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November 10, 2010 / economistindia

Little Mirrless and UNIDO approach -A comparision

The UNIDO approach of project Appraisal

 The UNIDO guidelines provide a comprehensive framework for appraisal of projects

and examine their desirability and merit by using different yardsticks in a step-wise manner.The desirability is examined from various angles, such as the impact on

  (a) financialprofitability of utilization of domestic resources,

(b) savings and consumption pattern,

(c)income distribution, and

 (d) production of merit and demerit goods.

 These different aspects are examined in five stages, each stage leading towards a

social benefit-cost of the project.

 Stage one

measures financial profitability from detailed integrated standard analytical tables enumerating various costs and benefits at the market price and examines profit viability from investors’ point of view.

 Stage two

adjusts the financial costs and benefits to various distortions introduced by market imperfections by valuing costs and benefits or net benefits in terms of economic efficiency or shadow prices.For shadow prices, it categorizes project inputs and outputs into “traded”, “tradable” and“non-traded”. For traded and tradable, the guidelines use the border prices (f.o.b/c.i.f)as the relevant shadow prices, whereas non-traded inputs and outputs are broken down into their components and each tradable subcomponent is valued at border prices, andso on. The residual non-traded components of commodities are valued at domestic willingness to pay criterion and the labour is valued at shadow wage rate.

 Stage three

 This stage designed to examine the impact of projects on savings and consumption which are of vital consideration in the choice of alternative investments in labour-intensive and capital-intensive projects. If saving is assigned great importance, as should be the case in capital-scarce countries, this stage recommends the rate for adjustment for savings by which the social value of a rupee/dollar investment exceeds its consumption value.

 Stage four

This important for those countries that regard income redistribution in favor of weaker sections and backward regions as desirable objectives. The guidelines suggest weighting net benefits to various income groups or regions that reflect the judgment of politicians or the planners.

 Stage five

Finally, in stage five, the UNIDO analysis suggests a methodology for necessary adjustment of the deviations in economic and social values and difference between the efficiency and social value of project output, say, between good and bad or merit and demerit goods.It has been claimed that the analysis of merit and demerit goods is not designed for“purists in economics who think that economics should be devoid of political or subjective judgements” (UNIDO 1978).

 

Little – Mirrlees Method

 The seminal work of Little and Mirrlees on benefit-cost analysis systematically develops a theoretical basis for the analysis and its underlying assumptions and lays down step-wise procedure for undertaking benefit-cost studies of public projects. The mathematical formulation is identical to the UNIDO method except for differences in assigning value to discount rates and accounting for imperfections and other market failures and social considerations.

 Like UNIDO guidelines, the Little-Mirrlees method also suggests valuation of projectinvestment at opportunity cost (shadow prices) of resources to correct distortions due tomarket imperfections. Both methods make use of border prices to correct distortions butwith a major difference.

While Little and Mirrlees express the numeraire in terms of border prices in foreign currencies, the guidelines recommend that foreign exchange values be calculated in terms of domestic currency.

Little and Mirrlees have also suggested an elaborate methodology for calculating shadow prices of non-tradables. Use of detailed input-output tables is suggested with a view to tracing down the chain of all non-traded and traded inputs that go into their production. However, in the case of non-availability of detailed input/output tables, a conversion factor based on the ratio of domestic costs of representative items to world prices of these items could be used for approximation of shadow prices of non-traded resources. Little and Mirrlees believe that in all less developed countries, one of the major criteria for the choice of a project should be its ability to generate savings and, hence, the Little-Mirrlees method suggests the use of “accounting rate of interests” to calculate present worth of future annuities of savings and consumption. Guidelines, on the other hand, do not make any adjustment for consumption and saving impact of project investment. Unlike the five stages of UNIDO, the Little and Mirrleesprocedure is relatively more practical, although, unlike guidelines, it does not provide sufficient insights by examining project investment from different angles.

 Source :

1) unescap.org/ttdw/Publications/TPTS_pubs/pub_1959/rurpov_ch6.pdf

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