ENGINEERING FOR DEVELOPMENT

(First Draft)

E J Jefferies

March 1969

CONTENTS

PART 1 THE WORLD DEVELOPMENT PROGRAMME

Chapter 1 Introduction
Chapter 2 Closing the Gap
Chapter 3 Resistance to Change
Chapter 4 International Technical Assistance

PART II AN ENGINEERING APPROACH TO A PLAN FOR A COUNTRY

Chapter 5 Outline of the Approach
Chapter 6 Setting the Problem
Chapter 7 Basic, Concepts, Terms and Definitions
Chapter 8 Background Data Available
Chapter 9 The Starting Point for a Case Study
Chapter 10 Preliminary Calculations
Chapter 11 Patterns of Economic Growth
Chapter 12 Development Plan for Year 1
Chapter 13 Development Plan for Year 2
Chapter 14 Development Plan for Year 3
Chapter 15 Review of Changes During the Three Years
Chapter 16 The Control of Development
Chapter 17 Financing the Development

PART III THE IMPLICATIONS OF RAPID GROWTH

Chapter 18 Economic Growth and Technological Changes in Rural Communities
Chapter 19 The Influence of Agriculture on Industrial Development
Chapter 20 The Role of Manufacturing Industry
Chapter 21 The Contribution of Industrial Engineering to a Solution

PART IV DESIGNING FOR BALANCE IN DEVELOPMENT

Chapter 22 The Prediction of New Manufacturing Capacity Requirements by Product Group
Chapter 23 The Productivity of Labour
Chapter 24 The Growth of Productivity
Chapter 25 The Calculation of Appropriate Levels of Productivity in New Plants

CHAPTER 12

DEVELOPMENT PLAN FOR YEAR 1

4.1 We are now in a position to consider in some detail how to achieve the sectoral economic increases projected for YEAR 1 and the difficulties which will have to be overcome. We shall have to take into consideration in this plan that there are certain constraints which limit our freedom of action. There are:

•  
• Availability of capital for investment.
•  
• Availability of foreign exchange for imports and of products for export to generate additional foreign exchange.
•  
• The additional total of net product must include sufficient wages and salaries to permit the sale of all the extra gross final product which is not exported.
•  
• Different methods of making fixed investments in new productive capacity have different gestation times, some of which are very long. (In general, working capital can be made to produce returns more rapidly.)

4.2 We shall assume that our developments will be planned with a view to increasing consumption and standards of living in the short term: that long-term projects which cannot become fully effective for many years to come will not be included, however essential they may be to the economy as it will be in the distant future. (Such projects may need to be studied since they may affect the design of some of the less rapidly obsolescing projects required in the early years, but present resources will not be diverted into them.): that there is no need to assign resources on any appreciable scale into non-productive uses such as the build-up of war potential either for reasons of foreign policy or to absorb an excess of production over consumer purchasing power: that "prestige" projects will be resisted or deferred - the building of monuments and palaces; the establishment of elaborate diplomatic missions abroad, etc.

First Trial Allocation of Sectoral Increases

4.3 Tentatively we can allocate the increased net output of each sector to three major end uses: Consumption (intermediate and final) and Infrastructure; Productive Investment; and Export. The following bases may be used in making this allocation:

4.3.1 A normal ratio of consumption to investment (including Infrastructure investments) in a country at this stage of development is about 9 to 1.

4.3.2 A higher proportion of the increase of YEAR 1 not exported will be needed as productive investment if the increases in YEAR 2 and subsequent years are to be achieved. Provisionally this may be assumed to be about one-third of the increase; this assumption will be examined at a later stage. (This implies some control over the increase in standard of living; but it does not mean that the standard of living will be prevented from rising.)

4.3.3 The bulk of the increase in Exports must be based on primary production - Agriculture and Mining - but this will generate export values in the Transport Sector and in Trade (cf 2.23, 2.24 and Table 3).

4.4 It should be observed that we are departing from the normal economist's practice by including investment in infrastructure under "Consumption". This is justifiable since such investments do not produce any immediately accountable return; and by doing so we can make more accurate estimates of the effects of the remainder which is "Productive Investment". In effect, this implies that capital used for infrastructure purposes ranks as government consumption.

4.5 We now proceed to construct Table 8.

TABLE 8 Trial Allocation of YEAR 1 Increases Between End Uses

Explanations to Table 8

The Balance Between Production and Consumption

4.6 The total of column 5 Table 8 shows an increase in goods and services available for private consumption of $94 m during YEAR 1. This is about 60% of the increase of GDP compared with 77% of the total GDP of YEAR 0 (cf 2.21) so that the increase in consumer spending (and in standard of living) can be seen to be somewhat restricted (cf 4.3.2). Similarly the allocation of $10 m to increased Government consumption (column 6) is limited to about 6% compared with 10%. The $54 m of the increase allocated to productive investment (34% of the total of $159 m) meets the assumption in 4.3.2.

4.7 If the pattern of Table 5 for the disposal of Value Added were to continue unchanged from YEAR 0 to YEAR 1, the additional purchasing power generated would be as shown in Table 9, column 3, assuming that all wages and salaries are used for consumption and that all interests and dividends are reinvested. This is equivalent to assuming that the "propensity to save" our of earned incomes is ZERO and out of unearned incomes is ONE. This state is more likely to be approached in an economy at the stage we are considering than in an industrial economy. It is reasonable to assume that saving out of earned income may be balanced by consumer spending out of unearned income.

TABLE 9 Allocation of Increases Between Personal Incomes and Capital: YEAR 1

(Pattern of Productivity Unchanged from YEAR 0)

4.8 The assumption that the pattern of productivity might remain unchanged is seen to be untenable since it products too much personal purchasing power, i.e. $13.3 m more than the required $105 m given by the totals of columns 5 and 6 of Table 8. There are two main ways in which the balance might be restored:

•  
• To allocate less of the YEAR 1 increases to productive investment (column 7 Table 8) and more to consumption (columns 5 and 6, Table 8). Since a high rate of investment is one of the conditions for achieving future high rates of investment is one of the conditions for achieving future high rates of development, this does not seem to be a desirable course. The total allocated to investment in YEAR 1 is made up by: 13% or $600 m, or $78 m (paragraph 2.20); plus $54 m (Table 8 column 7); which equals $134 m. The question (to be examined later) is whether this amount is enough. To reduce it would obviously be undesirable in the long run.

•  
• To allow less increase in the return of labour and hence more increase in the return to capital. The total return to labour was $462 m in YEAR 0 and the increase in YEAR 1 is $118.3 m, making a total of $530.3 m, an increase of 25.6%. This increase could take the form of increased earnings of an unchanged work force; or the form of unchanged levels of earnings in an increased work force; or some combination of these, depending upon political considerations. In either case - a 25.6% increase could safely be cut back. If it is limited to $105 m to balance the planned increase in available goods and services, the increase becomes 22.8%. This course will be adopted.

4.9 As regards the rate of return allowed to new capital, it should be noted that in the technology-based sectors, especially the industrial sectors, a high future rate of growth depends not only on a high rate of investment but on the ability to raise the levels of technology used both in production processes and in organisation and management. This implies that the management of factory or service establishment newly established in say YEAR 1 must be able to envisage a complete reconstruction and re-equipment in a much shorter period of time than the traditional seven to fifteen years, which is appropriate to growth rates of around 5% per annum.

As an average it is likely to be more appropriate to allow a useful life of fixed investments of only some three years where the country's growth rate is planned at 26% per annum. This will involve among other things an adjustment of the rates of depreciation allowable on new investment under the company taxation laws in calculating taxable profits.

4.10 We can now reconstruct Table 9 to transfer $13.3 m from column 3 to column 4 as proposed in the second alternatively of paragraph 4.8. But before doing so, we must take some decisions on how to distribute the extra returns to capital between the different sectors.

4.11 One effect of allocating additional return to capital in a sector should be to increase the rate of re-equipment and hence the level of technology in that sector. From the point of view of long-term development, it can be argued that first priority should be given to modernising primary production and second priority to modernising trade. Since these account for around half the total GDP, we should therefore allocate more than half of the $13.3 m between these. Tentatively we might allocate:

$4 m to Agriculture,

$4 m to Services, Trade and Government,

$2 m to Manufacturing,

$1 m to Miscellaneous,

$1 m to Transport and Communication,

$1 m to Construction,

£0.3 m to Mining.

4.12 Table 9 can now be rewritten as Table 10, expanded to permit recalculation of column 2 of Table 9 to cover the performance of each sector for YEAR 1.

TABLE 10 Allocation of Value Added Between Personal Incomes and Capital: YEAR 1

Notes: Columns 1 and 2 are columns 1 and 2 of Table 8.

Column 7 is column 2 of Table 9.

Column 3 is column 1 times column 7 (same as column 2 of Table 5).

Column 4 is column 1 minus column 3.

Column 6 is column 2 minus column 5.

Column 8 is column 5 divided by column 2.

Employment, Earnings and Productivity

4.13 we now have the essential figures needed as a basis for estimating the possible levels of employment and earnings, and of the productivity of labour in YEAR 1 in each sector. There is not, of course, a single rigid solution to these inter-dependent questions; the answer adopted will depend on decisions which can be made socially acceptable in regard to the allocation of increases in earnings, and the provision of extra jobs, as between sectors; on the ability of people to perform new tasks and adapt themselves to new environments; and on the ability of the economy as a whole to provide the essential background for the required changes: new housing and services in the right places; new lines of personal transportation; new centres of education, entertainment and leisure activities.

4.14 There are two factors implicit in Table 1 and Table 5 taken with our target of rapid growth. Firstly, in YEAR 0, Agriculture provides more than half the employment and generates the lowest productivity of labour; and hence provides the main "growth potential" in the economy as a whole, especially in the growth of consumption. Secondly, the average productivity of labour in other sectors may be need to increase, since there is sufficient unemployment to enable the extra net output to be produced by extra jobs at the same level of productivity; we do not need to make any a priori assumption, at least for this year, that "productivity must rise".

4.15 We must make some assumption about the drift of population from the land into towns, which can be observed to happen in any country, whether it is to the benefit of the economy or not. Probably the most optimistic assumption we can make is that the drift away from the land can be limited to the natural increase in rural population, i.e. 2%, which means that about 7,800 economically active agricultural workers will seek non-agricultural employment during YEAR 1. This means that the figure of 390,000 for employment in Agriculture can be repeated unchanged for YEAR 1 and that output per person in this sector must go up by 12.4% (cf column 5 of Table 7). In other sectors we are left with a decision to make between ascribing additional output entirely to additional numbers employed, entirely to additional productivity of the present labour force, or to some combination of these. If we were to assume that productivity of labour remains unchanged, there would be a decline in wages (cf columns 7 and 8 of Table 10) which would certainly be politically unacceptable and would not provide any motivation for further change. In view of the high level of unemployment, we will assume that earnings per person in all sectors other than Agriculture remain unchanged for YEAR 1. This implies increased employment, some limited increase in productivity due to extra return to capital; and also provides some incentive to further change since the burden of maintaining unemployed relatives will be reduced.

4.16 We can now write Table 11 to show the changes from Tables 1 and 5.

TABLE 11 Disposal of Sectoral Value Added; and Employment: YEAR 1

Notes: Column 1 is column 2 of Table 10.

Column 2 is column 8 of Table 10.

Column 3 is column 1 times column 2.

The Figure against Agriculture in column 5 is the same as in column 3 Table 1.

The rest of column 5 is column 3 divided by column 4.

Column 6 is column 1 divided by column 5.

Comments:

•  
• Employment has increased from 750,000 to 860,000 by 11.5%.
•  
• Overall productivity of labour has increased from $800 to $885, by 11.2%.
•  
• Average individual earnings have increased from $616 to %660, but the increase is entirely in the worst paid sector, Agriculture, where the increase is 9.5%. Total wages and salaries have increased by 12.3% due to increased numbers employed in the higher paid sectors.
•  
• The increase in productivity of labour in all sectors except Agriculture is ascribed entirely to more efficient use of capital; in Agriculture one-third of the increase is so ascribed.

Capital

4.17 We must now consider whether the productive capital available in YEAR 1 will be adequate; under what conditions of management of existing investment and of design of new investment it can e made adequate; or what calls must be made on foreign investment.

4.18 The existing stock of productive capital assets in the country in YEAR 0 is unknown. It is not worthwhile attempting to make an absolute valuation since the bases of such a valuation would necessarily be hypothetical, the "Value" of a productive asset depending upon the use which is actually made of it. However we may be able later to make some observations on the possibility of more efficient use of existing capital assets.

4.19 The total amount of "fixed capital formation" reported for YEAR 0 is 13% of $600 m, or $78 m (paragraph 2.20). At the same time, Table 10 shows the "Return to Capital" for YEAR 0 at $138 m. The connection between these can be explained by considering what these terms mean to an individual enterprise. The capital account entries in the books can be subdivided into;

•  
• Consumption of Fixed Capital (depreciation, amortisation, or write-off of previous fixed investments or assets).
•  
• New Fixed Investments (new capital assets acquired, new equipment, improvements to equipment etc).

The total of these two is "Fixed Capital Formation".

•  
• New working capital (the cost of extra stocks of supplies which will be consumed in the course of production; of additional goods in course of processing; of stocks of product awaiting sale; and of goods delivered to customers for which payment has not been received) .
•  
• The cost of using capital (interest on loans; dividends paid out on equity).
•  
• Changes in Reserves and Capital Account Debts (amounts of loans repaid; bonuses paid out on equity holdings; revaluations of equity; funds placed in capital reserve accounts).

These last two can be combined into one item since they react on each other in terms of financial management policy.

4.20 The breakdown of the allocations of the return to capital for all individual economic activities can be combined to give similar items in the national accounts which will represent the combined performance of capital in the total economy of the country. These entries for YEAR 0 may then appear in the following form:

In this balance sheet, we started with only two estimated figures: Fixed Capital Formation at $78 m, and Return to Capital at $138 m. The logic upon which the addition shown was based can be explained as follows:

The above sum can be written on the basis of other relations between its various items, subject only to the following conditions:

4.21 Our immediate concern is of course with this amount of new productive capital becoming available year by year, in order to find an answer to the questions raised in paragraph 4.17, whether it will be adequate for our planned rate of development. In order to examine this, we must first consider how much of the capital "available" can actually become "productive" in the face of delays due to the time lag in putting it to work. Some data on this is available in Table 7-6 of Staley & Morse "Modern Small Industry for Developing Countries" (McGraw Hill, 1965). This shows that for fixed investment in Australia the median times between start of construction of a new factory and operation are seven months for small factories (ten to twenty employees) and seventeen months for large factories (over one hundred employees) with inter-quartile ranges of four to eleven months and ten to twenty-seven months respectively. This indicates that we have some control over the gestation period and hence over the amount of new productive capacity in YEAR 1, by deliberate policy measures and by design of new projects in manufacturing. Little data exists on the time lags between the provision of working capital and the start of production, or on similar time lags in the fields of trade and services, but these are probably shorter than for fixed investment in factories.

4.22 We can lay down a general policy to take effect from the beginning of YEAR 0, that new individual investments shall be designed and selected so that the median gestation period of all investment is six months and the inter-quartile range is three to eighteen months. This will limit the number and total of very large long-term investments and these will possibly have to be reserved for infrastructure and basic industry projects where high levels of technology and maximum scale are needed, such as power stations, basic metal production, paper pulp, chemicals, cement etc.

4.23 During YEAR 0, before any acceleration of development has started, we can assume that new fixed and working capital is being generated at a constant rate of $19.5 m per quarter. This will start to increase from the beginning of YEAR 1. In order to assess the rate of acceleration and the totals for each of YEAR 1 to 3, we need to work backwards from the yearly figures for Return to Capital, by the method outlined in paragraph 4.20. At this point it is convenient to combine the calculations for all three years, although we have not yet estimated the Return to Capital in YEAR 2 and YEAR 3 which will keep production and consumption in balance. (These appear later in Table 26 Chapter 22 and Table Chapter 13.) This leads to the construction of Table 12.

TABLE 12 Generation and Disposal of Capital Changes: YEARS 1-3

The construction of Table 12 involves some trial and error in attaining a balance between lines 2 plus 4 and line 5, since the former - the amount available for new investment - must not be so low as to imply a reduction in levels of technology in successive years, nor must line 5 be allowed for all so far as to eliminate incentive to invest and the build-up of reserves.

4.24 This gives us a starting point for plotting the growth of availability of new investment and deriving from this the amounts becoming productive each year, in accordance with the design criterion of paragraph 4.22 regarding allowable gestation periods. We can now proceed to construct Table 13 from the following data:

•  
• Capital available for new investment totalling $78 m arises in YEAR 0 at the rate of $19.5 m each quarter.
•  
• From the beginning of YEAR 1, the quarterly amounts arising increase in such a way that the yearly totals are: for YEAR 1, $112 m ; for YEAR 2, $154 m; for YEAR 3, $212 m, these being the sums of lines 2 and 4 in Table 12. (As it happens, these figures are the same as those in line 3, but this would not be the case if we varied the assumptions in paragraph 4.20 about disposal of returns to capital, e.g.†to increase the allocation to reserves.)
•  
• The spread of gestation periods (the lapse of time between capital becoming available and becoming productive) is as follows:

TABLE 13 Amounts of Total Investment Becoming Productive in Each Quarter

$ millions

4.25 We have assumed that programmes aimed at accelerating development, which are based on new policies and selected by new criteria, will begin to be approved for implementation at the beginning of YEAR 0. This allows for a year's time lag before economic effects of the new policies become apparent. It implies that preparatory work must be well in hand during YEAR MINUS 1. The entries in Table 13 refer only to the effects of these new programmes and are additional to the results of former programmes producing delayed effects in YEARS 0, 1 and 2. However, for each of calculation and provide a margin of safety during the transition we will assume;

Firstly, that former programmes will produce during YEAR 0 the results foreseen in Chapter 2.

Secondly, that the effects of former programmes carried over into YEARS 1 and 2 are relatively small and can be neglected.

Thirdly, that any effects from the new programmes which may be felt in YEAR 0 can more conveniently be included in the accounts of YEAR 1 since they are relatively small. This is equivalent to assuming a sudden change of slope at the beginning of YEAR 1, in all the graphs which could be plotted showing the course of the economy, whereas in actual fact this discontinuity would be rounded off.

4.26 Table 13 gives us information on the following subjects which we shall need for project design and for the planning and selection of investments and their timing:

•  
• How much new investment will become productive each year, to provide targets for the designed productivity of capital and total capital per new job in the new projects, in relation to their start-up dates.
•  
• How we should distribute investment between short, medium and long-term projects; in particular how much we should restrict long-term investments in favour of short-term ones, in order to achieve the rapid development planned.

4.27 Reverting now to our calculations for YEAR 1, we see from Table 13 that $90 m of new investment has become productive up to the end of YEAR 1 ($24.9 m for YEAR 0 and $65.2 for YEAR 1).

In order to judge whether this $90 m will be sufficient under any feasible design conditions to generate the required $159 m of additional net product, it would be useful to have rather detailed information on the productivity of capital and on how it varies between types of activity, size of undertaking and level of capital intensity or technology. We could also make use of data on investment per job and its variations. Such information is rather difficult to come by.

4.28 Some data is quoted in Table 7-2 of Staley and Morse for the Productivity of Depreciated Fixed Capital in manufacturing in predominantly small plants in Pakistan 1959-60, which may be summarised:

Minimum 0.41

Lower quartile 0.93

Mean 1.07

Upper quartile 1.42

Maximum 4.47

(Note that investment here excludes working capital.)

Again, Table 7-3 of the same book gives statistics for small plant industries in New Zealand in 1959-60 classified in sixty product groups which yields the following information:

Minimum 0.42

Lower quartile 1.16

Mean 1.24

Upper quartile 1.57

Maximum 2.52

(Again, investment excludes working capital.)

Each entry in both of these tables represents the average of an unknown number of factories forming the total productive capacity of "small" plants in the country for a separate group of products. Each entry will therefore cover factories having a range of values of productivity of capital and of investment per job, but this range unfortunately is unknown. However, the pattern will be similar in form to that between product groups and this will extend the ranges quoted if we could tabulate entries for individual establishments.

Further data can be extracted from "Profiles of Manufacturing Establishments, Vol 1", United Nations, 1967 (ID/SER.E/4), e.g. in forty-five medium and large factories in nine different groups of product in India in 1964 the Productivity of Total Depreciated Capital was:

Minimum 0.224

Lower quartile 0.365

Mean 0.403

Upper quartile 0.625

Maximum 2.070

(Note that investment here includes working capital, which in this sample average about half the total depreciated capital; and that the tabulated figures relate to individual factories.)

4.29 From the same sources, the spread of capital used per job was:

4.30 An indication of the correlation of productivity of capital with total investment per job is given in Figure 1 relating to the forty-five factories in India in 1964.

The nine of these factories with the highest investment per job employed an average of 2345 persons, showed an average investment per job of $8900 and a productivity of capital of 0.373. The averages for the whole forty-five were: 1428 employees per factory, $3760 per job and a productivity of capital of 0.432. The averages for the nine smallest were: ninety employees per factory, $1640 per job and a productivity of capital of 0.613. The averages for the nine best performers in respect of productivity of capital were: 1300 employees per factory (smallest thirty, largest 5303); $1060 per job and productivity of capital 0.985. The general indication in this is that there is plenty of scope for designing and selecting projects to use low levels of investment per job and at the same time to yield a high productivity of capital.

4.31 The above data relate to manufacturing. Unfortunately similar data for other sectors, especially Services, Trade, Transport and Communications is not readily available in published literature. This is probably due to the assumption among economists in industrial countries that development of manufacturing industries is the prime requisite for development in newly industrialising countries.

4.32 However, statistics such as these of past performances of investment are not of very great use without corresponding data on the levels of performance allowed for in the original design of the undertakings in question. In a radically new situation of very high economic growth rates such as we are postulating, it will be more useful if we can settle upon some constraints on the design of new (or expanded) projects which will favour the achievement of the target.

4.33 Overall we need $159 m of additional net product in YEAR 1 and we have disposable $90 of total new investment which may become productive during the year. At an average productivity of capital of $0.4 per $, our $90 m will add only $36 m to GDP, leaving a shortfall of $123 m. To eliminate this without calling on external capital, we shall have to stretch the average productivity of new capital to $1.77 per $. Similar we are faced with providing 110,000 new jobs for a total new investment of $90 m, which reduces to an average new investment of only $820 for each new job. (But see paragraph 4.50 which calls for the investment of $21 m in Agriculture, leaving $69 m for all other sectors, or an average of $626 per job.)

Possibility of Foreign Investment

4.34 If we are forced to call on foreign investment to fill a $123 m shortfall, the amount involved should be calculated on the basis that no design bias can be introduced in the new investments and that yield patterns continue as before. It is unlikely that foreign capital will be forthcoming if the total return offered is less than 25% (e.g. 15% repayment and 10% profit). This means that at a productivity of capital averaging 0.4, each foreign dollar produces a total of $0.40 of which $0.25 accrues abroad, leaving $0.15 as the increase in GDP. To eliminate the $123 m shortfall in growth of GDP we shall need on this basis $820 m of foreign investment to become productive during YEAR 1. This is equal to an average of $8100 of investment per new job, and implies of level of technology very much out of line with the country average.

4.35 Foreign investment at this level is patently not to be relied upon, especially since YEARS 2 and 3 would be likely to need further foreign investment at the same or maybe higher levels. It can noted that this injection of foreign capital would amount to some $270 per capita in one year, whereas in the last decade in all developing countries it has run at a level in the range $1 to $10 per capita per year.

Stretching the Existing Capital

4.36 One of the most commonly voiced criticisms from foreign businessmen visiting a developing country is that capital is used inefficiently. If this is true in YEAR 0 there should be some scope for improving the rate of return on much of the existing investment with little or no additional capital and with no change in the levels of technology.

4.37 Upon whatever basis we value the existing capital stock of the country in YEAR 0, an increase of only 26% in the average productivity of existing capital would generate the whole of the additional net product of YEAR 1. What are the mechanisms by which the productivity of existing capital can be increased above a present level which is assumed to be "inefficient"? Which of such mechanisms are feasible during YEAR 1? What are their implications?

4.38 For the entrepreneur, there are two simple methods of contributing additional net output to the economy without any great effort. These are: either to pay higher wage rates or two take higher profits, without increasing the hours worked, the number of employees, or the physical output of the enterprise. Both methods imply higher prices for goods and services already in production, but the effects on the economy as a whole are quite different. If wages and prices are increased by the same amount per unit of sales, the proportionate increase in consumer purchasing power is higher than the price increase. This creates a demand for goods which are not available and tends to force prices (and profits) still higher without reducing unemployment. If profits and prices are increased by the same amount, consumer purchasing power remains unchanged while the value of an unchanged volume of product increases. The result is a lowered volume of sales, lower profits and a reduction in employment.

4.39 Either of these routes taken alone is inherently unstable and their combined use relies on the action of competitive markets to restore equilibrium. However, even with ideal market conditions, this would not offer a reliable basis in YEAR 1 for a start to rapid economic development, since without technological change it would imply inflation.

4.40 There is a third method which is not so simple to apply from the entrepreneur's point of view since it involves him in additional planning and control operations. This is to increase physical outputs without altering prices or price structure.

4.41 A rise in physical output can be obtained by two different routes, or by some intermediate course between these extremes. Firstly: by operating with the same amount of labour at higher levels of technology. In this case in sectors other than agriculture under our conditions for YEAR 1, the total of all wages will remain constant and the whole increase in net output will be ascribed to capital. This is inadmissible since purchasing power in these sectors will not rise to help absorb the increased output, wages being unchanged. The second route is by operating with an increased amount of labour at the same level of technology, i.e. the same physical output per person per hour. In this case the total wages bill will rise with the rise in physical output, as will the return allocated to capital and the value added, and hence the productivity of capital. This is only possible in those activities with unutilised installed physical capacity; otherwise new fixed investment will be needed. This second route will be assumed to apply to existing operations in non-agricultural sectors during the first year of our crash programme up to the limit of existing installed capacities.

4.42 We have already assumed for social reasons that Agriculture will be treated differently from all other sectors, by assuming an unchanged amount of labour and an increase in wage. However, our assumption about the new output level for agriculture does not yet include any assumption about changes in physical output and price levels, only about Value Added. Price rises in the agricultural sector will be subject to some limitations:

•  
• Export prices are not within our control and must be assumed unchanged.
•  
• Prices of agricultural products used as raw materials in manufacturing and construction must not rise more than prices in those sectors.
•  
• Prices of direct personal consumption foodstuffs must not rise faster than the rise in net product available for personal consumption less the increase in population, less some small increase in physical consumption per capita.

Net agricultural product available for consumption has risen by about 8% and population by 2%, so if we allow for 2% more physical consumption per capita, prices of agricultural products for final consumption may rise by 4%. The maximum allowable weighted average price rise for agriculture as a whole, including exported products, therefore becomes about 2.7%.

4.43 In the sectors other than Agriculture, the connection between increases in physical output, net output and employment (wages bill) will depend on how much of the additional labour cost is incurred in direct production and how much in overheads. For existing activities which are expended or extended, it will be possible to operate at the new level with little or no new overhead labour, but new undertakings will need a normal proportion of non-productive labour. The overall effect will depend on the pattern of employment in existing undertakings and on the proportion of extra net output which involves setting up new undertakings. In the absence of statistics, we can only proceed further by making some reasonable assumptions. These may be:

4.44 The required increase in non-agricultural output in YEAR 1 amounts to 38% (Table 7) and the rise in the total wages and salaries bill in these sectors is 29.5% (Table 10). The changed allocation of wages can be calculated as shown in Table 14.

TABLE 14 Increase in Productive Labour and Hence

in Physical Output at Constant Technology

(Agriculture excluded)

4.45 Thus, there is a potential for 40.9% extra physical output due to a 29.5% increase in employment which is in line with the required increase in net output. It should be noted that the implied 8.7% increase in physical output per worker

is due not to an improvement in technology during the year but to an improvement in the proportion of workers engaged in direct production. This indicates that an overall price increase should arise from this cause (a decrease is theoretically possible, but unlikely in practice). However, the price of imported raw materials, fuels and replacement parts for equipment will rise by an assumed 3.5%. Since these items account for about one-third of production costs only in those undertakings not using local raw materials, the unavoidable price rise needed to met this additional cost of imports will average below 1%.

4.46 The excess of the increase in physical output over the increase in purchasing power will provide some restraint on price increases. However, care will have to be taken that the increase in physical output is not entirely in consumer goods and services; a proportion must be devoted to capital goods and to inter-sectoral transfers of goods and services in order to prevent a build-up of stocks of consumer goods produced in excess of demand.

4.47 We can now conclude that our Development Plan does not include built-in pressures which would lead to notable price increases in the non-agricultural sectors. However, at the level of individual products this will only be achieved by skilful selection and design of products which will be acceptable to consumers. Any gross failure in this will lead to specific shortages upon which the normal market mechanisms will operate to produce either high prices or high imports. Adequate guidance to industry will be needed to avoid this and possibly a control on specific investments if the guidance provided is inadequate or unacceptable.

Changes Induced in the Productivity of Capital

4.48 This question must be examined by reference to three general classes of individual activities: firstly, agricultural activities; secondly, existing non-agricultural activities expanding in physical output, employment and investment; thirdly, new non-agricultural activities.

Agricultural Activities

4.49 Agriculture in general is composed of a large number of undertakings not organised on industrial lines. Strictly speaking , large plantation operations should be treated as industries, but at this stage of development of the economy these are still negligible. The following are the increases in Agriculture during YEAR 1:

There are peculiarities in an agricultural activity which must be taken into account:

•  
• inputs of purchased raw materials and services are very small, probably less than 10% of sales;
•  
• the product arises seasonably over a short period of time, and sales are spread over say only three months.

This means that relatively large amounts of working capital are needed, e.g. three-quarters of annual production costs, to provide wages, or subsistence expenditure in times other than harvesting. (Storage for consumption in times other than harvesting is accounted under the sector "Transport, Storage and Communication".)

Table 15 is drawn up to show a possible change in the average pattern of the economy of an agricultural enterprise per $100 of original net output between YEAR 0 and YEAR 1 under the following constraints:

•  
• No extra land under cultivation.
•  
• Unchanged labour usage, but greater efficiency in labour utilisation.
•  
• 2% increase in Net Output.
•  
• 2.7% increase in price levels.

TABLE 15 Changes in Economies of Agriculture - YEAR 0 to YEAR 1

Notes: Working capital is assumed to be three-quarters of lines 2 plus 4.

The valuation of land is quite arbitrary, but is unchanged in YEAR 1.

4.50 The implications for the sector as a whole can now be calculated:

•  
• $10.5 of total new investment is required for every $1 1 of additional net output, i.e. a total requirement for $21 m of new investment in the sector, or 25% of the amount available for the whole economy (paragraph 4.19). Of this $15 m is working capital, e.g. additional short-term advances from Agricultural Loan Banks.
•  
• $3.5 m of additional supplies for every $11 of additional net output of $7.0 millions. This could if necessary all be allocated from the $14 m available for extra imports for consumption (Table 13).
•  
• The total additional return to the $10.5 m of new capital is $4 for every $11 of new net output, or $8 m. This checks with $7.3 m (35.3 m-28 m) in Table 10. The gross return on this new capital is 38%.
•  
• The $11 increase in net output is ascribed as $7 (or 63.5%) to labour and $4 (or 31.5%) to capital. This checks with the fourth comment to Table 11.
•  
• $3 of new investment in equipment is allocated for every 0.194 man-years of labour, i.e. about $15.5 per worker, as a country-wide average. Projects to which this fixed capital is allocated must be designed to give an average marginal productivity (calculated on the additional fixed capital only) of 3.67. The total involved is $6 m.

Non-Agricultural Activities

4.51 Agriculture has claimed $21 m of new total investment, to produce $22 m of new net output. This leaves $69 m for investment in all other sectors. Can this be made to yield the required $137 m of new net output, i.e. can it be made to achieve an average marginal productivity of 1.98? It is obvious that as a general rule the marginal productivity of new investment can more easily be designed to be high where an existing activity is expanded than where an entirely new activity is started.

Expansion of an Existing Non-Agricultural Activity

4.52 This includes in general two sub-classes;

•  
• Activities operating below the maximum physical output of the installed equipment. These will be predominant in a sluggish economy such as that of YEAR 0.
•  
• Activities already operating at or near maximum installed physical output. This will comprise mainly those operations which for technical reasons have to work 168 hours a week, such as certain chemica l processes, petroleum refineries, power generation, telecommunications, cement works and blast furnaces. These activities all show very high investment per job and long gestation periods for new investment.

Expansion of Output of an Existing Activity

4.53 Let us consider the case of an existing activity operating at less than its full installed capacity because of lack of demand. Increased physical output can be obtained without extra equipment and at the same level of technology with additional inputs of raw materials , services, and labour. This will involve the provision of extra working capital, the amount and productivity of which can be estimated from the past records of performance of the activity.

4.54 Since we can assume that we do not have records applicable to the individual activities in our country which can readily be analysed, we will attempt to transpose information from some other country. The records of forty-five factories in India in 1964 mentioned in paragraph 4.29 can be analysed and adjusted to our YEAR 0 conditions, as shown in Table 16. We can assume this as a pattern of the economics of similar activities and from it we can calculate the requirements and effects for an increase to full installed output. The adjustment is made to allow for higher existing levels of wages and technology and thereafter the effects of increased output are calculated by assuming: that unit costs of raw materials and services remain unchanged; that earnings of labour remain unchanged; and that the trade-off between additional investment and labour saving is at the level indicated by the Indian data, namely $1880 per job.

TABLE 16

4.55 The average utilisation of the installed capacity of these forty-five factories is indicated as about 80%, that is, physical output could be increased by 25% given larger demand and additional inputs.

4.56 At 25% higher output and still at constant prices and wages, the following changes from column 2 or Table 16 would occur:

4.57 This gives us some indication of the economic effect of increasing output where extra working capital only is needed but no new fixed investment. The result obtained can fairly safely be rounded off and applied generally to those activities which are substantial consumers of raw materials, fuels and services, i.e. services, transport, construction, mining and miscellaneous activities. We will assume that in YEAR 1 as compared with YEAR 0: that a 25% increase can be obtained in this way in 15% of the activities in the sector "Services, Trade and Government" and in 25% of the activities in the remaining sectors; that the productivity of the extra capital will be 2.90; and that each additional $716 of capital will generate one new job. This enables us to calculate Table 17 showing how much the existing capital stock already in use in YEAR 0 may be "stretched" by additional investment in YEAR 1 when restrictions of demand are removed.

TABLE 17 Investments Required to Expand Existing Activities During YEAR 1

Note: The figures for Agriculture are those calculated in paragraphs 4.49 and 4.50.

4.58 Thus it appears that we can count on generating purely by expansion of existing activities to their full capacity:

•  
• $48 m of additional GDP
•  
• 12,560 new jobs

and that this will consume $30 m of the $90 m of new capital expected to become productive (Table 13).

4.59 We are left with the following problem: to generate a further $111 m of value added and 97,440 more jobs using $60 m of capital. To do this, we must design new or extended activities having an average productivity of capital of 1.85; an average investment per job of $616; and an average productivity of labour of $1140. Since average earnings of labour in the sectors other than Agriculture are $840, this implies that the contribution of Capital to Value Added per job will be $300, which implies that a very high rate of gross return on capital must be allowed. Moreover, the new activation must become productive progressively during YEAR 1 using capital generated during YEARS 0 and 1; that is, we must design a large number of small activities for short gestation periods (of the order of six to twelve months) to provide this portion of the development programme.

The sectoral breakdown of these extensions and new activities is calculated in Table 18.

TABLE 18 Investments Required to Extend Existing Activities

and to Establish New Ones During YEAR 1

Column 1 is column 4 of Table 16.

Column 2 is column 5 of Table 11 minus column 3 of Table 1 minus column 6 of Table 17.

Column 3 is column 4 of Table 11.

Column 4 is column 2 times column 3.

Column 5 is column 1 minus column 4.

4.59 There are two distinct parts to the solution of this problem in design:

•  
• The extension of existing activities by new equipment and possibly higher levels of technology.
•  
• The creation of new activities.

In both of these we shall need to limit the levels of technology if the targets of low investment, rapid results and high employment are to be met. This indicates that we must concentrate on a very large part of our development effort on small scale activities.

4.60 It will be of little help to count on foreign aid in the form of investment to make up our shortage of capital. Firstly: the volume will be small; we might count of $2 a head a year, i.e. $6 m of investment or loans in each of YEARS 0 and 1. Activities based on this investment will ultimately yield about 15% in extra net product in the country or $2 m a year of the $111 m we are looking for. Even if it is possible to negotiate a long delay in the outflow of capital charges - e.g. five to ten years - this will only increase this $2 m to some $5 m; and there will be a heavy commitment to a capital outflow in some future period which will certainly prejudice continued rapid development then. Secondly: the gestation period will be long, a minimum of eighteen months, so that investments negotiated at the beginning of YEAR 0 will begin to yield in the second half of YEAR 1 at the earliest. Thirdly: the injection of $2 m of foreign investmen t will involve committing some $0.5 m of our available local capital resources to the same long-term projects. This will tie up some - albeit a small fraction - of our available local capital in low yielding and slow maturing projects.

4.61 It would appear that if we are forced to call on foreign money to make up a shortfall, it would be better to apply it to the item "Interest, Dividends and Reserves" (line 5 of Table 12) specifically to expand the Reserves needed to increase the circulation of money and so to release an additional allocation to New Fixed Investment (line 2) or New Working Capital (line 4). Alternatively it might be allocated to the support of import/export activities, as effective working capital.