Full text: Study week on the econometric approach to development planning

possibilities and might appropriate the funds for ‘the requisite 
investments. Beginning in the 1930’s in my country, and at 
other dates elsewhere this process has become increasingly 
formalized and bureaucratized. Now a project proposal must 
be accompanied by an elaborate dossier setting forth estimates 
of its various economic and non-economic consequences and 
purporting to justify it by appeal to objective criteria. If the 
American Congress or other local legislature doesn’t insist on 
such a formal justification the World Bank will. We have even 
extended the range of activities counted as government invest- 
ments. Expenditures on education, for example, are now fre- 
quently considered under that heading. 
It is therefore appropriate for us to consider the application 
of quantitative methods of economic analysis to the appraisal 
of proposed public investments. We shall assume throughout, 
as a background, a mixed economy, one in which the public 
and private sectors are both significant. The issue of public 
investment cannot arise, by definition, in a pure private eco- 
nomy, if theré is one anywhere in the world. It takes an ‘enti- 
rely different form and meaning in a pure public economy. 
Thus we shall assume a mixed economy, and though we shall 
concentrate on the public sector the private sector will always 
be visible in the background. 
The broad subject of government investment has already 
accumulated an imposing literature, which I shall not survey. 
Rather I shall advance a proposal concerning one central issue 
that the literature, as I know it, treats unduly lightly. 
The analysis of public investments is strongly analogous 
to the problem of capital budgeting in the context of a private 
firm. Both are motivated by the need for wise allocation of 
scarce resources, and similar conceptual issues arise in the two 
cases. In both cases the benefits promised by the project must 
be weighed against the costs it entails and competing projects 
laying claim to the same resources must be compared. But in 
the case of government undertakings both the benefits and the 
3] Dorfman - pag. 

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