UNIDO APPRAOCH/SOCIAL COST BENEFIT ANALYSIS PART 2

 

• UNIDO APPROACH
  
  
  
•  FAMOUS ECONOMISTS STEPHEN MARLIN,AMARTYA SEN AND PARTHA DAS GUPTA PREPARED A MANUAL
• IT PUBLISHED THIS MANUAL IN 1972 UNDER THE TITLE “GUIDELINES FOR PROJECTS EVALUATION” IT BROUGHT ANOTHER MANUAL TITLED “GUIDE TO PARTICULAR PROJECT APPRAISAL” TO SIMPLIFY THE COST BENEFIT ANALYSIS OF PROJECTS FOR PRACTICAL APPLICATION.
• UNIDO APPROACH
• IT PLACES EMPHASIS ON AGGREGATE CONSUMPTION FOR THE REASON THAT IT IS ONE OF THE IMPORTANT PARAMETERS FOR THE MEASUREMENT OF THE STANDARD OF LIVING. CONSUMPTION LEVEL IS MEASURED BY MEASURING CONSUMER’S SURPLUS AND CONSUMER’S WILLINGNESS TO PAY
•  BASED ON THE  ASSUMPTION : A PROJECT MAY AFFECT

1.  TOTAL CONSUMPTION
2. TOTAL PRODCUTION
3. IMPORT/EXPORT

 

• UNIDO APPROACH
•  IF THE PROJECTS AFFECTS PRODUCTION: SHADOW PRICE IS BASED ON COST OF PRODUCTION
• IF THE PROJECT AFFECTS CONSUMPTION SHADOW PRICE IS BASED ON WHAT CONSUMERS ARE WILLING TO PAY
• IF THE PROJECT AFFECTS THE IMPORT/EXPORT THE SHADOW PRICE IS BASED ON BORDER PRICES THAT IS THE FOREIGN EXCHNAGE VALUE
• FOR SHADOW PRICES THE GOODS ARE CLASSIFIED INTO TRADEABLE AND NON TRADABLE
• STAGES ( UNIDO APPROACH)
• ARRIVING AT THE FINANCIAL PROFITABILITY OF THE PROJECT BASED ON MARKET PRICES
• USING SHADOW PRICES FOR THE RESOURCES TO ARRIVE AT THE NET BENEFIT OF THE PROJECT AT ECONOMIC PRICES
• ADJUSTMENT OF THE NET BENEFIT FOR THE PROJECT’S IMPACT ON SAVING AND INVESTMENT
• ADJUSTMENT FOR THE NET BENEFIT FOR THE PROJECT’S IMPACT ON INCOME DISTRIBUTION
• ADJUSTMENT OF THE NET BENEFIT FOR THE GOODS PRODUCED WHOSE SOCIAL VALUES DIFFER FROM THEIR ECONOMIC VALUES.
• FINANCIAL APPRAISAL
• PRIVATE SECTOR MEASURE THE FINANCIAL PROFITABILITY ON THE BASIS OF MARKET PRICES BUT FINANCIAL APPRAISAL OF PUBLIC SECTOR PROJECTS THE OBJECTIVE IS THE MAXIMIZATION OF SOCIAL WELFARE.

 

• EFFECT OF SHADOW PRICES
• SOCIAL COST BENEFIT ANALYSIS, THE MARKET PRICES OF BOTH INPUTS AND OUTPUTS OF A PROJECT ARE REQUIRED TO BE CORRECTED SUITABLY IF THEY DO NOT REPRESENT THE REAL PRICES OF INPUTS/OUTPUTS. SUCH CORRECTED PRICE OF INPUT/OUTPUT IS KNOWN AS SHADOW PRICE.
• EXAMPLE
• A NEWLY SET UP SMALL SCALE INDUSTRY IN INDIA ARE GRANTED SUBSIDY ON ELECTRICITY CHARGES BY THE GOVT AT A COST FOR THE INITIAL YEARS.
• LET US ASSUME STATE ELECTRICITY BOARD MAY PRODUCE ELECTRICITY AT A COST OF RS 7 PER UNIT. A NEWLY CHARGED AT A RATE RS 6 PER UNIT FOR THE FIRST YEAR, SECOND YEAR IT CHARGED 6.25 AND THIRD YEAR IT IS 6.50.
• SHADOW PRICES

 

• SHADOW PRICE MEANS THE ESTIMATED PRICE OF A GOOD OR SERVICE FOR WHICH NO MARKET PRICE EXISTS.
• WE CAN ALSO DEFINE SHADOW PRICE IS AN OPPORTUNITY COST OF AN ACTIVITY OR PROJECT TO A SOCIETY, COMPUTED WHERE THE ACTUAL PRICE IS NOT KNOWN OR IF KNOWN DOES NOT SHOW THE REAL SACRIFICE MADE.
• NUMERAIRE
• IS THE UNIT OF ACCOUNT IN WHICH THE VALUE OF INPUTS AND OUTPUTS ARE EXPRESSED
• IN UNIDO APPROACH : DOEMSTIC ACCOUNTING RUPEES
• DOMESTIC ACCOUNTING RUPEES TAKES INTO ACCOUNT THE SHADOW PRICE RELATIONSHIP
• DEFINITION BY UNIDO
• NET PRESENT CONSUMPTION IN THE HANDS OF PEOPLE AT THE BASIC LEVEL OF CONSUMPTION IN THE PRIVATE SECTOR IN TERMS OF CONSTANT PRICE IN DOMESTIC ACCOUNTING RUPEES
• TRADEABILITY OF GOODS AND SERVICES
• DECIDING FACTOR IN SHADOW PRICING IS THE TRADEABILITY OF GOODS AND SERVICES
• TRADEABALE GOOD IS ONE WHICH WOULD BE TRADED BETWEEN TWO COUNTRIES WITHOUT ANY RESTRICTION
• SHADOW PRICE FOR TRADEABLE GOODS IS INTERNATIONAL PRICE ( BORDER PRICE)
• BECAUSE IT IS POSSIBLE TO SBUSTITUTE IMPORT FOR DOMESTIC PRODUCTION AND EXPORT FOR DOMESTIC CONSUMPTION
• A NON TRADED GOOD IS ONE THAT IS NOT TRADED DUE TO TRADE POLICIES OF THE COUNTRY
• A NON TRADED GOOD THAT IS NOT TRADED DUE TO TRADE POLICIES OF THE  COUNTRY
• APPRAISED AT ITS MARGINAL ECONOMIC VALUE THAT IS THE AMOUNT THE DOMESTIC COSNUMERS ARE WILLING TO PAY FOR ADDITIONAL UNIT
• A NON TRADED GOOD MAY BECOME A TRADEABLE GOOD IF THE POLICY OF THE GOVT CHANGES
• TRADEABILITY OF GOODS AND SERVICES
•  
• DOEMSTIC PRODUCTION COST OF GOODS PLUS TRANSPORTATION TO THE DESTINATION MAY BE LOW TO SUBSTITUTE WITH IMPORTED GOOD
• THERE WILL  BE  NO ANY IMPORT
• DOMESTIC PRODUCTION COST OF GOOD PLUS TRANSPORTATION COST TO THE DESTINATION MAY BE TOO HIGH THAT EXPORT IS NOT POSSIBLE
• NO EXPORT
• SUCH GOODS CAN NEITHER BE IMPORTED OR EXPORTED DUE TO PRICE DIFFERENCE ARE CALLED NON TRADEABLE GOODS
• NON TRADEABLE GOODS CAN BECOME TRADEABLE GOODS ONLY IF DOESTIC COST BECOMES CHEAPER AS COMPARED TO INTERNATIONAL PRICE
• SHADOW PRICE OF RESOURCES
• TRADEABLE INPUTS AND TRADEABLE OUTPUTS :
• FULLY TRADED MEANS :
• WHEN INCREASE IN ITS CONSUMPTION RESULT IN A CORRESPONDING INCREASE IN IMPORT OR
• DECREASE IN EXPORT

·         FROM PRODUCTION POINT OF VIEW :

·         GOOD CAN BE CONSIDERED FULLY TRADED WHEN AN INCREASE IN ITS DOEMSTIC PRODUCTION RESULT IN CORRESPONDING INCREASE IN EXPORT OR A CORRESPONDING DECREASE IN EXPORT

• SHADOW PRICE OF RESOURCES
•  FOR FULLY TRADED THE SHADOW PRICE IS BORDER PRICE OF GOODS IN TERMS DOMESTIC CURRENCY RATE PERVAILING IN THE MARKET.

·         DOMESTIC CAHNEGS IN  DEMAND AND SUPPLY AFFECT ONLY THE LEVEL OF IMPORT OR EXPORT

·         FOR THIS TO BE TRUE : THE FOLLOWING CONDITIONS :

1. IMPORT AND EXPORT ARE NOT RESTRICTED
2. SUPPLY OF IMPORTED GOODS IS PERFECTLY ELASTIC OVER THE RANGE OF IMPORT VOLUME
3. THE DOMESTIC INDUSTRY HAS NO SURPLUS CAPACITY AND ANY INCREASE IN DOMESTIC DEMAND IS TO BE MET ONLY THROUGH IMPORT
4. EVEN IF THE DOMESTIC INDUSRY HAS SURPLUS CAPACITY IT CAN NOT BE PUT  TO USE DUE TO SHORTAGE OF NECESSARY INPUT
5. THE COST OF GOOD IMPORTED TO MEET ADDITIONAL DOMESTIC DEMAND INCLUSIVE OF THE COST OF TRANSPORTATION TILL THE POINT OF DOMESTIC CONSUMPTION IS LESS THAN MARGINAL COST OF  DOMESTIC PRODUCTION
6. THE COST OF IMPORTED INPUTS IS LESS THAN DOMESTIC MARGINAL COST

• SHADOW PRICE OF RESOURCES
• NON TRADEABLE INPUTS AND OUTPUTS : A GOOD THAT IS TRADEABLE ALL THE CONDITIONS ARE NOT SATISFIED THEN IT IS NON TRADEABLE
• BORDER PRICE DOES NOT REFLECT THE SHADOW PRICE
• THE ECONOMIC VALUE OF NON TRADED GOOD IS MEASURED AS UNDER :
• IF THE OUTPUT OF THE PROJECT ADDS TO THE DOEMSTIC SUPPLY.THE DOMESTIC CONSUMERS’S WILLINGNESS TO PAY  IS TAKEN AS THE ECONOMIC VALUE OF THE GOODS
• IF THE OUTPUT OF THE PROJECT CAUSES REDUCTION IN PRODUCTION OF LESS INEFFICIENT UNITS SUCH GOODS IS VALUED AT MARGINAL COST OF PRODUCTION
• SHADOW PRICE OF RESOURCES
• NON TRADEABLE IMPUTS AND OUTPUTS :
•  GOOD IS CONSIDERED NON TRADEABLE IF
• ITS IMPORT PRICE ( CIF) IS GREATER THAN DOMESTIC COST OF PRODUCTION
• OR ITS EXPORT PRICE ( FOB) IS LESS THAN DOEMSTIC COST OF PRODUCTION
• SHADOW PRICE OF RESOURCES
• VALUATION :
• IF THE IMPACT OF THE PROJECT IS TO REDUCE THE AVIALABILITY OF INPUTS TO TOHER USES,THE WILLINGNESS TO PAY FOR THAT INPUT REPRESENTS THE ECONOMIC VALUE OF THE GOOD
• IF THE INPUT REQUIRMENTS OF THE PROJECT ARE MET BY PRODUCING ADDITIONAL UNITS,THE PRODCUTION COST OF SUCH ADDITIONAL UNITS REPRESENTS THE ECONOMIC VALUE OF THE GOODS
• SHADOW PRICE OF RESOURCES
• VALUATION :
• IF THE IMPACT OF THE PROJECT IS TO INCREASE THE CONSUMPTION OF THE GOODS THEN CONSUMER WILLINGNESS TO PAY
• IF THE IMPACT OF THE PROJECT IS TO SBSTITUTE THE CONSUMPTION OF OTHER SIMILAR NON TRADEABLE GOODS THE MEASURE OF ECONOMIC VALUE IS ONLY THE SAVING IN COST OF PRODUCTION ( GOOD THAT WAS SUBSTITUTED AND GOOD THAT IS SBSTITUTED )
• EXTERNALITIES
• EXTERNALLY OF A PROJECT IS AN EFFECT WHICH IS NOT

1. DELIBRATELY CREATED BY THE PROJECT
2. IS NOT TRADED IN THE MARKET PLACE
3. IS BEYOND THE CONTROL OF THE PERSON

·         IMPROVEMENT IN THE TRASNPORT SYSTEM IN PARTICUALR AREA RESULTING FROM THE CONSTRUCTION OF ROADS IS AN EXTERNALITIES

• EXTERNALITIES
• EXTERNALLY OF A PROJECT IS AN EFFECT WHICH IS NOT
• DELIBRATELY CREATED BY THE PROJECT
• IS NOT TRADED IN THE MARKET PLACE
• IS BEYOND THE CONTROL OF THE PERSON

·         IMPROVEMENT IN THE TRASNPORT SYSTEM IN PARTICUALR AREA RESULTING FROM THE CONSTRUCTION OF ROADS IS AN EXTERNALITIES

• EXTERNALITIES
• BENEFICIAL EFFECT :
• CONSTRUCTION OF A DAM ACROSS A RIVER PROVIDES A COMMUNICATION LINK BETWEEN THE TWO SHORES OF THE RIVER
• A ROAD IMPROVEMENT PROJECT RESULT IN REDUCTION OF ACCIDENTS
• EXTERNALITIES
• HARMFUL EFFECT :
• AIR POLLUTION,WATER POLLUTION AND NOISE POLLUTION
• IMPORVED TRANSPORTATION FACILITY AND REDUCED TRANSPORTATION TIME MAY RESULT CONGESTION TO CITIE
• EXTERNAL EFFECTS ARE INTANGIBLE IN NATURE AND VERY DIFFICULT TO VALUE COST/BENEFIT
• CANNOT BE MEASURED IN TERMS OF MONETARY
• QUALITATIVE EVALUATION
• CAPITAL INPUTS
• WHEN CAPITAL FUNDS ARE INVESTED IN PROJECT
• CONVERSION OF FINANCIAL RESOURCES INTO PHYSICAL ASSETS
• FINANCIAL RESOURCES USED HAVE AN ALTERNATIVE USES
• CAPITAL INPUTS
• FULLY TRADED GOODS : THE SHADOW PRICE IS INTERNATIONAL PRICE
• FOR NON TRADED GOODS THE SHADOW PRICE IS MEASURED: THE CONSUMER IS WILLINGNESS TO PAY IF THE PROJECT ADS TO DOMESTIC SUPPLY AND SHADOW PRICE IS EQUAL TO THE MARGINAL COST OF PRODUCTION IF THE OUTPUT OF THE PROJECT CAUSES REDUCTION IN PRODUCTION BY LESS EFFICIENT UNITS.
• APART FROM THE PHYSICAL ASSET SHADOW PRICE : THE OPPORTUNITY COST OF CAPITAL IS ALSO TAKEN INTO ACCOUNT
• THE OPPORTUNITY COST OF CAPITAL IS THE BENEFIT FORGONE BY SACRIFICING ( NOT CHOOSING THE BEST ALTERNATIVE PROJECT)
• IN CONVENTIONAL INVESTMENT APPRIASAL EITHER THE INTERNAL RATE OF RETUNR OR NPV IS USED
• CAPITAL INPUTS
• THE COSUMPTION RATE OF INTEREST ( CRI) IS USED IN UNIDO APPROACH AS DISCOUNT RATE IS SINCE THIS APPROACH IS BASED ON CONSUMPTION OBJECTIVE
• CRI IS NOTHING BUT SOCIAL DISCOUNT RATE
• CRI =  (PARAMETER OF UTILITY FUNCTION X GROWTH RATE OF PER CAPITA CONSUMPTION ) + RATE OF PURE TIME PREFERENCE
• LABOUR
• SHADOW WAGE RATE : LABOUR IS A SERVICE WHEN IT IS USED IN A PROJECT IT MAY RESULT IN :

1. TAKING AWAY LABOUR FROM OTHER PROJECTS
2. CREATION OF NEW WORKERS
3. BRINGING WORKERS FROM OTHER COUNTRIES

• LABOUR
• LABOUR FOR PROJECT IS TAKEN FROM OTHER PROJECTS SHADOW PRICE MAY BE TAKEN TO EQUAL TO WHAT OTHER ARE WILLING TO PAY FOR THE SAME
• IN CASE PROJECT CREATES NEW WORKER :SHADOW PRICE OF LABOUR IS EQUAL TO THE MARGINAL PRODUCT OF THE LABOUR IN THE PREVIOUS EMPLOYMENT ( ZERO IF THE WORKER IS UNEMPLOYED ) PLUS THE VALUE OF LEAISURE FOREGONE AND COST OF TRANSPORTATION AND REHABILITATION AND THE ADDITIONAL CONSUMPTION OF FOOD + COST OF TRAINING WORKERS

LABOUR

• WORKERS ARE IMPORTED
• SHADOW PRICE = WAGES PAID TO THEM PLUS PREMIUM ON ACCOUNT OF FOREIGN EXCHNAGE REMITTED BY THEM TO THEIR COUNTRY

 

• FORMULAE  BY UNIDO
• SHADOW WAGE RATE= LABOUR’S FORGONE MARGINAL PRODUCT + NET SOCIAL COST OF INCREASED CONSUMPTION + SOCIAL COST OF REDUCED LEISURE
• FOREIGN EXCHANGE
• UNIDO METHOD USES DOMESTIC CURRENCY AS THE NUMERAIRE
• BENEFITS IN INTERMS OF FOREIGN EXCHNAGE ARE TO BE VALUED AT DOMESTIC CURRENCY
• FOR TRADED GOODS : IMPORT = CIF+ CLEARING CHARGE +INTERNAL TRANSPORT CHARGES TO THE DESTINATION
• FOREIGN EXCHANGE
• EXPORTABLE GOODS : IF THE FOB PRICE OF EXPORT ARE HIGHER THAN ACTUAL DOMESTIC PRICE THEN FOB SHOULD BE USED
• IF THE ACTUAL DOMESTIC MARKET PRICE IS HIGHER THAN FOB USE THE ACTUAL DOMESTIC MARKET PRICE
• IF SAME EITHER CAN BE USED
• ADJUSTMENT :
• IMPACT OF THE PROJECT ON SAVING AND INVESTMENT :
• MAY HAVE THE IMPACT ON DIFFERENT GROUPS
• WORKERS.CONSUMERS,GOVERNMENT AND ADD OTHER BUSINES UNIT
• IT MAY AFFECT THE INCOME DISTRIBUTION AND SAVING
• THE GAIN OR LOSS= DIFFERENCE BETWEEN SHADOW PRICE AND MARKET PRICE OF INPUT AND OUTPUT AND DIFFERENCE BETWEEN VALUE RECEIVED
• SAVING IMPACT OF THE PROJECT= CHANGE IN THE INCOME OF THE GROUP X MPS
• ADJUSTMENT :
• IMPACT OF THE PRODUCT ON THE INCOME DISTRIBUTION :
• GOVERNMENT WANTS TO ACHIEVE AN EQUITABLE DISTRIBUTION OF INCOME AMONG DIFFERENT STRATAS OF THE SOCIETY OR AT LEAST REDISTRIBUTION OF INCOME IN FAVOUR OF ECONIMICALLY WEAKER SECTIONS
• NET GAIN OR LOSS IS WEIGHED

 

 

• ADJUSTMENT  FOR MERIT  AND DEMERIT GOODS :
• MERIT GOOD IS ONE WHICH THE SOCIAL VALUE EXCEEDS THAN ECONOMIC VALUE
• CREATION OF EMPLOYMENT OPPORTUNITIES AND IMPORT SUBSTITUTE GOODS ARE MERTI GOODS
• DEMERIT GOOD : WHOSE SOCIAL VALUE LESS THAN ECONOMIC VALUE
• LIQOUR IS DEMERIT GOOD
• LINK FOR SOCIAL COST BENEFIT ANALYSIS FIRST PART
• https://www.gargshashi.com/2020/10/SOCIAL-COST-BENEFIT%20-ANALYSIS.html
• https://www.gargshashi.com/2020/10/LITTLE-MIRRLESS-APPROACH.html