Investment Criteria for Economic Development and the Theory of Intertemporal Welfare Economics

Abstract

Introduction, 56.- I. The ideal criterion under perfect competition, 57. II. Capital rationing: the SMP criterion in a closed economy, 59; correcting market prices to reflect social values, 60; the interest rate in the SMP criterion, 63. - III. Modifying the rate of capital accumulation: the MGC criterion, 65. IV. The interest rate in development planning, 74. - V. Some extensions of the analysis, 79; the optimal interest rate for the SMP criterion, 79; multiple rationing: investment criteria in the open economy, 81. - VI. Some limitations of the analysis, 83; population still an exogenous variable, 83; income distribution assumed satisfactory, 83. - VII. Concluding comments, 84. The applicability of orthodox efficiency criteria for the selection of investment projects in underdeveloped countries has been challenged on a number of grounds in recent years. Much of the literature supporting the doctrine of balanced growth argues that the static optimum criteria of the free market economy fail to maximize economic growth and must be seriously modified in order to assure proper exploitation of external economies.' Professors Galenson and Leibenstein2 have now carried these criticisms to their extreme conclusion by arguing that the orthodox criteria will systematically interfere with economic growth and that criteria of an altogether different nature should be used. In the present article I seek to indicate the kind of criteria that are needed for project selection, given some of the specific market imperfections found in underdeveloped countries, and particularly assuming that the capital market performs its functions poorly or not at all. The criteria developed are assumed to be applied by a development planning authority which has some control over the choice of projects to be undertaken.