ENGINEERING FOR DEVELOPMENT

(First Draft)

E J Jefferies

March 1969

CONTENTS

PART 1 THE WORLD DEVELOPMENT PROGRAMME

Chapter 1 Introduction
Chapter 2 Closing the Gap
Chapter 3 Resistance to Change
Chapter 4 International Technical Assistance

PART II AN ENGINEERING APPROACH TO A PLAN FOR A COUNTRY

Chapter 5 Outline of the Approach
Chapter 6 Setting the Problem
Chapter 7 Basic, Concepts, Terms and Definitions
Chapter 8 Background Data Available
Chapter 9 The Starting Point for a Case Study
Chapter 10 Preliminary Calculations
Chapter 11 Patterns of Economic Growth
Chapter 12 Development Plan for Year 1
Chapter 13 Development Plan for Year 2
Chapter 14 Development Plan for Year 3
Chapter 15 Review of Changes During the Three Years
Chapter 16 The Control of Development
Chapter 17 Financing the Development

PART III THE IMPLICATIONS OF RAPID GROWTH

Chapter 18 Economic Growth and Technological Changes in Rural Communities
Chapter 19 The Influence of Agriculture on Industrial Development
Chapter 20 The Role of Manufacturing Industry
Chapter 21 The Contribution of Industrial Engineering to a Solution

PART IV DESIGNING FOR BALANCE IN DEVELOPMENT

Chapter 22 The Prediction of New Manufacturing Capacity Requirements by Product Group
Chapter 23 The Productivity of Labour
Chapter 24 The Growth of Productivity
Chapter 25 The Calculation of Appropriate Levels of Productivity in New Plants

CHAPTER 23

PRODUCTIVITY OF LABOUR

The key to development is the application of better technologies. A level of technology by itself cannot be expressed in economic terms, but its derivatives (that is, its effects on capital requirements, employment, production costs and markets) can be expressed in precise figures, through the normal application of industrial engineering methods. Of these effects, the level of productivity of labour is the most important since this determines indirectly purchasing power, size of market and production costs.

The term "productivity" is too often used without a precise understanding and definition of its meaning. Very often it is taken to mean "volume of production" or "total sales value of production" per person employed. The first of these does not have much meaning in comparing the manufacture of similar products under widely different economic circumstances. As noted by Meier¹², productivity, defined as physical units of output per many-day can be as high in factories in underdeveloped countries as anywhere else, where simple operations are involved, even in highly advanced technological fields. Again, Salter¹³ concludes that rises in productivity, defined thus, result mainly from technical change and from economies of scale; and that the resulting economic gains are not distributed either to the operatives in the form of increased wages (since these are set by the general pattern of wages in the country), or as increased profits to the investor, but to consumers. The second definition does not give a usable or meaningful measurement in economic terms, since it includes the intrinsic value of the raw material which may be very high or very low and may have to be imported.

For our present purpose, the standard definition of Productivity used by economists will be adopted which is: VALUE ADDED PER EMPLOYEE. This is usually reported as "per year" and is applicable to any economic activity.

The overall equation of an economic activity over a given period of time can be written:

The gain to the economy of the country as a whole due to the activity, i.e. the "Net Product" or "Value Added" is the result of the operation of a certain amount of capital and a certain amount of labour on the other resources used in producing the product. This is measured by adding up the terms for: Costs of Capital; Labour Costs and Salaries; and Profit, in the overall equation above.

This "Value Added" divided by the number of persons engaged in producing it, is defined as Productivity of Labour.

This calculation of the productivity of labour shows the economic value of any activity in the same terms as are used in reporting the overall state of the economy. In fact, the sum of all the "Value Added" terms for every economic activity in the country becomes the "Gross Domestic Product". Thus, in use, these individual calculations of productivity of labour can be directly co-related with the state of the economy. If a particular case study results in a calculated Value Added which is additional to what existed before, the GDP has been increased. If the same case shows that persons who were previously unemployed will be used in the proposed new activity, then unemployment will be reduced; but if the new proposal involves dismissing some employees, then unemployment will be increased. Each individual case will show only small figures for extra Value Added or extra employment relative to the total in the economy as a whole. However, the economy is the sum of a very large number of small activities and each must make its own contribution, however modest. Any case which leads to estimates that Value Added or employment will be reduced must be rejected or amended; it is not good enough to accept it with the excuse "it is only a very little one".

The calculation of the Value Added for each individual activity is made in the same terms as the calculation of the economy as a whole. This by definition on pages 1-9 includes depreciation (provisions for consumption of fixed capital). So depreciation should be included in Costs of Capital in the equation from which Value Added is derived. This is in line with the normal practice of industrial engineering, where provision for depreciation is included in deriving costs of production, price levels and profits.

The Pattern of Productivity of Labour

The average productivity of all the persons engaged in all economic activities can be estimated as the Gross Domestic Product (National Income) of the country divided by the total available work force. In the absence of better data on employment, it can be taken as 2.5 times the per capita GDP, i.e. assuming the total labour force is 40% of the population¹⁴.

It should be remarked that productivity of an individual within a group of people combining to carry out a single economic activity (e.g. a factory) has no meaning. In such a case the only meaningful measure of productivity is the total net product divided by the total number of persons, since the efforts of one individual would have no result without the addition of the efforts of all the others. However, a professional man performing some service without other help, or an artist, or a subsistence farmer can be considered in some cases to have an individual productivity.

Within these limits, the cumulative distribution of level of productivity against work force can be plotted. This distribution cannot be assumed to be "normal" in the statistical sense; it is likely to be skew and biased towards the lower productivity side.

Since it is improbable that direct data will be available to plot the productivity work force curve, its shape can be appreciated by using any data which may be available on the distribution of personal income or expenditure throughout the population. This is probably safe enough as a first approximation, since in those activities which predominate in an underdeveloped country wages form a large proportion of the Value Added.

This is illustrated for Ceylon in Tables 4 and 5 and Graph 5.

TABLE 4 Personal Income Per Capita: by Income Groups, 1963

(Source: Survey of Consumer Finances 1963, Central Bank of Ceylon)

From this data a new Table can be drawn up:

TABLE 5

Table 5 produces the curve of Graph 5. Since in Ceylon the work force is about 35% of the total population, the figures of the horizontal scale can be increased by dividing by 0.35 to show the distribution of earnings versus percent of work force; and since the per capita GDP is known to be Rs 530 compared with the mean value of Rs 435 for per capita earnings, a further increase in the horizontal scale by multiplying by ⁵³⁰/₄₃₅ gives an estimate of the distribution of productivity of labour versus percent of work force, with a mean at Rs 1520 on the lowest horizontal scale. In passing it can be remarked that the ratio of per capita earnings to per capita GDP (in this case ⁴³⁵/₅₃₀ or 0.82) indicates that the average contribution of labour to Value Added is 82%, leaving 18% as the contribution from capital.

Given information on the growth of per capita GDP planned or expected for the immediate future, Graph 5 can again be rescaled by an appropriate factor to correspond with the pattern which may be expected in five, ten, fifteen years time. The pattern for the appropriate future year, taking into consideration the write-off time for the plant in question, can be used as the criterion in designing for appropriate productivity in a new plant.

Use of the Graph of Productivity of Labour

Since the interquartile region marked in Graph 5 accounts for half the population, action designed to effect an upwards shift in this region will probably be more effective in producing development than the same effort directed to the upper or lower quartiles.

Where the improvement is proposed of an operation at present carried out at a productivity level below the median, it is suggested that the new target of productivity should be chosen by multiplying the existing level by two factors: first by the factor of increase in level of output foreseen for say five to eight years hence or half the planned write-off period; and secondly by the factor of increase foreseen for the per capita GDP in the same period. This will limit the numbers immediately thrown out of work to a level which the operation will expect to re-absorb in a few years time; and at the same time will ensure that the new technology is not again equally obsolete until the new equipment has been used for about half its write-off life.

It is suggested that wherever unemployment is a problem, new manufacturing plants providing new employment opportunities should in general be designed on the basis of an existing productivity of labour corresponding to the range from the "mean" up to the "upper quartile" line, increased by the two factors indicated in the previous paragraph, since new plants below the "median" will not contribution to economic expansion and plants above the "upper quartile" will not contribute significantly to an absorption of labour into industry.

In certain cases, where a proposed new plant is one of a group of interdependent plants, it may be desirable to calculate the productivity for the group as a whole and ensure that this falls within the appropriate range. This will allow for the case where, by the nature of the techniques used in one of the plants, its productivity is unavoidably high or low.

Diversity of Productivity Within an Industry

In any country where a given manufacturing industry (e.g. a product group of Table 3) is represented by more than one factory, these will operate at widely different levels of productivity. The basic reason for this lies in the continuous advance of technologies, which can only be fully applied when a new production unit is designed. Every group of industry will include small and large units; handcraft and mechanised units; and old and new units. The course of industrial development is for the units whose capacity and productivity level has been outpaced by the general development of the economy to be abandoned and replaced by new units capable of operating at a more appropriate level. This is equally true in developing countries and in industrial countries.

However, under conditions where pressure of unemployment is high, the closure of units of low productivity level is naturally delayed, since the provision of jobs is of more importance and the provision of new capital is more difficult. This tends to produce a condition where "subsistence manufacturing" (comparable with subsistence farming) becomes widespread. The effect can be accenuated by the setting up of a small number of high capacity units capable of operating at an inappropriately high level of productivity, since these will compete with and eliminate those units formerly operating at medium to high levels of productivity rather than units in the "subsistence manufacturing" area.

Since both employment and economic development are needed, it is equally important to avoid establishing the new units of a developing group of manufacturing industry either on the subsistence manufacturing level or on an inappropriately high productivity level.