Dynamics of sector policy

DYNAMICS OF SECTOR POLICY

SUNARIO WALUJO

lU JAN. iflU

ARCH

EF

lab. v. Scheepsbouwbmh

Technische Hogeschool

Deift

DYNAMICS OF SECTOR POLICY

With emphasis on the maritime sector optimum development

PROEFSCHRI FT

ter verkrijging van de graad van doctor

in de technische wetenschappen aan de

Technische Hogeschool Deift, op gezag

van de Rector Magnificus Prof. Dr. Ir. F.J. KIEVITS

voor een commissie aangewezen door het

College van Dekanen te verdedigen op

WOENSDAG 20 September 1978

des namiddags orn 16.00 uur

door

SUNARIO WALUJO

Dit proefschrift is goedgekeurd door de promotor Prof.Ir. N. DIJKSHOORN eri de co-promotor Prof.Dr. G.G.J. SOS.

to my daughter Anita Imanati, at vhose birthyear the birth of my ideas has taken place.

DYNAMICS OF SECTOR POLICY

with emphasis on maritime sector optimum development

CONTENTS SIDE

Preface

1. PHILOSOPHY AND METHODOLOGY 1.1 Policy analysis 1.2 System dynamics 3 1.3 Policy 14 Ecological impact 6 1.5 Technological impact 6 1.6 Economical impact 9

1.7 Social political impact 12

SECTOR CASE STUDY: MARITIME SECTOR 15 2.1 Development cf maritime sector 15 2.2 Shipping in developing countries 17

2.3 Shipping policy i8

BASIC MODEL STRUCTURE 22

3.1 Sector Analysis 22

3.2 Description of the model 214

3.3 Structure of the model 26

14. STANDARD WORLD MODEL 33

14.1 Capital sector 33

14.2 Population sector 514

14.3 Policy sector 6o

14.14 Enphasis Sector: Maritime Rector

66

14.5 Description of the equations 68

STANDARD INDONESIAN MODEL 914

STANDARD NETHERLANDS MODEL 108

MOLDE BEHAVIOUR MODES 120

OBSERVATIONS 121

OPTIMUM POLICY 123

CONCLUSIONS 125

APPENDIXES

Appendix A : Docuinentor Listing Appendix B Definition File

Appendix C : Plots of Parameter and Structural Changes for Indonesian Model Buns Appendix D : Printout of Model Behaviour Apperdix E : Row to Bead Dynamo

PREFACE

The maritime sector, for a complex of reasons, has become a major concern of world economy. It is the purpose of this thesis, by integrating many distinct but relevant pieces of information, to help focus and expedite more cogent discussions on maritime sector alternatives.

In the broadest context, an integrated set of data is presented on the forces that affect the demand for and supply of maritime sector's services in order to provide a more rational background for decision making in respect of these problems.

The underlying premises include the possibility to identify, with reasonable agreement, basic economic and technological forces that are affecting the maritime sector and secondly if this is accomplished, it will be possible to focus discussions on appropriate goals and criteria in setting maritime sec-. tor's policies.

Decision making in this area should be improved significantly by building up reasonable agreement on basic economic and technological forces in the context of appropriate goals and criteria.

In short, the emphasis has been directed upen the study of the reactions of basic problems rather than on finding solutions for detailed problems in the maritime sector.

The assumption was, that conclusions or policy prescriptions depend haevily on identification of the underlying forces, which condition the growth and development patterns of global and national areas and that first these forces need exploration and study.

The following areas were identified for particular intensive study: Behaviour mode of the macro economic sector.

1ehaviour mode of potential demand of the maritime sector. Governmental policy affecting maritime sector requirements.

The study concentrates on better understanding of the areas and embedding it in appropriate nunerical methods.

The development of gross national product and foreign trade could induce potential demand in the maritime sector.

The mathematical model has shown that an appropriate investment policy could achieve an advantageous development in the production and employment sector in the long run.

In the standard world model is observed, that due to overinvestrient in the maritime sector in the past, the potential demand has declined. This had

it could recover under the influence of an appropriate policy on the system behaviour.

A policy analysis study can provide the decision maker with information and perspectives but can seldom, possibly never, tie everything down so tightly that the rational decisionmaker has no choice but to take the solution from the analysis.

Five key elements are throughout the study present: o1Dectives, impacts, alternatives, criteria and models. Of these five elements, models are the central mode of every analysis. These may range in form from an elegant computer simulation to a few assumptions and rules of the thumb. The models in this thesis were constructed using the system dynamics approach to simulation modelling, a method developed by J.W. Forrester.

Chapter 1 - provides introduction to the philosophy and methodology. Chapter 2 - examines the problems areas of the maritime sector. Chapter 3 - provides the basic model stru2ture.

Chapter -

6 -

applies the model to global, indonesian and netherlands case. Chapter 7 - 9 - analysis the behaviour modes, the observations and the

optimal policy.

Chapter 10- contains the conclusions.

I want to express my appreciation to the staf of Netherlamd Maritime Institute, P.T. Tri Hasta Consultants and International Technical Assistance Department for making this thesis possible,

By the sun and his biightness, And the moon when she followed him And the day when it revealed him . And the night when it concealed him

And the heaven and Him who built it And the earth and Him who spread it And a soul and Him who perfected it

And inspired it what is wrong for it and right for it

He is indeed prosperous who caused it to grow And he is indesd a failure who damaged it.

The Sun, Koran 91

1. PHILOSOPHY A1D METHODOLOGY

1.1 Policy analysis

Not only the maritime sector is a major concern of world economy, other sectors too are affected by a crisis. It is a part of an integra], world wide problem, not only in the economica]. but also in the social, politi-. cal and environmental field.

In search of the answer to solve this problem, E.F. Schumacher, in his book "Small is beautiful", wrote in the Epilogue: "Every where people ask: 'What can I actually do?'. The answer is as simple as it is dis-concerting: we can, each of us, work to put our own house in order. The guidance we need for this work cannot be found in science or techno-logy, the value of which utterly depends on the ends they serve; but it can still be found in the traditional wisdom of mankind."

For this reason, I begin this study citing the above Koran verse. The choice of Islam for this purpose is purely incidental, the teaching of Christianity, Judaism or Buddhism could have been used, just as well as those of any other of the great Eastern traditions.

The moral has teached the plight of mankind to preserve the nature; by maintaining a steady-state growth, wellbeing will be achieved, and by destroying it, they will get lost.

This will also be the guidance in the whole process of this study.

The subject-matter of this study is policy analysis. Policy analysis comDris!s systematic development, analysis and comparison of policy and

-

-2-policy projects.

In the past when events moved more slowly, the corrective effects based on experience played a very much larger role than they do to day. Through trial an error and political give and take, it was possible to develop policies that took into account the objectives, estimates and

values of everybody in society. This is no longer the case, technology

and events move on rapidly, that natural trial and error can lead to catastrophes.

Not only war, but also population pressures, resource shortage, lack of energy and environmental deterioration belong to this category. The objective of policy a'alysis is to assist decision makers in complex problems of choice under uncertain conditions.

These problems are varied, hence an appropriate analysis must be

versa-tile arid take into account all the typical aspects of a "iany-sided decision problem. The following aspects should be included:

An investigation of what the decision maker has to accomplish. A search of alternative ways of achieving the objectives. A full comparison of the alternatives in terms of their impacts. . A corisideraticn of all significant aspects of the problem. 5. An iterative approach.

In the score of years that policy analysis has been in action, it has

become apparent that scientific research and policy analysis go hand in hand. The complicated relationships which are critical in policy

analysis often require scientific research, before these relationships can be expressed in a workable form for analysis.

Inversely, scientific inquiry in complicated problems can lead to policy analysis, the result of which may provide a breader insight.

Experience has shom also that policy analysis often indicates fields

of scientific research where improvement of outcome could he obtained. It is obvious that scientific research provides policy analysis with a number of tools. Many of the techniques now conmonly in use for

analysis were derived from mathematical research and statistical

analysis. Linear programming, dynamic programming and system dynamics simulation are typical examples.

Policy analysis has particularly bensfited from developments in computer sciences. Interactive languages eased the nan-machine interrelation, thus promoting ad-hoc modelling capabilities of the policy analyst during the study.

Nowadays industrial society becomes increasingly dependent on decisions to be projected further and further ahead of the period of their maximum impact. Social pressures on the individuals have diminished the personal incentives on serious thinking about the future. The consequences of important decisions which control economic grorth, once laid inside the time horizon of the individual's personal planning abilities, now the widening horizon is most typical.

Historically, military necessity has often led not only to new inven-tions and applicainven-tions like aircraft and digital computers, but also to new organisational forms and to new understanding of social forces. These developments have later been applied to civil use. Such innova-tions also became operative in the military command function. As the pace of warfare has quickened, there has been a shift of emphasis

from tactical decision (moment-by-moment direction of battle) to strategic planning (preparing for possible eventualities, establishing policy, and determining in advance how tactical decisions will be made).

1.2 System dynamics

The founding of system dynamics is an experimental approach to the understanding of systems behaviour. Deterministic analysis seemed not powerful enough to yield general analytical solutions.

An alternative is the experimental approach. A mathematical model of the discretized system resulted. Such a mathematical model is a more or less detailed system-description which tells how the conditions at one point in time leads to subsequent conditions at later points in time. The model behaviour is observed, and related to the real system. Models can be used for experimental investigations at lower cost and in less time than experiments in actual systems. Models have become widely accepted as a means for studying complex phenomena. A model is a substitute for real systems.

_14_

By using a model, the expectations of predicting specific actions in the future should be less than enhancing the understanding of the inherent characteristics of the system. The model should be judged by its ability to reproduce more or less precise the behaviour characteristics of the system.

The objective is to enhance understanding and purification of thinking about the system, a model can already be useful if it represents on1y the basic relations and provides insight in the nature of the system under study.

A mathematical model should be based in the best information that is readily available, but the design of a model should not be postponed until all pertinent parameters have been accurately measured. That day will never come. Data should be estimated where necessary, so that many things that can be learned on systems behaviour while data gathering is proceeding.

A principal use of dynamic models is the study of the influence of potential policy decisions ori system behaviour. All the input and the output of th model are placed under the complete control of the

policy. Policy furnishes the basie for controlling flows at all points in the actual system. Can estimated decision functions be good enough to be useful 7 In general, it appears that they can be.

1.3 Policy

The word policy is used as a general term to describe in which way the decision process converts information into action. Which action will result from certain information inputs ? What is the conversion relationship between information sources and the stieem of resulting decisions. Policy is a formal function which fixes the relationship between information sources and resulting decision flows. Policy is a choice between alternatives.

Planning is essentially a decision process. It consists of taking past and present available information and converts these into instructions to control a course of action.

It is obvious that an economic model cannot possibly represent every individual decision which takes place in the system. If individual actions are properly grouped according to similarity of circumstances,

the average behaviour can be more accurately described than individual incidents separately. How this grouping or aggregating is done is of great important.

The significance of a model depends on the correctness its purposes are served. The purpose of the dynamic model is to aid the promotion of an improved economic system. To attain the optimum policy in the

economic field, there are two different acts:

I. Quantitative policy: the changing within the qualitative framework of the existing structure of certain political parameters or poli-tical instruments.

2. Qualitative policy:by changing qualitative aspects of economic structure.

In principle, the determination of the optimum policy, if only alter-ations of qualitative policies are possible, is the optional choice from a limited number of alternatives. For each conceivable policy the result of structural changes on the target variables should be known.

Some school of thought on economic policy expresses that an optimum policy is guaranteed by a qualitative choice only, their choice being

that of "lajsez faire". Another example of an a-priory belief of this

type is the extreme socialist opinion that only state ownership can be a guarantee for the maximum of general wellbeing.

Both of these cases are examples of an a-priory policy, based on

theories

rather than on empirical research.

Their counterpart is represented by empirical policy, based on experience with alternatives.

Most of the examples of economic policies are of the intermediary type; they are based on knowledge of economic behaviour of an econometric character.

As a very important object of economic policy is the determination of the optimal policy, a broad search in the vide field of alternatives to achieve the objective, will be carried out.

The impacts of technological and political factors will he considered, as they are relations between these factors: moral value is the guidance of political value, political value is the guidance of economic value and economic value is the guidance of technology, this is the hierarchy of the system.

-5--6

1. Ecological impact

The ecological world view represents mankind as an integral part of larger, natural systems, limited by physical laws and the finite earth. Although physical laws may be immutable, man's conditions within the natural system are defined to a certain ectent by his own decisions and actions. As his understanding of the natural and social system increases, those decisions and actions may improve the welfare of the entire human race. Figure 1.1 . Behaviour modes of growing population in a finite environment, illustrates the four possible behaviour modes that a growing population can exhibit over

time. The node actually observed in any specific case will depend on

the characteristic of the carrying capacity, the level of population that couid be sustained indefinitally by the prevailing physical, political and biological cystems, and the nature of the growth process itself. One of these basic behaviour modes must in principle characte-rize any physically growing quantity, such as productive capital or output.

1.5 Technological impact

Technology has an important impact on the development of world history. The development of technology has changed the pattern of civilization.

The stages of development is determined by the phase of occupation of the population in a country. There are ssveral classifications and descriptions of these occupation sectors, the most commonly used scheme for subdivision is based on the International Standard of

Classification (iSiC').

In this study terms used by Chenery and Taylor will be applied:

primary occupation for fishing, forestry, hunting, agriculture and

mining.

Industrial occupation, is concerned with the processing of the product of primary occupation.

Service occupation, is concerned with rendering service to the

time

GRADUAL ACCOMMODATION---S-SHAPED GROWT1

_-carrying capacity

carrying capacity

_{,_\}

'_\

/

¡

/

/

/

/

/

population

_/

4- population

time

time

OVERSHOOT AND OSCILLATION

timo

OVERSHOOT AND COLLAPSE

- F3ehaviour modes of

rowirg population j

a finite environment.

/

'

carrying capacity

/

t

/

¿-I

/IS._ population

- -.

- carrying canacity

- -

-/

population

/

Meeuse has divided the development of technology in the following stages: trade, technique, and technology.

The processing of a product is developed from the trade stadium by addition of energy to the technical stadium. This is developed further by incorporating information into the technological stage. The stages are characterized as follows:

past present future

trade technique technology

material + energy + information

production process system

autonomy coordination integration

primal industrial service

The technological impact on the economic development can be derived from the GNP development of a country. Kahn (196T) divided five levels of income as a function of industrial development as under:

Agricultural Transitional Industrial Advanced Post-industrial

GNP per capita

4000

3000

2000

1000

agricultural

industrial

transitional

advanc Qi $ 50 - $ 200 per capita $ 200 - $ 600 per capita $ 600 - 1500 per capita $ 1500 - $ IWOO per capita $ 4O0O - $20,000 per capita

post industrial

-7-8

The stages of development are induced by the technological developments which stimulate growth. The terms of growth in each development stage can be defined as follows:

agricultural stage growth transitional stage development industrial stage - progress advanced stage - convergence post-ialustrial stage - perfection

In the agricultural stage, the growth is auantitative and has a natural character.

The transitional stage is the take-off stage to the industrial stage. In the industrial stage the progress is marked by accelerating growth. The growth is quaititative and qualitative at the same time.

The character of progress is artificial, marked by applying artificial muscles, materials and brains.

In the advanced stage the limiting capacity of the environment versus the potential demand has forced the growth to be reduced to a conver-genging growth.

In post-industrial stage the growth is growth in perfection, it is only qualitative, limited by the carrying capacity. It is only qualitative, limited by the carrying capacity. It is a synthese of natural and artificial character.

The trend of the development in occupational division can be seen in the following figure:

100%

75%

50%

25%

primary occupation

industry

service s

Figure 1.3. Development in occupational division.

agriculture

i nd ust ri al

post-industrial

Technological progress will reduce employment in the primary and indu.-strial sector. In the post-induindu.-strial stage the fraction cf the primary sector and industrial sector employment could probably be Only 20% of the total labor force.

To solve the employment problem, the creation of new jobs should be emphasised in the service sector. The service sector will gain a more important stage; it renders services to God, environment, social well-being, to the primary sector, industrial sector and to the service

sector itself.

1.6 Economical impact

For a large number of countries, if not for all, the following group of aims play a predominant role, in giving proper attention to:

toe development of the national income, as representative of the development of production over time.

the distribution among social groups and regions of the fruits of the production.

the degree of stability of production and prices in general, and especially against unstable markets.

. improvement of the situation of employment.

5. achievement and maintaining the equilibrium of the balance of payment.

Macroeconomics are turning towards the question of the growth of potential output as well as the determinants of their level of

utilization at any one time (growth theory), and towards the deter-minants of the level of actual output relative to potential output at any time (stabilization theory).

The flow of product and income in simple two sector economy, only with producer and consumer car. be illustrated as such:

w

-\

/

- goods,& services

.-

- . -. = money

information

According to this picture, an economic system is a dynamic feedback system. The circular flow is an integrated flow. There are especially two important flows:

goods, services and money. inforniation.

An important property of flow is speed, and this speed could be zero. For the formulation of flow with a zero speed, reckoning with previous

and next flows, also is used the term: potential flow. An example is the storage and the man made lake. The functions of stnrage are:

regulating big scale, periodic input to small scale, almost continious, output (or reverse).

stabilization of fluctuations. accumulation and processing. 1. building up of reserves.

The blood circulation is a more relevant comparison for the economic circular flow, money is the blood, the medium which carries the

move-ment of goods and services. The nervous system of the organism is the

information flow in economic systems.

Economic development is coupled with growth. Growth depends on inter-nal and exterinter-nal factors, like economical, social and political influences. The most important factor is the investment. Investment could he financed through saving or loan, in this study they will be called respectively internal and external financing. In any system,

internal and external financing fulfils a significant role with res-pect to growth. Potential flow could be an important source of exter-nal financing. The fraction of exterexter-nal financing will increase with the development of economy, it performs an important role in the development itself.

Three types of aggregation could be applied to the subject of output: divisinn in consumption and investment.

division in collective and individual sector. division in obligatory and free will fractions.

The obligatory fraction is applied mostly to the collective sector, and almost never to the individual sector.

The total output could than be written, as follows:

0=1

+0

+1.

+C.

+1.

+C.

co co 10 10 if if I Investment for co C = Consumption of co I. = Investment for lo

the collective sector from obligatory fraction. the collective sector from obligatory fraction. the individual sector from obligatory fraction.

In the market economy 'io and C. are scarcely existing, in the cen-trally planned economy 'if and C1 hardly exist.

While in general the means to achieve the object of maximum welfare can be private act, as well as public law. Examples of ways and means of economic policy are taxes of various kinds, public expen-ditures for various purposes, import duties and quota, price control, and market regulation. Another means could be added, they are obliga-tory actions to regulate the individual sector. Obligaobliga-tory saving could provide a potential flow to induce economic development. The application of the methode of economic policy can take place in varying degrees of centralization. Least centralized are those applied at local level, most centralized are those applied at the highest international level. The optimum or best degree of

centrai-zation for any kind of policy should depend on its external effects. Policies with conciderable influence on other nations should not be freely handled by national governments.

C. = Consumption of the individual sector from obligatory fraction. I.

if =

Investment for the individual sector from free will fraction. C.f = Consumption of the individual sector from free will fraction.

12

-1.7

Social political iiapat

The significance of social and political impact on economic policy is

undoubtly the most inportent one, as guidance of the economic system.

The world economical and polical systems are divided in several

systems, ranging from Marxist-Leninist socialism to social-democratic

system, third world socialism, mixed economy and capitalist systems.

A real human problem arises from the antinomy of order and freedom.

Antinomy means a contradiction between two laws: law of authority

discrepancies between individual laws or principles, both founded

equally on the force of reason. Without order, planning,

predictabili-ty, central control, accountancy, instructions to subordinates,

obedience, dicipline, without these, nothing fruitful could happen,

because every thing disintegrates. And yet, without the magnanimity

of disorder, the happy abandon, the entrepreneurship venturing into

the unknown and incalculable, without risk and gamble and the creative

imagination, without all this, life is a mockery and a disgrace.

The formulation of aims of policy become more necessary after the

belief in laissez faire was given up. Before, there was no need for

planning, since it was believed that free economic forces would lead

to the best developn'ent conceivable. When this belief died ìt became

necessary to formulate norms and rules for optimum development.

For the sake of clarity the problem will be simplified, by aggregating

substantial characteristics of available systems. An event (social,

economical and political) can be formulated as follows: Event (E)

is

a function of a constant (C) and a variable (V).

Ef( o

,

y

Planning (P), an essentially decision making process, is fixing the

relation of a constant (C) with a variable (V) of the function

event (E):

Pf (c

The constant (C) is the aggregate of polarization on order's side,

has the positive property, the order, but has also the negative

property, being static. In the other hand, the variable (V), has the

the positive property, being dynamic, but has the negative property: fluctuations caused by gaps.

The planned event (p) can be written as

=

Here homogeneity is ensured by making the sum of the coefficients of C and V one unity.

This planned event function can be put in benefit terms, the positive properties of C and V will be concidered:

b. variable benefit = ir V b = constant benefit = C C b = total benefit = b + b t V c C s

= -

= system's rate r V (1 -)

cV

e b = C a V V V a r

The change in benefit related to system's rate S can be computed:

d b y = s (a-1)

V r

which is positive. The second derivative,

- - i) s (a - 2)

2 r

is negative since a <1

This shows that d h is decreasing with increasing s.

The calculation of bc in reverse direction will give the saine result. The sum of b and b is total benefit h and will reach an optimum

y c t

if

a = 0.5 . _{Figure 1.5,'system-henefit diagram' shows the relations} of the system rate and the benefits.

All available economic-political systems in the world are actually a mixed system. The whole crux of economic life, and indeed of life

14

-in general, is that it constantly requires the liv-ing reconciliation of opposites which, in strict logic, are irreconcilable. In macro-economics it is always necessary to have both planning and freedom,

not by wy of a weak and lifeless compromise, but by a free

recogni-tion of the legitimacy of and need for both.

bt

b

b

V

C s:_ V

Figure 1.5 System-.Benefit diagram.

The order is the institution of obligation, its expression is the duty. On the other hand the freedom is the institution of free-will, its expression is right. Conduct is the combination of duty and

right.

The existing world systems each are expressed in the system-benefit

diagram by a circle.

north

south

2.

A SECTOR CASE STUDY: THE MARITI SECTOR

2.1 Development of the maritime sector

The maritime sector, a bundling of sections of industrial and service sectors connected with sea-transportation include: shipping, ship-building, seaport-terminal and shipbuilding-supporting sub-sectors. A large proportion of the external trade is transported by ships, maritime transport is a servant to foreign trade of the country. Shipping is anirxterr.ational industry as ships from all nationalities are competing for the carriage of the world trade, Shipping industry is a complex industry, it is not the ship alone. Many activities complement each other so as to cause the smooth profitable running of the ship. Such activities are: shipbuilding, shiprepair and main-tenance facilities, shipbuilding-supporting industries, shipsupplies and stores, national seaport-facilities, shipping agencies, efficient communication system, shipsurvey, trained crew, efficient management, banking services, statutory system, brokerage, insurance business.

It is recognized by economiets, financiers, and politicians alike that the maritime sector is a specialized industry:

Maritime sector is a very capital intensive industry with heavy investments in ships, shipbuilding yards, seaport-terminals and supporting industries.

Ships operate to a very large extent outside national juris-dictions independently of the national economics and

requi-rement s.

The freight market and Ships' sales and purchase market operate under conditions

which

approach pure competition.

In actual terms shipping experiences a most pronounced trade cycle every ii_6 years with freight fluctuations of i to 5 in some dry cargo trades and i to 20 in some tanker trades, between trough and peak.

From a financing point of view, these basic differentiating factors create a large number of important differences between shipping and other industries:

16

-Almost all ship financing are fixed investments and are usually longtcrm.

There is hardly any short terni working capital financing. This together with the high amounts of investment required

and the coipetitive ternis of shipyards have resulted in customary high percentage financing of fixed investments. Little reliance can be placed on cash-flow projections over such periods of time and especially under the volatile conditions of the freight market.

Similarly, the value of the only possible collateral security vessels and freight assignments fluctuate widely over time and make the financing operation even more problematic.

5.

During the period of a loan at least one full trade cycle should be experienced and consequently the timing of invest-ment, and financing is of crucial importance.

If one introduces into the scene the effect of structural longer-term changes which in shipping assume the form of quick successive leaps and bounds, rather than smooth transitions, the difficulties are compounded further. Such structural changes are related either to basic changes in the type of shipping services required, or to tech-nological change, or more usually to both.

Seaborne trade in previous years continued to lie in the doldrums. The crisis in the maritime sector continued. The tonnage of tankers layd up reached a peak of 8 million DWT in April

_19T6,

the idle capacity in shipbuilding is tremendous.

During this decade the open registery fleets, which are generally regarded as benefially owned by developed market-economy countries continued to grow steadily. The total fleets of the developed market-economy (including open registry fleet) declined as a percentage of the world total. Nevertheless, despite of this decline, these countries

still own

90

percent of tanker and bulk tonnage, 97 percent of

container fleets and all of the barge carriers. Socialist countries of eastern Europe and Asia increased marginally their share in the world fleet in ternis of GRT from

_8»

in 1975 to

8.5

in

_1976.

In

1976

the share of developing countries over 1975 in ternis of GST increased from

6.7

to

7.5.

bhipowners in most developing countries acquire

vessels mainly from foreign countries, in particular from developed market economy countries.

Purchase therefore involves foreign exchange and external financing, normally from one or more of the following sources: shipyard credits, export credits, commercial bank or ship morgage banks, bond markets, bilaterial assistance or international lending institutions as well as equity financing.

Shipyards of developed market-economy countries accounted for

_92.9

percent of tonnage completed during 1976 and

85.6

percent of the world orderbook at the end of September

_1976.

At the end of September

1976,

21 developing countries were engaged in shipbuilding activities, their combined share of total orders was

_9.7

percent. The tonnage delivered by yards in developing countries in ₁₉₇₆ was 1.3 million GRT,

account-ed for only

3.8

percent of the world total.

Fleets registered under the flags of con7enience grew from

88.5

mil-lion GRT in

_{1975 (26%}

of world fleet) to

_99.8

million GRT in

_1976.

There seems some evidence that the growing public consciousness to the problems posed by flag of convenience has had an effect upon their development. In spite of its uneven impact, the campaign of the International Transport Workers Federation to boycott ships particu-larly under flags of convenience which do not adhere to certain wage scale agreement, have had a significant impact on the willingness of charterers to accept such ships. The loss records, particularly of the smaller flags of convenience countries have been high-lighted in a number of meetings, notably in IMCO and ILO in connection with sub-standard ships, as well as in the International IJnion of Marine

Insurance. The record for i96 looks to be even worse, as, on Lloyd's

provisional figure, 56 of major ship losses are attributable to flag of convenience.

2.2

Shipping in developing countries

Developing countries have expresses keen interest in establishing and expanding their merchant fleets and increasing their share of the total world fleet. Despite universal support to their aspiration and

18

-adoption of several resolutions within the United Nations on this sub-ject, the share of developing countries in the world fleet has been declining instead of increasing.

Shortage of investment capital, scarcity of foreign exchange and the inability of developing countries to provide adequate collateral security have hampered the growth of the merchant fleets. It is notic-ed that while the total of developing countries share in the world se&borne trade was 614.3 percent of goods loaded and 17.5 percent of goods unloaded, their share in the world fleet in GRT declined from 7.3 percent in 1965 to f.0 percent in 1973. Though this share is very much smaller than a rational distribution of economic activity through the world would suggest, these countries are unable to expand it. It is evident that the hopes of developing countries to reach the target of owing 10 percent of the world fleet in 1980 will be diffi-cult to realize.

Two important events in this decade concerned shipping, the first is the resolution which was taken by Unctad's third session in Santiago, to set a target for developing countries to owo at least 10 percent of the world fleet by 1980. This resolution was one of the targets of the international development strategy for the second development decade. The second event is the principle which was agreed upon in Unctad's Code of Conduct.

Though Unctad's Code of Conduct for Liner Conferencec tried to give the national fleets the right to carry a share of their liner trade which reaches up to 14o, the resources of each of the developing country to expand its liner shipping to this share will not be adequate.

2.3 Shipping policy

Extensive discussions were held on industry and intergovernmental level in attempt to reach an agreement on joint measures to adjust their shipping and shipbuilding capacity.

Nations with more or less chronic shortages of foreign currencies consider investments in the maritime sector a way of improving this

financial problems, as investment in shipping will improve the balance

of payment, and as shipping will induce other subsectors of the maritime sector and the entire economy.

Measures at the national level aimed at the adjusting of the maritime sector capacity are taken.

In shipping, cargo reservation laws and flag discrimination were established. Unilateral, bilateral and intergovernmental agreements were set up. At the same time a number of shipbuilding countries were taking steps to help national shipyards to conclude contracts for national shipowners. For instance major shipbuilding programmes to provide employment for their yards, providing loans at low rate inte-rest, credit terms for companies ordering vessels from national yards were substantially improved, and investment premiums were allowed to shipowners ordering from home yards. Most of these measures have a tactical character, a periodical emergency supporting measure. Some countries, on the other hand have introduced laws, with a more strate-gic impact, On 21 October _1910, the President of the United States signed the law the Merchant Marine Act of _1910. Built upon the foundation of the act approved in ₁₉₃₆ which established a system by which government subsidy was paid to American shipowners for cer-tain specified items of expenses experienced in the operation of ships, and a percentage of the building cost of those ships, the new law reflected the willingness of the nation to develop the maritime sector. The national policy is expressed in section 101 as follows: It is necessary for the national defense and development of its foreign and domestic commerce that the United States shall have a merchant marine:

sufficient to carry its domestic waterborne commerce and a sub-stantial portion of the waterborne export and import foreign commerce of the United States and to provide shipping service essential for maintaining the flow of such domestic and foreign waterborne commerce at ali time,

capable of serving as a naval and military auxiliary in time of war or national emergency.

owned and operated under the United States flag by citizens of the Unites States insofar as may be practicable.

composed of the best equiped, safest, and most suitable types of vessels, constructed in the United States and manned with a trained and efficient citizen personel.

supplemented by efficient facilities for shipbuilding and ship-repair.

-It is here by declared to be the policy of the United States to foster the development and encourage the maintenance of such a merchant marine.

Brasilian governiient has introduced shipping financing policy

through

shipping turnover tax regulation.

The discussion of maritime policy almost invariably branches off into the complications of pricing, economic efficiency, and social welfare. These problems can be conveniently arranged under the headings of pricing principles, the possibility and justification of subsidy, market structure and regulatory institution. An almost inherent

characteristic of these problems when they touon maritime policy,

is the eçtent to which their evaluation hinges on empirical evidence or value judgments.

Major problems of the maritime sector are the fluctuation in the level of activity, the price level, and its international character. Stabilization regulations should be taken at international level. Important event on international level concerning shipping is the Code of Conduct for Liner Conferences proposed by Unctad in 1975. The fundamental objectives and basic principles are: The objective is to facilitate the orderly expansion of the world seaboine trade. Article 2:

Participation in trade, which sets out the principle of equal shares in any pooling or other similar arrangement for the groups of lines

of each of the importing and exporting countries in their mutual trade, with a share, given indicatively as 20 percent, for third flag lines; it also provides that lines may request that pooling or

similar arrangements be introduced where they do not exist. Article 12:

Criteria for freight-rate determination: shall be fixed at as low a

level as feasible from the commercial point of view and shall permit a reasonable profit for shipowners.

Article 49 paragraph 1: of the convention provides that the

conven-tion shall enter into force six month after the date on which not

less t1'n 2 states, the combined tonnage of which amounts to at

least 25 percent of world tonnage, have become contracting parties

to it.

20

-i

Although the convention could be the basic principle for a sound development of the maritime sector, the acceptance by the national governments is not easy.

The United Nations Code Convention was closed for signature on 30th

June

1975,

when it had been sigied by 30 countries whose tonnage

constituted 25.8 % of the world fleet of general cargo ships. Since the closure date, twenty countries were at end April 1977 contracting parties to the convention. Their total tonnage comprises

_3.77%

of the world general cargo fleet.

However, a considerable distance has to be bridged over before 214 states and 25% of tonnage required are complete and the convention enters into force.

World trade can be considered to determine total shipping demand. World models and country models can provide, even predict, import and

export volumes, demand and supply.

They are the basis for long term policy studies and policy formula-tion.

22

-BASIC MODEL STRUCTURE

3.1 Sector analysis

By studying sectors in the economy, aggregation and disaggregation is applied. Two different considerations are under discussion, seçtoral aggregation and aggregation by sector.

The purpose of aggregation is to diminish the great buzzing confusion of information which cones from the world around us and to bring it into a form one can appreciate and apprehend.

Information has to be condensed (aggregated) sothat the appropriate degree of detail is obtained, to use the information in a model. Essential points of aggregation are the practice of grouping quanti-ties together, to open the possibility to discuss them as a whole

in general. Broad groupings and little detail is said to be highly aggregated. See figure 3.1.

Aggregation accurs in two dimensions, in sectors (horizontal

aggrega-tion) and in levels (vertical aggregaaggrega-tion).

Mostly, basic data are obtained fron time series observations for a

particular sub-level.

One finds disaggregation simultaneously at both level and levels, depending of the availability in a desired time period.

The proper degree of aggregation for any particular model depends

on the model's purpose. A model may be built l'or all of the following purposes:

Simulating a behaviour mode (dynamic understanding). Exploring policy alternatives (analysis).

Integrating existing literature and data (communication). . Convincing a client (implementation).

Too little aggregntion leads to unnecessary detail and waste of the model builder's time and causes confusion, too much aggregation leads to loss of important distinctions and modes. To make this choice

easier the following guide lines are followed:

In general, larger space boundaries and longer time horizons imply more aggregation.

Always start at the highest possible degree of aggregation. The model can be made more elaborate later, if necessary.

ete.

Figure 3.1

The Aggregation Pyramid

(nc

rea.

¡r1

LeveL

of

r3A4iøP

svu

frS&2VIbLJ

¡0 (veL of

re-Model elements may be aggregated if they are dynamically similar, that is, of they are controlled by similar rates, if their outputs are used for similar purposes elsewhere in the system, and if their mix is relatively constant. Nonlinear table functions should be chosen with the mix

of aggregated quantities in mind.

The level of aggregation should be consistent throughout the model.

Flexibility is an advantage.

Ultimately the degree of aggregation chosen for a model is dependent

upon judent and art, there is no single best choice and no objective

way of settling arguments about aggregation. Four sectors of aggregation are chosen:

Capital Sector (Economic System). Population Sector (Biological System). Policy Sector (Political System). . Emphasis Sector (Sectoral System).

The hierarchical levels of aggregation of each system are as follow:

ECONOMIC SYSTEM

<national

world

individuals .( occupations

_<firms

economy

<

economy BIOLOGICAL SYSTEM

molecules <cells (organisms <populations <ecosystem

POLITICAL SYSTEM

household rules .( firm's rules ( state's rules world rules

SECTORAL SYSTEM

national world members

_{<associations ( economic < economic}

- 2

-3.2 Description of the model

The model is a system of mathematical equations describing relation-ships between variables. The model is constructed using the system dynamics approach to simulation modelling. As this study deals only briefly with the philosophy and underlying system dynamics, as a source for further background on the structure and behaviour of this systems, and in order to fully understand the relatively complex model examined here, it is useful to read "Principles of Systems" by J.W. Forrester.

The equations are written for the Dynamo II simulation compiler. Dynamo is designed especially for simulation of system dynamics models. For a more complete treatment of the Dynamo simulation language, one is referred to the "Dynamo II User's Manual" by A.L. Pugh III.

The economic and the population models used are in accordance with the principles and methctology of "Dynamics of Growth in a Finite World" by D.L. Meadows, W.W. Behrens III, D.H. Meadows, R.F. Naill, J. Sanders and E.K.O. Zahn.

Many models have been developed in the past. By using available principles it was the intention to develope further in consistency the existing performances.

There are several critisisxns about using mathematical models for forecasting and planning with the aid of electronic computers; for example that of E.F. Schumacher in his book "Small is Beautiful" who says:

"Yet a nan who uses an imaginary map, thinking it is a true one, is likely to be worse off than someone with no map at all; for he will fail to inquire wherever he can, to observe every detail on his way, and to search continously with all his senses and all his intelli-gence for indications where he should go."

However, the model as it stands now, in spite of its shortcomings and imperfectness, forms the beginning and a guide to future more perfect and more reliable models; just as the old naps of the ancient seafarers were once the beginnings of our present day modern maps. Without those previous maps we cannot inseagine that the exploration of the world could been ever have taken place.

Making a formal systems model is a nonlinear process which involves many experiments, regressions, and reiterations. Nevertheless, the process must cycle through a number of logical steps in sequence; each steps is dependent on the successful completion of the one before.

To be useful to policy makers, a model must make some statements about the future, but information about the future may take several different forms.

This model is designed to provide information on conditional, impre-cise projeetions of dynamic behaviour models and is limited to conditional and broad questions, rather than precise predictions; this being done for two reasons: First by social systems are by nature unpredictable in the absolute sence. Since any prediction made about the future of a social system becomes an influence on

social policy, the prediction itself may change the system's behaviour. Second by the incomplete and inaccurate world data base

currently available do not permit a higher degree of precision, even for conditional long-term prediction of social systems.

Although precise long-term predictions for social systems do not seem to be attainable, a conditional, imprecise understanding of global and national system's dynamic properties is possible. Such a level of knowledge is less satisfactory than a perfect, precise prediction could be, but it is still a significant advance over the level of understanding attainable by current mental models. It should provide a useful input to future policy decisions, which may have a signifi-cant impact on human society for many decades to come.

The time horizon of a model is the period over which the modeller is interested in the system's behaviour. This period usually corres-ponds either with the tine necessary for the system to manifest a behaviour mode of interest or the tine required for the system to respond fully to some proposed new set of policy.

An average capital lifetime is about 30 years, thus the dynamics of sector policy are based on this time horizon. The year 1971f is chosen, as a start because most data available dates from this year.

For the maritime world it was a peak year of the fluctuation cycle and for the Indonesian economy it was the year of the beginning of the second five year plan.

26

-It was formally possible to continue the computer analysis past the 30 years. It was not done so because the validity of many important assumptions so far into the future is questionable and because information about developments that might occur beyond 30 ycars

could IDe of little importance' for nowadays decisions.

Even with the exclusion of longterm and short-term factors, innumera-ble variainnumera-bles remained which could be incorporated into a model. Since it is not useful to answer all possible questions about the

system, nor to predict its exact future, extensive detailing was unnecessary in the model. It was also undesirable because a model

which is too complex cannot be easily communicated, critized, or

improved.

However, the basic elexrents are included within the model, which are both necessary and sufficient to represent the mode of approach of the sector policy.

Elaboration and alternative formulations may in principle be inserted into the model, tested for their effects, and finally included if their effects are indeed significant.

The model was constructed with a view to be as simple as possible, without omitting the information required t.o fulfill its purpose.

3.3 Structure of the Model

The construction of the standard model begins with the distinction of

separate sectors, of which the four sectors to follow, are most responsible for the dynamic growth:

Capital - including the means of primary production, industrial and service output.

Population - incorporating the effect of economic and environmen-tal factors that influence human birth and death rates and thus population size.

Policy - all regulating instriments, incorporating the effect of all political, social, economical and environmental factors.

Ephasis sector - the case sector which will be studied and

Figure 3.2 'Interaction among the basic sectors', illustrates schema-tically the four model sectors and the most important interactions among them.

It is sufficient here to mention only the most important simplifying assumption made about social systems. Since the model is primarily concerned with the suppose of the decision maker to promote equili-brium of potential demand and actual supply, the relation of the human population with the carrying capacity defined by physical limits

(equilibrium stage) is excluded from this study.

Once the four model sectors were defined, it was necessary to decide the number of parameters to be included within each one. This is a

question of aggregation, the degree of gruping elements with common

characteristics together. Choosing the appropiate level of aggrega-tion in any model involves a difficult trade-off. A highly disaggre-gated model with much detail may be unwieldy and incomprehensible; an aggregated nodel with little detail may leave out important relationships which could alter the behaviour of the model and the conclucions drawn from it.

As already mentioned the model described is a highly aggregated model because it was comprehensible and the answers did no require great

detail.

This model is referred to as the standard model.

Having identified the relevant elements of the system, the important relationships, that interconnect those elements, have to be specified. This is done in two steps, in order of decreasing obstruction.

First the general system structure is postulated; second the numerical values of the parameters that quantify that structure are estimated. Structural assumptions express the general causal links among model elements, so that a system arises.

The following are examples of the structural assumptions included in the standard model:

An increase in GNP per capita will cause a decrease in the population gro'Wth_rate.

2. An increase in GNP per capita will cause a decrease in the labour per capital uni.t.

-LABOR UTILIZATION

FR ACT t O N

GNP PER

CAPITA

OUTPUT SECTOR SECTOR

LABOR FORCE

/

POLICY

SECTOR OUTPUT

FIGURE 3.2

INTERACTION

AMONG THE BASIC

SECTORS

INCOME DESIRED GROWTH RATE

STATE

LABOR

POTENTIAL

ACT UAL

POPULATION

FORCE DEMAND SUPPLY

The structural assumption that makes up a system dynamics model are

conmionly expressed by a causal-loop diagram (see Figure 3. 'Causal-loop diagram of standard modele).

In the causal loop diagram, system interactions are shown by arrows leading from each element to all other variables that might be

influencd by changes in that element. The polarity of each causal

influence is indicated by a * or - sign near the head of the arrow.

A positive polarity means that an increase in the first element will

cause an increase in the second (aoci a decrease will cause a decrease). A negative polaritysignifies that an increase in the first element will produce a decrease in the second (and a decrease will produce an increase). Causal-loop diagrams are rough sketches of the inter-acting feedback ioops in the model. They do not contain enough

infor-mation to permit a complete understandin of the possible modes of

behaviour or to analyze the model on the computer, but they do convey

the general pattern of major system interactions.

A Dynamo flow diagram contains considerably more information about

the model structure than a causal-loop diagram.

It provides information on the functional form used to represent each element in the Dynamo equation of the model.Dynamo, a computer language used to express system dynamics models, is not absolutely essential to the method - other flow diagram conventions and computer languages could be used. However, since Dynamo was developed

specifi-cally to represent the continuous feedback interaction in system dynamics models, it was the easiest language available in defining

the elements of the standard model.

Two important feedback loops in the standard model produce the potential for exponential physical growth in the model system. The

fipst governs human births; the second determines capital investment. In the first loop an increased number of human births increases the population, and the greater number of DeoDle then leads to still more births.

Similarly, an increased rate of capital investment adds to the

stock of capital, which makes possible a greater output.

Increased output, in turn, permits more investment, which raises the stock of capital still higher.

-OUTPU T

PER CAPrTA

+

POPU LAT ION

BIRTH

DEATH

PER YEAR -f-

PER VEAR

DESIRED

STATE

OUTPUT CAPITAL

INVESTMENT

7-AVERAGE LIFETIME

OF CAPITAL

+

_{POTENTIAL...t}

STATE

DISCREPN4CT'

ACTUAL

STATE 4.

EMPHAS?S SECTOR

Figure 3.3

Causal-Loop Diagram of Standard Model

Growth in population and capital is exponential in form because of the nature of the processes that generate population and capital. Annual increase in population or capital this depends in part upon the amount of population or capital already present. The existence of a causal structure that provides a potential exponential growth does not mean that the potential is always realized. In addition to the positive feedback loops that promote exponential growth, the standard model contains numerous environmental, economical, political, and social factors that may balance or even overbalance the forces inducing growth. These factors constitute negative feedback ioops within the model system. Their relative effectiveness constantly changes as growth progresses, and the resulting balance between growth forces and stabilizing forces continually shifts.

Negative feedback is provided by various social mechanisms; shifts in growth rate, advances in technology, and changes in social values which may operate to adjust the rate of tpproach of the growing population to the ultimate carrying capacity of the environment. Since their representation in the model is indirect, and since they may be important in the development of new policies, it is worth-while to describe the assumptions made about these mechanisms. Detailed system dynamics model of economic change, technological advance, and social value change have been constructed by others. The purpose and time horizon of this study made it unnecessary to include elaborate representations of these factors in this model. The network of interlocking feedback loops defined by structural assumptions constitutes the skeleton of the model, the frame work on which all further analysis depends. System dynamics places primary emphasis on determing this model structure, rather than on estimating numerical parameters, for three reasons.

Firstly, experience ir, modelling feedback systems rapidly demonstrates that even the most sophisticated numerical estimation techniques will not produce useful conclusions from a faulty or incomplete model structure.

Secondly , system dynamics models are usually concerned with broadly questions about the general behavioural tendencies of social systems. Thirdly, a correct causal structure generally produces realistic model behaviour, even with only approximate numerical parameters.

32

-System dynamics is primarily a technique for simulating social systems, and its users are working to understand the possible behaviour

patterns of a total system rather than to predict the precise future value of a specific variable.

The standard model is a device for testing the implications of alter-native assumptions, not a predictor of future events. Numerous simulations of the model system with different sets of parameters values indicate the range of behaviour modes that the system can exhibit and the sensitivity of these behaviour, modes to parameter changes.

Since many of the model's parameters may be inaccurate, it is especial-ly important to u1derstand how the conclusions drawn from the model may be influenced by numerical errors.

Fortunately, given the inaccuracy cf most social data, the behaviour of complex feedback systems is generally riot qualitatively sensitive to parameter values.

After the feedback-loop has been established and quantified, the model can be analyzed on the computer to calculate from the entire set of

structural and parametric assumptions the resulting behaviour of all the variables with time.

Numerous alternative assumptions may be made and tested.

Throughout this process the modeller assesses the model's behaviour, by comparing it with his knowledge cf real-world system's

characteris-tics and sensitivity concepts so as to decide whether he has suffi-cient confidence in the model and eventually use it as a tool for policy decisions.

This standard model was developed consequently from analysis of and assembly from many sources; as such it may induce reexathination of the

underlying assumptions of current available mental models, or it may

stimulate further attemps to improve the process of model making, and as such may provide an interim nodel, until better models are made, as a resource to long-term policy formulation.

. STANDAED WORLD MODEL

4.1 Capital Sector

The objective in the capital sector was to provide the basic coinpo-nents of causal model that would project long-terni patterns in the global and national development of Gross National Product (GNP, Capital and Labour.

Lt is not concerned with interest rates, wage rates nor with the level of unemployment and prices in the short-terni, but with the shift in the productive capability and consumption over a long-term period.

Economists have surpassed other social scientists in the production and analysis of formal theories, but their attention has been almost exclusively on short-term problems.

Since this standard model involves economic phenomena that evolve over long-term periods, most current economic models were of little use in constructing the capital sector.

However, there are common patterns in the aggregated relationships among production, consumption and investment in different economics around the world with regard to time.

Measurements of historical global productive activities must be derived from indices of the productive activities of individual countries or sectors. The most widely used national economic index is gross national product (GNP), a monetary evaluation of all the material goods and services produced by a country in one year. The ratio of a nation's ON? to its population, its per capita GNP (measured in dollars per person-year), is for many purposes a conve-nient index for a comparison of the living standard in different countries. Analysis of time-series and cross-sectional data on the magnitude and composition of CN? per capita of many different

coun-tries yield two behaviour patterns: exponential growth in total output and shifting composition of that output. In economic data compiled by World Bank (World Bank Atlas

_1976),

2 countries exhibit

a declining GNP per capita because their populations were growing faster then their GNP's.

The other 1611 countries for which World Pank data are available were at the same time exhibiting growth in GNP per capita at rates up to

314

-21.2 per cent per year. Although there are nomerous problems in deriving statistics, particularly in evaluating output that is not traded for any currency, the overal pattern in the world today appears to be growth in both per capita and total GNP.

The most commonly used scheme for subdivison of output, is that based on the International Standard Industrial Classification (ISIC) scheme. The nine major ISIC categories are:

Code Classification and Description

1 Agriculture, hunting, forestry and fishing 2 Mining and quarrying

3 Manufacturing

14 Electricity, gas, and water

5 Construction

6 Wholesale, and retail trade, restaurants and hotels 7 Transport, storage, and communications

8 Financing, insurance, real estate, and business services

9 Community, social, and personal services

One study divided GNP into three sectors: primary production1 industry and services. In their study Chenery and Taylor defined the primary sector to include agriculture, mining, forestry and fishing products (ISIC 1-2), the industry categrory to include manufacturing, con-struction and other material product (ISIC 3_14_5), and the service category to include all banking, health care, insurance, and other intangible products (IsIc 6-7-8-g).

When the fraction of GNP in each of these three sectors was related to the total ON? per capita of the country at several points in time during the growth of economy, a common pattern of evolution was found for all the countries studied; as the total GM? per capita of a country increases, the fraction of product from the primary sector declines, the fraction of product from the service sector rises slowly, and the fraction from the industrial sector rises rapidly.

See Figure 14.1 'GNP per capita versus sector outputs', and figure 14.2

40 30 Ei 20 70 60 50 'TO 30 20 10 8 6 50 lo

GNP PER CAPITA (DOLLARS/PERSON-YEAR)

1 UNITED kINGDOM P3 CANADA 58 TROTEO STA"ES

f 9.4.1 _{OUF per capita versus the contributions of primary}

and industry produc. tion to IotI output at one point in time_{for nlr.etern large countries} fcrons-sectionaj data)

Primary share versus GNP Industry share versus GNP Sourc: Chenery atrd Taylor 1968. p. 394.

fi9.4.? GrosUth in GNP per capita for seven natis

Source: Kuzneta 1971.

-

35

-i IIODEMIA 2 BORNA 3 PAXISTAII 5 05059 8 ThNILABO 32R0REA

59 BRAZIL 20 TURKEY 21 PRILIPPINES 30 XI5O 33 .SAParJ

35 SPAIN 37 LRIEIITONA 38 ItALY AA OERYSASY 49 PRANCE

36

-When a country's GNP per capita is between 50 and 100 dollars per year, 50-60 per cent of the total GNP is derived from the production of raw material and food, 10-15 per cent arises from industrial

production and the remaining

_25-40

per cent is in the form of services. When a country's CTP per capita is 2000 dollars per year, only 10 per

cent of that amount is from the production of raw material and food, while 1W-50 per cent is composed of industrial production and 40-50

per cent is in the form of services.

Although the relative share of the primary sector declines from 60 per cent to 10 per cent during industrialization, the absolute value of the primary sector's product actually rises with increasing GNP.

Over different time spans, other industrialized countries have exhibited similar pattern. The regularity of these compositional patterns despite regional differences in resource endowment, climate, culture, technology, and other characteristics, points at a set of common changes underlying the development of a country from an agrcrian to an industrial and service economy.

The general development patterns just described are quite understand-able and are to be expected, so long as most individuals in a society have some influence cver the allocation of investment either through free market mechnisrns or through political processes. Most human societies share a common set of priorities: first physiological sustenance; then physical comfort; and finally intellectual or spiritual fulfillment. Until nutricion is raised to survival levels there is little interest in housing or education. Once the agriculture sector has grown sufficiently to provide basic food needs, more attention can be placed on housing, clothing, and other necessities for physical comfort.

With the physical needs met through the expansion of the industrial sector, emphasis may shift to increasing services. This hierarchy of needs, which has been recognized by social scientists (for example,

Maslow 195k), would suggest that the development patterns found by

Chenery and Taylor (1968) and Ternin (1967) are fundamental to man's economic systems.