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Volume :10 Issue : 2 1982      Add To Cart                                                                    Download

Project appraisal Methods for LDC’s

Auther : Erfan Al-Shafey

Three-problem areas arise in the application of social cost-benefit analysis to investment project in less-developed countries. These are (a) efficiency pricing, (b) distributional equity and (c) externalities. The two most prominent methodologies, which address these problems in a systematic way due to the UNIDO (1972) and little Mirrelees (1968, 1974). The rivalry between these two approaches has lead to a growing literature and continuous refinements and synthesis. As a result, project appraisal methods for LDC’s have reached a high degree of sophistication in comparison with orthodox commercial profitability analysis which is customarily bases on market prices; is indifferent to distributional equity; and is neglectful of externalities. One purpose of the article is to outline the main procedures of the UNIDO and little-Mirreless approaches and to point out their respective merits and demerits. For analytical clarity, a candidate project is assumed which is dependent on international markets for for (a) partial procurement of its inputs, and (b) the entire sale of its output. The attention is then focused upon a cross-section of the project’s cash flow. A symbolic formulation of the procedures of commercial profitability is then presented. This is followed by a demonstration of the reformulations which would be necessary in the UNIDO and Little-Mirreless approaches respectively. By using the same symbols throughout, the similarities and differences between the two approaches are brought out in sharp relief. A second purpose of the articles is to evaluate from both the conceptual and practical viewpoints the main thrust of social cost benefit appraisal of projects in LDC’s as represented by the UNIDO and Little-Mirreless approaches. A critical assessment is given of the potential and limitation of these techniques as tools of investment planning in LDC’s for pursuing the dual goals of efficiency in resource allocation and equity in income distribution.


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