Economic
lopmtror
India Project
C/6113
PROGRAMIJNG TECHNIQUES FOR ECONOMIC DEVEIDPMFXNT
A REVIEW /
So Chakravarty
The book under review is a report on programming techniques for
economic development which was written by a group of experts at the request
of the Economic Commission for Asia and the Far East,
The expert committee
was headed by Professor Jan Tinbergen whose interest and contributions to
the problems discussed in the report are too well known to be repeated,
The fact that the U-N0 has now come out with a published version of the
report reflects the growing attention that is being paid to developing a
more systematic approach to questions of economic development based on a
quantitatively articulate framework of thinking,
If we believe in the old
adage that proof of the pudding is in the eating,
then the new pudding is
admittedly "not proven" at this stage.
But there are sufficient reasons
to think that these relatively recent techniques connected with the main
streams of contemporary economic thinking involving "activity analysis," on
the one hand, and interest in building models of growth processes,
on the
other, will turn out to be very fruitful in answering questions on optimal
allocation of investment, sector-wise, as well as in optimal choice of
techniques,
There is no contradiction between this relatively new way of
looking at the problem and the traditional way, largely based on an understanding of the specificities of a particular situation..
In fact, to be
fully effective, they must be regarded as complements, rather than substitutes -
Programming Techniques for Economic Development (with special reference to
Asia and the Far East), Report by a group of experts, United Nations.
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As the title of the report indicates, its purpose is to discuss
techniques for programming, and not the case for development programming.
In fact, it makes sense to talk about these techniques only if we assume
that the preliminary question "why programme?" has been settled in the
affirmative,
Arguments based on the ideal output theorem of perfect
competition may be adduced to suggest that a market mechanism can do all
the signalling needed for achieving coordination of investment decision
with a minimum amount of information0
Since information is a cost, this
may be regarded as an important point in favour of letting market decide
the important questions.
This argument, however, is not true for the
development problems faced by the countries to which this report is
particularly addressed,
There are purely empirical considerations relating
to the great market imperfections and significant structural disproportions
which exist in these countries which indicate that the ideal output theorem
would not have much validity in this context.
Two obvious examples of
these disproportionalities are existence of chronic balance of payment
difficulties or significant amount of rural overpopulation.
In addition,
there are theoretical reasons which limit its usefulness in the context of
development.,
They refer to the process of development as implying non-marginal
changes which are phased over a period of time.
A market mechanism which
essentially works on the principle of marginal adjustments may not be
adequate to such a job.
Further, the ideal output theorem in its modern
form states that an "efficient situation" (one where no one can be made
better off without making anybody worse) is sustainable by a pricte-guided
allocation under conditions when increasing returns are absent,
But it does
not say anything about the nature and dimension of costs involved in the
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adjustment process involving movement from a non --optimal initial configuration to a desired situation,
If the market does not necessarily lead to an optimal allocation of
resources, it
is important that the government has some methods of arriving
at such allocations conceptually,
It is precisely the purpose of the present
report to indicate the various techniques which have been developed to arrive
at such consistent and optimal set of estimates, which are usually embodied
in a plan.
With the help of these techniques it is possible to decide on
what instruments of policy to use in
steering the econoxry from an initial
situation to a preferred path of development.
related but distinct problems in planning:
There are usually two inter-
one is the problem of selecting
an "optimal" allocation; the other is the problem of execution o plan
implementation,
Within the terms of reference of the group there was no
occasion for going into questions of plan implementationo
It is, therefore,
unreasonable to criticise the report for not considering possible interactions
between plan formulation and implementation,
The report is divided into two parts,
A non-mathematical discussion
of the various problems involved in programme formulation,
The discussion
proceeds on the basis of successive approximation, from simple aggregative
models of growth processes to more complicated intersectoral dynamic models,
culminating finally in ar interregional model.
The other part consists of
several appendixes addressed to the more mathematically minded readers,
which deal more rigorously with the various conceptual issues touched upon
in the main body of the report.
After some introductory observations in Chapter 1, the report discusses
in the second chapter the policy implications of what amounts to a simplified
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Harrod-Domar model. Questions connected with replacement of capital stock
and depreciation practices are ignorede
This facilitates discussion of
"capital-output ratios, " which are then defined in the usual way as net
investment needed to produce an additional unit of net output without
indicating how "net" the net estimates are,
noted but it
Foreign aid implications are
would have been more interesting to present a more realistic
model involving marginal savings ratios higher than average savings ratios
for the initial yearo
It is only in this latter situation that foreign aid
makes an important contribution because through achieving a high growth rate
based on foreign help it
is possible to reach self-sustained growth after a
certain length of time,
Chapter 3 deals with the problem of distribution of investment between
the main sectors of the econoy
been considered:
Three interesting bi-sectoral schemes have
investment vs. consumption goods, farm vs0 non-farm sector,
production for export and production for domestic market,
The first type of
model has been discussed in detail in recent years by authors such as
Mahalanobis, Domar and Dobb,
considered important,
It is understandable why this distinction is
They relate to the relative importance of capital
goods in the vertical structure of production,
similar to Mahalanobis's but is not the sameo
The two sector model is
There is,
however, a curious
statement in Appendix II of the Report (p. 87) that they are precisely the
same.
In fact, the model discussed is less interesting than the Mahalanobis
model because it
assumes a constant average savings ratio,
The analytically
important element in the Mahalanobis model is the change over time in the
average savings coefficient consequent on choosing a set of allocation
coefficients for investment goods and consumer goods industries.
The very
process of a changing average savings coefficient with the sectoral capital
coefficients remaining the same gives rise to a continuously changing growth
rate for the economy for all values of allocation coefficients excepting
for singular situations when both the sectors are increasing at the same
relative rate.,
In the present version of the two sector model, this possi-
bility for accelerated growth does not appear.
The relative importance of
the distinction between agricultural and non-agricultural sectors arises
from special demand conditions characteristic of agriculture, namely, a
falling income elasticity of demand with rising income,
In the underdeveloped
countries, characterized by disguised unemployment in agriculture, we also
have different supply conditions,
The mathematical presentation of this
model unfortunately does not take these properties into account,,
Chapter IV is concerned with fitting individual projects into an
investment plan.
This is an important problem and raises wider issues of
decentralized decision-making,
This chapter touches on the important notion
of shadow prices, The discussion in this chapter, however, does not go beyond
what is
already available,
say, in Tinbergen's "The Design of Development,"
While the latter discussion served an important purpose by directing attention
to the possible use of "shadow prices" in deciding questions of programme
evaluation, further development of the- concept requires that these prices
should be identified with the values of the variables involved in the dual
of the usual linear programming problem dealing in quantitiesc
The perfect reciprocity that exists between a linear programming
problem which tries to maximize the value of final output subject to
availabilities of production factors such as labour, capital and foreign
exchange and the converse problem which seeks to minimize the total cost of
productive resources subject to meeting specifications on final demand is
both conceptually satisfying and empirically usefulo
Fmpirical usefulness
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arises from our ability to solve programming problems on relatively aggregative levels and, then, use the shadow prices obtained from their solution
This is a point which the report
in choosing detailed investment projects,
does not mention,
This omission is, however, surprising because considerable
attention is paid in some of the Appendixes to linear programming formulations
of development programmes,
The definition of "shadow prices" implicit in the above discussion is
conceptually the same as the marginal productivity of a factor when all
alternatives have been taken into account within the available discrete
spectrum of activities briefly called the technology of the systeme
But
marginal productivity is apt to change when factor endowments are changing
over time,
Thus we would require a timepath of shadow prices,
But, once
again, these would be related in a dual fashion to the timepath of optimal
quantities involved in a dynamic linear programming problem, which has also
been discussed in the report in Appendix IV,
It
is worthwhile to point out that in a practical setting the derivation
of shadow prices is usually only half the problemo
involved in implementing these shadow prices.
are two distinct problems in this regardo
There are difficulties
So far as one can see, there
One of these problems is to choose
investment projects in the public sector, while the shadow prices of capital,
labor and foreign exchange obtained from the solution to a programming
problem serve as bookkeeping estimates,
Their essential job is to discrimin-
ate between projects within a given production sector,, To use these thadow
prices in deriving an intersectoral allocation is a correct procedure on the
assumption that increasing returns and external economies in the strict sense
are not important,
Thus, once we have estimates of shadow prices, their
implementation in this case does not raise much problem,
But, what about
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letting the private investors use these notional prices?
This is the
second problem,, For him the operationally important prices are market
prices,
Thus, to say that in an overpopulated country shadow price of
labor is
zero is not interesting so long as he has to pay a market price
for ito
In this case, we have to devise a system of taxes and subsidies
to implement shadow prices, a question to which more attention should be paid.
Chapter V presents discussions relating to the distribution of investment
between a large number of sectors,
this question is
It
is well known that the discussion of
facilitated greatly, at least on a first approximation, by
using the Leontief apparatus of input-output and capital stock output matriceso
The first approximation is based on the assumptions of only one way of producing
a commodity as well as the general absence of excess capacity throughout the
economy during the entire planning processo
It
is generally replaced subse-
quently by the more realistic assumption of multiple activities, as well as
relaxing the assumption of no idle capacity,,
In fact, the latter relaxation
may sometimes be needed to make the dynamic model self consistent.
This is
a point which has been clearly brought out in the well-known volume of
Dorfman, R.1,
Samuelson, P0 A0 , and Solow, R0 Mo,
on "Linear Programming and
Economic Analysis.1 '
There is a reference to this difficulty in Appendix IV
of the Report (p, 94)
,
But the reference is apt to be somewhat obscure,
especially to someone who is not mathematically very sophisticated or is not
aware of it
already,
For planning problems, particularly those in the medium
run, this difficulty is
unlikely to cause much concern with initial situation
referring to an already functioning economy,
The other difficulty, namely,
rigid technical conditions is apt to be more serious,
Relaxing this
artificial assumption naturally leads to a programming formulation of the
model,
The greater part of Appendix V is
devoted to possible dynamic linear
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programming formulation of development problemso
As an extension of the notion of "efficient point solution" which
figures in static analysis, one derives efficient paths of the relevant
variables in solving dynamic problems.,
Although there are references to such efficient paths in the appendix,
more care could have been taken in defining terms such as "efficiency" or
the distinction between "one-period efficiency" and "intertemporal efficiency."
The central result that a sequence of one-,period efficient choices need not
generate an inter-temporal efficient path has not been mentioned.
The
importance of "terminal conditions," namely, the end configuration aimed at,
had been commented on at one point but not in a sufficiently clear or detailed
manner.,
There is also a discussion on the maximal rate of steady growth,
But
even here not enough care has been taken to spell out the conditions under
which we can assert the proposition that maximal rate of steady growth is a
desirable path along which the economry should be allowed to grow,
The most
notable omission in stating the theorem and one which restricts its applicability significantly is
that the commodities which are positively valued in
the configuration appropriate to the maximal rate of steady growth must also
be the same commodities which the policy maker values positively in his
preference function relating to the "final" state of the econogy.
It is also
confusing to state at one point that for every initial stock there is a
maximal rate of steady growth and then stating later that the initial stock
configuration must be changed so as to get to the maximal growth proportions.
Having discussed the various problems connected with inter-sectoral
allocation of investment, the report goes on to discuss inter-regional planning
problems,
In Chapter VI, as well as in a mathematical appendix,
an interesting
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inter-regional model has been presented,
The inter-regional model introduces
problems of mobility and transportation costs as essential elements of the
picture.
The algebraic version represents an operationally interesting
extension of the multi-commodity models0
But it
may require some more work
before we fully realize all its implicationso
Chapter VIl deals with problems of adjustment to short-run changes in the
data.
Chapter VlI makes some pertinent but casual comments on questions of
planning manpower, education and income distribution,
Chapter IX ends with
some recommendations concerning the use of models and improvement of data,
On the whole,
the report performs a very useful function by presenting
a systematic exposition of recent developments in the field of methodology
of planning,
There are a few questions, in particular, the problem of inter-
regional planning, where it seeks to break new ground,
By and large, the
accent is on making known to a wider audience what is already available in
more technical journals or publications,
Before concluding, I should like to mention a few points which have
been ignoredi in the text.
the rbeport 0
research0
They should not be construed as criticisms of
Their purpose is to point out some possible directions of future
The first point that needs relaxing in this context is the
assumption of thoroughgoing linearity.
This applies all the more to the
discussion of the mathematical appendiceso
Now, linearity is a convenient
assumption because of the ease with which it can be handled0
with, it
is
better one,
in
To start
even a good assumption because the simpler postulate is
other things remaining the sameo
planning economic development,
the
But the difficulty is that,
linear assumptions may sometimes give rise
to wrong gualitative conclusions, not to mention its quantitative inaccuracy.
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I would expect this criticism to apply very strongly to certain types of
investment decisions, in particular to those which are Usually considered
by the government for planning economic development,
typically non-linear in these cases.
Cost curves are
For manry purposes, these non-linearities
can be well explored by assuming linear relations in facets,
These would
lead to breaking up one non-linear programming problem into a succession of
linear problems,
an idea for which simple examples may be easily-constructedc
There is a related but conceptually distinct problem connected with the
all-or-none character of many investment problems,
such a problem is
unitso
A typical example of
the situation where investment takes place in lump-sum
Thus, the choice the planner faces is usually between investing
within a certain limited range or not investing at all,
This gives rise to
non-convex programming problems which are rather intractable from the computational point of view
Some recent work on "integer programming" is
particularly interesting from this point of view,
It
is extremely important
that people interested in development programming should direct some amount
of attention to this area,
A satisfactory treatment of problems involving
"social overhead capital" is possible only by extending the scope of conventional programming methods along these lines.
Since investment in overhead
facilities figures as important components of many development plans, such
analysis is all the more important,
It is
rather interesting to note that
while the report emphasizes the usefulness of programming formulations involving
time9 it
nowhere tries to analyze fully how time enters crucially into
planning decisions,
Apart from the problem of varying gestation periods and
the recursive character of production, in general, the importance of
the time
element in this context arises from requirements to build ahead of
demand, the
indivisibilities of certain production installations, the choice of durability
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of different types of investment,
To emphasize the importance of these
elements is not necessarily to criticize the report for what it has so ably
discussed,
For it
is well known that a complete resolution of the above
problems would be a very ambitious undertaking indeed,
But it may be worth-
while at this stage to spend some time trying to play around with these
difficulties even though in an illustrative manner rather than completely
confine oneself to strictly linear analysis.