Development planning the arithmetic of planning

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_{UNITED NATIONS}

.AFRICAN INSTITUTE FOR ECONOIJJ.IC D.SVELOPHENT A:ND PLANNING

DAKAR

DEVE:LOPMENT PLANNING

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The Arithmetio of Planning

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: .. : '· ·The malcinl(o·f-·the Plan· should begin siniu:ltaneously at· its ;tHo endsf

~.at ··thë: •indivl.'du·iü '.Projeot leve;l, ·and· at the maèroeèonornia

liver •. ·

^{Then the}

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results of tnese

: tvio · · a : re

ad.justdd'to one ânothe.r. ·.

:·i.-''- .. ~ .. . .. \;J~~if·:o~ e~oh )p~o·j~ot ~~<wlves

both teohnol6gical and

e~àn.onti.o

^'investi-

;· · 1', .::·-~i!"/-.;. ;_:,:·.~-- >.'···· ·.:: ;j_;-. ; >'·: :: > ~)~~: ... :.. .·· ~- . . . ·.' .. . . , 1 .. .

gat ions.

The

teohnologist is conoerned wi th the methods of production

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^{. . .} ,· >vi th oostings, and with blueprints; the eoonomiet with the ohoioe arnong different 'rri-eth6tts 7

\.At'n

_potenti.âi' market~, wi th tF1e: assessment df indirect ' bene fi ts and

; ~~ · ... : ~ l.:rt:·t'err~:f'a:tiôri-s.h:fp\3~;

ànd

wfth .:the appr.op~iiit'e ·s'èale ·~cr--location ·of outp'tlt•

~-·Trtis:·'work':is ,'ti~consumîfii.: ifJ 'indeea·· the 'rha. J·or·'reàson wt.&Y:it .takes· ·two·

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... :::-~·· · ·.·.· '~hofe ;y-é·a.:r:s to prépare

a(PÎan

·prope'rly. '$ince one is prea':Lotilig. t·he ·future.,

·• :· .. , · ·''·!·tnê·work·'~:ts·;·subj·e'ct ·ta' ·muol:l··e-rror; its, quality deperid.s mo:t-e ·On flair a.nd

'. L

~~-. p~~-o'J~·

^of·

th~ . ma~;~~oonornio ex~roi.se

is to hEüp

t~ · e·ri~~r~

^Ùiat

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the Plan is internally sel~-consistent; that the resouroe requiTements of the propos ad increases in pri va.te oonsumption, publio services and investment do not add up to more than is a.vaila.ble; that the expeoted inoreases in output

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of indi vidual seotors are consistent· with the· expeoted increa.ses in inputs;

·' ~ ·, i'hà.t·''de~d-:an'd supp.ly··\:till .baianoe', u ( the sense tha.t what people will

-.~ .. ; ::damand·. is ·~ha.t 'the .syst'e.m _will produoe;, ·that impor-ts ··will -nQt grow ·fas ter than

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""~: .. ··~:X:ports; :t-~a.t.-iïhe e?CPeo~ed ra~~ of growth will:be consi'stent wi~h available ... ·::·; . sk~led ·mat~powe:ç_ ~d· o api ta.l;. a_nd so on!" One h~ · only to

l:'eM.

the average

.; · . De:ve_lopme,nl Pla~ now be$1lg issl,led to see how. us~ful this ex~r~-~se oou,ld be;

, ·;;_'·i ·: most _published Plans a.re riddled with inoonsistenoies of.the ~in~ ;r~{erred to

•:'·· ·;··, .... ~in "t~ü:(paré3,gr~h, \'lh,;ic}?. could not._.ha.ve. ~urvived yhe:;.qons.truotion of a. macro-

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~o~?om~c. fp~mework • . On the oth~~ hand, .s_uoh ~.framework o~ot .1?~- better than :the ,s~a:l!i.'stios availab;le ~or. ~ing. ij; ,. and i t mus't be ... ~_ully ._re9ognizep. that

· · .;the majo~i~Y.. _{,. •} of unaerd~yel9ped _. aountries do not as _. .. yet ha.ve .. good _{- fi" : • .} .. enough stati_{• .'} :::ticr.·

·ror relia.ble ca.J.cula.tions of this. sort •. _{. ... :. ~--}

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REPRQDUCTIO:r,jq~~O

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The technique of this•'· exeroise 'l~ to pro je

ct"

what the national inooma : . W·il.l be f'·'SeOtor· by seotor; at th~ end of the.·· Plan period; :-this ::Ï:s·· compared

·,•,; v~ith' natipna,l .îhcotne· a.t .. tl1e beginning·, ~nd,. ⁱⁿ the more elàborate· mo?-els • with

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national incarne in Ba~··inter.vening year •... These projections ·are used to

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~; ~?T?.~f~. d~roand_ a:nd s_u~.:ply

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as ~ma:rlçets as. pos~ibJe: reql,l~red investment wi th li,kely s.avings; demand ÇLn9,. suppl;v' o'f !=laoh oornmodÙy,t impor~s an~ experts;

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. a!ld · so ·eni

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.t.· ;'; 1 ··, ;;:,'To illust'I'é.lte 'thè t8chniqùe1 we s-hé?ll make suoh

a

projeotiop·in this

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,·, ohapter for an imaginary country," . This will be done. at a very .elemen:h:ry level, beoause this volume .is intende'd! .as a.n. ~troduotion to development plaJ1tling

f'or·peoplB, -learning the eleme.hts •. of.the subjeott and not as a teolmfca.l trea.tise

· for·: experts i One simplification will, ·be to deal in a · small number of seo tors, so as to keep the ari th!netic simple• Working with tlventy .to forty t.imes as many se?tors t aq Planning Agen?~el3 ~o .,~ l~ge oountries t m;:ly gi

ve

muoh grea ter a<?s:ura6y, but does not inyolve a:tJ.;! oha.nge 9:t:tprinoiples.

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^TijE PLAN

PERIOD

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:Pl-a.ns.-odrne. in ·thi'ee. sizesf short~ m,cdium•'arrd longe .. The short

is

^{'tïhe Annua.l}

· Pla:ll• .

·Tl:ie ·medium ra.ng.e be_tween t.hreè a.nd seven· years 1 _with 'l'ive yea.rs as the

most poplÙar choice•. · The ·long range upvlaœds from ten years to twent.Y ;years •

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The \.Anhual Plan is not a substi tu te for the .ethers~ · This is

thè '

control ...

ling

'p1· a.nt

in the sense tha.t· this is 'the· only

, d• .~ument

whicht

whcn - ~~ssed

by ' .

Parlia.ment (normall;y in thè form of

· an

^annua.l capitar budget) authorizes Ministers

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to· spend money; a ^~ive or Ten Year Plan is not an authorising doqument• but merely

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· a sta.tement of intentions • ¹1'he Annual· Plan is · also the contr6J,.ling Pl::.n in

thé~ sense. tha.t 'i t is this -~ lich ye~r by year' matches 'reltourcês ·to possible

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àbhiewment·s~ · It is governed by the medium or lo:Qg term Plari, whioh sets its direction, but the Annual Plan i~ th~ opera.tive document.

The first Development Plan should be a Ten Year Plan& this for three reas ons.

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'Firsi~ ; th~·:'~' ing ~f-'' th:~ ·r}jéi

i>ev'el.Opmeht' Plan requires an··assessment

,.· f . ^1.,, r· • 1 •,. _ .-.•r f •. ··' ... , .

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long term perspectives• · To forriru.latè ·thé .. poi-'tion bf t'he· ... Plan .·aeal~ wi th

t

· ··! ;~ads -~~e ·~ s·~ · lo~k ·~e~

^a.t

lea~ t

^teri'

year~·~

·The sbhool ·authorÙiès s·hould

. :·.:. :,·: ~l~b:· be 'io~~-k "~t'

^...

ie'asi~

^{t'en Years}

<:ih~àd, si~oe ~eache'~s ·

^{are not produoecl over-}

.~, ~ight ·~ ;"·' Th~ , Mi~'listtry . ' or Ag;iè~liure

^'is

~ihg

· to ·be oalleëi upd'n to· build .. üp an

~:··~ .. :t·.:. ~-:1''(::·::;.''•,:t · ·~ · . . . _-, 1 • • '

. extension servioe; training will' take 'many years, ahd re·sults 'üll · take' still

:,,~~rè~~: Ô~e

^o.f thé

~ie ' \.rripoitant :us~'s

^{of'::planning''·is tha.t'·it}

: ro~ocs

·<iàdision-

.i.'-.• ;1 .. :\, .l.- .. ;., ^{~-.-(f~:. • . . . : ·',;:: ••. . .. '. . . . •}

makers to stop ana think to formulate l.ong-rangè· goa1s, ·and to brfng'·immediate

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actions into line with longer perspectives• · ''

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3eoondly₁ \'l'hat is true of policy-making in indi~i.dual industries· is also

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true for the eoononzy as a whole. The main purpose of development planning is

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to move towards 'self-sustaining' grmvthf i.e., to create a·. ;oadre of trained

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manpower, to raise the pèrcentage of' national income saved domestioa1ly, to

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increase .knowledge of na.ttiral reeïoùrôes and their'·effective ùiiilita.tion, and

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to oreate inst"i tut ions whlch favour entei-.prise and invèstment • All 'thÜ~ talees

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time~- 'Development. planning is' a 16ng-t'i3r·m businesso

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. ·,:: ·~The .il'h~<;Lad:v:~~é%e of. ~ong-term .P.l?Jllling is purely political.

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oall goes out for pro.je_?ts, ·:~v:f3ry area .and ey~ry interest puts in its The result is a demand for publio services

f~ i~ exo:e~~

^{of ava.Üa.ble}

When the oia.im.

resources.

In order to retain support, the Government will be anxious to show th;..·t it

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reoogniz.es the le.gi timate needs of all the people.

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;Lnto the;_ Plan, but H .can· put more ··than ilwioe" as ··much into

It oannot put '"èvèrything

a

^{Ten·Year ~lan as}

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into a Five Year Plan (since resouré'es should bè la.rge'r ~m the ·seoond f.ive year~

than in the first fi ve years),

àna

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orui ~rovide twioe as ! muoh' pleasure. The importanoa of such political considerations must not be underestimated, since the people are more lik~.~y -~o. ao_qui~~.O.~: ):..n_ ~.~_e payment of the high taxes

·!. w};l~oh d~yelo.proo.rt .. r~qui:res, if -;they. seE;l t_ha.~ . the:j..r needs are reoognized₁ than

· .: ;_i,f the; Pit..aJ:l

d~~l?

^.pot _. ^..

me~ti~n .'s~h~mes whi~~

^they

v~iu~ ~· · ~~

^{me:œÙons tli.em only}

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REPRODUOTION/~38-80

Page 4

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These arguments fqr a Ten Yea;r Plan $UppQrt even more strongl.y a Fifteen or. 'I't"lenty Year Plan. The se

longe!\o!o~~rm

_{• • '} .p1ans ( calleQ. 'perspeoti _{• .. . • ·1} ve plans._{• ~} !) _. are sometiines maàe t woother f9·:r;' sorne seotors only, or for the who le eoonomy, but are .seldom ·published·.· They serve· as g).lides to deoisi?n~akers, bJ7 .sf1owing

· U:p. bottleneoks whioh will erœrge· as the. econqmy,.expands, .. ~f a.nticip,.a.t?ry action

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:is ·not talten vJell in. ad~q.nce. They are not pub~lisheQ. beoéJ,~S~ a. doou~nt ,looking

... ··fifteen 'to tweenty. years .. ahea.d. is .largely guessworlq and also beoaus"e ~oh

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···of wha.t i t cohta.in~

is ..

irrelevant ,;t;o ·immediate deqis ion-making~ The n~i? purpose of the published Development Plc.n is to serve as a. ·.framewo~.~ for. prepa,r~tion

o.f the Annual ^~la~., and fo:r;- this purpose one needs a narrower horizon tha.il fifteen or twenty years.

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· To· stnxt with a· Ten Y~a.:rJ.Plan ma.y:.a.void one of. th~. chief defects of Five

·y~ar Plans₁ whichis the;i.r overcrowding. Too muoh ie expeoted in too short

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a: timea·: Publication ·of .tha Ten Year. Plan is. an earnest_pf good, intentio1,1s.,

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· However, a. ,Ten Year Plan soon: .g~ts out of date• By ,the end of the ~_~~cond yea.r work should sta.rt on ·.a nevr Five Yea:r Plan, .to come into effec:t. 88:Y ?:~ the end

· .... of the. four.th year₁ when the existing Ten Year Plan will be superceded. Five

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, .. <·,. yea.rs .is a. good plan period, though 'it is not inrnensely superior to threet fourt

·' .. ·.· six or .seven yea.rs,, which are also pobular nuinbersè

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Summary ^•J

Ther.e. should be an Annual Plan, ^:a medium term Plan; and a ,~o,llg term perspective Plan. ·· The firs:V pubJ.ished Plan should oover about t~n years; t:4is should be

·... ·supercëded by Plans for shorter periods. _·'

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2• THE. RATE 6F GROhfTH

The C0f$10rJ.~.§t error in development planning is to' project' an"imp6~sibly high

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ra.te of grm~th. The rate of growth of an econorey· cannot be immensely different at the end of a five yea.r period from wha.t it was at the.begüuü~

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^{'ex6'êpt in}

countrios reoovering from disaster• This is so because the ra te of grovJth is

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REPRODUCTION/038-80 Pél€e

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constrained. by fundament~l factors vlhich are not easily ohanged in five yea.rs~

When one rea.ds in a DE)velopme:nt Plan tha;t an. economy, now growing a.t 3 per cent per annum is: 'planned•· to grow at an ,averél€e rate of 6 per cent per annum over the next five yeÇU'S, on?l knows a.t once that the documènt · Q~ot be ta.k:en soriollsl since it, will be planning to dispose of otltput, taxes and savings in quantitios which will not be thore,

Excessive Projections

Governments fall 'into this error for one or other of three· reasons. F~r~t.t:

they .may be pu15lishing a Plan merely as a p ropa.gandéi exeroiM ,. wï.thout inte~

ding

to

be bound by it •· Seco~dly t the i r Pla:: m~.y list wha.t the oount~y. n~~ds, rdher than 'what the country is. capable of producinge· Thirdly₁ it ·rna.y be thoughi:

th?t the a.mount of ree.ouroes likely to be. available is i tself a functio~ of the size of the Plan •

... It may seem strange for a. Govérnment to p~blish a Developmènt ·Plan whioh

it does not intend tb implement.

b . .~ This may .ha.ppen for several rea.~ç)nse · The Plan lllél.Y .have peen ma.d.e by the wrong people. For e..;x:ample, the Minister of Development may be keen to have a Plan, vlhile the Prime Minister is lukewarm. ' The Cabinet agrees to set.up the•machinery.for-ma.king the Plan; foreign experts are hired; and prodigies of.arithmetic are performed. The Plan is accepted₁ published, ahd acclaimede The Minister of Development maves on to sorne other office, and this is the end of the Plan.

· Even if the right people ma.ke the Plan, they may have thèir· to·ngues in their cheelés~ One

may'

publish. a. Plan to plaase the public, or t6 plea.se foreigr aid . administra tors ₁ · wi thout ever intending implementation~

~very politioal party publl.shes a party programme, .as a. way of attracting votes·_, but only the unsophisticated expect., politic~l parties t6 adhere' to. their

·programmes • . When a Oovernment· publisheà a. l)evelopment Plan· :the samé sort of ritual is involvedelvhether the Plan is ·meant seriollsly or not, its··publicatiç>n

is an importa.nt~occasion. The 'i?lan fortifies tb,e na.tionf's oon.sciousness of

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REPRODUCTION/038~80 Page 6

i tself •· In this i t is at least on a. par ^\Ü th suoh ether oc cas ions as the celebration of the King¹s Birthday, or the playing of 'the World Series, or the lining of the streets to vsàvé to

a

^{visi ting Presideï:lt~.- The. i'act: t,hat ç. ·Develop-}

...

merit Pian is not an authorizing document permi ts Govern.ments to. exploit if fQ.r political purposes.

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.A Government newly in office is espeoially prone to publish ém inflâted Plan. While in opposition i t ha.s made innumerable promises, which H must now reoognize. Aotually ^t one need not overload a. Fi ve_ :Yea:r .. ~lan; p~e:y-o~.d.·)i~~

!Oapaci ty for implerœntation, .rnerely .to. reoogn,ize corrmitmentse All thd is hecessary is: to ·issue instead. a Ten Year Plp.n: since resourc.es grow, one .oan corrmi t more than tv:ioe as much ·ill a· Ten Yea.r as ;Ln ~· Fi ve Year Plan.

The second eouroe of errer is to base a Plan· on .¹naed ¹ ré1ther than on resouroes.

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Assessmàrit of resouroès may indicate a. possi"'ble

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per cent rate of groüth. This is judg~d to be too low. The country ¹needs¹ 6 or 1 rer cent. So a .. high figure is assumed; ?api t.al needs are caloulated on this base; and the Plan cornes out

wit~. a long list of projects w~ich there i~ no hope of implementing~ Alter-

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natively, one oa.loulates how rrru.ch investment it would take to eliminàte unGmplo-y..:.

mè~, and programmes aocordingly₁ without regard t' o available resouroes.

This a.ga.in ra.ises the cpastipn of intent. If the purp_Qse _of . .a. I;llan_; is to control the use of' resources, it must be based on ava.ilable reso.urces. Needs are unlimi ted; a Plan based on nee:ds is an ·.a.dvert.isement rather than. n.n instrument of control.

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This brings us to the third reason for excessive. Plans, _whioh is tha.t an a.dvertisement may bring replies; more speoifioa.lly, the . amount of.^·: ll!oney ava.ilable may itself be a fuiwtion o.f the size .of the Plan. This ,is obyious in relation

·· to the searoh for foreign aid. If one presents to the foreign aid administrators a Plan for whioh

àn

the required re sources are a.lready ·a va.ilable, no role is left for them. But if one oan point ~o a. large ilumber of usef.ul and feasible projeots which lack finan~e, they may begin to give .serious côn~ide.ra.hon. The

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demands. of foreign aid administrators have novl beoome one of the most importrmt reasons for m2king Development Plans, and have indeed helped to improve the qua.lity of Plans.

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REPRODÛCTIONJÔ3à-8o

Page 1

The Plan. _{. ..} also helps to inc.rease the amount of domestic financee . When

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development planning begins, the iqea~ is new to the· public, and suggestio11s thc:.t ta.xee, be raised or savings increased to finance it <:~-t'e. not taken serio~sly~

But if the Plan ·lists. a number of pro.jects which. seem desirable_ to· the publio₁ and then yea.r by year the Plan is fqlling behi,nd .. for la.ok o.f resources ₁ the.

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publiC),_ may we~l educnpe it~elf into ,_being will;i.ng to make ~- la.rger oontribuüon. However, the legitimate.desire to plan in f3\.l.Oh

a:.

Hay ns to attract· more rèsources is· easily ~et ·by having; t'irst and second ·priorities• A fire~/ iis·t

shows· .what. can. be -do.n:e \•li th the finanoial reso~es likely to be available, Hhile e.

second.· list. sho~;s a.dditione.:l projocts:.\'lhich are··· feasible and desirable.; but for wl:üch finance is not yet in sight. Thus the Plan is made realistic by giving a range of possibilities~ .

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T~ publish a. Plan which ca.nnot. be impl~mented. beca.uco ;it. is e:x;ye!'lsively large negàtes tilo principal, purpose of plarming, which is to g~ide polioy. vlhen

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too ~a~y. proj_eèts are .. lis~ed, th?se which get carri·dd out. are. pot_ those vri th the highest priori~y, but just those which happen to get off the board ~ef9re the

t : ·, ,···.

riloney r~s out. The Pl

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an misleads ^. a.ll who take i t seriously. It tells civil servants hov1 much they shoÙld prepare to spend; if the mon~.Y-is not there, such prepn.ràtions are wa.sted. To the privd.te sector _,. it indicé:.tes hm-1 much foreign anQ. dome'stié fiiwnc~ the Government thinks t-~ïll 'bè ava.ilable ₁ and ther_efore wha.t

· ·' i ts foreign exohange and lèndi~ policies will ~è; i f these e:xPeota.tions are

excessive,· privete de·cision-~.kers are led astrav'• In 'indicative planningf the ma.trix of interrelnted dema.nds is intended to guide producers as to the probable

size· o:f their mnrkets; . if. the figures are set deliberately high• they will c~:.use

.. _--~ frustration.. I:( the Plan bears little relation to what is likely to happent i t

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is not ·meroly'ùseless for oonttoil:.;-oi"t.is al~o dau.gerous'-'t6-anybody.who=takes it

;

s.eriôuslye · In pr.acti-ce·, unrealistic· •Plans are not taken serïously by ali:œt decision-..

makers~ ^{· The .}document is not consulted, because it is irrelevante·' The planr{ing

~uthorities a.re unable--to exe·rcise influence.·· And fbreign aid administrators td;:e note that the · Governme:nt is not serious about development planning·•

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REPRODUCTION/038-80 Page 8 - ; ,_ '-

Ol;.lef reas on for ._the incr~2s ing populari ty. of macroeconomie exerc ises wi th . profes:;li._{- .} o11a1 _,. pléll!p.er.~ is .that tlwse exeroises do. impose upon po

ii

tioiéms -the

\J~:rd.~n, ?f .consistenc~-·

_.. If:

t.he Plan a.s a v1hole is tao larg~t consisteno;y is not , '· o~ m~ch.:help •.. But .i f o.ne.., can eet the .Prir?0 Ninister to agree to J~xing a

r~nêo~al,>le ~ota.11 tl")..en a. macro~conort:~io exeroisc _works ~onde~s in. eliminating prOJ)o.sa.l,s from indiyidual Ministers \'lhich a.re inoonsü:tent with balanoe in othcr

sectors_~ On the o~her. han~; determin~d politioians a.re not d0feated by ari tho.;

riietiof . ·if t}1ey thave . ~o a.ccept cons,istency, the'y merely work for a Plan which

' . ' ,: '.i. . ~ • J • ' • • . '.. : <. • J • • • • • "

is consistent but _excessive• Ma.ny .. De-velopment Plans are now publishe.d v1hich

. i . . · :

meet every ~est

~f consiste~éy ,

but

~~hich

are nevedheless obvio.usly

exce_ ~sive e

Oonstraints on Growth

Development planning sta.rts with assessing w!J.a.t ~he econ~m.y can do,. .rather tha.11.

· by .a~king 1-{hc.t it .would_have: ta do ta meet sol\le ;desirable end, such as· inor.easing

~

output by

50

pe;r cent or halv;irig the tl,llemploymel?-t ratee -.The four-fundamentéil c·onétra.ints. _on the · rc:.te of growth. ~e i nat ur al -resources ^t skilled manpower f the

.il~hys ical' ca.paci

t f

of the ca.pi tal goods industrie:::;, and .finance•

TJ:i~ planner:¹s'·-rirst, task is to · pinpoin·li the new resources or techniques whôse e:icpl~ita:Üo~ is 'going· to càrr'y the econom.y upwards. This is done in

· oo-op e~aÙ~n

'with .. the geologists,

th~

:a.gronomists, the industrie..l promoters and ali the qthér spoci.n.l'tsts

w h o

are study:l.ng outlets for new investment or new

lé~owled~gë'~ .- .. '··

.

., ^'

In pra.otice the overa.ll rate of grmvth achievable in an unde:rdcveloped

, •• : .. 1 ' ' , , · ,"': .,.t· ._-,·- • ' • ' •¹ ,• • ••

econom.y depe!jd;:: prima.rily on v-1hat ha.ppens to its ~rieul ture. In -·J,.e typic.:tl Afri-

~ . . ^.'

.

^,. . . . . . . . . ~ .

.

^{. . \}

cap, or As1an eaont'\m;f, agriculture prodtllites .. •omething like 50 per cent, of gross

·' .

ci;~es tid .pr~d1,1Ct

(GDF);.

s .erVic~s a~co~nt

for·'

35

per cent' and industry for only 15'

p e~ cent~ ,

^{Drea.ms. of}

ra.p~d

^grO\<lth

US~a. Ùy.

^Centre

~i~ ~~~ manufact~ing ~e ~tor

^•

-~o~è-ver , thi~

^{sedor is so} smal l that

~even i:t:

^it e:>..-pands a.t an

ext~ao;ai~&;y

^rate,.

.. ,

ii s influënëe on- the

. . ' .~' .

growth ~àte' of the ec~n~IT\Y as a whole is ,relatively sma.ll.

. .

^{1 .• ' •• • • •}

The main determinant of gro1-vth of the economy q.s a whole is t'he grO'I'lth rate of agriculture.

REPR~DPCTION/038-$0 Page

9

This is easily illustrated sta:tistica.lly. Between. 1950 and 1960 rna.nu- facturing industry grew at an annual rate of',t3.3 pé~ cent in Britain,

6. 5

per cer in India and ~.2 per cent in Bra.zil. ··Let u8, assume: tha.t an underd,eveloped

country a.chievcd the extraordina.ry high rate of 10 per cent. Let us also assume tha.t i ts agricui tÙre g rows at a rat~ of ·

.3

^J3r ce~t p.a., which is also higher than most underdeveloped countries ~chiêve. The output of services (~noluding transporta.tion}' usua.lly grows a. li ttie fast~'r than ·the output of corrrnodi ties, i~ renl ta;rf!!S •. (In rooney terms services .grow rn'J.ch .fas ter than ·national ü1come; productivity. increa.se::ï fa.ster in commodities,- so service priees .rise relatively to other ,priçesh . We then· get the following result: , ·

TABLE II. Growth Rate .A-:'er~e '.

.'. G:pP yea:r 0

---· --·

.Agriculture 50 Manufactures 15 Servio~s

35

100

Growth · . .Absolute ··

-.RD:.~~~-

3.0

1.5

• ... '~ 1 ;·.

t.o.o 1..5

~ 4~;9

1\7

#

4·1

The resulting increase of

4·1

per c~nt. is very high. 1~s_. t _.. underdeveloped _{i .} countrr-es are :not in a position to "achieve· a ^gro~th rate of 5 .per cent, not be cause vhey o ^a~ot step up .rna.nufacturing ac ti vi ty, . but be cause they., have not · found the seore't of .P.~~.tJng their. fa.rmer,s to incrense .a.gricul tural output by

·~ . ^··~\ . .·• ' ..

more than 3 per cent per annum. IV"Ja~y of these coun.tries olaim :to bç) growing at rates of

6 ,1

or even 8 per cent. Most of the se olaims can be dismiss,e.d

.

^'· summa.rily A rate of 5 per cent per annum can be excecded only in the following circumstance~

(1) if agriculture is growing ra:pidly beqause new lands are being opened upt or massive investment in irrigation is pa.ying off·'· or .the peasants have become enthusiastic about fertilizers , new varieties, or new orops; or

REPRODUC~DN/0~0 Page 10

( 2) if the development of the econoll'\Y is already \vell advanded, so that

·the importance of agriculture in the total" has ·already diminïshed

sïgnificantly₁ o»

,

^..

(3) if there is a rapidly expanding mining industry •

... t• 1_: • :

In most uiiderdeveloped countriEis none of these conditions' riôlds • .

' .An

• • • • ' • ~ • 1 ' • ' ' • '

annual rate of ·increase of

5

per cent · must then be rega.rded as a; remar1càbly high achievEm1ent, and c leims in exces"~ of this must be -treated 1-li th s'ùspicion •

...

The moral . of this a.ri.thmetic is not that Development Plans should normall;

accept 4 per cent a.s their target, but that they should normally give priority to trying to ra.ise agricultural output fa.stor than by 3 per cent per annum.

In the absence of mining, high rates of gro<vth nre ~mposs.ible unJ.ess .there is a break-through ^·~n agriculture. A few underd~veloped countries are getting rates of agricultural ~rowth as high as 4 a.rrd. 5 ... per cent per annum₁ over a decade. Most~of the ethers .qould do a.s vmll, if they tried~

...

Man power ·

....

The second oonstraint on growth which mny make 5 per cent hard to aohieve is a shorta.ge of skilled manpower.- This may show itself in any séctor. Û"t1e may be able to build schools or hospi tals, but not to man them with teachers or

·;·. nurses. Industry needs skilled artisans, fo_remen and _superviser::> • The .agricul•

tural programme ma.y la.g for lack of· extens,ion 9gen:l;;l'?:, .-and so

. ?1?-. •

T\.vo. ^ofJ the more: important rrra.npower bottlenecks. are .in .the Gove.rnment¹s .a.dminist;r_élt_iye

service and in· the construction industry •. , These two are s.o importa:nt _that if they are set targets beyond their ca.pe;city the.rewl:tl ·is not ~rely a shortfa.ll, but. may well be tha.t less is a.chieved thnn would. be possible if the targets vJere

low_ere

Th~s may occur because the Plan consists of hundreds 9f individual projects each :of ·which must itself be planned. ·.If buildings are req\lired, they must

be designed, put out to tender and wa.tched. !llachinery ·must b~ imported. Skilled

REPaODUÇ~ION/q38-80 _{" ,,}

.. ·

Page 11

labour nru.st be tre.ined and hire de T_he cape city of the ^{éldministN~ti} ve service

' ; ,. • . ·~ ^{• •• : :_ • • -:: f • •.} t . :· . :·· . -~ •,·-:' . . . ~ . . . .

·4'",-~_is lim~ted~~-~--~f .it tri_.Js .. ~o do more th~ ~t can do efficierttly; mista:kes

4 . . ; . : .

!DU~.tiply rapi~}Y.• Buildings are .not prope'ri.y d·esigned;. e-qÛi~~n't is not· ordered in

- ~:i.me ,

^or :?!10s.e11 with care;_

tr~ining pÏa~s-

^are·'

dela.y~d.

'Tlie lesul·f is vJaste. , .. If _onl'l: ha.s r,esQ,p.rces_. . capable of

-~ieli~

re

suit~

. . wonth one· mÜl±on and tries

. ·. ' . " ^{' '} .

-"!~~ .get from "tïhe!Il one and ._a half million of resuÙ~, 'o~e ~.y end up vii th'

a:

"product

. . -~ " . . ·.: . . . . ::'\:· .. .

worth_{. ...} .only _{... . .} three-qp.ç~~_~. ers of a million. Ii is unque~tiortably a mista.ke ta load

' . . ' ... ' .. ^~ . ^. ' : .

.

on to _{! . . ..} ·the admin._.: istra.ti ve _. servie~· a· bitÙser '·programine

,If, _wha.t

q~n .

be. do !le se ems sma.ll ^t. the,.

cor~~-ct . re~~dy

^îS' to begin by s trengthening

' :-'.

then i t · oan· ·efficiently execut

· . ..,:

,IH.;: ..

··.Ad'mirfistra:tive··.capacity =:is s,trengt;hened .. ~.q the long run by educating more

peoplè₁· especially e.t·=-s~co;ndary._c.nd higher ],eveis: this is a.n_. ess~riÜ.â .. l part

. •.• ' • • •• • •,, -~ • • • : : ,1 : ~ ' ~~~

· · of any· Pla.rt:.'. In ·the short run ndminis~ra.tive ca.pacity can be strengthened by -

" .i..

. · '· .. importing. ski~ls. · A ·short age. of .. ~nginêers or arc hi tects need not hold up the

:·. prep'a.:riatiion. :of. projects t

~ince

^{it_ is}

p~,~-~i~l~

^to

hi·r~

^tpe

S~r~i ce ~ ^{O . f} GOl~SUlting

engii:wers and. a rchitects. -.A short~.ge o~ entreR-.f:::~el~r~ ?..an

be

~t 'b(using foreign entrepreneurship, a.lone, or in asoociotion with domestie enterprime

1 r 1·

{whether ·:Pt'iYél·iï~:

..

or p~blic) •. Thanks to bilateral md multila.terai teehrlical a.r,t.s~taR~-·:.prqgr.él-mmefi;, high~le~ei manpower is ava·il:alÙe 'iit ·r~la.ti vely low oost.

r.- .· :· .. ;"

Ip.J;ermed~~;e

^..

~k-ills

^{a,;e· more}

dif~icu l t :ç.( ~ur~es· ;

teechert:l;;

s'e c~ètariè s'·,

^··tech-

niçi~-ns), - s i~.~·e:

^t,t:e

n~mbers r~ qu ired ~~

^{farge, ·and tM 'coct} ·of lfrriportti:iug them high. But the

1

se ;

^{on the . other}

^hand~

^{.-ru:.e. fai J.?ly} ea.Sîiy 'muJ.tiplied by establishin<

, .. fp.c~lities fo:s .training. Hig~level tnanpOioJer is therefore no longer ·süch a ·

. ^·

:'"'

..

^,

.. .

. bott le,neck as .

±;li-

was fifteen yea.rs ago • .. .

Capitn~ _Eormat~on

.. -' ^{~· .}

' Most neW pro jeets require. C?·Pi ta.l ;fo~mc:!;ion, he~c~ the ca.pacity to crea.te new

·capital is· 6-rté= of. the.. constra.ints. on grovrth~. About two-thirds of ca.pl. ta.l

. . . •. . . '1. .•

' formation goes into consi;r,uctiofl,

ano.

élb~ut one-third into equ.ipment. ···'l'he nature

•:. , . • • 1 • . , :· •

of the oo·nstraints is different in these twq sectors.

...

. l

~ ;

REPRODUCTION/038/80 : Page 12

In oonst:ruct ion thé nlélin constra.int wouid be skilled mé:npmver, sinoe

~ore than h~lf thë worker~ in. this ind~stry are a.rtisans who mus.t have a.t 'lea.st

...

^{a yoar of trai~ing to} a~qu1re 'proficiiency. How much more ···work one can load on

. 4-''·

this indu.stry therefore depends on how much slack there is. After :a period of

' ~ . . .-·"-' ,.,. .

., ... s~ag,n~:tion the indust;y: ca.n probàbly take as much extra work as oan be financ::Jd;

' • 1 '

" ,,,

but if~~~ indus~ry is ~-lrea.ci.y working near ca.paoi ty, a. decision to accelera te

c a.pi ~c .l

.. ;formation rapidly may caine up :against the coristraint 'of building oapacity. • .

,T~e . ~onst~u~-~·ion

industry win·.

·Ù~en · è ~éÙld

^ra.pidly Ni th unskillèd .. labour,· bu.t

o;-;ing to inadequate ~upervision and poor ·eraiiling the work is doné badly @nd n.t high oost.. Contractors t2.ke the opportuni ty to double "ànd t ré ble the ir profit margins~ '

r . funy

refuse to · quote a fixed priee, and insist on. oo~?t-plus contracts. i&lmost' inevi tably, 'what :\:Jas planned to co.st a million costs one and a half milliori 'or even two million,. The moral is that ·one should lo<?k c],osely d the ca.pa.ci ty of ihc construction industry when beginning to. p~an., and should include

in the Plan itself measures for incroa.sing capaci ty., Proposals tha.t the a.mount invested ·should ·grow by·I!Icœ·than 10 per cent per .. annum should norma.lly 'Qe

resisted • ·'

· -

The cxisting ca.pacity to produce ma.chi nery is' a' constra'int in a oloscd (3conomy, but not in an open eoonom;y >vhioh cari conveit sa:vings ~ foreign

( .

. ~~qlJ.a.nge.~ In a 'olosed ecdnom;y_, acceleration of gro~1t:1 requires heavy investffi'.3nt

. -.·;1.'.. . . .

in the ma.chine- producing industries, _. to· the erlent · porrni tted by _the ra'te of

,.

saving. Jin Open econOlî'\Y need not. prôduce its OWn ·machines, and dOe& not therefore have to start by expanding its hea.vy industries.·· If savings ·can be converted

in'to foreign exchange, the decisiÔn whether to import moohines or to malœ them at home turns on simple considerations of oost and convenience •

.An increase in saving is converted into foreign excha,rige be~u~e i t causes a reduction in the importe: of consumer goods, or a reduc~ ion in the d:ama.nd for domest ic rer.;ources, whose· product is then 0xportede The factors which malec this ea.sy or difficnlt \'lere Encamined when w~ considered the related possibility that the rate of growth

~of

experts could be a breke on the rate of gr.owth of output. 1 1, See page 39•

•

REPRODUCTION/038-80 Page 13

In the textbook economy saving is the only constraint o• investment; foreign exchange does not cons ti tute a separate constraint since saving c·à.n always be convertéd into foreign exchange. In the real world, this conversion can be difficult. Imported machinery then becomes more expansive in real terms than i t is in monay terms, and i t pays to produce rather more

machinery at home than would ·~herwise i~ the case., Then, the more depen- dent the country is on its own machinery supplies, the more important the capacity to produce machines will loom as a separate constraint on the possible rate of growth of the economy.

,•

Most countries begin their industrialization by investing in light consumer good industries rather than in he avy capital good industries •. · This is partly because many capital good industries require advanced skills₁ and partly because the market for such goods is relatively small when

compared with the scale at wui~h their production is economie. A large country like India, which is relatively well equipped with skills, iron ore and coal, has a comparative advantage in the production of iron and steel, and of sorne maohinery. Small countries, not slimilarly endowed, will find it more profitable to start with consumer goods and to move into

capital goods, via repair services, only as the home market expands and skills accumulate.

Finance

The fourth constraint on the rate of growth is money. :Economie growth requires large expenditures on the public services and also on capital formation. The annual recurrent budget must allocate large sums to such services as research and surveys, road maintenance, agricultural extension, education and public health; there is no fixed ratio, but less than 10

per cent of GDP (excluding defence expenditures and social security transfera~

is not liksly to be adequate. Again there is no specifie figure for capital formation; but adopting for the moment an incremental capital output ratio (ICOR) of 3 to 1, it would follow that an annual rate of growth of

5

^percent

REPRODUCTION/03.8-80 Page

14

J,

requires annual net investment amountin~ to 15 per cent of GDF. This sum exoeed~ the current savings .. ratios of most underde~eloped .countries~ If

_,.

the se countries had to depend only on their own ~.es,ouroes, . very few wo1,lld have a 4 per cent gr~wth rate.

Capital- Output Ratio

..

;

ICORfs oan vary widely. In the first place, ·only .a small propor:tion· j • , . of inves tment goes directly into the. production of commodi ti es (.agriculture, roining and manufacturing); usually well under half. About a sixth goes

1 1. • • : •

into housing, _and the rest into. public utilit.~es ttransportation,. power., water) a?d public services (e.g. sohools,h.ospitals~ roads)~ 'rhe proportions can be varied. One _:-; can temporarily get a very. _. low ICOR if the existing

: ^'

public utilities and services have excess oapacity (one reason for rapid recovery ~~te~ after ~ war)• One may.also _distinguish betwe~n that capital- which :l.s required to prbduoe. the gr~wth of ootnroodi ty output, ~4. other

capital which is .ivanted for services which are demanded because growth has ·

1

taken place. One cannet postpone inve.stmeht which is w.anted f.or growth, without impeding growth; but it is possib.leto J?OStpone invest!Jlent wh~ch

mârely facilitates consumption; ^e~g~ housing, hospitals o.r entertainment services (as the USSR did in its earlier Five Year Plans); However, this can only be temporary; for sooner or later the expansion of commodity output will create irresistible demands for inoreased expenditure on housing,

utill. ties and servicès·.

Secondly, even in the. commodi ty-produc.ing seo tor, the ICOR. depends on technology, and on the commodity mix _. •. _. Is the development mostly in heavy _{' .}

ind~try, or in light industry? Does agricul tural exparui:ion require heavy investment in irri~ation or reclamation, or is it merely a question of using

fertil~zers and planting better yarieties or more profi table .. crops?. Develop- roent planning of.fers mu' h leeway for the use of scarce capi t'al :t;"esources in ways which keep the ICOR low.

~

.

. . ',

.

', ,

REPRODUCTION/038~0 Page

15

Tbi_rdl~, the •IGOR ià a f~nction of .the rate of investment-':J..tself.

Ne~ · inve~tme~t

^{and n.}ew technology go together; ·hertc·è,

· th€ · :f ~sÙ'r

^capital

'! .'

grows, .th.e glieat~r the proportion of n~~ technology embodied· in' 'the c~pi tal stock. A co~ntry which has doubled i

ts

'éapi tal in. t1-1elve yeare will have a higher

outp~t

pe'r 'unit of capital than

'a

c'o'un't;y which ( ceteris p'àri bus) h,as doubled i.n twenty-foUr years ~ because "the te'chnology of the l'ast

twel ve years is embodied in half the 'capital in the first 'c<J.se, bU:t only in, perhaps a third. o.f the capital in the second case. ' It may -be true that growth owes more t'o te~hnology than to capi't~'r; but :ln practice thos'e 'who inves·t most will also improve technology· 'f'astest.

'. '. ! .

..

.. .

P.OP,ula ti on growth,~.· ·If P~.enty of empty culti vaple land exis ts, a growirig ... population,_can.be accommodated in the. countrysid~ :for an investment not

• • •• • • 1 •

notably different from the existing ratio of the capital stock to output

' . . . ·.. .

( usually between I. 0 and I.

5),

since tools and housing are simple, and 'the:;

supply of utili ti es (power, buses, water) and services ( schoo.~s, hospi tals, roads) is rudirnentary. No~ soif the popu1=ât·~~n-~ino:r'ease. is .. sw.e11iiig.the

·towns ¹ wi tli the ir more elabora té infrastructure' and. more capitalif?·tic me_:thods of 'production:. · Here and hero only is ï t plausible to spaak of an ICOR wftliout distinguishing whether income is increasing bec<31use of popula-

·iiôn growth Ôr beoause ··of in'creased .produoti vity.

On the other h~nd., given the population, the IGOR is highe.r in sparsely

.

^.

populated than in densely populated countries. · This is. beoause the oost of running

wat e ~

^{pipes' electric oables}

~ ro ad~'

telephone wires ànd raih e.y lines i~ primar:Üy a function of 'the .. ~ea .. se~ved, and ~nly secondaril';yr a f;notion of the traffic carried. (The ~ost' of .such services per head is much greater if there are fifty persans per square mile than if there are 500 persans per square mile). For the same reason; the oost of infrâstruo- ture may fall wi th developrr.-ent, sincc, as population increases, the oost of extending the system is proportionately smaller than the original oost of building i t.

REPRODUCTION/ 0 3·8-8

o :

Page 16

Ftnally₉ the ICOf depends. on emplo~~ent _policy• If 13nd is abundant, as in.West Africa, and most of the people live in the countryside, and the

to~ms have not. ye.t be come a magnet, there will be little unemployment ... • Capital. ~an then be used in ways whiqh maximize the rate of growth of

incarne,- without bothering about affects on ernployment. But if the country is o.v·3rpopulated,, and .upemploym~nt in the .. towl/s sub~tantial, and large

. ': t' .... •

numbers live in _. intolerable misery, humani tarianis.m (not to speak of the

. . . . .

fear of revolütion) dema.nds tha.t immediatE) relief measures take precedence

• ' j

over futur<~ growth.. A l!axge part of ayailable resources will then go into public worko;;, using v~ry li tt le equipment, in arder to crea te as much

employment as possible. Well chosen works will increase productive capacity (e.g. water··~orks, re~lamation, erosion controls, roads, schools, hospitals, and even house's) but i t is qui te' concei va ble that if :the same resources were invested instead in commodity-producing industries using more equip~

ment and iess labour, the ICOR would be smaller.

Increasing Domestic Resources

However orietrims the ICOR; the basic difficulty will remain: domestic :resourées available for public expendi ture and cani tal formation will not

suffice :for the rate of growth which the Goverrtment wishes to achieve' These resources can be supplamented by foreign aid, -whether investment -by foreign companies, -or loans or .grants • . Here aga.in the variations are wide, and in a few cases the surn of dornestic resources and foreign ai.d is ,adequate. But in most c~ses resources still dt not add up to what is needed for achieve- ment of the desired rate o~ growth. Sornetimes the gap in resources can be

. .

plugged by an increase in taxation, but often it is too wide for this. How.hqrd it is .to mobilize domestic financ~ is best illustrated by an arithmetical example•

. ^'