The Little-Mirrlees Manual: An Evaluation of Its Relevance for the Developing Countries

Author(s): Bimal Jalan

Source: Economic and Political Weekly, Vol. 8, No. 4/6, Annual Number (Feb., 1973), pp.
329-331+333-336
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4362306
Accessed: 18-09-2016 10:47 UTC

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 The Little-Mirrlees Manual
An Evaluation of Its Relevance for the Developing Countries
Bimal Jalan

From the point of viewv of the levelopinlg colntries, the Little-Mirrlees method of project evaluiationi
Cann11ot fiulfil the high hopes thait its aulthors and prota;'onists have of it. Perhaps no method of pro;ect
evalul(iti(on call do soC in c 1ilxed, and16 partially conttrolled, economzy.
Uniless a numlttiber of p)rior assiouiiptionis can be nxqade abouit quiestions siuch as the degree of "openi-
niess", the development objectives of the counztry, anl the planning approach anid apparatuis (or, rather,
thle lcck of it), it cann71ot he takeni (Is proven that the development fuinction caln best be delegated to pro-
ject evalzuators.
In developing economn ies the role of the Little-Mirrlees method is likely to be very mulch mnore re-
stricted thaii wthat its cauithors enivision. Given the existence of a long-termi plan? and the broad sectoral
aillocation of investmnenit, the miiethlod can0 be uised to mnake somi-ie m77icro-level decisions-but no m?Zore

I fromii the poinit of View of developing anid the pirevailing distortionis do not al-
couniitries; since the pros an(l cons of low free play of marklet forces at home.5
Introduction the nmethod halve beea extensively dis- Thuts, as in the classical for mullation,
THE ctiurr CeIt upsurge of interest in thectissed in the literature, a word of ex- the imiain concerin of Little-Mir rlees is
metho(ds of pr'oject evaluaitioni would seem
planation is necessary for attempting not yet so much with an-y partictular size
to be the result of two emnpirical find(- another evaluationi of the method. an)( structure of the ind(uistrial sector
ings wvith respect to the r-esults of pastIn the auithor's view, the need for that should be developed hut riather
industrialisation- policies in (tevelopilc,n
another look at the Method arises he- with the "efficiency", based on the in-
countries: (a) that, in these C0oun1tries,catuse tlher e are at least three issties of ternational price strtuctture, of whatever
there exist pervasive divergences I )e- intere.st to the developinig couintries that itidstry happens to emerge iun(ler their
tween market prices and social values, have heen overlooked in the academeiic rtules of the game.
and (b) that the pursuit of import sub- excitemenit over the technical properties For the purpose of th.is note, it is not
stitution strategy by many of these of a aiexv tool and, one might add, the necessary to diispute or clisprove the role
countries has led to the encouragemiient aid-givers' satisfaction with yet another assigned to the price rechanism (how-
of import substitution projects regardi-mlleanls of hringing ahout social revolul- ever "pturified" or "corrected" for dis-
less of social costs. The finding that tion in other peoples' countries. T he first tortions) in the allocation of resources;
social values may diverge from miarket issue is whether the structuiral transfor- nor is it necessary to recall once again
prices is, of course, not newv in ecoino- mlation of developinig societies, on the the case for long-termii planning for
mics; what lhas given it a new relevanicenee(l for wvhich mo.st economists seemil bringing about strtucttural change. WVhat
for development policy is the convictioan to agree on, can b)e b)rought about hy is necessar-y is only to poinit otut that
that widespread government interven- a jud(licious application of piroject eva- such a case exists, acnd( that (loub)ts ahout
tion in the economies of (leveloping Itiation technliques alonIe. Unfortuinate- the role of project (valuiation in invest-
countries may have served to further ac- lv, it has become customary for project- ml-ent allocation caninot he simply (lis-
centuate rather than atteniuate these di- enthusiasts to (lismiss any suich douhts mlisse(d as the last sta.nd( of inaiumerate
vergences.' Once it could( also be show-nas in(licative of pr-eference either for economists.
that goveniment policies have mla(le pos-nion-quantitative" economnics or exactly The second issuie relates to the r-ole
sible the domestic prodluctioni of milaulx' its opposite, i e, a searclh for "perfec- of nion-economic or, f or want of a het-
manufactured producits in dleveloping>tioii in (illanititative econom-nic analysis, ter wordI, "political" considerations in
cotintries at exceptioInally high socialwhich, as we all knlow, is not possihle determining (levelopment ol)jectives an(l
cost, the conclusion was inevitable that in dleveloping economies.t The po)int, policies. By "political" considerations,
what the developing couintries nieedled lhowever, is at little ionre fun d(laental in this context, we (lo inot mecan arbi-
was a good method of pr-oject cvzltia- anid (goes beyond the quecstion of (quanti-trary, whimisical, or Nkniaimesque d(e-
tion, which would bridge the gap be- fication of costs a(I l)bnenfits. rt is rio cisionls onl econlomllic policies, but colnsi-
tween private anid social valutes. less fundamental thlian the ol0( and, one lerations which dlo not f'all within the
The Little-Mirr-lees Manual2 is ani would have thouglht (lefunet, copitrover- purview of technical ecomomics and on
answer to this need. Wlhatever success sv over the role of long-termn plannin, wvhich ain economiist (10(i econIoImlist, in
the Manual may or may not have had versuis price mechbanism in thle allocatiointhe presenit state of airts, cani have very
in converting the developing couinlties of resouirces. The Little-TN4"irrlecs MNIe- little to sav. These considerations, for
- to which it is primarily addrcessed - thod is frankly of tht mnarket per-stia- example, enter in the choiec of a (leve-
there is no doubt that it lhas alrecady had sion - vith only two diflerences fromii lopment strategy. It hias too often been
an important iifluienice oan aca(lemic the traditional formlatlietion. Onie is that assumiield that the only "correct" strategy
thiniking as well as oIn the oper-ationial at least some production alnd investmiienit for a country to follow is that of maxi-
policies of some aid agencics. This has lecisions in their systemn \-otul(l ) be mad( imiisinlg current national incollmi froml1
b)een vell brought ouit in a recent Synm- hy the govemimnicnt riathel- thain] inlividual xear to year. Ecoiiooiic theory, espc-
posium on this Manutal, pUblishedl in the entrepreineurs; the other is that these de- cially in ifs Aniglo-Saxon traclition, has
Bu3lletin of the Oxford U[iciversitil Intsti- cisiolns \would ohev the revealed prefer- created a stroaig presumption in favouir
ttute of Econiomlics tand(l Statistics.3 The ences of conlsumiers ahroadl, rather than of stuch a strategy because it can be ri-
purpose of this note is to present an at honme. The latter is a niecessarv ImlC- gorously proved, in algebra as wvell as
evaluation of the Little-Mirrlees method lification since government intervention is geometry, that the reliance on the

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 Annuial Nuimber Februarv 1973 ECONOMIC AND POLITICAL W;'EEKLY

market mncchanisini Nvill be a good sx av inal)ility to generate sifficient employ- oni the other hand, hiave arguel that
to implement such a strategy - of moent opporttniities for the poor. InI they (1o iot il genleral "espouse" free
course, w7ith marginal interferi(n ce 1b thlese countries employiment of la.hoor, trade, l)ut optimal trade an(l (omnestic
the State to correct the divergence be- therefore, can hardiv he consi(dere(l pro(lnetion.1*l
tween private and social marginal pro- simply as anothler input into the pro(l1ic- In saying this, Little and NMirrlees are
tion process. For maniv of them, it is
cluctivities of resources in (lifferenit tuses. formally correct in the sense that they
Many developing countries have also the principal mleanis wherecly the pre-(1o not accept the Ricardiani version of
opted for sutch a strategy because this is ;aling ine(lualities of inicolmle distribu- free trade, as the ideal policy for deve-
the only onie which is consistenit wN7ith tioin l)etveen the emiployed anid the otn1- loping cotuntries. They explicitly fa-
the political and social system they de- emplovedl can l)e redticed. In this con- voutr a system of taxes-curm-subsidies as
sire. However, there is also anothei text, insistence on viewing the prollem a way of dealing xwith domestic distor-
view on development strategy; in this of additional savings as one of restrict- tions, and even allowv for the possibility
view, causes of uinderdevelopiiment lie in inig employment wvould seeim to lc a of providing special encoutragement to
the technological backwardness of the particularly inapt way of goinig ahonit indutstry through "'pronmotional" mea-
productive structure, and an appropriate the development bulsiness.7 stures designed to bring market prlces in
strategy for development should( be con- Section II of this paper deals with line with internatlonal prices.11 In re-
cerned with overcoming this (lisa(lvan- some aspects of the Little-Mirrlees ap- cognising the existence of domestic dis-
tage in the shortest possible time. This proach, which have been the subject tortions as well as external economies in
may involvet a certain sacrifice of cur- of considerable debate, in terms of the mantufacturing, they are in line with
rent income ancl a certain neglect of perspective outlined above. In doing so, curirent developments in international
cutrrent opporttunities in favouir of build-I shall not, howvever, try to r epeat the trade theory, and can hardly be fauilted
ing the basic technological and produic- rationale or the logic of their appproach, for riecommending the 19th century mo-
tive infrastructure of the economy. This since the Method has already been ftully del of free and unfettered trade to de-
strategy may also require, among other explained and elucidated by its support- veloping coutntries.
things, a larger allocation of investmient ers as well as its critics. For these, the From the point of view of (leveloping
to the indtustrial sector as well as a lar- reader is referred to the Manual as well couintries, however, this is not the whole
ger investmiient in the capital goo(ds in- as the Symposium volume of the story. While Little-Mirrlees do not es-
duiistries thani would be permitted by Bulletitn of the Oxfor-d Institute men- potise free trade in the formal classical
considerations of cuirrent comparative tioIned earlier. Section III examines the sense, they do seem to asstume an unli-
a(lvantage.6 r elevance and possible use of the Me- mlited willingniess oni the part of the de-
The choice betwveen these alternative tho(d in developing economies. Section veloping cotntries to trade at the market
strategies cannot be entirely a matter IV deals with some practical problems terms of trade. Similarly, they assume
of logical debate among economi.sts in- that mnight arise in applyina the Methocl.
that "openness" is the best (levelopment
volving as it does the choice of a parti- policy for developing countries.12 In this,
cular intertemporal pattern of consuimp- II however, the dleveloping couintries' plan-
tion as well as a particuilar riole for ners, and( not only their politicians, may
Some -Basic Considerations
State in determining the pattern and (liffer. Willingness to tra(le may be
pace of development. If it can be THE FnEE TIRAnE BIAS affected by two considerations: one is
granted that these choices canniot be what has been referred to as "trade
made without introdtucing certain poli- The novelty of the Little-Mirrlees ap- optimism" of the country, and the other
tical considerations or value jud(gyments, proach to project evaluation lies in the is the judgment that international trade
the question niaturally arises whether particular rules they propose for valua- at prevailing market termis of trade may
the industrial struictture emerging uncder tion of goods and services. As is well be inequitable to the dleveloping cotun-
the Little-Mirrlees ruvtles of the game known, they propose to valtue inputs and tries. The latter is not a matter of whe-
wouild be consistent with all possible ouitputs of a project at "world" prices ther external markets are expanding or
development strategies? Or, ar,e these on the grounmd that "following the chain whether export prices are fluetuating
rules an attempt to prescribe a uiniquie of prodluctioin arounicd, onie miuist even-but whether the exchange r atio (as de-
development strategy, based on the pre- tuially end at commodlities that are ex- termined by the existing distribution of
vailing international pr-ice structire, for ported or substituted for imports".8 income and historically-dletermined fac-
all dleveloping countries irrespective of Vorl(d prices, therefore, can be taken as tor endowments) betwN een capital-inten-
their own preference or(kering of avail- representing the opportunity cost of va- sive products of the indtustrially advanc-
able alternatives? riious goo(Is and services to the society. ed countries and the labour-intensive
The thir(d issule relates to the riole of It, therefore, follow s that the country products of the developing countries is
project selection in generating saviigs. shouild prodlulce only that in wN hich it isequitable and fair.
The isstue her e is not so mullch \vhetherinternationalllv coimipetitive, andl obtain Perceptioni and evaluiation of oppor-
saviags in dleveloping couintries are op- any bundlet of goods it (lesir-es to con- tunities in trade is likely to vary from
timiail or sub-optimial, but whliether pr o- sllime by tradilnTg. I Sinice the conisumlp-couintry to coulntry, an(l so is the "open-
ject selection is the ideal or even ani ap-tion preferenices of the society, in their ness" of their economnies. Aside from
pr-opriiatc means of' restrictilngT conlsuilip- system, are griven independently of the the fact that the past exper-ience with
tion of workers in societies wvhere nn- dlonmestic pro(luction, it also follows that the growth of expoorts of developing
enmploymnent anid inconei ioie(lualities are the choice of projects would at the samiie couintries are a group has not been con-
fast b)ecomingn the burning( political and(1 tiiime determinie the amnouint and pattern ducive to excessive tra(le optimism,
social isstues of the dav-. The iniabilitv of interniationial trade that a country en- there is the important question of uncer-
of miao'y of the (developing countries g(Yages in. Oni this grotuncd, the critics of tainties involved in heavy dependence
to redulce eitc(r the extent or the ex- their metho(d have pointed out that the on trade. These uncertainties arise not
trem' -s of povert is niow wvidely consi- Little-Mirrlces method suffers from a only due to the lack of perfect foresight
dered as a direct consequence of their "free trade" bgias.9 Little andl Mirrlecs, ab)out fulture economic deveQlopments but

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ECONOMIC AND POLITICAL WEEKLY Annual Number Febr-uary 1973

also due to the political elemlnt involv- tors to cmphasise the nieed for a "social" rates of ieturn (say above 10
ed in the trading policies of othler maicro-ecoInomic plan. Little and Mirr- per cent). What should he advise the
countries. Some countries which are too lees do not fall to givc plannillg its duie; governmienit to do? If the foreigners are
dependent on economic developments in fact there are twvo wVhole sections ill willinig to buy unlimlited quantities of
abroad or wZhich rely on exports of oine the Manual wIhich explicitly suggest Iindliani footwear, cotton and aluminium,
or two commodities might, thelrefore, that "planis require projects" anid "pro- his advice, following the Manual, will
be willing to pay a price (in terms of a jects require plans"."4 However, it can- l)e straightfor ward: export these coim-
lowver current income) in order to re- not be deniied that the Manual's view of noclities in exchainge for the other seven
dtuce their dependence on other peo- the role of planning is extremely nar- coimmo(lities. In practice, several prob-
ples' actions. Others might wish to de- row; the pr-imary purpose of planning lemios are likely to arise;15 however, the
crease their dependence for certain types in its scheme of things seems to be to imore importanit question is whether in
of goods or on certaini counltries anid lhelp project evaluation! The main func- a(Ivisiing this he would have in minid the
pay a certaiin price for it. Self-sufficien- tioin of the plannaers is to forecast de- saine futtue econiomy that the planners
cy in food production, for example, is miand or "gtuess how scarcities will lhad inlii iind? lf, on the other lhanid, the
an objective which seeins to command change" or anticipate whether "disguis- forcigners are IlOt Willing to buy the
ulniversal approval. ed or actual unemployment will rise or commodities that the evaluator wanits to
For these reasons, it does not seem fall" anid so on, so that the project push (a more likely assumptioni), should
possible to recommend a desirable deg- evaluator mnay do a better job of eva- hie advise his governmnent to cut dowan
ree of "openness" for all developing luating projects. They, however, con- (loimestic investment an(d invest surplus
counitries wvithout introducing a prior cltude "wlhercas it is beyond argumencllt funLds in the Newv York Stock Exchange?
value juLdgmenit. If tllhlt be so, anid if it good planis require good projects,
that Thlie Maniual's answer would be yes",16
cani le assumiied that the value judg- the ar gumiienit outlined above, that a lbut this advice is unlikely to help the
imeInt (atnd, therefore, the willingness to proper analysis of projects itself re- cause of development or that of project
trade) might differ from one country to quiires good plans, can be over-empha- evaluation. Oil Sheikhdoms on this cri-
aniother, it is clear that the prevailing sisedc... in general, one can make terion, would be considered the most
price at which a commodity can be somile guess as to real scarcities which developed, anid the wisest, of countriesl
b)ought and sold can nio longer be taken face the economy in its development, Tl he purlpose of planning, from the
as representing its social value in equal anid put a price on them, even wvithout developinlg counitries' poinlt of view,
iieasure to all societies. the benefit of any attempt at overall w ould seem to be a little more than
Similarly, Little-Mirrlees are concern- planning". This is lhardly a resoundingproviding denmand forecasts for parti-
ed onily with the monetary value of diffe- enidorsemenit of the need for planning! Cular comimlodities. It is no less than the
rent commodities in production and ex- It is true that experience with overall option to choose a different growth path
change. Thus, to them the production planniing in the past has not been such in search of long-terml- advantage than
of a tonne of steel is exactly equal to as to ptut its critics to shame. It is also the oane that reliance on market prices
so many metres of cloth or so many perhaps reasonable to argue that if one (domestic or foreign) would indicate.
bushels of wvheat. Yet, can it he denied cannot plani properly, the least one can It should be mentioned that the
that the economic impact of steel-mak- do is to try and select projects accord- above is n1ot anI argument against pro-
ing is Jikely to be different (not neces- inig to certain economic criteria. This ject evaluatioll per se by Little-Mirrlees
sarily better or wvorse) than that of farm-way investmenit returns are likely to be or any other method. What I do wish
ing? Or that a country which produces better than a situation of "no plans and to emiphasise is that "rationality" of a
steel and buys cloth is likely to be poli- nio projects". Ilowever, it will not do policy or an action cannot be judged'
tically and economically different from to claim that the Little-Mirrlees method independently of a country's develop-
a country which produces cloth and of project evaluation can be consistently nienit objectives, and an attempt to pres-
exchanges it for steel? These differen- applied whatever the content of the crihe uiniversally valid "rational" poli-
ces inay l)e dismissed as irrational, but country's plani or that the content ofcies a is taantamount to imposing the per-
what would seem to be important for country's plan should be such as to sonial value judgments of a particutlar
project evaluation from the point of facilitate the application of this method. economllist with regard to what these
view of a dleveloping country is to give ob)jectives ougohlt to be.
T ake the current Indian planning
it the kinid of developmneant that it
exercises, for example. The plans con-
wvants (in tlhe most efficient maniner, of COPE
tain macro-economic inivestmenit and
course) rather than the kind of develop-
growth targets, sectoral investmlent tar- Thie extenIt of power1s to be vested in
onent that suits its triading partners or
gets, ancd production and demand tar- tle Centr-al Office of Project Evaluation
coiiventionlal ecoinoimic tlheory. The Ma-
gets for individual commnodities. In addi- (COPE) has been a subject of consider-
nutial discuisses this issuie; it muist, lhoNv-
tioin, the plans aimii at redlucinig theahle academnic dlebate; so much so that
ever, be pointed out that the discutssioni
import-depenidence of the economy has- thec miiain dliffer-enice between the Little-
is perfunictory and(l is iiore concernied
ed oni anl assessment of export possibili- iirrlces aind another comnpeting method
with irrational fears about dislocation of
ties anid likely aid inflows (these assess-ot project evaluatioll is claimed to be
trade or warfare rather than with the
menits may be saidc to lie irrational, blutthe differing assumiptionis they make re-
legitimate economic ancd political objec-
w7ho is to decide?). Now, suppose the arlding howv powerful this office is
t-ives of the developing countries (as they
project evaluiator, armned with the Little-likely to be in practice."7 From the
see them).13
Mirrlees Manual, sits down to evaluate point of viewv of developing countries,
priojects in 10 different industries tlhis wlhole controversy, however, has an
PLANS AND PROJECTS
steel, fertilisers, nylon, rayon, aluminium, "Alice in Wonlderland" quality about it.
It is customary for planners to empha- atutomobiles, refrigerators, wagons, cot- It is takeni as self-evidenit that there can
sise the importance of project evaluation ton textiles and foot-wvear. Futrther sup- h)e only one set of "rational" and "effi-
for implementing the plan julst as it ha.s pollse that he findls that footw ear, cotton ciebnt"' policie.s for all developing coun-
blecomle emistoimary for p?rojecet evalna- an(l alulminiumn prlojects have} high tr ies in all situlationlS. It is also self-evi-

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dent that developing countries are un- of reflecting this preference) in their the Little-Mirrlees method cannot fulfil
likely to be following these policies. method of project evaluation. the high hopes that the authors and the
Therefore, what is needed is a wise Since actual savings in many develop- protagonists of their method have of it;
project evaluator who would tell the ing countries are considerably lower perhaps no method of project evalua-
government what to do. If the govern- than the declared intentions of their tion can do so in a mixed, and partially
ment is sensible and follows his advice,governments, it is difficult to sympathise controlled, economy. These, unfortu-
the Manual method of project evalua- with the view that whatever the level nately, are also the economies where
tion is the correct one.'8 If, however, of savings, it must be considered opti- the divergence between market prices
the government is stupid and does not mal from the point of view of that and social values is likely to be the most
know where its interests lie, then we country.20 However, it must be empha- serious. However, unless a number of
should lool for some other method, i e, sised that to argue for more savings is prior assumptions can be made about
the UNIDO methodl Project evaluation not the same thing as arguing for the questions, such as, the degree of
thus becomes a branch of political an- Little-Mirrlees method of project eva- "openness", the development objectives
thropology I
luation, although some statements of theof the country, and the planniing
In reality, project evaluation groups method tend to give just the impres- approach and apparatus (or rather the
are not likely to be sole islands of sanity sion.21 The objective of generating more lack of it), it cannot be taken as proven
amidst irrationality. Nor, in my view, is savings through project choice, if a that the development function can best
it necessary to assume either total country should so wish, can be accom- be delegated to project evaluators. The
rationality or total irrationality in gov- modated in other method of project eva- question then arises: does this leave
ernment policies; what is necessary is luation also, including the one that any scope for the use of Little-Mirrlees
to assume only the governments ktnow would value non-labour inputs and out- method in developing economies? I
what they are doing and that they puts at market prices. For example, in think so; however, its role is likely to
need project evaluation methods to tellconditions of insufficiency of savings, be very much more restricted than what
them about the economic costs and Dasgupta has argued that both the its authors envision. Given the existence
benefits of alternative projects and pro- UNIDO and the Little-Mirrlees ap- 'of a long-term plan and the broad
grammes. Sensible governments will proaches would make identical recom-sectoral allocation of investment, the
take these exercises seriously and weigh mendations. To quote, "both Lpproachesmethod can be used to make some
the costs and benefits of projects before are committed to the belief that if inmicro-level decisions-but no more.
embarking on them; insensible ones fact the government is not in a position First and foremost, the method can
would probably ignore them. What to attain an optimum level of savingsbe used to advantage for maximising
they in fact do with their project re- and investment via fiscal and monetarythe domestic value of any planned level
ports may be of great interest to aid policies then the problem ought to beof imports. While countries may differ
agencies and development experts; from faced at project level. In the UNIDO in their preferred degree of openness,
the point of view of method of project approach we found that this is done by they all do have, and plan to have, a
evaluation per se, this is immaterial. The using a shadow price of investment certain level of imports. The current
validity or superiority over another of exceeding unity... In the OECD ap- approach to import planning in many
any particular method of project eva- proach the process is the other way. developing countries is based on the
luation would seem to be a technical Investment is the unit of measure- criterion of "essentiality". Importables
rather than a political question, and any ment".22 are assigned what may be called
attempt to change policies or introduce "essentiality co-efficients" and the
The emphasis on savings, therefore, greater the essentiality co-efficient of a
"rationality" in a country's objectives
cannot be considered to be a ipecial commodity, the greater its chance of
through the instruments of project eva-
merit of the Little-Mirrlees mnethod. In being on the import list. Thus heavy
luation can be correctly labelled as
fact, since the valuation of government machines may be considered more essen-
pseudo-scientific.
savings in the Little-Mirrlees method is
tial, and therefore more import-worthy,
in terms of world prices, it can be argu- than light machines, light machines
SAVINGS AND CONSUMPTION ed that their method suffers from a more essential than intermediates, irter-
practical disadvantage as an instrument mediates more essential than consumer
With regard to the relationship bet-
for raising the level of domestic savings. goods, and so on. Essentiality co-
ween savings and project evaluation,
Governments are used to budgeting and efficients of commodities are also highly
there are two issues that have been dis-
planning in terms of domestic prices; variable over time, and thus what is
ctussed: (a) whether savings in develop-
unless the economy is a completely open
ing countries can be considered to be considered import-worthy today may be
one (with convertible currencies) it maydismissed as non-essential tomorrow, anid
sub-optimal and (b) if so, how much
weight should be given to the "savings
happen that the value (at domestic vice versa.
prices) of savings generated through the
objective" in project evaluation. Stewart When domestic production of so-
and Streeten, for example, have argued
use of Little-Mirrlees method would be
called non-essentials has been allowed
that if the government is free to tax,less than if the government had used while imports have been banned, the
existing savings may be considered to domestic prices for evaluation of pro-
above process has been extremely
correspond to the savings preferences of jects. The point is not one of theory but wasteful of domestic resources.23 Thus,
the government, and in that sense opti- of practice; most national accounts are quite typically in developing countries,
mal.'9 Little-Mirrlees and others, on the in terms of domestic currencies, and fertilisers may be considered to be more
other hand, seem to be inclined towards most governments plan in terms of import-worthy and essential than nylon
domestic prices.
the view that savings in developing eco- or passenger cars. Yet domestic costs of
nomies are likely to be sub-optimal in producing passenger cars or nylon (at
the sense that their governments are 1III capacity levels determined by domestic
likely to value a Unlit of savings more demand) per unit of foreign exchange
than a unit of consumption. They would, The Relevance of the Method
saved may be considerably mnore, and
therefore, like to reflect this preference It would thus seem that from the social return much less, than that of
(or at least provide for the possibility point of view of developing countries, producing fertilisers at home.2S In these

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Annual Number February 1973 ECONOMIC AND POLITICAL WEEKLY

circumstances if the country wvanted state of our knowledge, use of world social objectives outweighed interna-
both cars and fertilisers, it is likely thatprices for evaluating resource-costs may
tional cost considerations; however, it
it would do better, both in terms of provide a convenient way of assessing is likely that a decision reached in the
foreign exchange and national income, the profitability of projects without light of such an analysis will be (luali-
if it were to import cars and produce having to rely on either market prices tatively better than if no such analysis
fertilisers rather than the other way (which may be misleading) or domes- were made.
rouind, unless there were other objecti- tic shadow prices (which may not be
ves arnd external economies which out- available). IV
weighed cost considerations. The coun- An example from an Indian project
try is likely to get more donmestic value for the manufacture of synthetic tyre Problems in Application
out of any planned level of imports if cord, to which the Little-Mirrlees me- If what one expects of the Little-
decisions with regard to the commodi- thod was applied, would illustrate the Mirrlees Method is less than "optimum"
ty-composition of these imports were point. The domestic demand for this allocation or "optimum" trade, the prac-
made on the basis of an assessment of particular type of synthetic tyre cord in tical problems that arise in the applica-
their real domestic costs rather than 1975 was assumed to be 10,000 tonnes; tion of the Method also become much
their apparent essentiality.25 it was further assumed that this demandless severe - and less important. Not
In this approach, however, the Me- would be met entirely through domes- much, therefore, needs to be said about
thod is no more than a method; only tic production. The question to be in- these beyond what the authors themsel-
when a country gives itself the choice vestigated was whether 10,000 tonnes ves have suggested. On valuation of non-
of either importing a commodity or pro- should be produced in one plant, two traded inputs, one can thus accept the
ducing it at home that the choice can plants (with a capacity of 5,000 tonnes authors' judgment that the methods used
be settled by applying the Little- each) or five plants (with a capacity of to value them "can vary with the time,
Mirrlees method of project evaluation. 2,000 tonnes each). It was also assum- skill, and knowledge, possessed by the
No prior assumption is made about the ed that, provided they were considered evaluator", and in any case "a very so-
degree of openness that a country ought viable, smaller plants were to be pre- phisticated treatment would not be ne-
to have, this is a decision to be made ferred to larger plants (on grounds, suchcessary when evaluating the large ma-
by the planning authorities or the gov- as, diffusion of entrepreneurship as well jority of industrial projects".22 Similarly,
ernment on grounds that they consider as wider diffusion of economic benefits). the problem of estimating "external cf-
relevant to that decision. It also does fects" associated with different projects
The following Table shows the rates
not follow that a country would urder- of return at market prices as well as the becomes much less important if the
take the domestic production of only Method is used as an aid to investment
social rates of return, calculated accord-
those commodities where the Little- planning for comparing similar indus-
ing to the Little-Mirrlees method, for
Mirrlees return is high; it can - on trial projects or different ways of doing
plants of different capacity:27
grounds such as externalities, linkage- the same thing. The argument of some
effects, independence, and defence, or I'lant Market "Social" critics, cited by Gutowski and Hammel,
any other - decide to reserve certain Capacity Rate Rate that the Little-Mirrlees Method may be
(tonnes) of Return of Return unfair to the industrialisation efforts of
sectors for domestic production without
bothering to calculate the international (per cent) (per cent) a developing country29 would no
value of these activities. Similarly, 2,000 17.0 2.1 longer worry us since the use of the Me-
there may be situations when a country5,000 30.5 14.5 thod would not indicate the total
10,000 40.0 22.0 amount of industrial investment that
may ideally wish to import a commodi-
ty on cost considerations but does riot It will be noticedtook place in the
that economy. the
both The exist-priva
have the means to do so; then the and the social retums improve marked- ence of excess capacity in many indus-
choice before it is either to produce it ly as the plant size is increased. Since tries does present a methodological pro-
at home or go without it. If it decides the economies of scale are significant in blem.30 However, in practice, one
to produce, the extra costs incurred have this industry the world over, this re- could assume that to the extent that cur-
to be deemed as the price that the sult is not surprising. However, what is rent production costs (ignoring capital
country is willing to pay in order to interesting is that while the pri- costs) are less than the world price, the
have that commodity at this time. Pro-vate rate of return for all the product could have been exported and,
ject evaluation thus becomes an aid to three plant-sizes is satisfactory, the therefore,
social the world price represents the
investment and import planning rather rate of return is extremely low when real social cost: to the extent that cur-
the
than a substitute for it. plant size is 2,000 tonnes but becomes rent costs are higher, the use of world
A second area in which the applica- favourable at the 5,000 tonne level. prices as the accounting prices will not
tion of Little-Mirrlees method could In view of the prevailing shortages and adversely affect the project.
prove useful is in choosing between al- high domestic prices for this type of Finally, the shadow wage rate. The
ternative ways of doing the same thingtyre cord, almost any technologically theoretical logic of the Little-Mirrlees
or achieving the same output. Two al- feasible size of the plant is likely to haveformulation is impeccable. They bave
ternative projects may produce the sane showed high private profits. However, argued that in societies where savings
output or satisfy the same need, but the above results also show that from are sub-optimal and where the possibi-
may use different resources and have the society's point of view, it may be lities of raising saving through fiscal
different costs. Use of market prices for better to opt for a higher capacity plant policy are non-existent, the only way in
evaluating the social costs of these pro- which would be internationally as well which savings can be increased is by
jects may be highly misleading; while as domestically viable - and at the restricting industrial employment. They
estimation of social opportunity costs in-same time be consistent with the would, goal therefore, like to reflect this con-
dependently of market prices may be of import substitution in this industry. sideration in project selection through
difficult, unacceptable or invalid.26 In The country may still decide in favour the mechanism of the^shadow wage rate.
these circumstances, and in the present of small plants, if other non-quantifiable In their- formulation, therefore, the va-

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 ECONOMIC AND POLITICAL WEEKLY Annual Number February 1973

lue of the shadow wage rate would de-
pend on the net incremental consuimp-
tion of the employed and the value that
society places on additional savings;3'
its value would be higher (and employ-
ment lower), the greater the need for
savings. The theoretical conditions that
have to be fulfilled before this calcula-
tion can be made have been adequate-
ly spelt out by the authors themselves,
and need not be repeated.32 However,
the more important difficulty in this ap-
proach lies in its rejectifon of employ-
ment as a distinct and separate objec-
tive of development policy, and its fail-
ure to distinguish sufficiently between
consumption of different classes in the
society. It is true that an employed
worker is likely to consume more, but
this is precisely the reason why employ-
ment has come to be regarded as the
principal means of relieving the ex-
treme poverty of the unemployed. Si-
milarly, in societies where inequalities
in consumption and income distribution
are pervasive, the choice with respect
to employment is not so much between
the present and the future as between
the present consumption of different
classes.
It may be argued that Little-Mirrlees
framework is capable of handling the
employment objective; what one has to
do is to value the incremental consump-
tion of workers differently. This is true.
However, in that case a simpler and a
more relevant approach to the estima-
tion of shadow wage rate may be to
make its value dependent on the em- which, according to the theory of
ployment-preferences of governments. In- laissez-faire, they ought to miieasure
stead of trying to calculate the social
value of savings in terms of consump-
tion or the marginal product of labour
in agriculture,33 one would simply ask
the government what the value of sha-
dow wage rate should be in the light
of its employment objectives. The choice
of shadow wage rate then becomes the
means whereby the government can in-
dicate the margin of preference that
should be given to the employment of
labour vis-a-vis capital in project selec-
tion.
Notes
1 Since "social" value is usually de-
fined as that value which would
have obtained if the government
had not intervened - and if the
rules of perfect competition had
prevailed - this conclusion, it
must be noted, is not surprising.
2 All references to the Manual are
to "Manual of Industrial Project
Analysis in Developing Countries,
Volume II, Social Cost Benefit
Analysis", by I M D Little and
James A Mirrlees, Development
Centre of the Organisation for Eu-
ropean Co-operation and Develop-
ment, Paris 1968.
3 Vol 34, No 1; February 1972. All
references to the Bulletin, unless
otherwise mentioned, are to this
issue. It is interesting that of the
eight contributions to the syinpo-
sium, six are from British universi-
ties and two are from aid agencies;
there is none from the plannier or
the project evaluator in developing
countries. Both the contributions
from aid agencies are highly lauda-
tory.
4 Thus on the question of "strate-
gies", Little and Mirrlees lhave this
to say: "our belief is that such
hunches have no general value. The
best direction of advance of a par-
ticular economy can be determined
only by close analysis of that eco-
nomy. Furthermore, nOn-quantita-
tive anialysis, even if shrewd, is
dangerous", Manual, p 59 (my ita-
lics). After emphasising the need
for close analysis of individual eco-
nomies in choosing the direction
of advance, they proceed to enun-
ciate a method, which with equal
validity, would determine the di-
rection of advance for all econo-
mies! See also, Vijay Joshi, "The14 Sections 5.2 and 5.3, pp 58-61.
Rationale and Relevance of the 15 If world markets are not perfectly
Little-Mirrlees Criterion", Bulletin,competitive, the country may not be
op cit. After examining various
objections to project evaluation,
Joshi concludes, "In the end, one
must emphasise that project eva-
luation is not a subject for a per-
fectionist", p 5.
5 Lest this be considered a caricature
of their method, let me quote from 18 "If the commercial policy of a
the Manual, "Cost-benefit analysis
is the more necessary the greater
the extent to which project expendi-
tures differ from the social costs
- and similarly for project re-
ceipts" p 24. Also, "Not all the dis-
tortions . . . in the price mechanism
. . can be dealt with by using ac-
counting prices in project selection.
Many of the distortions can be sa-
tisfactorily dealt with only by re-
moving them - i e, by adopting 19 Stewart and Streeten, p 87, op cit.
policies which lead to a proper cor- 20 In India, for example, the Fourth
respondence of prices, and costs
and benefits", p 37.
6 Such a development strategy, for
example, emerges from Mahalano-
bis model for India. For a power-
ful exposition and interesting modi- declined during the first two years
fication of this model, see R M
Sundrum, "Studies in Planning
Techniques", Economic and Politi-
cal Weekly, Vol VII, Nos 19-23,
1972.
7 ". . . employment imposes a com- 21 For example, the oft-repeated
mitment to consumption which
taxation cannot rationally be used
to restrict, in which case less em-
ployment implies more saving (and
a faster growth of employment),
and there is no way of achieving
additional saving without reducing
employment", Little and Mirrlees
"A Reply to Some Criticism of the
OECD Manual", Bulletin, Febru-
ary 1972.
8 Manual, op cit, p 93.
9 Stewart and Streeten, "Little-Mir-
rlees Methods and Project Apprai-
sal",, Bulletin, op cit.
10 Little and Mirrlees, "A Reply to
Criticism of the OECD Manual",
op cit. For a statement of what
these optimal policies should be,
see also "Industry and Trade in
Some Developing Countries: A
Comparative Study", by Little,
Scitovsky and Scott, 1971.
11 Manual, pp 69-75.
12 Incidentally, the preference for
"openness", which coincides with
the development philosophies of
western donor countries, is perhaps
one reason why the method has
found so much favour with aid
agencies.
13 Section 3.32, pp 46-47. In their
reply, op cit, Little-Mirrlees have
dismissed the issue by saying "It is,
therefore, irrational to emphasise
the development of domestic uses
for local resources and production
at the expense of trade possibili-
ties" (their italics), p 157. If this
is not an assumption of "openness",
what is? China, according to their
criterion, would be the most "irra-
tional" of developing economies.
able to meet its requirements of
steel, etc, by expanding exports of
footwear, etc.
16 Manual, p 118.
17 P Dasgupta, "A Comparative Ana-
lysis of UNIDO Guidelines and
OECI) Manual", Bulletin, op cit.
nation were efficient it would be
entirely correct to value tradable
goods using world prices as the
OECD approach recommends. How-
ever, in such a situation this is pre-
cisely the procedure that the
UNIDO approach would recom-
mend as well. But typically the
trade policies of a nation may in-
deed be imperfect and it may be
fair to judge that they will femain
so" (italics in original), P Dasgupta,
p 48, op cit.
Plan had aimed at raising the rate
of domestic savings (as percentage
of NDP) to 13.2 per cent in 1973-
74 from the level of 8.8 per cent in
1968-69. In fact, savings have
of the Plan (8.3 per cent in 1970-
71). See, Planning Commission,
Government of India, "The Fourth
Plan Mid-term Appraisal", Ch 6,
Vol 1, 1972.
statement that Little-Mirrlees me-
thod "assesses the effect of the pro-
ject in terms of savings rather than
in terms of consumption" p 137, J
M Healey, "An Aid EconoInist's
Evaluation of the Little-Mirrlees
Manual", Bulletin, February 1972.
Assessing the effect in terms of sav-
ings rather than consumption is a
contrast with the UNIDO method
and not with methods of project
evaluation in general.

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22 P Dasgupta, p 44, op cit. time-path for the economy by maxi- thumb" anyway, e g, the judgment
mising a social utility function over that the shadow wage rate should
23 For an interesting exposition of
time. If one can do this, why one be "half' or "two-thirds" of the ac-
this phenomenon, see Little, Scitov-
should still need project evaluation tual wage rate. See, for example,
sky, and Scott, "Industry and
is anybody's guess! Little, Scitovsky, Scott, op f it,
Trade in Some Developing Coun-
tries", 1971. 33 Incidentally, in practice such at- Table on p 195; and N H Stern,
tempts usually end up in "rules of Bulletin, op cit, p 114.
24 The OECD Development Centre
has made a number of case studies
of projects in India, Pakistan, Mexi-
co and Brazil, which provide esti-
mates of social rates of return ac-
cording to the Little-Mirrlees me-
thod. Of the five fertiliser plants
studied, three showed exceptionally
good social return and two showed
moderate returns. Several passenger
car projects, on the other hand,
showed negative value-added at
world prices. See Chapter V and
Appendix to Chapter IV, "Industry
and Trade in Some Developing
Countries", op cit.
25 There are other measures, such as
the "domestic resource cost" rnea-
sure and the measure of effective
protection, which could be used to
provide essentially the same an-
swers (e g, Michael Bruno, "The
Optimal Selection of Export-Pro-
moting and Import-Substituting
Projects", United Nations Centre
for Industrial Development, 1965).
However, the Little-Mirrlees me-
thod has several advantages over
these; e g, it provides the (nly Prim proper...and plural
systematic way of taking into ac-
count the foreign exchange costs of A singular woman who obdurately remained
inputs that are not actually t-aded plural was Queen Victoria. "We are not amused,"
as well as the time-profile of costs she would exclaim when told funny
and benefits. Another practical ad- stories, including others in the audience
vantage is that the "rate of return" who rather thought them jolly good.
concept used by Little-Mirrlees is
a familiar one, and is customarily Prim and proper-that was Victoria,
used in financial evaluation of pro- And clean, too. This despite Buckingham
jects. Palace lacking the basic amenity of a
26 See, A Rudra, "Use of Shadow bathroom in 1837, the year she became queen.
Prices in Project Evaluation", In the years following,however,her
Indian Statistical Institute, 1970. subjects would seem to have got into
27 For calculation of social rate.s of re- hot water. Bathing was'In'and soap
turn, tradable items were valued at sales so soared that production hit a new high
c i f o r f o b prices. Valuation of uli- of 96,000 tons, in 1851. Two things helped:
lities and non-traded services wv as (i) The problem of alkali supplies had been solved
based on conversion factors derived by Leblanc developing a new process for
by the OECD Development Centre producing caustic soda from common salt.
for their case studies of Indian pro- tii) Advertising, another essential (sic) in the
jects, with cer-tain adjustments (see
soap business had had its first brush with art.
"Guide to the Methods Used in
Cost-Benefit Studies of Industrial Sir John Millias, a future President of the Royal
Projects in India", mimeo. The au-
Academy created around this time his famous
thor is grateful to I M D Little "Bubbles" poster for Pears Soap...
for making a copy of this paper bringing his work and the soap to the notice of
available to him). A shadow wage the queen and the great unwashed.
rate of 45 per cent was applied for Respectively,rather than vice versa.
valuing labour costs. At actual
wage rates, social returns would be At Mettur,we make caustic soda,both rayon
slightly lower. The conversion ra- and commercial grades. In solid, flakes and lye.
tios used for estimating social return
Here's the full range of the chemicals we produce:
were admittedly very crude and
are based on old data, but they INORGANIC CHEMICALS:
would do for the present purpose. Caustic soda * Stable bleaching powder * Hydrochloric
acid * Liquid chlorine * Calcium chloride * Aluminium
28 P 154 and p 160, op cit.
sulphate * Potassium chlorate * Silicon tetrachloride
29 P 129, Bulletini, op cit.
30 For a discussion of this problem, ORGANIC CHEMICALS:
see hleather Joshi, "World Prices Methyl chloride s Methylene chloride * Chloroform
as Shadow Prices: A Critique", Carbon tetrachloride * Chlorinated paraffin wax
Bulletin, op cit, p 57-59.
31 The formula for calculation of the THE METTUR CHEMICAL A INDUSTRIAL t
shadow wage rate is given in Chap- MettCORPORATION LIMITE T
ter XIII of the Manual.
_ ~~~Mettur Dam -636402 Salem Dt. Tamil Nadu ,
32 Ideally, for this calculation, one
would need to derive an optimal

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