Course on plan financing : global approach

UNITED NATIONS

ï- V J

Economic Commission

For Africa

AFRICAN INSTITUTE

FOR ECONOMIC DEVELOPMENT

AND PLANNING

Session 1966 -

19

₆₇

Course xk ^on PLAN FINANCING

(Condensed)

by Mr

NIVOLLST

UNITED NATIONS

AFFICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING

DAKAR

781-4

COURSE ON PLAN FINANCING

GLOBAL APPROACH

THE FINANCIAL EQUILIBRIUM AND THE FINANCING CIRCUITS

Series FIN PLA 40 and 50

UNITED NATIONS

AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING

DAKAR.

U.U-

IDEP/ET/XXXVIII/781-40

Mr. A. NIVOLLET

:k"ÍI

FIN. PLA. 40

a jcmq&ij&i

THE "ECONOMIC" (REAL OR PHYSICAL) OR

THE FINANCIAL ANGLE: FROM WHICH ANGLE SHOULD WE APPROACH THE PLAN?

The study of financing at the microeconomic level has taught

us some elementary commonsense rules about the financial management of the firm.

It is now time to draw a parallel between the financing of a

■;!' ;j"'a ii ili ^: | ' '- ' : •• -

firm and

plan

_financing.

I - Let us try to represent the.functional relationships within the enterprise by a pyramid which we will subsequently project onto

a plane surface.

Diagram I

^-dimensional

Diagram II the same on a

plane surface 4 separate elements

illustration of the functioning of

a firm

A G

\ \

organizational

7

^JID~\

^capacity

TY AND x x

CASH RESERVES^

i

IDEP/ET/XXXVIII/781-40

Page 2

Triangle ABE; _represents the productive aspect of the firm:

uses of capital = assets

Triangle B C E: represents, the financial aspect of the firm:

source of capital = liabilities

Triangle CAE: reflects the financing procedures.

It shows the need to make daily use of circulating capital —

cash reserves - and to maintain a certain harmony between the various items in the assets and liabilities.

Triangle ABC: symbolizes a set of decisions concerning the pro¬

duction process and the^costing policy, and it_reflects the technological

and financial organizing capacity. i-olcx•x&r

These four elements represented by triangles are interdependent.

The degree of this interdependence can be assessed overall, at a given

time and in a given context, by the Balance Sheet and, more specifically, by the ledger accounts

(production

account, profit and loss account or

analytical trading

accounts).

t

.

x X X

X

IDEP/ET/XLmi 1/781-40

Page 3

II - We will use the same geometric figure to represent a draft plan. In this way. it will he easier for us to stress the similarities and differences between "firms" and "development

Triangle ABE; represents the physical equilibrium at constant prices, the simplest formulation of which is the

(1 ) following»

Y+M=C+X+I = physical equilibrium.

In this equation international trade plays,a dual rôle. It dis¬

turbs the equilibrium.if M

£ X. It

may

either induce growth

or not, depending on the resultant of the external decision-making centres

(see

course on international economics, 1st and 3rd

folder).

Triangle B C E: represents the equilibrium"xn"~relative prices.

This equilibrium is calculated on the basis of the physical equilibrium

at constant prices, taking into account the changes that will occur during the plan period in the hierarchy of the prices of each branch

1)

Symbols: Y = gross domestic production

M = imports X = exports

C =-consumption

I = investment

(physical

and its financial

counterpart)

Id = domestic investment

If = foreign investment

(outside

^the domestic

economy)

Sd = domestic savings

Sf ⁼ foreign savings

isep/et/xxxvii 1/781-40

Page 4 ' '

of industry respectively. These changes are either induced "by growth

or are introduced "by international trade.

• ■

». . ...

\ ". .ï ■ i.r : — . ■■ ... 0

Y1 + M' = C» + X' + 11 = physical equilibrium

in relative prices *

(Triangle C D E: represents the financial equilibrium, i.e. the

■ '

volunie

of savings whioh will have to be appropriated to investment in

order to achieve the physical target. ^. -

i

I ⁼ S ⁼ financial equilibrium

International relations also come into this _area, since some of

the savings and investment originate outside the country

(if

and

Sf).

Triangle D E A: represents the financing circuits (financial

flows),

i.e. the ability to transform Sd or Sf into I. In this connexion, too, the

international' economy"may"modify--the"basic--domesbic

data.

The quadrilateral A B C D: symbolises a multitude of prerequisites for the effective

implementation

of the plan: administrative organization production functions ^- efficiency of taxation ^- sociological thresholds,

etc.

...'."v. ■ . • e

All these conditions indicate the responsiveness of the periphery

~ t.." ' ^.

to the injunctions coming from the plan deadsion-making centres, whatever technique may be selected for formulating the' plan.

XXX

• ■ 'i '• J »: '- :i••••'. ' i.; -• ... •• - • - ;■

III -The

analogies between planning organization and the

management of

7'7 '

^{a firm are obvious: some of them are} superficial, but others are

more significant.

! ••. .: : .... • OÍfil .i'VSP liii'w Çii00 "d

. J.J r -,i:d on. c; esif -i.e.:.:; •

v.. y.., ^{. i.f" ::} i - •£; :,p?-

qtsq)

■- s

r:p.;:-...vo.:í îl:; >.'<• i ^{>■> ,}

IDEP/ET/XXXVIII/781

-40 Page 5

The superficial similarities are those which can he found in the tools for assessing results.

On the one hand: the general equilibrium table

(national accounts)

On the other hand: the balance sheet

In both cases: use of projected accounts, indicating an effort to know the future.

In both cases: use of _aooounts that are balanced "ex post".

The more significant analogies are those concerning:

The importance of the elements forming the base of the pyramid and$ first and

foremost,

the ability to organize the productive _apparatus.

In both cases, the existence of ratios between quantities representing the basic data. These ratios help in decision-making:

various ratios for the firm, and production

functions,

consumption functions, technical

coefficients,

capital-output ratios etc...

for the plan.

In both cases, disturbing effect of technological _progress, which is difficult to measure and always involves risks of obsoles-

oenoe and errors in orientation.

xxx

IV - The essential differences must now be stressed.

The plan is a political act. Planning decisions are often biassed by considerations alien to enterprise management. The rationality of decision-making will not be the same for the plan as for the firm.

idep/et/xxxviii/781-40

Page

6

This does not mean that'planning*"ideeis ions are less logical than

those of the entrepreneur. It is just that they are more complex in

nature. They are more difficult to analyse and often more difficult

to justify. ^, j. ,

Moreover, in the African context the external constraints imposed by international economic relations weigh relatively more heavily on the plan than on the enterprise.

Lastly, the logic of the relationships between "ways and means",

between "needs and resources""," is

Tess imperative

in the plan than in

the firm. The "time" factor in the plan, has a greater impact as regards changing the parameters and determining choices, whereas the time horizon

of the firm remains limited and the penalty for inconsistency is not far away; it is bankruptcy.

V - The consequences of these differences;

The political factor, a special time horizon, and pressing inter¬

national constraints force the planner to introduce a dichotomy between financial matters and those of the real economy. This approach would not; be operational.for..the. entrepreneur, because, for the latter, ^"eco¬

nomic" or Teal profitability and financial profitability are identical,

hence the two aspects cannot diverge for long.

The planner - or more correctly the political authorities of a coun¬

try who draw up a development plan ^- will, always be able to find, in

non-economic considerations or in a longer time horizon, or in a favour¬

able

environment,

arguments "for

de~ciui'ng

either that;

- the real _economy must determine the financial aspect, or

- that the financial aspect must determine the real economy.

xxx

ÎDEP/ET/XXXVI11/781-40

Page 7

VI ^- The real _economy or the financial aspect;

To _go back to diagram IV, there is a hierarchy

distinguishing

between: ' "

first: triangles ABE

(or BCE)

physioal equilibria

secondly: C D E a

financial equilibrium

and DAE

equilibrium of financing

•'-circuits

hence the real economy

We will accept that triangle DAE will always be in ^a somewhat sub-■

.ordinate position to the other two. Indeed the financing circuits are

highly flexible. Except in ^{a. case} of "force majeure" they can follow closely both the financial equilibrium ^and the physical equilibrium.

They do, of _course, involve manyj problems for the African planner, but.

these will be dealt.with in the series 50 or 60 rather than in this se.:'.

•40».-, But. to choose- a-:development policy without being concerned with

;its

financing,

or,cpqy§£s,ely.,.. iouchhose a financing policy without regard

for

development,

would bq such illogical stands that there can be no

question of dealing with plan financing without first specifying the respective priorities attributed to the real economy and to finance,

This varies in the different _African plans.

VII- Method used:

We will use the case study method in our teaching. The African experiences which we will mention in this series 40 are indeed rich in lessons. They show us that the choices cannot be as olear—out food definite .as we would like.

IDEP/ET/XXXVIII/781

-40 Page

8

Rather than disccursing ^en .plan financing.tio.._wili ask the trainees to think about specific elements of it in the context of exercises. The lecturer will subsequently draw ^a conclusion. Thus I.will be using an inductive method.

"

j

^{_ s, .} . ... X X, X

X X

X

VIII -Schedule of the oourses

Document 41.s Financial equilibriums methodological examination.

Document 42s Financial equilibriums' decisional process.

.Document 43ï Exercises on Tunisia.

Document 44s Exercises on Morooco.

Document 45- Exercises On Ghana.

j Document 46s Exercises ^on Guinea.

Document,47"• Lessons to be drawn from the above four finanoial policies.

(Techniques,

policies,

strategies).

idep/et/xxxviii/781-41

Page 9

Fig. PLA 41

THE'"financial equilibrium of the plan methodological study

The decision as to plan financing is based on the examination of

the capital accounts of the economic agents in national accounting.

In this note we will deal with methodology. In the next note we will tackle the decision-making process.

I ~ Analogies between In national ^••

accounting

In private accounting

national accounting and private accounting.

You know that if the resources of the appropriation

accounts are greater than their uses, we get a

"surplus" which will be a future source of financing

for the _economy.

,'L,• -.s®"

àbfea.~

^•

If the profits in the trading account exceed the cost

we get a gross profit, which will also be regarded as

a source of finance for the next financial _year.

In national The "surplus" found in the appropriation account is accounting entered under resources in the capital account of

0,0». agent

In private accounting.

The gross profit i,s entered under "uses side" of the profit-t-and-loss account| then the net profil

is transferred to the balance sheet on the ^resoj:

side.

•v:'

D'

Except for the rest-of-the-world account, which dees not have ^an

•appropriation account or a

capital

account.

ïDSP/ET/XXXVI11/781-41

Page 10

In national accounting

In private accounting

This resource of the capital account will make it possible to meet certain ^new investment needs which will he the ^uses of the capital account.

These new investment needs are determined by the production functions (Domar ^or Cobb-Douglas type) ^or by the use of an incremental capital-output ratio, or else by a more thorough analysis of the files

(feasi¬

bility

studies)

on investment to be implemented or

implemented in the past.

These coefficients or ratios correspond to the various ratios which were" studied in the last few documents of series 20 and the first few of series 30.

Financing "capacity" or "need",'

There is no reason to suppose that total resources and uses in the capital account will be balanced, and even less reason to assume that each agent balances his own capital resources with his own capital

uses. : • -•

4.-s. .. .. ■■■■■■ —

If the resources of the capital accountthe uses, we have a

disequilibrium which we call "financing capacity". Financing capacity clearly means that the _economy or the "agent concerned" holds moro capital

(savings

⁼

S)

^than he needs for investment

(investment

=

ï)

hence I. .

^ , .. ,, . - v-.-x

If the resources of the capital

account-<C^the ^{uses, we have a}

disequilibrium which we call "financing need". Financing need means that the economy or the "agent concerned" needs to be financed somehow, because more is being invested than is being saved:

I^)> ^S

000

ïDEP/ET/XXXVI11/781-41

Page 11

III ^- First stage of the study,;,;,

The study begins at the level of the first two agents' accounts;

households and non-financial enterprises.

The households account in Africa usually shows a financing Capacity

'

^';

Equation 1

Sh/>

^Ih

The account_" of non-financial enterprises shows, structurally, a

( 1 )

financing need v ; . . ;

Equation 2 ' ^•

Ss<^IS

The first stage in the study of the financial equilibrium consists

in adding algebraically the net balances of the 2 previous accounts:

There are 3 possible combinations for the sums

; J. jJ .

equation 3a Sh +

Ss^> ^{Ih + Is} financing capacity

equation 3b Sh + Ss ⁼ Ih + Is equilibrium equation 3 c Sh + Ss Ih + Is financing need

In assumption 3 a we haW"a "financing capacity

(there

is a

surplus).

but the _proper financing of the plan is not thereby

ensured.,

because this

dir.:

surplus may disappear at later stages.

In assumption 3 b the financial equilibrium ^{poses no} problem, except that of ensuring the transfer of Sh to Is.

In assumption 3 c we have a financing need. At this level there is

a first handicap. Will it disappear during subsequent stages?

(ï)

Sh, Ih = Savings, Investment Of households Ss = Savings, Inves

ment of incorporated enterprises

("sociétés").

I

DEP./ET/XXXVIII/781

-41 Page 12 ^{^ . . -.T}

IV - Second stage; the government

(public)

sector. ;t

u, ... .. i

..The intervention of the government sector is completely decisive

for determining the financial equilibria of. African plans, jwhatever

the political approach to development. For the socialist countries, the public sector is naturally the "keystone11"'of the" financial equilibrium.

We shall see that the public sector is also important in the mixed- economy countries.

At the level of., the government sector there are 3 conceivable situations; balance between government savings and

investment,

(1 )

financing capacity or financing need. ^, .j -r-\

equation 4 a

Sg^> Ig ' surplus

equation 4b Sg = Ig balance

equation 4 c Eg

<^Tg " deficit

•j.' V :,I < Sc. + ^.

These three situations, combined with the 3 previous assumptions, give us 9 possible financing combinations.

EQUATIONS

Starting position ^...,

with _with a with a

surplus 3 a balance 3' b deficit 3 c

3a 4a, 3a 4b, 3a 4c 3b 4a, 3b 4b,.3b..4c. 1... ^... 3c.4a, 3c 4b, 3c Ao

If _you have been following the above argument you will already know that situation 3a 4a reflects a definite surplus

,,p • _ y,. ...

3b 4b

reflects., a,.definite .balance

; 3c

îj.c

reflects a definite deficit

(ï)

Sg; gross government savings Ig; gross government investment

idep/et/xxxviii/781-4i

Page 13

If you assume , moreover, that the surplus and deficit at the leve

-j :.-t> r .iff?'* * :■){'■■' **•

of 'equation 3 and equation 4 offset each other ---as*'the planner often

assumes for want of anything better ^- you will have ^an equilibrium in

situations _;

.

3a 4c and 3c 4a => restored -equilibrium Thus we find at the end of the 2nd stage:

= situations with a sorplus:

- because of the

government

sector in ^{3b 4a}

- because of the first two accounts in 3a 4b

- because of the three account.? in 3a 4a

= situations with a deficit:

- because of the government sector in 3b 4c

- because of the first 2 accounts in 3c 4b

- because of the 3 accounts in 3c 4c

= situations with an equilibrium or close to it:

- because of the government sector in 3c 4a

- because of the first 2 accounts in 3a 4c

ft; r+ (

- because of the 3-aeeo-oht-s—in 3b 4b

yd

The external sector.

' : Let us bring in the international _economy

(i.e.

the rest-of-the- world account or else thè balance of

payments).

The rest-of-the-world account is kept frqm the point of view of the rest of the world and the balance of payments from the national point of view. This difference of approach must be borne in mind according to which document is used. ... .

Let us work with the rest-of-the-world account:

a/

Suppose that it is balanced

No problem Sf

(foreign

savings

received)---If (investment

abro

■ r >' or: savings tra.in¬

ferred abroad.

- "

IDEP/ET/XXXVIlt/781-41

Page 14 -

The resultant ^- the summation of the three net balances of the 4 agents'

accounis - will be.what is found at the end of.,the 2nd stage.

b/

Suppose that it shows ^a financing need

(surplus).

The economy of the rest-of-the-world needs financing

- uses of the rest of-the

world^v

^resources of the rest of / the world

'• 2. ill ^{.. -}

- existence of a trade surplus derived from the domestic economy and sent abroad

Consequently the real

outflows^ the real inflows

hence financial outflows financial inflows.

In this situation;there are 3 possible .assumptions according

to the attitude of the Central Bank, the psychology of people and the

efficiency of exchange control.

i/

either the Central Bank transforms these additional financial inflows into domestic savings by selling the foreign exchange as it is earned to increase domestic credit. In this case the surplus nature of the equilibrium

"resulting" from the _previous stages is accentuated. The banking system is comfortable and a cumulative _{process can} start: equation

5a—^Sf^>0

domestic savings reinforced

by

Sf^ ^ ^

^{which adds to}

Sh Ss and Sg

ii

/

or the Central Bank increases its foreign exchange reserves to the amount of the surplus. It makes a specific appro¬

priation of these additional financial inflows, since it

usés them to buy foreign currency. It is exactly as if this additional'flow had "come out of" the domestic

economy. Buying foreign currency is equivalent to "relen- ding" abroad the extra financial flows received.

•

g

Irt;.thi8

;assumjption.the ne.t .contribution of foreign savings is nil ^{; k}

(1)

Sf = foreign savings

IDEP/ET/XXXVIII/781-41

Page 15

equation

5"b—_^Sf

⁼ 0 but there is an increase in the assets of the Central Bank

The financial equilibrium of the plan remains unchan¬

ged, except from the Central Bank's point of view; the banking system gets an opportunity to grant ^more loans.

iii/

^or else the Central Bank allows a proportion of domestic savings greater than the value of the trade surplus go be transformed into foreign exchange. We .have a net leakage

of savings which corresponds to the equation

5c—^Sf

<^0

domestic savings reduced by Sf.

c/

^{Suppose that the} rest-of-the-world account shows a financing capacity

(deficit).

This means that the rest of the world is able to finance the domes¬

tic economy,. This accounting terminology sounds somewhat strange in

connexion with rich countries and _poor countries. Let us say more simply

that after international economic relations come into it the poor count./

requires some external financing.

- Resources of the rest of the

world^> its

uses

trade deficit

real outflows real inflows

- financial

outflows^» financial inflows.

In this situation there ^are three possible assumptions:

T.:. {Sitdxli.

i/

' either the• Central Bank allows some claims on it to be

:t ■ : :

bought or it sells abroad ^some of its currency

(increase

in its foreign liabilities, increase in its foreign

assets)

In this case the mechanism of additional finance coming

from abroad is made possible; this is the very frequent

case of countries receiving international financial assistance.

IDSP/ET/XXXViri/78I

^-41

Page 16 ^;

We can write' an equation 5d■—>Sf>Q domestic savings

... reinforced

ii/

^or the Central Bank sells its previously acquired assets

,so as not to have to confront a transfer of domestic savings ahroad._;

We can write an equation 5e—^Sf = 0 but reduction of th

assets of the Cent:?

? : "■>. -ï-? ^... Bank.

iii/

^or else the Central Bank allows a leakage of more domesti

: savings "than "would he required to cover the trade deficit

t.-a.;: because it does not receive _any aid or because its exchan

ge control is inefficient.

We. tha.n write an equation $f-—-^Sf

4^0

^{domestic savings}

---——-—

reduced

So remember that both flow elements and stock elements enter into the 3rd stage to offset or reinforce in one direction or another the financing imbalances met with during the first two stages.

d/

Alternative combinations during the 3rd stage.

Let us regard as significant 3 of the 9 situations found

at the end of the 2nd stage

(that

o.f. the definite surplus, the definite deficit, and the stable equilibrium 3a4a, 3b4b, 3c4c

respectively).

Let us see how they combine with

thé'

^{6 new} situations stemming from the

rest of the world.. The number of plausible combinations is not very

great, because there is a certain

.logic

to

it. Foreign savings must not

enhance the disequilibria, or at least the planner must prevent a cumulative _process occurring either in the direction of the deficit or of the surplus.

"

- h : ï

MP/ST/XÎXVI í 1/781-41

Page 17

On the basis of initial situation with a surplus:..

degree of

a = 3a.4a 5a = "over-equilibrium" of financing likelihood

by Central Bank no

5b = 3a 4a 5b = surplus, maintained perhaps

^5c

=

3a 4a

5c ⁼ re-equilibrium through rest-of-

■y . ' world or deficit or over-equilibrium yes

J» 4«'.

5b = 3a 4a 5b = 3a 4a 5a no

^5e

⁼ 3a 4a 5© = 3a 4a 5b perhaps

5f =.3a 4a 5f = 3a 4a 5p yes

On the basis of an initial situation in equilibrium:

5a ⁼ 3b 4b 5a = increased "over-equilibrium" no

5b = 3b 4b 5b = equilibrium ye:

5c ⁼ 3b 4b 5c = deficit perhaps

3b 4b

\\^5<1 = 3b 4P 5b = increased over-equilibrium ^no

'5e

⁼ 3b,4b 5e ⁼ equilibrium yes

*5f

⁼ 3b 4b 5f ⁼ deficit perhaps

On the basis of an initial situation in deficit:

=• 3c-4c 5a - - equilibrium or deficit Or surplus" perhupr

= 3c 4c 5b =

deficit

yos

= 3c 4° 5c = increased deficit yes

3c 4c'

.... S '5b =

3c

4c 5b ⁼ beficit or

equilibrium

or

surplus perhaps

5e =,3c 4c 5e = beficit yes

5f = 3c 4c 5f ⁼ increased defioit yes

¥e are faced with 18 alternatives of which only 4 are to be disregarded. All the alternatives corresponding to an increased deficit

are obviously plausible.

r

IDEP/ST/XXXVIII/781-41

Page 18

VI - The: "resultant": "

•■plausible ones are = a re-balancing of the financial equilibrium by the rest-of-the-world 3a 4a 5o and

3a 4a

=' the maintenance of a normal surplus or of financial equilibrium

3b 4b 5a and 3b 4b 5b

= the occurrence of a residual deficit, which

can be absorbed in the subsequent stage thrr.

the financing circuits

3b 4b 5c and 3b 4b 5f 3c 4o 5b and 3c 4c 5e

= the occurrence of a cumulative deficit which

no financing circuit will be able to check

- effectively:

3c 4o 5c and 3o 4c 5f

000

^11 ~ Fourth stage: the account of the financial intermediaries.

i

The financial intermediaries - and primarily the Treasury ^{- come}

into it at this stage to absorb the surplus liquidity

(levelling

of ^a position of

surplus)

or to cover the deficits.

This intervention occurs at two levels: that of the'Central Bank and that of the banking system

(commercial

banks +

Treasury).

[i

Let us select the most plausible kinds of intervention:

idep/èt/xxxvii1/781-41

Page 19

There oca

- at the

Bank

with the financial intermediaries

(1)

fall in credits CE and CG

(defending

^the

currency)

a 5f

foreign

erves

6b/ 6c/

increase in . \ increase in no these credits X?"

(not

^defending the

currency) i/

Starting with "re-equilibrium" situations

Central

3a-4a 5c

Pall in foreign

reserves

-and 3a 4

^ _{Pall i:}

re:

6

a/

situation 3a 4a 5c 6a is highly orthodox

situation 3a 4a 5c 6b may indicate that priority is being given in the future to the economy»

situation 3a 4a 5c 6c may indicate that priority is being- given to immediate consumption.

\\

(ï)

^{AE =} foreign assets CE -credits to the economy CG = advances to Treasury.

.

.IDEP/ST/XXX¥III/761-41

Page 20 ^{-, ...}

I»

.i.i/

^. .Starting....with. gL.defici.t situation but a recoverable one.

ï n/.

3b 4b 5c 3b 4c 5a

3b 4b 5f

(typical

situation of a country

/

receiving

aid)

6

V

/foreign

^{•r Ç, ..}

^assets

There occurss

-at the Central Bank' -with the Financial ^.

intermediaries

^

,_in_QG aid CE

hence

6e/

\

_foreign

"

assets but

CG and CE

Financing policy 6d is orthodox

6e is also orthodox in the medium term if it saves time.

iii/

Starting with ^a deficit situation which is not recoverable.

the cumulative _process spreads without interruption,

or else growth is drastically halted.

3c 4c 5c

There occurs

- at the Central Bank

et/

Drastic fall in AE

but

- with the financial

intermediaries CE and CG

3c 4c 5f

7 ^6g/

Drastic fall in AE

\

but CE and CG

Policy 6f is inflationary with no precise limit; policy 6g

marks an abrupt halt to expansion.

o o o

ïDEP/ET/XXXVI11/781-41

Page 21

VIII - CONCLUSION:

To sum up this process of examining plan financing we can, for teaching purposes, distinguish 4 stages:

1st stage - We start with the net balances of the capital accounts of households and non-financial enterprises.

2nd stage - We bring in the net balance of the government account

(Treasury accounts).

We then have a more or less definitive situation unless the introduction of the rest-of-the-wcrld account restores or worsens the situation.

3rd stage ^- This net balance of the rest-of-the-world account brings

in flow elements and stock elements which complicate the analysis and make the results somewhat uncertain.

Resultant - From then on we are faced with a resultant, which, unfor¬

tunately, the planner does not make sufficiently explicit,

because the use of national accounts induces him to submit

a balanced resultant. This supposed ex-post equilibrium

is of little pedagogical value. Nor is it operational,

because it is liable to give the impression that the

intervention of the financial intermediaries will in every case succeed in eliminating the surplus and covering V. 0 deficit.

000

4th stage - But in fact, the accounts of the financial intermediaries introduce even more uncertainty into the final result.

Cumulative situations, either of surplus or of deficit,

may then appear.

The first 3 stages serve to construct the financial equilibrium The 4th stage traces the action of the financing circuits. The quality

of the resultant shows whether or not a transition is possible between

the financial equilibrium and the equilibrium of the financing cirou- v..

XXX

UNITED NATIONS

AFRICAN INSTITUTE POR ECONOMIC DEVELOPMENT MD PLANNING

DAKAR

781-4 ter

NIVOLLET ^- 1967

COURSE ON PLM FINANCING

GLOBAL APPROACH

(second, stage)

THE FINMCING CIRCUITS

METHODOLOGY - EXERCISES - CONCLUSIONS

Series PIN PLA 50 to 59

UNITED NATIONS

AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING

DAKAR

IDEP/ET/XXXVIIl/781-50

January 1967

Mr. NIVOLLET

FIN PLA 50

THE EQUILIBRIUM OF THE FINANCING CIRCUITS.

I - The documents in series 40 have shown us sufficiently clearly:

1)

that the equilibrium of the financing circuits has some flexibility, that is to _say it follows, more or less faith¬

fully the dictates of the financial equilibrium.

2)

that nonetheless this flexibility has its limits, since it

may bring about a cumulative state of disequilibrium, which

reacts on the financial and physical equilibria, causing ^a breakdown

in growth

and/or

devaluation

(which

may or may not be followed by

renewed

growth) and/or

^a continuing deficit in public finance.

II- In series 50, we are going to highlight the 4th stage in the deci¬

sional process of financings that concerned with the financing circuits, that is to say the 3rd triangle in the pyramid described in document 40,

page 3. ■ • -i

Teaching Programme.

Doc. 51s How does one organize the decision-making regarding the monetary and financial equilibria within the financial institutions? a working diagrams the triangle of credit.

Doc. 52: Exercisess the establishment of monetary and financial equilibria: Example taken from the base-year of the Plan.

IDEP/ET/XXXVIII/781-O

Page 2

3)

Semi-global;

- for effecting a choice between external

(File

N°

7)

^or

internal financing, whether by an appropriate budgetary organ

(File

N°

8)

or by a suitable fiscal policy

(File

N°

9)»

Lectures on Files

6, 8

and 9 will be given jointly by Mr. Chafanel visiting lecturer and myself.

Thus the course on the financing of the plan during the second

term of the academic _year 1966-67 will comprise 9 files.

N.B. All the notes for these lectures will be issued under the referen FIN. PLAo followed by a serial number.

For _purposes of classification ^a decimal code will be used,

the first digit indicating the file N° and the second the nature of the

subject matters lecture notes, summaries, exercises. Solutions of

exercises will bear the same number as the corresponding exercise, plus

the indication "bis"

e.g. Document FIN PLA 13 is N° 3 in File N° 1 FIN PLA 55 is N° 5 in File N° 5

» FIN PLA 26 bis gives the solutions for the exercises on Doc. 26.

UNITED NATIONS

AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING

DAKAR

781

COURSE ON PLAN FINANCING

MICRO-ECONOMIC APPROACH

THE RELATIONSHIP BETWEEN THE ENTERPRISE AND THE PLAN

Series FIN PLA 10, 20,

1