of "planning in stages." In Tinbergen's view, development planning has become s u f f i c i e n t l y complex to warrant dealing with the a c t i v i t y in "stages". The suggested breakdown i s a planning in three stages, namely a "macrophase", "middle phase", and "microphase." The underlying requirement i s of the nation to be divided into sectors or industries, and into geographical regions in the widest sense, which make up the basic planning elements (units) of the "middle phase." In turn, both these subdivisions are considered in greater d e t a i l in the "microphase", i . e . the project l e v e l . The macro or national picture i s further polished in two steps, each providing a s p e c i f i c limited view of desirable changes. The planning output 68 of one phase both feeds and r e s t r i c t s the output of the other two. It is a natural, essential feature of "planning in stages" that the results of a l a t e r stage may lead to a revision of an e a r l i e r stage, and vice versa. Therefore, the t o t a l number of steps in the planning process may, and often w i l l , surpass the three stages envisioned in the f i r s t instance. In the view of Tinbergen 1967): "The macrophase has to show the most desirable development in macro-economic terms, without subdivision into regions or industries. In t h i s phase, then, only such o v e r a l l figures are used as the national product and c a p i t a l , the t o t a l investments, imports and exports and state expenditure. In the middle phase, the picture res u l t i n g from the macrophase i s made clearer by distinguishing a number of sectors or industries and a number of regions. F i n a l l y in the microphase, an even clearer and more detailed picture i s obtained by dealing with separate projects and even smaller geographical regions, perhaps even separate r u r a l and urban d i s t r i c t s . " The central d i r e c t i o n , and the sense of where an economy is going must come from an o v e r a l l view of the economy. This is the central task of the macro-phase in comprehensive development planning. The comprehensive development plan is generally thought of as the culmination of the national planning process. It i s simultaneously "a p o l i t i c a l symbol of a governmental commitment to economic and s o c i a l progress; a general strategy for re-modelling the economy and i n s t i t u t i o n s ; a basis for decisions on individual investment; and a standard by which to measure r e s u l t s " (Chenery 1965). It is a "focus not a substitute for decision making" (Cairncross 1961). As indicated e a r l i e r , the basic task of comprehensive planning i s to ensure consistency, f e a s i b i l i t y , and to allow for rati o n a l decision making (see Section II.4.2). 69 5.4. The Role of Projects According to some scholars, the most p r a c t i c a l method for gaining a good sense of dire c t i o n i s through the use and development of national account s t a t i s t i c s - the design and study of the macro planning phase, and the d e f i n i t i o n of the macro plan. Other economists, however, disagree diametrically with this approach. Whereas, they recognize there i s a role to be played by the macro phase or even the middle phase, they point to an equal or greater role for the micro or project phase. The need is not only for an average ov e r a l l consistency in the economy, but also for real s p e c i f i c consistency at the resource (project) l e v e l . In fact, they argue, that without including a "planning from below" (bottom up) approach - as opposed to having a "planning from above" (top down) approach only (Waterson 1969a) - the l i k e l i h o o d of achieving s p e c i f i c a l l o c a t i o n a l consistency i s rather limited i f not impossible. The question which continues to haunt the planning profession, however, i s which p a r t i c u l a r approach should take precedence. The development arena remains divided on the issue and no consensus among economists seems imminent in the near future. In this limited sense, the role of the project phase in comprehensive planning is not clear, as i t becomes a matter of subjective preference which approach i s to be given precedence. The j u s t i f i c a t i o n for detailed planning at the project level i s , nonetheless, founded in reasons that go beyond those of ideology. Regardless of the degree of planning sophistication, good strong project planning becomes an act of p r a c t i c a l necessity in LDCs. Development requires plans and plans require 70 projects. Without projects ( s p e c i f i c investment options), improved resource a l l o c a t i o n cannot be attained e f f e c t i v e l y . As is self evident, any macro development plan must materialize as a set of individual projects, largely in the private sphere but not exclusively. It i s axiomatic that good projects w i l l require good project planning. The role of the micro (project) phase i s further strengthened by the argument that i t is es s e n t i a l to a smooth, e f f i c i e n t functioning of the feed-back and feed-forward process of comprehensive planning (Tinbergen 1967 and Waterston 1969a). Naturally, i f no comprehensive planning mechanism is available, a rather common occurrence in LDCs, project planning becomes esse n t i a l to development, as the nation must rely solely on project-by-project information for rat i o n a l decision making and program formulation. A. Plans Require Projects A sound development plan w i l l generally require a great deal of knowledge about existing and potential projects. This i s self evident for a short-term operational plan (3-5 years) which, among other things, must contain s o l i d feasible plans for public expenditures in d i f f e r e n t sectors; but i t i s just as v a l i d for a medium or long term perspective plan covering a period of 10-20 years (Waterston 1969a, L i t t l e and Mirrlees 1974). The role of project design and evaluation is paramount to good perspective planning. A perspective development plan w i l l lay down target rates for the growth of national output, consumption, and investment. For a plan to be consistent and f e a s i b l e , a lot of s p e c i f i c 71 self-knowledge (input-output i n f o r m a t i o n ) i s r e q u i r e d . I f t h i s self-knowledge i s to be gained, the c r i t i c a l a p p r a i s a l of p r o j e c t s (investment a l t e r n a t i v e s ) , past and f u t u r e , cannot be n e g l e c t e d . The p o i n t i s made that good r e a l i s t i c p lans can h a r d l y be formulated i n the absence of s u b s t a n t i a l p r o j e c t p l a n n i n g , or without adequate economic a p p r a i s a l of a v a i l a b l e investment o p t i o n s . T h i s p r e r e q u i s i t e would seem obvious. However, the f a c t remains that i t has been almost u n i v e r s a l l y n e g l e c t e d . B. P r o j e c t s Require Plans The p o i n t i s made above that plans r e q u i r e p r o j e c t s . However, i t i s e q u a l l y important that p r o j e c t s r e q u i r e p l a n s . The best economic a p p r a i s a l of p r o j e c t s can only be made i n the context of a p l a n . To s e l e c t the r i g h t investment o p p o r t u n i t i e s , the a n a l y s t must have a f a i r l y good knowledge of the demand f o r v a r i o u s outputs. But how can he f o r e c a s t the demand f o r any commodity or s e r v i c e unless he has some i n s i g h t about how the economy w i l l develop? And, i n t u r n , how can he estimate f u t u r e economic progress without adequate knowledge concerning the medium and long term plans of government? The need f o r having some idea as to how the economy w i l l perform i s paramount to the p r o j e c t i o n of demand f o r most commodities. However, i t i s e s p e c i a l l y important when p r o j e c t i n g the demand f o r i n t e r m e d i a t e and c a p i t a l goods. For in these products, the government's plans f o r i n d u s t r y development and investment play a major r o l e i n determining f u t u r e requirements. Furthermore, the extent to which t o t a l 72 demand w i l l be met by imports or by domestic production, depends on government p o l i c i e s towards custom duties, foreign exchange rates and, generally, import controls and domestic taxation. These, in turn, are inextricably t i e d to the designs the government has in store for the economy in the national development plan ( L i t t l e and Mirrlees 1974). By the same token, the supply picture cannot be projected without some knowledge of future economic progress. Estimates of the real costs of a project require an understanding of the magnitude of the r e l a t i v e s c a r c i t i e s at work. C. Projects and Comprehensive Planning The role of projects and of project planning is c r u c i a l to the development and economic progress of nations, regardless of the l e v e l of sophistication employed in the planning process. Nevertheless, when dealing within a framework of comprehensive planning, the marginal value of project planning and the need to study s p e c i f i c investment options in as great d e t a i l as i s p r a c t i c a l l y possible, r i s e s dramatically. "Comprehensive planning" in general and "planning in stages" in p a r t i c u l a r , are e s s e n t i a l l y processes of successive approximations. Due to severe data l i m i t a t i o n s , especially in the f i e l d of s o c i a l u t i l i t y , true economic optimization or a " f i r s t best" solution remains an Utopian planning dream. The i n t e l l e c t u a l framework of modern development planning i s i n t e r -industry economics and welfare economics. The planning techniques developed by Tinbergen (1958, 1967), Sen (1960), Chenery (1974) and others, must necessarily be adapted to suit 73 l o c a l circumstances. No one acquainted with the planning environment in LDCs can possibly suggest that a h o l i s t i c system of equations be set up, i t s matrix calculated and solved, to find the right answer. It i s a fact, unfortunate as i t may be, that project planning and evaluation w i l l continue to be done in many LDCs without the benefit of a comprehensive planning mechanism. Whereas, i t is beyond dispute that superior plans require good projects, the reasoning that a proper appraisal of projects, i t s e l f , requires superior plans can be overstressed. Admittedly, analysis within the framework of an ove r a l l plan may lead to better project planning than in the absence of such a plan. But thi s should never be interpreted to mean that project planning i s either impossible or useless without the benefit of informed governmental estimates about future economic development. L i t t l e and Mirrlees (1974) observed, and thi s i s supported by Stolper (1966), Tinbergen (1967), and Hirschman (1967), that without the guidance of a national plan, project design and appraisal "... w i l l probably be less good insofar as guesses have to be made about the government's own investment intentions. But, in general, one can make some guess as to the real s c a r c i t i e s which face the economy in i t s development, and put a price on them, even without the help of any attempt at overall planning. The difference is that the guess w i l l be less enlightened without such plann ing." Furthermore, the view is taken that being less enlightened need not necessarily be detrimental, as u n r e a l i s t i c macro planning has on occasion made worse demand (input) and supply (output) estimates than would otherwise have been the case. 74 6 . PROJECT PLANNING - THE REQUIREMENTS FOR A RATIONAL APPROACH The b a s i c p r o b l e m o f d e v e l o p m e n t i s t h e a l l o c a t i o n o f s c a r c e p r o d u c t i v e r e s o u r c e s so as t o i n c r e a s e t h e economic a v a i l a b i l i t y o f t h e s e r e s o u r c e s . Once t h e m a t t e r of how much c o n s u m p t i o n may be a l l o w e d i s s e t t l e d - m o s t l y a p r o b l e m of s o c i a l t i m e p r e f e r e n c e f o r c o n s u m p t i o n and of p o l i t i c a l f e a s i b i l i t y - t h e major i s s u e becomes one of i n v e s t m e n t . The q u e s t i o n w h i c h t h e d e v e l o p m e n t p l a n n e r s e e k s t o answer i s where and how t o b e s t a l l o c a t e p r o d u c t i v e f a c t o r s so as t o maximize r e t u r n s o v e r t i m e . The b e s t and most w i d e l y a c c e p t e d a p p r o a c h f o r c a r r y i n g o u t t h i s t a s k i s " c o m p r e h e n s i v e p l a n n i n g " ( s e e S e c t i o n I I . 5.3). An e s s e n t i a l s t a g e o f " c o m p r e h e n s i v e p l a n n i n g " i s t h e " m i c r o p h a s e " , t h e s t a g e a t w h i c h t h e s m a l l e s t a d m i n i s t r a t i v e e l e m e n t s of t h e d e v e l o p m e n t p r o g r a m a r e p l a n n e d . As f a r a s t h e economy i s c o n c e r n e d , t h e s e e l e m e n t s a r e e i t h e r s e p a r a t e i n v e s t m e n t p r o j e c t s o r c o m p l e x e s o f p r o j e c t s w h i c h n o r m a l l y a r e t h e r e s p o n s i b i l i t y of a s i n g l e a d m i n i s t r a t i v e body. In e s s e n c e , a l l d e v e l o p m e n t p l a n s must m a t e r i a l i z e a s i n v e s t m e n t p r o j e c t s , and i t i s w i t h i n t h e s e p r o j e c t s t h a t t h e d e v e l o p m e n t a l a l l o c a t i o n and r e - a l l o c a t i o n of r e s o u r c e s a c t u a l l y t a k e s p l a c e . The q u e s t i o n a r i s e s as t o how i s p r o j e c t p l a n n i n g b e s t u n d e r t a k e n ? What a r e t h e p r i n c i p l e s t h a t g o v e r n t h i s a c t i v i t y and how s h o u l d p r o j e c t s be d e s i g n e d and a p p r a i s e d t o i n s u r e t h a t an i m p r o v e d a l l o c a t i o n of r e s o u r c e s does t a k e p l a c e ? The f o l l o w i n g s e c t i o n s d e a l w i t h t h e s e and o t h e r i m p o r t a n t m a t t e r s of p r o j e c t p l a n n i n g . 75 6.1. Standard Method for Establishing P r i o r i t i e s F i r s t of a l l , projects should f i t into the development plan, both at the national and regional l e v e l . A frequent handicap in project selection is the lack of uniformity in c r i t e r i a between government min i s t r i e s (usually representative of economic sectors) and/or regional development agencies (usually responsible for l o c a l planning and administration). This lack of uniformity would seem to arise from c o n f l i c t i n g present and past p o l i t i c a l decisions; from preconceived ideas about one type of investment; or from p a r t i c u l a r l y strong p e r s o n a l i t i e s among planners and administrators (Tinbergen 1967, Waterston 1969). The end result i s quite often an u n j u s t i f i e d and t o t a l l y inappropriate preponderence of certain types of projects that severely d i s t o r t the development of the LDCs. For example, there are nations which subsidize a g r i c u l t u r a l transportation and power production, not for v a l i d economic aspirations but for u n r e a l i s t i c security and sovereignty reasons. In other instances, governments of less p r i v i l e g e d nations, influenced by p o l i t i c a l and technological dependence on the MDCs, have adopted a heavy industry ( c a p i t a l intensive) development that i s important more for i t s related prestige and p o l i t i c a l gains than for any substantial economic reason. At times i t is an acceptable practice for newly elected governments not to complete the projects i n i t i a t e d by their predecessors. The planning scenario regarding project design appraisal and evaluation i s often quite dismal in LDCs. The picture described above is unfortunately much more common than is readily admitted. Not that the MDCs are free from turpitude in t h i s 76 regard, but r i c h n a t i o n s with powerful c o m p e t i t i v e f r e e market economies can a f f o r d s e v e r a l more plann i n g mistakes than weak, poor, and d e s t i t u t e c o u n t r i e s . One way or another the planning weaknesses of LDCs lead to widespread and q u i t e unwarranted economic wastage, and p r o v i d e e x c e l l e n t ammunition for those committed to the demise of the government's pl a n n i n g r o l e . The problem c l e a r l y c a l l s f o r an adequate - uniform method for d e s i g n i n g , a p p r a i s i n g , and e v a l u a t i n g p r o j e c t s put forward by a l l concerned m i n i s t r i e s ; whether of a p u b l i c or p r i v a t e concern, or of a " p r o d u c t i v e " or "nonproductive" nature. Admittedly, a completely uniform a p p r a i s a l system may be  impossible to implement, mainly due to the unmeasurable elements i n v o l v e d i n d i f f e r e n t investment o p p o r t u n i t i e s . To compare the welfare i m p l i c a t i o n s of a school with those of a road, h o s p i t a l , or p o r t f a c i l i t y w i l l always be d i f f i c u l t , but at l e a s t i t can be made c l e a r what i n c r e a s e i n m a t e r i a l output i s s a c r i f i c e d i f one p r o j e c t i s chosen over another. A step removed from the i n d i v i d u a l economic e v a l u a t i o n of an investment o p t i o n , which may or may not be e n t i r e l y f e a s i b l e on i t s own, i s the " h o l i s t i c assessment" which measures the d e s i r a b i l i t y of a p r o j e c t (or set of p r o j e c t s ) i n the context of the h i g h e s t p o l i c y of a n a t i o n . The development planner must at a l l times remember that investment p o l i c y i s only a part of  g e n e r a l p o l i c y and that the s e l e c t i o n of investment p r o j e c t s cannot be d i v o r c e d from other d e c i s i o n s . As suggested by Tinbergen (1958), " i t i s the combination of d e c i s i o n s which must be the most e f f i c i e n t avenue to the goal s e t . " The i m p l i c a t i o n i s f o r the p r o j e c t s to f i t i n t o the 77 production program for the economy as a whole. They should not demand more resources than can possibly be made available considering the commitments in other productive a c t i v i t i e s . At the same time, they should not duplicate the provision of goods and services to markets supplied by alternative and cheaper domestic sources of supply. The development program should be made-up by projects with the potential to make the highest contribution to the nation's welfare. The methods by which this goal can be achieved w i l l be discussed l a t e r . The test that must be applied may be referred to as the "national welfare tes t " ; i f welfare i s defined to mean production or consumption, i t may be more appropriate to speak of the "national product or  consumption test" (Tinbergen 1958, UNIDO 1972, L i t t l e and Mirrlees 1974; see also Section I.4.2.). 6.2. Comprehensive Appraisal of Economic Consequences When submitting investment project's to a comprehensive welfare test, i t i s f i r s t necessary to c o l l e c t and generate relevant information concerning a l l measurable regional and national consequences (costs and benefits) of project development. For instance, what additions to national product (consumption) can be expected? What changes in other welfare parameters, e.g. income, are probable? What additional -indir e c t s o c i a l gains and costs are involved? A technical description of the project would be a pre-requisite to the computation of a l l relevant inputs and outputs. 78 A. Direct, Indirect, and Secondary Consequences For the effects to be cor r e c t l y inputed i t i s essential to undertake an economic appraisal of a l l project consequences, as these w i l l not always be obvious or properly understood by the decision makers. Project consequences are usually grouped into three major categories, namely the "direct", " i n d i r e c t " , and "secondary" (induced) consequences. A l l three include changes in aggregate income (consumption), in the d i s t r i b u t i o n of income, and in other variables known to influence the economic well-being of a nation. "Direct consequences" are those d i r e c t l y related to the inputs and outputs of a project, be they of a market or non-market type. In other words, a l l opportunity costs and s o c i a l benefits a r i s i n g from a p a r t i c u l a r investment need to be included whether they are of a private or public kind and internal or external in nature (UNIDO 1972, Layard 1974, L i t t l e and Mirrlees 1974). "Indirect consequences" are those expected in the absence of further changes in t o t a l national income. They are the adjustments on the supply side required by the projects, and by and large they w i l l be found in the stages of production v e r t i c a l l y related to the new production i . e . , the stages preceding or succeeding the process involved (Tinbergen 1958). It is important to note that the backward and forward linkages of investment spending need not necessarily amount to an e f f i c i e n c y gain in the economy. The net benefit gain w i l l only occur i f the gross s o c i a l benefits generated in related economic a c t i v i t i e s exceed the opportunity costs incurred in 79 these a c t i v i t i e s . In fact, further polishing t h i s interpretation, i t i s possible for a net benefit effect to arise even i f there i s no i d l e capacity present in the linked sectors (forward and backward) of economic a c t i v i t y , and new productive f a c i l i t i e s must be b u i l t to meet the additional demand. However, for t h i s to happen, i t is clear that there would need to be i d l e resources (land, labor, or capital) available in the economy, in which case the new output would be considered as a surplus gain over and above the opportunity costs of a l l inputs. A net benefit (e f f i c i e n c y ) e f f e c t would arise but only in proportion to the amount of i d l e resources employed in the new f a c i l i t i e s (Haveman and K r u t i l l a 1968, Haveman and Margolis 1970). "Secondary consequences" are the changes in productive a c t i v i t i e s (an consequently in national income and consumption) resul t i n g from dire c t and indi r e c t changes in output (income). The consumption and investment spending induced by the incremental income of the d i r e c t l y and i n d i r e c t l y employed factors leads, in turn, to increased output and yet to more income. The respending of a given amount of new income may, in t h i s manner, induce a t o t a l output that is higher than the o r i g i n a l production. This phenomenon is normally referred to as the "income m u l t i p l i e r " effect (as opposed to the "technical m u l t i p l i e r " process c o n t r o l l i n g the indirect consequences), and is b a s i c a l l y responsible for most secondary consequences of resource investment. Income m u l t i p l i e r behavior i s the result of individuals' tendency to spend a portion of their increased income. This tendency to spend i s both a result of personal 80 preferences and of the economic structure of the nation. The induced spending that matters for m u l t i p l i c a t i o n purposes is that on a l l f i n a l production, including goods and services for investment (Samuelson 1939, Chenery 1952, Tinbergen 1958, Isard 1960, Evans 1969, Fromm and Tauban 1973). The secondary changes in output are not always important and may be i n s i g n i f i c a n t i f a l l productive factors happen to be f u l l y employed when the d i r e c t and indirect income changes occur. In LDCs, however, th i s is unlikely to be the case, as there are generally abundant resources (labor and sometimes land) that continuously remain i d l e . There i s , therefore, a good case for considering secondary effects in these countries. Due to the complexities of the m u l t i p l i e r process and potential lack of data, i t could be that only a rough computation of secondary consequences i s possible. In such circumstances i t may be necessary to resort to a gross estimate proportional to the d i r e c t and indirect income created. A more refined, i f s t i l l rough, computation can be made i f the project(s) in question i s l i k e l y to influence major variables of economic development, e.g. the savings' rate due to a change in the d i s t r i b u t i o n of income. This could be the case where the choice is between a labor intensive and a c a p i t a l intensive project, as i t i s evident that with the l a t t e r , far more w i l l be saved than with the former. In these circumstances one need only have some idea of the average savings rate in the economy and of i t s effect on development to be able to discern some of the welfare implications of a new saving pattern. Of course, i t i s impossible to determine the exact welfare 81 implications of a l l d i r e c t , i n d i r e c t , and secondary project consequences. It i s unavoidable that proxy welfare parameters w i l l have to be used to evaluate these consequences. The fact that the measurement of s o c i a l u t i l i t y remains imperfect demands that this p a r t i c u l a r approach be taken. Therefore, the best we can hope for is to use "economic welfare" c r i t e r i a for assessing project consequences (see Section 1.3.2. and 1.4.2). The essential feature of good project planning, however, i s not "precision", i t is "comprehensive consistency" throughout the study of a l l cost-benefit e f f e c t s . What distinguishes comprehensive project planning from other more primitive forms is i t s global approach to factor use. Investment options are matched against each other and against the available resources. Only in this manner can a less b e n e f i c i a l option be shown to be undes i rable. B. Toward a Comprehensive Appraisal Methodology Project consequences are generally not easy to appraise. The degree of d i f f i c u l t y increases as one moves from the assessment of dire c t effects to the indirect and secondary e f f e c t s . T r a d i t i o n a l tools of appraisal, such as cost-benefit analysis, have worked mostly within the realm of direct project consequences. The methods for studying these d i r e c t e f f ects have been polished to the point where they can provide f a i r l y good estimates of both e f f i c i e n c y and equity implications of investment (Dasgupta and Pearce 1972, Layard 1974). Furthermore, the methodology has been improved to deal with the appraisal of s o c i a l costs and benefits under the special 82 conditions of underdevelopment (UNIDO 1972 and 1978, L i t t l e and Mirrlees 1974). The state of the art regarding the study of indire c t and secondary cost-benefit e f f e c t s , however, i s not as nearly developed. Although economists have recently attempted to integrate the appraisal of a l l project consequences - d i r e c t , i n d i r e c t , and secondary - into a general theory of public investment planning, they have limited their concern to questions of resource e f f i c i e n c y in more developed economies (Haveman and K r u t i l l a 1968, Haveman 1970, Fromm and Taubam 1 973) . The methodology for appraising project consequences in LDCs, encompassing more complex welfare c r i t e r i a than just aggregate e f f i c i e n c y and bearing down on the higher int e r r e l a t e d character of the economy, remains lacking. Whereas economists have been p r o l i f i c in th e i r study of development planning "from above" and in t h i s a c t i v i t y have incorporated "dynamic e f f i c i e n c y " as well as "dynamic equity" c r i t e r i a , they have f a i l e d to be as productive and comprehensive in their study of "planning from below." As a result, there i s no clear h o l i s t i c methodology available for appraising projects in LDCs which f u l l y considers the dynamic in t e r r e l a t i o n s h i p s of the economy. Nonetheless, there are available individual tools of analysis from which an improved methodology of th i s nature can be structured. For example, there i s a wealth of techniques of regional and national economic planning that can, and should, be used to further the appraisal of projects beyond the study of direc t e f f e c t s . They include economic base theory, aggregative macro-economic models such as the Harrod-Domar and two gap 83 model, disaggregative sectoral models of a simultaneous equation - behavioral nature, input-output analysis, and Keynesian and non-Keynesian mu l t i p l i e r analysis (Leontief 1936, Isard 1960, Miernyk 1965, Vernon 1966, Haveman and K r u t i l l a 1968, Evans 1969, Islam 1970, UNIDO 1972, Glasson 1974). Admittedly, the appraisal task i s not easy, p a r t i c u l a r l y in the l i g h t of the p r a c t i c a l i m p o s s i b i l i t y of c a r d i n a l l y measuring every cost-benefit effect and the paucity of appropriate data. In many LDCs the d i f f i c u l t i e s w i l l be compounded by the primitive condition of the planning i n s t i t u t i o n s and the lack of long range economic planning and forecasting. But this in i t s e l f is not a v a l i d excuse for continuing to cut short the appraisal of projects and avoiding to prepare a more comprehensive statement of developmental consequences. The indirect and secondary cost-benefit effects of investment must be, as far as possible, evaluated. This i s , in my view, the very essence of comprehensive development planning: that one must never lose sight of a project's i n t e r r e l a t i o n with other parts of the economy. Relevant questions concerning the long term welfare of the nation must be asked in such a manner that when answers are forthcoming, they can be f i t t e d into other development programs, into budgets, manpower tr a i n i n g schedules, balance of payments estimates and, i f need be, into economic policy concerning incentives for private sector p a r t i c i p a t i o n in the development process. I am not preaching perfection, but only the beginning of an attempt to view resource investment in  toto. If the use of sophisticated tools of analysis is impractical, the planner-analyst w i l l have to resort to other 84 more p r i m i t i v e methods of a p p r a i s a l . But, somehow, the d e c i s i o n maker must be provided with an estimate, i f necessary, a gross estimate of l i k e l y p r o j e c t consequences on the whole economy. T h i s i s b e t t e r than no comprehensive p i c t u r e at a l l . The f i n a l d e c i s i o n concerning which, p r o j e c t ( s ) to implement may s t i l l be based l a r g e l y on the s t r e n g t h of the d i r e c t e f f e c t s which, a f t e r a l l , are the ones for which more r e l i a b l e estimates can be prepared. At times, however, major e x t e r n a l economies induced by otherwise not so f a v o r a b l e d i r e c t e f f e c t s , may h e l p o v e r t u r n a d e c i s i o n concerning a given investment o p t i o n . A l s o , i f a p r o j e c t needs to be chosen out of two or more, showing equal or s i m i l a r d i r e c t economic gains, the d e c i s i o n would be f a c i l i t a t e d by the a v a i l a b i l i t y of a comprehensive impact statement. The c h o i c e would then be made on the b a s i s of which p r o j e c t o f f e r e d the most f a v o r a b l e i n d i r e c t and secondary economic consequences. C. L i m i t a t i o n s i n A p p r a i s i n g I n d i r e c t and Secondary  Consequences For many years now, the economic p r o f e s s i o n has been advancing the f r o n t i e r of econometrics. The advent of advanced mathematical and computerized techniques of a n a l y s i s have taken t h i s s c i e n c e to unprecedented l e v e l s of s o p h i s t i c a t i o n ; and systems a n a l y s i s i s now a standard t o o l of economic f o r e c a s t i n g and p l a n n i n g . Despite t h i s tremendous surge in knowledge and i n the c a p a c i t y to process data, econometrics has yet to provide a method by which c o s t - b e n e f i t a n a l y s i s can become dynamic and, thus, f r e e of the l i m i t a t i o n s imposed by the assumption of p a r t i a l e q u i l i b r i u m . The s o l u t i o n to the problem i s i n c r e d i b l y 85 complex. A c o n d i t i o n of general e q u i l i b r i u m , to be s u c c e s s f u l l y a p p l i e d , would r e q u i r e almost p e r f e c t knowledge concerning f a c t o r markets and f a c t o r c o s t s f o r a l l economic a c t i v i t i e s in the s h o r t , medium, and long term. T h i s knowledge would need to extend to the world economy at l a r g e , as modern input-output i n t e r r e l a t i o n s h i p s do not end with p o l i t i c a l boundaries. T h i s i s t r u l y a mammoth economic s i m u l a t i o n e x e r c i s e which would r e q u i r e a g i g a n t i c system of equations and a matrix which we are, as yet, incapable of a n a l y s i n g , l e t alone of c o n c e i v i n g . It i s q u e s t i o n a b l e , even i f we had the c a p a c i t y to c a r r y out t h i s e x e r c i s e , whether i t would be worthwhile to do so. Continuous t e c h n o l o g i c a l change, which i s f o r e v e r a l t e r i n g p r o d u c t i o n p o s s i b i l i t y schedules, and the exogenous p l a n n i n g i n f l u e n c e s of i n d i v i d u a l n a t i o n s , would almost i n s t a n t a n e o u s l y i n v a l i d a t e a "general e q u i l i b r i u m " s o l u t i o n . T h e r e f o r e , i t i s not s u r p r i s i n g that s c h o l a r s of c o s t - b e n e f i t a n a l y s i s continue to. t r e a t t h i s technique w i t h i n the framework of a " p a r t i a l e q u i l i b r i u m " assumption. I t i s t h i s c o n d i t i o n which s e v e r e l y r e s t r i c t s the extent to which the a n a l y s t can a p p r a i s e the many e x t e r n a l economies and diseconomies of investment. D. I n d i c a t e d Procedure In view of the circumstances j u s t d e s c r i b e d , what then should be an a p p r o p r i a t e a p p r a i s a l procedure? In my o p i n i o n , the evidence p o i n t s to a r a t h e r obvious and, i n some ways, simple answer. A g l o b a l a p p r a i s a l n e c e s s i t a t e s a c a r e f u l comparison of a) the s i t u a t i o n c r e a t e d by the execution of the p r o j e c t , with b) the s c e n a r i o that would have p r e v a i l e d had the 86 project not been undertaken. It i s , therefore, essential to have some concrete knowledge, or good estimate, of the potential development of the economy as a whole. This i s why macro planning, i f at a l l feasible, must play an important role in the procedure. Economists, however, are generally quick to point out that th i s kind of project appraisal strategy should only be interpreted in a p r a c t i c a l way. Within reason, i t i s more the approach which matters than every conceivable d e t a i l . As suggested by Tinbergen (1958) "... above a cert a i n l i m i t the better i s the enemy of the good." A major factor which w i l l necessarily influence the appraisal of project consequences i s the qu a l i t y and nature of existing information. To a large degree, the qu a l i t y of available s t a t i s t i c s and the potential for c o l l e c t i n g additional data in LDCs is d i r e c t l y related to the stage of development of the host nation. The development planner must be prepared to make allowances in instances where data i s found lacking. Furthermore, he might be c a l l e d upon to subjectively estimate economic parameters for which real figures are not available and/or impossible to compute. More often than not, data c o l l e c t i o n w i l l heavily tax both the imagination and knowledge of the planner. In these circumstances, seeking information p a r t i c u l a r l y from l o c a l entrepreneurs, c i v i l servants, and the public who are close to the problem could be most enlightening. On the other hand, there is a tendency to over-emphasize the influence of the quality of data on the type of analysis required. More guesswork is obviously needed i f the data i s poor, but the logic of the planning process i s not necessarily di f ferent. 6.3. Use of Accounting Prices - The Social Approach A. The Case for Accounting Prices in Project Evaluation It is a tenet of development planning that "accounting prices" must be used to value the inputs and outputs associated with public investments. The s o c i a l approach inherent to a l l government planning requires that s o c i a l cost and benefits be used to appraise project consequences. The essence of the "accounting" p r i n c i p l e is that i t does not accept that actual expenditures adequately measure s o c i a l costs, and actual receipts s o c i a l benefits. But i t does accept that actual expenditures and receipts can be suitably adjusted so that the difference between them w i l l properly r e f l e c t a s o c i a l gain or loss. The prices used, after the indicated adjustments have been made, are c a l l e d " s o c i a l accounting prices," but are often referred to as "shadow prices" or simply "accounting prices" (Dasgupta and Pearce, 1972; Layard, 1974; L i t t l e and Mirrlees, 1974; Gregersen and Contreras, 1979; Gregersen, 1980). There are two essential features of a free price mechanism i f i t i s to work f u l l y in society's interest. The f i r s t i s that the prices of the f i n a l outputs (consumer goods and services) should r e f l e c t the contribution of each product to the " s o c i a l value of consumption." This is largely a matter of consumers' sovereignty, and of consumption d i s t r i b u t i o n among individuals 88 and through time. The second f e a t u r e i s that f a c t o r (input) p r i c e s should r e f l e c t t h e i r "economic s c a r c i t y . " In other words, the p r i c e s of resources should r e f l e c t t h e i r "opportunity c o s t " ( b e n e f i t s foregone) as determined by the resource' marginal revenue product i n the next best a l t e r n a t i v e use. For t h i s to happen, market p r i c e s need to f r e e l y balance the supply and demand f o r each p r o d u c t i v e f a c t o r , and must be equal to the f a c t o r s ' marginal s o c i a l c o s t . U n f o r t u n a t e l y , there are many reasons why the fr e e p r i c e mechanism does not operate n e a r l y as w e l l in LDCs. They i n c l u d e rampant i n f l a t i o n , o v e r v a l u a t i o n of domestic currency, imperfect f a c t o r markets, e f f e c t s of l a r g e p r o j e c t s , e x c e s s i v e p r o t e c t i o n from o u t s i d e c o m p e t i t i o n , and a host of a d d i t i o n a l economic i m p e r f e c t i o n s that go from ignorance and i n e r t i a to p o l i t i c a l i n s t a b i l i t y and dependence. The c e n t r a l p o i n t to be made concerning the use of "shadow" or "accounting" p r i c e s i n p r o j e c t a p p r a i s a l i s that market p r i c e s i n LDCs, p a r t i c u l a r l y those of the pr o d u c t i o n f a c t o r s (land, l a b o r , and c a p i t a l ) , may di v e r g e from t h e i r " i n t r i n s i c v a l u e " or " s o c i a l worth." That i s to say, market p r i c e s d i f f e r from the value that would p r e v a i l i f (a) the investment o p t i o n being c o n s i d e r e d were a c t u a l l y undertaken, and (b) e q u i l i b r i u m e x i s t e d i n the market as a r e s u l t of a p e r f e c t economic s i t u a t i o n , e.g. p e r f e c t c o m p e t i t i o n i n f a c t o r and product markets, p e r f e c t knowledge and f o r e s i g h t , n e u t r a l i n n o v a t i o n , and no e x t e r n a l i t i e s . In s h o r t , there are two major reasons f o r r e p l a c i n g market p r i c e s by accounting p r i c e s . F i r s t l y , the execution of the p r o j e c t i s i n i t s e l f l i k e l y to i n f l u e n c e f a c t o r 89 and product p r i c e s , p a r t i c u l a r l y when l a r g e investments are con temp la ted . Second ly , there e x i s t in the wor ld at l a r g e , but e s p e c i a l l y in LDCs, a number of " fundamenta l d i s e q u i l i b r i a " which d i s t o r t the market p r i c i n g mechanism. A good example of t h i s a r t i f i c i a l a l t e r a t i o n i s ev idenced by the e x i s t e n c e of open and d i s g u i s e d l abor unemployment wh ich , to a l a r g e e x t e n t , r e s u l t s from c o n s i d e r a b l y h igher wage r a t e s than " i n t r i n s i c ( e q u i l i b r i u m ) l e v e l s " would war rant . On the o ther hand, i t can be observed tha t the p r i c e of investment funds , as determined by the market , w i l l c o n s i s t e n t l y be underva lued wi th r espec t to i t s t rue s o c i a l p r o d u c t i v i t y . T h i s happens as a r e s u l t of h i g h l y imper fec t c a p i t a l marke ts , a c o n d i t i o n f u r t h e r compounded in the case of f o r e i g n funds by a p r e v a i l i n g fundamental d i s e q u i l i b r i a in the n a t i o n a l ba lance of payments. The e s s e n t i a l r a i s o n d ' e t r e fo r u s i n g " a c c o u n t i n g p r i c e s " in p r o j e c t a p p r a i s a l , t h e r e f o r e , i s to p rov i de a t e c h n i c a l ins t rument by which to assure the f u l l use , and no more than the f u l l use , of the a v a i l a b l e f a c t o r s of p r o d u c t i o n . They are the p r i c e s at which supply e x a c t l y meets demand; they r ep resen t the va lue of the net s o c i a l marg ina l p roduc t to be ob t a i ned from each f a c t o r s i n ce investments showing no s u r p l u s above the cos t of employed f a c t o r s (measured at " a c c o u n t i n g p r i c e s " ) , w i l l be marg ina l as to t h e i r acceptance or r e j e c t i o n (T inbergen 1958). In a good c o u n t e r p o i n t to i t s own argument, T inbergen r a i s e d the e s s e n t i a l q u e s t i o n of " . . . whether i t would not be more n a t u r a l to l e t market p r i c e s f i n d t h e i r e q u i l i b r i u m - perhaps by a b e t t e r economic p o l i c y g e n e r a l l y - than to app ly such a r t i f i c i a l concepts as a c coun t i ng p r i c e s and to make the a p p r a i s a l of investment p r o j e c t s " undu l y " c o m p l i c a t e d . " 90 H i s answer was r e a l i s t i c and p r a c t i c a l i n , so f a r , that he admitted, "... that t h i s may be p o s s i b l e f o r a few markets, such as the f o r e i g n exchange market, but that f o r others i t i s i m p o s s i b l e . The s h i f t s in i n t r i n s i c values to be expected from the r e a l i z a t i o n of the investment p a t t e r n , by t h e i r very nature, w i l l only take p l a c e a f t e r the investment i s completed, and the fundamental e q u i l i b r i a can be helped only by a prolonged process of investment. Making wages equal to t h e i r i n t r i n s i c value would mean imposing on the workers a l e v e l s u b s t a n t i a l l y lower than p r e s e n t l y p r e v a i l s and having the r e v o l u t i o n r i g h t now." B. Accounting P r i c e s and P r o j e c t Implementation Whereas the t h e o r e t i c a l l e g i t i m a c y of "accounting p r i c e s " appears to be w e l l founded, a matter of p r a c t i c a l i n t e r e s t a r i s e s concerning how to a c t u a l l y ensure the execution of an investment as i n d i c a t e d by the accounting p r i c e t e s t . " In s h o r t , the answer i s t h a t governments and t h e i r agencies are f r e e to c a r r y out or encourage any investment, even i f i t shows to be f i n a n c i a l l y u n p r o f i t a b l e . They can, t h e r e f o r e , and w i t h i n l i m i t s , behave as the "accounting t e s t " would r e q u i r e them t o . An important l i m i t a t i o n i n t h i s regard a r i s e s from budgetary c o n s t r a i n t s which p o l i t i c a l l y may be d i f f i c u l t to s o l v e . However, p r o j e c t implementation remains p o s s i b l e and w i t h i n the realm of d e m o c r a t i c a l l y accepted means of inducement. P r i v a t e e n t r e p r e n e u r s can, and u s u a l l y w i l l , r i s e to the c h a l l e n g e of new investment o p p o r t u n i t i e s , but w i l l r e a c t only i f accounting p r i c e s are made a r e a l i t y to them. Among other means, investment can be encouraged by v a r i o u s kinds of s u b s i d i e s and taxes, tending to s t i m u l a t e the use of abundant, and discourage the use of s c a r c e , r e s o u r c e s . The a l l important requirement, 91 however, i s f o r p r i v a t e and s o c i a l p r o f i t to c o i n c i d e . E a r l i e r i n t h i s chapter, the q u e s t i o n was r a i s e d as to the fundamental p r i n c i p l e s that should r e g u l a t e p r o j e c t a p p r a i s a l i n LDCs. I t i s my c o n t e n t i o n , as I have argued throughout, that r e a l i s t i c p r o j e c t p l a n n i n g i n these c o u n t r i e s should only be undertaken w i t h i n the framework of three e s s e n t i a l c o n d i t i o n s . a. There must be a "uniform method" ( c r i t e r i o n f o r e s t a b l i s h i n g p r i o r i t i e s ) ; b. There must be a "comprehensive a p p r a i s a l " of p r o j e c t consequences, namely d i r e c t , i n d i r e c t , and secondary; and c. There must be an "accounting a p p r a i s a l " of a l l q u a n t i t a t i v e economic impacts. T h i s i s the i n e s c a p a b l e c o n c l u s i o n to which the observed evidence l e a d s , and requirement sine qua non on which development p r o j e c t p l a n n i n g must r e s t . The suggested methodology f o r t h i s p a r t i c u l a r approach i s d e s c r i b e d i n d e t a i l i n Part III below. 92 PART I I I R E S O U R C E D E V E L O P M E N T P L A N N I N G - S T R A T E G Y , S E Q U E N C E AND A P P R A I S A L METHODOLOGY• 93 1. INTRODUCTION Part I of the t h e s i s d e a l t with the problem of development and underdevelopment, the a p p r o p r i a t e goals of economic development, and the c r i t e r i a f o r a p p r a i s i n g resource a l l o c a t i o n in order to maximize the r a t e of r e g i o n a l development. Part II i n tu r n , d e f i n e d the nature of development plann i n g , o u t l i n e d the reasons f o r pl a n n i n g development i n LDCs and suggested g u i d e l i n e s f o r undertaking t h i s a c t i v i t y i n the most > e f f e c t i v e way. The r o l e of p r o j e c t planning w i t h i n the process of n a t i o n a l comprehensive p l a n n i n g was d e f i n e d and the fundamentals f o r s u c c e s s f u l p r o j e c t design and a p p r a i s a l were e s t a b l i s h e d . It was concluded that a b e t t e r approach to p r o j e c t p l a n n i n g r e q u i r e d a standard method f o r e s t a b l i s h i n g p r i o r i t i e s , a comprehensive a p p r a i s a l of economic consequences, and the use of a ccounting p r i c e s . Improved n a t u r a l resource u t i l i z a t i o n and development i s not a unique f i e l d of development p l a n n i n g . L i k e i n any developmental f i e l d a f f e c t i n g the m a t e r i a l ends of s o c i e t y , the  problem reduces to a matter of investment (or disinvestment)  and, as such, to a qu e s t i o n of optimum resource a l l o c a t i o n . The  goals and c r i t e r i a which govern the development of a g r i c u l t u r e , f o r e s t r y , f i s h e r i e s , mining, or water resources are i d e n t i c a l to  those that r e g u l a t e investment i n other economic a c t i v i t i e s . These goals and c r i t e r i a were reviewed at l e n g t h i n Part I. S i m i l a r l y , the e s s e n t i a l nature of n a t u r a l resource p l a n n i n g i s in no way d i f f e r e n t from that of general p l a n n i n g - the act of t a k i n g thought to determine an a c t i o n or s e r i e s of a c t i o n s beforehand. Nor, i s the need f o r t h i s a c t i v i t y l e s s v i t a l than 94 s o c i e t y ' s urge to c o o r d i n a t e , r e s o l v e c o n f l i c t s and, g e n e r a l l y , ensure that the socio-economic environment i s working e f f i c i e n t l y . The general economic i m p e r f e c t i o n s of the LDCs, which set the stage f o r v a r y i n g degrees of government  i n t e r v e n t i o n i n p r o d u c t i v e a c t i v i t i e s , whether in a s u b s i d i a r y r o l e or otherwise, provide the j u s t i f i c a t i o n f o r a s i m i l a r  (planning) i n t e r v e n t i o n i n resource development. Part II of the t h e s i s reviewed the conceptual b a s i s of development plan n i n g and e s t a b l i s h e d ground r u l e s f o r undertaking p r o j e c t p l a n n i n g i n LDCs. C o n s i s t e n t with the s t a t e d o b j e c t i v e s of the t h e s i s , i t remains to s t r u c t u r e a p r a c t i c a l methodology f o r p l a n n i n g n a t u r a l resource development in accordance with the r u l e s and p r i n c i p l e s e s t a b l i s h e d i n P a r t s I and I I . T h i s methodology should d e s c r i b e the fundamental procedure f o r d e s i g n i n g , a p p r a i s i n g , and s e l e c t i n g resource p r o j e c t s i n LDCs. I t then f o l l o w s that t h i s methodology must be t e s t e d f o r i t s p r a c t i c a l a p p l i c a b i l i t y . Part III below, d e a l s with the q u e s t i o n of methodology and procedure. Focusing on f o r e s t management and f o r e s t i n d u s t r y development, i t explores how to i d e n t i f y the a p p r o p r i a t e r o l e of resource investment w i t h i n the o v e r a l l development process; how to d e f i n e t h i s i n terms of s e c t o r a l - r e g i o n a l g o a l s ; how to t r a n s l a t e these i n t o o b j e c t i v e s and t a r g e t s ; and how to i d e n t i f y and a p p r a i s e p r o j e c t s w i t h i n t h i s framework. I t does not cover the o p e r a t i o n a l aspects of p l a n n i n g , nor the act of managing or completing p l a n n i n g stages a c c o r d i n g to schedule; or d i r e c t i n g human p h y s i c a l resources to execute a p l a n . Furthermore, i t i s 95 not concerned with t e c h n i c a l or o p e r a t i o n a l aspects of resource development, in t h i s case f o r e s t i n d u s t r y development, knowledge of which i s e i t h e r i r r e l e v a n t to the p l a n n e r - a n a l y s t or assumed to be a v a i l a b l e i n proper form. Part I I I , t h e r e f o r e , i s not a plann i n g manual but only a set of g u i d e l i n e s intended to provide a framework f o r pla n n i n g resource ( f o r e s t r y ) development i n a n a t i o n a l ( r e g i o n a l ) c o n t e x t . 9 6 2. IDENTIFICATION OF THE PLANNING PROBLEM(S) The p l a n n i n g problem and u n d e r l y i n g issue i s i n t h i s case how to enhance economic development by means of f o r e s t r y investments. In other words, the qu e s t i o n f a c i n g the planner i s how and how much of a n a t i o n ' s scarce p r o d u c t i v e resources should be a l l o c a t e d to timber p r o d u c t i o n a c t i v i t i e s i n a r e g i o n a l c o n t e x t . If the economy under study i s c e n t r a l l y planned, the answer to the pl a n n i n g q u e s t i o n may h e l p channel d i r e c t p u b l i c investment i n t o f o r e s t i n d u s t r y development. I f , on the other hand, the economy i s market o r i e n t e d , the pl a n n i n g output should a i d the government i n p o l i c y making that encourages adequate p r i v a t e investments i n f o r e s t r y . That i s , investments that maximize the p o t e n t i a l c o n t r i b u t i o n of the s e c t o r to r e g i o n a l and n a t i o n a l development. In the simplest economic terms, the type of investments that g e n e r a l l y meet t h i s goal are those that p r o v i d e f o r i n c r e a s e d economic e f f i c i e n c y , improved economic e q u i t y , and some degree of s a t i s f a c t i o n of s o c i e t y ' s most p r e s s i n g merit wants (See S e c t i o n 1.3.2). But how can one a s c e r t a i n which f o r e s t r y investments have a r e a l chance of meeting these development c r i t e r i a and should, t h e r e f o r e , be s e l e c t e d f o r d e t a i l e d study and a p p r a i s a l ? The answer to t h i s q u e s t i o n must n e c e s s a r i l y come i n stages. 1. There must be a d e t a i l e d understanding of the p r o d u c t i v e f a c t o r s a v a i l a b l e f o r f o r e s t r y enhancement i . e . f o r e s t land, l a b o r , and c a p i t a l r e s o u r c e s . Among other t h i n g s , t h i s e n t a i l s having a f i r m grasp of the p h y s i c a l and socio-economic base p r e v a i l i n g i n the study area. 97 2. One must identify relevant resource development and planning opportunities. 3. A statement must be formed of reasonable planning problems and questions which lead the planner into 4. Goal d e f i n i t i o n (development t h e s i s ) , and 5. Additional data c o l l e c t i o n . F i n a l l y , 6. A l i s t of preliminary investment options is drawn up within the context of the defined planning issue and in the l i g h t of the c o l l e c t e d information. This section (III.2) deals only with steps (1), (2), and (3) leading to the d e f i n i t i o n of the relevant planning problem. Steps (4), (5), and (6) are dealt with in separate sections thereafter. 2.1. The Regional Resource Base: A Description of the Study Area. The land, labor, and c a p i t a l that constitute the forestry make-up of a regional entity are not unique or special resources from an economic standpoint. They may be physically or b i o l o g i c a l l y d i f f e r e n t from other resources but, as regards development, they must be treated, used, and allocated as a l l resources are: according to s t r i c t welfare c r i t e r i a . I say t h i s because there seems to exist in the forestry profession a trend towards treating forest resource development in i s o l a t i o n of society's most pressing economic wants, with not a small measure of subjective c r i t e r i a , and with reference to archaic concepts of u t i l i z a t i o n (Haley and Smith, 1976; Byron, 1976). The forest industries should not be viewed independently from the rest of 98 the r e g i o n a l economic make-up. They must be d e s c r i b e d and analyzed j o i n t l y with a l l other p r o d u c t i v e a c t i v i t i e s and t h e i r development should p r o p e r l y account f o r o p p o r t u n i t i e s ( b e n e f i t s ) foregone i n the r e s t of the socio-economic system. What i s r e q u i r e d at t h i s stage of pl a n n i n g i s b a s i c a l l y an overview of the r e g i o n a l economic environment i n general and f o r e s t r y a c t i v i t y i n p a r t i c u l a r . I f the o b j e c t i v e i s to improve the aggregate s i t u a t i o n r e l a t i v e to the f o r e s t s e c t o r , we can induce changes i n land use, s i l v i c u l t u r e , f o r e s t management, wood h a r v e s t i n g r a t e s , the composition of wood p r o c e s s i n g i n d u s t r i e s , the r a t e of output of these i n d u s t r i e s , manpower t r a i n i n g , technology, e t c . The l i s t i s too long to provide a comprehensive p i c t u r e . The qu e s t i o n remains, however, and that i s , what kind of land use changes, s i l v i c u l t u r e , and so on. Furthermore: how, where, and when should the change be implemented? To answer these q u e s t i o n s even in a p r e l i m i n a r y way, I propose that one must f i r s t look at the study area and become f a m i l i a r with: Regional Background Information - P o l i t i c a l and A d m i n i s t r a t i v e Overview - Geography (boundaries, s i z e , topography, c l i m a t e , hydrography, n a t u r a l resources) - Socio-Economic S t r u c t u r e ( p o p u l a t i o n , economic a c t i v i t i e s , primary and secondary p r o d u c t i o n , s e c t o r a l breakdown, investment, s o c i a l i n d i c a t o r s , r e g i o n a l d i s e q u i l i b r i a ) . The Regional Resource Base - Land Use ( a g r i c u l t u r e , f o r e s t r y , urban, e t c . ) - F o r e s t r y Development ( s i l v i c u l t u r e , management, f o r e s t i n d u s t r y , markets, p r o d u c t i v i t y , p o t e n t i a l f o r development) 99 A v a i l a b l e I n f r a s t r u c t u r e f o r Resource Development - Energy ( e l e c t r i c i t y , f u e l ) - T r a n s p o r t a t i o n and Communications (roads, r a i l , p o r t s , telecommun i c a t ions) - Economic P o l i c y and Development Environment (development p l a n , investment i n c e n t i v e s , p o l i c y c o n s i d e r a t i o n s , and d i s i n c e n t i v e s ) 2.2. Development and Planning O p p o r t u n i t i e s The important q u e s t i o n now a r i s e s as to what c o n s t i t u t e s an a p p r o p r i a t e resource development and planning o p p o r t u n i t y . While i t would be tempting to d e f i n e planning o p p o r t u n i t i e s s o l e l y i n terms of t e c h n i c a l c o n s i d e r a t i o n , e.g. mechanization of wood h a r v e s t i n g a c t i v i t i e s , f o r e s t i n d u s t r y i n t e g r a t i o n , m u l t i p l e f o r e s t land use, or o p t i m i z a t i o n of growth and. y i e l d per u n i t area, i t should be r e a l i z e d that there i s a l o t more to r e g i o n a l resource development than t e c h n i c a l o p t i m i z a t i o n . The s o l u t i o n to b e t t e r resource u t i l i z a t i o n must n e c e s s a r i l y i n c l u d e a l l r e g i o n a l f a c t o r s , those inherent to f o r e s t r y and o t h e r s . There are two sources of i n f o r m a t i o n a v a i l a b l e to the planner f o r the i d e n t i f i c a t i o n of r e l e v a n t f o r e s t r y development and p l a n n i n g o p p o r t u n i t i e s . F i r s t , there i s h i s knowledge of the nature of f o r e s t r y investments which, f o r a wide v a r i e t y of reasons, i s known to be advantageous f o r economic development. The r o l e of the wood and wood based i n d u s t r i e s i n the process of economic growth can be the i n s p i r a t i o n f o r many resource development ideas that may, i n t u r n , be amenable to p l a n n i n g . Second, there i s the a c t u a l i n f o r m a t i o n a c q u i r e d d u r i n g the p r e l i m i n a r y r e g i o n a l reconnaissance and, in l a t e r stages, which in i t s e l f i s a v a l u a b l e source of pl a n n i n g i d e a s . The 1 00 comparison of t h i s data v i s a v i s the t e c h n i c a l p o t e n t i a l of f o r e s t r y may suggest investment o p p o r t u n i t i e s that can improve the u t i l i z a t i o n of r e g i o n a l r e s o u r c e s . A. Developmental Role of F o r e s t r y A c t i v i t i e s F o r e s t s serve mankind i n MDCs in many ways and have the p o t e n t i a l to serve people of LDCs i n e q u a l l y important i f not b e t t e r ways. Peasants and u r b a n i t e s a l i k e use wood and wood based products i n some form - i n such simple household uses as f u r n i t u r e , t o i l e t paper, books, firewood, and wrapping m a t e r i a l s ; as paper and packaging i n d i v e r s e use i n o f f i c e s and s t o r e s ; and as an e s s e n t i a l component of the c o n s t r u c t i o n f o r homes, f a c t o r i e s , o f f i c e s , and t r a n s p o r t a t i o n means. In f a c t , i t i s p r a c t i c a l l y impossible to conceive of any human being, be he poor or r i c h , young or o l d , or of any race who does not use wood in some form. As suggested by Marion Clawson (1975) "... he would have to l i v e i n a cave, use stone f u r n i t u r e , burn c o a l p icked o f f the s u r f a c e of the land, and have found some nonwood s u b s t i t u t e f o r t o i l e t paper." Furthermore, a s u b s t a n t i a l part of a l l water used in homes (whether f o r d r i n k i n g , cooking, or washing), i n i n d u s t r i a l p l a n t s , and f o r m i s c e l l a n e o u s urban and r u r a l purposes ( i n c l u d i n g land i r r i g a t i o n , n a v i g a t i o n , and power generation) flows from watersheds that are l a r g e l y or wholly f o r e s t e d . A growing p o r t i o n of the p o p u l a t i o n i s engaging i n outdoor r e c r e a t i o n i n wooded areas and the f o r e s t i s the home f o r a r i c h and v a r i e d w i l d l i f e which supports and maintains our d e l i c a t e envi ronment. 101 F o r e s t s are a s t a r t i n g p o i n t f o r i n d u s t r y . L i k e a l l other n a t u r a l resources they p r o v i d e a stream of raw m a t e r i a l flows which feed and support manufacturing process of many kinds. Wood which i s manufactured and s t o r e d in a f o r e s t i s perhaps the most v e r s a t i l e n a t u r a l raw m a t e r i a l known to mankind. At times, wood i s used in shapes and forms c l o s e to i t s n a t u r a l s t a t e . Most o f t e n , however, wood undergoes primary, secondary, and t e r t i a r y manufacturing before i t i s made f i t for f i n a l consumption. From s e e d l i n g s grow timber crops and from these crops logs are harvested and s u p p l i e d to m i l l s . Lumber and wood f i b e r products are used i n i n d u s t r i e s ranging from house c o n s t r u c t i o n to t r a n s p o r t a t i o n , packaging and the p r i n t i n g of m a t e r i a l s , and enter economic a c t i v i t i e s at p o i n t s g r e a t l y removed from the o r i g i n a l f o r e s t stand. T y p i c a l examples of f o r e s t r y development o p p o r t u n i t i e s would be the a v a i l a b i l i t y of mature timber stands f o r i n c r e a s e d h a r v e s t i n g or the e x i s t e n c e of vacant (marginal) land amenable to a f f o r e s t a t i o n with f a s t growing p l a n t a t i o n s . Abundant r u r a l manpower may represent an e x c e l l e n t o p p o r t u n i t y f o r i n c r e a s i n g wood products manufacture with l a b o r i n t e n s i v e t e c h n o l o g i e s , or i n c r e a s e d domestic demand may o f f e r a chance f o r i n d u s t r y d i v e r s i f i c a t i o n and i n t e g r a t i o n . The optimum r a t e of f o r e s t r y investment or disinvestment i s f r e q u e n t l y a c h a l l e n g i n g q u e s t i o n worthy of d e t a i l e d p l a n n i n g , p a r t i c u l a r l y when much of the f o r e s t land i s p u b l i c l y owned or there i s a d e s i r e to open to u t i l i z a t i o n a new v i r g i n area. In LDCs with an a p p r o p r i a t e land base, s o i l s , and c l i m a t e , an i n t e r e s t i n g hypothesis to t e s t i s the p o s s i b i l i t y of expanding the commercial f o r e s t r y e s t a t e with 102 a view to increasing log or other forest industry exports for which a demand exists abroad (Arnold e_t a_l. , 1979). B. Planning Opportunities Suggested by Data It i s important to re a l i z e that major resource development opportunities, p a r t i c u l a r l y in a regional context w i l l only materialize following the i d e n t i f i c a t i o n of s p e c i f i c community requirements and, often but not always, as a result of growing s o c i o - p o l i t i c a l pressure. The i d e n t i f i c a t i o n of development and planning opportunities can be helped and ideas stimulated by asking systematic questions about the economics of the regional wood based industries. I n t e l l i g e n t , systematic, consistent and continous manipulation of the acquired data i s , in thi s regard, a pre-requisite to e f f i c i e n t resource planning. From a continuous survey, concrete development opportunities may a r i s e . I f , for example, much forest land i s found i d l e , the obvious opportunity available could be to encourage rapid a f f o r e s t a t i o n or other means of intensive forest management. If production i s short in one or two areas and raw materials are being wasted, wood products manufacture could be increased to supply the market, and so on. There are numerous p o s s i b i l i t i e s in the forest industries sector for structuring alternative schemes to improve on resource u t i l i z a t i o n . According to Watt (1973), the broad areas where there i s scope for choice include: Alternative ways of obtaining a good or service Technical processes Equipment used Alternative materials Alternative combinations of production factors Varying product quality Degree of manufacture (value added) 1 03 A l t e r n a t i v e s of s c a l e and i n t e g r a t i o n A l t e r n a t i v e s of l o c a t i o n A l t e r n a t i v e timing A l t e r n a t i v e ways of f i n a n c i n g , i . e . m o b i l i z i n g resources fo r development. The l i s t i s not complete but does provide an idea of the re l e v a n t areas where s i g n i f i c a n t o p p o r t u n i t i e s may a r i s e . 2.3. Problem D e f i n i t i o n Having surveyed the r e g i o n a l resource base and i d e n t i f i e d a p p r o p r i a t e development o p p o r t u n i t i e s , i t i s p o s s i b l e to d e f i n e the s p e c i f i c p l a n n i n g problem or quest i o n f o r which a s o l u t i o n i s to be attempted. T h i s statement of co n c r e t e problems, d i f f i c u l t i e s , or qu e s t i o n s i s an important step i n the p l a n n i n g process and must be s t r u c t u r e d p r i o r to e s t a b l i s h i n g the planni n g goals and d e f i n i n g a development t h e s i s . While i t i s tempting to take the view that the p l a n n i n g problems should be e n t i r e l y d e f i n e d f o r the planner by some higher i n s t i t u t i o n a l a u t h o r i t y , t h i s must not be the case. The development s p e c i a l i s t can and should make a s i g n i f i c a n t s o c i a l c o n t r i b u t i o n by suggesting, i n the l i g h t of approved welfare c r i t e r i a , r e l e v a n t p l a n n i n g problems to the d e c i s i o n maker. The nature and d e f i n i t i o n of the pl a n n i n g problem i s , to a la r g e extent, a matter of s u b j e c t i v e p r e f e r e n c e and common sense. The q u e s t i o n (problem), f o r which answers are being sought, may take many forms depending on the p a r t i c u l a r c h a r a c t e r of the study area, the p r e v a i l i n g s i t u a t i o n concerning development, and the e s t a b l i s h e d r e g i o n a l g o a l s . I s h a l l not attempt, t h e r e f o r e , to pro v i d e a comprehensive l i s t of p l a n n i n g problems, but only a few examples of the type of i s s u e s that 104 c o u l d be of concern. As regards the making of a p u b l i c p l a n , program, or p o l i c y , the "what," "how," and "how much" qu e s t i o n s of resource a l l o c a t i o n (investment) are most r e l e v a n t . Hence, i t i s problems of t h i s kind, but i n a r e g i o n a l context, that need to be formulated. Of the g r e a t e s t concern i s the development of  f o r e s t r y w i t h i n a framework that uses a l l a v a i l a b l e p r o d u c t i v e  f a c t o r s and makes the h i g h e s t p o s s i b l e c o n t r i b u t i o n to r e g i o n a l  growth and d i s t r i b u t i o n . The type of problems that are most important and should, t h e r e f o r e , be given p r i o r i t y are: What should the optimum s i z e and best composition of the f o r e s t r y e s t a t e ( i n d u s t r y ) be? Or put i n more economic terms, what should the optimum r a t e of investment ( a l t e r n a t i v e l y d isinvestment) i n t o wood and wood products manufacture and r e l a t e d s e r v i c e s be? The most s u i t a b l e t r a n s p o r t a t i o n system f o r moving f o r e s t r y output on a r e g i o n a l ( n a t i o n a l ) b a s i s and i n c l u d i n g other economic a c t i v i t i e s ? The fundamentals of a comprehensive f o r e s t r y development p l a n , program, or p o l i c y f o r the region ( n a t i o n ) ? The optimum types of i n c e n t i v e s f o r the m o b i l i z a t i o n of r e g i o n a l and e x t r a - r e g i o n a l resources ( i . e . p r i v a t e investment) f o r f o r e s t r y development? Manpower t r a i n i n g and t e c h n o l o g i c a l i n n o v a t i o n i n a r e g i o n a l - s e c t o r a l and, perhaps, n a t i o n a l p e r s p e c t i v e ? S o c i a l aspects of resource development such as the adequate p r o v i s i o n of h e a l t h , e d u c a t i o n , housing, and other p u b l i c s e r v i c e s to maintain a h e a l t h y balance between e f f i c i e n c y and e q u i t y c r i t e r i a i n f o r e s t r y investments? The adequate p r o d u c t i o n and d i s s e m i n a t i o n of t e c h n i c a l and economic i n f o r m a t i o n by p u b l i c r e s e a r c h i n s t i t u t i o n s ? The q u a l i t y of t h i s t e c h n i c a l and economic r e s e a r c h and the means and ways of p r o v i d i n g the r e s u l t s to the economy at l a r g e ? Optimum land use i n c l u d i n g the p o s s i b i l i t y of m u l t i p l e use and a l t e r n a t i n g crops i n f o r e s t areas? The supply of energy, p o r t f a c i l i t i e s , and other p u b l i c i n f r a s t r u c t u r e e s s e n t i a l to the development of f o r e s t i n d u s t r i e s ? 1 05 The l i s t is too var ied and lengthy to include a l l poss ib le problem areas. The examples, however, do provide a notion of the type of questions that are most re levant . 1 06 3. DEFINITION OF GOALS AND DECISION CRITERIA There are two types of goals ( o b j e c t i v e s ) to be c o n s i d e r e d at t h i s stage. F i r s t , there i s the " p a r o c h i a l o b j e c t i v e " of pl a n n i n g which must be d e f i n e d to channel t h i s a c t i v i t y toward a s p e c i f i c t a r g e t . If the planning problem i s , f o r example, how to develop the r e g i o n a l f o r e s t i n d u s t r i e s , i t f o l l o w s that the " p a r o c h i a l o b j e c t i v e " should be to formulate a resource development plan i n one of the accepted forms e.g. i n d i c a t i v e , master, e t c . Likewise, i f the problem i s a lack of government l e a d e r s h i p i n f o r e s t r y development, the p l a n n i n g o b j e c t i v e should be to d e f i n e a s e c t o r a l p o l i c y f o r encouraging p r i v a t e investments i n t o f o r e s t r y . In s h o r t , the " p a r o c h i a l o b j e c t i v e " must be problem o r i e n t e d and i s simply the answer to the  p a r t i c u l a r p r o d u c t i v i t y problem. Second, there i s the "development g o a l " which u l t i m a t e l y must be the t a r g e t of a l l development p l a n n i n g . The p r a c t i c a l , m a t e r i a l aims of r e g i o n a l development have been d e f i n e d as the achievement of a r a p i d , s u s t a i n e d r a t e of economic growth and income d i s t r i b u t i o n (see S e c t i o n 1.3.2). Unable to measure the i n t a n g i b l e aspects of " s o c i a l w e l f a r e , " economists are reduced to working with the l e s s p e r f e c t but more measurable concept of "economic w e l f a r e " (see S e c t i o n 1 . 4 . 1 ) . In these terms, the  development goal can be r e - d e f i n e d as the t r a n s f o r m a t i o n of the  socio-economic system f o r the p r o v i s i o n of i n c r e a s e d (maximum)  economic e f f i c i e n c y , i n c r e a s e d economic e q u i t y , and some degree  of s a t i s f a c t i o n of s o c i e t y ' s merit wants. C o n s i s t e n t with t h i s m a t e r i a l i s t i c view of development, the primary goal of development plan n i n g i s one of i d e n t i f y i n g the 1 07 most suitable ( e f f i c i e n t ) investment opportunities for a l l o c a t i n g the nation's scarce productive resources, and choosing income d i s t r i b u t i o n p o l i c i e s that maximize present and future "economic welfare". The secondary goal of development planning is that of devising p r a c t i c a l methods for mobilizing available resources to the most desirable a c t i v i t i e s (see Section 1.3.1). It follows that the goal in forestry development planning should be one of selecting the most productive ( e f f i c i e n t ) and equitable forestry investments, and of defining the means and ways by which to carry out these investments. 108 4. DATA COLLECTION AND DEFINITION OF ALTERNATIVE INVESTMENT  OPTIONS Detailed information, p a r t i c u l a r l y quantitative information, is e s s e n t i a l raw material for planning (Arnold 1974). Before concrete development options can be defined i t is necessary to describe and assess in d e t a i l the ex i s t i n g s i t u a t i o n . This involves the c o l l e c t i o n , analysis, and presentation of resource data. Without th i s preliminary groundwork i t i s impossible to project the results of future actions and, hence, impossible to judge which course of action i s most l i k e l y to achieve the planning goals (Johnston, Grayson, and Bradley 1967). 4.1. Sources and Types of Information. It i s a f a i r l y accepted tenet of planning that the usefulness of the planning process is dependent upon the accuracy of the data. A willingness to plan c a l l s for a willingness to c o l l e c t information. A commitment to data gathering i s , therefore, unavoidable. At the same time, i t i s equally unavoidable that this a c t i v i t y should be costly and time consuming. Data c o l l e c t i o n must be c a r e f u l l y planned so that only the measures that are actually needed are gathered (Arnold 1974; Gregersen and Contreras, 1979; Gregersen, 1980). There are two major sources of information available to the planner: "primary" and "secondary." "Primary sources" are obviously the most valuable but can only be tapped through special surveys of manufacturers, wholesalers, r e t a i l e r s , and consumers. These surveys are p a r t i c u l a r l y costly and d i f f i c u l t 109 to undertake in LDCs. "Secondary sources" are the most accessible and consequently the most widely used. These represent existing publications and records of private and public i n s t i t u t i o n s . They include m i n i s t e r i a l and departmental records, development agency reports, s t a t i s t i c a l reports from the o f f i c i a l s t a t i s t i c s o f f i c e , publications from private organizations and trade groups and results from previous surveys (United Nations 1958, Watt 1973). It i s d i f f i c u l t to make a clear d i s t i n c t i o n between the general regional information outlined in Section III.2.1 and the detailed data required at this stage, for the two sets are clo s e l y related. The grouping of the data w i l l , to some extent, be determined by the nature of the planning objective. In general, nevertheless, the information relevant to forestry development planning may be divided into two broad groups. The f i r s t group embraces the physical resources available to the forest industries and includes land, growing stock, future productive potential, roads and infrastructure, manufacturing f a c i l i t i e s , machinery, and labour. The second group covers technical f i n a n c i a l and economic data including factors determined outside forestry, such as forest products demand, output prices and input costs, e.g. the cost of land, labor, and c a p i t a l (Johnston, Grayson, and Bradley 1967). A. Resource Surveys These surveys aim at the c o l l e c t i o n of information pertaining to the regional resource base, i t s current productivity and potential for development. They should include 1 10 data on the s t a t e of three major pr o d u c t i o n f a c t o r s , land, c a p i t a l , and labour. Land Resources - Fores t Land and Growing Stock - Land use c l a s s i f i c a t i o n f o r r u r a l land, i n c l u d i n g a g r i c u l t u r a l (areas, geographic d i s t r i b u t i o n , c a r r y i n g c a p a c i t y ) - Land tenure and s i z e of h o l d i n g s - E x i s t i n g v e g e t a t i o n and t h e i r p h y s i c a l c h a r a c t e r i s t i c s (growing stock - in v e n t o r y , mature timber, volumes) - S i t e q u a l i t y (geology, topography, s o i l s , c l i m a t e , a c c e s s i b i l i t y ) - P h y s i c a l p r o d u c t i v i t y (growth and y i e l d , product q u a l i t y , dimensions) - F o r e s t management methods i n c l u d i n g s i l v i c u l t u r a l p r a c t i c e s - A l t e r n a t i v e uses of f o r e s t land (current and potent i a l ) . C a p i t a l Resources - F o r e s t Industry and Regional I n f r a s t r u c t u r e Primary F o r e s t r y A c t i v i t y - S i l v i c u l t u r e - S i z e , l o c a t i o n , and p r o d u c t i v e ( i n s t a l l e d ) c a p a c i t y of the wood growing, wood h a r v e s t i n g , and r e l a t e d f o r e s t act i v i t i e s - Survey to i n c l u d e : f o r e s t n u r s e r i e s and s i l v i c u l t u r e , f o r e s t management, wood h a r v e s t i n g and t r a n s p o r t a t i o n - Time s e r i e s f o r p r o d u c t i o n (output) in the above a c t i v i t i e s i . e . growth, y i e l d , l o s s e s , harvest - Q u a l i t a t i v e d e s c r i p t i o n of output - markets - P h y s i c a l input requirements per a c t i v i t y i n c l u d i n g land, equipment, m a t e r i a l s , and labour. Secondary F o r e s t r y A c t i v i t y - Manufacturing - S i z e , l o c a t i o n and p r o d u c t i v e ( i n s t a l l e d ) c a p a c i t y of the wood p r o c e s s i n g a c t i v i t i e s - Depending on the depth and scope of a n a l y s i s , survey to i n c l u d e the manufacturing o f : sawnwood, wood c h i p s , plywood, p a r t i c l e board, f i b r e b o a r d , pulp and paper, wood f u r n i t u r e , f l o o r i n g , parquet, window and door frames, broomsticks and t o o l handles, laminated beams, p r e f a b r i c a t e d houses, and any other a c t i v i t y dependent on wood or f o r e s t r y raw m a t e r i a l s - Time s e r i e s f o r p r o d u c t i o n (output) - Q u a l i t a t i v e d e s c r i p t i o n of output - markets - P h y s i c a l input requirements per a c t i v i t y i n c l u d i n g land, equipment, m a t e r i a l s , and labour Regional I n f r a s t r u c t u r e - Roads and r a i l w a y s ( l o c a t i o n , c a p a c i t y , and reach) 111 P o r t s ( l o c a t i o n , docking, l o a d i n g and unloading c a p a c i t y ) Energy ( i n s t a l l e d c a p a c i t y , q u a l i t y , e l e c t r i c g r i d ) Human Resources - Labour and Management - P o p u l a t i o n (geographic d i s t r i b u t i o n by sex and age, f o r e c a s t s ) - Labour f o r c e (geographic d i s t r i b u t i o n , employment and unemployment f o r s k i l l e d , s e m i - s k i l l e d , and u n s k i l l e d labour) - Employment and unemployment by major a c t i v i t i e s B. T e c h n i c a l , F i n a n c i a l , and Economic Surveys These s t u d i e s aim at the c o l l e c t i o n of " t e c h n i c a l i n f o r m a t i o n " on p r o d u c t i v e a c t i v i t i e s , "market" and "accounting" p r i c e s f o r inputs and outputs and, g e n e r a l l y , a l l the c o s t -b e n e f i t i n f o r m a t i o n necessary f o r the design and a p p r a i s a l of investment o p t i o n s . They i n c l u d e such data as: Techn i c a l - Raw m a t e r i a l p r o p e r t i e s - q u a l i t i e s - P o s s i b l e p r o d u c t i o n methods - T e c h n i c a l design and e n g i n e e r i n g - S c a l e s of pr o d u c t i o n - Q u a l i t y of p o t e n t i a l i n d u s t r i a l s i t e s - P h y s i c a l input - output r e l a t i o n s h i p s per investment a c t i v i t y i n d i c a t i n g o r i g i n and d e s t i n a t i o n , i . e . domestic or f o r e i g n F inane i a l - F a c t o r and product markets, i n c l u d i n g c u r r e n t and fu t u r e demand, p r i c e s , and e l a s t i c i t y of demand - the degree of responsiveness of demand to a change in a demand s h i f t i n g f a c t o r , e t c . Estimates on f u t u r e changes i n p o p u l a t i o n , income, p r i c e s , technology, and t a s t e of consumers may be necessary i n l i e u of the e l a s t i c i t y of demand - Cost data per u n i t f a c t o r and per a c t i v i t y , e.g. f o r e s t land, machinery and m a t e r i a l s , labour -wood h a r v e s t i n g , s a w m i l l i n g , t r a n s p o r t a t i o n , e t c . 1 1 2 - Market interest rate duly discounted for i n f l a t i o n but including risk factors - Price of foreign exchange - Price indices - Customs duties on imported equipment and materials - Tax structure a f f e c t i n g the forest industries - Other government incentives and disincentives for forestry investment - Overall national and regional development programs (Plan) A more detailed description of the f i n a n c i a l data necessary for project planning can be found in United Nations (1958) and OECD (1968). Economic Bearing in mind that the c o l l e c t i o n of economic information i s for the purpose of carrying out a socio-economic evaluation, the type of data that are necessary to assemble refers mainly to s o c i a l costs and benefits of forestry investments. The data which should be obtained, preferably from the Central Planning Organization, include: - The accounting price of land (opportunity cost) - The accounting price of labour (shadow wage) - The accounting price of savings/capital (shadow price of investment) - The s o c i a l value of foreign exchange (shadow price of foreign exchange) - The so c i a l discount rate ( s o c i a l time preference for consumpt ion) - Regional and national income (employment) m u l t i p l i e r s - Marginal rate of return on investment of the private sector - Marginal rate of reinvestment of p r o f i t s - Marginal propensity to save of: labour c a p i t a l i s t s government taxpayers at large - Marginal propensity to re-spend regionally and nationally - Set of national weights on the objectives of: aggregate consumption regional r e d i s t r i b u t i o n , i f applicable group r e d i s t r i b u t i o n 1 1 3 If , however, this set of s o c i a l parameters i s not available to the planner, he must c o l l e c t a wealth of regional and national macro economic information in order to compute his own estimates. Most of t h i s information would be found in a set of regional and national accounts but special surveys may be needed to obtain a l l pertinent data. The l i s t includes t o t a l value and composition of: - Gross Domestic Product - Gross National Product - Gross and Net Investment (Saving) - Aggregate regional and national consumption - Income d i s t r i b u t i o n (by group and by region) - Net transfer payments (Taxes) - Value added by economic a c t i v i t i e s - Foreign Trade (exports and imports) - Private and government expenditure (consumption) - Input output table and technical m u l t i p l i e r s - National and regional development plans (models), and, generally, - any economic data that can provide a basis for estimating the "accounting" (social) price of inputs and outputs in d i f f e r e n t economic a c t i v i t i e s , i . e . , s o c i a l costs and benefits measured as opportunities foregone or realized in a welfare context. A more detailed l i s t of socio-economic information necessary for general project planning can be found in UNIDO (1972) and L i t t l e and Mirrlees (1974). The data required for forestry projects in p a r t i c u l a r are outlined in Watt (1973), Arnold (1974) and King (1974). 4.2. Defining and Limiting the Number of Investment Options -Adequacy of a Planning Model Having i d e n t i f i e d the nature of the planning problem, defined the planning goals and objectives, and c o l l e c t e d detailed information, i t follows that a limited number of investment options must be selected for further study and 1 14 a p p r a i s a l . Put i n the simplest terms, the f o r e s t r y planner i s presented with a s u c c e s s i o n of investment o p p o r t u n i t i e s which henceforward I s h a l l c a l l investment (development) o p t i o n s and, which f o r p r a c t i c a l reasons of time and budget, he must reduce to a manageable number. The act of l i m i t i n g the number of a l t e r n a t i v e s i s , to some extent, a s u b j e c t i v e process but, to even a l a r g e r extent, i t i s a matter of p a i n s t a k i n g l y reviewing the performance of the past investment d e c i s i o n s and of comparing these r e s u l t s to those i n i t i a l l y suggested by theory. By e l i m i n a t i o n of the f a i l u r e s i t i s then p o s s i b l e to concentrate i n the a l t e r n a t i v e s that are most l i k e l y to succeed. Bearing i n mind that development c r i t e r i a are the p l a n n e r ' s only measure of the degree with which an o p t i o n i s l i k e l y to meet the e x p l i c i t development g o a l s , the d e s i r a b i l i t y of an  o p t i o n should be weighed by a p r e l i m i n a r y estimate of the  c a p a c i t y of the o p t i o n to provide s i g n i f i c a n t measures of the  development c r i t e r i a . In s h o r t , the c a p a c i t y of an investment  o p t i o n to provide f o r increased ( s u s t a i n e d ) aggregate  consumption, a b e t t e r d i s t r i b u t i o n of consumption among groups  and r e g i o n s , and a degree of s a t i s f a c t i o n of s o c i e t y ' s most  p r e s s i n g merit wants. There i s , n a t u r a l l y , the p o s s i b i l i t y of the planner using a s i m u l a t i o n model or some other mathematical technique of a n a l y s i s to t e s t a v a s t l y i n c r e a s e d number of investment o p t i o n s . In t h i s case, there would be no need to l i m i t the number of a v a i l a b l e o p t i o n s as the model would generate - i n f a c t simulate - and a p p r a i s e as many a l t e r n a t i v e s of resource 1 15 a l l o c a t i o n as deemed necessary. Computerized mathematical techniques, however, are not an a l t e r n a t i v e to common sense. They supplement common sense and, i n terms of ha n d l i n g vast amounts of economic data, may o f f e r an expedient way f o r maximizing or o p t i m i z i n g s p e c i a l f e a t u r e s of development. For models to be of any p r a c t i c a l value, however, there must be a v a i l a b l e a wealth of data on which to b u i l d the mathematical e x p r e s s i o n s which make up the heart of the system. Furthermore, the q u a l i t y of the data must be s u f f i c i e n t l y h i g h f o r the output ( s o l v i n g of the model) to be r e l i a b l e for d e c i s i o n making. F i n a l l y there must be s t a t i s t i c a l and computer f a c i l i t i e s a v a i l a b l e f o r the r e p e t i t i v e t e s t i n g (debugging) of the model u n t i l i t reaches a working c o n d i t i o n . These are requirements that may or may not be p o s s i b l e to meet in a young, poor, and emerging n a t i o n such as the more backward LDC. A d i f f e r e n t s i t u a t i o n may p r e v a i l i n some of the more forward LDCs, where a long t r a d i t i o n of s t a t i s t i c s and the advent of new technology may permit the use of mo d e l l i n g techniques e f f e c t i v e l y . T h i s , n e v e r t h e l e s s , i s not the average s i t u a t i o n and, more o f t e n than not, the expense of going through model c o n s t r u c t i o n and t e s t i n g w i l l not be warranted i n the l i g h t of the budget and data c o n s t r a i n t s . I would, t h e r e f o r e , l i k e to warn the reader a g a i n s t becoming e x c e s s i v e l y c o n f i d e n t on the support he may d e r i v e from using advanced mathematical t o o l s of a n a l y s i s in p r o j e c t p l a n n i n g i n LDCs. I f , however, the s i t u a t i o n were to be r i p e , i . e . such as in long term resource master p l a n n i n g , and a model was to become e s s e n t i a l , i t i s l i k e l y that e i t h e r l i n e a r programming or 1 16 simulation would be s u f f i c i e n t for the needs of the occasion. An explanation of these tools of analysis is beyond the scope of this thesis but the theoretical structure and functional make-up of these models can be found in much of the published l i t e r a t u r e . Of pa r t i c u l a r interest are the works of: Dorfman, Samuelson, and Solow (1958); Tinbergen 1967; and Maisel and Gnugnoly (1972). Examples of the application of these techniques to forestry planning can be found in Gould and O'Regan (1965), Navon and McConnen (1967), Gane (1969), Muthoo (1970), Navon (1971), Williams (1976), and Chappelle (1977). 1 1 7 5. ANALYSIS AND EVALUATION In a mixed economy, government attempts to r e a l i z e i t s development plans in two ways. F i r s t l y , i t encourages the mobilization of private resources into a c t i v i t i e s that are believed to be s o c i a l l y p r o f i t a b l e . For this i t influences the general framework of economic development via f i s c a l and monetary controls, i . e . price controls, import r e s t r i c t i o n s , r e s t r i c t i v e labour laws, and foreign exchange regulations or, less subtly, by means of p r e f e r e n t i a l c r e d i t , investment regulations, control of strategic information, special tax or t a r i f f concessions, and outright subsidies. Secondly, governments may elect to invest themselves in productive a c t i v i t i e s which, for reasons of scale, p o l i t i c a l expediency or sovereignty are f e l t should be in the public's domain. Irrespective of the strategy chosen to implement development, investment options (including forestry) need to be f i n a n c i a l l y and economically appraised before they can be submitted for implementation (Gregersen and Contreras, 1979). The f i n a n c i a l appraisal is necessary to ensure that the expenditures connected with the investments are within the l i m i t s of the f i n a n c i a l resources av a i l a b l e . This evaluation refers simply to a cash flow analysis where forestry inputs and outputs are measured at market pr i c e s . The objective i s three-f o l d : (1) to determine the private p r o f i t a b i l i t y of each pre-selected option and to infer from t h i s p r o f i t a b i l i t y the potential for the private sector investing in these options; (2) to estimate the impact on government finance of a l l o c a t i n g private and public resources to forestry and to assert that 1 18 s u f f i c i e n t resources are budgeted to meet, a l l f i n a n c i a l o b l i g a t i o n s ; (3) to e s t a b l i s h a f i n a n c i a l bench mark a g a i n s t which to compare the economic (accounting) performance of each o p t i o n and to develop a b a s i s f o r adequate p o l i c y making. The economic, or s o c i a l c o s t - b e n e f i t a p p r a i s a l , i s necessary to determine the s o c i a l d e s i r a b i l i t y (development consequences) of the proposed investments. The o b j e c t i v e of t h i s e v a l u a t i o n i s t w o - f o l d : (1) to e s t a b l i s h the economic f e a s i b i l i t y and welfare i m p l i c a t i o n s of the proposed investments; (2) to develop a foundation f o r e s t i m a t i n g the degree of economic d i s e q u i 1 i b r i a ( d i f f e r e n c e between market and accounting p r i c e s ) present i n each investment. 5.1. F i n a n c i a l A n a l y s i s A. Inputs and Outputs - The Basic P r e d i c t i o n s The b a s i c f i g u r e s r e q u i r e d f o r f i n a n c i a l a p p r a i s a l c o n s i s t of a p r e d i c t i o n of (a) a l l r e c e i p t s from the s a l e of outputs of the investment f o r each year of the l i f e of the investment. R e c e i p t s should i n c l u d e the s a l e of any machinery, equipment, or b u i l d i n g which at the end of the l i f e of the investment has not d e p r e c i a t e d completely; (b) a l l expenditures on goods and s e r v i c e s a c c o r d i n g to the year i n which they are made, from the date of the f i r s t investment u n t i l the end of the l i f e of the p r o j e c t . These expenditures i n c l u d e c a p i t a l e x penditures, whether f o r i n i t i a l equipment or f o r replacement, as w e l l as a l l o p e r a t i n g c o s t s . 1 19 It i s e s s e n t i a l to present the c o s t revenue p i c t u r e of a p r o j e c t d i v i d e d i n t o the c o n s t r u c t i o n , or investment phase and the o p e r a t i n g , or p r o d u c t i v e , phase. It i s a matter of p r e f e r e n c e then whether gross expenditures are compared to gross r e c e i p t s (duly d i s c o u n t e d f o r time preference) or i f c u r r e n t expenditures are s u b t r a c t e d from c u r r e n t r e c e i p t s and net c u r r e n t r e c e i p t s (gross p r o f i t s ) are compared to c a p i t a l e xpenditures So f a r , I have assumed that w e l l d e f i n e d investment options have been prepared and are a v a i l a b l e f o r a p p r a i s a l . However, before the a n a l y s t can draw such a neat cost-revenue p i c t u r e , s u b s t a n t i a l p r e p a r a t o r y work must have been completed. T h i s i n c l u d e s undertaking a d e t a i l e d : (1) T e c h n i c a l Study F i r s t , p r o d u c t i o n processes must be chosen and a s c a l e of o p e r a t i o n s e l e c t e d . In a f f o r e s t a t i o n investments, t h i s i n c l u d e s t h i n g s such as optimum s p e c i e s s e l e c t i o n , minimum land area to be t r e a t e d , e t c . In wood p r o c e s s i n g , t e c h n i c a l and e n g i n e e r i n g d e c i s i o n s need to be taken a n d ' t h i s concerns the best manufacturing technique and the optimum product mix. A good understanding of the nature of the a v a i l a b l e raw m a t e r i a l s and the f i n a l products i s e s s e n t i a l to a s u c c e s s f u l a n a l y s i s . Species t r i a l s and wood t e s t s may be necessary i f they are not a v a i l a b l e . Due c o n s i d e r a t i o n should be given to a l t e r n a t i v e development s i t e s . A c h o i c e must be made reg a r d i n g the technology and the degree of mechanization to employ i n the investments. As should 120 be evident by now, the most c a p i t a l i n t e n s i v e p r o j e c t s are not n e c e s s a r i l y the best s u i t e d f o r LDCs. Within reason, the most labor i n t e n s i v e p r o j e c t s may be the most e f f i c i e n t , p a r t i c u l a r l y in c o u n t r i e s with high unemployment and acute balance of payments d e f i c i t s . Because i t i s d i f f i c u l t to t e l l a p r i o r i what degree of mechanization i s most s u i t a b l e , whenever p o s s i b l e i t i s wise to t e s t a l t e r n a t i v e combinations of labour and c a p i t a l . The p o t e n t i a l f o r h o r i z o n t a l and v e r t i c a l i n t e g r a t i o n in the f o r e s t i n d u s t r i e s i s very s t r o n g . S p e c i a l care should be taken not to overlook o p p o r t u n i t i e s i n t h i s regard. In summary, the main t e c h n i c a l a s p e c t s that need to be reviewed are: (a) the prod u c t i o n process, (b) the c h a r a c t e r i s t i c s of the means of pr o d u c t i o n , (c) the requirements of the e n t e r p r i s e , and (d) the l o c a t i o n of the p r o d u c t i o n u n i t s . (2). Commercial and Market Study T h i s study i s concerned with the purchasing of goods and s e r v i c e s p h y s i c a l l y r e q u i r e d to c a r r y out the investments. I t i s a l s o concerned with the s e l l i n g of the outputs generated by the investments. I t i s a study of the procedure to a c q u i r e inputs such as seed, f e r t i l i z e r , t o o l s and equipment, c o n s t r u c t i o n m a t e r i a l s , e t c . , and of the approach to marketing timber l o g s , sawnwood, plywood, and other f o r e s t products. Input and output market p r i c e s and a f o r e c a s t of these p r i c e s f o r the l i f e of the investment i s the goal of the commercial study. Demand and supply ( p r i c e ) f o r e c a s t i n g , although c e n t r a l to the pl a n n i n g and a p p r a i s a l of p r o j e c t s , f a l l s o u t s i d e the scope of t h i s t h e s i s . I s h a l l , t h e r e f o r e , concern myself only 121 s u p e r f i c i a l l y with this aspect. The methods that can be used to forecast demand and prices vary from the most simple to the highly sophisticated. In a market economy, price changes are the result of s h i f t s in the supply and demand of product. It i s the interaction of the two that forces a certain price to p r e v a i l rather than another. In short, the methods used to deal with the question of demand/supply and price include: (a) projection of the trend, (b) technical c o e f f i c i e n t s in input-output analysis, (c) econometric methods based on regression and c o r r e l a t i o n analysis, and (d) international comparisons between nations of similar degree of development. When attempting to project demand, attention is usually focused in estimating l i k e l y changes in demand s h i f t i n g factors such as: income, taste of the users, and a v a i l a b i l i t y of substitutes. The l i t e r a t u r e in t h i s f i e l d i s abundant. Simple, general descriptions of the methods employed in supply, demand and price forecasting are given by UN (1958) and OECD (1968). Forestry applications of these methodologies are presented in Johnson e_t a l . (1967), IUFRO (1971), Gregory (1972), and Arnold (1974). (3). Cost Forecast Technical and costing studies are very c l o s e l y related. A project i s often said to be technically impossible when in fact i t i s perfectly possible, but only at a p r o h i b i t i v e cost (OECD 1968). While this is not always the case, the cost analyst should make a point of obtaining from the technical advisors a l l necessary information to compare alternative options. He must 1 2 2 then assess the t e c h n i c a l ( p h y s i c a l ) s o l u t i o n s i n terms of c o s t s by b r i n g i n g i n p r i c e s . Some of the methods f o r e s t i m a t i n g c o s t s i n c l u d e : (a) Reference to s i m i l a r investments. A comparison with s i m i l a r p r o j e c t s p r e v i o u s l y undertaken can be used t o s t r u c t u r e an exhaustive l i s t of c o s t s and to e s t a b l i s h an idea of r e l a t i v e magnitudes. Problems of t h i s approach i n c l u d e p o t e n t i a l d i f f e r e n c e s i n pr o d u c t i o n s c a l e and technology, l o s s of data v a l i d i t y due to time lags and i n f l a t i o n , and the r e s i d u a l need to p r o j e c t u n i t a r y input p r i c e s i n a l l c a t e g o r i e s where r e l a t i v e p r i c e s are not expected to remain c o n s t a n t . (b) E n q u i r i e s addressed to p o t e n t i a l s u p p l i e r s . T h i s method i s i n f a c t the s a f e s t way to o b t a i n the l a t e s t p r i c e s f o r major resource inputs and should be used i n c o n j u n c t i o n with method ( a ) . Care should be e x e r c i s e d to ensure that c o s t s i n c l u d e allowances f o r t r a n s p o r t a t i o n , h a n d l i n g , and i n s t a l l a t i o n of equipment. (c) Reference to economic surveys and p u b l i s h e d documents. Some c o s t s may be contained i n o f f i c i a l r e s e a r c h documents and these should be reviewed. However, at times i t may be that s p e c i a l surveys are the only way to determine d e t a i l e d c o s t s . (d) C o n s u l t i n g with t e c h n i c a l e x p e r t s . T h i s may o c c a s i o n a l l y be the s o l e source of a s p e c i f i c c o s t d a t a . Due to the nature of t h e i r work, t e c h n i c a l a d v i s o r s are conversant with the l a t e s t changes i n p r i c e s t r u c t u r e s and equipment m o d i f i c a t i o n s . 123 It i s important to study costs consistently and comprehensively for a l l investment options. Special care should be taken to guard against pervasive sources of error. According to OECD (1968) a trend exists among cost analysts to: (a) underestimate investment expenditures due to time lags in construction, transportation of materials to s i t e , and assembly costs; (b) f a i l to allow for working c a p i t a l ; (c) be over optimistic regarding operating costs and revenues during s t a r t -up; (c) f a i l to make e x p l i c i t assumptions about future price trends; (e) f a i l to make allowance for risk and miscellaneous expenses. B. Financial Appraisal The aim of f i n a n c i a l appraisal was described in d e t a i l in the introduction to Section III.5. Analysis and Evaluation. B r i e f l y , however, t h i s aim is to find the technically feasible solution to a given investment which gives an acceptable f i n a n c i a l return, i s adapted to the i n s t i t u t i o n a l and managerial framework of the country, and which can be financed with the available resources. (1). P r o f i t a b i l i t y C r i t e r i a In analysing an investment option, a table can be drawn up showing the receipts and the expenditures to be expected during each year of the project's l i f e t i m e and, thus, the p r o f i t s i t would y i e l d . This i s precisely what th i s Section i s set out to achieve. Hence, a l l investment becomes an exchange between 124 f u t u r e r e c e i p t s and present or forthcoming e x p e n d i t u r e s . The c h o i c e among a number of investments reduces simply to that between d i f f e r e n t cash flows. The a p p r a i s a l of these cash flows n e c e s s i t a t e s a s o l u t i o n that can grade them to a s i n g l e p o i n t i n time. The method f o r a d j u s t i n g time streams f o r temporal d i f f e r e n c e s i n t h e i r present or c u r r e n t value i s d i s c o u n t i n g . By v i r t u e of d i s c o u n t i n g , c o s t s and revenues are reduced to t h e i r present value by a given annual percentage margin ( r a t e of i n t e r e s t ) . T h i s d i s c o u n t r a t e r e p r e s e n t s the o p p o r t u n i t y cost to the i n v e s t o r of using h i s resources i n one p a r t i c u l a r way r a t h e r than i n the next best a l t e r n a t i v e . It i s the r a t e that r e f l e c t s the present f i n a n c i a l r e t u r n s that have to be foregone by w a i t i n g and the general u n w i l l i n g n e s s to put o f f p r o f i t a b i l i t y u n t i l l a t e r . Three c r i t e r i a f o r p r e s e n t i n g the d i s c o u n t e d flow of expenditures and r e c e i p t s (Discounted Cash Flow or DCF) are c u r r e n t l y i n use (Arnold 1974). -- Net Present Value (NPV) i s obtained by d i s c o u n t i n g both c o s t s and revenues at a s p e c i f i e d r a t e (often the market rate of i n t e r e s t ) , and then s u b t r a c t i n g the r e s u l t i n g present value of the c o s t s stream from the present value of the revenue stream. A l t e r n a t i v e l y , c u r r e n t expenditures can be s u b t r a c t e d from c u r r e n t r e c e i p t s to give a net revenue fo r each year. The net revenues are then d i s c o u n t e d to the present and added. Ignoring r i s k (about which I s h a l l say a few words l a t e r ) i t i s f i n a n c i a l l y a c c e p t a b l e to make any investment which r e s u l t s i n a p o s i t i v e NPV. The 125 mathematical expression of t h i s c r i t e r i o n i s : NPV = (Ro - Co) + ( R l - CI) + (R2 - C2) + (Rn - Cn) (1 + r ) (1 + r ) 2 (1 + r ) n t = n or NPV = Rt - Ct «. ^ — (1 + r ) 1 t = o K J where: R = gross revenue C = gross c o s t r = d i s c o u n t r a t e expressed as a decimal t = time i n t e r v a l 0, 1, 2, 3, n = years of p r o j e c t ' s l i f e The NPV value i s an ab s o l u t e measure of p r o f i t a b i l i t y . I t can e a s i l y produce a high value simply because the investment i s very l a r g e . T h i s c r i t e r i o n does not measure the r e l a t i v e e f f i c i e n c y with which d i f f e r e n t s i z e p r o j e c t s use reso u r c e s . -- I n t e r n a l Rate of Return (IRR) i s the di s c o u n t r a t e which makes the present value of the cost stream equal to the present value of the revenue stream, or as i s sometimes d e f i n e d , the r a t e which reduces the dis c o u n t e d net p r o f i t to zero. To compute the IRR one s o l v e s the equation: t + n Z Rt ~ C"t _ Q (1 + r ) t In a r i s k l e s s s i t u a t i o n , i t pays to i n v e s t i f the IRR exceeds the rate of i n t e r e s t at which money can be borrowed to execute the p r o j e c t , or exceeds the rate ( f i n a n c i a l y i e l d ) that c o u l d be obtained from a l t e r n a t i v e investment o p p o r t u n i t i e s , 126 whichever of the two is higher. -- Revenue/Cost Ratio (R/C) is obtained by dividing the (discounted) present value of the revenue stream by the present value of the cost stream. A variant of this c r i t e r i o n , the net revenue - cost r a t i o (NR/C), is obtained by dividing the present value of net revenues by the present value of costs. The mathematical expressions of these c r i t e r i a are: t = o Rt Revenue _ t = o (1 + r ) t Cost t = n Z — t = o (1 + r ) 1 t = n y- Rt - Ct r Net Revenue t = o ( l + r ) t or, for = Cost t = n Ct t = o (1 + r ) 1 According to the revenue/cost r a t i o , a project is worth undertaking when the r a t i o i s greater than one, the bigger the ra t i o the more e f f i c i e n t the project. Based on the net revenue - cost r a t i o , a project i s worthwhile when the ra t i o i s po s i t i v e . Both the IRR and the revenue/cost r a t i o measure the e f f i c i e n c y with which resources are employed irrespective of the size of the investments. When projects are not mutually exclusive, ranking by e f f i c i e n c y w i l l result in the largest o v e r a l l f i n a n c i a l gain (Arnold 1974). The revenue - cost r a t i o , however, is technically superior, since the IRR can give an incorrect result in special circumstances, i . e . multiple rates 127 in the presence of a NPV function whose stream of net revenues becomes negative more than once. The p r a c t i c a l advantage of the IRR, and one that should not be frowned upon, i s that (assuming i t does give the correct result) i t i s more familiar to businessmen and administrators. It i s in fact the proper way to calculate what is loosely known in f i n a n c i a l c i r c l e s as the " y i e l d " ( L i t t l e 1967). (2). Mutually Exclusive Projects and L i f e of the Investment When projects are mutually exclusive so that only one can be chosen for implementation, ranking by r e l a t i v e e f f i c i e n c y c r i t e r i a , may be incorrect. For example, Arnold (1974) pointed out, " i f adequate funds are available at a fixed rate of interest, i t w i l l be usual to seek investment opportunities which produce the maximum NPV. However, i f the opportunities for investment are limited - e.g. i f there is only a limited area of land that can be afforested, or a limited supply of raw material available for processing - then the project which gives the maximum NPV may not necessarily be the most e f f i c i e n t . " If the investments are repeatable and have d i f f e r e n t duration, their NPV should be compared over the same length of time to be v a l i d . This i s necessary because each investment l i f e may generate a d i f f e r e n t stream of costs and revenues. In forestry projects of long duration (not an unusual si t u a t i o n in s i l v i c u l t u r e ) i t may be more advisable to use i n f i n i t e time streams. A common time period is also necessary with the IRR. Although t h i s c r i t e r i o n employs a NPV of zero, and p r o f i t s can 1 2 8 always be reinvested at the market rate of interest, investments should be considered over the l i f e span of the largest project and e x p l i c i t consideration should be given to the reinvestment of intermediate returns. (3). Risk and Uncertainty So far I have dealt with r i s k l e s s cases only. There is no single correct method of allowing for r i s k . OECD (1968) c l a s s i f i e s the r i s k s of investment into three categories: - Risks which can be measured in terms of a p r o b a b i l i t y c o e f f i c i e n t related to each possible situation -e.g. economic a c t i v i t i e s subject to climatic conditions are uncertain, but known in terms of p r o b a b i l i t y . - Risks r e l a t i n g to a future situation which cannot be measured in terms of p r o b a b i l i t y , but depend on a single event or limited number of events such as the outcome of p o l i t i c a l negotiations, s c i e n t i f i c discovery, etc. This i s what may be more properly c a l l e d "uncertainty." - Risks due to ordinary mistakes in forecasting and planning. The inherent quality of risk i s that i t can be assessed quant i t a t i v e l y by expressing i t in terms of the probability of a certain event (result) occurring. Uncertainty, on the other hand, i s indeterminate. Not only i s a certain event unreliable, but also i t s degree of u n r e l i a b i l i t y is unknown (Arnold 1974). The theory of choice under uncertainty remains one of the 1 29 major subjects of controversy in economics (Mishan 1974), and there i s considerable disagreement between economists and s t a t i s t i c i a n s on quite fundamental issues (Eckstein, 1961; Dorfman, 1962; H i r s h l e i f e r , 1965 and 1966; L i t t l e and Mirrlees, 1968; Zeckhauser 1974). Therefore, i t is hard to determine the most e f f i c i e n t way of dealing with risk and uncertainty in project appraisal. There is no unique approach to the treatment of risk and uncertainty in a theoreti c a l context. There are, nonetheless, several popular methods that can be used successfully in project appraisal. These include: (a) Adding a Premium to the Discount Rate. Depending on the degree of risk involved, a premium may be added to the discount rate to r e f l e c t the uncertainty of future costs and benefits in present value terms. This i s a popular method with the private sector which is assumed, largely in the face of uninsurable r i s k s , to function under conditions of greater uncertainty than the public sector. While the uniformity of this c r i t e r i o n has advantages in terms of preventing subjective and i r r a t i o n a l preferences from erasing the re s u l t , there i s the corresponding disadvantage that risks do d i f f e r between cash flow items and projects and that they can, to some extent, be broken down for separate consideration instead of being lumped together in an ov e r a l l risk allowance ( L i t t l e 1967). (b) Upward - Downward Revision of Prices. Under conditions of uncertainty for s p e c i f i c project prices, a popular 1 30 method to deal with risk is to adjust downward the expected future output prices and/or to adjust upward the expected future input ,prices. (c) Introducing Subjective Probability into the Calculation. This i s a common approach for evaluating investments in LDCs. The procedure allows for risk and uncertainty by estimating, in addition to the most l i k e l y future price of each input and output, both an upper and lower l i m i t to i t . In this manner, a t r i p l e t of cost-revenue estimates can be obtained: a most optimistic, a most l i k e l y , and a most pessimistic estimate of the net revenues in each time period. This method, unfortunately, does not give a good idea as to the l i k e l y chance of each estimate occurring. According to Mishan (1974) a more thorough approach to the informed guesses method i s possible by attaching to each of the three price outcomes, the most optimistic, the most l i k e l y and the most pessimistic, the conjectured p r o b a b i l i t y of them occurring. The res u l t i n g treatment of risk cannot, of course, be more accurate than the subjective estimates of price p r o b a b i l i t i e s . However, i t does bring out the f u l l implications of the estimates. 131 C. F i n a n c i a l Impact Three major f i n a n c i a l c o n s t r a i n t s may a r i s e that l i m i t the amount and kind of resources that can be m o b i l i z e d f o r development in a mixed economy. If the investments are to be c a r r i e d out by the p r i v a t e s e c t o r , the f i r s t c o n s t r a i n t has to do with the p r i v a t e p r o f i t a b i l i t y a v a i l a b l e to i n v e s t o r s in each p r e - s e l e c t e d a c t i v i t y . There i s , t h e r e f o r e , an obvious reason for f i n a n c i a l l y a p p r a i s i n g d i r e c t p r o j e c t e f f e c t s . T h i s i s p r e c i s e l y what S e c t i o n (B) above i s designed to a c h i e v e . A second c o n s t r a i n t has to do with the a v a i l a b i l i t y of p u b l i c funds f o r p r o v i d i n g the support s e r v i c e s , economic i n f r a s t r u c t u r e and, g e n e r a l l y , the f i n a n c i a l i n c e n t i v e s that may be r e q u i r e d by p r i v a t e s e c t o r development. In t h i s l i g h t i t i s important to e s t a b l i s h , i f even approximately, how much s t r a i n d i r e c t l y , i n d i r e c t l y , and secondary i s a given p r o j e c t l i k e l y to p l a c e on the p u b l i c budget. The t h i r d major f i n a n c i a l c o n s t r a i n t to p r o j e c t implementation has to do with the a v a i l a b i l i t y of f o r e i g n exchange f o r purchasing abroad the m a t e r i a l inputs that make up the f o r e i g n content of c a p i t a l and o p e r a t i n g e x p e n d i t u r e s . While a p r o j e c t may on the whole appear to have a favourable e f f e c t on the balance of payments, i t i s p o s s i b l e that the heavy spending (and no revenues) of the i n i t i a l years may tax the f o r e i g n exchange account beyond i t s c a p a c i t y . T h i s , i n t u r n , may r e q u i r e i n c r e a s i n g the e x t e r n a l debt to a p o i n t that may or may not be d e s i r a b l e . Furthermore, i n d i r e c t and induced imports r e s u l t i n g from the input-output l i n k a g e s of investment may grow to o f f s e t some, i f not a l l , of the d i r e c t p r o j e c t e x p o r t s . In 1 32 these c o n d i t i o n s , i t i s e s s e n t i a l that y e a r l y e s t i m a t e s be prepared f o r the l i f e t i m e of a p r o j e c t on the s t a t e of the f o r e i g n account v i s - a - v i s the export-import l i n k a g e s of i t s d i r e c t , i n d i r e c t , and induced economic a c t i v i t i e s . Both the cash flows i n and out of the p u b l i c t r e a s u r y and the e f f e c t s on the balance of payments a r i s i n g from major investment d e c i s i o n s are main p o i n t s of concern to p u b l i c f i n a n c e . I s h a l l now attempt to pr o v i d e g u i d e l i n e s f o r e s t i m a t i n g the f i n a n c i a l impact of major p r o j e c t s i n LDCs. (1). D i r e c t F i n a n c i a l Impact Th i s part of the a n a l y s i s i s s t r a i g h t f o r w a r d and should present l i t t l e d i f f i c u l t y to the p r o j e c t planner that has c a r e f u l l y prepared a d e t a i l e d cost-revenue f u n c t i o n f o r each investment o p t i o n he wishes to a n a l y z e . From the f o r e s t products market and demand study i t i s p o s s i b l e to know the p r o p o r t i o n of the output that i s intended f o r ex p o r t . T h i s i n f o r m a t i o n can then be used to set up a c u r r e n t ( y e a r l y ) revenue t a b l e f o r the l i f e t i m e of each investment i n which the f o r e i g n component'of t o t a l s a l e s i s i d e n t i f i e d . S i m i l a r l y , with the backing of the t e c h n i c a l and co s t data generated f o r each f o r e s t r y p r o j e c t , i t i s p o s s i b l e to i d e n t i f y the f o r e i g n component (imports) connect with the c a p i t a l and o p e r a t i n g expenditures of the investments. The f o r e i g n and domestic component of t o t a l expenditures should be compared, i f at a l l p o s s i b l e , a g a i n s t the f o r e i g n and domestic component of t o t a l s a l e s i n the same t a b l e . The treatment of government revenue, e i t h e r j o i n t l y with the 1 33 foreign account flows in a single table, or separately, i s a matter of subjective preference. For simple, primitive economies, however, i t is recommended that a single table be set up showing the direct impact of project development on both accounts. The computation of the d i r e c t cash flows in and out of the public treasury is simply a matter of painstakingly tracking down the value of government subsidies, taxes, and customs duties a r i s i n g from c a p i t a l and operating expenditures, revenues, and p r o f i t s associated with each project. Specimen Tables 1, 2, and 3 below provide examples of how to present the direct f i n a n c i a l impact of a project. (2). Indirect Financial Impact In addition to the d i r e c t e f f e c t s of investment, there are the indirect consequences resulting from adjustments in the supply side of projects. These indir e c t consequences emerge in the absence of further changes in t o t a l national income and arise out of the technical linkages existing between industries in a regional economy. As a general rule the greater the i n t e r -relationship between economic a c t i v i t i e s , the greater the indirect impact that can be expected following an autonomous change in production in one p a r t i c u l a r a c t i v i t y . By and large the i n d i r e c t consequences w i l l appear in the stages of production v e r t i c a l l y related to the new production, i . e . the stages preceding (backward linkages) or succeeding (forward linkages) the process involved (Tinbergen 1958, Hoover 1975). While i t may be dangerous to suppose that the i n d i r e c t impact of a project constitutes e n t i r e l y an economic gain, as T a b l e 1. D i r e c t E x p e n d i t u r e s , Revenue and Net Revenue A s s o c i a t e d w i t h an Investment B e g i n n i n g i n Year 1 and Ending i n Year n. ($) Y E A R 1 1. 3 u TOTAL EXPENDITURE INVESTMENT F i x e d C a p i t a l F o r m a t i o n C a p i t a l T r a n s f e r 1 OPERATING EXPENDITURE TOTAL REVENUE OUTPUT ( S a l e s ) Domestic E x p o r t s CAPITAL TRANSFER 2 NET REVENUE (CASH FLOW) 3 1 A c q u i s i t i o n o f Land, B u i l d i n g s and o t h e r E x i s t i n g C a p i t a l Goods + Working C a p i t a l . 2 R e s i d u a l P l a n t V a l u e , Land and o t h e r C a p i t a l Goods V a l u e + Working C a p i t a l R ecovery. 3 T o t a l Revenue - T o t a l E x p e n d i t u r e . T a b l e 2. Cash Flow A f t e r Tax A s s o c i a t e d w i t h an Investment B e g i n n i n g i n Year 1 and Ending i n Year n. Y E A R 1 2 3 n CASH FLOW (GROSS) 1 EXPENDITURE/REVENUE ADJUSTMENT 2 AVERAGE DEPRECIATION 3 L ESTIMATE OF GROSS PROFIT/LOSS TAXABLE INCOME 5 6 DIRECT TAXES CASH FLOW AFTER TAXES 7 1 From T a b l e 1. 2 From Table 1. E q u a l to E x p e n d i t u r e on d e p r e c i a b l e a s s e t s + e x p e n d i t u r e / revenue from n o n - t a x a b l e c a p i t a l t r a n s f e r s . 3 As a l l o w e d by law f o r t a x purp o s e s . 4 Cash f l o w + e x p e n d i t u r e / r e v e n u e a d j u s t m e n t - average d e p r e c i a t i o n . 5 E q u a l to e s t i m a t e o f g r o s s p r o f i t - accumulated l o s s . 6 C o r p o r a t e income o r b u s i n e s s p r o f i t t a x . 7 Gross c a s h f l o w - d i r e c t t a x e s . Table 3. Summary of Direct Financial Impact of an Investment Beginning in Year 1 and Ending in Year n. {$) Y E A R 1 2 3 n PRIVATE ACCOUNT FIXED CAPITAL FORMATION LABOR1 - Total Wages & Salaries (Total Employment) S k i l l e d Labour (Employment) Semi-Skilled Labour (Employment) Unskilled Labour (Employment) 2 CAPITAL - Gross Factor Compensation PUBLIC ACCOUNT FIXED CAPITAL FORMATION GOVERNMENT SERVICES3 DIRECT SUBSIDIES 4 NET RECEIPTS EXTERNAL ACCOUNT EXPORTS OF GOOD AND SERVICES TRANSFER - From Rest of the World IMPORTS BALANCE5 VALUE ADDED6 1 Including fringe benefits and contributions to s o c i a l security by employers. 2 Total compensation to land and c a p i t a l . 3 Mainly i n d i r e c t taxes (including value added or sales tax, import duties and lo c a l government taxes) + d i r e c t government services. 4 Government Services - d i r e c t subsidies. 5 Exports + transfers - imports. 6 Labour + c a p i t a l + i n d i r e c t taxes - subsidies. 136 t h i s i s dependent on the amount of i d l e resources that can be put to e f f e c t i v e p r o d u c t i o n i n i n d i r e c t economic a c t i v i t i e s , i t i s c o r r e c t to assume that i t i s " f i n a n c i a l l y l i n k e d " to the d i r e c t change in p r o d u c t i o n . I n d i r e c t consequences, t h e r e f o r e , are dependent and, in a l i m i t e d f i n a n c i a l sense, s u b s i d i a r y to the exogenous ( d i r e c t ) change in investment. But how can the i n d i r e c t e f f e c t s on output (income) be estimated f o r an investment? I t should be c l e a r that as a region (nation) i n v e s t s i n p r o j e c t s , the m a t e r i a l input requirements necessary f o r the development and o p e r a t i o n of these p r o j e c t s need to be s u p p l i e d . I t i s t h i s added demand f o r l o c a l l y pr'oduced goods and s e r v i c e s that can be expected to encourage i n c r e a s e d domestic manufacturing. T h i s added l o c a l p r o d u c t i o n w i l l , in t u r n , r e q u i r e i t s own supply of intermediate ( m a t e r i a l ) i n puts which w i l l , l i k e w i s e , give r i s e to a second i n c r e a s e in domestic demand. Suc c e s s i v e p r o d u c t i v e impacts w i l l thus be generated to the extent that "leakages" a r i s e i n the demand for l o c a l l y produced goods and s e r v i c e s i n each stage of p r o c e s s i n g . Leakages c o n s t i t u t e those monetary expenditures t h a t , i n each s u c c e s s i v e round of spending, do not t r a n s l a t e i n t o i n c r e a s e d s a l e s by domestic i n d u s t r y . These are f o r the most pa r t imports and payments to "primary supply" s e c t o r s , i . e . the s e r v i c e s of labour, c a p i t a l , and government, which enter the economy's p r o c e s s i n g flow without encouraging a " t e c h n o l o g i c a l " change i n f i n a l demand. I emphasize the t e c h n o l o g i c a l aspect because, as I s h a l l e x p l a i n l a t e r , some of these "primary supply" expenditures may s t i l l generate t h e i r own r i p p l e e f f e c t s throughout the economy. T h i s , however, w i l l 1 37 happen as a r e s u l t of a "Keynes ian m u l t i p l i e r " e f f e c t brought about by the p r o p e n s i t y of i n d i v i d u a l s to spend l o c a l l y a p o r t i o n of t h e i r d i r e c t l y and i n d i r e c t l y earned income. T h i s e f f e c t f a l l s i n to the ca t ego ry of induced impact and w i l l be dea l t w i th s e p a r a t e l y in another s e c t i o n . The i n d i r e c t f i n a n c i a l impact of a p r o j e c t can be es t ima ted by a number of ways. D i f f e r e n t methods of computat ion can be a p p l i e d depending on the q u a l i t y of the n a t i o n a l account s t a t i s t i c s a v a i l a b l e fo r a n a l y s i s and on the degree of economic s o p h i s t i c a t i o n ev idenced by the p l a n n i n g agenc i es of LDCs. For the more advanced n a t i o n s , where i n t e r - i n d u s t r y t r a n s a c t i o n ma t r i c e s may a l r eady be a v a i l a b l e , i nput-output a n a l y s i s o f f e r s e x c e l l e n t o p p o r t u n i t i e s f o r c a r r y i n g out the t a s k . For c o u n t r i e s of more p r i m i t i v e s t a t i s t i c a l make-up and/or fo r sma l l s c a l e p r o j e c t s , rough t o o l s of a n a l y s i s , i . e . average " t e c h n i c a l " m u l t i p l i e r s may be the on ly ones a p p l i c a b l e . For c o n d i t i o n s in between, a bag of mixed a l t e r n a t i v e s i s a v a i l a b l e fo r a n a l y s i s . i ) Input-output a n a l y s i s i s a form of d e t a i l e d q u a n t i t a t i v e economic a n a l y s i s which focuses upon the in te rdependence between the v a r i o u s s e c t o r s of an economy. I t i s a means by which one can t r a c e the e f f e c t s of a change in one s e c to r of the economy upon a l l o the r s e c t o r s . The input-output method i n v o l v e s a framework of " r e g i o n a l a c c o u n t s " d e s c r i b i n g t r a n s a c t i o n s between a r eg ion ( count ry ) and the ou t s i de w o r l d , and among a c t i v i t i e s w i t h i n the r e g i o n . It i n c l u d e s m u l t i p l i e r r a t i o s that sum up the r e l a t i o n between an i n i t i a l i n c r ea se in demand and the u l t i m a t e e f f e c t upon r e g i o n a l ou tpu t . The a n a l y s i s was f i r s t 1 38 developed by Wassily Leontief (1936) in a dire c t application to the economy of the United States but, since then, i t has spread rapidly throughout the world as a tool of national, regional, and inter-regional economic analysis (Chenery and Clark 1959, Isard 1969, Miernyk 1965, Bourque e_t §_1. 1967, Miernyk et a l . I960, Round 1972, Hoover 1975). The input-output model is a form of double-entry bookkeeping which c a l l s for the recording of each transaction between sectors (firms) as both a sale of output and a purchase of input. The essence of the model i s a set of accounts representing transactions among the following major economic sectors: Intermediate - private economic a c t i v i t i e s within the region. The sector is broken down into individual industries or a c t i v i t i e s (e.g. mining, agriculture, construction, chemical products, forestry, etc. It is sometimes referred to as the inter-industry sector because much of the d e t a i l of the input-output table refers to transactions among the separate industries within the sector. Primary - which include, Households - individuals and families residing or employed in the region, considered both as buyers of consumer goods and services and as s e l l e r s (primarily of their own labor) Government - national, p r o v i n c i a l , or l o c a l public authorities within the region. Outside World - a c t i v i t i e s (other than government) and individuals located outside the region. Capital - (at times, part of i t included within the household sector) the stock of c a p i t a l , including both fixed c a p i t a l and inventories. Value added, which i s equal to the income of households, government, and c a p i t a l sectors; is a term sometimes used in l i e u of these three sectors in simple input-output tables. In the broadest sense, i t is equivalent to the GDP generated in the various productive a c t i v i t i e s throughout the economy. Through the use of three separate tables or matrices, a quantitative description of the interdependence among the 139 various sectors of the economy is developed. The matrices are the inter-industry transaction table, the table of dire c t requirements, and the table of dire c t plus indirect requi rements. I s h a l l not discuss here the d e t a i l s of structure or procedure in input-output analysis, as thi s i s a matter which has been s u f f i c i e n t l y described by Chenery and Clark 1959, Isard 1960, Miernyk 1965, Hoover 1975, and others that have worked extensively in the f i e l d / I s h a l l instead, refer d i r e c t l y to the mechanics of m u l t i p l i e r analysis that form the essence of the indicated procedure to determine the indire c t impact of an investment (project). The Inter-industry Transaction Table A s i m p l i f i e d form of an inter-industry transaction table is described in Table 4. In order to express a l l of the transaction flows in a common unit, they are stated in monetary terms as payments/receipts for the goods or services transferred. For most economies, of course, there would be many more transactions among sectors than those indicated in Table 4. It i s to be expected that, in a real world case, the number of rows and columns of the intermediate sector would grow considerably. In addition to the transactions among sectors there could be transactions among the a c t i v i t i e s within each sector (e.g. among households or among d i f f e r e n t units of government). However, not a l l categories of transactions are of equal interest to the analyst investigating the pa r t i c u l a r problem. In our case, we focus on the interdependency of T a b l e 4 . I n t e r i n d u s t r y T r a n s a c t i o n s T a b l e ( H y p o t h e t i c a l I n p u t - O u t p u t M o d e l ) . To Final demand sectors From Capital (gross private A Intermediate sector, by industry B C D Households (consumer goods sales in region) Government (sales to governments) Outside (exports) Investment, including additions to inventories) Output totals A 300 400 100 500 1600 500 200 700 4300 Intermediate B 50 200 1000 300 100 200 100 900 2850 sector, by C 1000 200 100 700 100 300 200 500 3100 industry: D 0 800 200 500 700 0 0 400 2600 Primary supply sectors Households (labor services) Government (public services) Outside (imports) Capitnl (capital con-sumption and withdrawals from inventories) INPUT TOTALS 1900 200 200 650 4300 300 100 300 550 2850 1000 200 300 200 3100 400 100 100 2600 S o u r c e : H o o v e r ( 1 9 7 5 ) -p. o 141 industries within the intermediate sector and in their relationship with primary supply sectors. The form of accounting described in Table 4 represents a usual abridgement to i l l u s t r a t e this type of problem, where the lower right-hand portion of the matrix is not f i l l e d i n . What i s shown in Table 4 is simply an itemization of the inputs and outputs of each of the designated a c t i v i t i e s in the Intermediate sector. Figure 2 further i l l u s t r a t e s the mechanism of an Input-Output model such as the one described in Table 4. A c t i v i t i e s within the intermediate sector engage in inter-industry transactions with one another. Sales by intermediate sector to other sectors are c a l l e d sales to " f i n a l demand." At t h i s point, the outputs are considered to be in their f i n a l form and ready for their f i n a l use as far as regional production i s concerned, i . e . export, private or government consumption, or c a p i t a l formation. According to Hoover (1975), "they are leaving the region's stream of current processing a c t i v i t y . " The input-side or counterpart to f i n a l demand is "primary supply": Imports and the services of labor, c a p i t a l , and government are entering the region's processing system for the f i r s t time. The abridged set of accounts in Table 4 shows t o t a l inputs and outputs for only the a c t i v i t i e s in the intermediate sector, since transactions among a l l other sectors are ignored. This type of table, therefore, omits the incomes that individuals receive from government jobs, s o c i a l security, property rents, or c a p i t a l ownership and does not show t o t a l regional personal income. Nor does i t show t o t a l regional exports or imports 1 42 since the transactions of the household, government and c a p i t a l sectors with the outside world are ignored. The Table of Direct Requirements The input-output model shown in Table 4, although incomplete, i s nonetheless very useful in tracing and evaluating certain cumulative effects of v e r t i c a l linkages ( p a r t i c u l a r l y backward) in a region. For example, i t is easy to construct from i t a table of direct requirements (technical c o e f f i c i e n t s ) - see Table 5 showing that for each d o l l a r ' s worth of output of industry A, that industry buys 1.20 worth of industry B's output, 23.30 worth of industry C output, and 7C worth of output from i t s e l f . The table of dire c t requirements i s obtained by dividing the entries in each column of the interindustry transaction table by their respective column to t a l s ( i . e . t o t a l inputs). In th i s manner, i t can be determined that for the average d o l l a r spent by any industry i.n the intermediate sector, X d o l l a r s of sales w i l l be made by a l l other sectors in the economy. Based on the assumption that the technical c o e f f i c i e n t s remain constant or that they change slowly in time, i t is possible to estimate the dire c t e f f e c t s upon the economy resulting from a change in f i n a l demand. The increased sales (output) of the intermediate industries w i l l generate further transactions among the processing industries as they themselves require inputs to produce the additional output. The chain of repercussions, or "i n d i r e c t e f f e c t s " i s , in p r i n c i p l e , endless; but t h i s does not mean that the i n i t i a l increase in sales of one sector w i l l snowball into an i n f i n i t e l y 143 Figure 2 . Intcrscctor Flows of Goods and Services in a One Region Input-Output Model. Outf it ' . ' wor ld Table 5. Table of D i r e c t Requirements (Input or Technical C o e f f i c i e n t s f o r A c t i v i t i e s i n the Intermediate Sector - C a l c u l a t e d from i l l u s t r a t i v e data i n Table 4). Purchases (in dollars) from: Per dollar's worth of gross output In: A B C D Intumwdiutc sbr.tor A .070 .140 .032 .192 B • .012 .070 .323 .115 C .233 .070 .032 .269 D 0 .281 .065 .192 Primary supply sectors Households .412 .105 .323 .154 Government .017 .035 .065 .038 Oulsiriu .047 .105 .097 0 Capitul .151 .103 .0G4 .038 Totals" 1 000 1.000 1.000 ' 1.000 * Columns iln not always add exactly to totals, hcoauso of rounding off. S o u r c e : Hoove r ( 1 9 7 5 ) . 144 l a r g e growth i n the r e g i o n ' s output. At the most, the t o t a l e f f e c t w i l l only be a few times l a r g e r than the i n i t i a l f i n a l demand i n c r e a s e . The r a t i o in t h i s case i s c a l l e d the r e g i o n a l " t e c h n i c a l m u l t i p l i e r " . The reason why the m u l t i p l i e r i s not i n f i n i t e l y l a r g e i s that there are "leakages" from the economy. Each time one of the intermediate i n d u s t r i e s experiences an in c r e a s e i n s a l e s ( f i n a l demand), i t has to a l l o c a t e part of the e x t r a revenue to purchase inputs from the primary supply s e c t o r and not the inte r m e d i a t e s e c t o r . In t h i s way, f o r i n s t a n c e , money p a i d f o r a d d i t i o n a l imports leaves the r e g i o n , and i t s stimulus to r e g i o n a l demand i s terminated. As f a r as the t e c h n i c a l m u l t i p l i e r i s concerned, a s i m i l a r leakage occurs when expenditures are made f o r the payment of the r e s t of the primary supply s e c t o r s , i . e . wages and s a l a r i e s of labor (households), i n t e r e s t to c a p i t a l and taxes to government. The stream of "new money" that i s c i r c u l a t e d among the p r o c e s s i n g a c t i v i t i e s gets s m a l l e r with each round of spending u n t i l i t disappears completely. The t a b l e of d i r e c t requirements, however, shows only the f i r s t round of spending generated by the i n c r e a s e i n f i n a l demand. I t only p o i n t s t o the s i z e of the t e c h n o l o g i c a l l i n k a g e s e x i s t i n g among s e c t o r s . 145 The Table of D i r e c t plus I n d i r e c t Requirements The a n a l y s t can, nonetheless, estimate q u i t e a c c u r a t e l y what the t o t a l stimulus ( t e c h n i c a l m u l t i p l i e r ) w i l l be out of i n c r e a s i n g the f i n a l demand of any intermediate a c t i v i t y d e p i c t e d i n our input-output model. T h i s can be done through the Table of D i r e c t Plus I n d i r e c t Requirements d e s c r i b e d in Table 6, which shows the sum t o t a l of the r i p p l e (expansionary) e f f e c t s i n each s e c t o r generated by an i n i t i a l i n c r e a s e i n f i n a l demand. Table 6 i s c a l c u l a t e d by t o t a l l i n g the sum of each separate round of secondary t r a n s a c t i o n s . While i t i s p o s s i b l e to do t h i s manually f o r a small f i n a l demand i n c r e a s e i n a simple three s e c t o r economy, the computation i s g r e a t l y f a c i l i t a t e d i n more complex s i t u a t i o n s by the use of matrix a l g e b r a and high-speed computers. According to Miernyk (1965), the upper p o r t i o n of the t a b l e of d i r e c t p l u s i n d i r e c t requirements ( i . e . the pa r t d e a l i n g with t o t a l added s a l e s by intermediate a c t i v i t i e s ) , - i s t e c h n i c a l l y d e r i v e d by t a k i n g the d i f f e r e n c e between an i d e n t i t y matrix and the matrix of t e c h n i c a l c o e f f i c i e n t s f o r the' intermediate s e c t o r (upper p a r t of the Table of D i r e c t Requirements) and from t h i s computing a transposed i n v e r s e matrix. In matrix algebra t h i s i s expressed as: , T ( I " A ) ' 1 ' where: A i s a matrix of input-output c o e f f i c i e n t s f o r the intermediate s e c t o r 146 T a b l e 6 . T a b l e o f D i r e c t P l u s I n d i r e c t R e q u i r e m e n t s ( T o t a l D i r e c t a n d I n d i r e c t E f f e c t s o f a n I n c r e a s e i n F i n a l Demand - C a l c u l a t e d f r o m i l l u s t r a t i v e d a t a i n T a b l e 5 ) . Per dollar of Increased sales to find demand by: Total added sales (in $) by A. B. C, 0 Intermediate activities A B C D combined * A 1.118 .289 .157 .359 661 B .126 1.234 .439 .352 .439 C .297 .284 1.171 501 .477 D .068 .452 .247 1.400 .400 Total 1.609 2.259 2014 2612 1.977 Added purchases (in Sj by all Intermediate activities Irom primary supply sectors: Households .614 .419 .532 574 554 Government .079 .092 .108 .115 092 Outside .095 .171 .167 .103 .123 Capital .215 .317 .193 .207 .231 * Figures In this column show the impact of an added dollar of aucji(M|.iU! I I I I . I I demand sales by all Intermediate activities/apportioned in the same proportions as these activities shared in the final demand sales shown in Table 9 3 Specifically, this means added final demand sales of 46tf by A . 20J by fl. 17c by C. and 17* by D, totalling SI.00. S o u r c e : H o o v e r ( 1 9 7 5 ) . 1 47 I i s an identity matrix T is transposed. For further d e t a i l s on the methodology see Chenery and Clark, 1959 or Miernyk, 1965. The lower portion of the table of direct plus indirect requirements ( i . e . added purchases by a l l intermediate a c t i v i t i e s from primary supply sectors) is mathematically derived by multiplying the lower portion of the technical c o e f f i c i e n t matrix ( i . e . purchases from primary supply sectors per d o l l a r ' s worth of output in a c t i v i t i e s in the intermediate sector) by the upper portion of the matrix of dire c t plus indirect requirements ( i . e . t o t a l added sales by intermediate a c t i v i t i e s ) . The algebraic expression for this computation i s : The upper portion of Table 6 shows the amount by which the sales of each intermediate a c t i v i t y are ultimately increased by a one dol l a r increment in the f i n a l demand sales of any intermediate a c t i v i t y , including a l l of the m u l t i p l i e r effects described a r l i e r . The reason why the figures on the diagonal of the table are s p e c i a l l y large (in fact larger than 1) i s because the effects are naturally largest for the a c t i v i t y experiencing the i n i t i a l f i n a l demand increase, as that increase i s part of the t o t a l increment. The complete Table of Direct plus Indirect where: is a matrix of input output c o e f f i c i e n t s for the primary sector. T is a matrix of direct plus i n d i r e c t requirements of the intermediate supply sector. 1 48 Requirements, including the lower portion, summarizes the t o t a l generation of income resulting from the technological linkages between a region's intermediate a c t i v i t i e s . The c o e f f i c i e n t s in the table, therefore, indicate the size of the individual sector m u l t i p l i e r s . For example, the "technological m u l t i p l i e r " for sector A is 1.609, and the related increment in purchases from primary supply sectors generated by this additional output i s Households 0.614, Government 0.079, Outside (Imports) 0.095 and Capital 0.215. In the context of a forest industry investment purchasing, say, $1.million in inputs from the chemical sector, and assuming thi s sector was equal to a c t i v i t y A in our input-output model, the above c o e f f i c i e n t s (multipliers) would show that the t o t a l aggregate effects on the economy of the $1 m i l l i o n chemical purchase would amount to an increment in Gross Output of $ 609 thousand, Household Income of $614 thousand, Government Revenue of $79 thousand, Imports of $95 thousand and Capital Income of $215 thousand. To complete the analysis of a project's indi r e c t impact, the procedure would need to be repeated for a l l other intermediate sector purchases made throughout the l i f e of the project. For wood and wood based industries projects t h i s would imply looking mainly into the indirect impact of purchases from intermediate a c t i v i t i e s such as transportation, chemicals, construction, fuels and energy, metal works, trade, banking and government services. 1 49 i i . Aggregate M u l t i p l i e r A n a l y s i s If a p r o j e c t i s being e v a l u a t e d and there i s no input-output model a v a i l a b l e f o r the n a t i o n a l economy, a cruder but simpler approach to the computation of the i n d i r e c t impact needs to be f o l l o w e d . T h i s approach, which I have named the "aggregate m u l t i p l i e r " a n a l y s i s , uses gross average n a t i o n a l accounts s t a t i s t i c s i n s t e a d of d e t a i l e d input-output c o e f f i c i e n t s to estimate the t e c h n o l o g i c a l " r i p p l e " e f f e c t s of investment. T h i s approach r e q u i r e s the f o l l o w i n g i n f o r m a t i o n : - The aggregate (average) p r o p e n s i t y to purchase intermediate goods and s e r v i c e s ( i ) i n the economy per d o l l a r of gross output (APP^) - The aggregate (average) p r o p e n s i t y to purchase inputs from i n d i v i d u a l primary supply s e c t o r (n) per d o l l a r of gross output ( A P P n ) . N = household ( h ) , government ( g ) , f o r e i g n or import ( f ) , and c a p i t a l ( c ) . If these f i g u r e s are not r e a d i l y a v a i l a b l e they can be computed with the help of standard n a t i o n a l accounts s t a t i s t i c s such as t o t a l gross output, t o t a l value added, t o t a l imports and t o t a l i n d i r e c t taxes ( u s u a l l y value added or s a l e s t a x e s ) . T o t a l output ( s a l e s ) by i ntermediate s e c t o r a c t i v i t i e s can be obtained by d i f f e r e n c e between t o t a l gross output and the output of the primary supply s e c t o r . From t h i s data a set of aggregate t e c h n i c a l c o e f f i c i e n t s can be computed for the economy as a whole. The "aggregate t e c h n o l o g i c a l m u l t i p l i e r " f o r i n c r e a s e d purchases from primary supply s e c t o r (n) per d o l l a r of added s a l e s to f i n a l demand by i n t e r m e d i a t e a c t i v i t i e s i s : where k i s the Aggregate T e c h n o l o g i c a l M u l t i p l i e r 1 50 APP^ i s the Aggregate P r o p e n s i t y to Purchase intermediate goods and s e r v i c e s per d o l l a r of gross output. APP^ i s the Aggregate P r o p e n s i t y to Purchase primary supply inputs (n) per d o l l a r of gross output d e l i v e r e d to f i n a l demand, n = h,g,f, and c. The formula f o r t o t a l added purchases ( d i r e c t and i n d i r e c t ) from primary supply s e c t o r (n) a r i s i n g from an i n c r e a s e i n the f i n a l demand of intermediate a c t i v i t y (m) i s : TP = AFD k n m t where TP n = T o t a l Purchases from primary supply s e c t o r (n), n = household (h), government (g), f o r e i g n or imports ( f ) , and c a p i t a l (g) AFD m = Change in the F i n a l Demand (added s a l e s ) of i n t e r m e d i a t e a c t i v i t y (m) s u p p l y i n g inputs to the p r o j e c t k t = Aggregate T e c h n o l o g i c a l M u l t i p l i e r While the "aggregate t e c h n o l o g i c a l m u l t i p l i e r " i s a q u i c k , expedient method f o r computing the i n d i r e c t impact of an investment p r o j e c t , i t i s not very p r e c i s e . The concept i m p l i e s that a i l i n t e r m e d i a t e a c t i v i t i e s i n the region have the same p r o p e n s i t y to purchase l o c a l goods and s e r v i c e s , and primary supply i n p u t s per u n i t of output to f i n a l demand. I t i s , t h e r e f o r e , unable to d i s t i n g u i s h between the impact upon the economy of added s a l e s by one intermediate a c t i v i t y from another. A l l added s a l e s are t r e a t e d the same, r e g a r d l e s s of d i f f e r e n c e s e x i s t i n g between the i n d i v i d u a l producing i n d u s t r i e s . I t i s , hence, recommended that t h i s method be used only as a l a s t r e s o r t under severe budgetary r e s t r i c t i o n s or extreme lack of data. 151 i i i . M o d i f i e d Aggregate M u l t i p l i e r A n a l y s i s For s i t u a t i o n s i n which there i s a b e t t e r data base than the one r e q u i r e d f o r aggregate m u l t i p l i e r a n a l y s i s but not as good as f o r input-output a n a l y s i s , e.g. the p r e c i s e l i n k a g e s between a l l a c t i v i t i e s of the intermediate s e c t o r are unknown but there i s some idea of the breakdown of input requirements f o r i n d i v i d u a l (major) intermediate a c t i v i t i e s , i t i s suggested a "modified aggregate" m u l t i p l i e r a n a l y s i s be done. By v i r t u e of c a r r y i n g out the a p p r a i s a l i n two steps, t h i s method o f f e r s a s u b s t a n t i a l improvement regarding the a b i l i t y to d i s c r i m i n a t e between the impact of a d d i t i o n a l s a l e s by intermediate a c t i v i t i e s with widely d i f f e r e n t t e c h n o l o g i c a l make-ups (e.g. leakage f a c t o r s ) . To c a r r y out a "modified aggregate m u l t i p l i e r " a n a l y s i s , the f o l l o w i n g i n f o r m a t i o n i s r e q u i r e d : As per the aggregate m u l t i p l i e r a n a l y s i s APP^ = The aggregate p r o p e n s i t y to purchase intermediate goods and s e r v i c e s ( i ) i n the economy per d o l l a r of gross output. APP n = The Aggregate Pr o p e n s i t y to Purchase primary supply inputs (n) i n the economy per d o l l a r of gross output n = household (h), government (g), f o r e i g n or imports ( f ) , and c a p i t a l (c) However, the a n a l y s t must a l s o have the f o l l o w i n g data f o r each major category of intermediate s e c t o r purchases r e q u i r e d throughout the l i f e of the p r o j e c t . SPP- = The S e c t o r a l P r o p e n s i t y to Purchase intermediate goods and s e r v i c e s ( i ) per d o l l a r of gross output d e l i v e r e d to f i n a l demand by i n d i v i d u a l intermediate a c t i v i t i e s (m) m = major c a t e g o r i e s of intermediate a c t i v i t i e s s u p p l y i n g inputs to the p r o j e c t a,b,c ... e t c . S P P n m = The S e c t o r a l P r o p e n s i t y to Purchase primary supply 1 52 i n p u t s (n) p e r d o l l a r o f g r o s s o u t p u t d e l i v e r e d t o f i n a l demand by i n d i v i d u a l i n t e r m e d i a t e a c t i v i t i e s (m) n = h , g , f , and c m = a,b,c ... e t c . As i n d i c a t e d e a r l i e r , t h i s d a t a may not a l l be r e a d i l y a v a i l a b l e , p a r t i c u l a r l y i f t h e p r o j e c t b e i n g e v a l u a t e d r e p r e s e n t s an i s o l a t e d e f f o r t and t h e r e i s no c o m p r e h e n s i v e p l a n n i n g underway w h i c h c o u l d c e n t r a l l y p r o v i d e i t t o a l l p r o j e c t s . N e v e r t h e l e s s ad hoc s o u r c e s of i n f o r m a t i o n may s t i l l make t h i s t y p e o f a n a l y s i s p o s s i b l e i n LDCs. I f p r o p e r l y r e q u e s t e d f r o m s t a t i s t i c a l a n d 1 p l a n n i n g a u t h o r i t i e s , t h e r e a r e numerous p i e c e s o f t h e economic p u z z l e t h a t c a n be p u t t o g e t h e r . T h e s e , i n t u r n , s u p p l e m e n t e d by i n d i v i d u a l f e a s i b i l i t y and p r e - i n v e s t m e n t s t u d i e s , b o t h i n and o u t of t h e government s p h e r e , may y i e l d t h e n e c e s s a r y s e c t o r a l d a t a . S t i l l , i t i s a measure o f t h e a n a l y s t ' s t e c h n i c a l s k i l l s and i m a g i n a t i o n how he c h o o s e s t o s t r u c t u r e a r e l i a b l e d a t a base and c o n c i l i a t e t h i s b a s e w i t h h i s b e s t t o o l s of a n a l y s i s . T h i s , I am a f r a i d , f a l l s o u t s i d e t h e s c o p e of t h i s t h e s i s and must be d e c i d e d i n d i v i d u a l l y by e a c h p l a n n e r - a n a l y s t f a c e d w i t h t h e c h a l l e n g e . The " m o d i f i e d a g g r e g a t e t e c h n o l o g i c a l m u l t i p l i e r " f o r i n c r e a s e d p u r c h a s e s from p r i m a r y s u p p l y s e c t o r s (n) p e r d o l l a r o f a d d e d s a l e s t o f i n a l demand by i n t e r m e d i a t e a c t i v i t i e s (m) mk^ = SPP + SPP- 1 APP nm im \1 - A P ? i ) n The f o r m u l a f o r t o t a l a dded p u r c h a s e s ( d i r e c t a nd i n d i r e c t ) by a l l i n t e r m e d i a t e a c t i v i t i e s f r o m p r i m a r y s u p p l y s e c t o r (n) as a r e s u l t o f a f i n a l demand i n c r e a s e i n a g i v e n i n t e r m e d i a t e 153 a c t i v i t y (m) i s : / \ TP = = AFD SPP + SPP. 1 APP n m nm 1m U - APP £J n where TP = T o t a l Purchases from primary supply s e c t o r (n) n n = h, g, f and c AFD = Change i n the F i n a l Demand of Intermediate m . • a c t i v i t y m m = a,b,c ... e t c . SPP = S e c t o r a l Propensity to Purchase primary supply inputs (n) per d o l l a r of gross output d e l i v e r e d to f i n a l demand by intermediate a c t i v i t y (m) SPP. = S e c t o r a l Propensity to Purchase intermediate inputs i m ( i ) per d o l l a r of gross output d e l i v e r e d to f i n a l demand by intermediate a c t i v i t y m APP^ = Aggregate Propensity to Purchase intermediate inputs per d o l l a r of gross output d e l i v e r e d to f i n a l demand by the economy as a whole. APP n = Aggregate Propensity to Purchase primary supply inputs (n) per d o l l a r of gross output d e l i v e r e d to f i n a l demand. The weakest aspect of input-output a n a l y s i s , or of any m u l t i p l i e r a n a l y s i s f o r t h i s matter, when attempting to estimate the t e c h n o l o g i c a l i n d i r e c t impact of a p r o j e c t upon the economy, i s the u n d e r l y i n g assumption that the t e c h n i c a l c o e f f i c i e n t s of the economy remain constant over time. T h i s o b v i o u s l y i s not t r u e , although more o f t e n than not, the t e c h n i c a l l i n k a g e s among i n d u s t r i e s do not change r a d i c a l l y over the short term, and i n some cases they may even remain constant f o r extended p e r i o d s of time. The speed with which the economic make-up of a region or country changes i n time i s d i f f i c u l t to gauge. I t i s even more d i f f i c u l t to f o r e c a s t with any degree of accuracy the p a r t i c u l a r s t a t e of the economy that w i l l p r e v a i l at some d i s t a n t p o i n t i n 1 54 the f u t u r e . However, attempts to modify t o o l s of r e g i o n a l economic a n a l y s i s to i n c l u d e these concepts are being made by both development economists and planners a l i k e . New a d a p t a t i o n s to the input-output technique and m u l t i p l i e r a n a l y s i s i n c l u d e methods f o r dynamic input-output a n a l y s i s , the combination of s i m u l a t i o n and input-output a n a l y s i s , and the i n c o r p o r a t i o n of allowances i n t o the t e c h n o l o g i c a l m u l t i p l i e r f o r p o s i t i v e e f f e c t s of complementary l i n k a g e s and/or negative e f f e c t s of h o r i z o n t a l l i n k a g e s . On average, however, these techniques are too advanced to have any p r a c t i c a l a p p l i c a b i l i t y in LDCs, where even more rudimentary a n a l y s i s i s c o n s t r a i n e d f o r l a c k of a p p r o p r i a t e data. N e v e r t h e l e s s , the p o s s i b i l i t y that advanced techniques of r e g i o n a l economic a n a l y s i s may soon become widespread i n LDCs i s s t r o n g . In the meantime, p r o j e c t planners w i l l have to do with the l e s s a c c u r a t e but more a p p l i c a b l e t o o l s of s t a t i c input-output or m u l t i p l i e r a n a l y s i s . S t a t i c models of economic i n t e r r e l a t i o n s h i p s may be l i m i t i n g f o r e s t i m a t i n g with p r e c i s i o n the a b s o l u t e impact of long term p r o j e c t s . T h i s l i m i t a t i o n , however, does not extend to t h e i r a b i l i t y to rank p r o j e c t s r e l a t i v e to a given f u t u r e s t a t e of the economy. If a l l p r o j e c t s are a p p r a i s e d w i t h i n a given time span a g a i n s t the same model e n t a i l i n g equal assumptions as to e x i s t i n g economic l i n k a g e s , other t h i n g s being equal, the ranking of p r o j e c t s as i n d i c a t e d by the model i s v a l i d f o r the assumed s t a t e of the economy. Depending on the p r e c i s e needs of the p l a n n e r - a n a l y s t t h i s idea may be of small c o n s o l a t i o n . I t i s , nonetheless, a thought which may help curb a premature d e s i r e i n the reader to bury m u l t i p l i e r a n a l y s i s as a u s e f u l 155 t o o l of p r o j e c t a p p r a i s a l . C o n s i s t e n t with the format employed f o r the d i s p l a y of d i r e c t e f f e c t s , a summary t a b l e must be s t r u c t u r e d to present the r e s u l t s of the study of i n d i r e c t e f f e c t s . Table 7 i l l u s t r a t e s the approach. (3) Secondary or Induced F i n a n c i a l Impact Income i s generated in a r e gion as a r e s u l t of the development of p r o d u c t i v e a c t i v i t i e s . We have seen that among the d i r e c t e f f e c t s of investment are payments to primary supply f a c t o r s such as l a b o r , c a p i t a l and government. These payments c o n s t i t u t e , i n the broadest sense, a value added to the economy and are, t h e r e f o r e , a source of r e g i o n a l income. S i m i l a r l y , i n d i r e c t e f f e c t s v i a t e c h n o l o g i c a l l i n k a g e s between p r o d u c t i v e a c t i v i t i e s , generate t h e i r own a d d i t i o n s to income. T h i s happens as a r e s u l t of the changes in p r o d u c t i o n brought about by the need to supply inputs to the i n i t i a l investment. The extent and d i s t r i b u t i o n of the d i r e c t and i n d i r e c t a d d i t i o n s to income w i l l d i f f e r with the type of investment that i s undertaken. Secondary a d d i t i o n s to income, i n t u r n , w i l l depend on the s i z e and q u a l i t y of the d i r e c t and i n d i r e c t e f f e c t s . Secondary or induced e f f e c t s are those that a r i s e as a r e s u l t of a change in r e g i o n a l income and the subsequent respending of t h i s income throughout the economy. The r e c i p i e n t s of the d i r e c t and i n d i r e c t income w i l l tend to spend a p o r t i o n of t h e i r economic gains i n the purchase of domestic goods and s e r v i c e s , and i n doing so, w i l l t r i g g e r f u r t h e r i n c r e a s e s i n p r o d u c t i o n which in turn w i l l f u r t h e r i n c r e a s e Table 7. Summary of Indirect Financial Impact of an Investment Beginning In Year 1 and Ending In Year n. Y E A R 1 2 3 n PRIVATE ACCOUNT LABOUR1 - Total Wages & Salaries (Total Employment) Sk i l l e d Labour (Employment) Semi-Skllled Labour (Employment) Unskilled Labour (Employment) 2 CAPITAL - Gross Factor Compensation PUBLIC ACCOUNT GOVERNMENT SERVICES3 EXTERNAL ACCOUNT IMPORTS VALUE ADDED4 1 Including fringe benefits and contributions to so c i a l security by employers. 2 Total compensation to land and c a p i t a l . 3 Mainly indirect taxes*net of subsidies. 4 Labour + Capital + Government Services. Table B. Summary of Secondary Financial Impact of an Investment Beginning i n Year 1 and Ending in Year n. SSI Y E A R 1 2 3 n PRIVATE ACCOUNT LABOUR1 - Total Wages & Salaries (Total Employment) Sk i l l e d Labour (Employment) Semi-Skllled Labour (Employment) Unskilled Labour (Employment) 2 CAPITAL - Gross Factor Compensation PUBLIC ACCOUNT GOVERNMENT SERVICES3 EXTERNAL ACCOUNT IMPORTS VALUE ADDED4 1 Including fringe benefits and contributions to social security by employers. 2 Total compensation to land and c a p i t a l . 3 Mainly indirect taxes net of subsidies. 4 Labour + Capital + Government Services. 1 57 r e g i o n a l income and so f o r t h . The respending of a given amount of new income w i l l generate i n t h i s manner a t o t a l income that i s l a r g e r than the o r i g i n a l i n c r e a s e i n income. T h i s phenomenon i s c a l l e d a "Keynesian income e f f e c t " and i s brought about by an "income (expenditure) m u l t i p l i e r " p r o c e s s . The induced respending that i s of i n t e r e s t f o r m u l t i p l i c a t i o n purposes in f i n a n c i a l impact a n a l y s i s i s that connected with a l l expenditures on f i n a l goods and s e r v i c e s that are a f u n c t i o n of income. As I s h a l l e x p l a i n l a t e r , these expenditures are f o r the most p a r t those connected with a change i n consumer income while changes i n i n v e s t o r s and government income are ignored. The s e c t o r a l source of the d i r e c t and i n d i r e c t income i s i r e l e v a n t p r o v i d e d i t i s an i n j e c t i o n of funds i n t o the economy. Due to the p r o p e n s i t y of i n d i v i d u a l s to spend d o m e s t i c a l l y , any stimulus to the economy i s not c o n f i n e d to i t s o r i g i n a l impact but g i v e s r a t h e r a s e r i e s of s u c c e s s i v e pushes to the system u n t i l i t i s absorbed i n t o the normal c i r c u i t of expenditure and r e c e i p t . The magnitude of these s u c c e s s i v e pushes r e l a t i v e to the i n i t i a l expenditure i s a f u n c t i o n of leakages from the spending stream. Leakages are c o n s i d e r e d to be any behavior p a t t e r n which reduces the spending of income w i t h i n a given economy. The b a s i c theory of income m u l t i p l i e r i s simple enough. A money i n j e c t i o n i n t o a n a t i o n a l or r e g i o n a l economic system ( i n our case the consumer expenditures of those d i r e c t l y and i n d i r e c t l y r e c e i v i n g income), w i l l cause an i n c r e a s e in the t o t a l l e v e l of income by some m u l t i p l e of the o r i g i n a l i n j e c t i o n . Where Y rep r e s e n t s the change in the l e v e l of a 1 58 region's income, J i s the monetary i n j e c t i o n and k s i s the secondary income m u l t i p l i e r . AY = (J) k s (1) The c o n v e n t i o n a l f o r m u l a t i o n f o r the m u l t i p l i e r i t s e l f assumes that the l e v e l of Investment ( I ) , Government (G) and r e g i o n a l exports (X) remain constant and autonomous, then makes allowances f o r the v a r i o u s leakages d u r i n g the m u l t i p l i e r p r o c e s s . When assuming a s t a r t i n g p o i n t from GDP, these leakages i n c l u d e the p r o p o r t i o n of a d d i t i o n a l income that i s p a i d f o r f a c t o r income abroad ( f v ) ; the p r o p o r t i o n of income that i s d i r e c t l y and i n d i r e c t l y taxed by government i n c l u d i n g c o n t r i b u t i o n s to s o c i a l s e c u r i t y , net of s u b s i d i e s and t r a n s f e r payments ( t x ) ; the p r o p o r t i o n of income that i s saved f o r gross investment and f o r the true hoarding of money, i n c l u d i n g i n s t i t u t i o n a l l a g s ( s ) ; the p r o p o r t i o n of consumption expenditures d i r e c t l y spent on imported goods and s e r v i c e s (m c); the p r o p o r t i o n of consumption expenditures d i r e c t l y spent on d o m e s t i c a l l y manufactured ( i n t e r m e d i a t e ) goods and s e r v i c e s ( i c ) ; the p r o p o r t i o n of gross aggregate expenditures (output) spent on imported goods and s e r v i c e s (m a = Aggregate P r o p e n s i t y to Purchase imports per d o l l a r of gross o u t p u t ) ; and the p r o p o r t i o n of gross aggregate expenditures spent on d o m e s t i c a l l y manufactured goods and s e r v i c e s ( i a = Aggregate P r o p e n s i t y to Purchase intermediate goods and s e r v i c e s per d o l l a r of gross o u t p u t ) . With these leakages and f o l l o w i n g the usual Keynesian 159 relationships (Brownrigg 1971, Bramson 1972, Moore and Sufrin 1974, Archer 1976, Davies 1976, and Wonnacott 1978), the basic formulation of the national (regional) income m u l t i p l i e r can be established: 1 General form k = (2) 5 1 - (c) (y) where k = Income mu l t i p l i e r s c = Marginal (sometimes average) propensity to consume estimated at c/y i f dc/dy not available y = Marginal (or average) propensity to generate income ( d i r e c t l y and i n d i r e c t l y ) per d o l l a r of consumption expenditure. It is the portion of a dol l a r of consumption expenditure that remains in the economy as a l o c a l factor payment. If aggregate consumption c i s not available from national account s t a t i s t i c s , an estimate of c can be obtained from: c = ( l - f y - s - t ) (3) y in turn i s a composite of the d i r e c t propensity (y^) and the indir e c t propensity (y^) to generate income of consumption expenditures Y = Y d + Yi (4) where y d = 1 - mc - i c (5) 1 and y^ = i c 1 - ma - i a (6) 1 " *a 160 expanding (4) y = ( 1 - mc - i c ) + • i c 1 - l . (1 - ma - i a ) (7) and substituting (3) and (7) in (2), we have the s p e c i f i c form of the income m u l t i p l i e r (8) If i n s u f f i c i e n t information i s available on the precise sectoral breakdown of consumption, a more gross but s t i l l useful estimate of y can be obtained from aggregate accounts as follows: y = 1 - i . (1 - ma - i a ) (9) in which case substituting (3) and (9) in (2) the income mu l t i p l i e r becomes (10) The income m u l t i p l i e r as described above means that for every d o l l a r of increase in consumer expenditures ( d i r e c t l y and i n d i r e c t l y induced by a project) a t o t a l of k g d o l l a r s of additi o n a l income w i l l be generated over time via the m u l t i p l i e r process. Therefore, as described in ( 1 ) AY = (J)k s and the secondary change in income AYS = AY - J (11) We know, however, that the change in consumer expenditures 161 (J) i s equal to the d i r e c t and i n d i r e c t change i n GDP (A Y d + i ^ l e s s any income (leakage = Le) which may not add to domestic consumer demand. During the d e r i v a t i o n of the m u l t i p l i e r i t was e s t a b l i s h e d that t h i s leakage i n c l u d e d f a c t o r income payments abroad ( f ^ ) , savings f o r gross investment and f o r the true hoarding of money ( s ) , and d i r e c t and i n d i r e c t government taxes i n c l u d i n g c o n t r i b u t i o n s to s o c i a l s e c u r i t y , net of s u b s i d i e s and t r a n s f e r payments ( t x ) . The u n d e r l y i n g assumption i n these leakages being that the s t a r t i n g p o i n t of c a l c u l a t i o n i s GDP, and that investment and government expenditures are exogenous v a r i a b l e s to the model (autonomous and independent of income). Th e r e f o r e J = Ay . - Le (12) d+1 or J = A Y d + i - £ - s - t x (13) F i n a l l y , s u b s t i t u t i n g (1) i n (11). and s i m p l i f y i n g , the s p e c i f i c formula f o r the secondary change i n income ( A Y S ) can be d e r i v e d AY s = (J) ( k s - 1) (14) s u b s t i t u t i n g (13) i n (14) and r e a r r a n g i n g , the formula becomes AY s - ( k s - 1) (A Y d + i - f y - s - t x ) (15) I t has been suggested that i f a d e t a i l e d , up to date i n p u t -output t a b l e i s a v a i l a b l e to the a n a l y s t , the study of the i n d i r e c t and secondary f i n a n c i a l e f f e c t s of a p r o j e c t can be e a s i l y c a l c u l a t e d i n a one step s o l u t i o n rather than i n the two steps o u t l i n e d above. The procedure would b a s i c a l l y e n t a i l the c l o s i n g of the p r o c e s s i n g s e c t o r of the input-output t a b l e to 162 households. By doing t h i s , the model would then show an automatic feedback from household supply to household demand. The result, which was succinctly described by Miernyk (1965) and Hoover (1975) i s that (1) the presently incomplete households row and column in Table 4 would need to be completed, and (2) the households primary supply sector (row) would need to be made perfectly equivalent to the households f i n a l demand sector (column), so that any increase in households income can be assumed to translate d i r e c t l y and with no leakages into increased household (consumer) expenditures. Within the imperfect data world of the t y p i c a l LDCs, both requirements unfortunately are unlikely to be met with ease. For these reasons, i t is not recommended that the analyst focus on the input-output technique for the computation of secondary e f f e c t s . Instead, i t is suggested that a modified Keynesian m u l t i p l i e r approach, as described e a r l i e r , be used. A f i n a l concept which must be considered in the application of a m u l t i p l i e r is the concept of time. It i s obvious that a l l rounds of spending and respending cannot take place instantaneously but are spread over time. The precise lag in the spending pattern is unique to each economy and cannot, therefore, be generalized upon. A rule of thumb, however, i s to assume that the effect of the m u l t i p l i e r w i l l take place over a one to two year period from the time of the i n i t i a l change in income, and that respending w i l l occur, on average, every 2-4 months. Given t h i s assumption and knowing the t o t a l income m u l t i p l i e r , the f i r s t round of expenditures and additions to income can be estimated separately and added up. By difference 163 between the t o t a l m u l t i p l i e r and the f i r s t round e f f e c t s , the second round additions to income can then be determined. Having determined the secondary change in income, i t remains to determine the f i n a n c i a l impact of thi s change upon the private, public and foreign accounts. From national accounts s t a t i s t i c s we know the relationship between value added (GDP) and imports, including the portion that on average goes to pay for the use of foreign income factors. Likewise, from the income side of national accounts we know the r e l a t i v e compensations paid to each factor of production. With th i s data i t becomes possible to estimate the average impact upon each of the aforementioned accounts and to structure a summary table of secondary effect such as Table 8. (4) Summary of Financial Impacts At t h i s point in the f i n a n c i a l appraisal a l l that remains to be done i s to structure a f i n a l table summarizing the d i r e c t , indirect and secondary f i n a n c i a l impact of a forestry investment upon the private, public and foreign accounts of the nation. This can be accomplished by simply adding Tables 6, 7, and 8 which are already in the prescribed form. Specimen Table 9 provides an example of how to display the aggregate impact. Table 9. Direct, Indirect and Secondary Financial Impact of an Investment Beginning i n Year 1 and Ending i n Year n. (S) Y E A R 1 2 3 PRIVATE ACCOUNT DIRECT FIXED CAPITAL FORMATION LABOUR1 - Total Wages & Salaries (Total Employment) S k i l l e d Labour (Employment) Semi-Skilled Labour (Employment) Unskilled Labour (Employment) i 2 1 CAPITAL - Total Gross Factor Compensation i PUBLIC ACCOUNT DIRECT FIXED CAPITAL FORMATION GOVERNMENT SERVICES3 - Total DIRECT SUBSIDIES L NET RECEIPTS - Total EXTERNAL ACCOUNT DIRECT EXPORTS DIRECT TRANSFERS IMPORTS - Total BALANCE5 - To t a l VALUE ADDED6 1 Including fringe benefits and contributions to s o c i a l security by employers. 2 Total compensation to land and c a p i t a l . 3 Mainly i n d i r e c t taxes (including value added or sales tax, import duties and l o c a l government taxes) + d i r e c t government services. 4 Government Services - d i r e c t subsidies. 5 Exports + transfer - imports. 6 Labour + c a p i t a l + i n d i r e c t taxes - subsidies. I I - From rest of the World l I 165 5.2. Economic Analysis A. The Regional and/or National Welfare Test During the f i n a n c i a l analysis our concern was mainly with cash flow effects of alternative investment options. In economic analysis, the emphasis i s on studying the welfare implications of these options. The net contribution to society's well-being of each option must be established so that a ranking of alternatives can be made, and ultimately, a project or set of projects chosen for implementation. The key elements in economic analysis are development goals, development c r i t e r i a and appraisal procedure. I s h a l l now summarily refer to these elements and attempt to provide guidelines for the economic appraisal of forestry investments. (1) The P r a c t i c a l Goals Part I of the thesis, p a r t i c u l a r l y Sections 3 and 4, reviewed at length the goals and c r i t e r i a of economic development. The general conclusion was that economic development is concerned with changes in the l e v e l of welfare of a nation (region) over time. As such, economic development encompasses a l l of the welfare components of society's members -goods, services, l e i s u r e , environmental qualit y , economic equality, and many other things which convey s a t i s f a c t i o n to ind i v i d u a l s . The catch, however, i s that t h i s concept of welfare cannot presently be quantified - not only i s individual welfare a very personal and ambiguous concept but the 1 6 6 aggregation of t o t a l w e l f a r e over i n d i v i d u a l s i s f o r a l l p r a c t i c a l purposes i m p o s s i b l e . Recognizing the i m p o s s i b i l i t y of measuring changes in t o t a l w elfare, economists l i m i t themselves to methods f o r measuring "economic w e l f a r e " - that p o r t i o n of s o c i e t y ' s wants that has to do with the m a t e r i a l ends of l i f e . Thus, the p r a c t i c a l g o als of economic development and to which a l l p r o j e c t s , f o r e s t r y or otherwise, should c o n t r i b u t e , are d e f i n e d as the p r o v i s i o n of i n c r e a s e d (maximum) economic e f f i c i e n c y , improved economic e q u i t y , and some degree of s a t i s f a c t i o n of s o c i e t y ' s most important merit wants. (2 ) E f f i c i e n c y C r i t e r i o n The c r i t e r i a f o r a p p r a i s i n g a p r o j e c t ' s c o n t r i b u t i o n to economic development a r e , i n the s i m p l e s t terms, connected with measures ( r e l a t i v e or absolute) of economic e f f i c i e n c y , e q u i t y and merit wants. As f a r as a n a t i o n i s concerned, one important p r a c t i c a l measure of economic e f f i c i e n c y i s the l e v e l of aggregate consumption made p o s s i b l e by the g a i n f u l employment of i t s s c a r c e p r o d u c t i v e r e s o u r c e s . By i t s very nature, aggregate consumption r a i s e s measurement problems. I t i s , n e v e r t h e l e s s , one good i n d i c a t o r of the l e v e l of m a t e r i a l s a t i s f a c t i o n a t t a i n e d by s o c i e t y as a whole given a s p e c i f i e d performance of the economy. In layman's language, " i t i s a measure of the s i z e of p i e baked by the economy at each p o i n t i n time." While d i f f i c u l t i e s a r i s e i n the measurement,of aggregate consumption they are not insurmountable. In the context of economic a p p r a i s a l , s o c i a l c o s t s and b e n e f i t s are nothing more than s u b t r a c t i o n s and a d d i t i o n s to 167 aggregate consumption. With s o c i a l b e n e f i t s d e f i n e d as a d d i t i o n s to aggregate consumption, s o c i a l c o s t s become s a c r i f i c e d s o c i a l b e n e f i t s , i . e . aggregate consumption foregone. The d i s t i n c t i o n between s o c i a l c o s t s and b e n e f i t s i s simply one of s i g n , so that there i s no c l e a r c u t a n a l y t i c a l d i s t i n c t i o n between measuring b e n e f i t s and measuring c o s t s . If a more e f f i c i e n t economy i s one that p r o v i d e s f o r a higher l e v e l of aggregate consumption, i t f o l l o w s that a l l p r o j e c t s showing a s u r p l u s of s o c i a l b e n e f i t s over s o c i a l c o s t s should be undertaken, as t h i s would lead to a higher o v e r a l l aggregate consumption. If p r i o r i t i e s need to be e s t a b l i s h e d , those p r o j e c t s showing the h i g h e s t net s o c i a l b e n e f i t should be undertaken f i r s t . In cases where mutually e x c l u s i v e p r o j e c t s of d i f f e r e n t s i z e need to be compared, ranking by the net s o c i a l b e n e f i t c r i t e r i o n c o u l d be m i s l e a d i n g . T h i s i s because l a r g e a d d i t i o n s to aggregate consumption can simply be generated by making l a r g e investments. For t h i s task i t i s p r e f e r a b l e to use a r e l a t i v e e f f i c i e n c y c r i t e r i o n such as the s o c i a l b e n e f i t -s o c i a l c o s t r a t i o (SB/SC) or net s o c i a l b e n e f i t - s o c i a l cost r a t i o (NSB/SC) which measure the aggregate economic e f f i c i e n c y with which d i f f e r e n t s i z e p r o j e c t s use r e s o u r c e s . The s o c i a l worth of economic output (aggregate consumption b e n e f i t ) i s not a simple concept to measure. F i r s t , there are d i f f e r e n t types of goods and s e r v i c e s that i n d i v i d u a l s consume. Somehow, t h i s heterogeneous bundle of commodities needs to be reduced to a homogeneous value so that they can be aggregated. The accepted procedure to do t h i s i s to weigh each good by i t s market p r i c e duly c o r r e c t e d f o r economic i m p e r f e c t i o n s , 1 68 e.g. r a t i o n i n g , consumer s u r p l u s , buyer monopolies and e x t e r n a l i t i e s , so that the p r i c e u l t i m a t e l y r e f l e c t s the true consumer's w i l l i n g n e s s to pay f o r a l l of the p r o j e c t ' s output ( i n c l u d e d traded and non-traded goods and s e r v i c e s ) . While i t may be v a l u a b l e to i n c l u d e a l l of the p r i c e c o r r e c t i o n s i n one f i g u r e of s o c i a l worth, i t c o u l d be e q u a l l y advantageous to i n t r o d u c e some of the c o n s i d e r a t i o n s s e p a r a t e l y . The p r e c i s e way i n which the a n a l y s t t a c k l e s t h i s problem i s not a matter of p r i n c i p l e but of convenience. Second, the measurement of aggregate consumption ( s o c i a l b e n e f i t s ) i n v o l v e s the q u e s t i o n of adding a stream of consumption over time. Consumption now, next year, and the year a f t e r are c o m p e t i t i v e with each other, and the r e d u c t i o n of f u t u r e consumption b e n e f i t s to make them comparable to present b e n e f i t s r e q u i r e s d i s c o u n t i n g . The a p p r o p r i a t e r a t i o of d i s c o u n t i s the " s o c i a l time p r e f e r e n c e f o r consumption" and i s d e f i n e d as the r a t e at which s o c i e t y ' s weight on increments to consumption d e c l i n e s over time. The most common terminology used to r e f e r to t h i s "accounting r a t e of consumption" i s u s u a l l y the " s o c i a l d i s c o u n t r a t e . " While i t may not be too d i f f i c u l t to support a p o s i t i v e s o c i a l d i s c o u n t r a t e under c o n d i t i o n s of r i s i n g f u t u r e per c a p i t a consumption, i t i s a f a i r l y h e r o i c task to attempt to e s t a b l i s h a p r e c i s e number f o r t h i s r a t e . The problem a r i s e s out of the d i f f i c u l t y of measuring the d i m i n i s h i n g marginal u t i l i t y of aggregate consumption over time, as t h i s i s dependent on e t h i c a l judgements about the importance of the w e l f a r e of d i f f e r e n t g e n e r a t i o n s as w e l l as on the d i s t r i b u t i o n of 169 consumption among contemporaries. Nonetheless, there are e s t a b l i s h e d procedures f o r computing the a p p r o p r i a t e s o c i a l d i s c o u n t r a t e , and i n s i t u a t i o n s where no estimates are a v a i l a b l e from the c e n t r a l p l a n n i n g o r g a n i z a t i o n , these methods would need to be a p p l i e d to a r r i v e at some f i g u r e that would permit the comparison of consumption b e n e f i t s over time. In cases where even these estimates are not p o s s i b l e , the only a l t e r n a t i v e l e f t to the a p p r a i s e r i s to undertake a s e n s i t i v i t y a n a l y s i s of the p r o j e c t to a s u f f i c i e n t range of di s c o u n t r a t e s . T h i r d , the concept of aggregate consumption as a measure of s o c i a l welfare i n v o l v e s adding the consumption l e v e l of d i f f e r e n t i n d i v i d u a l s . The q u e s t i o n a r i s e s as to whether these b e n e f i t s should be simply added in c u r r e n t monetary terms, or f o l l o w i n g adjustments f o r income d i f f e r e n c e s , with a higher weight a t t a c h e d to the consumption of the poor. Although there are a n a l y t i c a l advantages i n the l a t t e r approach i t i s o p e r a t i o n a l l y convenient to f o l l o w the f i r s t approach and to introduce c o n s i d e r a t i o n s of income d i s t r i b u t i o n i n t o a separate category of s o c i a l b e n e f i t s . T h i s i s p r e c i s e l y what the e q u i t y c r i t e r i o n d e s c r i b e d below i s designed to achieve and the reason f o r e x c l u d i n g e q u i t y c o n s i d e r a t i o n s from the measure of aggregate consumption b e n e f i t . ( 3 ) E q u i t y C r i t e r i o n The c r i t e r i o n f o r measuring the e q u i t y i m p l i c a t i o n s of investment p r o j e c t s cannot be s t r i c t l y separated from q u e s t i o n s of economic e f f i c i e n c y and the concept of aggregate consumption b e n e f i t s . F i r s t , the r e l a t i v e p r i c e s used to estimate aggregate 170 consumption depend on income d i s t r i b u t i o n , since prices (willingness to pay) are influenced by demand and demand is influenced by income d i s t r i b u t i o n . Second, the whole idea of a given t o t a l of real consumption being parcelled out to individuals is unreal, since the composition of production is influenced by demand and demand is dependent on income d i s t r i b u t i o n . While, in p r i n c i p l e , i t i s possible to correct prices to r e f l e c t considerations of income d i s t r i b u t i o n , such detailed corrections are extremely d i f f i c u l t to make. In t h i s l i g h t , i t is considered preferable to treat equity as a separate category of s o c i a l benefit and to use generally a simple c r i t e r i o n , which although rough in nature is p r a c t i c a l to implement. One such c r i t e r i o n i s to attach an additional weight to income accruing to, or consumption enjoyed by, the poorest group of society, e.g. The lowest 10-20%. Alt e r n a t i v e l y or j o i n t l y , a backward region may be singled out as p a r t i c u l a r l y worthy of receiving additional consumption benefits, in which case consumption generated in that region may be given a higher weight. According to th i s approach, the measure of r e d i s t r i b u t i o n benefit i s simply the amount of consumption that is generated in the poorest region or enjoyed by the poorest c l a s s . (4) Merit Wants C r i t e r i o n The c r i t e r i o n for measuring the degree with which a project meets the merit wants objective of development i s perhaps the most elusive. The problem begins with the heterogeneous nature 171 of the great number of s o c i a l wants whose r e l a t i v e importance i s not determined by i n d i v i d u a l s i n t h e i r c a p a c i t y as consumers. Wants such as n a t i o n a l s o v e r e i g n t y , s e l f - r e l i a n c e , environmental q u a l i t y , c o n s e r v a t i o n , equal o p p o r t u n i t y are examples that f i t i n t o t h i s category of s o c i a l g o a l . The concept of merit wants can even be extended to i n c l u d e s p e c i f i c consumer goods produced by a p r o j e c t on the grounds that t h e i r n a t i o n a l importance i s g r e a t e r than what consumers thin k i t i s . A good example of such a s i t u a t i o n can be r e a d i l y observed in some backward r u r a l areas of LDCs where people are r e l u c t a n t to spend income on e d u c a t i o n . I t i s not without l o g i c that p u b l i c p o l i c y should aim to f o s t e r c h i l d r e n ' s education d e s p i t e the consumers' (or t h e i r r e p r e s e n t a t i v e s ' ) r e l u c t a n c e to pay f o r such a s e r v i c e . The s p e c i f i c c r i t e r i o n by which merit achievements are to be measured i s l a r g e l y a s u b j e c t i v e matter that depends on the p a r t i c u l a r nature of the s o c i e t y i n q u e s t i o n and of i t s d e c l a r e d planning o b j e c t i v e . Q u a l i t a t i v e r a t h e r than q u a n t i t a t i v e measures may o c c a s i o n a l l y be the only ones a p p l i c a b l e . I t should be c l e a r that to put merit wants in terms comparable to aggregate consumption, a n a t i o n a l weight would need to be attached to i t . Only then i t i s p o s s i b l e to aggregate the two c r i t e r i a i n t o a s i n g l e measure of economic w e l f a r e . (5) T o t a l S o c i a l B e n e f i t - Summing Up the M u l t i p l e  Object i v e s On a g e n e r a l b a s i s , i t can be s t a t e d f a i r l y s a f e l y that economic a p p r a i s a l should, at the very minimum, e n t a i l a t e s t for economic e f f i c i e n c y (aggregate consumption), economic e q u i t y 1 72 ( r e d i s t r i b u t i o n to t a r g e t groups or r e g i o n s ) , and some q u a n t i t a t i v e - q u a l i t a t i v e assessment of s o c i e t y ' s most p r e s s i n g merit wants. I n d i v i d u a l p r o j e c t a p p r a i s a l f o r each of the competing goals of development can r e a d i l y be made, but not without p a i n f u l compromise between the extremes of t h e o r e t i c a l r i g o u r and of o p e r a t i o n a l f e a s i b i l i t y . I t i s a tenet of development economics that compromise must n e c e s s a r i l y be made in the d i r e c t i o n of the second p o l e . The aggregation of the v a r i o u s development c r i t e r i a i n t o a s i n g l e measure of economic welfa r e i s , however, a f a r more complicated process, r e q u i r i n g agreement as to the q u a n t i t a t i v e importance of p o s s i b l e s h i f t s in the components of w e l f a r e . In sho r t , there has to be a v a i l a b l e a welfare index composed of a set of n a t i o n a l weights that e x p l i c i t l y set out the r e l a t i v e importance of the "aggregate consumption" o b j e c t i v e , the " r e d i s t r i b u t i o n " o b j e c t i v e and the " m e r i t o r i o u s " o b j e c t i v e s . T h i s o b v i o u s l y i s a p o l i t i c a l c h o i c e that many LDCs are p r e s e n t l y u n w i l l i n g or unable to make. In t h i s vacuum only rough methods of b e n e f i t aggregation are a p p l i c a b l e . At times, even the r o l e of the a n a l y s t may be l i m i t e d to simply p r e s e n t i n g the best " p o s s i b l e X-ray" p i c t u r e of l i k e l y p r o j e c t consequences to d e c i s i o n makers. Faced with t h i s r i s k , he must assess the p r o j e c t from as many angles of economic e f f i c i e n c y , e q u i t y and merit wants as i s p r a c t i c a l l y f e a s i b l e . T h i s way he can pro v i d e to the d e c i s i o n maker a s o l i d data base on which to compare p r o j e c t s and u l t i m a t e l y compromise between the competing goals of development. F i n a l l y , i t i s important that every attempt be made to 1 73 appraise projects for their d i r e c t as well as indire c t contribution to economic e f f i c i e n c y , economic equity and merit wants (see Section 1.4.2. and II.6.2.). The approach to this "comprehensive" solution i s described below. B. Economic Appraisal ( 1) Guidelines for Appraising Projects The procedure for economically appraising a project refers generally to an act of estimating i t s major economic consequences (net s o c i a l benefits), and wherever possible reducing them to an equal basis and aggregating them for decision making. Many studies (Tinbergen 1958 and 1967, United Nations 1958, L i t t l e 1967, L i t t l e and Mirrlees 1968, UNIDO 1972 and 1978, Layard 1974, Mishan 1974, L i t t l e and Mirrlees 1974) have pointed the way to the cost-benefit appraisal of projects, and while they are not of the same mind in every d e t a i l , a l l seem to advocate the same approach to the fundamental aspects of the method. The general methodology of cost-benefit analysis i s well established in the l i t e r a t u r e , therefore, I w i l l not take i t up here. Only essentials of the procedure w i l l be reviewed as a means of developing a framework for discussing the comprehensive appraisal advanced in the hypothesis. The d e t a i l s of the methodology are available in the above references, p a r t i c u l a r l y in UNIDO (1972 and 1978) and L i t t l e and Mirrlees (1974), which make up the most advanced works published on the subject. The 174 approach adopted here to c o s t - b e n e f i t a n a l y s i s i s g e n e r a l l y c o n s i s t e n t with the methods in a l l three r e f e r e n c e s . But as regards the computation of accounting p r i c e s and o v e r a l l summing-up of d i r e c t s o c i a l b e n e f i t s , the s t r a t e g y p a r a l l e l s more that of UNIDO which, i n s t r i c t t h e o r e t i c a l terms, i s con s i d e r e d to be s u p e r i o r . The approach to c o s t - b e n e f i t (economic) a n a l y s i s chosen, c o n s i s t s i n attempting to measure as many of the impacts of a p r o j e c t on an economy as p o s s i b l e . C o n s i s t e n t with t h i s i d e a , i t i s e s s e n t i a l that every e f f o r t be made to q u a n t i f y the i n d i r e c t as w e l l as the d i r e c t economic consequences of a p r o j e c t . If the shadow p r i c e s r e q u i r e d f o r a n a l y s i s can be d e r i v e d from a general e q u i l i b r i u m model of the economy, the a d d i t i o n a l step connected with the measurement of i n d i r e c t e f f e c t s becomes unnecessary, f o r these e f f e c t s are a l r e a d y i n c l u d e d i n the shadow p r i c e e s t i m a t e s . I f , however, only a p a r t i a l e q u i l i b r i u m assumption i s made r e l a t i v e to the computation of accounting p r i c e s , a separate q u a n t i f i c a t i o n of i n d i r e c t e f f e c t s i s r e q u i r e d to remain comprehensive. Faced with s t a f f and data c o n s t r a i n t s that make i t d i f f i c u l t to estimate general e q u i l i b r i u m models i n LDCs, the a n a l y s t i s u n l i k e l y to have the b e n e f i t of the former approach and must, t h e r e f o r e , be prepared to expand the a p p r a i s a l to i n c l u d e i n d i r e c t e f f e c t s . For reasons e x p l a i n e d e a r l i e r (see S e c t i o n II.6.2) i t becomes necessary d u r i n g a p p r a i s a l to r e j e c t the t r a d i t i o n a l s t r a t e g y of i g n o r i n g the dynamic e x t e r n a l i t i e s of investment, as these may be of c o n s i d e r a b l e importance i n LDCs. Of p a r t i c u l a r 175 importance is the measurement of in d i r e c t and secondary s o c i a l benefits (or disbenefits) a r i s i n g out of idle or underemployed resources activated by input-output i n t e r r e l a t i o n s h i p s . While i t may not yet be possible to estimate the external economies associated with the s k i l l producing e f f e c t s of manufacturing or i t s general impact on the modernization of the economy, i t i s feasible to estimate, i f even roughly, some of the economies and diseconomies of employing over or underpriced factors in a c t i v i t i e s backwardly linked to a d i r e c t investment. Therefore, i t i s legitimate and necessary to compute potential indirect additions or subtractions to the d i r e c t net benefit estimates of a project under conditions of widespread unemployment, resource immobilities, and/or increasing or decreasing returns to scale in the economy (Tinbergen, 1958, 1967; Haveman and K r u t i l l a , 1968; Haveman, 1970; Haveman and Margolis, 1970; Haveman, 1976) (see also Section II.6.2.). The act of appraising a project (program) economically i d e a l l y requires the comparison of two development strategies for the economy; development with and without (in the absence of) the project (Gregersen and Contreras, 1979). If an exact development model of the economy were available, two successive solutions of the system of equations of such a model would s u f f i c e . In the f i r s t solution, a l l data r e f e r r i n g to the project would be used, and i f the system of equations were precise, the difference between the two solutions would automatically y i e l d the complete net consequences (benefits) of developing the project, i . e . , d i r e c t , i n d i r e c t , and secondary -and there would be no reason for distinguishing between these 176 types of consequences. However, a p r e c i s e system of equations does not e x i s t . T h e r e f o r e , f o r p r a c t i c a l purposes i t i s necessary to s i m p l i f y i n p r o j e c t a p p r a i s a l without a f f e c t i n g e s s e n t i a l f e a t u r e s . T h i s must be done by using the r i g h t degree of aggregation of the economy, a s i m p l i f i e d p i c t u r e of development, and a p r a c t i c a l  manageable i n t e r p r e t a t i o n of s o c i a l c o s t s and b e n e f i t s . The f i r s t task at hand i n economic a p p r a i s a l i s to determine the complete succession of d i r e c t inputs and outputs f o r the l i f e t i m e of each investment o p t i o n . T h i s i n c l u d e s a l l inputs d u r i n g the investment p e r i o d and a l l inputs and outputs d u r i n g the o p e r a t i o n p e r i o d . Second, a l l i n d i r e c t consequences ( i n p u t s and o u t p u t s ) , such as changes in the i n d u s t r i e s s u p p l y i n g raw m a t e r i a l s to the p r o j e c t s must be estimated. T h i s study may be extended to i n d u s t r i e s using outputs of the p r o j e c t s , i f a s i g n i f i c a n t forward l i n k a g e , bearing on economic gains or l o s s e s in these i n d u s t r i e s , can be e s t a b l i s h e d . For the most p a r t , however, i t w i l l only contemplate backward l i n k a g e s . I t i s of l i t t l e importance whether these changes are accompanied by f l e x i b l e or r i g i d p r i c e assumptions i n the r e s p e c t i v e markets. What matters i s that r e a l i s t i c c o n s i s t e n t assumptions are made. T h i r d , to complete the input-output a p p r a i s a l , a l l secondary or induced consequences must be estimated and added to the primary or autonomous change. These are e f f e c t s a r i s i n g out of the respending of income generated by the primary ( d i r e c t and i n d i r e c t ) changes i n p r o d u c t i o n . These three t a s k s , give or take one or two minor p o i n t s , are p r e c i s e l y what the f i n a n c i a l a n a l y s i s d e s c r i b e d e a r l i e r i s designed to achieve, except that 177 i t s i n t e r p r e t a t i o n of consequences (cash flows) i s w i t h i n a context of market p r i c e s rather than s o c i a l c o s t s and b e n e f i t s . The f o u r t h task i n economic a p p r a i s a l i s to bridge the gap between the " p r i v a t e i n t e r p r e t a t i o n " of the f i n a n c i a l a n a l y s i s and the " s o c i a l i n t e r p r e t a t i o n " of the economic a n a l y s i s . T h i s i m p l i e s s u b s t i t u t i n g market p r i c e s f o r accounting p r i c e s i n the e v a l u a t i o n of p r o j e c t inputs and outputs. The f i f t h and f i n a l task i n economic a p p r a i s a l i s to e s t a b l i s h the t o t a l net s o c i a l b e n e f i t of a p r o j e c t by harmonizing the c o n t r i b u t i o n of a p r o j e c t to the competing goals of economic development. A f u l l y q u a n t i t a t i v e approach would n e c e s s a r i l y imply having a set of n a t i o n a l ( r e g i o n a l ) weights to trade between the c o n f l i c t i n g development o b j e c t i v e s of aggregate consumption, d i s t r i b u t i o n a l j u s t i c e and merit (developmental) wants. (2) Accounting P r i c e s - A Set of N a t i o n a l Parameters For reasons e x p l a i n e d i n S e c t i o n II.6.3. i t becomes necessary to s u b s t i t u t e accounting p r i c e s f o r market p r i c e s i n the a p p r a i s a l . Some of these shadow p r i c e s f a l l i n t o the category of n a t i o n a l parameters - values that are best computed at the n a t i o n a l l e v e l - and must be a s c e r t a i n e d e a r l y in the a p p r a i s a l . These parameters i n c l u d e the r e l a t i v e weights on the r e l e v a n t o b j e c t i v e s of economic development, the s o c i a l r a t e of d i s c o u n t , the shadow p r i c e of land, the shadow p r i c e of investment, the shadow wage, and the shadow p r i c e of f o r e i g n exchange. Because these parameters are in general independent of a l l d e c i s i o n s taken with respect to i n d i v i d u a l p r o j e c t s , 178 their c a l c u l a t i o n i s best assigned to the "Central Planning Organization" (CPO) rather than to the project l e v e l ; hence their name of national parameters (UNIDO 1972). While, i d e a l l y , a l l national parameters should be provided to the project analyst by the CPO, thi s may not always be possible as only a few LDCs have s u f f i c i e n t resources s k i l l s and the w i l l to provide t h i s service. More often than not, i t w i l l be up to the project evaluator to make some reasonable estimate of the values of the national parameters. For t h i s task, several detailed and short cut methods have been described in the l i t e r a t u r e . Of pa r t i c u l a r relevance are the top-down and bottom-up approaches described in the UNIDO (1972) Guidelines. Reference is made to this work when there is a need to estimate national accounting prices. To minimize confusion and f a c i l i t a t e the i d e n t i f i c a t i o n of each national parameter the following nomenclature i s adopted: National Parameters (1) Foreign exchange premium = $ (2) Unskilled labour premium = X (3) Domestic s k i l l e d labour premium ( i f relevant) = x (4) Marginal land premium = 3 (5) Social discount rate = i (6) Associated shadow price of investment = Pinv If Pinv not d i r e c t l y available, obtain: (7) Marginal rate of return on investment = q (8) Marginal rate of savings = s (1 - s) q and estimate Pinv = i - sq To correct the value of income benefits and costs by the shadow price of investment link the consumption - investment e f f e c t of 179 the project to the expenditure pattern of the groups who lose  and gain with the project, i . e . marginal propensities to consume of those financing and/or gaining within the project. Depending on the a v a i l a b i l i t y of data and the accuracy desired, obtain (9) Marginal propensity to save of as many groups i d e n t i f i e d as losing and gaining from the project, e.g. (9a) Labour, i f necessary s k i l l e d , semi-s k i l l e d and unskilled = sL (9b) Private investors = sP (9c) Government = sG If interested in the regional d i s t r i b u t i o n objective, obtain (10) Marginal propensity to consume regionally = Cr (11) Proportion of foreign personnel salary spent = Cf regionally To harmonize the c o n f l i c t i n g goals of development, obtain (12) Weights on objectives: (12a) Aggregate consumption = 9C (12b) Redistribution to lowest income group(s), most l i k e l y extreme poor = 6Rp If relevant and important (12c) Regional r e d i s t r i b u t i o n = 9Rr (12d) Merit wants = 8M (3) Direct Aggregate Social Costs and Benefits While in s t r i c t a n a l y t i c a l terms any type of s o c i a l benefit great or small can be treated as the unit of account, i t i s recommended that aggregate consumption be used as the "numeraire" in cost-benefit appraisal. I have indicated that there are problems in the measurement of s o c i a l welfare and no indicator may alone r e f l e c t the t o t a l contribution of economic a c t i v i t y to the general well being of a nation. Even aggregate consumption is found lacking when i t comes to assessing such 180 important matters as economic e q u i t y or n a t i o n a l defense. However, as f a r as the a p p r a i s a l of aggregate e f f i c i e n c y i s concerned, the p r a c t i c e of t r e a t i n g consumption as the u n i t of account remains widespread and t h i s r e s u l t s simply out of the accepted importance of consumption v i s - a - v i s other development ob j e c t i v e s . The a c t u a l measurement of the aggregate consumption value of a heterogenous bundle of goods and s e r v i c e s i s i n h e r e n t l y d i f f i c u l t given the s l i p p e r y nature of the concept. For p r a c t i c a l reasons t h i s task i s u s u a l l y performed i n terms of "consumers' w i l l i n g n e s s to pay". I t seems s e n s i b l e to reserve the term "aggregate consumption" to measure the value of consumption as consumers see i t and to c o n s i d e r departures from consumers v a l u a t i o n s to accommodate a d d i t i o n a l s o c i a l o b j e c t i v e s . I t matters l i t t l e i n c o s t - b e n e f i t a n a l y s i s how the c o r r e c t i o n s of consumers' v a l u a t i o n s are brought i n -- whether through the c o n s i d e r a t i o n of separate o b j e c t i v e s (merit wants), or through a c o r r e c t i o n of the measure of aggregate consumption i t s e l f . A step by step approach to the e v a l u a t i o n of d i r e c t aggregate consumption b e n e f i t s i s presented i n the UNIDO (1972) study. T h i s method makes up the essence of the procedure recommended below. A p p r a i s a l of D i r e c t Aggregate Consumption B e n e f i t s (a) A s c e r t a i n the d i r e c t "net output" of the p r o j e c t ( s ) f o r each year of working l i f e and s p l i t i t up i n t o adding to supply and saving r e s o u r c e s . The "net output" of the 181 p r o j e c t i s the goods and s e r v i c e s made a v a i l a b l e to the economy that would not have been a v a i l a b l e i n the absence of the p r o j e c t . (b) Estimate the amount that consumers w i l l a c t u a l l y pay for the a d d i t i o n a l supply of goods. (c) For a d d i t i o n a l supply of consumer goods, check whether the consumers are f r e e to buy as much as they l i k e ; i f there are r e s t r i c t i o n s (e.g. r a t i o n i n g ) , t r y to estimate what the consumers w i l l be w i l l i n g to pay f o r the a d d i t i o n a l supply, which w i l l i n general exceed the market p r i c e . (d) For a d d i t i o n a l supply of consumer goods, check whether any consumer has monopsony power, and i f so, c o r r e c t the p r i c e of the commodity upwards to r e f l e c t the d i f f e r e n c e between the consumers' w i l l i n g n e s s to pay and what they a c t u a l l y pay. (This i s u n l i k e l y to be a very important cons i d e r a t ion.) (e) For a d d i t i o n a l supply of consumer goods, check whether the s i z e of i t i s so l a r g e compared with other sources of supply that the p r i c e would be p e r c e p t i b l y lowered by the a d d i t i o n a l supply. If so, t r y to estimate, approximately at any r a t e , the shape of the demand curve to estimate the consumers' w i l l i n g n e s s to pay, which would exceed what they a c t u a l l y have to pay. (f) For producer goods, complete ( c ) , (d) and ( e ) . The same e x e r c i s e must be done and supplemented by c o n s i d e r a t i o n s of monopoly power f o r the subsequent stages of p r o d u c t i o n , e.g. f o r s t e e l c o n s i d e r the q u e s t i o n of the r a t i o n i n g of s t e e l - u s i n g products, response of the 182 p r i c e s of s t e e l - u s i n g products to a d d i t i o n a l supply, e x i s t e n c e of monopoly i n l a t e r stages and so on. T h i s should be extended to as many stages as p r a c t i c a b l e . (g) For goods that s u b s t i t u t e f o r imports or add to exports, estimate the impact on f o r e i g n exchange a v a i l a b i l i t y by making e x p l i c i t assumptions about f o r e i g n markets e t c . , and a l s o about the p o l i c i e s of government. Use the shadow p r i c e s of f o r e i g n exchange, s u p p l i e d by the c e n t r a l p l anners, to convert f o r e i g n exchange b e n e f i t s i n t o u n i t s of aggregate consumption i n domestic currency, (h) For goods that are not s o l d i n the market but are s u p p l i e d f r e e i n s t e a d , t r y to estimate, i f p o s s i b l e , what the purchasers would have been ready to pay f o r these f a c i l i t i e s i f they were to be purchased. I f t h i s i s imp o s s i b l e , simply use some e s t i m a t i o n of the r e l a t i v e importance of the f a c i l i t i e s i n terms of gen e r a l aggregate consumption. T h i s would i n v o l v e judgements, and while they must be made, i t may be h e l p f u l f o r r a t i o n a l d i s c u s s i o n on p r o j e c t c h o i c e to s t a t e these e x p l i c i t l y . ( i ) For each p r o j e c t and year of i t s working l i f e , add up a l l these d i r e c t b e n e f i t s of aggregate consumption and s p l i t them i n t o adding to consumption and adding to investment by l i n k i n g the consumption-investment e f f e c t to the expenditure (saving) p a t t e r n of the groups that gain from the p r o j e c t ( s ) e.g. labour, p r i v a t e i n v e s t o r s , government. 1 83 (j) If warranted by a shadow price of investment (Pinv) d i f f e r e n t than 1, correct the current annual benefits for future consumption gains (or losses) a r i s i n g out of the generation of investment. Multiply the investment portion of annual benefits by Pinv to convert these gains to homogeneous units of current aggregate consumpt ion. (k) Add up the consumption and investment gains to obtain an annual t o t a l of d i r e c t aggregate consumption benefits; the benefits are homogeneous thanks to the use of appropriate shadow prices. (1) To obtain a t o t a l of present aggregate consumption benefits, convert the annual gains into present value by using the so c i a l rates of discount supplied by the central planners. The appropriate concept of s o c i a l costs is one of "maximum alter n a t i v e s o c i a l benefits foregone". It is important, however, that in the i d e n t i f i c a t i o n of costs with maximum benefits s a c r i f i c e d , alternative opportunities be r e a l i s t i c a l l y defined, bearing in mind real f e a s i b i l i t y and not merely technical p o s s i b i l i t i e s . Real f e a s i b i l i t y , in turn, must be interpreted in the context of a country's s o c i a l and p o l i t i c a l framework that may constrain what otherwise would be economically feas i b l e . This aspect of real f e a s i b i l i t y , while a n a l y t i c a l l y simple, may be d i f f i c u l t to handle empirically. To i d e n t i f y real feasible opportunities (as opposed to technical opportunities) a 184 considerable depth of understanding regarding the s o c i a l and p o l i t i c a l make-up of a nation, present and future, may be required. Such considerations, naturally, take project appraisal beyond pure economics. The simplest way of handling this task is perhaps, as suggested by UNIDO (1972), to ask the question: "If we did not choose to invest in the project, what difference would i t make?" The alternative economic scenario that would emerge would, with due considerations, of p o l i t i c a l and s o c i a l constraints, set the stage for i d e n t i f y i n g adequate economic opportunities. Since costs are (maximum) benefits foregone, they are measured much the same way as benefits are measured. Aggregate consumption costs, therefore, are measured according to the c r i t e r i o n of "consumers'" willingness to pay. Like benefits that consist of the "net output" of a project, costs consist of the "net inputs" of a project - the goods and services withdrawn from the rest of the economy that would not have been withdrawn in the absence of the project. Based on the recommendations of UNIDO i t i s suggested that the following steps be taken to appraise d i r e c t aggregate consumption costs. Appraisal of Direct Aggregate Consumption Costs (a) Ascertain the d i r e c t "net input" of the project(s) for each year of i t s working l i f e and s p l i t i t up into reducing the t o t a l supply of inputs and absorbing resources to keep the input supply constant through expanded production. The "net input" of the project being the goods and services withdrawn 185 from the r e s t of the economy that would not have been withdrawn in the absence of the p r o j e c t . A u s e f u l breakdown of inputs f o r c o s t a p p r a i s a l i s : producer goods, f o r e i g n exchange, labour and n a t u r a l r e s o u r c e s , i . e . land, water, etc . (b) Check the market c o s t of the i n p u t s . (c) In the case of r e d u c t i o n of t o t a l supply, estimate the w i l l i n g n e s s to pay f o r these inputs through s e v e r a l c o r r e c t i o n s . The f i r s t c o r r e c t i o n i s r e l a t e d to the value of r a t i o n e d inputs at some stage or other. (d) The second c o r r e c t i o n s i s concerned with the monopoly power in buying or s e l l i n g at the immediate stage or at a l a t e r stage. (e) The t h i r d c o r r e c t i o n i s concerned with the s i z e of the i n p u t - s u p p l y r e d u c t i o n and i t s impact on p r i c e . If there i s a r e a l impact on p r i c e , the demand curves would have to be estimated - f i n e l y or roughly - to c o r r e c t f o r the w i l l i n g n e s s to pay. T h i s , too, should be c a r r i e d to l a t e r stages in p r o d u c t i o n i n v o l v i n g the products made by these i n p u t s . (f) If the a b s o r p t i o n of producer goods in t h i s p r o j e c t i s to be compensated by an expansion of supply of these resources from other sources (e.g. an expansion of domestic p r o d u c t i o n ) , c a l c u l a t e the a c t u a l c o s t s i n v o l v e d i n that expansion. (g) I f some of the resources are imported, or are obtained at the expense of p o t e n t i a l e x p o r t s , c a l c u l a t e the s a c r i f i c e of f o r e i g n exchange i n v o l v e d , and c o r r e c t by the shadow p r i c e 186 of f o r e i g n exchange. (h) C o r r e c t i o n s for labour and l a n d must be i n terms of r e d u c t i o n of supply, as they cannot be met by expansion of p r o d u c t i o n . A p p r o p r i a t e c o r r e c t i o n s w i l l i n c l u d e a l l c o n s i d e r a t i o n s of w i l l i n g n e s s to pay d i s c u s s e d i n ( c ) , (d), and ( e ) . These inputs must always be measured at the demand margin. ( i ) For inputs that are not purchased in the market but are obtained f r e e i n s t e a d , t r y to estimate, i f p o s s i b l e , what the s e l l e r s would have asked to be p a i d f o r these goods and s e r v i c e s i f they were to be s o l d . If t h i s i s i m p o s s i b l e , attempt some estimate of the r e l a t i v e s o c i a l importance of these inputs in terms of general aggregate consumption. (j ) For each p r o j e c t and year of o p e r a t i o n , add up a l l these d i r e c t c o s t s of aggregate consumption and s p l i t them i n t o s u b t r a c t i n g from consumption and s u b t r a c t i n g from investment by l i n k i n g the consumption - investment e f f e c t to the expenditure (saving) p a t t e r n of the groups that pay f o r ( l o s e with) the p r o j e c t ( s ) e.g. labour, p r i v a t e i n v e s t o r s , government. (k) I f warranted by a shadow p r i c e of investment (Pinv) d i f f e r e n t than 1, c o r r e c t the c u r r e n t annual b e n e f i t s f o r f u t u r e consumption gains (or l o s s e s ) a r i s i n g out of the g e n e r a t i o n of investment. M u l t i p l y the investment p o r t i o n of annual b e n e f i t s by Pinv to convert these gains to homogeneous u n i t s of c u r r e n t aggregate consumption. (1) Add up the consumption and investment gains to o b t a i n an annual t o t a l of d i r e c t aggregate consumption b e n e f i t s ; the 187 b e n e f i t s are homogeneous thanks to the use of a p p r o p r i a t e shadow p r i c e s . (m) To o b t a i n a t o t a l of present aggregate consumption b e n e f i t s , convert the annual g a i n s , i n t o present value by using the s o c i a l r a t e s of discount s u p p l i e d by the c e n t r a l p l a n n e r s . (4) I n d i r e c t and Secondary Aggregate S o c i a l Costs and  Benef i t s From our study of f i n a n c i a l impact we learned of the i n d i r e c t and secondary cash flow e f f e c t s a s s o c i a t e d with the d i r e c t p r o j e c t e x penditures. I t was e x p l a i n e d how the backward l i n k a g e s of investment helped r a i s e the demand f o r i n d u s t r i e s s u p p l y i n g inputs i n t o the p r o j e c t ( s ) , and how t h i s demand, under c e r t a i n circumstances, encouraged a higher l e v e l of output. Furthermore, i t was shown that the i n c r e a s e d consumption expenditures of those earning income i n d i r e c t and i n d i r e c t a c t i v i t i e s had t h e i r own r i p p l e e f f e c t s i n the economy. In e f f e c t , the a d d i t i o n a l (secondary) rounds of spending and respending r a i s e d the f i n a l demand f o r consumption and pushed the economy to an even higher l e v e l of income. The " t e c h n o l o g i c a l " and "Keynesian" m u l t i p l i e r s s t i m u l a t e d p r o d u c t i o n u n t i l the "leakages" from the spending stream absorbed the o r i g i n a l impact i n t o the normal c i r c u i t of expenditure and r e c e i p t . However, i t i s obvious that had our p r o j e c t not been undertaken, some other economic a c t i v i t y would have taken p l a c e i n s t e a d . There i s , t h e r e f o r e , as i n the case of d i r e c t b e n e f i t s , an o p p o r t u n i t y c o s t a s s o c i a t e d with the genera t i o n of 188 i n d i r e c t and secondary value added. T h i s o p p o r t u n i t y c o s t must be c o n s i d e r e d before c l a i m i n g net economic gains from i n d i r e c t or secondary economic a c t i v i t i e s . Value added i n the economy i s simply a measure of b e n e f i t . The f i n a n c i a l a n a l y s i s estimated the i n d i r e c t and secondary value added at market p r i c e s a s s o c i a t e d with the d i r e c t p r o j e c t expenditures. T h i s estimate of income, computed a n n u a l l y throughout the l i f e t i m e of the investment, represents the domestic f a c t o r compensation made p o s s i b l e by the change i n output. I t i s made up of payments f o r wages and s a l a r i e s , rents and p r o f i t s , and government s e r v i c e s . As value added, these f i g u r e s are n a t u r a l l y net of expenditures on imported goods and s e r v i c e s . To determine i f an i n d i r e c t or secondary net b e n e f i t or d i s b e n e f i t has occurred, c o r r e c t i o n s need to be made to the market estimate of value added. F i r s t , the b e n e f i t ( i n d i r e c t and secondary value added a s s o c i a t e d with the p r o j e c t ) should be c o r r e c t e d to show i t s r e a l s o c i a l worth. I d e a l l y , t h i s would e n t a i l l o o k i n g i n t o every d i s t o r t i o n of the market system and making r e c t i f i c a t i o n s , e.g. f o r consumers' w i l l i n g n e s s to pay i n the face of r a t i o n i n g and/or goods s u p p l i e d f r e e , consumer buyers' and producer s e l l e r s ' monopoly power, economics of s c a l e , the s o c i a l worth of saving (investment), e t c . Second, the f u l l o p p o r t u n i t y c o s t of a l l f a c t o r s employed must be deducted. In the case of imported inputs t h i s may e n t a i l computing a premium cost equal to the d i f f e r e n c e between the shadow p r i c e of f o r e i g n exchange and the market r a t e , and deducting i t from the value added. T h i s i s necessary because 189 the f i n a n c i a l estimates of value added (income) f o l l o w the market and do not n e c e s s a r i l y c o n s i d e r the p o s s i b l y g r e a t e r s o c i a l worth of f o r e i g n exchange. For labour i n p u t s , the o p p o r t u n i t y cost deductions should c o n s i d e r the r e a l s o c i a l value of u n s k i l l e d labour (shadow wage), which under c o n d i t i o n s of unemployment may be worth l e s s than the wage r a t e . I t i s p o s s i b l e , t h e r e f o r e , f o r a net economic gain to a r i s e from the employment of t h i s f a c t o r . For re n t s and p r o f i t s , the o p p o r t u n i t y cost deduction may normally be c o n s i d e r e d equal to the market compensation p a i d to c a p i t a l . However, under c o n d i t i o n s of i d l e land and/or i d l e manufacturing c a p a c i t y , or some other severe i m p e r f e c t i o n i n c a p i t a l markets, i t may become necessary to c o r r e c t the f i n a n c i a l v a l u a t i o n , and c o n s i d e r a higher or lower o p p o r t u n i t y cost than the one i n d i c a t e d by the market. The approach to government s e r v i c e s i s normally to assume a balanced budget s i t u a t i o n and an o p p o r t u n i t y c o s t equal to the market compensation p a i d to government. But i f a p u b l i c d e f i c i t or s u r p l u s c o u l d be p r e d i c t e d , the s o c i a l worth of p u b l i c inputs would need to be a d j u s t e d p r o p o r t i o n a t e l y , with a shadow p r i c e i n excess of the market r a t e f o r a d e f i c i t and one below the market rate f o r a s u r p l u s . T h i r d , the premium cost a s s o c i a t e d with the investment s a c r i f i c e d to produce the i n d i r e c t and secondary value added must be deducted. For t h i s , i t i s f i r