Estimation of the social price of investment and the shadow wage rate of unskilled labour for the Kenyan economy

Abstract

The topic of this thesis is the ''Estimation of the social price of investment and the shadow wage rate of unskilled labour for the Kenyan economy''. Thus the main objective was to estimate the social price of investment, consumption discount rate and the shadow wage rate of unskilled labour for the Kenyan economy. The scarcity of resources requires that the available one be used as efficiently as possible. This efficiency could partly be enhanced by using social cost-benefit analysis to distribute limited resources among competing uses. To undertake social cost-benefit analysis there is a need to obtain social prices which are not available for the Kenyan economy. This thesis is then intended to partly provide the required social prices. In trying to determine these prices the approach has been to take the state of the economy as we find it rather than to assume conditions of optimality. As a result we identify separate social prices for inVestment and for the rate of discount of consumption, rather than making the conventional 'optimality' assumption of equality between them. The guiding principle has been to define these prices in terms of opportunity cost. It was found impossible to estimate the consumption discount rates directly so indirect metnods were used based on market interest rates and estimates of the marginal productivity of capital. As regards the social price of investment, this is derived as a function of consumption discount rate, the marginal propensity to save and the social price of investment. . The crucial variables in this analysis are the marginal productivity of capital, the marginal propensity to save, the market wage rate, interest rates and productivity of labour. From this one can observe the need for data on these variables. Due to data and other limitations we were unable to determine a unique value for the consumption discount rate, providing instead a range of values, namely 10, 15 and 20 per cent per annum. This also made

it necessary to estimate three values for the social price of investment and the shadow wage rate. Our estimates for the social price of investment are 5.25, 2.47 and 1.60. These are rates which give us the consumption equivalent of a unit of investment. We estimated the shadow wage rate of unskilled labou:t as K.Shs.303.19, 125.02 and K.Shs.71.21 per month, based on consumption discount rate of 10, 15 and 20 per cent respectively. Lastly we applied the methodology to a case study - The Kenyan Fiberboards Corporation. The results were then compared to that of the conventional approach and private project appraisal (using market prices) . It was noted that the net present values obtained are different. Since we are avoiding the conventional 'optimality' assumption we argued that the methodology we followed appears logical. As mentioned above the data requirements were very large and statistics were not available in a usabl form in several cases. However, this deficiency was partly overcomed by using the research findings of othe

with some adjustments as necessary. Our inability to work out a unique value of the consumption discount rate forced us to be satisfied with minimum, intermediate and maximum values for the social price of investment and the shadow wage rate. These findings will be useful as a starting point for more research in this area. The results could also be used, with some caution, to evaluate projects