Tanzania - Basic economic report (Vol. 6 of 8) : Industry : Perspective and strategic choices

Report No. 1616-TA Tazania Basic Economic Report LE COPY Annex V-Industry: Perspective and Strategic Choices December 1977 Eastern A.nca Country Prograrrs I FOR OFfICIAL USE ONLY Document of the Worid Bank This document has a restricted distnbut-on and may be used by rec!pients orlv in the pe-forrnance of their offic!ai dut:es Its contents -nay not otherfwise be disclosed without vVofd BanK authonzatkno  CVM.ECY EQUIVALENTS I1 SDR. 1. 00 Tarnzania Shilling (T.Sh.) 9.66 US$ 1.00 - Tanzania Shilling (T.Sh.) 8.30 T:Sh. 1.00 :US$0.12 TANZANIA FTSCAL TEAB.. July lst -June 30th I/1 in 0ctober- 1975 the- Talnzanian Shilling was pegged to the value of the Special Drawing Rights (SDR) of the International Monetary Fund. The US Dollar/Tanzania Shilling exchange rate is therefore subject to change.  FOR OFFICIAL USE ONLY TANZANIA - BASIC ECONOMIC REPORT ANNEX V INDUSTRY: PERSPECTIVE A-YD STRATEGIC CHOICES Prepared by Mr. Gene Tidrick The full report consists of the following separately bound volumes: Main Report Annex I - Domestic Finance and Resource Use Annex II - Fiscal Implications of Universal Primary Education and Universal Rural Water Supply Annex III - Labor Market Allocation and Income Distribution Annex IV - Income Distribution and Growth: A Simulation Model Annex V - Industry: Perspective and Strategic Cnoicas Annex VI - Key Issues in Agriculture and Rural Development Annex VII - Appropriaze Technology in Tanzanian Agriculture: Some Empirical and Policy Considerations This document ha!b Artntrycteddistribufion and riay :eoused by recipients oniy 1%1 I P f omace of their oinciai duties. itscontents iuy not othtrwi.e be dlbciosed without World BLnk -uthorization .  (i) TABLE OF CONTENTS 2a.,e No, CHAPTER I. THE ROLE OF INDUSTRY IN TANZANIAN DEVELOPMEENT STRATEGY 1 A. Industrial Strategy in the Past 1 B. Alternative Strategies of Industrial Development 7 CHAPTER II. INDUSTRIAL DEVELOPEtENT SINCE INDEPENDENCE 22 A. Overall Growth 22 B. Structural Change 36 CHAPTER III. PARAST'ATAL PRODUCTION AND PLA2NNING 47 A. Growth of Parastatal Production 47 B. Performance of Parastatals 5O C. Organization and Control of the Parastatal Sector 59 D. Investment Planning System 62 E. Production Planning System 63 CHAPTER IV. LONG-TEPM INDUSTRIAL STRATEGY 68 A. The Basic Industry Strategy 68 B. The Case Lor the BIS 75 C. Problems with the BIS 85 D. Policies for Implementation 92 CHAPTER V. ISSUES AND POLICIES 98 A. Labor Productivity 98 B. Excess Capacity 113 C. Parastatal Surpluses 117 D. The Investment Planning System 121 E. Manufactured Exports 129 F. Role of the Private Sector 136 G. Small-Scale Industry 137 CHAPTER VI. SUMMARY AND CONCLUSIONS 140 APPENDIX A. APPENDIX TABLES 149 APPENDIX B. THE PRICING OF INDUSTRIAL GOODS IN TANZANIA 161 APPENDIX C. CONSTRAINTS ON EXPORT OF PROCESSED AND MANUFACTURED GOODS 172 APPENDIX D. VALUATION OF THE CAPITAL STOCK IN LiLRGE- SCALE MAINUFACTURING i90  ( ii.) LIST OF TEXT T-ULES -_'a c. -?aze Mc. 1 Characterist4cs of :ernative Industrial Strategies 21 2. 'Ma-.fa turi-.g V~a ue cAdded 1964-1975 22 3. Manufacturing investment 1966-1973 25 4. Ef`ect on Growth of the Ircreased ICOR 27 3. CaDital-Output and Capital-Labor Ratios in Large- Manufacturing, 1963-73 28 6 C-ross Rate of Returm on CaDital in Large-Scala Yanufacturing, 196i-74 30 7. Employment and Productivity in Large-Scale Manufacturing, 1963-1973 32 8. Wage and Labor Costs in Large-Scale Manufacturing, 1965-1973 34 9. Summary of Trends in Large-Scale Manufacturing, 1966/67-1972/73 35 10. Structure of Value Added and Employment in Large-Scale Manufacturing 1965-73 37 11. Structure of Gross Output in Large-Scale Manufacturing 1965-73 38 12. tmmort Substitution in Manufacturing 1961-73 40 13. Production of Manufacturas for Import Substitution and Export 1961-73 41 14. Manufacturing and Other Exports 1960-75 43 15. Estimated Import Content of Manufacturing Production 1961-73 46 16. Manufacturing Parastatal Production and Other Indicators 1966-1975 49 17. Incremental Capital-Output Ratio of Manufacturing Parastatals 52  (ii i) Table No. Page No. 18. Net Rate of Return on Capital in Parastatal and Private Mbanufacturing 53 19. Capital-Output and Capital Labor Ratios in the Parastatal and Private Sectors, 1966-1975 54 20. Capital, Labor, and Total Factor Productivity in Parastatal and Private Manufacturing 56 21. iManufacturing Operations of National Development Corporation 57 22. MC Headquarters Expenses 61 23. Alternative Investment Allocations 1975-1995 70 24. Comparison of Structure of Production under Alternative Strategies 78 25. Comparative Efficiency of Production Possibilities, 1975-95 80 26. Simulation of BIS and Alternative Industrial Strate-y 86 27. The Effect of Delaying Liganga Steel Production 91 28. Output Per Worker in Selected A-reas 100 29. Output Per Worker in Tanzanian Textiles 102 30. Production Volume Indices in Selected Industrias, 1973-75 114 31. Capacity Utilization in 'DC Group Companies 115 32. Industrial Parastatal Surplus and Rate of Return 1966-75 118  (iv) LIST OF APPENDIX TABLiES Table No. 1. Value Added in Manufacturing 2. Value of Manufacturing Output 3. Structure of Output 4. Employment and Labor Costs 5. Structure of Employment 6. Average Wages in Major Industries 7. Value Added Per 'Worker 8. Number of Manufacturing Establishments by Region, 1966 ard 1973 9. The MaLnufacturing Sector: An Analysis of Domestic Production and Trade, 1961 10. The Manufacturing Sector: An Analysis of Domestic Production and Trade, 1965 11. The Manufacturing Sector: Analysis of Domestic Production and Trade, 1971 12. The Manufacturing Sector: An Analysis of Domestic Production and Trade, 1973 13. Comparison of Capital Stock Measures for Large- Scale Manufacturing  CHAPTER I. RE ROLE OF INDUSTRY IN TANZAINIAN DEVELOPF_UT STRITEGY A. Industrial Strategy in the Past Strategy After Independence 1.1 At the time of indenendence in late 1961, Tanzania had only a rudimentary industrial structure. The largest single manufacturing sub- sector was cotton ginning. There was no factory production of textiles, shoes, cement, or cigarettes. Beer and sugar were produced but did not meet domestic demand. The only export industries were canned meat and wattle extract. There were numerous small establishments producing clothing, bread, bricks, footwear, and the like, mostly owned by Asians. Total manufacturing employment was about 20,000 out of a total population of around 10 million and manufacturing and handicrafts contributed less than 5% of GDP. 1.2 The newly-independent Government inherited an industrial strategy based upon reports by Arthur D. Little and the World Bank. 1/ This strategy was to encourage private investors (mostly foreign) to produce a few simple goods for the domestic market. Processing of local raw materials for export was seen as a longer-term possibility, but for the moment the most promising prospect was to substitute domestic produc- tion for the import of cotton textiles, cigarettes, shoes, beer, sugar, cement, and tires. The World Bank's sober assessment was that this program of import substitution, while large in relation to existing capacity, would add only 3% to existing GDP. 1.3 The First Five-Year Plan (22X2)2/ published in 1964, proposed a more ambitious program of industrial development without changing the broad outline of the inherited strategy. The analysis underlying the FFYP strategy was that industrialization was limited by two factors: the availability of capital and the extent of the market. The capital constraint could only be overcome by reliance on private, including foreign 1/ Arthur D. Little, Inc., Tanganyika Industrial Develovment (Dar es Salaam: 1961); IBRD, Economic Development of Tanganyika (Baltimore: John Hopkins Press, 1961). See also Government of Tanganyika, DeveloDment Plan for Tanganyika, 1961-1962, 1963-1964 (Dar es Salaam, Government Prircer, 1961) 2/ The United Republic of Tanganyika and Zanzibar, Tanganyika Five-Year Plan for Economic and Social Development 1st July, 1964 - 30th June 1969 (Dar es Salaam: Government Printer, 1964)  - 2 - investment. .hree-cuarters of total industrial invest-ent during the Fir-st Plarn oeriod was to come from the private sector. The Government was preparad to participate in financing through its Tanganyika evelop- menc Corporation, but the ain policy instr=ments to achieve ind.ustrial investment targets were to be accelerated deoreciation allowances, tariff protection, and guarantees for the repatriation of capital. 1.4 Thne market constraint was to be loosened bv a charge ir the rules of the East African Common Market. The Common Market with Uganda and Kenya had been in force since 1927 and was widely regarded as an obstacle to Tanzanian industrial development. Kenya, with a larger existing industrial base, attracted a disproportionate share of industrial investment. Under the relativ-ely unrestricted customs union which existed at the time of indenendence, Tanzania not only had little hope of attract- ting industries which would produce for the entire Common Market, but also had difficulty in setting up industries to substitute for imports of Kenyan manufactures. President Nyerere had attempted to achieve Political federaticn which would have preserved a full customs union, but when that failed Tanzania sought greater scope to pursue an independent industrial policy. The result of these efforts was the Kampala Agreement of 1964 which modified the rules of the Common Market and widened the potential market for Tanzanian industry in two ways. First, it permitted Tanzania to impose restrictions on some partner state imports, thereby giving protection to local import substitution irdustries. Second, it set up a licensing procedure which reserved to each of the partner states the production of several industries which depended on the entire regiornal market. Tanzania was allocated aluminum rolling, tires, and radio assembly. Although Kenya never ratified the Kampala Agreement and later set up some of these same industries, production was started in Tanzania in the expectation cf obtaining the entire Common Market.l/ 1.5 The First Five-Year Plan did move beyond the Three Year Plan in some ways. It proposed a wider range of import substitute investments for the domestic market, including rolled steel, oil refining, and fertilizer. it also proposed that processing of sisal and cashews for export be initiated on a modest scale. Finally, it extended the concept of import substitution to embrace the entire East African Common Market. Nevertheless, industrial strategy remained broadly consistent from the time of independence until the Arusha Declaration. rne aim was to increase the rate of economic growth by exploiting some obvious opportu- nities for industrial investment. The fact that most of these opportunities were for the import substitution of simple consumer goods or building materials was inC4dental; no signiflcance was attached to the nature of 1/ J.F. Rweyemamu, Underdevelooment and Industrialization in Tanzanria (Nairobi: Oxford University Press, 1973), p. 119. Chapters 2 and 4 of this book give a detailed analysis and c-iti'ue of Tanzanian industrial strategy through 1971.  -3- either the product or of the market. There did not even appear to be any particular significance attached to industrialization as such; manufactu- ring output was valued largely for its potential contribution to GDP rather than for its linkage effects, external economies, or role in structural transformation. The early industrial strategy also paid little attention to three other aspects of industrial structure: pattern of ownership, choice of technique, and comparative advantage. The Tanzanian leadership would probably have preferred public, or at least local, ownership of industry, but this was not viewed as a serious possibility given the capital and managerial requirements of the industrial program. There is little evidence that much thought was given to the choice of technique; increased employment was a professed aim of industrialization but there seems to have been little consideration of the possibility of systematically promoting labor-intensive techniques or sectors, nor to the likely effect on employment growth of promotional policies such as accelerated depreciation allowances. Comparative advantage and production cost considerations were also neglected. Tariffs were usually established through negotiations with investors and tariff levels varied amongst industries. If the level of protection proved to be too low, the tariff might be raised again as happened in the case of radio assembly. Nominal rates of protection for new industries usually ranged between 33% and 50%, but effective rates of protection ranged from negative to over 500%.1/ Post-Arusha Industrial Strategy 1.6 The Arusha Declaration charted a completely new course for Tanzania based upon socialism and self-reliance. It reversed a basic principle of previous industrial strategy; dependence on foreign invest- ment as the major instrument of industrial development. Henceforth, most major industries would be publicly owned and most new investment could be made by the public sector. Foreign investment could no longer be the principal agent of industrial development, first, because the requisite amounts of foreign capital were not forthcoming and, second, because dependence on foreign investment would not be consistent with political independence, self-reliance, or socialism. As the Declaration put it, "Th.e policy of inviting a chain of capitalists to come and establish industries in our country might succeed in giving us all the industries we need, but it would also succeed in preventing the establishment of socialism unless we believe that without first building capitalism, we cannot build socialism".2/ 1/ See Rweyemamu, pp. 130-137, and D. Kessel, "Effec-ive Protection in Tanzania", East African Economic Review, (June, 1968). 2/ Julius K. Nyerere, "The Arusha Declaration," reprinted in UJamaa - Essays on Socialism (New Y7ork: Oxford UnTriversity t ress, 1968),p.26.  -4- 1.7 A second consequence of the policy changes following the Arusha Declaration was increased attention to employment creation in industry. One concern which led up to the Declaration was the rapid growth of wages, particularly in large-scale industry. This was believed to be respcnsible for growing inequality between urban' workers and peasants and for the stagnation of overall employment growth. A new incomes policy based upon an ILO report was introduced to reverse these trends.l/ The wage guide- lines establi shed by the new incomes policy set an upper limit of 5% for annual wage increases. 1.8 The Arusha Declaration also attempted to define the role of industry within the overall strategy of economic and social development. A major theme of the document was that too much emphasis had been put on industry in the past. Tanzaria could no:t establish very much industry because it had neither the =oney nor the expertise to do so, and depend- ence on foreigners was no.t acceptable because it jeopardized self-reliance and socialism. More fundamentally, reliance on industrialization as the primary agent of development was to confuse means and ends. Industry, like money, was a consequence rather than a cause of development. "Industries will come and money will come but their foundation is the ?eople and hard work, especially in AGRIC'ULTURE. This is the meaning of self-reliance." 1/ 1.9 This stress on agriculture and rural development and the disparagement of the importance of industry created in some minds an expectation that Tanzanials industrial program would be'drastically cut back. It is doubtful if that was ever the intention. The intention was to exhort people to greater effort - to persuade them that development did not mean having what developed countries have (a l'ot of money and modern industries) but that it meant acquiring the skills and attitudes which would enable Tanzanians to be as productive as people in developed countries. Development was seen as the development of people, not as income growth or structural change. But since the development of people is not primarily a matter of investment, this did not mean that investment in industry would be greatly changed. The Arusha Declaration made no connection between the structure of production and its underlying concept of development. It therefore had almost no implications for the structure 1/ International Labour Organization, Report to the Government of the United Republic of Tanzania on Wages, Incomes and Prices Policy, Government Paper No. 3, (Dar es Salaam: Government Printer, 1967). This is frequently called the Turner Report after its author Professor H.A. Turner. The Government's response was contained in United Republic of Tanzania, Wages, Incomes Rural Development, Investment and Price Policy, Government Paper No. 4, (Dar es Salaam: Government Printer, 1967). 2/ Nyerere, "The Azrusha Declaration", p. 33 .Iiphasis in. the original.  of production and investment, though it did of course imply a better distribution of income between urban and rural areas. In the absence of any link between the production structure and development, as implici ly defined in the Arusha Declaration, investment in industry was to continue much as before, except that now it would be undertaken by public enter- prise. 1.10 This interpretation of the strategic implications for industry of the Arusha Declaration is supported by subsequent development plans. The Second Five-Year Plan (SFYP),1/ published two years after the Arusha Declaration, set a target rate of growth for manufacturing of 13.0%, exactly double the target rate of 6.5% for total GDP. This differed little from the First FY? (which had also declared agriculture to be the foundation of development) with a planned rate of industrial development of 14.8% and a target rate for total GDP of 6.7%. President Nyerere endorsed the new industrial growth targets in a speech introducing the Second FE?. 1.11 In addition to being ambiguous on the size of industrial program, the Arusha Declaration gave no positive guidance on the content. This uncertainty about the appropriate content of industrial investment, and the basic continuity with previous industrial strategy, are reflected in President Nyerere's sul-Azry of industrialization plans for the Second Five-Year Plan period. "We shall continue to expand simple manufacturing, the process- ing of primary commodities, and the provision of basic constr- uction materials; but we have now reached the stage where we must think seriously about the next and more difficult phase of industrialization. For it is comparatively easy to produce your own textiles, cement, and similar goods; beginning to produce your own capital goods, and goods which are used only in the production of other things, is a more complex operatior. and demands a more sophisticated degree of economic planning. Yet such a move is essential for long-term growth; an important task which will be undertaken early in the Second Plan period is the preparation of a long-term in.dustrialization ?lan, taking into account the possibilities of the East African Common Market and of exports. The aim is that we should be ready to embark on this kind of work at the very beginning of the Third Plan. Let me just add one further point. Although mass production is the best and cheapest way of meeting the needs of our people 1/ United Renublic of Tanzania, Tanzania Second Five-Year Plan for Economic and Social Develosment 1st July, 1969 - 30th june. 1974 (Dar es Salaam: Government Printer, 1969).  -6- for certain types of goods, there are many others where the needs can be best met by labour intensive, small-scale industries and craft workshops. Obvious examples of this are furniture, which can be made locally from local materials without the problem of transportation over long distances; ready-made clothes, and local food preservation. It is vital that we should increase our efforts in this matter, for such activities have the further advantage that they require very little capital investment, and they can be carried on in the villages and small towns of our country, thus improving the quality and variety of life in the rural areas."I/ !.12 The industry chapter of the Plan extended the range of possibi- lities. In addition to producing simple import substitution goods, intermediate and capital goods (later), manufactures for exports, manufactures for the East African market, and simple manufactures from small-scale industries, the Plan provided that industry was to be decentralized, labor-intensive techniques were to be encouraged, social cost-benefit analysis was to be used to evaluate all industrial investments consistently, and cost reduction was to be enforced through reducing tariffs over time. A case could be made for each of these proposals on its own, but taken as a group, they did not add up to a coherent industrial strategy. The industrial section of the Plan as it finally emerged was little more than a list of 385 projects of which 70% were expected to be completed. 1.13 The Arusha Declaration changed the ownership pattern of industry and, through the new incomes policy, sought to increase the rate of employment growth and to improve the distribution of income between urban and rural areas. Fowever, it did not appreciably affect industrial strategy in any other way. There was increasing concern about what industrial products should be produced, the market orientation of industry, the cost of production, and linkages with other sectors, but no guiding doctrine emerged nor was there any visibly coherent pattern of policy with respect to these aspects of industrial strategy. The definition of a long-term industrial strategy was left as an exercise to prepare for the Third Five-Year Plan. 1/ United Republic of Tanzania, Tanzania Second Five-Year Plan, Vol. 1, p. xiii.  B. Alternative Strategies of Socialist Industrial Development 1.14 After the Arusha Declaration there was general agreement that Tanzania must pursue a socialist industrial strategy. Hiowever, apart from the implication that the role of the private sector would be limiced, there was little agreement about what constituted a truly socialist strategy. While not everyone concerned with Tanzania industrial policy had a fully-articulated strategy, most subscribed, either implicitly or explicitly, to one of four main models of socialist industrial development: a maximum growth strategy, a processing strategy, a basic industry strategy, or a small-scale industry strategy. As presented below, the distinctions between these alternative models are heightened and individual variations are minimized in order to keep the discussion within manageable bounds. While no single individual might agree with every aspect of the ideal types which are presented, the mcdels do give a fair summary of the range of conflicting views of the role of industry in socialist develop- ment.1/ Maximum Growth Strategy 1.15 Perhaps the dominant model of industrial development during the late 1960's and early 1970's was the maximum growth strategy. In this strategy industrialization is seen as the main engine of growth cf the economy. Industry is valued for its contribution to GDP and industrial projects are selected on the basis of their rate of return. No importance is attached to what, how or for what market a product is produced; it matters only whether a product is in demand and can be .produced at a cost which gives an acceptable rate of return. In practice, cost considerations tend to favor light industrial products for import substitution or the processing of local raw materials for export, and the use of relatively labor-intensive techniques of production, but this is an incidental result of the search for projects which would maximize the growth of GDP. 1.16 There are two main streams of thought within the group of maximum growth strategists. The first, and most influential, is the "state capitalist" school. This was best exemplified in the late 1960's by the National Development Corporation which became the princiDal industrial development institution after the Arusha Declaration. The NDC model of development depended on the establishment of independent, state-owned firms (parastatals) which would act as profit maximizers. 1/ Much of the discussion in this section is based upon an unpublished paper by M. Roemer, "Models of Socialist Industrial Development", (Dar es Salaam: mimeo, September, 1972).  NDC's role was to identify the most profitable investment opportunities (with some allowances made for employment and foreign exchange benefits) and then to set up a subsidiary company to produce the goods. The subsidiary parastatal was then supposed to operate much like a capitalist firm, seeking out the most profitable product lines and searching for ways to reduce costs of productior.. The parastatal sector did not have the resources to produce all the manufactured goods possible, of course, so a sizeable amount of residual manufacturing would be left to the private sector. Cooperatives would be encouraged to compete with the private sector wherever possible and the parastatal sector would gradually expand its share of manufacturing production. 1.17 Since the Arusha Declaration did nct have a clearly stated industrial strategy, the state capitalist version of the maximum growth strategy became the actual Tanzanian strategy by default. However, the strategy has not worked in practice quite as intended. AJthough parastatal production has expanded rapidly and with little regard to the type of product vroduced, the technique of production, cr to market orientation, the parastatal sector has not been as cost-conscious as the ideal set by the maximum growth model. Ideally, a parastatal considering production of a new product would ask, "Can it be produced efficiently?" Tanzanian parastatals have tended to ask only, "Can it be Droduced?" In both investment and production decisions the parastatal sector has not responded well to market signals which indicate that costs are too high., When market signals have impinged upon parastatal thinking - for example, when losses are being made - the response has frequently been to try to remove the market cnnstraint by securing a higher product price or by converting loans to ecuity, rather than to try to reduce costs. In spite of this lapse, the ideal of the state capitalism model remains for independent state enterorises to maxi'mize profits (and reduce costs) subject to the constraints of existing market prices. 1.18 The second variant of the maxiJum growth strategy is the "market socialism" model. This has been advocated largely by professional economists (frequently foreign) and is based on the well-known Lange- Lerner model.I/ Yugoslavia is probably the closest working model of market socialism, thiough the Yugoslav economy differs significantly from the Lange-Lerner ideal. The market socialism model pays more attention to the policy framework within which parastatals operate than does the state capitalism model. Independent state-owned firms (worker-managed firms in Yugoslavia) would still seek to maxi.mize profits, but decisions would be based uvon social costs and benefits rather than commercial costs and benefits as in the state capitalism model. Investment decisions, for example, would be based upon social cost-benefit analysis using shadow I/ 0. Lange, On the Economic Theory of Socialism, (Minneapol4s: Univer- sity of Minnesota Press, 1938); and A.P. Lerner, The Economics of Control,(New York: Macmillan, 1944).  - 9 - prices or, better yet, market prices would be brought into line with shadow prices. Since the social cost (shadow price) of foreign exchange and capital is higher than the market price and the social cost of labor (shadow wage) lower than the market wage in Tanzania, a market socialism strategy would tend to favor labor-intensive production techniques and projects bringing quick foreign exchange returns even more than the state capitalism model. As in the state capitalism variant, however, the structure of production which results is due to the attention paid to comparative advantage and the cost of production rather than to any dogma that labor-intensive, export-oriented industries are always better. 1.19 A maximum growth strategy of either the state capitalist or market socialist variety has several drawbacks. First, it may be diffi- cult to reconcile maximum growth with certain socialist objectives such as minimizing the use of material incentives or increasing worker parti- cipation.l/ The difficulties encountered by some parastatals in ea-rning the profits expected of them is partly due to an incentive structure which inadequately focuses the attention of planners, managers, and workers on efficiency and profit maximization. The problem of devising an incentive structure which adequately reconciles growth-efficiency with equity-participation objectives is discussed in more detail in a latez section. 1.20 A second drawback is that the strategy may not be effective in meeting its own major goal of maximum growth in the long run. Commercial cost-benefit analysis, orn which the state capitalism strategy is based, does not adequately take account of linkages or training effects which create external economies for other industries. Social cost-benefit analysis, on which the market socialism strategy is based, takes account of these benefits in principle, but in practice frequently ignores the differential training effects of alternative projects because they are difficult to quantify. This means that the maximum growth strategy may ignore infant industries with high long-term growth potential. In the long run, the non-quantifiable benefits of certain industries may outweigh the gains of maximizing short-term comparative advantage. 1.21 A third criticism of the maximum growth strategy is that it bases decisions on distorted market prices. On the production side, alternative production structures will generate different sets of future price structures (in spite of international trade) owing to linkages among industries and to differential productivity growth from learning by doing. On the consumption side, relative prices and profitability reflect the present inegalitarian income distribution. The state capitalism model 1/ For a discussion of the way in which worker-managed firms may be biased against growth see J. Meade, "The Theory of Labour-Managed Firms and Profit-Sharing," Economic Journal, Vol. 82, No. 325 supplement (March, 1972), pp. 402-428.  - 10 - bases ali production and investmenr decisions on these distorted prices, n or bcialysm a-1 distortions could be corrected by the use c: ie-; orzl'care- s-acow p but as a oract-ical matter, manz of the discoroSrzls rwoull Se Le _ .Z-ected because of the scarcityr of o'u-li_ied project analysts and the zressures to make timely investment decisions. I1. 22J A^. final criticism of the maximum growth strategy is tnat it is marginal_st. The method of analysis is based on small (marginal) ch:anges and therefore is frequently biased against major structural change. It is not just that the strategy may reject a particular structural change because its cost in terms of foregone growth would be high. It is also that the maximum growth strategy may not even envision possible structural change which would be perfectly consistent with high growth. This is cue to the short-cern rocus and deceatralized decision-making characteristic of the planning mechanism under thle strategy. Most projects are proposed by parastatals which tend to propose only marginal changes