Tools and Techniques of Development Planning

The tools and techniques of planning refer to those quantitative and qualitative methodology, measures and analysis that are made in comparison, assessment and in choice in the planning process.

                                                1.      Capital -Output-Ratio (COR)

The concept of capital-output ratio (or capital coefficient) expresses the relationship between the value of capital investment and the value of output. It refers to the amount of capital required in order to produce a unit of output. When the capital-output ratio in the economy is said to 5:1, it implies that a capital investment of Rs. 5 crores is essential to secure an output (income) worth Rs 1 crore. It may thus be defined as "given relationship between the investments that are to be made and the annual income resulting from these investments". The capital-output ratio is of two types: average capital-output ratio (ACOR) indicates the relationship between the existing stock of capital and the resultant flow of current output. The incremental capital-output ratio (ICOR) expresses the relationship between the amounts of increase in output (income) delta Y , resulting from a given increase in stock of capital delta K ,. This can be indicated as delta K/ delta Y. In other words, "average capital-output ratio refers to everything that has been invested in the past and to the whole income. The marginal ratio refers to everything that has been added in a recent period to the capital or income".

The concept of capital-output ratio is applicable not only to an economy but also to its different sectors. There are different capital-output ratios for different sectors of the economy depending on the techniques (capital intensive or labor-intensive) used by them. In a sector using capital intensive techniques the capital-output ratio would be high and in another sector using labor-intensive techniques the capital-output ratio would be low. Transport, communications, public utilities, housing and capital goods industries have very high sectoral capital-output ratios. While capital-output ratios in the agriculture sector, manufactured consumers' goods industries and service industries are generally low. The overall capital-output ratio for a country is the average of the sectorial ones. The capital-output ratio is an important and useful concept for purposes of economic planning in an underdeveloped country. "This is particularly true where it is necessary to check the consistency of targets for the growth of national income against the additional capital likely to be available from current savings of foreign investment". In order to estimate the financial requirements of growth, it is necessary to have an estimate of the volume of investment needed to attain a given target of output. The capital-output ratio is thus used to determine the growth rate of an economy. The Harrod -Domar models of growth are based on this concept.

In formulating a plan, an ICOR is required for the purpose of calculating the growth rate of the economy. Suppose we want to increase national output by 10 and assume the ICOR to be 2. In this case the required addition to the capital stock needed for new investment will be (10*2=20). Assuming the current level of national output to be 1000 and the saving rate 0.04, the domestic saving will be 40. Now this much of domestic saving can be invested for the purpose of increasing national output. Given the ICOR of 2, this amount of saving and investment would increase national output by 20 (= 40/2). This gives the growth rate of 2 percent per annum in national saving ratio by the ICOR, i.e., 0.04/2=0.02 or 2 percent. Moreover, the importance of capital-output ratio lies in making out the case for obtaining large foreign aid for investment by underdeveloped countries. Since the domestic saving-income ratio is low in underdeveloped countries, a higher rate of foreign aid is required for achieving a higher growth rate, assuming a conventional capital output ratio of 3 to 4. Thus the concept of capital-output ratio is a useful tool which highlights the importance of capital in development planning, helps in testing the consistency of the desired growth rate and the resources of an underdeveloped country.

The following are the guidelines for successful Capita-output Ratio (COR) computation

·         The measure of ICOR should be attempted only if data is available for long period

·         If the period covered by the data is less than three or four years, every efforts must be made to make sure that the period is normal.

·         The undertaking of a development plan itself changes the COR and straight forward projection of past ICOR in the same country is not satisfactory.

·         The purpose of calculating ICOR is only to determine total capital requirement and it should not be used for establishing priorities among investment projects or sectors.

                                                 2. Cost-Benefits Analysis (CBA)

In appraising projects from the national viewpoint the most appropriate and popular method is cost -benefit analysis. This analysis is the most scientific and useful criterion for project evaluation. It helps the planning authority in making correct investment decisions to achieve optimum resource allocation by maximizing the difference between the present value of benefits and costs of a project. It involves the enumeration, comparison and evaluation of benefits and costs. This implies weighing of the returns against the costs involved in a project. Thus the cost-benefit analysis "purports to describe and quantify the social advantages and disadvantages of a policy in terms of a common monetary unit." Its objective function is the establishment of net social benefit. This objective function can be expressed as NSB= Benefit- Cost, where benefits and costs are measured in terms of 'shadow' or 'accounting' prices of inputs and outputs instead of in actual market prices.

                             Table 1. Project Evaluation on the Basis of Cost- Benefit Criteria

S.N	Evaluation	Decision
1	B-C	It would always favour for a large project, and make small and medium size projects less beneficial. Thus, this criterion can only help in determining the scale of the project on the basis of the maximization of the difference between B and C.
2	B-C/I	·         It is for determining the total annual returns on a particular investment to the economy as a whole irrespective of to whom these accrue. Here I does not include the private investment that may have to be incurred by the beneficiaries of the project, such as the cultivators from an irrigation project. If the private investment happens to be very large, even a high value of B-C/I may be less beneficial to the economy. ·         Where, B and C refer to benefits and costs respectively, I relates to direct investment and Δ is incremental or marginal.
3	ΔB/ΔC=1	It is meant to determine the size of a project that has already been selected and is not for selecting a project.
4	B/C>1	The benefits are more than costs and it is beneficial to undertake the project.
5	B/C<1	The benefits are less than costs and the project cannot be undertaken. The higher the benefit-cost ratio, the higher will be the priority attached to a project. Since capital and other investible resources are scarce in underdeveloped countries, it can maximize output by using them on a project so that its benefit-cost ratio is higher than that of the next alternative project.
6.	B/C=1	The Project is marginal. It is just covering its costs.
7	Net present Value (NPV)	It is important criterion used for project evaluation. NPV is equal to the present value of benefits minus the present value of operating and maintenance costs minus initial outlay. This criterion is also expressed as the net present value of benefits (NPVB) criterion so that Net Present value of Benefits= Gross Present Value of Benefits- Gross Present value of Costs. A project is socially profitable if the NPVB>0. If there are number of mutually exclusively projects, the project with the highest net present value of benefits will be chosen.

 

The cost benefit analysis was developed in the United States for the appraisal of investments in irrigation and transportation projects. In LDCs, projects are often selected on an ad hoc basis and sufficient attention is not given to their evaluation in terms of costs and benefits. Since all pubic projects are related to the objectives of growth, they aim at maximizing social welfare. Stephen Marglin points toward three merits of cost-benefit analysis for such countries. First, it helps in reducing differences in the marginal effectiveness of alternative measures for accomplishing such objectives as between irrigation and other means of raising agricultural production. Second, it helps in assessing the costs of fulfilling one objective in terms of benefits sacrificed with respect to other. Third, it has a political advantage in that, "it would be difficult for any particular group to distort project plans to serve its own interests if its consent, along with the consent of other relevant sections of the community, were obtained at the time of setting the criteria in advance of planning specific projects." Another merit of the use of cost-benefit analysis is that it permits decentralized decision-making, Even if the public sector is small, no single authority can hope to handle the vast mass of technical information needed to decide on a number of specific projects. In order to calculate costs and benefits of each project, a separate authority is needed for each. This, therefore, necessitates decentralization of decision making.

Again, the cost-benefit analysis is "practical way of assessing the desirability of projects, where it is important to take a long view (in the sense of looking at repercussions in the future, as well as the nearer future) and wide view (in the sense of allowing for side effects of many kinds on any persons, industries, regions, etc,). As such, it is a highly useful tool for project evaluation in developing countries.

                                                    3. Project Appraisal (PA)

Project appraisal or project planning is a process of decision-making over-time, starting with the identification of projects and going through stages of various feasibility studies e.g. engineering, financial etc., then the investment phase, and finally evaluation. The notion of project cycle is identification of project cycle is identification of projects and setting a targeted growth rate -feasibility studies (engineering, financial, technical etc.) -evaluation of projects (cost-benefits analysis, net present value, sensitive analysis) i.e. economic and social appraisal.

A typical 'project appraisal report' should consist the following components.

·         The term of reference

·         An engineering study to see whether the project is technically feasible.

·         A financial study to ascertain how much project will cost in budgetary terms at market prices.

·         An appraisal of economic costs and benefits valuing outputs and inputs at social prices. It includes secondary impacts (indirect impacts of projects) on economy and effects on the distribution of income.

·         Details of administrative requirements of the projects.

·         Conclusions and recommendations.

                                                4. Input-Output Model (IOM)

Input-output is a novel technique invented by Prof. Wassily W. Leontief in 1951. It is used to analysis inter-industry relationship in order to understand the inter-dependencies and complexities of the economy and thus the conditions for maintaining equilibrium between supply and demand. It is also known as "inter-industry analysis". This model tells that there are industrial inter-relationships and inter-dependencies in the economic system as a whole. The inputs of one industry are the outputs another industry and vice-versa, so that ultimately their mutual relationships lead to equilibrium between supply and demand in the economy as whole. Coal is an input for steel industry and steel is an input for coal industry, though are the outputs of their respective industries. A major part of economic activity consists in producing intermediate goods (inputs) for further use in producing final goods (outputs). There are flows of goods in "whirlpools and cross currents" between different industries. The supply side consists of large inter-industry flows of intermediate products and the demand side of the final goods. In essence, the input-output analysis implies that in equilibrium, the money value of aggregate output of the whole economy must equal the sum of the money values of inter-industry inputs and the sum of the money values of inter-industry outputs.

 A United Nations study lists the following uses of input-output models in development programming:

·         They provide for individual branches of the economy's estimates of production and import levels that are consistent with each other and with the estimates of final demand.

·         The solution to the model aids in the allocation of the investment requirement required to achieve the production levels in the programme and it provides a more accurate test of the adequacy of available investment resources.

·         The requirements for skilled labor can be evaluated in the same way

·         The analysis of import requirements and substitution possibilities it's facilitated by the knowledge of the use of domestic and imported materials in different branches of the economy.

·         In addition to direct requirements of capital, labor and imports the indirect requirements in other sectors of the economy can be estimated.

·         Regional input-output "models can also be constructed for planning purposes to explore the implications of development Programmes for the particular region concerned, as well as for the economy as a whole."

It concludes that these models "are primarily applicable that have achieved a certain degree of industrial development and hence have a substantial volume of inter-industry transactions".