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Folder Title: Hayes, J. P. - Articles and Speeches (1962)

Folder ID: 1651859

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PUBLIC DISCLOSURE AUTHORIZED

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ArchiIves 1651859A1992-007 ther#: 9 212054B

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of " 'iiited auQr r e :.- h L i .r

id llt:.ut cOr r, to 4r as

:iorou3 d 'inil ion. -ctasi rovin u - u~l to t -,,r.--,s ah

* n 7 o whicl resibts zt:i-ct 2 1>7imii: oxaml_ :iVht . '-ta'c-.

" - i*.,, -sujtni gro-th". Moserer, u ch tcnr-s becoc i l 1v'

prasie oicy 00:23idcrationiz, v' men. of. :aiLing is likzly tobVT

incroa v dyCri3u. This stage a per cps ocen rahdi h

a :3 ing ttogap~rach

1. aI 1957, odllikan and ;:tad h ".iwulnttk vr

l x. ran to Supply all tho ca-ital rec ir -z n;s of the prc. _ l - -

d: lo ~arzeas undor -uitable cri. .ria ci &..vriv: c:. zcity1 J e

i 07 pocd "that the Unikod 1..:, i1 1Ci witn th 04

c velcp.: nations, &hould give au ra:w xc ei cy U-1rdcvcloped Ure

orld ut:y that it can secure r c ia as it can use rr; uctivcly

in accorda:ce tith strict critcria of productivity.2/ Tho follVm;

criteria .:ere saz -ested:

l It ust be within t'. 1-1 ;, CiL ad zdminitrative calb-ilio

of the ivinZ country to carr; cut iti: -no-ozed project it .

: ici- 75 ovcr the time period c t:g Ic: :r jrant.

. s nust havc btcn t .ke i, .. 2rZ that the ., t ny

Ll zh o Egcowtry is coeoe ficatly to h

lliikan and ti.U ',I ar a o to anT Iffehe CP. 52.

. 6.

vc The rcCcivn ctr2 Uet havO n oveI(r-all naUional divel1.

prto ignad to .k h c tivo "loeiblo u-c 0f its

r:ourc. ; this nhould incl:c :zt l c r of int.rrltcd ci

. Tivin;; a:

e IS c;t ;ith the rccuir.- - f c d co7.ri rca and t

rnational division of 6 .j T.. uir r a.dh'it thAt T "cTh

CCiOn of th;c critc-ia -ill - Ilajdgment, 01i41, 'an

ude tu1g. N:o for,-? sot o' -rulrs cn 3rtitute for wiso &.in--

"/ hepazes und'rlizwd in -oin-z A :nd $ clearly raie -ro

C t OanJ e .

-It "" 0' this 7:r'P.

. T ill ~.Ianostow view ne ap'Iar to !hve obtained con:Cie.rable

, -hcther 7un to the awith r: voCacy' or 1 thinkin-; alon- th

cazc li:.s by oVher3. lien coun4b:>-' -? ivt p-o- -rms- or 52orin

list CO c for scrutiny, it is o Lt" 2..o< 2;ht .. :rcndituro of a

cer'tain ize which 'i;ht not crec th: fin:cilC ibilitics, Iou-d

be beyo:-d the counitrios' absorptviv cC, Ciy (Gr C ' zyony:i1 o i2r.).

iy Step to _-, ' 0 gstir, oti ,

al- 4,* 2O :izanoin3 Of 'prmolrans u t'o 14lnit of absorUvc czpacity;

or that it -s the function of IDA .; hcul"o countrics to 'inlanac Pr.-Crans

u to tho li-its of their abuorptive cza, while 4.arinl thn 'rom

;- riuws d -crvicuA problems. Th ne:c p is to try to esti.xz,

th cCxtcraal "capital requiremen t r, of >c er r-develorad, non-,ct

r t. celling set by -- corptive capacity, to nee wheuhe it

is in fact real ictIic to asanwe that these require7ents can in :wCt !a

jo* n-fall for :01 countries.

/ -od, 'p -71; my undirlinin.:T: ,d3 p. *

-3-

q.Tz cucztion uhich has to b-, act: is ;>cthis "limits to arpi

cca> city" or 'strict criteria of ouctii;" ca in fct provide reo.ably

u'ebic and objective gidez for inter Ua l devlxnnt poli'y. By

&bjectivo is meant, not disrirT oi vau juJ ets: that iY to "y ca

3nts vhich in the lart rcort canot bQ vli&atl, eveA in nninc i >,

by npir-Lcal Ovidence.

Li.-itations of absorptivc ca,, acit;, aY ordin to the viC. .ih lays

strz*s on t e- may co.e in L.t ay or all of the followin- stae:

a. 7encral economic pla ;

b. project p1anninz;

. r-oductive use of ca.ital whn in.taled.

ect 1---i n

6, TZo implication of these lixtatitns can be convenicntly illust

by cone trating on the case of projQct pannin-,

7. Tho' the point of viow of a len.ing a Enzy such aS tho I.>, tho

a .:ant o7 loans which can uzefully he c.' to a country often apzr ".o

bQ limitcd by the small nueber of 37q c:-.2e. ly prepzrcd projoct. This

rzices the question of what is mcant by adriutc prcparation or of ihat

1i projects are not "adequately r:ard"I

C. AJequata prparation involv.sc

a. Assessin; the demand (or cconomic juotification) for the

proposod investment.

b. Selectin the appropriate tyP, zcale and location of

invost::,-nt.

c. Plaannir, the nethod of crr in: out thc proposed invCv.Lnt

at the minimum fe.asible cost.

9. :ai.ire to a&scss doriand or jco:toific juSication will l."! to I

u of invetatcnts which in rr'z e ive lo"_err

than could be secured by oth"r - ititut2bl invcstaonLs. Ths is, in

fzct, an aspect of the dogrfo ot ofh r co oic pln.nzi

10. Zolcction of inap propri.ao type, cacl or locrtion will ri6buco, in

-0 8c si ificant oen-c, the ratio of r 'iurn io costs.

11. :.nfziciont planning of th etLA of :arrying oit z0ro0d

invnstaent Will raise the real cozst of thlo c.ocity installed.

ge < v canacity as a oacstion o' r o e:: OA rvurn

12. 1 1u it would appear that h-. efect of inadequate prpziration is

al.ay- to raise costs or to reduck rturns, in .xinhr caso reci.< the

;ntio of retuirna to cots, that i& to say, thL roto of return. Othcr

a;nets of absorptiv- capacity cxza also bn ao involvin, ezLnily,

*'ate3 of return. Inefficient -nir- . :c;Lc plnrinr will lead t Che

lection of projects with louer r cS 1 rta-tuns to costs than Voulr b-

ofcered by alterna*ives. Inefficit. cution of investment projc.t: T211

raise coiits. inefficient use of cc aciWY when installed will lower the

r>"oical returns.

T:e rlat-Aivc nature of ab-omt~iv n;,'

13. Diinishing returns to incr:asin. inrvst.enit da not in thc. ' e

ind-icate a clear and unambi;uous cut-orf point, short of the point of zr ,ro

rari-inal return, whereas abserpiv. cap city is cometim:s spoken of as

it did si;nify come abso.ute and i cntiiable out-of 7 point. On this i>;

investmint up to a certain total size (over-all or in a particular )

could be soon t be within the li:rits of a country's a Zorptive c -c-i*t,

while investz.nt above that size could be clearly identified as c-:c'dUn-

abs .orptive capacity.

14. Thn &ia ram illustrates viea of the zcaning of liritod aSorptivc

c,-pacity which have a certain ____ pla-uibility but which Econ,

on cxain .tionr, to be unteale.

15. The diagram rclate- :ountL of ixrwu. n: (horontal acs) to

mar;;inQ rates of rtura (v .'criL axiz;). The concept of nar;inl r.e

o: rtu'rn is not free fron prac:i'nl 2ba a in this context, but the:e

can be i-;norod for the p.reet az-i ta!on -op in a later ection,

16. The first nituation to bz cznsi ez'c i, r -- nted by tL curve

Cf. The u.pr part of this cxr,. p a sitation in which invet-

ncmnL can ;o progressively inrc asr with o--. y >irly mradue l reductiono

of the 1-ar-inal rate of return. .oevcr, at certain point, R, linita-

tions of asorptive capacity take 1heir toll, ad thercafter incrcaso 62

4nmst-ent brin-n rather oharxp d-crazo of 'the arinal rate o. rcturn.

Thore io a kink in the curve, rep r ljn; lizit :1 ab orptive cZ<acity.

io :v, dOcs it :ollow that inctzen' mt obviously be liidtcd to Ob,

t- :amount corresondin- to the ink at, R? ;t necessarily, ii the

a nal rate of return Ci, corrcccondinl to ., is suIficiently i;:

for it is possible to increaro i vztmz:nt bc;>ind Ob and still t) o1thin

po' tivo zar inal returns which m-z a hi ;h cu h to be acptzble.

TLo zink ozly has an absoluto rc ic ;ce curve bek"s vcc4ical

o;o:d -the zidk, -ianifying tha hyond a c(rLirL point the rarain

:"turn fLl~S abruptly to zero.

17. T di ituation is roere nci :y to': h curv P,. Does it no> oL na

ha invuztA nt will be cA offi at I?, and nio nocArc? Hot nmcu-s il;

if the crrespnding mar;nnl ;z e of roturc, Cia, io unaccptlr lc-

t mi ht b: considored desirable to iirt tcnont, ffor c::azplc, to

e anoui co.Isistent with a : QJ r tez o retur of 0i0 .

15. A urther point to be cinsLdered i th.: plausibility o a r

cped .lic ?P. It sepems quitc lnui)le that th*i cuxrv for incivLdua

Coctors s'ould be so s*ap-, in'l:xible li itations to th= suiply of

snc cific fact :rs lcadin- to 6h'rly 6ihinishin ar inal ruturn; to

invest-,ant beyond a certain polit. 1IMvcr, when invejt.-:.at in one

ctor rcaches the point at which the 'r;inal return afr ptly calls

of . to zero, there is always liIkely to 'u ,nother ector in

n:Qst: nt can increa a vithout i7-tdia2ly rC ucinZ the poiat of

z ro ar;ial rrturn. In the cia rant. aa, bb, cc a::cd dd reprezont

the mar ;inal returns to inve3t.2;it, for varicous sectors. or cach

fector, except that represonted by cc, there is at po:o point a

in tue curve such that raturns to increasing investcat abruptly fall

off fron a positive value to zero. The thick curve, X , rnprcents t1e

vertical sum of the sector curves. This total curve has a nu-bor of

kinks, but at no point does it become vertical, since tho sector curve

cc does not become vertical. The curve XX nro ofi'era only one eut-qff

point of absolute significance, the point at V ich the mrinal roturn

at last becomes zero. But it is unlikcly to be acceptable to fPIanca

countries' development efforts up to the r oint at wh~ich the nrgtainal

return to investrxent becomes zero (broviddcd tilat there is not an abrupt

drop t. zero from sone rr ore acceptable rate of return). The cut-off

Point consid, red appropriate may tlell be the return OiO; and there is

no reason why this return should corrcLspoun with a kink in the curve XN.

2.9. It may be considered to be unrelistic to surnate inlepenontly

eztimatcd curves for individual sectore, on thea :rounds that the sectors

arc ihely to be in competition for cortain srjec-ific factors la inel2astic

supply. The curve XY (with dotted conti atien at the low r cnd) is

in:Anzded to reflect the ef.'ect of over-all scarcity of certain factore.

his true agregate curve -ay 'icll. bccoin v'rtical at a certain point.

But tho ar,.-eat rerains that th2 rate of return eorrczp.nding t the point

of fe21-off to the vertical, ruLIcietd by ;i" in the dia-ran, -ay be

un-acc.->tably low. It may be r asonable to chooce to finance invoctnnt

only up to the point givin a rriAl r-turn of, say 01O, altcough tho re

is a Scction of the XY curve to t .e rIht of this point which is still

n,,-t ve .rtical.

20. The conclusion appears to be tiat the eoncpt of liritd absorpive

caoacity cannot be used as a criterion for tho aipropriato size of dCvrlo;-

wont nro-rams, without brLnin in a convct of the cut-off rate of roturn.

Thi CJT-2F7 TE: oF T~i ; : A 2OijcY c:IT: :I:

21. The next stage then appcars to >o to considor a cut-off rate Of

return as a criterion of interational invcstrnit allocation. The argi:n

h-s in fact been heard that cAtal inflow into each undrzevelop country

should to pushed up to the point at hich the mar:iinal retnra (in so

sii;nicicant sense) reaches the lo"st Uccepaale lnit. The narinal rate

of return on capital inflow woulV th. n e ouo an essential guide-post to

dCeelOp7Cnt policy.

22. This apparently raises three ty es of problem:

a. what is ireant by tho nar7inzl return?

b* how is the marginal ctarna in dif.crent countries to 'c

r.3asured in a way making posmiole maningful intnrna tional

comparisons?

c. how should the cut-off rate of return be fixed?

In fact, this line of approach ti11be eiolished by consLderntions aplyin

to qucstion (b), so that question (c) vil1 nevr be reached. Jevrtheez,

it is by no means a waste of timo to be:in with question (a) boafor

-roccedin; to (b).

A- !wb th, Ina*~na r,:rn

In practica pro'Aemn o' i-rnatioQ f inance oi dccvelop ont, t

nz m retZrn in a .EveLO'eft zrr ca:not bt usefully idenAi cd

ith th: 'return on the narjinal prouct.

4. Tn the first place, any ev;lop'nt pxo-ramr will include an

o -:ro-*cts -. ich nz.% not cuscc,-tillu ati n term -I rae f

r'tuzrn. E: an ditu. s on d2cat on ad halta az' the obvious cxzm-ic .

T'his consid'ation i6 strcngthCncd by th, 1a nt that to convwntion-.

diztinction batwoon "governmant inve>t;:nt" and ovemt conwumption"

is islcadin; rather than helpful in as-czsn. public dwvelo'nant efLorts.

In e ducation, why should school lbaildirn- 'o considcrcd "inve trcnt" and

trachin'; "consuiption", when it is the teachiag which nay bo hoped to

incr er suture productive capacity? ny should buildin- and oculp-in-

of laboratories be considare in estment, but the labors of scicntits

in thsac laboratories be consi!e counrmption, whateva ' the ef:'c it

may hava on mazina possible incraas of production? There is no .iced to

labor the point, which is now vi ely accpted. It is dfIfficult to dra

a clear line dividine roverntxnt a tivitics which art-i

fron those which are not. It m.y be deinitely wron to pr-aie

.. :nt for rcalizing coniniorable governnont zaving, in t'.e ac-ted zonr, if

this is done by checkinz th, -rowth of a.-icultural extenuion wor:, rcncarch,

etucation or the machinery rcq -ircd for ef 'ective econo ic plaJni.

7:sia soc-s to imply that "rturn" in acanoPic dcvclopwnnt haLq t be

reerred to govzrient activity ar a whole, or at least to a rau'o of

activities considerably widcr than those conventiorailly includ6i

'invcst 2nt" (limited by the Ul definitions to fixcd capital foruatioi

and increase of stocks). But now awid ran of ;overnnent activities

% under review, it bcomes difi'..icult to rank by any meanc all 2 then

in torna of rates of return. Th- rates of rcturn to the ser;icez of hc

st4tistfcian, the coil choci:it, t11 1e- r zud t'U V doctor, to the air-

con-iiioned office, the laboratory, the zchocol and the clinic, all prove

Ci-ficult to assess, if not even imposr'ible.

25. .tcondly, nost dnvelopment :vr:w ill nclu4 e certain pri

-rojects, or projects which aro rolitically dt inThe3, -::,enditurms thioh

could not be juotified by rcfcrcnce to t cir rates of return. It is

clearly inappropriato to identify the r -inal r-turn to a -ro-ra:. with

the return to the worst projcct thc t can be found. Cn the other h.nd,

to inoro presti-e projects, aid also unranable projects, and to look

for the return on the lowest rankable, non-presti-e project would also

Ziva absurd results. Suppose th:at the rturn on successive ran :able,

eon-prestipe projecte is indicated by the curve XX in the 4iagrz;. The

i- ,overaleat oxpenditure is liiitcd to a cortain sun, the eapenditure

oC :-oro on unrankable projocts or prestic nrojcts wi.l leave lcz to

be s:pnt on rankable, non-prcrtio proj:cts, and1, so w:ll raico the

rat'urn on the marginal (lowest ra ked) nroject of this typo (on the

auxption that such projects are seleotod according to their ran'king

in terz of rates of return). I.e., it would b pos.-ible to raise

the arInal rate of return, i ;ntiied pith the roturn on the

l- st ranhable, non-prestige -rojceot, by mulb;ituting prestig- tojectz

of low rates of returns, or unrax'able proje:ats of highly dubious offect

on the crowth of productive capacity.

26. Obviously the true marginal rate o' return has tobD regardtd as

the dif."'erence between average rates of return for different sizes of the

'ro;ran as a whole. Presti-e proj cts will lcwcrcr the marninal. rates 01

r-turn if thoy are added at the .ar :in. iofv vn, 11 hijhest pref-rcnce

is accorded to the pr ?tige project, and 1t is -ore !ro4uctive przjects

ch -6 a ,e 4,cd 0? subtracted at the: ;a. i, thin the true mar;inal rate

of return will be higher than the r -turn on 'ho pr;sti;e project. ]n

- 10 -

Pct, it is p ssible to have a vclopret prora in which the r:arji al

rate of return is, in a zignificant -en'43, h r than th avkra t :C

of return, and this without r rnce to co 01inntariticz, cconomics of

scale or external economies. LCJuca a r wold halvn to b

re arded es badly deai7ned.

27. It is a conctant, preoccu atlon of ti.e k for practical fezonsz

to attemt to judze the justifica.tion of individual projectz in tcr25 of

their i'dividual rates of return. The rational must be thet th- -roject

in eueaticn is conzidered as bci tLh rrojc-t. Th1110 the

ro'turn on this nar;inal projcct Ls higher thna tha e avcr rotuzrn on

'The remainer of the pro-rmn, the ef ec , of addin the projeet iut

be tL, rcie the avcra;e return (provided that r:roper allo."aco is

cadc for all external effects of the projet). If the rcturn on

the project is a little lowar than the avxeae rettun on tho reCt of

the pro ram, then the project ,,ay still be COnla der( the re.scneblo

next adition to tha total. ouver, i the rcturn on the projec. ..s

cnsideably lower than the avera, e retr,. oa the rest of the prci

t t1-.-hs can "be re-arded as a sica tht theore ;-ay b-1 othor projects

_ith hi_,hr rates of return whOch .hould 'o pr.ferred. Qf cour'c, it

pcu not follow that the Bank or 1.A huld nec esarily agree to

Cn:nce a project merely bocause ito reVurn is equal t or :rer

the averago return on the proru. .s a 1-ho. The return on the

j y be considered to be -oo low in co - ab-oluto ten-c, or

too low by cozparison with prolets avaiable 2or financing in ct-er

2 Tis last consideration lea s back to t-e ccztion of whcthcr

ia pc-bloe to compare ratc3 of rrturn on projects (or$ indi

o rae in dif'crent countries.

*-orntional co ricons of rz.te of rcturn

?. Ratet of return on "ifce;et projcct3 in a ingli cIuntr' arc not

t1h'ouagh1'.t to bc ad- 11uatoly , .! y JaLi; the reciprocals of t

ner>.-ntal ca-)ital-,xutput ratios. It iLs nce.ary to take into account,

or ech rojctthc costa of ot'-.r vac .r wich coopora ,e withc, ia

to -rouco the outpTut. 3f two invcotn iOprated with tle a

c: itnl-outnut ratio, that which e: ploys the leas labor of the a o qality,

or- the- loc coztly lcbor even if the labor forces aro equal in nu:;bcor,

will b3 -aid to have the hihacr rate of r4-t.irnl, cetoris paribu'.

30. Two types of problea which arise in estimating returns to dificrant

n n the same country, are partiu.rly relevant to the preoent

discusion:

i. estimation ot the a,,r.riat; ;rice of the other factors

employed in coopxratin wiih capital;

ii. e -titioa of the axr,.,o :rices of difercnt p'-roducts.

Qthor Larilikar probloau,, such as the zrpriate treat:met of c ', ction

Znd of dif forcat patterns of proJucticn over time, and idcntification of

the full ranZo of co;.ts and -roducts which should be attribute% t. particulcr

inventi-ats, affect n.tional comparisonis o& returns equally With inter-

national comparisons, and so ned.i not *.c vpciLically considcre. here.

31. The arguent that all t;pcs of isvetment 8hould be increatsod up

to the point where returns at the .rarl-,in arc equal, or, in other words,

that an in:estment showing a hiihe.zr r.to of return should necessarily

be chosen over ono sharing a lower rate of return, depends on the

assum.-ption that the prices. used reflect:

- 12 --

a. conxumer proernczx aei an equitablo dir

income;

b. rolative scarcitica and disutilities of various neute.

n pravtim 4hose assuptioni arz reco fizo' to b falr"fied bh i-oc

icome diitributio, differential d&:rnos of nonspoly, inrtitutia-1

n7luenccs on relative factor nricn, tc. The at'eint nay ho ztdr to

rc-- y thi-!f departures from the optiu cornditions by the applica'inn

of "lsha2ow nrices".

2. Such shadow prices muot in rriVcip le involv4- an elent of value

;jud;"nt, nince the postulate of aa eqiiitable income distribution is

unt'mcntal. Iowever, in a sin-.le czcorior ly it 4o possible to r the

for-ulation of shadow prices as lar ,ely a cuotion of what pricos h ie

in thn aboonce of a fairly limi ran of erket imperfoctions and

in-titutional rigidities.

33. The rationale for comanrin rat( of r turn to invect,-mnit in a

sin'le country is sufficiently uner rstood, and the theoretical ar..

prcacticrl difficulties involved have r ccived much attention. Lc -:

att ention seems to have been 7ivon to t :e wel2.fare si.nificance of

international comparisons of rat1'. of roturn.

31k. The classic distinction t int',rnaational and intran itional

trale is that many factors of production ar vcry much less mobile

between countries than within countrics. 1hile there nay be argu'nt

abouit the echanism, there is :onkral a 'reere'.nt that this comrarative

i-hbility of factors, and particulzirly of labor, has givca rice to an

e tremcly inequitable distribution of incorw bctuoen countries. :n

thcun circumsvstances, it is rathlr inplausible thl.t strucutures c -2ric s

of o and of factors of production in difert countrins ch.ul4

co ni-r to a single world pattern of thvz ty:pe reck:Ired to validate th- t --

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tonditions for opti"ization of production. In order to chw a-y l

si:7aificance in praferring a high rato of return in country A i;o a lomr

rate of r-turn in country 2, it would be neccsZary to work on the .asis oc

s ructurO in the two countries (laoth for products and fcr a:t::s

of production) raflectinz an apnronriate adantation of patterns 2! 7rrdLc-

tion in the two countries to an oqultaboe inco distribution cov ;ring

the inhalitants of the two countries in comIr.on.

3$. Weeas the solution of thri allocation 7robLcm by nw uaaz o2uaac

pricing -ay have some plausibility in a Zin-jlc country, it ic-cs 2.l

plasbility in international connarisonsz. The hypoth;%ical si i

wh:ch it is necessary to conjecture is so far away from tho ac<ual

tuat~io that it cannot bo deuaccd Ivy zorc aduot:entD to the actual

situation.

3i. ..e rigorous fornulation o- th ;e ar, -'io woul< .coad cZsnizo1Uly

more tneor ctical research. aowcvcr, "2tGr a littlc r ct1io .t z"c.

suf iiently obviouc that a 10' -turn to an inve tret doec not .zan

tho same thing in Ni,?aria as in .cuador or as in asil, or YandLa, or

bir;a, or Tugoolavia; nd that no omount of hadow pricing tiat IS

practically feasible could produce rates of return for the-o difnrent

countrics which would be truly comparable.

T7DS iL SYSTE',JATIC I'"-111"T" AL ALLOC_'fAT-;'1 CF

37. This is not to say that a syste:iatic approach to international

allocation of investment resources is irnnosoible. All that has boen

vu-;csted is that this approach cannot be made in terms of rates of

raturn to individual projects. ".or can it be made in tsrms of av :ra-c

rates of return on investment as a whole in 3ifferent countrie *. While

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coparisoas of returns on Inve-t- a Lis a whole uwuld be besot by all

th-- conSidrations which invfliorte co1pariror idi'idl prjot:

tie concopt of the avera,;c rato of return on irvcAttnt as a wholo raites

urther dif"iculties whici need n t be e>aalined hure.

Th, a,-; of a ncew, a-oroach

33. The attempt to anchor intrniational devoloprxnt policy to orptIvo

cz acity, rzgarded as an in'zcnd nt, azcrtainable magnitud..e haas been

clg~ezted to be unworkable. Thore st-c-a to be two further posile anchors

for a coherent policy: a tar4-et rate of ;rowth, to be ro ardod az the ,-oal

to be -romoted in all underdc'vcopcd countrics; or a firxd amrount of

resources aszumed to be rade available to underdeveloped by devcloped

c,-untric- .

32. The objection to the tarot rate of -rowth approach is that it -ould

ten,! to inply that moro resour~cx, ra.thar than less, should b ch.;clled

to countri&s where a given inflow of risources has little e .'cct in :al in

the rt of igrowth.

I have for a long time cidcrcd that intornational de lpU t

etratay should be rogarded esacntially as a prcbleri of allocatin_

r souscs between alternative clai0anZs. Of course, "given" &oe no .ai

"fixed": advanced countries, on s- e in, uhat could be achieved by a

particular. resourco flow, right then conEid,1r that the lo- should be

larger or amaller. But to produce a c aablo optiiuzation ,.roblen, it

is necessary to take the flow as an in cependcnt variable.

41. Tw other initial =su:ptions havy to bu maae:

a. the utility iei:hts to be attached to incrcaseu of dif'ercat

incomes;

b. a pure rate of tine preferenco.

it wi:ll presu~mably be considered more urent, other things bein: cyz l, to

raise the lower incon'es rather than incoes which are vozewhat hi :h-r - to

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sccurc a broad rise of. incones in India, Pakis'an, Tat anyi a ri' ,

athe ~than nerely to achieve a rive of avera inco.co In Ax ntina,

e co or Yugoslavia. A rate of time prd:erenoe in rcqu--ired, in irinciple

At !st, to dtstinguish a case in which capital inflow is li: to

rroduce lar;;e immediate increase of incomn but with lor growth prosp ctz

from a case where the reault is likely to b" s:all imediate incone r!th

out h !h .rowth prospects.

It2. It is freqtently said that any discasslon of intrn=tional alloc:ion

mst give Zreat voiht to political considerationg. HI.cvrr, it is h.IM'rily

to bh thought that political notivez lexve nrv plact for the parallel oreration

or econonic calculations. Political decisions can 1ne allowed for in the

su -estd formula either in the form of constraints or throuh assi-ning

utility weights which reflect political az vell as we.lfzre considcratiors.

13. * The next state isj in principle, em-prinal - to dctermine how the

rates of' sriowth of the various underdcvclo-ed countria are likely to be

afVected by various vises of not capital inflo-r.

h4. Finally, place should perha's be rade in the for=ula for ccn irrations

of international "feed-back". If certa'.1n countries can be brourht ratidly

to a sta.-e of "self-sustaining rmith", they will by definition cease to

n7ed capital inflow on exceptional terms, thus releasing such resources

for other countries, even if thry do nct themiselves beco-e net providc.s

of capital on exceptional tn's.

45. In this schene a very low-incone country would recrive a clain to

canital inflow by reaSon of the hs' utili,1y woight attached to !ncr s

of inconle thore. This claim would be increacd if it could b- chuin t>.t

capital inflow would have a fairly lar7e ef fect in incrEasinm pro-uctin.

A relativ ly high income country would derive its claim either from s!.or-in-

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relatively favorable potential rcsponsc of econ,;.:.iic growth to canltal irflic,

or olso from the "feedback" arumont.

46. It will be seen that the jud(ment vnade on the appropriate -;raa-tin

of utility weights according to incomo levcle would aftect the distributicx-a

of' resources between low-income ani hi hor-incomie countries. The iportance

of f cd-back via promotion of "celf-sustAinin- !rowthl would bk "rcat r

t.e lower the rate of time preference applied. A low rate of til'o

preference will tend to increase the claims of countries with hih r .

47. It may perhaps be argued that a low rate of tir-o prefercnce is

appropriate in applying such a formila, on the 'rounds that world

6evelopment is a slow process. Application of a high rate of tire

proference and a steep utility gradient would lead to concentration on

i-mediate raising of the lowest incoics. A low rate of tire prnferncie

and a shallower utility gradient would be likely to make for a -raater

rise of total incomes in the long rn, especially since nany of the

lovect-income countries nay not yet be ready to make effective use of

anV considerable capital inflow.

ratical a- plication

40. Such a formula, if worked out in algebraic termsr, rdight a-pear to

be of little practical use, given the Key role of the utility an- ti-z

preference judgments involved and the difi'iculty of predicting the wa 's in

which many countries would be affacted by differing sizes of capital inflow.

llowovnr, the foriumla could pnrhaps be applied to show ways in which nr c nt

developnent strategy (or the lack of it) could be improved.

49. Recent material prepared by OCD and the UN gives a fairly d:taile2

picture of the pattern of public intcernational assistance to dovelonment

in 1960. This picture shows marked, and aparently erratic, variations in

the amount of resources going to the various countries. The proposed.

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oirula could be applied to these data to the point of deaoawtrtn P,

dcviations of present rrsource distribution from any r-viotely ju;I1i9ble

pattern. This could at least sunzt diroctions in which the pat ary

sirild bn changed, except insofar as aberrctiona may be found to a arc

to political rotives.

Ti r, L-E F A9S'.R7IIV.-' CAP.-VITY

50. While absorptive capacity has beon dcthroncd as the nain anchor o,

the allocation pattern, it would noverthelacs play its part in the proposal

foriula, taking the form of dirainishin7 returns (in terns of mr.t

rOmotion) to increasing *apital inflows.