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The 'Surplus' Approach For Project Appraisal (An Application To The Aswanhigh Dam)

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The 'Surplus' Approach For Project Appraisal (An Application To The Aswanhigh Dam)

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Content This dissertation has bean m icrofilm ed exactly as received 66-10,542 K AND EEL, Abdel-Fattah Mohamed, 1927- THE ’ ’ SURPLUS*' APPROACH FOR PROJECT APPRAISAL (AN APPLICATION TO THE ASWAN HIGH DAM). University of Southern California, Ph.D., 1966 Economics, theory University Microfilms, Inc., A nn Arbor, Michigan THE "SURPLUS" APPROACH FOR PROJECT APPRAISAL (AN APPLICATION TO THE ASWAN HIGH DAM) A Dissertation Presented to the Faculty of the Graduate School The University of Southern California In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy (Economics) by Abdel-Fattah Mohamed Kandeel June 1966 UNIVERSITY O F S O U T H E R N CALIFORNIA THE GRADUATE SCHOOL. UNIVERSITY PARK LOS ANGELES, CALIFORNIA 0 0 0 0 7 This dissertation, written by Abdel-Fattah Mohamed Kandeel under the direction of h.i.s...Dissertation Com mittee, and approved by all its members, has been presented to and accepted by the Graduate School, in partial fulfillment of requirements for the degree of D O C T O R OF P H I L O S O P H Y Dean Date.J.™el9& 6 DISSEHTDATION c q m m ' l£Z> TABLE OF CONTENTS CHAPTER PAGE I. INTRODUCTION............................. . 1 The Problem . . . . . . . . . . 1 Statement of the Problem . . . . . 2 Purpose of the Study............... 4 Scope and Limitations of the Study . . 6 Hypothesis .............................. 8 Methodology .............................. 9 Major Sources...................... 10 Organization of the Remainder of Dissertation ........................... 12 II. CRITIQUE OF SOME CRITERIA FOR PROJECT A P P R A I S A L......................... 14 Methodology for Project Appraisal in the USSR: Recoupment Period ............. 15 Critique ............. . . . . . 23 National Income Approach ............. 27 Estimation of Effects . . . . . . 28 Accounting Prices ................. . 32 Critique......................... 36 Benefit-Cost Ratio .................... 42 Critique ........................... 48 • • iii CHAPTER PAGE III. THE USE OF CONSUMERS' AND PRODUCERS' SURPLUS FOR PROJECT APPRAISAL . . . . 58 Definition of Consumers1 and Producers' Surplus................................ 59 Definition of consumers' surplus . 60 Definition of producers' surplus . . 61 Controversy Over Consumers' Surplus . . 62 Contributions of Marshall ............. 63 Hicks* Critique of the Marshallian Measure . . . . . . . . . . 66 The "definition" versus the "triangle" 67 Hicks' four concepts . . . . . . 69 The Case for Marshall's Measure . . . 72 Superiority of Marshall's Method, for Empirical Measurement . . . . . 72 Plausibility of the assumption of constant marginal utility of money 72 Limited usefulness of Hicks' four concepts . . . . . . . . . 74 Marshall's measure a better approximation 75 Use of Marshall's Measure for Economic P o l i c y .......................... 78 The "dead loss" of excise taxes . . 79 A criterion for public utilities . . 80 The Use of Consumers' and Producers* Sur plus for Project Appraisal . . . • 81 IV. A STUDY ON THE ASWAN HIGH D A M ............ 88 Background. 88 iv CHAPTER PAGE The Aswan High D a m ................... 99 The Need for the Dam ............. 99 Industrial and. Agricultural Effects . 102 Estimated. Cost....................... 105 Economic Evaluation of the Project . . 106 Difficulty in Obtaining Data for Industry........................... 106 Limited Reliability of Our Data for Agriculture . . . . . . . . 107 Appraisal on the Basis of Agriculture Alone . . . . . . . . . . 108 Supply and Demand Estimates . . . 110 Form of equations................. 110 Equations overidentified . . . . 112 Estimation of coefficients . . . 115 Effects of the Project............. 118 Initial equilibrium and. area between c u r v e s ........................... 119 Shifts in demand and supply . . . 120 Calculating the surplus . . . . 122 Comparing surplus with costs . . 126 Waste of potential surplus . . . 132 Appendix to Chapter I V ................. 137 V. SUMMARY AND CONCLUSIONS................. 154 Summary................................ 154 Conclusions..................... 156 V CHAPTER PAGE APPENDICES............................................... 164 BIBLIOGRAPHY............................................ LIST OF TABLES TABLE PAGE I. Population of Egypt . . . . . . 90 II. Cultivated. Area in Relation to Population . 91 III. Use of Fertilizers in the Middle East . 94 IV. Comparison of Crop Yields . . . . . 94 V. Distribution of Income (1958) . . . . 96 VI. Distribution of Agricultural Land by Size of Holdings (1896 and. 1952) . . . . . 98 VII. Changes in Consumers1 and Producers1 Surplus and Their Discounted Values . . . . . 124 VIII. Estimates of Agriculture1s Share in the Project's Cost . . . . . . . 128 IX. Demand and Supply at X2 = 0 and Equilibrium Values of Xj and. X2 . . . . . 131 X. Equilibrium Values of X2 If National Income Grows at 3 Per Cent After 1969 . . . 160 XI. Equilibrium Values of X2 If National Income Grows at 4 Per cent After 1969 . . . 161 CHAPTER I INTRODUCTION The Problem Planning has been widely accepted, as one of the essential means to guide economic development in under developed economies.'*’ A study of the specific experiences of several developing countries led to the conclusion that, while many factors affect the success of economic develop ment in a country, development will go forward more rapidly 2 with well designed plans. Competing claims for resources impose a limit on the number of projects to be included in any development ^-United Nations, Economic Commission for Asia and. the Far East, "Decade of Development Planning and Imple mentation in the ECAFE Region," Economic Bulletin for Asia and the Far East, Vol. XII, No. 3, December, 1961, p. 1. Q F. Hagen (ed.), Planning Economic Development (Homewood, Illinois: R. D. Irwin, 1963), p. 326. 1 2 plan. The determination of the scope and nature--and the selection--of projects at the planning stage requires that the planning agency must have rules which can be applied. It does occasionally happen that, to some extent, politics may determine what projects will be undertaken. It also may happen that one particular thing stands out as the supreme need at a particular moment, and in that case it is perfectly proper that such a particular project should be considered and promoted. But as a rule, criteria to indicate priorities are usually needed., and the choice of projects will be based on certain indicators as to the results of executing each alternative project under con sideration. Projects are ranked, according to their re sults, measured by the specific indicator acceptable to the planning agency as the yardstick for project evalua tion. A process of selection is then performed, starting from the top of the list and moving down until the re sources available for the plan are exhausted. Statement of the Problem A variety of criteria for determining the priority of development projects are expounded in the literature. Aside from--sometimes because of--the difficulties of 3 measurement involved in carrying out many of these priority tests, certain elements of arbitrariness enter, and some times are forced, into the process. Moreover, the majority of these approaches do not give special consideration to the welfare aspects in underdeveloped economies. This attitude is not surprising, since the concept of "effi ciency," as the cornerstone of welfare economics, is usually conceived, of as a static concept, while the goals of development--!.e., radical transformation of the eco nomic structure--may require non-adherence to such static concepts. A system . . . that at every point of time fully utilizes its possibilities to the best advantage, may yet in the long run be inferior to a system that does so at no given point of time, because the latter1s failure to do so may be a condition for the level and speed of long run performance.^ But if these Schumpeterian considerations are valid for the operation of the economic system as a whole, there seems little or no impediment to growth possibilities introduced by considering the concept of economic effi ciency in its static sense for individual project appraisal 3 J. A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper, 1942), p. 83. 4 at the planning stage. In some cases there may be even a more convincing reason to consider these aspects. In the cases mentioned above, such as when politics decide the choice, or when the project stands out (or alone) as the supreme need at a certain time, there is every reason to consider welfare aspects as the only meaningful frame of reference to which we should refer. It is true that no country or system lives according to the formal principles of welfare economics. The use of such criteria is nonethe less justified insofar as adherence or departure from such efficiency rules might be an indicator of relative economic merit. Purpose of the Study The present work is mainly a quantitative case study on the Aswan High Dam. The purpose of this study is to apply--empirically--a quantitative criterion for eco nomic evaluation of the project. This project seems to fall in the class of unique undertakings; it stands out as the single project capable of achieving what the planners call the "economic salvation for the UAR." The specific welfare criterion applied is the estimation of the increase in consumers’ and producers* surplus as a result of the project. It is not within the scope of this study to pre sent any exposition of the theory of welfare economics. Welfare economics is based on the concept of ’’optimum” as derived from the well-known Pareto formula, defined as a position from which it is not possible, by any realloca tion of factors, to make anybody better off without making 4 at least one person worse off. There are several condi tions to be satisfied, simultaneously in order to define an optimum position.5 It has been shown^ that these could be condensed into three basic conditions: (1) exchange opti mum conditions which require that the rate of ’’subjective substitution” be the same for all pairs of goods in the economy; (2) production optimum conditions which require 4 See V. Pareto, Cours d’Economie Politique, Vol. II (Laussane, 1947), p. 90; and also E. Barone, ’’ The Ministry of Production in the Collective State,” in F. A. Von Hayek (ed.), Collectivist Economic Planning (London, 1935)* pp. 245-290. ^M. W. Reder, Studies in the Theory of Welfare Economics (Oxford University Press, 1947), chapter II. He presented, seven conditions. ^E. J. Mishan, ”A Survey of Welfare Economics, 1939-59,” Economic Journal, Vol. LXX, No. 278, pp. 206-207. that the rate of "objective substitution" be the same for all pairs of factors; and (3) a top level optimum condition which requires that the rate of "subjective substitution" be equal to the rate of "transformation" for all pairs of goods.^ Scope and. Limitations of the Study Our study concentrates on testing the quality of the project from the point of view of economic efficiency. There are no judgements about changes in the distribution of income, political objectives, or social imperatives--all of which are left out of this study for the government to dec ide upon. The purpose of the research was, originally, to study the effect of the Dam on all the economy. In such a case, the effect of the project on the industrial and 7 For a very lucid presentation of how these three "optimum" conditions are linked., diagramatically, see F. Bator, "The Simple Analytics of Welfare Maximization," American Economic Review (1957), pp. 22-59. For further important aspects of the theory of welfarp economics, see A. Bergson, "A Reformulation of Certain Aspects of Welfare Economics," Quarterly Journal of Economics (1938); O. Lange, "The Foundation of Welfare Economics," Econometrica (1942), pp. 215-228; G. Tintner, "A Note on Welfare Eco nomics," Econometrica, Vol. XIV (1946), pp. 69-78. agricultural sectors should be analyzed. However, the difficulty of obtaining data about the industrial sector forced us to limit ourselves to the agricultural sector alone. We are aware that the existence of imperfections in the economy makes the application of principles essen tially derived from the perfectly competitive model not strictly valid. Departure from the competitive situation, however, is sufficiently small in the agricultural sector to permit the use of the "surplus" model for the limited purpose of the present study. Our interest is confined to the evaluation of the effects of the Dam on the agri cultural sector, the output of which consists of goods to which the notion of a free market can be readily applied.® We assume in this study that the quantitative significance of the resultant distortion in the price structure (due to price controls on some provisions) are not so large as to introduce errors of overriding magnitudes. 8 There is no process of nationalization of land in the agricultural sector. 8 Hypothesis Our interest in applying the criterion of con sumers' and. producers' surplus for economic evaluation of the Aswan project was strengthened by the fact that we were forced to confine our study to the agricultural sphere. The hypothesis that we intend to test is that the project will not maximize total benefits in agriculture-- as represented by the area between the domestic supply and demand, curves for agricultural products--if the project is stripped of its industrial effects. In other words, max imizing the area between the supply and demand curves in agriculture will in fact depend on whether or not the proj ect has other effects outside agriculture. If our findings support this hypothesis, the cri terion applied in this study will have proved its superior ity over other criteria in going a step further beyond a simple comparison between costs and outcomes. Even when a positive net gain in consumers' and producers' surplus is assured, we still can make a judgement concerning the potential maximum for the area between the curves. 9 Methodology Domestic supply and demand equations are estimated from published UAR data of agricultural production and prices. There were some gaps in the time series used, for which we had to make estimations. Equilibrium quantities and prices are calculated, and the area between the supply and demand curves is found by integration^ for this initial position of equilibrium. The construction of the project will result in shifts in both the supply and demand curves,^ and a new position of equilibrium will be estab lished. Another process of integration to yield the area between the two curves, in their new position, will be performed. The difference between the two outcomes of integration, i.e., initial and final position, represents the effect of the project. The figure obtained will be compared with the cost of the project. We expect to be able to reach a conclusion on the rationality of allocating ^G. Tintner, Mathematics and Statistics for Econ omists (New York, 1953), pp. 188-189. G. Tintner, The Econometrics of Development and Planning (First Draft, 1964), pp. 500-504. 10 resources to this project if the agricultural aspects were the only expected results. Major Sources A variety of sources have been drawn upon for dif ferent parts of this study. For the first three chapters we relied mainly on the relevant Russian literature trans lated into English,11 on J. Tinbergen's writings on the subject of programming,12 on several works in the field of 1 q water resource development in the United States, J and on ^ Problems of Economics, English translation of Russian articles, (monthly publication); L. V. Kantorovich, The Best Use of Economic Resources (English Edition, Perga- man Press, 1965); V. S. Nemchinov (ed.), The Use of Mathe matics in Economics, English translation edited by A. Nove, (Oliver and Boyd, 1964). 12J. Tinbergen, Economic Policy: Principles and De signs (Amsterdam: N. Holland Publishing Co., 1956); The De sign of Development (Baltimore: John Hopkins Press, 5th Edition, 1963); Central Planning (New Haven: Yale Univer sity , 1964). -^S. C. Smith and E. N. Castle (eds.), Economics and Public Policy in Water Resource Development (Iowa State University Press, 1964); J. V. Krutila and O. Ecksteip, Multiple Purpose River Development, Studies in Applied Economic Analysis (Baltimore: John Hopkins Press, 1958); J. Hirshleifer, et.al., Water Supply: Economics, Technol ogy, and Policy (Chicago! University of Chicago Press, 1960); M. Hufschmidt, et.al., Report of Panel of Consultants to the Bureau of the Budget on Standards and Criteria for 11 several theoretical sources such as those of A. Marshall,1^ J. Hicks,15 H. Hotelling,16 and G. Tintner.17 Figures from the United Arab Republic's publica tions,1® and our own statistical estimations for the gaps, Formulating and Evaluating Federal Water Resource Develop- ment (Washington, D.C., June 1961); 0. Eckstein, Water Re source Development: The Economics of Project Evaluation (Cambridge: Harvard University Press, 1958); S. V. Ciriacy- Wantrup, Resource Conservation, Economics and Policies (2nd Revised Ed., University of California, 1963); S. V. Ciriacy-Wantrup, "Cost Allocation in Relation to Western Water Policies," Journal of Farm Economics, Vol. 36, No. 1, (1954), pp. 108-129; P. O. Steiner, "Choosing Among Alter native Public Investments in Water Resource Field.," Ameri can Economic Review, Vol. LXIX, (December 1959), pp. 893- 916. 1'^A. Marshall, Principles of Economics (New York: The Macmillan Co., 8th Ed.., 1953). ■^J. R. Hicks, "The Rehabilitation of Consumers' Surplus," Review of Economic Studies, Vol. VIII,(1941), pp. 108-116; "The Four Consumers' Surpluses," Rev, of Econ. Stu., Vol. XI (1943), pp. 31-41; "The Generalized Theory of Consumers' Surplus," Rev, of Econ. Stu., Vol. XIII, (1945), pp. 68-74; and. A Revision of Demand. Theory (New York: Oxford University Press, 1959), pp. 96 n.2. 16H. Hotelling, "The General Welfare in Relation to Problems of Taxation and of Railway and. Utility Rates," Econometrica (July 1938), reprinted, in R. Musgrave and C. Shoup (eds.), Readings in the Economics of Taxation, (Home wood, 111., 1959), pp. 139-171. 17 G. Tintner, The Econometrics of Development and Planning (First Draft, 1964). 18 UAR, Dept, of Public Mobilization and Statistics, Handbook of Basic Statistics (Cairo, 1963). 12 constitute the basis for the empirical study of chapter four, whereas the econometrics of that chapter are based on the works of H. Theil^ and G. Tintner Organization of the Remainder of Dissertation In the following chapter, some criteria for project appraisal are summarized and each is followed by a brief critique. The main purpose is to focus on weaknesses com mon to most of them as a prelude to presentation of the criterion which we will apply in our study. Chapter Three presents the theoretical background for the empirical work in Chapter Four. The two concepts of consumers' and producers' surplus are defined, and a case is made for the Marshallian measurement of the con sumers' surplus. Examples for the use of the area between the demand and supply curves for purposes of economic poli cy are given and the suggestion that the method may be used for project appraisal is finally presented. Theil, Economic Forecasts and Policy, (Rev. Ed..), (Amsterdam: N. ftolland Publishing Co. , 1965). 20 Tintner, loc. cit. 13 Chapter Four incorporates the background of the Aswan High Dam as well as the econometrics of the project's appraisal. It includes the estimation of domestic supply and domestic demand equations, and the method used for such estimation. Integration to find the area between the two curves is made, separately, for eighteen years (1960-1977), from the start of construction works on the project until the last addition to the land area is completed. An inter pretation of our findings is given at the end of the chap ter . Chapter Five includes the summary and conclusions of the dissertation. CHAPTER II CRITIQUE OF SOME CRITERIA FOR PROJECT APPRAISAL As we stated in the previous chapter, the purpose of this study is to apply--empirically--the method of estimating the increase in consumers’ and producers' sur plus for economic evaluation of the Aswan High Dam. Before embarking on these calculations, however, we will present a brief exposition of three other criteria selected for the purpose of pointing out some of their common weak nesses. We do not intend to make a complete survey of any of these criteria; all that we intend to do is to famil iarize the reader with them, and to point out some of their shortcomings. Such shortcomings--we feel--could be re duced, if not completely eliminated, when we use the method applied in our present study. The three criteria selected for this purpose are: the period of recoupment (applied in the USSR), the national income approach, and the cost- benefit analysis. The shortcomings, which will be pointed out subsequently, center around three main points: the 14 15 degree of arbitrariness involved in stating or working out the approach; the difficulties of measurement encountered in handling it; and the neglect, or a weak link, of eco nomic welfare considerations. Methodology for Project Appraisal in the USSR:1 Recoupment Period A search for criteria of priorities for capital investment, choice of projects, and technical variants 2 started, in the USSR in 1953. A famous discussion of this A. Katzenelenbogen, "Problems of the Methodology of Determining the Economic Effectiveness of New Tech niques," English translation in Problems of Economics, Vol. II, No. 5, (September 1959), pp. 68-72; V. Cherniavski, "An Attempt to Define the Efficiency of Capital Investment in the Iron and Steel Industry," English translation from Voprosy Ekonomiki, No. 7, (1959) in Problems of Economics, Vol. II, No. 7, (November 1959), pp. 18-22; T. Khachaturov, "Methodological Questions Determining the Economic Effec tiveness of Capital Investment," Planovoe Khoziaistvo, No. 8, (1959), English translation in Problems of Economics, Vol. II, No. 8, (January 1960), pp. 17-21; "Standard Meth odology for Determining the Economic Effectiveness of Capi tal Investments and New Technology in the National Economy of the USSR," Planovoe Khoziaistvo, No. 3, (1960), English translation in Problems of Economics, Vol. Ill, No. 6, (October 1960), pp. 11-17. 2 V. Petrov, "Effectiveness of Capital Investment in the Transport Industry in the USSR," English translation in Problems of Economics, Vol. I, No. 3, (July 1958), p. 51. 16 topic was held few years later. Several Russian econo mists participated in the exchange of views over the matter which continued for six or seven years. Among those who made a contribution to the solution of the problem is T. Khachaturov, whose views on the issue were incorporated in an official document which is now considered the Stand- 4 ard Methodology of the USSR. The mathematical determination of the criterion for project evaluation and selection in the USSR boils down to finding the greatest possible production effect for society C with the least possible input of "social labor." The cri- 3 "Les Methodes Actuelles Sovietiques de Planifica- tion," Economie de Democraties Populaires, Cahier de LTIn- stitut de Science Economique Appliquee, Serie G., No. 7, (Paris 1958). ^The Standard Methodology rules have been elabo rated by the Institute of Economics (USSR Academy of Science) with the participation of the Scientific Research Institute of Economics (State Planning Committee of the USSR), the Institute of Economics of Construction (USSR Academy of Construction and Architecture), the State Scien tific and Technical Committee of the USSR, the Central Statistical Administration of the USSR, and The Construc tion Bank of the USSR. They have been discussed by the Presidium of the USSR Academy of Science, and approved by the Scientific Council on Problems of the Economic Effec tiveness of Capital Investments and. New Technology. Plan ovoe Khoziaistvo, No. 3, (1960). ^In the Marxian sense. 17 terion named "economic effectiveness of capital invest ments1 1 is actually expressed in terms of the growth of the productivity of the "social labor,” i.e., in a reduction of the production cost per unit of output, taking into account the time factor. But production cost is no more than the "social labor," and the time factor is taken into account by discounting over time by a formula derived from the "economic effectiveness" itself. The "economic effective ness" so determined (as we shall see later), is then applied to planning investments, designing projects, and introducing new technology. In the Soviet economy, it is thought that an exact determination of "economic effectiveness" is possible only on the basis of a calculation of value. But since such calculations have not been made as yet,^ they agreed to use indices of prices and production costs, since it gives an See A. Zauberman, "The Soviet Debate on the Law of Value and Price Formation" in G. Grossman (ed.), Value and Plan (University of California Press, 1960), pp. 17- 35; G. Grossman, "Industrial Prices in the USSR," American Economic Review (Proceedings), XLIX, No. 2, (May 1959), pp. 50-64. 18 < 7 approximation of the actual economic effectiveness. The Soviet Methodology recognizes the fact that in determining the "economic effectiveness" of capital in projects which entail development of allied branches, account should be taken, not only of investment in the project under consideration but also in other economic Q activities needed for the operation of the given project. However, the range of allied branches should be limited and consideration should be given to the immediate ones.^ For determining the comparative effectiveness of capital in a project, production costs in terms of "social labor," and the amount of capital investment are the two items needed to make the comparison. The formula for such procedure is expressed in either of two forms: 1. One is the so-called "recoupment period," T, which is the number of years in which returns of the addi tional investment in terms of saving costs is expected to attain the value of the difference in capital outlay. This 7 Khachaturov, op. cit., p. 19. ^Standard Methodology, op. cit., p. 12. ^Khachaturov, op. cit. , p. 20. 19 calculated T is to be compared with a normative index Tq set for each branch in the national economy. The rule is that T ^ T q in order that a project passes the test of evaluation and be selected for the national plain. 2. An alternative way of expressing the formula is the so-called "coefficient of effectiveness," i.e., E, which--as we shall see--is the reciprocal of the "recoup ment period." As before, this calculated E is to be compared with a norm, Eq , set for the branch of the given proj'ect. For passing the test, we should have E ^s>Eq . Let us proceed with calculating the T, or inversely the E, for deciding on economic effectiveness. The recoup ment period is to be calculated by, where k-^, k2 are the amounts of capital to be invested in proj'ects 1 and 2 respectively. Similarly with the produc tion costs of annual output c^, c2.10 In cases in which one of the proj’ects shows lower production costs as well as smaller capital investment the question of recoupment period does not arise. 20 In an alternative fashion, the "coefficient of effectiveness’ * is to be calculated by, where the symbols are the same as before,"^ and E stands for the "coefficient of effectiveness." Normative coefficients for different branches are at present set at between 15 per cent and 30 per cent, which are equivalent to recoupment periods of about three to seven years. For branches which are characterized by more capital intensity, such as power stations, iron and steel works, chemical and oil industries, and transport facilities--long normative periods may be set.12 The seven year periods are typical of less capital intensive branches. The shorter periods of recoupment are estab- So far the discussion seems as if different projects produce the same volume of output. This is rarely the case. When projects produce different volumes of out put, the sum of capital investments and the annual produc tion costs should be adjusted, for a comparable volume of output. 12 The term used by Soviet writers in this regard is "capital consuming" branches. The norms for these branches must not be more than ten years anyway, i.e., 0.1 coeffi cient of effectiveness. See "Standard Methodology," p. 13. 21 lished for some branches with a low "organic structure" of capital.13 xhe same applies for branches characterized by 14 a more rapid rate of technical progress. In comparing projects whose capital expenses are scheduled for different times in the future, the Soviet methodology requires the application of a discount factor which takes into account the average effect which can be obtained in the given branch,^ provided that capital in vestments are employed efficiently.^^ A simple formula 0£= (1 +ET) is applied for discounting for only few years, and a compound interest formula is used in the case of long period of construction. To illustrate the Soviet methodology we take a numerical example from "machine building." In this branch the normative coefficient of effectiveness is set at I o C x- 3This is presumably the Marxian ratio -- . 14 Khachaturov, op. cit. , p. 20. ■^Standard Methodology, op. cit., p. 14. ■^T. Khachaturov, op. cit., p. 20. 22 Eq = 0.2, i.e., a period of recoupment of five years. Consider two projects with capital investments of $20,000 and $25,000 respectively. Their annual production costs are $30,000 and $28,000 respectively. Applying formula (1) we get a period of recoupment of 2.5 years, which is equiv alent to a coefficient of effectiveness of 0.4. Comparing this E with E q we find E E q . Hence the second project is more effective than the first. Formula (1) and (2) are suitable for comparing two projects. There is, however, another formula suggested by the "Standard. Methodology" for comparing more than two 18 projects. The most economically effective project among those considered is determined by the smallest sum: + Tq C^ = minimum 19 or: (3) C . + E^ K . = minimum x Ox 17 Standard Methodology, op. cit., pp. 14-15. 18 Ibid. Also Khachaturov, op. cit., p. 19. 19 Take an industry with a normative recoupment period T q = 5, i.e., E q = 0.2. Assume we have three proj ects to select from. Project one has Kj = 1000, C-^ = 1200. Project two has K2 = 1100, C2 = 1150. The third, project has K3 = 1400, C = 1050. Then: 23 Critique: Although the "Standard Methodology" established a quantitative criterion to be followed and respected by all sectors in the USSR, it left the door open for a number of other considerations, such as "improvement and lightening of labor conditions," "safety," and "raising of the working people's cultural level." The document also makes explicit statements that in comparing projects special attention should be devoted to considerations of the country's de- 20 fence capacity. We feel that it is safe to conclude that the establishment of indices of economic effectiveness does not preclude the possibility that projects which yield a smaller "effectiveness" may be selected on other grounds. We have seen that the formula used for calculating Project one: 1000 + (5)(1200) = 7000 or: 1200 + (0.2)(1000)= 1400 Project two: 1100 + (5)(1150) = 6850 or,: 1150 + (0.2) (1100)= 1370 Project three: 1400 + (5)(1050) = 6650 or: 1050 + (0.2)(1400)= 1330 The third, project is the most economically effec tive according to formula (3). 20 Standard Methodology, op. ci t., p. 12. 24 the recoupment period is constructed in a way compatible with Marxian economics: the denominator of that formula, i.e., the difference between and Cj, is the saving in terms of "social labor," without reference to any other item of costs. The use of "bourgeois" economic concepts and terms, such as "rate of return" or "maximizing out- o I put," is prudently avoided by using the concept of "min imizing input" for a given output, with the term input o o here being synonymous with social labor. One obvious criticism of the criterion is the lack of uniformity in its application in the Soviet Union, where the T q (or E q ) is not set at the same figure for every sector. The arguments in support of this practice are mainly those of Khachaturov, and they are not really 21 Economists were attempting to keep clear of trouble during the period which immediately followed the 1930*s Stalin purge. The flourishing of economic thinking was taking place in what is called "Soviet under world eco nomics." For an exposition of those attempts, see G. Grossman, "Scarce Capital and Soviet Doctrine," Quarterly Journal of Economics, LXVII, No. 3, (August 1953), pp. 327- 329; see also Benjamin Ward, "Kantorovich on Economic Cal- culationg," Journal of Political Economy, No. 6, (December 1960), p. 549. 22No inherent difficulty, however, exists for ad justing the criterion to fit into the western economic concept of cost. 25 convincing.^ He objects to a uniform Eq on the grounds that such uniformity requires, and leads tp, uniform tech nique. He further believes that different capital dura bility should have a different T q . Finally he alluded to different rates of technical progress which, he argues, should require different E q ' s . His argument of uniformity in techniques could not be supported by the realities of economic life: there is nothing sacred about assigning the same EQ for a steel mill and a beer brewing factory, and they cannot possibly use the same technique. The weakness of his argument on capital durability is clear, since Tq is actually the reciprocal of Eq and has nothing to do with the physical life of the machine. The third argument could also be disposed of quickly, since technir cal progress has to do witch obsolescence rather than allo cation . The most serious criticism, however, is the arbi trariness of the approach. The values of Tq and Eq serve as a yardstick by which projects are ranked, for the purpose 23 On this point, I have benefitted from personal discussion with Professor Gregory Grossman in 1962 on some points in Soviet Economic Thought. of selection. But there is no more or less objective method for determining or explaining why a certain Tq was decided upon rather than any other T q . A further weakness --due to the practice as it stands, combined with the arbitrary nature just mentioned--is the possible contra diction which may arise in determining the norms Tq or Eq. We have seen that the methodology calls for assigning a small Tq to branches characterized by rapid technical progress, and a large Tq for more capital intensive branches. But, in general, technical progress is more likely to appear in sectors with a higher capital/labor ratio. Inventions often result in capital goods that are sufficiently large to be adopted more readily in larger than in smaller plants, and the capital intensive sector is the more likely to have the larger plants. 24 H. Leibenstein, ’’ Technical Progress, the Produc tion Function, and Dualism," Banca Nazionale del Lavore, No. 55, (December 1960), reprinted by the Institute of Industrial Relations, University of California, Berkeley, California, Reprint No. 177, pp. 13-14. 27 25 National Income Approach The national income method of appraisal advocates that the principle to be followed for project evaluation should be to maximize the contribution of the project to the country's "wellbeing"; wellbeing is taken to mean p A national income, present and future. There is a more explicit statement by J. Tinbergen that this method may be 27 called the national welfare test. The methods of estimating the contribution of a project to the national income is known to be of a fairly complicated nature which justifies their being handled by 25 Programming Techniques for Economic Development, Report by a group of specialists, United Nations, Economic Commission for Asia and the Far East, (Bangkok 1960); J. Tinbergen, Economic Policy: Principles and Designs (Amsterdam: N. Holland Publishing Co., 1956); The Design of Development (Baltimore: John Hopkins Press, 5th Ed., 1963); Central Planning (New Haven: Yale University Press, 1964); H. Chenery, "The Application of Investment Criteria," Quarterly Journal of Economics, (1953), pp. 76-96. 26 Tinbergen recognizes that for "wellbeing" to mean "national income" corrections for income distribution over social groups are needed. But, as he says, since these corrections will have to be incidental in the major ity of cases, nothing could be said about them in a general way. 27 Tinbergen, Design of Development, p. 33. 28 specialists.28 The economic repercussions of executing the project on all sectors of the economy should be care fully considered if a fairly good estimation of a project's contributions is to be obtained. Estimation of Effects For the purpose of a complete estimation, there are primary and secondary effects to be considered. "Di rect primary" effects are the contributions which are to result from the production process to be created by the project considered,2^ i.e., those which result within the sector of the project. In addition, there are "indirect primary" effects which are adjustments on the supply side required by the project.8^ These indirect effects usually result in sectors vertically connected, with the project 31 sector, because of direct technological links. They 28 Tinbergen, Economic Policy . . . ., p. 179. 29Ibid., pp. 179-180. 30 Tinbergen, Design of Development, p. 33. 31 Programming Techniques for Economic Development, p. 34. consist of increased production of investment goods needed, QO of finished products, or of raw materials. Secondary effects, on the other hand, are all other consequences "created by the increase in income." There is a strong case for considering these secondary effects in underdeveloped economies where the productive factors are not fully employed without the project in question and so there is a good chance for the multiplier effect to 33 work itself out. It has been recognized^4 that the most accurate method of estimating a project's economic impact would be to use a detailed econometric model bringing out all the relationships between the project and the economy as a whole. The solution of the problem would require comparing two paths of development for the economy, with and. without the project. The complete effect of the project would be computed only if an exact model for development of the economy concerned were available. If such a model existed, 32 Tinbergen, Economic Policy . . . ., p. 180. ^J. M. Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, 1936), chap. x. ^4For example, see Programming Techniques . . . ., p. 35. 30 we could determine two successive solutions of the system q e of equations, i.e., with and without the project. There would have been no reason to make the distinction between direct, indirect, and secondary effect; since the solution would give us a value for the total and complete effects. But as Tinbergen says, an exact system of equations does not exist, and even if it does, it would probably be un manageable, and certainly complicated. For practical purposes, some simplifying methods are resorted to for handling this problem. One way is by Q A using the so-called method of input-output analysis. We here think of the subdivision of all economic activity into a number of sectors (or industries) each of them charac terized by a product and a method of production. If we choose a sufficiently large number of sectors, we can think of each of them as a process with a homogeneous product. Such a process would require a number of inputs in order 35 Tinbergen, Design of Development, p. 81. o r See for input-output analysis: W. Leontief, The Structure of American Economy, 1919-1939 (2nd. Ed., New York: Oxford University Press, 1951); H. B. Chenery and P. G. Clark, Interindustry Economics (New York: Wiley, 1959). 31 to obtain a certain output. These inputs consist of the 37 outputs of some other sectors. The production of the project under consideration, say, in industry A will re quire certain inputs from other sectors, e.g., B, C, D, et cetera. The production of these inputs, in turn, will require inputs from some other, or the same, sectors. The process is thus interdependent, and with the aid of an 38 algebraic method, we can calculate how much more must be provided of everything in order to make possible a new level of production, increased as a result of the project in industry A. The yield that we are interested in calcu lating in order to appraise the undertaking must be based. 37 Of course other factors of production are also needed, but we disregard that for the sake of exposing the nature of the input-output method. 38 Where X is a vector of gross outputs, Y is a vector of net outputs, and A is a matrix of input coeffi cients , i.e., -1 X — A X = Y. Hence, X = I — A For a complete explanation of the solution, see H. B, Chenery and P. G. Clark, Interindustry Economics, pp. 55. 13- 32 gg on the value added of all the sectors and the capital needed in all sectors. This will give a good approxima tion of the project's contribution. Another way of simplifying the problem of calculat ing the contribution of a project is by resorting to some degree of aggregation without affecting the essential fea tures.^0 In the form of aggregation offered by Tinbergen, the sector of the project, and the rest of the economy are dealt with separately in a formula which would enable us to estimate the direct and indirect influences in general form. The method consists of comparing real national income, with and without the project, appropriately dis counted, and with appropriate "accounting prices." Accounting Prices This brings up the question of "accounting prices," their significance, and the way they are calculated. In 39 By value added we mean the gross value of the goods produced, less the value of all inputs, among which we have to include the wear and tear of machines and other means of production. 40 Tinbergen, Economic Policy . . . ., Appendix 3, p. 264; B. Higgins, Economic Development, Principles, Prob lems, and Policies (New York: Macmillan Co., 1959), pp. 663-664 (i.e., Tinbergen-King formula). 33 the language of programming "shadow prices"4^ are nothing but the Lagrange multipliers of a constrained optimization problem.42 Another way of describing them is in terms of 43 the optimum solution of the so-called "dual problem.". Their importance to the economist is explained by the teaching of the neoclassical theory of resource alloca tion, i.e., that the value of the national product is max imized when the factors of production are employed up to the point where the value of the marginal products equal their prices. The plain economic meaning of "shadow prices" is that of the value of the marginal product of the factors in an optimal situation where all alternative 44 uses have been taken into account. In underdeveloped economies in particular, a number 41 "Shadow" and "Accounting" prices are used inter changeably in the literature. See R. Dorfman, P. Samuel- son, and R. Solow, Linear Programming and. Economic Anal ysis (New York: McGraw Hill, 1958), p. 33. 42Ibid.. , p. 307. 4^For the algebra of linear programming see Linear Programming . . . ., pp. 64-105. 44S. C. Chakravarty, "Use of Shadow Prices in Pro gram Evaluation," in P. N. Rosenstein-Rodan (ed.), Capital Formation and Economic Development, pp. 46-67, (MIT Press, 1964). 34 of market prices often deviate from their "intrinsic val ues, as would be calculated from the optimization solu tion of a programming problem. This is particularly the case for factors of production (especially capital and. labor), and for foreign exchange. The main explanation of such phenomenon lies in the fact that a number of funda- 46 mental disequilibria characterize the factor markets. The institutional context of perfect competition is almost entirely absent, and there are structural rigidities which 47 do not respond to price changes. The realization of investment programs will itself influence the scarcity nature of factors.^8 45 Tinbergen, Design of Development, p. 40. ^R. S. Eckaus, "The Factor Proportion Problem in Underdeveloped Areas," American Economic Review (September 1955), reprinted in A. Agarwala and S. Singh (eds.), The Economics of Underdevelopment (Oxford University Press, 1958), pp. 348-378; J. Robinson, Essays in the Theory of Employment (2nd Ed., Oxford University Press, 1947), chap. ii. 47 In some cases this is not an unmixed evil from the wider sociological point of view. For a clear explana tion of this point, see H. Leibenstein, Economic Backward ness and Economic Growth (New York: Wiley, 1957), chapter vi, especially pp. 70-77. 48 Tinbergen, Design of Development, p. 37. 35 It should be obvious now that if the objective is to maximize the value of national income, then planning investment projects should be guided by "accounting" or "shadow" prices, rather than the "market prices." For instance, if a considerable number of— or all--workers on the project would, have been idle, the "intrinsic value" to the country of a man who would otherwise have been unem ployed is very much lower than the market wage rate, and the relevant appraisal of the project should be based on this "intrinsic value." Or if the official foreign ex change rate for a country is lower than its true "intrin sic value" it should not be used for our purpose, otherwise it will lead to biased calculations in favor of projects which yield import surplus, and unfavorable for projects 40 with an export surplus. Calculating "shadow prices" is a process which, in principle, requires a development program to solve for its "dual problem." "Accounting prices," however, may have to 4^A lower rate of foreign exchange than the in trinsic value will underestimate the costs of imports and the proceeds of exports. 36 be determined by a cumbersome process of trial and error, including "shadow programming" which differs from the actual program in the sense that it uses flexible pricing to obtain equilibrium.^ But even if, for some reason, no equilibrium can be obtained by flexible pricing alone (such as a market of "unlimited" unskilled labor), Tin bergen suggested the "use of common sense consideration,"^1 such as applying an "accounting price" equal to zero. Other approximations were indicated for the interest rate, and foreign exchange rate, without solving any actual or shadow program. He also indicated that even if it is not possible to make any sensible estimate of an accounting price, it may be useful to use plain guesses for this pur- 52 pose. Critique: Several difficulties are encountered in handling the national income approach; some of them are recognized even by its advocates. The input-output method is cer- 5( ^Tinbergen, op. cit. , p. 83. 51Ibid., p. 87. 52Ibid., p. 86. tainly useful, but may lead., as Tinbergen noticed, to cer tain exaggerations in its application. The need to in crease production as a direct or indirect consequence of the increased production in, say, sector A of the project does not exist for all sectors. It exists only for sec tors of which the products cannot be imported, e.g., building, electricity, services which are non-transferable. These sectors are referred to as "national sectors," and they represent the real complementary activities to the sector of the project originally concerned. Tinbergen suggested for this problem what he calls a "semi-input- eq output method.Here the changes in production in the other so-called "international sectors" would be put equal to zero. The unknowns of the problem are the necessary changes in production in the "national sectors," and the change in imports (or exports) of the "international sec tors." The results of this semi-input-output method will be different; the yield will be less than that calculated 53 J. Tinbergen and H. Bos, Mathematical Models of Economic Growth (New York: McGraw Hill, 1962), pp. 83 n. 38 with the complete input-output method. But whether "complete" or "semi,” the input-output method requires an entire knowledge of the input-output coefficients, for all sectors considered. For practical purposes, this remains a handicap for many underdeveloped economies.^ Tinbergen again has a simplified solution,^ to reduce the number of unknowns to be determined from the system of simultaneous equations. In fact, some of the most pronounced "circularities" in interindustry relations are non-existent in underdeveloped countries, since these relations manifest themselves mostly when there are more advanced, and more industrialized sectors. Tinbergen's suggestions to reduce the number of unknowns include: simply putting a number of small coefficients equal to 54 For the shortcomings of the use of the Leontief model in underdeveloped countries, see F. Hanssraann, "Op erations Research in National Planning in Underdeveloped Countries," Operation Research, Vol. IX, No. 2, (March- April) 1961, pp. 232-247. * * ^Institute of National Planning, Cairo, Memo. No. 159, reprinted from Industrial India, 1961. 56 A. Hirschman, The Strategy of Economic Develop ment (New Haven: Yale University Press, 1958), pp. 98- 104. 39 zero, aggregation of sectors not immediately connected with the project, and some of the typically "national industries" may be supposed to depend on the general level of production, instead of on each production variable. These difficulties, and their attempted solutions, show that the calculation of the project's contributions by the present method will--at best--be an approximation and will often be arbitrary; including only the "direct" and, probably, most of the indirect effect. Tinbergen implicitly recognizes this arbitrary nature when he sug gests5^ that for the "secondary" effects, an addition of a figure proportional to income created directly and in directly may be a good approximation. He then admits that "in such circumstances, the appraisal of projects may be based on their primary effects."58 But even for the "indirect primary" consequences Tinbergen seems sceptical of obtaining a perfect estima- 57 Tinbergen, Design of Development, p. 34. PQ -^Almost the same conclusion, i.e., of overlooking sometimes the importance of secondary effects was reached, by the advocates of benefit-cost analysis, as we shall see below. 40 tion, and calls for avoidance of "too great a perfection." It is more the approach which matters, he said, rather than every conceivable detail. He suggests that the esti mation of the indirect consequences need not be calculated separately, but can be included in the calculation of "accounting prices.But this is solving the problem by lumping it with another of a different nature. In planning economic development, the endowment of the relevant primary factors are continually changing, and their scarcity aspects are shifting. The "shadow price" needed then is not one relating to a point in time. What is actually needed is to determine the time path of shadow prices, which requires the solution of a dynamic linear programming problem. But even for a moment in time, sha dow price estimation without a shadow program will have elements of arbitrariness. Those who suggest^ that we can at least estimate ranges within which shadow prices for factors might be expected to lie are only confirming that the method will not aim at any quantitative exacti- 59 Tinbergen, loc. cit. Chakravarty, op. cit. , p. 52. 41 tude, but will only suggest certain limits. We have noted earlier that Tinbergen advocated the use of plain guessing for estimating "accounting prices," if no sensible estimate for them could be made. Since it is admitted that "shadow prices" can be correctly computed (by solving the dual problem) for complete programs only, and not for separate projects,61 it is fairly reasonable to assume that "plain guess" may turn out to be the most probable procedure for the purpose of project evaluation. The relation between the national income approach and. "welfare" is somewhat slurred over. Tinbergen did not go into the preliminary question investigating the rela tionship between national income and welfare. He makes an emphatic statement that "it is essential that the maximum refers to total" national income, then merely calls this the national welfare test. 61Tinbergen, op. cit., p. 83; Chakravarty, op. cit. p. 63. 62 There is even disagreement on whether total na tional income increase is the right index for economic development. See H. Leibenstein, Economic Backwardness and Economic Growth, pp. 7-14; N. Buchanan and H. Ellis, Approaches to Economic Development (New York, 1955), pp. 21-22; S. Kuznets, Six Lectures on Economic Growth (Glen coe, 111.: The Free Press of Glencoe, 1959). 42 But actually national income figures can do no more than indicate, very roughly, the efficiency of eco nomic organization and. it cannot measure national welfare. A rise in national income may be the net result of some peoples' income rising and some others' falling. In the absence of explicit value judgements regarding the distri bution of income, we cannot tell whether the rise in na tional income corresponds to a rise in national welfare because we have no "value-free" way of comparing satisfac- tion of different people. As Scitovsky says, the utmost that national income estimates might do is to indicate the efficiency of production and the division of labor, and this determines only potential welfare. Benefit-Cost Ratio Benefit-cost analysis has been frequently applied for evaluating projects in the field of water resource development.^ The method, is characterized as the collec- T. Scitovsky, Welfare and Competition (Chicago, 1951), pp. 70-71. 64 S. C. Smith and E. N. Castle (eds.), Economics and Public Policy in Water Resource Development (Iowa State 43 tion and organization of data relevant, by some concep tually meaningful criteria, to determining the relative fL E preferredness of alternatives. It requires quantifica tion both in physical and economic terms. One way of expressing this criterion is to compare the differences between benefits and costs of alternative projects. This form would, obviously favor large projects over small ones, and is usually rejected on these University Press, 1964); J. V. Krutila and O. Eckstein, Multiple Purpose River Development, Studies in Applied. Economic Analysis (Baltimore: John Hopkins Press, 1958); J. Hirshleifer, et.al., Water Supply: Economics, Technol ogy , and Policy (Chicago: University of Chicago Press, 1960); M. Hufschmidt, et.al., Report of Panel of Consult ants to the Bureau of the Budget on Standards and Criteria for Formulating and Evaluating Federal Water Resource De velopment (Washington D.C., 1961); O. Eckstein, Water Re source Development: The Economics of Project Evaluation (Cambridge: Harvard University Press, 1958); S. V. Ciriacy- Wantrup, Resource Conservation, Economics and Policies (2nd Rev. Ed., University of California Press, 1963); S.V. Ciriacy-Wantrup, ’’ Cost Allocation in Relation to Western Water Policies," Journal of Farm Economics, Vol. 36, No. 1, (1954), pp. 108-129; P.O. Steiner, "Choosing Among Alter native Public Investments in Water Resource Field," Ameri can Economic Review, Vol. XLIX, (December, 1959), pp. 893- 916. ^R. McKean, Efficiency in Government Through Sys tem Analysis, with Emphasis on Water Resource Development (New York: Wiley and Son, 1958), Parts II and III. grounds.66 The most common form is to compare the projects under consideration in terms of the ratios of benefits to costs in each project.67 A benefit-cost ratio of a project sufficiently high to warrant its selection would, in the absence of extraordinary noneconomic circumstances, be a very strong argument for its construction. Projects with inadequate benefit-cost ratios would have to be shown to yield other intangible benefits, or to affect the redis tribution of income in a desirable pattern, or accomplish any other objective before they could be justified. To illustrate the form in which the benefit-cost ratio is usually constructed we need certain definitions: K = Fixed investment in the given project. O = Operating and maintenance plus annual re placement costs. C = Cost per year, including the charge on the amount of capital. U, S. Federal Inter-Agency River Basin Committee, Subcommittee on Benefits and Costs, Proposed Practices for Economic Analysis of River Basin Projects (U.S. Government Printing Office, May 1950), p. 14. 67 This is recommended by the Subcommittee on Bene fits and Costs, Proposed Practices . . . ., p. 37. B = Benefit received annually, as will be de fined. later. i = Interest rate. T = Amortization period. The present value of total benefits would be: T Dividing the numerator and denominator by T (1 + i) B t i = l and the present value of total costs, T 0 + K i=l Hence, the benefit-cost ratio is: T -1 I + K i = l we get the ratio on an annual basis 46 B B -1 O + K I i=l (1 + i)‘ If we denote i=l ( i + i ) t J -1 by , the benefit-cost ratio would be written: B B ° + KOCit where OC^ represents actual capital charges per dollar of fixed investment, i.e., interest and amortization.^8 If the problem of form is easy to grasp, the con tents of B and C are not so simple. There are sub divisions under the terms benefits and costs which we will now summarize. Benefits of a project are usually "tangible,” but there could, be other "intangible" benefits. "Intangible" benefits are those which cannot be expressed, in monetary 680. Eckstein, Water Resource Development, pp. 55- 57. 47 terms,and thus could not be readily expressed in quanti tative terms. Tangible benefits, on the other hand, are either direct or indirect (i.e., primary and secondary). Direct benefits are defined as the value of the immediate products and services resulting from measures for which 70 71 the direct costs are incurred.. Indirect (or secondary) benefits are defined as the values added to the direct benefits as a result of activities ’’stemming from’’ or "in duced by” the project.^ The former comprises those bene fits which accrue in connection with the ’’ processing of the immediate products” of the project; the latter com prises benefits alleged to accrue because expenditures on the immediate project stimulate other economic activities. Direct costs, in turn, are the values of goods If a reservoir floods a canyon, a product of which may be an impressive scenery. S. V. Ciriacy-Wantrup, "Benefit-Cost Analysis,” in S. C. Smith and E. N. Castle (eds.), Economics and Public Policy . . . ., p. 12. 70 S. V. Ciriacy-Wantrup* op, cit. , p, 14, 71 O. Eckstein, op. cit. , p. 51. 72 'The argument for including "induced by" second ary benefits is supported by analysis based on Keynesian economics. 48 and services required for the establishment, maintenance, and operation of the project, and to make the output of the 73 project available for use or sale. Indirect costs are those of further processing and any other costs "stemming from" or "induced, by" the project. Critique: The Benefit-Cost ratio approach has a certain con ceptual vagueness and some difficulties of measurement which may pose serious problems for the purpose of project evaluation with a reasonable degree of reliability. For estimating the benefits and costs of a project, two situations must be compared: the development of the economy "with" the project, and "without" it.^ The objec tive of benefit-cost analysis must be to identify the 73 Eckstein divides this direct cost into "project costs"--representing the value of goods and services used to establish, maintain, and operate a project--and "asso ciated costs," which is the value of goods and services needed beyond project costs to make the output of a project available. This subdivision, however, is of little signif icance for the purpose of our study. ^ A detailed account of the "with and without" principle is in M. M. Ragan and E. G. Weitzell, "Economic Evaluation of Soil and Water Conservation Measures and Pro grams," Journal of Farm Economics, (November 1947), pp. 1275-1294. 49 change in the path of the economic system, and. the "with and without” principle requires contrasting these two "hypothetical” situations. This is not an easy task, and it should not be confused with the fallacious basis of comparison "before and after." Great care is required in performing the "with and without" comparison so not to attribute to a project effects which, for instance, occur only because of the passage of time. The calculation of secondary benefits (and costs) requires greater care than the estimation of primary aspects of a project. For instance, the secondary "stem ming from" type of benefits finds expression in the demand by processors for the immediate product of the project. But we notice that an estimate of the demand function for that immediate product is an essential basic step in con sidering the primary benefits.^-* Hence, if by some more or less arbitrary accounting procedure we were able to determine the benefits from processing and then added that to the primary benefits, a problem of double counting is ^For more details on this point, see Ciriacy-Wan- trup, Resource Conservation: Economics and. Policies (2nd Rev. Ed.., University of California, 1963), chapter xvii. 50 involved. The secondary "induced by" type poses even more problems. We have noted that the argument to include this type is based on Keynesian economics. In the practice of benefit-cost analysis, however, this type of benefit is computed regardless of underemployment of productive serv ices. It is said that the most "practical" way to take this unemployment into account, for the benefit-cost anal ysis, is through evaluation of primary costs, not through secondary benefits. The justification of this view is that under competitive markets, the fact that productive services are underemployed, is reflected in the prices at which they are available. But in underdeveloped economies with no perfect competition and with rigid structures and little or no mobility, this is not true. The issue is so problematic, that it has even led to the suggestion that all classes of "net secondary bene fits (above all corresponding costs) should be dropped from consideration for the purpose of project selection."77 It 7 6 Ciriacy-Wantrup, Journal of Farm Economics, Vol. 37, No. 4, 1955, pp. 676-689. 77Ibid., p. 680. 51 is thought that the efforts presently invested in justi fying the inclusion of secondary benefits and costs could be employed to greater advantage in a more careful evalua tion of "primary" benefits and costs. There are other problems of measurement beyond, these conceptual difficulties. The benefit of a project to an individual is often defined as the amount of money which he is willing to pay if he were given the market choice to purchase. This concept is evidently derived from the classical economic theory of consumption. A simple assumption of adding the benefits of all people weighted equally is resorted to for comparing and aggre- 78 gating the benefits that accrue to different individuals. This, so far, is conducted, in terms of private benefits and costs. But conducting the analysis on the social level is usually the goal. Choosing between alternative time- streams of social benefits and costs is not so simple. Suffice it to mention the need, to assign a single social value measure to each time stream, and the difficulty in finding the proper discount factor. In underdeveloped. 7Q '“Eckstein, Water Resource Development, pp. 47-49. 52 economies, the weakness--or even the absence--of an organ ized capital market rules out the ease of finding a proper interest rate. Even the interest rate of a perfect capital market is inadequate for this task: unless all other assumptions of perfect competition are also fulfilled, this 7Q particular "price’ ' will have no normative significance. A social time preference, or a social opportunity cost, is required for discounting in such cases. The search for a "perfect" formula to specify the social time preference 80 rate, is said to be futile. A somewhat related question stems from the fact that prices do not accurately reflect the opportunity cost of resources. For an economy on the verge of transforma tion, benefit-cost analysis would have to include an im plicit forecast of economic development in order to esti mate benefits as the structure of the economy evolves, as well as the estimate of true costs over that horizon. In 70 R. G. Lipsey and K. Lancaster, "General Theory of the Second Best," Review of Economic Studies, Vol. XXIV, No. 63, 1956, pp. 11-12. 80 M. S. Feldstein, "The Social Time Preference Discount Rate in Cost-Benefit Analysis," Economic Journal, (June 1964), p. 362. 53 this regard, "shadow" or "accounting" prices are needed, 81 but their correct estimation is difficult to attain. Moreover, our forecasting could not be that accu rate over a very long period. Even with perfect forecast ing of the relevant data about the projects themselves, other information which is necessary may not be available at the time of project formation, or may not be attain able in quantitative form. For instance, there are facil ities whose present use may be abandoned because the pres ent project may provide that particular service better. In evaluating the project under consideration, allowance must be made for displaced facilities. The effects attributable to the project are to be measured by the value of the difference in physical effects with and with out the project, after allowance for any costs of the dis- 82 placed facilities made unnecessary by their abandonment. But this abandonment may not be easily conceived at the Q 1 We have commented on "accounting prices" in some other context in this chapter, see pp. 35-42. 82 United Nations, Formulation and Economic Apprais al of Development Projects, Vol. I, (1951), p. 126. time of formulation of the project, and may only appear 83 several years after the completion of the project. Another example of inavailability of necessary information in quantitative form is in estimating the costs. If we want to measure all the costs of a project, "to whomsoever they may accrue," social costs of taxation should be in cluded. A high level of taxation would influence the whole picture by the distortion and misallocation of re- 84 sources and human efforts. These costs are not possible to measure, although they are significant. As long as they escape measurement, the total cost of the project will not be accurately accounted for. In such a case, the test of economic justification cannot be performed with the benefit-cost analysis unless the margin of benefit over cost is exceedingly large. The relation between benefit-cost analysis and 83 We note here in advance that this criticism will apply as well to our criterion, i.e., the use of consumers and producers surplus. 84 The tax burden, however, is not of the same mag nitude for general income tax, general sales or excise tax, and a selective excise tax. See T. Scitovsky, Welfare and Competition. 55 85 welfare economics has been discussed, by several people. J The criterion, in this regard, is on more or less reason able grounds. Eckstein, for instance, makes a neat deriva tion of the benefit-cost ratio from a welfare function, bringing together the exchange side and the production side of the optimality conditions, in a theoretical frame work worked out with the finesse of derivatives and mar- ginality conditions. We will be content, therefore, with basing our case against the B/C approach on the arbitrari ness and difficulties involved. This ends the short summary and critique of the three criteria. Throughout this expose, we have noticed some similarities in the elements which represent some of their shortcomings on theoretical and practical grounds: their arbitrariness in some sense, and the difficulties encountered in carrying out these tests. The wide margin of inexactness, admittedly recognized by supporters of J. V. Krutilla, "Welfare Aspects of Benefit-Cost Analysis," in S. C. Smith and E. N. Castle (ed.s.), Eco'nom- ics and Public Policy . . . ., pp. 22-33; O. Eckstein, Water Resource Development, pp. 70-79. 56 these criteria, causes damage to the reasonable degree of "neatness" and "precision" which is required to charac terize a measuring rod of a quantitative nature. The Soviet methodology starts with a "norm" whose value seems to have no theoretical rationale. When considerations of developments in other branches--related to the project’s branch--are required, limitations are arbitrarily set at the "immediate ones," and without a precise definition of this term. The national income approach involves a lot of difficulties and. advocates a lot of arbitrary decisions. Problems of using the input-output method were pointed out above, and suggestions for simplifying some of these problems are haunted with arbitrary procedures. The sug gestion to "put small coefficients equal to zero" may end up with a lot of zeros in the matrix if a large number of coefficients are small; especially when there is no way of telling how small is a "small coefficient." Or the suggestion of "considering some sectors to depend, on the general level of production rather than on each production variable" may result in a serious distortion of reality. This would be true if one or two sectors contribute sub stantially to the general level of production but have little or no connection to the sector under consideration. 57 Welfare considerations, liberally defined in terms of efficiency in production and distribution, have not re ceived. special attention by the three approaches. The ; Soviet criterion is said to have only one purpose: ’’the saving in social labor to be achieved., compared, to the cost of labor entailed in the production of capital equip ment; . . . it aims at the greatest possible rise in net 86 production.” The same is true with the national income approach, which puts the emphasis on efficiency in produc tion, but takes this, however, as the basis of welfare. Although the advocates of the third criterion, i.e., the benefit-cost approach, made attempts to formally derive their criterion from a welfare function, their argument basically assumes that perfect competition must reign throughout the product and factor markets, which is not usually true. L. V. Kantorovich, The Best Use of Economic Resources, English Edition, G. Morton (ed.), (London: Pergamon Press, 1965), p. 155. CHAPTER III THE USE OF CONSUMERS' AND PRODUCERS' SURPLUS FOR PROJECT APPRAISAL The criterion for project evaluation which we will empirically apply in our present study has two advantages over the criteria discussed in the previous chapter. First, it has closer affinity with welfare considerations, even when conditions of the competitive model are not com pletely satisfied all over the economy.^ Second, it is an easy-to-handle approach which does not involve many practical difficulties or conceptual classifications of "primary and secondary," "direct and indirect," "stemming from and induced by" effects. However, although it is free from arbitrariness in the structure of the "hypo thesis" itself, it has an element of that weakness involved in the basic "assumption" upon which one of its components, ^We will see later how adjustments are made in such a case. 58 59 i.e., consumers' surplus, has to be based. For a better appreciation of the criterion, to be explained below, we will examine briefly the controversy on the surplus analysis, and on how the surplus concept is applied in decision making. Before we go into this, how ever, the consumers' and producers' surplus will first be defined. Definition of Consumers' and Producers' Surplus One of the most striking examples of how actual originators and pioneers are, in many cases, rarely--if at all--given credit for their early works is the case of consumers' and producers* surplus. Such merit as there may be in discovering the two concepts is Dupuit's. The diagramatic method of presentation is also Dupuit's, or else Jenkin's. Although the term "consumers' surplus" 2 F. Jenkin, "On the Principles which Regulate the Incidence of Taxes," Proceeding of The Royal Society of Edinburgh, session 1871-1872, reprinted in Musgrave and Shoup (eds.), Readings in the Economics of Taxation (Home wood, 111.: R. D. Irwin, 1959), pp. 227-240. 60 is Marshall's, "the essential idea, not every detail, is Dupuit' s. Definition of consumers' surplus.--Dupuit was original in his attempt to measure the social benefits of 4 collective goods. He was the first to note that most people would be willing to pay for the public service more than they actually did pay; and he came to the conclusion that the actual benefit to the community is greater than what is shown by the price of the service. He also drew a diagramatic representation of what we now call "con sumers' surplus"--and what he then called "relative util- ity"--by constructing a marginal utility curve for the collective good, and assuming that the maximum toll for each unit along the curve is to be charged. As additional units of the service are offered, this maximum toll is to be lowered by successive steps, and the total benefit of the facility to the public, in utility term, is equal to J. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), (Fourth Edition), pp. 838-840. 4 A. J. Dupuit, De la Mesure de l'Utilite des Travaux Public (Paris, 1844). 61 the area under the marginal utility curve up to the last unit sold. Dupuit's "surplus" is a money measure of the utility surplus to a consumer from being able to pay the same price for each unit of the commodity. Such is Dupuitfs presentation of his concept of "relative utility.""’ Definition of producers' surplus.--The concept of producers' surplus was also discussed by Dupuit, although he did not draw for it a diagramatic presentation. Pro ducers' surplus arises when the producers sell their serv ices at a uniform per unit price. The "surplus" then equals the "excess of the money they receive over the aggregate marginal cost" of offering the service. Although Dupuit did not draw a supply curve for deriving the pro ducers' surplus (as he drew a marginal utility curve for deriving the consumers' surplus), we can readily see that he clearly implied the use of the industry's supply curve which is perfectly approximated by the industry's marginal 5 It is true that what we have just presented might as well be considered as Dupuit's contribution to "con sumers' surplus" rather than "a definition" of the concept as it stands in the literature today. However, there is not at present a unique definition as we shall see, and Dupuit's original ideas are more suitable for our purpose. 62 cost curve when perfect competition reigns among producers. Finally, the sum total of these two "surpluses" is the measurement of the total benefit of the public good to | the community as a whole. As we have already seen, this sum is comprised of two separate magnitudes more or less different in nature: the producers' surplus is the sim plest and the least controversial concept; a concept it self defined, as a "money surplus," while the consumers' surplus was actually defined by Dupuit as a "utility sur plus," but was expressed in pecuniary terms because of the use of an invariable unit of measurement. It is out of the definition, the nature, and the measurement of this second concept that a controversy was started, with so much time and effort being devoted to refinements of minor "practical" importance. Controversy Over Consumers' Surplus We have chosen to refer to Dupuit’s as "the" defi nition of consumers' surplus. But this does not tell the whole story. There are now in the literature several re lated but different concepts, which led to a good deal of ambiguity and. contributed to the belief of some economists 63 that the practical importance of the surplus analysis is in doubt.6 We have preferred to use the definition of the originator of the concept, and. bring the other concepts in under our brief reference to the controversy. Contributions of Marshall Marshall’s contributions to the concept of con sumers' surplus can be appropriately summarized in one statement: popularization of the idea. This should not be literally interpreted, however, and other contributions to the concept by Marshall should not be overlooked: 1. Marshall discovered Dupuit's invention, but he labeled it in his own terms, "consumers' surplus." More over, he presented his own definition as the "excess of the price which (the consumer) would be willing to pay rather than go without the thing, over that which he actually does pay."^ "Price" here, however, is to be interpreted as the total amount rather than price per I. M. D. Little, A Critique of Welfare Economics, (2nd Edition, New York: Oxford University Press, 1957), p. 180. 7 A. Marshall, Principles of Economics (New York: The Macmillan Co., 1953) (8th Edition), p. 124. 64 unit.® Consequently, it is the difference between the sum of money paid for a given number of units of a com modity X, and the sum of money represented by the rele vant area under the demand curve for that good. This difference is supposed by Marshall to be a money measure of the excess satisfaction which the consumer derives from buying that quantity of X at that particular price.^ Q Ibid., Mathematical Note II. g We observe that Marshall's definition of pro ducers1 surplus is different from his definition of con sumers' surplus in that it is the actual excess sums of money obtained by the more favorably placed firm, as com pared with the earnings of the marginal firm, i.e., it is not a money measure of producers’ satisfaction. This is similar to Dupuit’s definition. The Marshallian pro ducers' surplus triangle is drawn on the basis of the "particular expenditure curve," regarded as the marginal cost curve of the industry for a given output, excluding general economies of production which are due to other than the change in output for the industry as a whole. See Principles of Economics, p. 811. For clarification of the "particular expenditure curve" concept, see J. Viner, "Cost Curves and Supply Curves," Zeitschrift flir National- okonomie, Vol. Ill, (1931), pp. 23-46, reprinted in G. Stigler and K. Boulding, (eds.), Readings in Price Theory, pp. 198-232 (especially pp. 225 and 226. 65 2. Marshall has been credited for a fundamental idea in the surplus analysis; that it should not be re garded as an absolute but rather as a relative concept. His statement that: . . . the chief applications of the doctrine of con sumers ' surplus are concerned with such changes in it as would accompany changes in the price of the commodity in question in the neighbourhood of the customary price . . . testifies that his concern was with the "change" in the size of the surpluses rather than the size of the sur pluses themselves. 3. Marshall also laid the basic assumption on which the famous triangle under the demand curve could be considered an adequate measure for consumers’ surplus: that the marginal utility of money is constant. He was well aware that unless this assumption is satisfied, a fall, say, in the price of a commodity X will result in an increase in the spending power of the consumer, and induce him to buy more of the commodity than otherwise would occur as a result of the change in relative prices; in other words, unless the marginal utility of money is 10Marshall, op. cit., p. 133. constant, the triangle under the demand curve is an over estimation of the consumers1 surplus proper. 4. Marshall then made an easy transition from the individual's consumer's surplus to the community's. After justifying his own analysis on the individual level and considering the "triangle1 1 as the measure for the concept, he followed by equating the collective consumers' surplus from a given commodity with the triangle under the collec tive, or market, demand curve for that commodity. As in the case of individual demand curves, the assumed con stant marginal utility of money is maintained. Also as before, the collective consumers' surplus is treated by Marshall as a relative and not an absolute concept. Hicks' Critique of the Marshallian Measure Although Marshall's concept of consumers' surplus, and its measurement by the triangle under the demand curve 12 were subject to several criticisms, the concept has sur- i:LIbid. , p. 128. 1 2 F. Knight, Risk, Uncertainty, and Profit (Boston 1921), pp. 69n.; Little, op. cit. , chapter x. 67 vived, and was somewhat elated as a result of the sophis ticated theoretical treatment by some critics.13 The Marshallian measure, however, did not enjoy such prestige as did the concept itself. We will not concern ourselves with any philosoph ical argument; we will concentrate instead on Professor Hicks1 critique of Marshall's measure as our theoretical point of departure. The "definition" versus the "triangle."--Professor Hicks' own critique does not pertain so much to the "con cept" itself, as it does to the "measurement." He observed that there is a discrepancy between Marshall's definition and the triangle and he sought to correct the latter. His attempt reveals a genuine concern to maintain the concept as a useful tool for measurements of welfare. His analysis, however, differs from that of Marshall in the sense that it is carried out in terms of "ordinal" rather than "cardi- R. Hicks, "The Rehabilitation of Consumers' Surplus," Review of Economic Studies, Vol. VIII, (1941), pp. 108-116; "The Four Consumers' Surpluses," Rev, of Econ. Stu., Vol. XI, (1943), pp. 31-41; "The Generalized Theory of Consumers' Surplus," Rev, of Econ. Stu., Vol. XIII, (1945), pp. 68-74. 68 nal" utility, and so it is presented with the use of a more powerful tool than what was available to Marshall, i.e., the indifference curves analysis. While it is true that Professor Hicks started out to correct the "triangle,” it is also true that a change in the "definition” has developed during the process. In "rehabilitating” the theory in terms of an ordinal utility system, consumers' surplus has come to be regarded, not as a money measure of excess satisfaction, but rather as the sum of money which is required to be paid to a consumer, or which he would be required jto pay after some change was made, in order to raise or reduce him to the same indif ference level as before. Hicks originally thought that these amounts are identical to Marshall's consumers' sur plus. It was Henderson who pointed out that this is not true unless the income effect is absent from the anal ysis. This point was well taken by Hicks. ■*-^A. M. Henderson, "Consumers’ Surplus and the Compensating Variation," Review of Economic Studies, Vol. VIII, (1941), p. 117. ^J. R. Hicks, A Revision of Demand Theory (New York: Oxford University Press, 1959), pp. 96 n. 2. 69 Subsequently, Professor Hicks observed that these two alternative sums might be identical to the sum of money which Marshall defined as consumers’ surplus: this will be the case only when the indifference curves are vertical displacements of each other, i.e., when the indif ference curves have parallel tangents at the given point on the quantity axis. The assumption of an indifference map having this property, at least over the relevant range, corresponds to Marshall’s assumption of a constant mar ginal utility of money; it is only on this assumption that the two sums, mentioned above, would, coincide and would, equal the usual demand-curve definition of consumers’ sur plus . Hicks’ four concepts.--Professor Hicks presented, a four-concept schema^ which covers all "theoretical” possibilities, open to the consumer, after a change takes place. The four are related., in some sense, to the area under the demand, curve, and yet different from the Mar shallian triangle. The two major classifications are the "compensating 16Hicks, "The Four Consumers' Surpluses," loc. cit. 70 variation" and the "equivalent variation," both of which apply either for a fall or a rise in price. The former is an amount which, when paid or received by the consumer, would leave him on the same indifference curve as before the change; the latter is the sum which, when paid or re ceived by the consumer, would enable him to stay on the same indifference level reached after the change. Two sub classifications of these magnitudes are made according to whether the consumer is free to choose the quantity of the good in question, or is restricted to buy the quantity which he would purchase in the absence of any compensa- 17 tion. A graphical presentation is analyzed on page 71. 18 Professor Hicks has rightly commented. that when the income effect is not negligible, we do not merely get a significant divergence between Marshall's definition and Marshall's measure; a family of different concepts would emerge which could easily be mistaken for one an other. Marshall's measure does not exactly fit any one 17 'For a concise verbal and graphical presentation of these concepts, see E. J. Mishan, "A Survey of Welfare Economics, 1939-59," Economic Journal, (June 1960), p. 240. 18 Hicks, A Revision of Demand Theory, pp. 177-178. Income (All Other Goods) 71 A 1 A A 2 II 0 Q/Unit Time CVp = AA2 EVp = AAX CVq = CD EVq = EB CVp: The maximum income the consumer will pay for the privilege of buying X at the lower price (P2) and remains at his initial level of welfare. EVp: The minimum sum which he will accept to relinquish the opportunity of buying at the lower price and still reach the welfare level he would reach if he did not relinquish P2* CVq : The maximum he will pay for buying at P2 if, at the same time, he is constrained to buy OM2, and remain at initial level of welfare. EVq : The minimum he will accept to return to the higher price if, at the same time, he is constrained to buy OM^, and so he would reach welfare level he could have reached, without being constrained to OM^. DIAGRAM 1 72 of these, but it lies between the compensating and the equivalent magnitudes. But if the money which the con sumer would pay for the good--if he had not got it--and the money which he would accept in exchange for the good-- if he had it already--are much the same, the compensating variation and the equivalent variation will coincide, and Marshall's measure is a good measure for either. The Case for Marshall's Measure Hicks' greatest contribution to the concept of consumers' surplus is that he saved it from collapse when the cardinal utility analysis was superseded by the ordi- nality of indifference curves. But for all practical purposes, we feel that he achieved only a finesse of theo retical perception, but failed to present a "practical” alternative measure; the Marshallian triangle retains its practicality as a meaningful measure amenable for empiri cal treatment of issues of policy. Superiority of Marshall's Method for Empirical Measurement Plausibility of the assumption of constant marginal utility of money.--We have seen that the assumption of the 73 constant marginal utility of money is basic for considering the Marshallian triangle a proper measure of consumers' surplus. Marshall's critics have attempted to throw the assumption away--as unrealistic--in order to discard the triangular method. But nonrealism of "assumptions" does not generally invalidate a "theory"; assumptions which are an inaccurate description of reality have often underlined powerful theorems. In fact, a "theory" would be important if it abstracts the crucial elements from the complex circum stances surrounding the phenomenon under study and gives an explanation on the basis of these crucial elements alone.^ However, Professor Hicks himself indicated that the constant marginal utility of money assumption is a "normally acceptable simplification." To satisfy this condition, he said, we need only to assume that the con sumer is spending a small fraction of his income on that 19 M. Friedman, "The Methodology of Positive Eco nomics," in Essays in Positive Economics (Chicago: Uni versity of Chicago Press, 1959), p. 14. 74 20 particular commodity. This does not add to what Marshall has already said. Limited usefulness of Hicks' four concepts.--Pro fessor Hicks made a great effort to retain much of the theory, although on a different theoretical basis, but rejected the Marshallian measure. His attempt to substi tute his own resulted, in four different methods, in terms of amounts of money which would have the effect of off setting the gains or losses, from a price change, if these amounts are taken from or given to the consumer. However, the question which originally occupied Marshall's mind, and. which interests us in the present study, is the esti mation of gains or losses; and we shall see below that the amount of money which would offset either of these is not necessarily the same thing as the gain or loss itself. Moreover, Professor Hicks’ four concepts have very little, if any, practical use for measurement purposes. In his own words: . . . it is certainly not to be supposed that . . . 20 J. R. Hicks, Value and Capital (Oxford Clarendon Press, 1939), p. 32. 75 the magnitudes we have been discussing could, be identified in any practical instance; so far as the theory has any application, it is not a direct appli cation of that nature.2- ^ Marshall’s measure a better approximation,--We have stated above that the gain or loss to consumers, as a result of a fall or rise in the price of a commodity, may not necessarily equal the amount of money which, if ex tracted from or added to a consumer’s income, would affect these magnitudes. Let us visualize the Hicksian compensated demand curve,22 reproduced on page 76, which is drawn under the assumption that income along the curve is continually adjusted in order to leave the consumer no better and no worse off than before the change in price. Starting from a point of high price on the uncompensated demand curve, the compensated curve for a fall in price is sloping down ward and will lie to the left of the uncompensated curve. Alternatively if we start from a point of low price on 21 Hicks, A Revision of Demand Theory, p. 176. 22Ibid., pp. 79-81. 76 Price A A, 2 O Quantity/Unit Time DD : Uncompensated Demand Curve BB^ : Compensated Demand. Curve for a fall in price from OA to OA2 C2C : Compensated Demand Curve for a rise in price from OA2 to OA DIAGRAM 2 77 the uncompensated curve, the compensated demand curve for a rise in price slopes upward with a negative slope but will lie to the right of the uncompensated demand curve. In other words we have the two compensated demand curves (for a fall and a rise in price) drawn on different sides of the uncompensated curve and intersecting it, alter natively, at the higher and the lower price with which we start, i.e., the two compensated curves, together with the higher and the lower price lines, would form a sort of a parallelogram bisected by the uncompensated demand curve. To put it differently, the uncompensated demand curve is actually halfway between the two compensated demand curves. There is a short step left to find ourselves fall ing back on the old Marshallian method: the halfway meas ure is a better approximation if we could be convinced that the two other curves respectively underestimate the gain and overestimate the loss. This was recently shown to be the case unless a certain condition is met.^ Re sorting to the diagram referred to above, it was demon- D. M. Winch, "Consumers' Surplus and the Compen sation Principle," American Economic Review, (June 1965), pp. 395-424. 78 strated that while the area under the compensated demand curve accurately measures the compensating variation of a fall in price if that variation is actually taken from the consumer, it underestimates the extent of the gain if the variation is not actually deducted. By similar reasoning, the compensating variation for a price rise, if it is actually added to the consumer’s income, will exceed the consumer’s loss. In other words, the consumer’s loss from a price rise if it is not compensated for equals his gain from a price fall if it is equally not compensated for; and the gain or loss are then measured simply by the area 24 under the uncompensated demand curve, i.e., we are back to the Marshallian triangle. Use of Marshall's Measure for Economic Policy Before we start the discussion of project appraisal by using the area between the demand and supply curves, we will cite two examples of how the concept of ’’surplus" would, be utilized for economic policy. 24 Ibid., p. 399. 79 The "dead loss” of excise taxes.--One of the ear liest examples of using the area between demand and supply 25 curves for issues of policy was given by Dupuit in 1844. His classical argument shows how the imposition of an ex cise tax would result in a loss to the community: by com paring tax revenue with the loss in consumers’ and pro ducers' surpluses, he found that there is a further "dead loss," estimated by Dupuit to be equal to \ T^. A where is the tax rate on commodity i, and A is the re_ Q fL duction in the equilibrium quantity of commodity i. 27 Expanding on this argument, H. Hotelling advo cated that sources of finance for construction of public 25 R. Frisch, "The Dupuit Taxation Theorem," Econo- metrica, 1939. 26 For a somewhat different graphic presentation, see K. Boulding, "The Concept of Economic Surplus," Ameri can Economic Review, (December 1945), pp. 851-869, re printed in W. Fellner and B. Haley (eds.), Readings in the Theory of Income Distribution (Blakiston, 1951), pp. 638- 661 (especially pp. 651-654). 27 H. Hotelling, "The General Welfare in Relation to Problems of Taxation and of Railway and Utility Rates," Econometrica (July 1938), reprinted in R. Musgrave and C . Shoup (eds.), Readings in the Economics of Taxation (Homewood, 111.: R.D. Irwin, 1959), pp. 139-171. 80 utilities should be a tax system which would minimize the "dead loss” for society. He observed that the ratio of dead loss to tax revenue depends greatly on the slopes of supply and demand curves in the neighborhood of equilib rium; the loss will be slight if either curve is very 28 steep in that neighborhood; the best tax in this respect, he said, would be a tax on the "site value of land” where the dead loss drops to zero, since the supply curve is essentially vertical. Other suggestions include income 29 tax and inheritance tax. A criterion for public utilities.--A further elab oration on the use of the concept of consumers’ surplus was also made by Hotelling with regard to the superiority of a toll-free bridge, in terms of total benefits to so- * 20 ciety, over a pay bridge. Assuming a linear demand 28 Ibid., pp. 154-155. 2^The advocacy of ”income tax” as preferable to "excise tax” was criticized by A. Lerner; since income tax is a kind of "excise tax” on the supply of efforts. See R. Frisch,”The Dupuit Taxation Theorem.” 30 Hotelling, op. cit. , pp. 159-160. 81 function, Hotelling could easily deduce that the toll-sys- tem has only 50 per cent efficiency in providing new bridges, and 75 per cent efficiency in use if the bridge is already built; this is readily seen because, for society as a whole, building the bridge would be beneficial if the total area under the demand curve and above the price line (price = zero in this case) is greater than the sum of interest plus amortization plus maintenance services. How ever, if the decision is to build the bridge out of tolls to be charged for its use, it will not be undertaken unless the area of the largest rectangle to be fitted under the curve exceeds the three aforementioned cost items. The Use of Consumers* and Producers' Surplus For Project Appraisal 31 In one of his latest works, Professor G. Tintner suggested using the surplus analysis for economic evalua tion of projects. The gist of his argument is to identify the given project with a shift parameter which would be 31 G. Tintner, The Econometrics of Development and Planning (First Draft, 1964), pp. 500-505. 82 incorporated into the supply function--of one or more commodities--relevant to the project, and which would determine the degree by which the function is expected to be lowered as a result of the project. The demand func tions) for the same product(s) would most probably in clude a similar shift parameter, although of different estimated value, and will be moved to the right as a result of income generated or due "to propaganda.” Esti mates of these two functions before the project is under taken are to be made, and the area between the two curves is to be calculated, by the line integral, where f(q) and. g(q) are the demand, and. supply functions respectively; Xq is the equilibrium quantity of commod ity X; and a^O. After estimating the shift parameter(s) , the terminal positions of the demand, and. supply curves could, be determined, and. a new line integral calculated. The difference between the values of the initial and. the terminal line integrals is then to be compared with the cost of the project. f (q) d q 83 The criterion consists simply of estimating demand and supply equations from a relevant set of data, and a mathematical process of integration. No difficulties are posed for its application even when we take into consid eration that supply and demand functions of certain com modities may be interdependent; the estimation of equa tions, and the process of integration would simply take this fact into account by using demand and supply function for, say, commodity i in the form, 9i " 9i ^2* * ’ * * qn> and the line integral would be Thus, the would be the estimate of the area between the two curves where 84 Marginal cost pricing and its relation to economic welfare is an established principle to the justification 33 of which we could add nothing new. Moreover, the supply curve is properly approximated by the marginal cost curve of the industry on the assumption that producers are price takers rather than price makers. If prices then are solely determined in the market by the play of supply and demand conditions, i.e., by intersection of demand and supply curves, the comparison between the initial and terminal positions of these curves, in terms of areas be tween them, is more or less based on marginal conditions underlying the analysis of economic welfare. With further 32 Hotelling has shown that the integrability con ditions, i.e., h^/ q. = h^/ q^ is required in such a case, and has also demonstrated that there is a good reason to expect these integrability conditions to be satisfied, at least to a close approximation, in an extensive class of cases. Satisfying this condition guarantees that even when the path of integration between the same end points is varied, the same value of the integral would be ob tained. See H. Hotelling, "Demand Functions with Limited Budgets," Econometrica, (1935), pp. 66-78. 33 N. Ruggles, "The Welfare Basis of the Marginal Cost Pricing Principle," Review of Economic Studies, (1949), p. 29. 85 adjustments in the cost function, this quantitative meas ure could be brought closer to satisfying more marginal conditions. This last statement deserves further comment. Bergson's^ first-order conditions for maximizing welfare require, among other conditions, that the marginal value productivity of each factor be equal to the price of that factor. We might then encounter some discrepancy when we calculate the area in the terminal position of the two curves, if factors used in the new project were drawn from other uses where competition does not reign, i.e., where, say, the prices of the factors exceeded their mar ginal costs. This problem, however, could easily be solved by some correction in the cost function of the new project: raising the marginal cost by an appropriate percentage 35 before integrating the area. 34 A. Bergson, "A Reformulation of Certain Aspects of Welfare Economics," Quarterly Journal of Economics, (1938). 35 For more details, see Little, Critique of Welfare Economics, pp. 174-176; E. Mishan, "Survey of Welfare Economics, 1939-59," pp. 241-245. 86 36 Finally, the only arbitrary element involved in the method is that part which underlines the concept of consumers* surplus itself. But the idea of "relativeness" as seen above works to the advantage of ridding the method of most of this weakness. In the case where the supply and demand curves shift more or less at the same pace to the effect that equilibrium points lie within a reasonable range which could be approximated by a horizontal line, a close-to-the-same degree of arbitrariness would be involved in the measurements of the initial and the terminal situa- 36 The criterion as expounded by Professor Tintner seemed to leave a certain margin for a decision to be taken by an "expert" to determine the value of the shift para meters. This appears to leave the possibility that dif ferent experts may give different estimates. With the state of the art making very rapid progress, the possibil ity of different experts giving very close--or similar-- estimates for the supply shift-parameter, is greatly en hanced. The demand shift-parameter however might not have this advantage especially when the shift is the result of "propaganda." After discussing this point with Professor Tintner, he suggested the inclusion, in the supply and demand functions, of variables which will themselves under go a drastic change in magnitudes as a result of the proj ect . However, this procedure may not be always possible; in these cases, there may be no alternative to the re liance on experts to estimate the shift parameter. 87 tions, and we may feel justified to exempt the "difference" between the two from this weakness. It is only this "dif ference" which is the crucial element in this criterion for project appraisal. CHAPTER IV A STUDY ON THE ASWAN HIGH DAM We will here apply the method of consumers' and producers' surplus, presented in the previous chapter, for economic evaluation of the Aswan High Dam. Before we start the quantitative study, we will summarize briefly the economic conditions which necessitated the decision to undertake such a mammoth project. Background The typical situation of Egypt at the beginning of the 1950's was a case of underdevelopment characterized by a rapid rate of population growth on a rigidly limited land area already cultivated to capacity.^ The main fea tures of this background are overpopulation, disguised unemployment on the land, severe unemployment in urban centers, a less than sufficient industrial activity to add ^D. Warriner, Land Reform and Development in the Middle East (London, 1957), p. 15. 88 89 a modern sector to the agrarian economy, and an institu tional structure inimical to economic development. From 1917 to 1954, the population increased from 12.75 million to 22.65 million (Table I). The natural rate of population growth increased from 15.4 per 1000 in 1936, to 28 per 1000 by the end of the 1950's.^ The in crease in population reflects the fact that the crude birth rate maintained an average of about 42 per 1000, while the death rate showed a declining trend from 28.9 3 per 1000 to 15.7 per 1000 over the same period. The increase in arable land was much more modest. Over the period 1897-1947, population more than doubled, while the cultivated area increased by only 14 per cent. Through 1962, population had tripled, while land area in creased by 18 per cent. (See Table II.) Population density is one of the highest in the 4 world.. In 1952, the cultivated area was supporting 2 National Bank of Egypt, Economic Bulletin, Vol. XVI, Nos. 1 and 2, (Cairo, Egypt, 1963), p. 6. ^Ibid., p. 6. 4United Nations, Department of Economic Affairs, Land Reforms, Defects in Agrarian Structures as Obstacles to Economic Development (New York, 1951), Appendix X. Year 1917 1927 1937 1947 1948 1949 1950 1951 1952 1953 1954 90 TABLE I POPULATION OF EGYPT Average Annual Population (OOO) Increase 12,751 1.4 14,218 1.1 15,933 1.2 19,022 1.9 19,494 C M • C M 19,888 2.1 20,393 2.5 20,872 2.3 21,473 2.9 22,062 2.7 22,651 2.7 UAR, Statistical Year-Book, 1954. 91 TABLE II CULTIVATED AREA IN RELATION TO POPULATION Year Population (millions) Cultivated Area (million acres) 1897 9.7 5.1 1907 11.2 5.4 1917 12.8 5.3 1927 14.2 5.5 1937 15.9 5.3 1947 19.0 5.8 1949 9 • O • • o C M 5.8 • • • • • • 1962 « • • • 27.3 • • • • 5.9 Source: Egypt, Permanent Council of Public Services, Eco nomic Sub-Committee of the National Population Commission, The Population Problem in Egypt (Cairo, 1955), p. 22; UAR, Statistical Yearbook, 1963. 92 22 million people, out of which 8.5 million were actively employed, but there were 16 million dependent on the land. It was estimated that 5 millions, i.e., 30 per cent of total agricultural population, were surplus population on the land.~* This was mainly due to a large natural increase in the farm population, and a scant movement of people from farm to non-farm occupations, far from sufficient to bring about an equilibrium in the distribution of the labor force. This is one of the most readily recognized effects on agriculture of industrial unemployment and of smallness of the industrial sector, both of which characterized the Egyptian economy and. formed a strong barrier to migra tion.^ Land productivity in Egypt is considered one of Q the highest in the world.. The land produces more than ^Warriner, op. cit., p. 16. ^For a theoretical explanation of the natural ten dency for a high birth rate of farm population, see: H. Leibenstein, Economic Backwardness and. Economic Growth (New York: John Wiley and, Sons, 1957), chapter x. 7 T. Schultz, Agriculture in an Unstable Economy (New York: McGraw-Hill, 1945), pp. 30, 98. g FAO, Year-Book of Food, and. Agricultural Statis tics, 1951. 93 one crop a year, and consumption of fertilizers per acre is already fifteen to twenty times as much as all coun tries of the Middle East, as can be seen in Table III. High crop yield per acre in Egypt is shown by the comparative figures in Table IV. However, this high land productivity is accompanied, by a very low productivity of labor. Outputs per acre are reasonably high, while output per man is extremely low. Egyptian national income esti mates^ show that the average gross agricultural output per feddan"*"0 in 1953 was L.E. 63, ^ and the average net was L.E. 43. Figures for income per head of active agricul tural population amounted to L.E. 34 before rent is de ducted; after this deduction income per head is only L.E. 25. Some comparisons have been made between this situa tion and that of a group of fourteen West European coun- Ministry of Finance and National Economy, National Income of Egypt for 1953, Official Estimates, (Cairo, 1955). 10One feddan equals 1.038 acres. 11L.E. means "Egyptian Pound" = $2.78 at the 1953 rate of exchange. The official rate at present is $2.3 94 USE OF TABLE III FERTILIZERS IN THE MIDDLE (In 1,000 Metric Tons) EAST Fertilizer Egypt Others Nitrogen 109.0 5.8 Phosphate 18.0 1.5 Potash 2.6 Source: FAO, UN, Agricultural Problems in Middle East, 1951. TABLE COMPARISON OF (Average 1948-1950: IV CROP YIELDS 100 Kg. per Hectare) Country Cotton Maize Wheat United States 3.2 24.6 11.1 United Kingdom - 26.8 Egypt 5.5 24.9 18.0 Europe 1.5 14.3 14.5 Source: FAO, Year-Book of Food and Agricultural Statis- tics. 95 1 P tries. ^ Results have shown that, for the European group, average net output per acre in 1950 was b. 24, while average net income per head of the active agricultural population was L. 190. As it was phrased succinctly, Egypt’s land produces twice as much per acre as most European countries, and its labor earns only one-seventh I Q as much. Income is unequally distributed, as a result of unequal distribution of land and. capital ownership. Table V shows that in 1958 1 per cent of the rural population controlled, more than 35 per cent of the income of that sector, while 73 per cent were landless with an average per capita income of L.E. 3.5 (= $8.05 at the present rate of exchange). The ’’ bourgeoisie and aristocracy” which represent 3 per cent of urban population earn 34.5 per cent of the income of that sector, while 51 per cent of the urban population earn only 4.3 per cent of the sec tor’s income. More than 2.6 million persons in 1952 12 UN, ECE and. FAO, Output and Expenses of Agricul ture in Some European Countries, First Reprint (Geneva, 1953), p. 16. 13 Warriner, op. cit., p. 20. 96 TABLE V DISTRIBUTION OF INCOME (1958) Total L.E. (000) Popula tion % Total Income L.E. million Per Capita Income (L.E.) A. Urban: Employment, unspec if ied. 2 983 37 • • • • • • Domestic servants 934 12 20 21.4 Unskilled workers 186 2 5 26.8 Handicraft workers 400 5 16 40.0 Workers of mod ern industry and transport 790 10 48 60.8 Clerical em ployees 736 9 94 127.7 Middle class 614 8 83 133.5 Bourgeoisie and aristocracy* 240 3 203 845.8 Total 8 000 100 587 73.4 B. Rural: Landless 14 000 73 50 3.5 Poor (below 1 feddan) 1 075 6 7 6.1 Intermediate sta tus (1-5 fed.) 2 850 15 76 26.8 Rich (5-20 fed.) 875 5 76 87.4 Rural capital ists, above 20 feddans. 150 1 116 773.3 Total 19 000 100 325 17.1 Source: Tiers Monde, July-September 1960 and April-June 1961. ♦Includes landed aristocracy, estimated at 50,000; this explains why figures for rural population do not add up to total. 97 (i.e., 94 per cent of the owners) owned only 35 per cent of the land while two thousand (i.e., 0.7 per cent of the owners) own 20 per cent of the land. (Table VI.) With the population pressure on the land, rapid increase of population, and few industrial employment opportunities available, the labor force continued to grow, with the ’ ’absolute” number of unemployed labor show ing a continuous upward trend from 1942 (about 2 million) to 1959/1960 (about 2.8 million).1^ It became clear that the only chance of economic survival would be to win the race between the population increase and development of additional resources. More land to alleviate population pressure, in the short run, and more power to stimulate, for the long run, a process of radical transformation of the country’s basically agrarian structure into an industrial one, capable of generating enough momentum and income to support an ever increasing population--became the two prominent solutions 14 United Nations, Statistical Year-Book, 1963, Table 10; National Bank of Egypt, Economic Bulletin, Nos. 1, 2 , p. 8. 98 TABLE VI DISTRIBUTION OF AGRICULTURAL LAND BY SIZE OF HOLDINGS (1896 and 1952) 1896 1952 Number Area Number Area of Owned of Owned Owners (feddans) Owners (feddans) Below 5 feddans 611 000 944 OOO 2 642 000 2 182 000 From From 5-10 1 10-50/ 144 000 1 816 000 79 69 000 OOO 1 226 291 000 000 From 50-100 6 000 429 000 From 100-200 > 12 000 2 192 OOO 3 000 437 000 Over 200 2 000 1 117 000 Total 767 000 5 002 000 2 801 000 5 982 000 Source: National Bank of Egypt, Annual Statistics, Economic Bulletin, No. 3, 1961. 99 in the minds of policy makers. The Aswan High Dam The Need for the Aswan Dam Since Egyptian agriculture depends on irrigation rather than rain, the direct prerequisite for increasing the area of arable land is the creation and improvement of irrigation and. drainage facilities. Egypt does not seem to be particularly rich in minerals, but it should be kept in mind that no adequate survey has been yet made except for a small fraction of the country.-*-5 Deposits of iron ore, phosphate, manganese, and. other minerals have been discovered and mined, some of them since the early 1930*s.^ But lack of a cheap source of energy remains the main handicap. Although Egypt was the first Middle Eastern country to start oil extraction in 1911, it is still a minor producer. There 15 L*Orient, January 20, 1962. ^C. P. Issawi, Egypt in Revolution (London: Ox ford University Press, 1963). 100 - i are no coal deposits of good quality; those deposits 1 R recently discovered are said to have coal of a low heat and high gas content. Coal importation would pose a continuous threat to the efficiency of any serious indus trial plan. Attention was drawn to the River Nile with a view to providing the necessary water for reclamation projects for agriculture, and creating the necessary hydroelectric power for the purpose of industry. The annual water requirements for the UAR amount to 52 billion cubic meters. The annual yield of the Nile averages 84 billions. This yield, however, may--in poor years--drop to 45 billions, endangering agricultural pro duction, and may--in good years--rise as high as 150 bil lion cubic meters, again endangering the country with the perils of flood. Large quantities of water, amounting 17 With the exception of South Africa and Southern Rhodesia, Africa appears deficient in coal. See D. W. Fryer, World Economic Development (New York, 1965), p. 315. 18 Al-Ahram, November 4 and 9, 1961. Judged to be suitable for steam engines. 101 sometimes to 100 billion cubic meters, find their way 20 annually to the sea without use. All dams already built on the Nile, including the old Aswan Dam (built in 1902), are incapable of storing water during the flood season. They were constructed for annual storage to be used later on, during the same year, when the natural yield of the 21 river falls below the requirements of agricultural crops. Hence came the idea of a large reservoir, capable of re taining the entire volume of flood waters, and regulating 22 their utilization over the years. After the technical 2 ^ and. economic feasibility was established, a decision for Aswan High Dam, Information Department, Cairo, May 15, 1964, p. 7. p I R. El-Mallakh, "Some Economic Aspects of the Aswan High Dam Project in Egypt," Land Economics, Vol. XXXV, (February 1959), pp. 15-23. 22 The reservoir behind the dam is intended to have a capacity of 130 billion cubic meters, with 25 per cent increase in water supplies. See Warriner, op. cit., p. 22. The Aswan Dam project had been discussed since 1947, but it remained only a blueprint until 1954 when it was brought up for serious considerations. The original plan was sug gested by Adrien Daninos, an Egyptian engineer, to the ministry of public works. 23 West German firms drew up designs which were ap proved by an international committee of consultants. Pro fessor K. Terzaghi of Harvard University gave his techni cal recommendations to the committee. 102 action was taken in 1954. Policy makers saw that the project constitutes Egypt's main hope of broadening the narrow strip of land, and of widening the base of the econ omy by a comprehensive program of industrialization. Industrial and Agricultural Effects The project is viewed as the cornerstone for the country's industrialization. Hydroelectric power will be generated at a relatively cheap cost. The Permanent Coun cil of National Production estimated that, after construc tion, the new Dam with eight power units, together with the old dam, will generate an output of approximately six billion K.W.H. This power is planned to be distributed between fertilizer production (1.8 billion K.W.H. ), irri gation (0.9 billion), and the rest (3.3 billion) to be supplied to Cairo and the delta region for the purpose of expanding other industrial projects as well as for domes tic consumption. In the second ten-year period, of the project, a similar number of units would be added. The High Dam alone would then account for 8.1 billion K.W.H. out of an aggregate (for the two dams) of 10 billion K.W.H. per year. It was also estimated by the Permanent Council that the requirements of power will amount to from 103 24 11.8 to 13.5 billion K.W.H. by 1975. Availability of electric power at a low figure, estimated to be the equiv alent of $0.0144 per K.W.H. would provide a cheap source of energy, and is expected to lower the import requirement of energy generating products (such as petroleum and coal) saving from L.E. 15 to L.E. 20 million annually in foreign exchange Short range employment opportunities will be widened by the absorption of thousands of laborers by the 2 6 Dam construction. But the long run gains of creating a skilled labor force is more important for future indus trial development. Development and expansion of steel, cement, textiles, quarrying industries are some of the conspicuous gains, but the overall benefits for indus trialization in the long run would be beyond comprehen sion and enumeration at this stage of economic development. 24 R. El-Mallakh, op. cit., pp. 18-19. This esti mate, however, seems not too accurate, since it was made before the First Five-Year Plan was even drawn. 25 For a picture of the foreign exchange problems for Egypt, see the annual report of the president of the Board of the National Bank of Egypt, March 1958. 2 ^ UAR, Information Department, o j d . cit. 104 The agricultural aspects of the benefits derived from the Dam are estimated to be as great. It is calcu lated that 1.3 million acres would be added to the exist ing six million. Reclamation of the new area is supposed to start during the construction period of ten years, 27 starting January 1960. During the first five years, 200,000 to 500,000 acres are expected to be brought under cultivation. Another 200,000 are expected to be added during the following five years. The 600,000 remaining 28 acres would be reclaimed after completion of the Dam. The project will enable the expansion of rice cultivation, mainly for export. It is estimated that an adequate water supply would be ensured for the cultivation of 700,000 acres of rice. Increased productivity of land is expected through improvements in draining conditions as a result of lowering the water table.^ It is estimated that inadequacy of draining facilities has been responsi ble for loss in yields amounting, in some cases, to 50 per cent. 27 UAR, Information Department, Aswan Dam, 1964. pQ R. El-Mallakh, op. cit. , p. 17. 2 ^ U A R , information Department, op. cit., p. 8. 105 Estimated Cost For estimates of the cost, there is no agreement. One estimate has been made by the International Bank for Reconstruction and Development, in its comprehensive sur vey and study conducted during the period 1954-1956. The 30 bank estimated the cost at L 465 million (at the 1956 rate of exchange of L 1.0 = $2.78). About $400 million are required in foreign exchange to supply machinery and 31 equipment. Figures published by the Egyptian Informa tion Department indicate that L 27.5 million of costs are devoted to hydroelectric machine construction, and L 50.0 million are costs of transmitting electric power and for 32 building several stations for that purpose. Other pub- 33 lications put the last two items at L 90 million. 30 R. El-Mallakh, op. cit., p. 19. The estimate is said to include costs of construction of the Dam, of housing and resettlement on the newly reclaimed land over the entire period. UAR, Information Department, The Major Projects (Cairo, 1964). 33 UAR, Ministry of Planning, Progress Under Plan- ning (Cairo, 1964), p. 38. This item will be of interest to us later in the process of evaluation of the project. 106 Economic Evaluation of the Project We will apply the criterion of Chapter III to an appraisal of the Aswan High Dam. For a complete study in this regard, demand and supply equations of all products which would, be affected by the construction of the Dam need to be estimated, and. the degree by which these curves will shift, as a result of the project, need, to be calcu lated. This evidently includes the agricultural sector as well as a substantial number of branches in the industrial sector which will be affected, either because they use agricultural products as raw material, or because they would expand., or substitute, the use of electric power for other sources of energy, or because of both. Difficult to Obtain Data for Industry As we already noted in the introduction (Chapter I), one of the limitations of our study was imposed, by the unavailability, to us, of the relevant data from the in dustrial sector. Although we are aware that many of the effects of the Dam on different branches of industry 107 could, not be totally conceived of at this stage, ^ there are certain branches, such as the textile industry which uses both agricultural raw materials and electric power, that could have served, a good, purpose had the da.ta been available. Faced with this problem, we had to limit the scope of our study to the agricultural sector alone. Limited Reliability of Our Data for Agriculture The set of data used, for estimating domestic demand and. supply functions for agricultural products was not completely available in the form that we used, in this study. The figures are taken from many sources^"* and the time series for several variables were not com plete. We had. to fill in the gaps by statistical estima tions, in some cases for several years, and. our study is performed, with only nineteen observations. The price in dex for agricultural products is worked, out and composed 34 And hence it may be even difficult to specify all the industries about which we need. da.ta for our esti mations . 35 See Appendices I-IV. 108 of price indices of a few main crops, together with a price index of an aggregate variable named "other crops," with each index’s contribution to the general price index weighted by the share of the value of each variable in 36 the total value of agricultural output. Because of the large number of processes performed to complete the data we feel that its reliability may be somewhat limited. Appraisal on the Basis of Agriculture Alone Our analysis in the remaining part of the disser tation is conducted on the basis of certain assumptions. We assume that the land-increase aspect of the project is the only expected result in the agricultural sector, i.e., the increased productivity of land as a result of the project is not taken into account. The reason, again, is the unavailability of any clue to the quantitative magni tude of the increase in productivity both as a result of improved conditions of draining, and of increased use of fertilizers as a result of the change in its price due to expansion of its production. The assumption then does not 36 See Appendix III, p. 185. 109 represent the true picture, but is necessitated by the fact that we have no data on the technical relation be tween drainage and. percentage improvement in productivity of land.. Moreover, since we have no idea about supply and demand, conditions of fertilizers, there is no way of quantifying this improvement. We also assume that the conditions of agricultural exports, and. imports, will remain the same in a ’’relative sense.’’ This again is not a realistic picture. But since the demands of the industrial sector for agricultural raw materials represent an important element in determining how much of these materials could, be spared, for exports, and since we have no access to data to estimate present, or future, industry demands from the agricultural sector, we have no quantitative idea of the magnitude or even the direction of the change in exports and. imports. We, thus, proceed, to estimate supply and demand for agricultural products and to calculate the effect of the project on the area between the two curves. All the calculations are included in an appendix to this chapter (page 137). 110 Supply and Demand. Estimates Form of the equations-A mathematical formulation of the law of supply and demand was first given by Cournot 37 xn 1838. Cournot stated that demand is a function of the price, i.e., D = f (P). He made only one assumption as to the properties of the function: that as a rule it is a diminishing function. From this single assumption it follows that f' (P) 0« The condition f* (P) <^1.0 is OQ regarded as a generalization of market experience. no Supply was defined in a similar fashion,"' i.e., S = g (P). Market experience led to the assumption that g' (P) 0. Economic theory, however, gives no suggestion as to whether the functions are linear or non-linear. But for practical purposes, linearity provides a simplifica- 37 A. A. Cournot, Recherches sur le principe mathe- matigue de la th£orie de richesse (Paris, 1838). 38 O. Lange, Introduction to Econometrics, (New York, 1963), p. 97. That the function has a first (and probably more than one) derivative, i.e., a continuous function, is a result of further development of the market research. But not by Cournot. O. Lange, loc. cit. Ill tion that facilitates the analysis. When the economist wants to estimate unknown parameters on the basis of ob served values of the economic variables, he would be prin cipally interested in having a function which is linear, 40 at least in the parameters if not in the variables. Our demand and supply equations are assumed to be linear, both in the parameters and in the variables. The structural relations are assumed to be of the form: Demand: K0 + K2X2(t) + K3X3(t) ^ SuPP1y : X1(t) = Lq + LaXa(t_1} ♦ L4X4(t) (2) where, X^^j in both equations is the quantity of agricul tural products at time t, with exports and imports taken into account; X2(t) t^ ie Price agricultural products at time t; Xg^ is the price of agricultural products with a lag of one period; X^^j is national income at time t; and X^^j is the amount of cultivated land, at 40 We should, notice that functions which are non linear in the variables may achieve a higher degree of realism. We also notice that the curvature of an economic relation can be displayed by a non-linear function which can be transformed into a linear one. 112 time t. In other words, the quantity demanded in time t is a function of price and national income of the same period, where K , K are the regression coefficients of 2 3 the two variables, and Kq is the constant term of the equation. Quantity supplied in time t is considered a function of the price of one period earlier,^ and of the cultivated area in time t. The parameters L2 and. are regression coefficients of the variables X„, ^ and X ... 2(t-1) 4(t respectively, and the constant term of the supply equa- • T 42 txon is Lq . Equations overidentified.--A familiar concept in econometrics is that two structural equations may be ”ob- 43 servationally equivalent,” i.e., they may have exactly 41 For the rationale of the lag in price for supply of agricultural commodities, see M. Ezekiel, ”The Cobweb Theorem,” Quarterly Journal of Economics, (February 1938), pp. 255-280. 42 Inclusion of national income (X«) in the demand equation, and of cultivated land. (X^) in the supply equa tion, was intended to affectuate the shifts in both the supply and demand curves, as these two variables will undergo substantial quantitative changes as a result of the Aswan High Dam. See Chapter III, fn. 35. 43 A. S. Goldberger, Econometric Theory (New York, 1964), p. 306. 113 the same implication about observable variables. If so, then no possible set of observations would enable us to conclude whether the estimated relation is, for instance, a demand or a supply equation. The analysis of the identifiability of a struc tural equation in a linear model consists in a study of the "possibility of producing a different equation of the same prescribed form by linear combination of all equa tions." If this is "shown to be impossible, the equation 44 in question is thereby proved to be identified." A necessary condition for identifiability of a structural equation within a linear system is that the number of variables excluded from that equation be at least equal to G-l, where G is the total number of the endogenous variables (which must be equal to the number of 45 structural equations in the system). 44 T. C. Koopmans, "Identification Problems in Economic Model Construction," Econometrica, Vol. 17, (April 1949), reprinted in W. C. Hood and T. C. Koopmans (eds.), Studies in Econometric Methods (New York, 1953), p. 38. 45 G. Tintner, Econometrics, p. 157; and The Econ ometrics of Development and Planning, p. 143. 114 There is, however, a necessary and sufficient condition which requires that, at least, one non-vanishing determinant of order G-l can be formed from the coeffi cients with which the variables excluded from the equa tion appear in the G-l other structural equations.^ Our system of equations contains G=2 structural relations, i.e., demand and supply equations, and two endogenous variables (xi(t)» X2(t)^* i*e*> the really economic variables "whose simultaneous explanation is the goal of the statistical analysis." In our system, how ever, variations of these endogenous variables are also influenced by two exogenous variables ^4(t)^ the past values of an endogenous variable (i.e., ^2(t-l)^’ the three being termed "predetermined variables." For the identifiability of our demand and supply equations we should have, at least, G-l = 1 variable ex cluded from each equation but at the same time present in the total system. We can readily see that we have two variables, not only one, which satisfy this condition for 46 Ibid. For elements of determinants, see G. Tintner, Mathematics and Statistics for Economists, pp. 54-60; and R. G. D. Allen, Mathematical Analysis for Econ omists (London, 1953), pp. 472-477. 115 each equation: ^2(t-l) anc^ ^4(t) are excluc^e<^ from the demand equation, while ^(t) an<i ^3^) are exclu^e<^ from the supply equation; the four variables, however, exist in the total system. As for considerations of the "neces sary and. sufficient" cond.itions, the demand equation would, be identified if at least one of the coefficients L2 and is not zero, whereas the supply equation would be iden tified if at least one of the coefficients K2 and Kg is not zero. In other words, if either X„,, or X..,. 2(t-1) 4(t) actually influences supply, the demand equation would be identified; and. the supply equation would in turn be iden tified if x2(t) or X3(t) actually influences demand.. Since we have more than necessary conditions for both equations (and apparently more than sufficient cond.i- 47 tions), the demand, and supply functions of our model are overidentified. Estimation of coefficients.--For estimating the constants K q , L q and the regression coefficients , K^, L2, in our model, we used the classical method, of least 47 We can be more positive about this condition only after we estimate the regression coefficients. 116 squares since it gives the best linear unbiased esti- AQ mates. Since we are dealing with overidentified equa tions, however, we used, the so-called two-stage least 49 squares method developed by Theil and. Basman. In the first stage we estimated the reduced, form equations: ^1 = a0 + a2X2(t-1) + a4X4(t) ^2 = b0 + b2X2(t-l) + b3X3(t) + b4X4(t) Applying the familiar procedures of the statistical esti mation by least squares, we obtained estimates for: V V V a n d : ^O* % ’ V V Estimates of the reduced form equations are thus: Xx = -32325.379 + 0.540 X-2(t-l) + 6.014 x4(t) (5) A X2=1053.991+0.115742 X2^ j +0.053397 Xg^±^-0.176999 x4(t) (6) 48 J. Johnston, Econometric Methods (New York, 1960), pp. 9-25; S. Valvanis, Econometrics, (New York, 1959), pp. 9-16 and 31-32. 4^H. Theil, Economic Forecasts and Policy (Amster dam, 1965), Revised. Edition, pp. 228-240. See also, G. Tintner, The Econometrics of Development and Planning, pp. 162-169. 117 Using equations (5) and (6), we then generated a series a a of estimates X-^ and X^ for all observations. In the second stage we used the estimated series A X2 in the original structural equation (1). The series X^ was not used in estimating any equation, since the variable X-^ does not appear on the right hand, side of any of the two functions. Again using the method, of least squares we obtained an estimate of the K's and. L's of the structural equations, and thus the demand and. supply equa tions are estimated as: Demand.: X1^tj = 2508.952 - 19.38 *2(t) + 1.812 Supply: X , = -32325.379 + 0.54 X0 t + + 6.014 X ., . . l(t) 2(t-l) 4(t) The regression coefficients K0, K , L , and L have the £ 3 ^ 4 right signs in both equations, and all of them satisfy the "necessary and sufficient1' condition for identification. The following table shows the values of the regression coefficients and. their significance: 118 Coeffi- Its Standard Statistic’s Significance cient Value Error t Value Level K2 -19.380 1.398595 13.856763 1% K3 + 1.812 0.518140 3.497124 2% L2 + 0.540 0.813700 0.663635 Not signifi cant L4 + 6.014 3.386610 1.775876 10% The equations.--We now need to put the supply and demand equations in the form most suitable for the purpose of our study. This requires the appearance of only the two variables: quantity X-^ and price X2. We therefore put the exogenous variables, X^ in the demand, equation and. X^ in the supply equation, at their mean values, and. obtain: Demand: Xl(t) = 4382*761 " 19.38 *2(t) Supply: Xl(t) = 2473.519 + 0.54 X2(t_1) Effects of the Project The essence of what we intend, to examine is to determine the degree of shifts of the demand, and supply 119 curves from their initial position and to estimate the increase in the area between the two curves. Initial equilibrium and area between curves.--We take as the starting point the year 1959, i.e., the year before construction work began. We assume that the demand and supply equations as estimated above are representative for that year. We therefore consider the integrated, area between the two curves as the initial consumers' and producers' surplus before the project. Equilibrium values of and are + 2525.276 and. + 95.845 respectively. For the process of integration we transform the two equations into the form: P = f(q) and we get: X2 = 226.149 - 0.0516 Xx X = — 4580.591 + 1.851 X, 2 1 The consumers' and producers' surplus is thus estimated by: 2525.276 2525.276 (226.149-0.0516 Xx dX1 - (-4580.591+1.851 ) 6X± 2473.519 120 This is equal to 404 191.406. Since the figures of are in thousand units, the initial consumers' and produc ers' is: L.E. 404,191,406. Shifts in demand, and, supply-Estimation of the changes in consumers' and producers' surplus requires determination of the new position of equilibrium, which in turn requires estimating the degree of shifts in one curve ot the other, or in both. In our study we shall see that actually both curves will shift, although by different degrees, and the demand starts to shift earlier than supply. An essential assumption underlying our estimation of shifts in the demand curve is that we do not take into consideration any other development in the national econ omy of the United Arab Republic; we abstract from any increase in national income other than that part which results from expenditure on the project. This is the only way by which we can isolate the effects of the proj ect and judge them on their own merits. The effect of expenditure on the project on national income via the multiplier is reflected in the 121 value of the variable X3; hence on the position of the demand curve. Local expenditures of the project are esti mated at approximately L.E. 20 million for each construc tion year.'*® With the marginal propensity to consume 51 estimated for the period to average about 0.8265, we obtain a multiplier of 5.763. We then administered, a shift in the demand curve over the construction period, of the project, i.e.* over the years 1960-1969 inclusive. Shifts in the supply curve are assumed to result only from the incr.ease of cultivable area. It is the offi cial expectation of UAR experts that 100,000 fed.da.ns of agricultural land would, be added, every year until the expected figure of 1.3 million feddans is finally re claimed.. Productivity of the new land., however, is ex pected to be lower than the old. land, at least during the first ten to twenty years. The Institute of National Planning has estimated that the lower productivity of the new added land is such that 100,000 feddans of the new would, equal only 62,000 feddans of the old land in terms 50 R. El-Mallakh, op. cit. , p. 21. 51Page 189. 122 of their yield.^ Taking this productivity factor into account, we administered a shift in the supply curve for thirteen con secutive years. Since there is no evidence in the pub lished figures (until 1964) that any such addition in land has yet taken place, we assumed that the first installment 53 of increased land will take place during 1965. There fore, the years over which we estimated the shift in supply constitute the period 1965-1977 inclusive. Calculating the surplus.--With the equilibrium value of X-^ determined, for each year from 1960 to 1977, the area between the demand and. supply curves was esti mated. for eighteen years separately. The difference in terms of the integral for each two successive years was estimated., and discounted by the proper l/tl+r)1”. The interest rate (i.e., r) was taken once to equal 3 per cent 52 UAR, Institute of National Planning, Memo No. 255, by M. M. El-Imam, Models Used in Drafting the 20-Year Plan(1959-1978), December 1962. 53 It was supposed, that between 200,000 and. 500,000 feddans would be added, by now. See p. 104, in this chap ter. 123 54 (Russian loan), and another time to equal 6 per cent (International Bank for Reconstruction and Development offer). Results are listed in Table VII. We first notice in column (1) that there is a positive change in consumers' and producers' surplus over sixteen years. Afterwards, and for a period of two years, a negative change in the surplus occurs. We also observe that the change in the surplus goes through four distinct stages: in the first stage (1960-1964), a steady annual increase in the surplus, at a mildly increasing rate, is the result of shifts in the demand, curve alone. In the second stage (1965-1968), the annual increase in surplus more than triples as a result of both demand, and. supply curves shifting simultaneously; and the surplus increases at an increasing rate. In the third, stage (1969-1975), there is a sharp drop in the absolute magnitude of the increase in the surplus, with the annual increase rising at a noticeable decreasing rate. This stage actually starts one year before the demand curve ceases to shift We were not sure that the interest rate on the Russian loan was 2.5 per cent as is usually said.; some sources put the figure at 3 per cent. We felt, therefore, that it is safer (for the conclusions of this study) to use the 3 per cent rate. 124 TABLE VII CHANGES IN CONSUMERS' AND PRODUCERS' SURPLUS AND THEIR DISCOUNTED VALUES (1) (2) (3) Increase in (1) Discounted (1) Discounted. Year Number Surplus By 1/(1+0.03)1 : By l/(1+0.06)* 1960 0 +27 255.112 +27 255.112 +27 255.112 1961 1 +27 318.582 +26 526.343 +25 761.423 1962 2 +27 379.677 +25 819.035 +24 367.913 1963 3 +27 438.175 +25 105.930 +23 048.067 1964 4 +27 501.763 +24 421.566 +21 781.396 1965 5 +83 686.537 +72 221.481 +62 513.843 1966 6 +84 536.613 +70 757.145 +59 598.312 1967 7 +85 384.284 +69 417.423 +56 780.549 1968 8 +89 366.119 +70 509.868 +56 032.557 1969 9 +83 940.824 +64 298.671 +49 692.968 1970 10 +36 402.131 +27 083.185 +20 312.389 1971 11 +29 303.130 +21 156.860 +15 442.749 1972 12 +22 204.212 +15 565.153 +11 036.493 1973 13 +15 105.236 +10 286.666 + 7 084.356 1974 14 + 8 006.287 + 5 292.156 + 3 538.779 1975 15 + 940.947 + 604.088 + 390.375 1976 16 - 5 963.768 - 3 713.427 - 2 349.725 1977 17 -12 864.043 - 7 782.746 - 4 792.560 TOTAL +656 941.818 +517 567.397 +430 260.884 125 (as a result of project completion). The fourth stage (1976-1977) covers the last two (out of thirteen) years of shifts in supply; by this time the curve would be far to the right and would, intersect the demand curve in the fourth quadrant. Now we observe that the total outcome is a sub stantial positive increase in the surplus by L.E. 656,941,818 million over the eighteen years, in spite of the negative magnitudes of the surplus in the last two years of this period. For evaluating this result in the agricultural sphere, a comparison with relevant costs has to be made. The project will then be considered passing our test if this surplus is greater, or at least equal to the relevant costs. We have no access to the particular cost figures which are specifically considered for the agricultural aspects of the Dam. However, as we indicated earlier in the chapter,^5 two different figures (L.E. 77.50 million and L.E. 90.00 million) were given by different sources for the cost of hydroelectric machine construction and power stations for generating and transmitting power from "*'Vage 105 and footnote 33 of this chapter. 126 the Dam. We would be on more solid grounds for later con clusions if we consider the smaller figure (i.e., L.E. 77.50 million), subtract it from the total cost of the Dam (L.E. 465.00 million), and take the residual (L.E. 387.50 million) as the cost for the agricultural aspect of the project. Comparing surplus with costs.--If we merely com pare the total increase in surplus (L.E. 656,941,818) with cost (L.E. 387,500,000), we arrive at a substantial net gain of L.E. 269,441,818, or more than two-thirds of cost. However, this method of comparison is not economically correct since costs and surplus are not of similar magni tudes and dor not occur at the same moment of time. The time factor is involved in both the accruing of surplus and the incurring of costs. We have already noticed that the surplus would be obtained, over a period of eighteen years, and. so a discounting process has to be applied (Table VII, page 124). As for the cost figure (L.E. 387.50 million), L.E. 200.00 million of it is to be spent over ten years (i.e., L.E. 20.00 million a year), and we have already used, this information in the process 127 56 of shifting the demand, curve. A discounting process has to be made for this amount over ten years, and the outcome is to be added to the part of the cost which is not dis counted.. Results are listed, in Table VIII. Comparison of surplus and. cost at the same discount rate, 3 per cent and. 6 per cent alternatively, shows that there would be a sizeable net gain of L.E. 154,367,397 and. L.E. 86,740,884 respectively. However, the result of a 3 per cent rate of discount is superior in more than the absolute net gain. First, the net gain amounts to one half of the cost, whereas at 6 per cent discount it is barely a quarter of the cost. Furthermore, the difference between the two values of the surplus, at the two discount rates, is four and a half times the difference between the 5 6 A possible flaw in this analysis stems from the fact that part of the costs of hydroelectric power may be included in the figure for "local expenditure requirements" of L.E. 20.00 million a year. The only possible way of estimating "working capital" (as against "fixed capital") out of the L.E. 77.50 million devoted, for electric power, is to use the labor/capital ratio in "industries' average" as 1/1400 or in "electricity" as 1/3112 (as estimated, by INP. See Memo No. 255, op. cit.). Even the bigger L/K ratio gives us only L.E. 60,000 out of the L.E. 77.5 mil lion, as working capital, and. the rest (i.e., L.E. 77.44 million) are for fixed, capital. Hence we proceed, on the assumption that there is no significant overlapping be tween the two figures of L.E. 77.5 million and L.E. 200.00 million. 128 TABLE VIII ESTIMATES OF AGRICULTURE’S SHARE IN THE PROJECT'S COST t (Year Value to be Year Number for Discount) Discounted in Million L.E. Discounted by t l/(1+0.03) Discounted. by l/(1+0.06) 1960 O 20.000 L.E. 20.00 M L.E. 20.00 M 1961 1 20.000 19.420 18.860 1962 2 20.000 18.860 17.800 1963 3 20.000 18.300 16.800 1964 4 20.000 17.760 15.840 1965 5 20.000 17.260 14.940 1966 6 20.000 16.740 14.lOO 1967 7 20.000 16.260 13.300 1968 8 20.000 15.780 12.540 1969 9 20.000 15.320 11.840 TOTAL 200.000 175.700 156.020 Undiscounted Part of Cost 187.500 187.500 187.500 TOTAL COST 387.500 363.200 343.520 129 two values of cost at the corresponding discount rates. Finally, the difference between the net gain at the two different discount rates is of the order of 75 per cent of the net gain discounted at 6 per cent. From the results mentioned above, and on the basis of the assumptions made earlier in this chapter (see pages 120-122), the Aswan High Dam could be economically justi fied. on the basis of its agricultural benefits in terms of the addition to consumers' and producers' surplus. It is also to be noted that the 6 per cent rate of interest, required by the International Bank for Reconstruction and Development in its withdrawn offer to finance the project, would, have reduced these benefits almost by one half. But there is a further argument to be brought up here, which is essential to the acceptance of this conclu sion. We have already pointed out in the previous chap ter-*^ that appraisal of projects by this criterion would, be on more solid, grounds if the equilibrium prices of the initial and final positions are approximately equal. The results of our study fare poorly in this regard, and. the sum total of the increased surplus may be considered, over- 57Pages 86-87. 130 CO estimated. Not only does the equilibrium price of the terminal position fall far below that of the initial posi tion, but it even falls below the horizontal axis and attains a negative value. Table IX lists equilibrium values of X-^ and X2 over eighteen years. The most reasonable procedure in our case is to consider the increased surplus as composed of two parts: a part from 1960 up until a year is reached where the equi librium value of X2 is close enough to the equilibrium X^ of 1959. This part is to be taken as it is, since it may even involve underestimation.^ The second part covers the rest of the years, and needs a correction for overestima tion by one way or another before adding it to the first part. The year 1970 could be taken as the borderline in our case, where equilibrium X2 = 87.475 (equilibrium X^ = 95.845 in the initial situation). The additional surplus over the period. 1960-1970, discounted at three and. six per cent, equals L.E. 503,415,759 and. L.E. 427,144,529 respec tively. The second, part of the surplus, from 1970 to 1977, is L.E. 14,151,638 and. L.E. 3,116,355. It is difficult to CO See earlier, Chapter III. ^See earlier, Chapter III. Year 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 TABLE IX DEMAND AND SUPPLY AT X2 = 0 AND EQUILIBRIUM VALUES OF X± AND X2 Demand Intercept with Quantity Axis 4 382.761 4 591.612 4 800.463 5 009.314 5 218.165 5 427.016 5 635.867 5 844.718 6 053.569 6 262.420 6 471.271 6 471.271 6 471.271 6 471.271 6 471.271 6 471.271 6 471.271 6 471.271 6 471.271 Supply Intercept with Quantity Axis 2 473.519 2 473.519 2 473.519 2 473.519 2 473.519 2 473.519 2 849.394 3 225.269 3 601.144 3 977.019 4 352.894 4 728.769 5 104.644 5 480.519 5 856.394 6 232.269 6 608.144 6 984.019 7 359.894 Equilib rium Value of X± 2 525.276 2 530.937 2 536.599 2 542.260 2 547.922 2 553.584 2 924.931 3 269.278 3 667.625 4 038.973 4 410.320 4 776.005 5 141.691 5 507.377 5 873.062 6 238.748 6 604.433 6 970.117 7 335.805 132 decide on a correction factor to apply to this last part to adjust for overestimation. However, even if we neglect this part completely, still the comparison of the first part with cost is favorable at both discount rates, with a net gain of L.E. 140,215,759 and L.E. 83,624,529 at the respective discount rates. Even if we move the borderline one year earlier (1969) where equilibrium = 106.344, the first part (of the surplus) alone still exceeds the cost by a comfortable margin of L.E. 113,132,574 and. L.E. 63,312,140 at the two alternative discount rates. Keeping this borderline as it is, we may even subtract the negative surplus of the last two years from the first part of the surplus and. still have a net gain of L.E. 101,634,401 and L.E. 56,169,855, which would justify the project on the basis of agriculture alone. Waste of potential surplus.--In conjunction with the analysis just presented, one more implication of the study has to be examined. This is the appearance of a negative equilibrium value of in the last three years of the period, as shown in the previous table. Although a negative price is implausible, this is 133 a statistical finding which has a meaningful economic interpretation. We recall that shifts in the demand curve over ten years are based on the assumption that no further increase in the national income is taking place (for eighteen years) beyond that attributed, to the multiplier and. the expenditure on construction work of the Dam. The supply curve shifts, for thirteen years, with a pace which takes it--in the years 1975, 1976, and 1977--out of the range of the positive triangular area under a demand, curve which originally represents the situation in the year 1969 and remains unchanged, thereafter. Let us now relax the assumption and. take into account the policy of the Egyptian planners to double the national income in ten years, beginning with 1959/1960 as the base-year income. Here we will not be concerned with any considerations of the course of development chosen to achieve this target. One point, however, is to be kept in mind : the Aswan High Dam is incorporated., and plays an important role, in that development plan. Expenditures on that project, therefore, and. their effect on national income through the multiplier, will not be dealt with separately here, otherwise we will be guilty of double counting. 134 We assume that the target of the plan will be realized and that L.E. 1,285,200 million will be added to the national income by the end of the decade (i.e., by 1969). We also assume that no further change in national income will occur after that year. On these two assump tions, still no positive value for equilibrium X2 is ob tained. in the last two years, i.e., 1976 : X2 = - 13.678 1977 : X2 = — 32.548 The negative magnitudes of the surplus, already referred to above, are outcomes of this intersection of demand and. supply curves in the fourth quadrant. Although their absolute values do not nullify except a very small portion of the substantial positive gain, the economic significance of their occurrence is important: there is more potential gain, from the project, which is now lost as a result of lag in shifting the demand curve. To recap ture this part, the demand, curve has to be pushed further to the right by a deliberate process which would, increase national income even more. This assumes, of course, that we consider the degree of shift in the supply curve- 135 applied in this analysis--as an accurate estimation of the effect of increased arable land. But there is an important assumption, or rather a requirement, for achieving the desired, result by the type of shift in demand which we here suggest. We have ex plicitly stated that a further increase in national income will be required for a positive intersection of the demand and. supply curves. But there could be other reasons for shifting the demand, such as a change in tastes or an in creased population. These types of shifts, however, could, not actually be planned.: the former is not predictable, while the latter is not advisable. For a policy decision compatible with the economic conditions in the United Arab Republic, affecting national income, and, through it, the demand curve is the plausible solution. If this is to be the case, any increase in the national income should, be generated from outside the agricultural sector; any fur ther improvement in this sector, at this stage, would re sult in a further shift in the supply curve to the right, and a more negative magnitude of the surplus will result.^ ^There is a possibility of an increase in national income which may come from the agricultural sector, without 136 It would be, finally, instructive to estimate the increase in national income which is required to just eliminate the negative surplus. Total national income necessary for achieving this result is estimated, from our study, at L.E. 2,928.009 million. This exceeds the plan- target figure (of doubling national income in the ten years ending 1969) by L.E. 357.809 million. At the compound rate of 7.2 per cent annually,^ this will take two years beyond the plan target date to accomplish. a shift in the supply curve as estimated in our study. This could be the result of an increase in either the vol ume of agricultural exports, or in their prices. The increased volume of agricultural exports will not have a significant effect, since the supply and demand equations as worked out in this study are only domestic, i.e., net of exports and imports. Moreover, with the aggregation performed for the analysis, the composition of agricul tural exports--rather than their volume--is more signifi cant in this regard. As for the effect of increased prices of agricultural exports, this is not a variable amenable to control by planners. ^This is the growth rate required in order that national income could be doubled in ten years. STATISTICAL AND MATHEMATICAL APPENDIX (Appendix to Chapter IV) I. Estimation of Equations A. The variables: = Quantity of agricultural products; X2 = Price of agricultural products; = National income; X4 = Area of cultivated land; and the number of observations N = 19. B. The data: The table on page 139 shows the values of the above mentioned variables, over nineteen years, as derived from published figures from United. Arab Republic sources. (See Appendices.) 138 Year 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 139 X-^OOO) X2 X3{ 000,000) X4(000) 2 753 70 414.40 • • ' • O 2 459 73 475.80 5 665 1 996 78 537.20 5 779 2 144 77 598.60 5 693 1 953 94 660.00 5 707 1 306 163 807.00 5 671 1 912 110 881.60 5 687 2 259 86 806.00 5 672 2 060 82 847.00 5 715 2 127 81 920.00 5 744 2 084 89 965.00 5 745 2 542 104 1 067 . 00 5 771 2 570 99 1 126.00 5 831 2 623 96 1 157.00 5 843 2 824 100 1 285.20 5 863 3 013 97 1 363.50 5 879 3 113 92 1 411.10 5 905 3 490 99 1 531.90 5 950 3 600 101 1 568.00 5 903 3 887 102 1 640.20 5 917 140 C. Estimation by two-stage least squares method. Our two structural equations are of the form: Demand: x1(t, = K0 + K2X2(t) + K3X3(t) «l> Supply: Xl(t) “ L0 + L2X2(t-l) + L4X4(t) <2> These are evidently overidentified,^ and. a two-stage least p squares method is required for estimating the parameters. The reduced form equations are estimated in the first stage. These equations are: X1 = aO + a2x2(t-l) + a4x4(t) (3> X2 ' b0 + b2X2(t-l) + b3X3(t) + b4X4(t) <4> Minimizing the deviations from the estimated line ^See pages 112-115. 2 H. Theil, Economic Forecasts and. Policy, pp. 228- 240. See also, G. Tintner, The Econometrics of Develop ment and. Planning, pp. 162-169. 141 of equation (3), we get: n i-1 8 a0 /\ x i = l l(t) “ a0 — a2X2 (t-1) a4X4 ( t ) * “ 0 n 3 Z e i=l = n -«Z i=l ^2 (t-1) A Xl(t)“ a0 ~ a2X2(t-1) ” a4X4( t) = 0 n 8 Z * 3 i=l _ n 2 ^ x i=l 4(t) ~ a ~ — l(t)~ a0 a2X2(t-1)" a4X4(t)'“ 0 Simplifying these three equations, we get the standard form of the normal equations for a straight line: n i=l n l(t) naQ + a 2 ^ X2(t-1) 1=1 n + a n Z iXl(t)X2(M)~a0 ^ 1X2(t.l)+ a2 ^ X2(t-l) + ^ ^ ^ ( t - l ) X4(t) n I i=l " • o Z n n n 1 ^ 1x4(t)+ a21 4 1X2 ew )X4 (t)+ 142 When the indicated values from the sample (19 observa tions) are inserted, they give three simultaneous equa tions, which are solved for the parameters aQ, a2, and a^. The results are: aQ = - 32 325.379 ^2 = *4 = + 0.540 + 6.014 Following the same procedures for equation (4), we have: n e n / Sb0 aE i-1 - b - 2 0 b2Z2(t-lf b3X3(tf b4X4(t)l‘ ° n si 2 e n i-1 - -2 £ X„ 2 /. v V ba*a(«r VSctf v«t) - 0 n Si 1 ,2 n ‘ " I V b0 ‘ V2(t-1) ’ b3^(tr Vi(t) - 0 n S L e ^ n 5^- - - »&*) (^ - b0 - V 2(t-1)- b3X3(t) - v«t) And the four normal equations are 144 Inserting the indicated values, and solving the four simultaneous equations for the four parameters, we get: bQ = + 1 053.991 t> 2 = + 0.115 742 b3 = + 0.053 397 b4 = - 0.176 999 The two reduced form equations, i.e., (3) and (4), are then: X1 = - 32325.379 + 0 .5 4 0 X 2 ^t l j + 6 .0 1 4 X 4 ^t j (5 ) X = 1053.991 + 0.115742X-, .. + 0.0 5 3 3 9 7 X - , 0.176999X.,.. 2 3(t) 4(t) (6) A Using equations (5) and (6), a series of estimates X^ and A X2 was generated for all the 19 observations. The table on page 145 lists the values for this series. In the second stage, the two structural equations (1) and (2) are estimated using the series & , instead of the original values of X2, in the demand equation. Since Year 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 145 Estimated Estimated A A X1 X2 1 782 85 2 469 68 1 954 87 2 038 88 1 831 104 1 964 113 1 845 106 2 091 98 2 263 96 2 269 98 2 429 100 2 798 94 2 868 93 2 987 96 3 085 98 3 240 95 3 508 93 3 229 104 3 314 106 146 the variable does not appear on the right hand side of A any of the equations (1) and (2), the estimated series was not utilized for any purpose. Moreover, the supply equation (2) is--by chance-- in a reduced form, and the values of the parameters L^, 1^2 > and are identical to those of 'a^, Q , and Va^, respectively. Estimations of the parameters Kq, » and. Kg are actually the only process performed in this second stage. Using the same method of least squares, the normal equations for estimating equation (1) are: n n n Z = nK + K2 Z X2 +K3 1 * 3 i=l i=l i=l n n n n L X1X2 = K0I. x2 + K2 X x2 + K3 X X2X' i=l i=l i=l i=l n n n n X, = K0 X X3 + K2X X2X3 + K3 £ x i = l i=l i = 1 i=l Inserting the indicated values and solving for the para meters, the demand, equation (1) equals: 147 Xl(t) “ 2508*952 “ 19*380X2(t) + 1.812X3(t) (1.398595) (0.518140) The supply equation is already estimated from cal culations of the first stage, and is equal to: Xl(t) = - 32325*379 + 0.54X2(t-1) + 6•014X4(t) (0.813700) (3.386610) Putting the exogenous variables and at their mean values, we get: Demand: X,,^x = 4382.761 - 19.38X0,„, l(t) 2(t) Supply: xi(t) = 2473.519 + 0.54X2^t We then transform the two equations into the form suitable for integration; i.e., P~f(q)j and we get: X2 = 226.149 - 0.0516X1 X2 = - 4580.591 + 1.851X-L and, Equilibrium value of X-^ = 2525.276 148 II. Estimating the Increase in the Area Between the Curves We consider the two equations, just estimated, as representing the situation in 1959. Using the available information and the assumptions of the text (pages 120- 122), the degree of annual shifts in the demand or the supply curve, or in both, is estimated. Equilibrium values for X-^ are determined, for each of the years 1960- 1977, and a year by year estimation of the area between the two curves is performed.: Year 1959 y ,-2525.276 ,2525.276 (226.149 - 0.0516X1)dx1 - / (- 4580.591 + l^SlX-j^dx-j^ O 2473.519 = 404 191.406 Year 1960 ,2530.937 ,2530.937 / (236.925 - 0.0516X1)dx1 - J (- 4580.591 + 1.85lX1)dx1 0 2473.519 = 431 446.518 Year 1961 / -2536. 599 (247.702 - 0.0516X1)dx1 - 0 = 458 765.100 Year 1962 / - 2542.260 (258.479 - 0.0516X1)dx1 O = 486 144.777 Year 1963 ^2547.922 / (269.255 - 0.0516X1)dx1 - O = 513 582.952 Year 1964 / - 2553.584 (280.032 - 0.0516X1)dx1 — O = 541 084.715 149 2536.599 (— 4580.591 + l.SSlX^dx-L 2473.519 >-2542.260 ((-4580.591 + l.SSlXjJdx-,^ 2473.519 ^2547.922 /(- 4580.591 + 1.851X1)dx1 2473.519 >-2553.584 I(-4580.591 + 1.85lX1)dx1 2473.519 150 Year 1965 J - 2924.931 (290.808 - O.OSieX-j^dx-L u = 624 771.252 Year 1966 3296.278 301.585 - 0.0516X1)dx1 = 709 307.865 Year 1967 ; - 3667.625 (312.362 - 0.0516X1)dx1 O = 794 692.149 Year 1968 ,-4038.973 / (323.138 - 0.0516X1)dx1 "0 = 884 058.268 y-2924.931 /(— 5276.656 + l.SSlX-^dXj^ " 2849.394 ^3296.278 (- 5972.720 + 1.851X1)dx1 3225.269 ^■3667.625 (- 6668.785 + l.SSlX-Jdx^^ ^3601.144 4038.973 /(- 7364.850 + 1.851X1)dx1 3977.019 151 Year 1969 4410.320 (333.915 - 0.0516X1)dx1 0 = 967 999.092 Year 1970 ^4776.005 / (333.915 - 0.0516X1)dx1 0 = 1 004 401.223 Year 1971 ^-5141.691 J (333.915 - 0.0516X1)dx-^ O = 1 033 704.353 Year 1972 — 5507.377 1(333.915 - O.OS^X-^dx^ 4410.320 I (- 8060.915 + 43S2.894 4776.005 I ( - 8756.980 + ^4728.769 ^-5141.691 I(_ 9453.044 + 5104.644 ^■5507.377 (- 10149.109 5480.519 l.SSlXj^JdXj^ 1.851X1)dx^ 1.851X1)dx1 1.SSIX^)dx^ = 1 055 908.565 152 Year 1973 '5873.062 .-5873.062 (333.915 - 0.0516X1)6x1 — (- 10845.174 + l.SSlX-^dx^ 0 *''5856.394 = 1 071 013.801 Year 1974 ,6238.748 --6238.748 (333.915 - 0.0516X1)dx1 - /(- 11541.239 + 1.851X1)dx1 0 -^6232.269 = 1 079 020.088 Year 1975 .6604.433 -.6604.433 (333.915 - 0.0516X1)dx1 - /(- 12237.304 + 1.851X1)dx1 O “6471.271 = 1 079 961.035 Year 1976 -6970.119 (333.915 - 0.0516X1)dx1 5 = 1 073 997.267 153 Year 1977 7335.805 333.915 - 0.0516X1)c3x1 = 1 061 133.224 The increase in the area between the supply and demand curves over the period 1960-1977 is found in the following table: Year Increase in Area 1960 +27 255.112 1961 +27 318.582 1962 +27 379.677 1963 +27 438.175 1964 +27 501.763 1965 +83 686.537 1966 +84 536.613 1967 +85 384.284 1968 +89 366.119 1969 +83 940.824 1970 +36 402.131 1971 +29 303.130 1972 +22 204.212 1973 +15 105.236 1974 + 8 006.287 1975 + 940.947 1976 - 5 963.768 1977 -12 864.043 TOTAL +656 941.818 CHAPTER V SUMMARY AND CONCLUSIONS Summary Among the three different approaches for project appraisal reviewed in Chapter II, there seems to be no single criterion which would accomplish a "comprehensive” and "exact1 1 evaluation of the project under consideration. A criterion of this nature requires an exact model for the whole economy, linking up all its development aspects in a detailed system of equations; and no such attempt in the literature has been made so far. Economists have to be content, therefore, with quantitative criteria of a dif ferent nature to approximate, as best as they could, the magnitude of numerous effects which spring from the exist ence of causal relations in the economic system, of which the project concerned, is only a small part. In their attempts to perform this approximation, however, they run into a web of entangled relationships which defies any thorough treatment by the simple tools of their criteria. 154 155 Faced with such a situation, these different approaches disregard the estimation of some classifications of costs or effects, or both. They go around the problem by ex plicitly advocating that the best procedure is "not to proceed" beyond an arbitrary point. The criterion which we have empirically applied in this study is not a "perfect substitute" for the de sired. "exact" model; it is only a tentative approach which is also bound to encounter some problems, such as the dif ficulty at the planning stage to conceive of all effects of a project on all supply and cost functions of the rele vant products. Yet, this approach does not involve any "guesswork," nor does it arbitrarily advocate giving up estimation of any part of the effects on grounds of prac tical difficulties. The merits of this criterion, in this regard, stems from the absence of conceptual vague ness and of complicated procedures. These, however, are all negative aspects of its merits. But besides having a closer reference to welfare considerations, the consumers’ and producers’ surplus criterion has two more positive advantages: its conclu sion would be statistically and mathematically derived with no arbitrariness involved, and. the usefulness of the 156 criterion is not limited to justifying (or rejecting) the project; it enables us to say something more--about the economy--which we could not easily, if at all, deduce from the findings of any of the three other criteria. Conclusions Our economic evaluation of the Aswan High Dam on the basis of its contributions to the agricultural sector in terms of the increase in consumers’ and producers’ sur plus led to the conclusion that the project is worth being undertaken. Although the margin between total surplus and total relevant cost was found to be sufficiently large to justify the project, the negative part of the surplus, and. the negative equilibrium value of X2 for some years, permit further conclusions. In Chapter IV, we have reached the conclusions that: 1. The Aswan High Dam is economically justified, on its own merits, abstracting from any other development in the United Arab Republic, and. assuming that national income does not increase beyond the multiplier effect of 157 expenditures of the project. 2. There is a loss of potential surplus due to the fact that shifts in supply outstrip shifts in demand to the effect that the two curves intersect in the fourth quadrant. 3. The loss in potential surplus still occurs-- although to a lesser degree--when we take into account the target of the UAR plan to double national income by 1969. This conclusion, however, is on the assumption that no further growth in national income after 1969 is consid ered. 4. The equilibrium value X2 is less than zero for the years 1975, 1976, 1977, in the case of the multi plier income; and only for 1976 and 1977 in the case of doubling national income by 1969. 5. Assuming that national income will be doubled by 1969 as planned, two more years of growth in national income at 7.2 per cent annually will be required to just eliminate the negative surplus, (and the negative values of X2). It is to be noted that conclusion (1) will be some- 158 what weakened, and (2), (3), (4) and (5) would, be strengthened, if some— or all--of the assumptions under lying the shifts of demand and supply do not hold. This will occur--in the case based on the multiplier--if the actual annual local expenditure on the Dam is less than the assumed, amount of L.E. 20.00 million, or if the mar ginal propensity to consume is substantially less than the estimated, figure such that the multiplier value would, be drastically reduced, or--and. this applies also to the case of doubling national income--if the productivity of the new land, is not as low as estimated by the Institute of National Planning,'*' or if improved drainage conditions on the old. land, is taken into account. If the planned, doubling of national income by 1969 is realized we have estimated that two more years--with 7.2 per cent annual growth in national income--would, be required, just to make X2 more or less equal to zero.2 But ^See Chapter IV, pp. 121-122. 2 Actually only an increase of L.E. 357.809 million in national income is required, for a value of equilibrium X2= 0; a 7.2 per cent growth rate for two years, beginning with 1969 national income, would, result in L.E. 383.462 million increase. This would, give an equilibrium X2= 2.4. 159 a value of X2 = O is as implausible as a negative value. It is difficult to foresee what course of action will be taken by the UAR government after the end. of the Second Five-Year Plan (1969). But if policy announcements of the UAR authorities are any indicator, another attempt at more or less doubling national income in ten years--beginning 1969--would be envisaged.^ If this is to be the case, the same annual growth rate of 7.2 per cent would be re quired.; and if this will be applied, from 1970 on, there is no chance of X2 falling below 80 even by the time all 1.3 million feddans are reclaimed. But we do not have to base our conclusion on the possibility of that fantastic rate of growth. In fact, even if only a mild rate of growth, of 3 or 4 per cent, takes place for eight years after the plan target of 1969 (i.e., from 1970 to 1977), demand, will keep shifting ahead of supply, and the theoretical negative values of X^ will never occur in reality. Tables X and XI list these re sults . Although Yugoslavia has tripled its national in come in fifteen years, the UAR experience--if realized-- would be a fantastic achievement. 160 TABLE X EQUILIBRIUM VALUES OF X- IF NATIONAL INCOME GROWS AT 3 PER CENT AFTER 1969 (i.e., 1970 to 1977) Total Demand. Supply National Intercept Intercept Equilib- Year Income (L.E.M) with Q Axis with Q Axis rium x2 1970 2 647.512 6 851.270 4 728.769 106.551 1971 2 726.043 6 995.188 5 104.644 94.906 1972 2 807.824 7 143.375 5 480.519 83.476 1973 2 892.059 7 296.008 5 856.394 72.269 1974 2 978.821 7 453.221 6 232.269 61.292 1975 3 068.185 7 615.148 6 608.144 50.552 1976 3 160.230 7 781.933 6 984.019 40.055 1977 3 255.037 7 953*723 7 359.894 29.810 161 TABLE XI EQUILIBRIUM VALUES OF X2 IF NATIONAL INCOME GROWS AT 4 PER CENT AFTER 1969 (i.e., 1970 to 1977) Total Demand Supply National Intercept Intercept Equilib- Year Income (L.E.M) with Q Axis with Q Axis rium x2 1970 2 673.216 6 897.845 4 728.769 108.889 1971 2 780.144 7 091.598 5 104.644 99.746 1972 2 891.349 7 293.101 5 480.519 90.993 1973 3 007.003 7 502.666 5 856.394 82.644 1974 3 127.283 7 720.613 6 232.269 74.716 1975 3 252.374 7 947,278 6 608.144 67.225 1976 3 382.468 8 183.008 6 984.019 60.190 1977 3 517.766 8 428.167 7 359.894 53.628 However, the fact that the negative values of X2-- and consequently the negative surplus--will not actually take place does not affect our basic conclusion, namely that although the Aswan High Dam project passes the test of the consumersT and producers’ surplus on the basis of agriculture alone, it results in a big shift in the supply curve for agricultural products, but does not, by itself, initiate a sufficient shift in demand to match that of supply* The result is a loss of potential surplus. Our study seems even to underestimate this loss.'1 * We have pointed, out, in Chapter IV, that in order to eliminate the possibility of this loss, a further shift in the demand curve should be effected by a further in crease in national income, beyond the multiplier effect. But we have also noted that in order that no fur ther loss of potential surplus may take place, the required 4 This can be seen from the fact that the differ ence (in our study) between the value of national income in 1969 when only the multiplier effect is considered, and the value of national income (also in 1969) when it is doubled as planned, is only L.E. 132.6 million. This seems to be the result of an exaggerated increase in national income via the multiplier. 163 increase in national income has to be created outside agriculture. The hydroelectric power, that is to be created by the project, is now brought into the conclu sion, since industrialization becomes a must, even if only to maximize the surplus from agriculture. And so we could finally conclude that our findings support our hypothesis: that stripping the Aswan High Dam project of its contribution to industry has serious ef fects on its maximum contribution to agriculture. The criterion applied in this study should be credited for bringing this conclusion into focus. APPENDICES APPENDIX I This appendix includes the steps followed in order to construct a general price index for agricultural prod ucts. This general index is composed of four indices, of four groups of crops; each of the indices being weighted according to the share of the value of that group in the total value of agricultural products. Steps were taken to transform the different base-years of the separate in dices to a unified base-year, i.e., that of 1959. 165 166 TABLE A (1) (2) (3) (4) (5) Gross Gross Value of Gross Value Agri Value of of cultural Cotton Cotton Year Crops^ Crop_ Seed._ (2)+(3) (l)-(l) L.E.M L.E.M L.E.M L.E.M L.E.M 1945 287.1 39.1 3.7 42.8 244.3 1946 295.1 51.2 4.3 55.5 239.6 1947 303.1 78.5 4.3 82.8 220.3 1948 311.1 98.3 6.0 104.3 206.8 1949 319.1 130.0 5.8 135.8 183.3 1950 374.6 213.7 4.8 218.5 156.1 1951 375.0 147.3 4.5 151.8 223.2 1952 312.5 121.9 5.6 127.5 185.0 1953 305.5 84.9 4.0 88.9 216.6 1954 333.1 96.6 4.4 101.0 232.1 1955 330.7 105.7 4.3 110.0 220.7 1956 383.5 123.1 4.2 127.3 256.2 1957 387.2 133.4 5.1 138.5 248.7 1958 388.5 135.3 5.6 140.9 247.6 1959 413.0 152.3 5.6 157.9 255.1 1960 444.5 151.6 5.9 157.5 287.0 1961 404.3 94.6 5.4 99.0 305.3 1962 423.0 138.6 5.7 144.3 278.7 1963 483.0 148.0 5.4 153.4 277.6 1964 498.9 151.3 5.4 156.7 282.2 Sources : UAR Department of Public Mobilisation and Statis tics, Hand Book of Basic Statistics, Cairo, Oct. 1963, pp. 78-81; National Bank of Egypt, Economii Bulletin , Vol. XVII, 1964, No. 1, pp. 106; UAR, Annuaire Statistique, 1959, pp. 250. In Column (1), the figures for 1945-1949, and. 1962- 1964 are least-squares estimates. In Columns (2) and. (3), the figures for 1963-1964 are least-squares estimates. 167 TABLE B W (?) (8) — (9) — CIO)____ {111 Year Gross Value of Wheat L.E.M Gross Value of Maize L.E.M Gross Value of Millet L.E.M Gross Value of Rice L.E.M Gross Value of Barley L.E.M Gross Value of Cereals: (6+7+8+ 9+10) 1945 45.3 43.9 7.1 10.1 1.5 107.9 1946 44.7 43.6 7.6 11.1 1.6 108.6 1947 44.1 43.3 8.1 12.0 1.7 109.2 1948 43.5 43.0 8.7 13.0 1.8 110.0 1949 42.8 42.7 9.2 14.0 1.9 110.6 1950 42.2 42.4 9.7 15.0 2.0 111.3 1951 41.6 42.2 10.3 16.0 2.2 112.3 1952 41.0 41.9 10.8 16.9 2.3 112.9 1953 50.7 35.7 9.5 10.5 2.4 108.8 1954 50.7 39.0 11.0 19.5 1.9 122.1 1955 37.7 46.2 13.6 21.7 3.0 122.2 1956 40.2 49.5 15.4 26.1 2.7 133.9 1957 39.8 37.4 14.2 28.3 2.5 122.2 1958 34.8 41.4 13.8 17.9 3.7 111.6 1959 35.6 35.3 14.5 26.8 3.5 115.7 1960 37.0 39.9 14.7 25.9 2.9 120.4 1961 35.4 38.1 14.7 19.9 2.8 110.9 1962 34.7 38.9 16.2 26.7 3.4 119.9 1963 34.1 38.6 16.7 27.7 3.5 120.6 1964 33.5 38.3 17.2 28.7 3.6 121.3 Sources: The figures for the years 1953-1961 are obtained from: UAR Department of Public Mobilization and Statistics, Hand. Book of Basic Statistics, Cairo, October 1963, pp. 80-81. The figures for the rest of the years are least- squares estimates. 168 TABLE C (12) Year Gross Value of T , Other, T Crops (5)* -_(11)** L.B.M 1945 136.4 1946 131.0 1947 111.1 1948 96.8 1949 72.7 1950 44.8 1951 110.9 1952 72.1 1953 107.8 1954 110.0 1955 98.5 1956 122.3 1957 126.5 1958 136.0 1959 139.4 1960 166.6 1961 194.4 1962 158.8 1963 157.0 1964 160.9 *See Column (5) of Table A **See Column (11) of Table B 169 TABLE D COTTON PRICE INDEX 1945 = 100 (1) (2) (3) (4) Gross Value (l)+(2): Price of Average Index Year Cotton Crop Quantity Price/ton 1945=100 (L.E."OOO") (000 tons) (in L.E.) 1945 39,091 235 166.34468 100 1946 51,158 273 187.39194 113 1947 78,480 286 274.40559 165 1948 98,306 400 245.76500 148 1949 129,961 391 332.38107 200 1950 213,724 382 559.48691 336 1951 147,327 363 405.85950 244 1952 121,868 447 272.63534 164 1953 84,914 319 266.18808 160 1954 96,609 349 276.81661 166 1955 105,709 335 315.54925 190 1956 123,065 325 378.66153 228 1957 133,441 406 328.67241 198 1958 135,299 446 303.36098 182 1959 152,300 457 333.26039 200 1960 151,600 478 317.15481 191 1961 94,600 336 281.54761 169 1962 138,600 457 303.28227 182 1963 148,000 450 328.88888 198 1964 151,300 458 330.34934 199 Sources: UAR Department of Public Mobilization and Statis tics, Hand Book of Basic Statistics , Cairo, Octo ber 1963, pp. 80-81; UAR, Annuaire Statistique, 1959, pp. 250; UAR National Planning Committee, Central Statistical Committee, Basic Statistics, January 1960, p. 65; Basic Statistics, May 1963, p. 71. In Column (1) the figures for 1963-1964 are least- squares estimates. 170 TABLE D (continued) In Column (2): the figures for 1946-1949 are transformed from units of "cantars" into tons by dividing by 22.257, The figures for 1963-1964 are least-squares estimates. Using Column (3) the index in Column (4) is cal culated by the formula: ^i . 100 p 1945 (i = 1945, 1946, . . . 1964) 171 TABLE E COTTON SEEDS PRICE INDEX 1945 =100 (1) (2) (3) I4)_ Gross (1) 4 (2): Value Average Price of price Index Year Cotton Seeds Quantity per ton 1945=100 (000 L.E. ) (000 tons) (L.E.) 1945 3 658 431 8.48723 100 1946 4 269 503 8.48707 100 1947 4 334 511 8.48140 100 1948 5 977 704 8.49005 100 1949 5 802 697 8.32424 98 1950 4 777 707 6.75671 80 1951 4 461 676 6.59911 78 1952 5 551 842 6.59263 78 1953 4 033 612 6.58986 78 1954 4 437 673 6.59286 78 1955 4 273 648 6.59413 78 1956 4 216 639 6.59780 78 1957 5 121 777 6.59073 78 1958 5 616 852 6.59154 78 1959 5 600 850 6.58823 78 1960 5 900 888 6.64414 78 1961 4 400 658 6.68693 79 1962 4 700 857 6.65110 78 1963 5 400 865 6.24277 74 1964 5 400 883 6.11551 72 Sources: UAR, Annuaire Statistique, 1959, p. 250; UAR National Planning Committee, Basic Statistics, January 1960, p. 65; Basic Statistics, May 1963, p. 71. In Column (1), the figures for 1963-1964 are least- squares estimates. 172 TABLE E (continued) In Column (2), the figures for 1946-1949 are transformed, from units of ”IrdabM into tons by multiplica tion by: .2 1 7 - = .12131 22 • 257 The figures for 1963-1964 are least-squares esti mates . Using Column (3), the index in Column (4) is cal culated by the formula: P.- 1 . 100 p 1945 (i = 1945, 1946, . . . .,1964) 173 TABLE F CEREALS PRICE INDEX 1945 = 100 (1) (2) Price Index Price Index Year 1939 = 100 1945 = 100 1945 286 100 1946 283 99 1947 249 87 1948 247 86 1949 241 84 1950 256 90 1951 270 94 1952 260 91 1953 286 100 1954 300 105 1955 317 111 1956 345 121 1957 340 119 1958 322 113 1959 327 114 1960 325 114 1961 340 119 1962 338 118 1963 350 122 1964 356 124 Sources: UAR National Planning Committee, Central Statis tical Committee, Basic Statistics, January 1960, p. 115; UAR, Department of Public Mobilization and Statistics, Hand Book of Basic Statistics, Cairo, October 1963, p. 179. In Column (1), the figures for the years 1963-1964 are least-squares estimates. Using the figures of Column (1), the index in 174 TABLE F (continued.) Column (2) is calculated using the formula* Pi - * 100 P 1945 (i = 1945, 1946, ..., 1964) 175 TABLE G "OTHER" CROPS PRICE INDEX 1945 = 100 Year Price Index 1939 = 100 Price Index 1945 = 100 1945 372 100 1946 391 105 1947 358 96 1948 363 98 1949 334 90 1950 375 101 1951 388 104 1952 384 103 1953 369 99 1954 306 82 1955 297 80 1956 358 96 1957 390 105 1958 415 112 1959 391 105 1960 399 107 1961 449 121 1962 448 120 1963 410 110 1964 414 111 Sources: UAR National Planning Committee, Central Statis tical Committee, Basic Statistics, January 1960, p. 115; UAR, Department of Public Mobilization and. Statistics, Hand. Book of Basic Statistics, Cairo, October 1963, p. 179. In Column (1), the figures for the years 1963-1964 are least-squares estimates. Using the figures of Column (1), the index in TABLE G (continued) Column (2) is calculated by using the formula: P. * 100 P1945 (i = 1945, 1946, . . . 1964) 177 TABLE H WEIGHTED PRICE INDICES (1) (2) (3) (4) Year Weighted Price Index of Cotton Weighted Price Index of Cotton Seeds Weighted Price Index Cereals Weighted Price Index of "Other" Crops 1945 13.61800 1.28800 37.58200 47.50900 1946 19.54512 1.45697 36.41496 46.65805 1947 42.72351 1.41702 31.36583 35.27434 1948 46.50390 1.92163 30.41878 30.24492 1949 81.40223 1.78210 29.20541 20.45459 1950 191.87245 1.01980 26.59432 12.05539 1951 95.83809 0.93304 28.27052 30.84493 1952 63.93130 1.39197 32.84269 23.81607 1953 44.46984 1.01636 35.61300 35.00124 1954 48.25919 1.02536 38.44926 27.16406 1955 60.63064 1.01002 40.95612 23.77975 1956 73.06888 0.85122 42.11762 30.68966 1957 68.07198 1.02270 37.51765 34.25057 1958 63.51148 1.11914 32.34062 39.05234 1959 73.87848 1.05182 32.02981 35.47677 1960 65.02493 1.03882 30.77945 40.20030 1961 39.60228 0.85721 32.60906 58.03522 1962 59.73748 1.05558 33.49840 45.21063 1963 67.89138 0.92090 34.24231 40.14692 1964 68.45898 0.88628 34.40116 40.79780 The figures of these four indices are calculated, using the indices in Tables D, Column (4); E, Column (4); F, Column (2); and G, Column (2), each weighted by the relative contribution, of its relevant crop, to the total gross value of agricultural crops (Table A, Column (1).) 178 TABLE I GENERAL PRICE INDEX OF AGRICULTURE PRODUCTION (CROPS)i 1959 = 100 (5) (6) Weighted Price Index of General Agricultural Crops Price Index Year (l)+(2)+(3)+(4)* Agricultural Crops (1945=100) 1959=100 1945 100 70 1946 104 73 1947 111 78 1948 109 77 1949 133 94 1950 232 163 1951 156 110 1952 122 86 1953 116 82 1954 115 81 1955 126 89 1956 147 104 1957 141 99 1958 136 96 1959 142 100 1960 137 97 1961 131 92 1962 140 99 1963 143 lOl 1964 145 102 ♦These Columns are taken from Table H. Using the figures in Column (5), the price index in Column (6) is calculated using the formula! P1959 (i = 1945, . . . 1964) APPENDIX II This appendix includes the steps followed to obtain figures for domestic supply of agriculture in terms of an aggregate unit. Adjustments for stocks and. for foreign trade were performed in the process. 179 180 TABLE A VALUE OF STOCK OF AGRICULTURAL OUTPUT (ASSUMED TO BE = VALUE OF STOCK OF COTTON CROP) (1) (2) (3) (4) Stock Average Value Stock of Cotton price of Stock Year of Cotton (000 tons) per ton (in 000 L.E^ (000 Cantars)(1)4 22.257 (L.E.) (2) • (3) 1945 8 238 370.131 166.34468 61 569 1946 7 824 351.530 187.39194 65 874 1947 5 880 264.187 274.40559 72 494 1948 3 356 150.784 245.76500 37 057 1949 2 226 100.013 332.38107 33 242 1950 911 40.931 559.48691 22 900 1951 1 648 74.044 405.85950 30 052 1952 2 180 97.947 272.63534 26 704 1953 3 443 154.693 266.18808 41 177 1954 1 671 75.078 276.81661 20 783 1955 2 081 93.499 315.54925 29 504 1956 933 41.919 378.66153 15 873 1957 1 003 45.064 328.67241 14 811 1958 1 994 89.590 303.36098 27 178 1959 2 136 95.970 333.26039 31 983 1960 1 170 52.568 317.15481 16 672 1961 1 421 63.845 281.54761 17 975 1962 814 36.573 303.28227 11 092 1963 776 34.994 328.88888 11 591 1964 741 32.612 330.34934 10 102 Sources: UAR National Planning Committee, Central Statis tical Committee, Basic Statistics, January 1960, p. 70; Basic Statistics, May 1963, p. 71 and. p. 79. Estimates are used, to obtain the figures for the years 1959-1962 of Column (2). The figures in Column (2) for the years 1963-1964 are least-squares estimates. The figures of Column (3) are taken from Appendix I, Table D, Column (3). 181 TABLE B VALUE OF DOMESTIC SUPPLY OF AGRICULTURAL PRODUCTS ill_______ m__________ ill Gross Value Value of of Value Agricultural Agricul- of Domestic Year tural Crops Stock Supply (OOO L.E.) (000 L.E.) (1) - (2) 1945 287 lOO 61 569 225 531 1946 295 100 65 874 229 226 1947 303 100 72 494 230 606 1948 311 100 37 057 274 043 1949 319 100 33 242 285 858 1950 374 600 22 900 351 700 1951 375 000 30 052 344 948 1952 312 500 26 704 285 796 1953 305 500 41 177 264 323 1954 333 100 20 783 312 317 1955 330 700 29 504 301 196 1956 383 500 15 873 367 627 1957 387 200 14 811 372 389 1958 388 500 27 178 361 322 1959 413 000 31 983 381 017 1960 444 500 16 672 427 828 1961 404 300 17 975 386 325 1962 423 000 11 092 411 908 1963 483 350 11 591 471 759 1964 498 274 10 102 488 172 182 TABLE C VALUE OF NET FOREIGN TRADE OF AGRICULTURAL PRODUCTS U)___________ { 2} _________________[31 Value Value Net of of Agricultural Year Exports Imports Foreign Trader (000 L.E.) (000 L.E.) (2) . 1945 36 902 4 114 32 788 1946 53 205 3 477 — 49 728 1947 76 378 1 443 — 74 935 1948 132 399 23 484 — 108 915 1949 122 207 19 968 — 102 239 1950 159 813 20 978 — 138 835 1951 180 374 45 741 — 134 633 1952 130 110 38 637 — 91 473 1953 120 662 25 289 — 95 373 1954 119 240 3 500 — 115 740 1955 119 185 3 523 — 115 662 1956 114 952 11 751 — 103 201 1957 141 755 23 853 — 117 902 1958 129 400 19 863 — 109 537 1959 119 014 20 453 — 98 561 1960 151 249 15 732 — 135 517 1961 117 598 17 826 — 99 772 1962 lOl 299 34 957 — 66 342 1963 150 403 49 083 — 101 320 1964 123 507 30 197 — 93 310 Sources: UAR Department of Public Mobilization and. Statis tics, Hand. Book of Basic Statistics, Cairo, Octo ber 1963, pp. 126-127, and 140-141; Central Bank of Egypt, Economic Bulletin, Vol. IV, No. 1, 1964, p. 102; UAR National Planning Committee, Central Statistical Committee, Basic Statistics, January I960, pp. 102-103, and p. 111. Year 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 183 TABLE D VALUE OF NET SUPPLY OF AGRICULTURAL PRODUCTS (000 L.E.) (1) (2) 111 Value of Agricultural Domestic Supply* Value of Net Agricultural Foreign Trade** Value of Net Agricul tural Supply (1) + (2) 225 531 - 32 788 192 743 229 226 - 49 728 179 498 230 606 - 74 935 155 671 274 043 -108 915 165 128 285 858 -102 239 183 619 351 700 -138 835 212 865 344 948 -134 633 210 315 285 796 - 91 473 194 323 264 323 - 95 373 168 950 312 317 -115 740 196 577 301 196 -115 662 185 534 367 627 -103 201 264 426 372 389 -117 902 254 487 361 322 -109 537 251 785 381 017 - 98 561 282 456 427 828 -135 517 292 311 386 325 - 99 772 286 553 411 908 - 66 342 345 566 471 759 -101 320 370 439 488 172 - 93 310 394 862 * Appendix II, Table B, Column (3). Appendix II, Table C, Column (3). 184 TABLE E AGRICULTURAL OUTPUT (REAL SUPPLY = DEMAND) (1) (2) (3) Value General Price Real of Net Index of Supply = Agricul Agricultural Demand Year tural Supply* Output ** (000 units) (000 L.E,) 1959 = 100 (1) (2.1. 1945 192 743 70 2 753.471 1946 179 498 73 2 458.877 1947 155 671 78 1 995.782 1948 165 128 77 2 144.419 1949 183 619 94 1 953.394 1950 212 865 163 1 305.920 1951 210 315 110 1 911.955 1952 194 323 86 2 259.469 1953 168 950 82 2 060.366 1954 196 577 81 2 126.876 1955 185 534 89 2 083.651 1956 264 426 104 2 542.458 1957 254 487 99 2 570.476 1958 251 785 96 2 622.760 1959 282 456 100 2 824.460 1960 292 311 97 3 013.415 1961 286 553 92 3 113.407 1962 345 566 99 3 490.466 1963 370 439 101 3 599.752 1964 399 580 102 3 887.333 ^Appendix II, Table D, Column (3). **Appendix I, Table I, Column (6). APPENDIX III NATIONAL INCOME t IN 1959 PRICES (In L.E.M) TABLE A UJ________ ill_______ ill Year National Income In Constant Prices of_1954 (In L.E.M) National Income at Current Prices^ (In L.E.M) (2) 4 (1) National In come Price Index 1954 = 100 1950 739.2 888.7 120 1951 817.2 970.6 120 1952 813.5 839.2 103 1953 819.0 858.1 105 1954 869.4 869.4 lOO 1955 918.2 899.8 98 1956 947.3 913.1 96 1957 980.7 1 086.2 111 1958 1 103.2 1 187.8 108 1959 1 213.4 1 323.0 109 Sourcesi The figures in Columns (1) and (2) are obtained from: UAR Department of Public Mobilization, Hand. Book of Basic Statistics, Cairo, 1963, pp. 270-273; UAR Central Statistical Committee, Basic Statistics, June 1962, p. 232. 185 186 TABLE B NATIONAL INCOME IN_1959 PRICES (In L.E.M) Year National Income 1945 414.4 1946 475.8 1947 537.2 1948 598.6 1949 660.0 1950 807.0 1951 881.6 1952 806.0 1953 847.0 1954 920.0 1955 965.0 1956 1 067.0 1957 1 126.0 1958 1 157.0 1959 1 285.2 1960 1 363.5 1961 1 411.1 1962 1 531.9 1963 1 568.0 1964 1 640.2 Sources: The figures for the years 1952-1962 are from: UAR, Statistical Pocket Book, Cairo, March 1962, p. 9j UAR, Ministry of Planning, Progress Under Planning, 1964, p. 25. 187 The values for the years 1950 and 1951 are obtained as followsi From Table A, Columns (2) and (3): 1. We multiply the value of national income of 1950 (in current prices) by the ratioi National Income Price Index of 1959 National Income Price Index of 1950 * and we multiply the value of national income of 1951 (in current prices) by the ratio: National Income Price Index of 1959 National Income Price Index of 1951 2. Thus: National Income of 1950 (in 1959 prices) = 109 = 888.7 j z q ~ 807.0 and: National Income of 1951 (in 1959 prices) = = 970.6 = 881.6 The figures for the years 1945-1949, and 1963-1964 are least-squares estimates. 188 APPENDIX IV DATA FOR CULTIVATED AREA (In 000 Feddans)* Year Cultivated Area 1945 1946 5 665 1947 5 779 1948 5 693 1949 5 707 1950 5 671 1951 5 687 1952 5 672 1953 5 715 1954 5 744 1955 5 745 1956 5 771 1957 5 831 1958 5 843 1959 5 863 1960 5 879 1961 5 905 1962 5 950 1963 5 903 1964 5 917 *One Feddan = 1.038 Acres. Sources: The figures for the years 1945, 1947, and 1950- 1962 are taken from two sources: (1) UAR Depart ment of Public Mobilization and. Statistics, Hand- Book of Basic Statistics, Cairo, October 1963, p. 73; and (2) National Bank of Egypt, Economic Bulletin, 1964, Vol. XVII, No. 2, p. 245. The figures for the years 1946, 1948-1949, and. 1963-1964 are least-squares estimates. APPENDIX V MARGINAL PROPENSITY TO CONSUME Year MFC 1964 0.852 1965 0.852 1968 0.836 1970 0.814 1974 0.794 1975 0.811 Source: M. M. El-Imam, Models Used in Drafting the 20- Year Plan (1959-1978), I.N.P. Memo, No. 255, (December 1962), Cairo, p. 11. 189 BIBLIOGRAPHY BIBLIOGRAPHY A. BOOKS Abramovits, et al. Allocation of Economic Resources. Californiai Stanford. University Press, 1959. Agarwala, A. N. and S. P. Singh, (eds.). The Economics of Underdevelopment. London: Oxford University Press, 1958. Allen, R. G. D. Mathematical Economics. New York: The Macmillan Company, 1956. Arrow, K. J. Social Choice and Individual Values. New York: John Wiley and Sons, Inc., 1951. Baumol, W. Economic Dynamics. Second edition. New York: The Macmillan Company, 1959. 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Economic Development, Principles, Problems, and Policies. New Yorks W. W. Norton and Co., Inc., 1959. Hirschman, A. The Strategy of Economic Development. New Haven: Yale University Press, 1958. Hirshleifer, J., et al. Water Supply * Economics, Tech nology, and Policy. Chicago* University of Chica go Press, 1960. Holsman, F. D., (ed.). Readings on the Soviet Economy. Chicago* Rand McNally and Co., 1962. Issawi, C. P. Egypt in Revolution. London: Oxford Uni versity Press, 1963. Johnston, J. Econometric Methods. New York* McGraw-Hill, 1963. Johr, W. A. and H. W. Singer. The Role of the Economist as Official Adviser. London, 1955. Kendall, M. G. and A. Stuart. The Advanced Theory of Sta tistics . Vol., I, II. London* Charles Griffen, 1958, 1961. Keynes, J. M. The General Theory of Employment, Interest, and Money. New York* Harcourt, Brace and World, 1963. Klein, L. R. A Textbook of Econometrics. Evanston, 111.* Row, Peterson and Company, 1953. Knight, F. Risk, Uncertainty, and Profit. 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New York: Macmillan and. Company, 1953. McKean, R. Efficiency in Government Through System Anal ysis, with Emphasis on Water Resource Development. New York: John Wiley and Sons, 1958. Myint, H. Theories of Welfare Economics. Cambridge: Harvard. University Press, 1948. Nurkse, R. Problems of Capital Formation in Underdeveloped Countries. New York: Oxford University Press, 1953. 195 Pareto, V. Cours df Economie Politique. Vol. II. Laus- sanne: 1947. Pigou, A. C. The Economics of Welfare. Fourth Edition. London: Macmillan and Company, 1932. Radner, R. Notes on the Theory of Economic Planning. Athens: Center of Economic Research, 1963. Reder, M* W. Studies in the Theory of Welfare Economics. New York: Oxford University Press, 1947. Robbins, L. An Essay on the Nature and Significance of Economic Science. London: Macmillan and Company, 1935. Second Edition. Robinson, J. Essays in the Theory of Employment. Second Edition. New York: Oxford University Press, 1947. _________. The Accumulation of Capital. London: Macmillan and Company, 1956. Samuelson, P. A. Foundations of Economic Analysis. Cam bridge: Harvard University Press, 1955. Schumpeter, J. A. Capitalism, Socialism, and Democracy, New York: Harper, 1942. _________. History of Economic Analysis. New York: Oxford University Press, 1954. Fourth Edition. Scitovsky, T. Welfare and Competition, the Economics of a Fully Employed Economy. London: George Allen and Unwin, 1952. Sen, A. K. Choice of Techniques. Oxford: Blackwell, 1960. Smith, S. C. and E. N. Castle (eds.). Economics and. Pub- lic Policy in Water Resource Development. Iowa: Iowa State University Press, 1964. Theil, H. Economic Forecasts and Policy. Second. Revised Edition. Amsterdam: North-Hoi land. Publishing, 1961. 196 Theil, H. Linear Aggregation of Economic Relations. Amsterdam! North-HoHand Publishing, 1954* Tinbergen, J, Central Planning. New Haven: Yale Univer sity Press, 1964. Tinbergen, J. Economic Policy: Principles and Designs. Amsterdam: North-Holland Publishing, 1956. _________» On the Theory of Economic Policy. Amsterdam: North-Holland Publishing, 1954. _________. The Design of Development. Baltimore: Johns Hopkins Press, 1963. Fifth Edition. Tinbergen, J. and H. Bos. Mathematical Models of Economic Growth. New York: McGraw-Hill, 1962. Tintner, G. Econometrics. New York: John Wiley and Sons, 1952. . Mathematics and. Statistics for Economists. New York: 1953. . The Econometrics of Development and Planning. (First Draft), 1964. Valvanis, S. Econometrics. New York: 1959. Warriner, D. Land and Poverty in the Middle East. London: Royal Institute of International Affairs, 1948. _________. Land Reform and Development in the Middle East, A Study of Egypt, Syria, and Iraq. Royal Insti tute of International Affairs. London and. New York: Oxford University Press, 1957. Wold, H. and L. Jureen. Demand Analysis. New York: John Wiley and Sons, 1953. 197 B. ESSAYS AND ARTICLES IN COLLECTION Barone, B. 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"The Methodology of Positive Economics," in Essays in Positive Economics. Chicago: Univer sity of Chicago Press, 1959. Haavelmo, T. "Methods of Measuring the Marginal Propens ity to Consume," in Studies in Econometric Methods, Cowles Commission Monograph 14, W. C. Hood and T. C. Koopmans (eds.). New York: John Wiley and Sons, 1953. Holzman, M. "Problems of Classification and Aggregation," in Leontief and others, Studies in the Structure of the American Economy. New York: Oxford Univer sity Press, 1953. 198 Hurwicz, L. "Prediction and. Least Squares," in Statistical Inference in Dynamic Economic Models. Cowles Commission Monograph 10, T. C. Koopmans (ed.). New York: John Wiley and Sons, 1950. Jenkin, F. "On the Principles Which Regulate the Inci dence of Taxes," proceeding of the Royal Society of Bdinburgh, Session 1871-1872. Reprinted in Musgrave and Shoup (eds.), Readings in the Eco nomics of Taxation. Homewood, 111.: R. D. Irwin, Inc., 1959. Klein, L. R. "The Efficiency of Estimation in Econometric Models," in Essays in Economics and Econometrics. Chapel Hill: University of North Carolina, 1960. Koopmans, T. "Maximization of Substitution in Linear Models of Production," in Input-Output Relations. Proceedings of a Conference, Stenfert-Kroese, Leiden, 1953. _________. "Identification Problems in Economic Model Con struction," in Studies in Econometric Methods. Cowles Commission Monograph 14, W. C. Hood and. T. Koopmans (eds.). New York: John Wiley and Sons, 1953. Krutilla, J. V. , T Welfare Aspects of Benefit-Cost Anal ysis," in S. C. Smith and. E. N. Castle (eds.), Economics and Public Policy in Water Resource De velopment . Iowa: Iowa State University Press, 1964. Marschak, J. "Economic Measurements for Policy and Pre diction," in Studies in Econometric Methods. Cowles Commission Monograph 14, W. C. Hood and T. Koop mans (eds.). New York: John Wiley and Sons, 1953. Reder, M. W. "Welfare Economics," in B. F. Haley (ed.), Survey of Contemporary Economics, Vol. 11^ Ameri can Economic Association, 1952. 199 Viner, J. "Cost Curves and Supply Curves," Zeitschrift fur Nationalbkonomie, Vol. Ill, 1931, reprinted in G. Stigler and K. Boulding (eds.), Readings in Price Theory. Homewood, 111.: R.D. Irwin, Inc., 1952. Zauberman, A. "The Soviet Debate on the Law of Value and Price Formation," in G. Grossman (ed.), Value and Plan. California: University of California Press, 1960. C. PUBLICATIONS OF THE GOVERNMENT, LEARNED SOCIETIES, AND OTHER ORGANIZATIONS Central Bank of Egypt, Economic Bulletin, Vol. IV, No. 1, 1964. National Bank of Egypt. Annual Statistics, Economic Bulletin, No. 3, 1961. _________. Annual Report of the President of the Board of the National Bank of Egypt, March 1958. _________. Economic Bulletin, Vol. XVI, Nos. 1 and 2, Cairo, 1963. _________. Economic Bulletin, Vol. XVII, Nos. 1 and 2, Cairo, 1964. United Arab Republic. Annuaire Statistique, 1959. _________. Central Statistical Committee, Basic Statis tics , June 1962. _________. Council of National Planning, Outline of the General Plan for Economic and Social Development, for the Five Years: July 1960—June 1965. (In Arabic), 1960. 200 United Arab Republic, Department of Public Mobilization and Statistics. Hand Book of Basic Statistics. Cairo, October 1963. United Arab Republic, Information Department. Aswan High Dam. Cairo, May 15, 1964. _________. Information Department. The Major Projects. Cairo, 1964. _________. Institute of National Planning. Abdel-Rahman, I. H. Memo. No. 63, Planning for Balanced Social and Economic Development in the UAR (Egypt). August 1961. _________. INP. Abdel-Rahman, I. H. Memo. No. 76, The Social Aspects of Development Planning in UAR. November 1961. _________. INP. Rl-Imam, M. M., Memo. No. 255, Models Used in Drafting the 20-Year Plan (1959-1978). Cairo, December 3, 1962. _________. INP. El-Imam, M. M., Memo. No. 201, Prepara tion of the General Framework of the Plan, (Arabic) July 10, 1962. _________. INP. Hammam, E. E. Memo. No. 169, Our Plan for Agriculture, Part 1, March 1962. _________. Ministry of Finance and National Economy. National Income of Egypt for 1953. Official Esti mates, Cairo, 1955. _________. Ministry of Planning. Progress Under Planning. (In Arabic), 1964, _________. National Planning Committee, Central Statistical Committee. Basic Statistics. January 1960. _________. National Planning Committee, Central Statistical Committee. Basic Statistics. May 1963. 201 United Arab Republic, The Egyptian Statistical and Census Department. Statistical Year Book, 1962. _________. Statistical Pocket Year Book, Cairo, 1952. _________. Statistical Pocket Year Book, 1960 and 1961. _________. Statistical Pocket Book, Cairo, March 1962. United Nations, Department of Economic Affairs. Measures for the Economic Development of Under-Developed Countries (B/1986-ST/BCA/10, 3 May 1951). _________. Department of Economic Affairs. Land Reforms. Defects in Agrarian Structures as Obstacles to Economic Development. New York, 1951. _________. Economic Commission for Asia and the Far East (ECAFE). MA Decade of Development Planning and Implementation in the ECAFE Region." Economic Bulletin for Asia and the Far East, Vol. XII, No. 3, December 1961. _________. ECAFE. Programming Techniques for Economic Development. A Report by a Group of Specialists, Bangkok, 1960. _________. ECR and FAO. Output and Expenses of Agriculture in Some European Countries. (First reprint), Geneva, 1953. _________. Formulation and Economic Appraisal of Develop ment Projects, Vol. I, 1951. _________. FAO. Year-Book of Food and Agricultural Statis tics. 1951. _________. Statistical Year-Book, 1963. _________. Statistical Year-Book, 1954. United States Congress. Dimensions of Soviet Economic Power. (Hearings, together with compilation of 202 Studies prepared for the Joint Economic Committee, Congress of the United States), Eighty-seventh Congress, Second Session, December 10 and 11, 1962, Washington: United States Government Printing Office, 1962. United States Federal Inter-Agency River Basin Committee, Subcommittee on Benefits and Costs. Proposed Prac tices for Economic Analysis of River Basin Proj ects . United States Government Printng Office, May 1950. D. ARTICLES AND PERIODICALS Alchian, A. A. "The Meaning of Utility Measurement." American Economic Review, Vol. XLIII, March 1953. _________. "Uncertainty, Evolution and Economic Theory." Journal of Political Economy, Vol. LVII, June 1950, Archibald, G. C. "Utility, Risk and Linearity." Journal of Political Economy, Vol. LXVII, No. 5, October 1959. Arrow, K. J. "A Difficulty in the Concept of Social Wel fare." Journal of Political Economy, Vol. LVIII, No. 4, 1950. _. "Decision Theory and Operations Research." Operations Research, Vol. V, No. 6, December 1957, _. "Little's Critique of Welfare Economics." American Economic Review, 1951. Basmann, R. L. "A Generalized Calssical Method of Linear Estimation of Coefficients in a Structural Equa tion." Econometrica, Vol. XXV, January 1957. _________. "The Computation of Generalized Classical Esti mates of Coefficients in a Structural Equation." Econometrica, Vol. XXVII, January 1959, and "Errata." Econometrica, Vol. XXVIII, January 1960, 203 Bator, F. M. "The Simple Analytics of Welfare Maximiza tion.” American Economic Review, Vol. XLVII, No. 1, March 1957. Benham, F. , ? What is the Best Tax System?" Economic a, 1942. Bergson, A. "A Reformulation of Certain Aspects of Welfare Economics." Quarterly Journal of Economics, 1938. _________. "On the Concept of Social Welfare." Quarterly Journal of Economics, Vol. LXVIII, No. 2, May 1954. Berliner, J. "The Informal Organization of the Soviet Firm.” Quarterly Journal of Economics, Vol. LXVI, August 1952. Boulding, K. "The Concept of Economic Surplus." American Economic Review, December 1945. Reprinted, in Readings in the Theory of Income Distribution, by W. Fellner and B. Haley (eds.), Blakiston 1951. Breads, G. F. "Excise Tax Burdens and Benefits." American Economic Review, 1954. Buchanan, N. "A Reconsideration of the Cobweb Theorem." Journal of Political Economy, February, 1939. Chenery, H. "Development Policies and Programmes." Eco nomic Bulletin for Latin America, Vol. Ill, No. 1, March 1958. _________• "The Application of Investment Criteria." Quarterly Journal of Economics, Vol. LXVII, No. 1, February 1953. _________. "The Role of Industrialization in Development Programs." American Economic Review, Vol. XLV, No. 2, May 1955. Chenery, H. B. and K. S. Kretschmer. "Resource Allocation for Economic Development." Econometrica, Vol. XXIV, No. 4, October 1956. 204 Chenery, H. B. and. T. Watanabe. "International Comparisons of the Structure of Production." Econometrica, Vol. XXVI, No. 4, 1958. Cherniavski, V. "An Attempt to Define the Efficiency of Capital Investment in the Iron and Steel Industry," English translation from Voprosy Ekonomiki, No. 7, 1959, in Problems of Economics, Vol. II, No. 7, November 1959. Ciriacy-Wantrup, S. V. "Cost Allocation in Relation to Western Water Policies." Journal of Farm Econom ics, Vol. XXXVI, No. 1, 1954. Coase, R. H. "The Marginal Cost Controversy." Economica, 1946. _________. "The Marginal Cost Controversy; Some Further Comments." Economica, 1947. Debreu, G. "The Co-efficient of Resource Utilization." Econometrica, 1951. Dehem, R. , r Welfare Losses." Econometrica, 1950. (Ab stracts .) Eckaus, R. S. "The Factor Proportion Problem in Under developed Areas." American Economic Review, Sep tember 1955. Reprinted in The Economics of Under development , by A. Agarwala and S. Singh (eds.). Oxford University press, 1958. Eckstein, O. "Investment Criteria for Economic Development and the Theory of Intertemporal Welfare Economics." Quarterly Journal of Economics, Vol. LXXI, No. 1, February 1957. El-Mallakh, R. "Some Economic Aspects of the Aswan High Dam Project in Egypt." Land Economics, Vol. XXXV, February 1959. Ezekeil, M. "The Cobweb Theorem." Quarterly Journal of Economics, February, 1938. 205 Farrell, M. J, "In Defence of Public-Utility Price Theory" Oxford Economic Papers, Vol. X, 1958. _________. "Some Aggregation Problems in Demand Analysis," Review of Economic Studies, Vol. XXI, No. 3, 1954. Feldstein, M. S. "The Social Time Preference Discount Rate in Cost-Benefit Analysis." Economic Journal, June 1964. Fisher, W. D. "Criteria for Aggregation in Input-Output Analysis." Review of Economics and Statistics, Vol. XL, No. 3, August 1958. Friedman, M. "The Welfare Effects of an Income Tax and Excise Tax." Journal of Political Economy, Vol. LX, No. 1, 1952. Frisch, R. "A Further Note on the Dupuit Taxation Theo rem." Econometrica, 1939. _________. "The Dupuit Taxation Theorem." Econometrica, 1939. Galenson, W. and H. Leibenstein. "Investment Criteria, Productivity, and Economic Development." Quarterly Journal of Economics, LXIX, No. 3, August 1955. Graaff, J. de V. "On Optimum Tariff Structures," Review of Economic Studies, Vol. XVII, No. 1, 42. Grossman, G. "Industrial Prices in the USSR." American Economic Review, (proceedings), Vol. XLIX, No. 2, May 1959. _________. "Scarce Capital and Soviet Doctrine." Quarter ly Journal of Economics, Vol. LXVII, No. 3, August 1953. Haavelmo, T. "The Statistical Implications of a System of Simultaneous Equations." Econometrica, Vol. XI, January 1943. 206 Hanssmann, F. "Operations Research in National Planning in Underdeveloped Countries." Operation Research, Vol. IX, No. 2 March-April 1961. Henderson, A. "Consumers' Surplus and the Compensated Variation." Review of Economic Studies, Vol. Ill, No. 2, 1941. Hicks, J. R. "The Foundations of Welfare Economics," Economic Journal, Vol. XLIX, December 1939. _________. "The Four Consumers' Surpluses." Review of Economic Studies, Vol. XI, No. 1, 1943. _________. "The Generalized Theory of Consumers* Surplus." Review of Economic Studies, Vol. XIII, No. 34, 1945. _________. "The Rehabilitation of Consumers* Surplus." Re view of Economic Studies, Vol. VIII, No. 2, 1941. Hotelling, H. "Demand Functions with Limited Budgets." Econometrica, 1935. _________. "The General Welfare in Relation to Problems of Taxation and of Railway and. Utility Rates." Econ ometrica, Vol. XI, July 1938. Reprinted in Read- ings in the Economics of Taxation, by R. Musgrave and C. Shoup (eds.). Homewood, 111: R. D. Irwin, Inc., 1959. _________. "The Relation of Prices to Marginal Costs in an Optimum System." Econometrica, 1939. Hurwicz, L. "Decentralized Resource Allocation." Econo metrica, 1955 (Abstracts). Joseph, M. F. W. "The Excess Burden of Indirect Taxa tion." Review of Economic Studies, Vol. VI, No. 3. Kahn, A. "Investment Criteria in Development Programs." Quarterly Journal of Economics, Vol. LXV, No. 1, February 1951. 207 Kaldor, N. "Welfare Propositions in Economics." Economic Journal, 1939. Katzenelenbogen, A. "Problems of the Methodology of De termining the Economic Effectiveness of New Tech niques," English translation in Problems of Eco nomics , Vol. II, No. 5, September, 1959. Khachaturov, T. "Methodological Questions Determining the Economic Effectiveness of Capital Investment." Planovoe Khoziaistvo, No. 8, 1959, English trans lation in Problems of Economics, Vol. II, No. 8, January 1960. Koopmans, T. C. "Efficient Allocation of Resources." Econometrica, Vol. XIX, No. 4, October 1951. Kozlik, A. "Note On Consumer's Surplus." Journal of Po litical Economy, 1941 Lancaster, K. "Welfare Propositions in Terms of Consist ency and Expanded Choice." Economic Journal, 1958. Lange, O. "The Foundations of Welfare Economics." Econo metrica, 1942. Leontief, W. "Quantitative Input-Output Relations in the Economic System of the United States." Review of Economics and. Statistics, Vol. XVIII, No. 3, August 1936. Lerner, A. P. "Discussions of Social Choice Functions." Econometrica, 1953, (Abstracts). Lipsey, R. G. and K. Lancaster. "General Theory of the Second Best." Review of Economic Studies, Vol. XXIV, No. 63, 1956. Little, I. M. D. "The Valuation of the Social Income." Economica, 1949. "The Foundations of Welfare Economics." Oxford Economic Papers, Vol. I, No. 2, 1949. 208 Malinvaud, E. "Capital Accumulation and Efficient Alloca tion of Resources." Econometrica, Vol. XXI, No. 2, April 1953. McManus, M. "Comments on the General Theory of Second Best." Review of Economic Studies, Vol. XXVI, No. 3, No. 71, 1959. Mishan, E. J. "A Reappraisal of the Principles of Resource Allocation." Economica, New Series, Vol. XXIV, No. 96, November 1957. _________. "A Survey of Welfare Economics, 1939-1959." Economic Journal, Vol. LXX, June 1960. _________. "Realism and Relevance in the Theory of Con sumer’s Surplus." Review of Economic Studies, Vol. XV, (1), No. 37. Nordin, J. A. "The Marginal Cost Controversy: A Reply." Economica, 1947. Nove, A. "The Problem of ’Success Indicators’ in Soviet Industry." Economica, XXV, No. 97, February 1958. Petrov, V. "Effectiveness of Capital Investment in Trans port Industry in the USSR," English translation in Problems of Economics, Vol. I, No. 3, July 1958. Phillips, A. "The Tableau Economique as a Simple Leontief Model." Quarterly Journal of Economics, Vol. LXIX, No. 1, February 1955. Reder, M. W. "Theories of Welfare Economics." Journal of Political Economy, Vol. LVIII, No. 2, 1950. _________. "Welfare Economics and Rationing." Quarterly Journal of Economics, 1942-43. Robbins, L. "Interpersonal Comparisons of Utility." Eco- nomic Journal, 1938. Robertson, Sir Dennis. "Utility and All What? Part III," Economic Journal, 1954. 209 Robinson, J. "The Production Function and the Theory of Capital." Review of Economic Studies, Vol. XXI, 1953-1954. Ruggles, N. "Recent Developments in the Theory of Mar ginal Cost Pricing." Review of Economic Studies, Vol. XVII, No. 43. _________. "The Welfare Basis of the Marginal Cost Pricing Principle." Review of Economic Studies, 1949. Samuelson, P. A. "Evaluation of Real National Income." Oxford Economic Papers, Vol. II, No. 1, 1950. _________• "Social Indifference Curves." Quarterly Journal of Economics, 1956. Scitovsky, T. "A Note on Welfare Propositions in Eco nomics." Review of Economic Studies, Vol. IX, No. 1. _________• "Reconsideration of the Theory of Tariffs." Review of Economic Studies, Vol. IX, No. 2. Simon, A. "A Behavioral Model of Rational Choice." Quar terly Journal of Economics, Vol. LXIX, February 1955. Steiner, P. O. "Choosing Among Alternative Public Invest ments in Water Resource Field." American Economic Review, Vol. XLIX, December 1959. Streeten, P. 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Asset Metadata

Creator Kandeel, Abdel-Fattah Mohamed (author)

Core Title The 'Surplus' Approach For Project Appraisal (An Application To The Aswanhigh Dam)

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Theory,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Tintner, Gerhard (committee chair), Elliott, John E. (committee member), Ford, James S. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-213398

Unique identifier UC11360112

Identifier 6610542.pdf (filename),usctheses-c18-213398 (legacy record id)

Legacy Identifier 6610542.pdf

Dmrecord 213398

Document Type Dissertation

Rights Kandeel, Abdel-Fattah Mohamed

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA