The use of DRCs to evaluate indigenization programs

Journal of Development Economics 6 (1979) 119-139. 0 North-Holland Publishing Company

THE USE OF DRCs TO EVALUATE INDIGENIZATION PROGRAMS The Case sf the Ivory Coast* Terry 3. MONSON Michigan Te&oiogical

University, Houghton, MI 49931, USA

Garry G. RURSELL Development Research Center, World Bank, Washington, DC 20433, USA

Received March 1977, final version received April 1978 The DRC methodclogy is extended to evaluate education programs for purposes of indigenization. Such programs can be likened to an import-substitution activity in which local labor is produced to replace previously imported skilled foreign labor. The method is then applied to the problem of expatriate labor replacement in the Ivory Coast.

1. Introduction In this paper, we apply the domestic resource cost of foreign exchange (DRC) methodolr gy in a unique fashion. As commonly used, DRCs analyze the foreign exch
120

T.D. Monson and G.G. Pursrll,

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multinational corporations or embryonic educational systems, foreign labor often forms a large part of the technical and managerial labor force in many deve:loping areas. For example, consider subsaharan Africa. There we find foreign nationals employed in various capacities in nearly every country. European expatriates are most important in the former French colonies; they are less important but still numerous in other African nations as well. Other foreign nationals (e.g. Asians, Syrians, Lebanese and Greeks) are active in commerce and smaller scale enterprises. In other developing areas, the situation is frequently the same. Consequently, indigenization efforts, i.e., education programs to train local labor to replace foreign nationals, are often important components of development programs and can be analyzed with our msdified DRC methodology. A second reason for applying our modified DRC approach to indigenization programs is that a comparison is provided between the foreign exchange generated by educational expenditure and by expenditure in more directly productive economic activities. At present, DRCs are used to analyze industrial or agricultural activities in many LDCs, while the standard approach to the analysis of education is the cost-benefit (CB) methodology. Results from these two approaches are not directly comparable. With minimal extra effort, DRCs can be estimated from data used in the CB approach, thereby providing srupplemental information for resource allocation decisions among the three sectors, i.e. education, industry and agriculture. The two approaches then easily become valuable complements in cases where indigenization is an important component of educational programs. In this paper we apply the DRC methodology to the case of expatriate replacement in the Ivory Coast. The Ivory Coast is a particularly interesting case study since European expatriates constitute some seventy percent of the modern sector manag&,ial and technical labor force. Finally, we briefly compare the results of the DRC analysis with more conventional cost-benefit methods applied to the same data. 2. A DRC model to evaluate expatriate replacement 2.1. Introduction In this section we outline how the DRC method can be applied to the evaluations of education for indigenization programs. As commonly applied, DRCs evaluate existing or planned economic activities under conditions in which foreign exchange is a constraint on economic development.’ The DRC coefficients indicate relative efficiencies of alternative foreign exchange pro‘For a discussion of the DRC concept Schydlowsky (1972).

see Bruno

(1972). Krueger

(1972) and Balassa and

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ducing activities and isolate areas in which a country’s comparative advantage may lie, given the existence of distortions between international and domestic rates of transformation implied by the foreign exchange constraint. Subject to some qualifications,2 activities can be ranked without the introduction of a shadow exchange rate. With the cost-benefit method, hoG!ever, the ranking of activities depends upon the value of the shadow exchange rate3 Before turning to the details of the DRC model, several general comments are in order. We conceptualize expatriate labor replacement 2s an importsubstitution activity. The product to be replaced is an imported flow of expatriate labor services. The replacement is a similar flow of trained local labor services. The import-substitution activity to be analyzed is the educational process that provides the locaf labor with the training needed to replace expatriates. Costs and returns of this activity will occur over two time periods- the training period and the period in which replacement occurs. Our analysis of the indigenization process is marginal in na:ure in the sense that we focus upon evaluation of the: replacement of a marg:nal unit of expatriate labor services, given a country’s current occupationa! and educational structure. This approach implies that we analyze the educational requirements needed to replace one expatriate in each occupation. However, for various reasons, more than one unit of local labor may need to be trained to replace one expatriate. Our discussion must then be framed in terms of expatriate equivalents. A method for determining these equivalencies is outlined in subsection 2.3 below. The marginal nature of the analysis also implies that it cannot identify structural changes resulting from education nor can it provide a composite view of the educational process. As regards education geared towards indigenization, the method is useful for discussing the continuation of existing programs, or incremental changes in them, but needs to be supplemented when evaluating long term changes in educational policy. For example, our analysis could be used in conjunction with a dynamic model such as that developed by Louis Goreux et al. (1977). Goreux’s model addresses dynamic l’soblems such as the timing of educational Iexpansion so as to ensure that the flow of graduates from the educational system does not exceed the economy’s capacity to absorb highly educated labor once the expatriates are replaced. However, these structural and dynamic consider-

‘In order to give rankmgs independent of the shadow excta;ige rate, the DRC method implicitly assumes that the opportunity costs in the numerator are expressed in terms of nontraded goods and services. Also, as noted in the text, in (order to rank discounted DRCs it is necessary to assume that the shadow exchange rate is unchanged over the periods considered. 30r the standard conversion factor in the Little-Mirrlees methaldology. Deepak Lal (1974) provides a succinct summary and comparison of the various method:,,.

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ations do not invalidate our procedure, but rather emph:.size that its results should be interpreted and used with due caution.’ Finally, our analysis excludes external effect and rncome distribution considerations- These factors certainly must be important in many countries but data for our case study were simply not available for inclusion in our models. 2.2. A DRC model of expatriate replacement As stated earlier, DRCs are commonly applied to evahtate alternative economic activities under conditions of foreign exchange scarcity. For our problem, we may think of the DRC coefficient as a cost-benefit ratio. The denominator will measure net marginal units of foreign exchange saved per expatriate replaced. The numarator will measure the net opportunity costs of domestic resources expended in training local labor to replace the expatriate. The term ‘net’ is important to this description of our DRC coefficients. Both costs and benefits of indigenization consist of domestic resource and foreign exchange elements. These elements au-efirst separated, then assigned either to the numerator (domestic resources) or to the denominator (foreign exchange). Thus, domestic resource benefits are netted from domestic resource costs in the numerator and foreign exchange costs are netted1 from foreign exchange benefits in the denominator. To see the process more clearly, consider the benefits first. Indigenization implies that income previously paid to expatriates is diver,ted to local labor. Since we may assume that expatriate labor is similar to any other traded (and in this case imported) input, the benefits of the import substitution activity consist of the divertecl income. However, as opposed to a traded physical input, imported labor services are paid for in both foreign exchange and domestic resources. Therefore, this benefit must be selparated into these two elements, one entering the numerator, the other the denominator. An expatriate’s income in year t can be broken down as follows. Income, = S, + M, + D, + taxes,. The foreign exchange element entering the denominator of the DRC coefficient consists of S,, the expatriate’s savings,’ plus M,, his expenditure on 4We thank an anonymous referee for emphasizing the above points, and for also pointing out that our analysis assumes the absence of a stock of educated employed capable of replacing the expatriates. 5We assume that all expatriate savings can be and are repatriated without restriction. This appears to be the case in the Ivory Coast aud in most of the franc zone countries. If a part of the expatriate savings were retained in the host country and perhaps eventually spent there, it would be necessary to allow for domestic resource as well as foreign exchange components. This may be of some importance in countries in which there are effective government controls on expatriate remittances.

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fully traded goods (valued at border prices)” and his direct spending nutside the country.7 The domestic resource element of this diverted income, J?,, is the return to domestic factors of production included in the value of nontradec’ goods and services consumed by the expatriate. These domestic resource costs of supporting the expatriate are no longer incurEd when he is replaced and consequently are subtraLted from the numerator. The tax component of the replaced expatriate’s income (income taxes, import duties and consumption taxes) are not included in this analysis. Taxes are not a cost from the country’s point of view, Hence, na corresponding tax benefit results when the expatriate is replaced by local labor.’ On the cost side, we separate costs into those incurred during the training and the replacement periods. During training, the direct costs consist of C’i, domestic resources (land, labor, and capital), and FX,, foreign exchange (imported labor services, traded goods, etc.). Indirect costs are E,, alternative earnings foregone by the l&al worker during the training program.” All these costs incurred during training are defined as costs per successful student, allowing for dropouts and failures. During the replacement period, there is only one cost. This is the income earned by the local worker had he not been trained and had he not replaced the expatriate. The value of these alternative earnings is denoted by A,. We must include this cost in our analysis since we utilize the roral income diverted from expatriates to local workers as a benefit of replacement. To keep our analysis consistent, we include not only the costs iilcurred durin,p the training period but also the local labor’s expected total income m alternative employment if he were not trained. The domestic resource costs, C,, E,, and A,, are added to the numerator of the DRC ratio while the foreign exchange cost, FX,, is subtractefd from the denominator. Therefore, the numerator represents the domestic resource component of costs from which II,, domestic resource benefits are netted out. The denominator consists of M, + S,, the foreign exchange portion of income formerly paid expatriates, minus FX,, the foreign exchange costs of training the local replacement. These concepts :!re summarized in eq. (1) below in which costs and

‘%Auding the border value of the tradeable component of expenditure on non-riradcd goods and services. ‘Includes spending on vacatiqns in the home country and indirect income parments abri.‘lad (pensions, transport, etc.). *Note that we consider the spending and savings of the expatriate as a cost to the Local economy rather than treating his income as an opportunity cost in the sense of output foregone. However, the spending and savings of local replacements are not considered as costs si;lce tile purpose of the cost-benefit analysis is to maximize domestic income. 9Both E and A, (see below) and all other domestic t,:source costs should be valued in shadow prices. HeIe it is provisionally assumed that foregone c,uGngs are equal to the opportunity cost of labor (shadow wage).

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T.D. Monson and G.G. Pursell, Indigenizatiotr programs

benefits are discounted over the training replacement period (t = m + 1,. . ., n),

period

(t= 1,. . ., m), and

the

4 DRCj

--_-

(1 +i)*

--

9

(1)

where DRCj=Estimated DRC coefficient for expatriate replacement in the jth occupation ; C,=Sum of domestic resource training costs per successful trainee; Et = Foregone earnings per successful trainee; A, = Alternative earnings per successful trainee; 0, = Expenditure on domestic resources per expatriate ; S, = Savings per expatriate replaced; M,= Expenditure on tradeables in border prices plus other foreign exchange expenditure per expatriate; FX, = Foreign exchange training costs per successful trainee; i = Discount rate; period), m + 1,. D., n (working lifetime until t = 1,. . .) m [educational retirement). Provided the shadow. exchange rate and the other shadow prices are unchanged over the period considered, it is well known that eq. (1) will give the same accept-reject criterion as other cost-benefit measures,” i.e. accept (reject) the project if (i) DRC < ( =>) ratio of the shadow to the o&ial exchange rate; (ii) cost-benefit ratio <( > ) 1; (iii) internal rate of. return > ( < ) shadow rate of discount; (iv) net present value > ( < )O. However, none of these methods will necessarily give the same rankings of activities above and l~low the cut-off point. The reason for this is that the methods are concerned with different (though related) questions. For example, whereas a cost-benefit ratio evaluates activities when the object is to minimize the present value of a stream of costs in relation to the present value of a stream of benefits, the DRC evaluates these activities when the object is to minimize discounted net domestic costs in relation to a discounted stream of net foreign exchange earnings. Because of the netting of domestic benefits from con’s in the numerator and of foreign exchange costs from benefits in the denominator of the DRC coefficient, an activity may be exceptionally efficient at earning foreign exchange and yet may rank lcrwer in terms of the benefits received for a marginal cost outlay, or the opposite may be the case. “E.g. see Balassa

(1974).

P

2 .D. Monson and G.G. Pursell, Indigenizution programs

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While this difference may appear to introduce some ambiguity into the evaluation of activities by the various methods, it should be emphasized that the rankings resulting from the summary indicators really indicate priorities to be given to expansion or contrac?ion at the margin, since if the shadow prices are correct all the profitable activities should be marginally expanded and all the unprofitable activities marginally contracted. As mentioned above, the decision rule for the discounted DRC is to compare the ratio given by eq. (1) to the shadow exchange rate. This obviously cannot be done if the shadow exchange rate is expected to change over time. Moreover, if the shadow exchange rate changes, all other shadow ptices will alter, including the shadow cost of expatriate labor. For example, if, with a fixed offtcial exchange rate, the ratio ofthe shadow to the offtcial exchange rate increases, tten D, will increase, i.e. expatriate incomes will rise in order to maintain the Pame or a similar level of real expenditure on domestic nontradeables.’ 1 While in principle it is true that we cannot expect s’hadow prices to remain unchanged over the periods being considered (education period plus working lifetime), the estimation of shadow prices for current or past periods is fraught with well-known difficulties and subject to wide margins of error.i2 Consequently, as a practical matter, unless major future developments can be foreseen with confidence (e.g. oil discoveries, major tariff reforms), it will seldom prove worthwhile attempting to estimate future shadow prices, as any such estimates will usually fall well with’n the range of error of estimates based on the present situation.

2.3. Expatriate equivalents Eq. (1) is formulated on the assumption that one trained local workei can replace one expatriate worker. This assumption may not be justified. IA most LDCs, salary and wage differentials exist between local and expatriate latir. Although socio-cultural factors may account for some of these differentials, more likely they are caused by real productivity differences due to higher levels of experience of the expatriate labor force. Firms have a choice of hiring a trained, but not experienced national, or a stream of renewable experienced expatriate labor services. Over his working lifetime the national “W’e are indebted to an anonymous referee for this last point. It couM be added that the supply price of expatriates will also depend on alternative earnings in their home ~~~~~:tries, which, for European expatriates in Africa can be expected to rise in real terms. However, changes in the sources of expatriates-perhaps associated with a diversification of the sources of direct foreign investment -may lead to a decline in the cost of expatriates if they come from countries with lower per capita ificomes. “‘Cf. Bacha and Taylor (1971).

T.D. Monson and G.G. Purse& Indigenization programs

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will have a productivity represented by

represented by the area under bin learning curve

n

w i --

W,+,Pdt. s WI+1

(2)

Over the same period, a renewable stream of experienced expatriate labor services could be bired at a constant wage, IV,.’ 3 A comparison of the national’s lifetime productivity to that of the expatriate labor stream will provide us with an equivalency ratio giving the number of nationals needed to be trained to replace one unit of this expatriate labor stream. Eq. (3) defines this ratio while fig. 1 illustrates these different concepts,

(3)

This equivalency ratio, R, is then applied to eq. (1) to obtain an expression giving the DRC coefficient for training R nationals to replace one expatriate. Eq. (4) incorporates this measure. Note that only the ‘costs’ are multiplied by R since more than one unit of labor now needs to be trained. The ‘benefits’ remain unchanged; only one expatriate is replaced.

.--.-

-.

W

DRC coefficients calculated from eq. (4) should be interpreted as giving the cost in domestic resources per unit of foreign exchange saved in the replacement of a marginal unit of expatriate labor. When this ratio is less than one, replacement is an efficient import-substitution activity at the official exchange rate. That is, it is less expensive to produce a worker locally than to import an expatriate laborer. If the exchange rate is overvalued the DRC coefficient would be divided by the ratio of the shadow to the official exchange rate, and would have the same interpretation. “Our analysis is simplified by the assumption of a constant expatriate wage. Obviously, there will be some learuing-by-doing as expatriates accustom themselves to working in a foreign context. Their wages should rise over time also. A more exacting analysis would have adjusted for this consideration, but the data do not permit such a refinement for the Jvory Coast.

T.D. Monson and G.G. Pursell, Iudigenization

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Wages and Productivity

m+l

-

Time

n

Fig. 1. Life time productivities:

An indiger:ous and an expatriate labor stream.

Negative DRC coefficients here may have a different interpretation than those of other DRC studies. As usually interpreted, a negative DRC is unfavorable since it implies negative net foreign exchange earnings in the denominator. However in our DRC coefficients, domestic resource benefits are deducted from domestic resource costs in the numerator, and foreign exchange costs are deducted from foreign exchange benefits in the denominator. It is possible that either numerator or denominator (or both) may be negative. For our case study, it will be seen that while net foreign exchange earnings are always positive, there are a number of cases in which domestic resource benefits (foregone expatriate consumption of domestic services and nontradeables) exceed domestic resource costs. In these cases, the negative DRC indicates an attractive investment possibility. The appropriate ranking of the coefhcients then is in descending order of the absolute value of the negative coefficients, followed by the positive coe&ients in ascending order. 3. Indigenization programs in the Ivory Coast 3.1. Introduction The method outlined above is now applied to analyze replacement of expatriate personnel in four broad occupational categories in the Ivory Coast (management, technicians,r4 supervisors, and skilied office 1,abor). The scope

14The term ‘technician’ is used here in the broader French sense to include all employees with speci, tlized tra;ning, e.g., computer programmers, accountants.

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Table 1 Some indicators

of foreign influence in the Ivory Coast.

Labor ::I (c) (d)

1:; (g) (h)

Estimated expatriate labor force (1972)a Expatriate wage bill/total industrial sector wage bill (1970)b Expatriate wage bill/value added in a sample of 22 manufacturing firms (1971)c Expatriate labor/total modern sector employment (including government) (1971)d Expatriate managers/total management labor force (1971 )I’ Expatriate technicians/total technician labor force (1971)” Expatriate supervisors/total supervisory labor force (1971) Expatriate skilled office workers/total skilled office labor force (1971Y

17,000 38 *3”:/..

Percentage

83.8 “i,

17.50/, 8.5% 76.8 “/, 74.8 % 39.0 % 15.3%

Capital (a) Aid (4

foreign ownership

of 100 largest firms (1970)’

Total foreign aid for current expenditures ( 1972)g Of which technical assistance personnel8

(b) Foreign exchange Repatriated (4 Repatriated (b) Repatriated (c)

on goods and services

savings of expatriates ( 1972)h profits from foreign direct investment ( 1972)h savings and profits/total exports (1972)b

$US 41 million $US 24 million $US 75 million $US 42 million 19.7 ‘;/

“Estimated using the 1970 quantity (15,980) and assuming a 500 per year increase in 1971-72. This value of 500 corresponds to the estimate given in Cacheux and Cologuegnes (1973, pp. 6162). bSETEF (1973, annex table A-30). ‘Sample firm level data collected by the authors [Monson and Purse11 (1975)]. dEstimated modern sector employment taken from data in Republique de CGte d’Ivoire (1971, 1973). ‘Republique de C&e d’Ivoire (1973), 3e partie, ‘Tableaux Statistiques’. ‘SETEF (1973, p. 18). 8RBpublique de C&e d’lvoire (1974, pp. 15-20, tables VII and X). hlbid., tables VI and IX.

for expatriate replacement is evident given the data of table 1. In the early 197Os,expatriates comprised eight and one-halfpercent of the modern sector labor force, occupied seventy percent of managerial and technical positions and collected more than one-third of the wage bill. This large expatriate presence is the result of a conscious policy aimed at overcoming skilled labor deficiencies at the time of independence. In 1961, the Ivory Coast neither possessed a university nor extensive secondary and vocational educational facilities. From an Ivorian age 15-24 cohort of about 700,000 persons, there were only 11,000 secondary school students and 850 uni*rersity students (studying abroad).. Only 270 students graduated from secondary schoo’l that year and less than 2,000 completed secondary school in the ten previous years.’ 5 In view of these educational deficiencies, the “Republique

de France (1970, vol. 1).

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Ivory Coast chose to rely upon skilled foreign labor while simultaneously increasing educational expenditures to train Ivorians to replace the imported foreign workers.“j RepLement of the skilled non-African labor force, already begun in some occupations, will accelerate in the 1980s as larger numbers of avorians are educated. Of the four occupations analyzed here, some replacement has occurred at the two lower levels. However, there is considerable scope for replacement in the managerial and technical levels. There was no appreciable change in the percentage representation of expatriates in these occupations during the 1960s and early 197Os, despite a rapid expansion in the total number of positionsl’ and there has been strong demand for, and no unemployment of, Ivorians with the required educational qualifications. 3.2. Educational and occupational requirements Ivorian nationals to replace expatriate labor are trained in an educational system patterned after that of France. There is a six-grade primary program followed by a seven-grade secondary program consisting of separate fourgrade (premier cycle) and three-grade segments (deuxi8me cycle). The length of post-secondary education varies; the most common are two-year cycles at technological institutes and four-year programs at the National University. In order to use DRC analysis to analyze these educational programs, there raiust exist a fairly high correlation between educational and occupational levels. This appears to be the case in the Ivory Coast, where the labor market is characterized by a form of ec!ucational screening or job rationing. ‘* Occupational placement in governmeni empioyment is formally contingent upon the possession of appropriate educational credentials. In the private sector, one observes a lesser, but still significant, relationship between occupations and educational levels. In the table below, we give two alternative sets of occupation-education equivalencies. Hypothesis one is the general relationship currently used by Ivorian planners to control entry and to guide students along educational paths dictated by manpower demand projections.‘g Hypothesis two is a slightly upgraded ver:ion that probably better indicates increased educational requirements likely to accompany improved technology. We take these relationships very strictly and assume that no Ivorian can be employed in an occupation unless he has the proper educational credentials. ‘“Ivorian education expenditures rose from 3.9 to 5.3 percent of GNP between 1960 and 19X They now comprise one-third of the government’s current budget. Educational investment expenditure is about seven percent of the capital budget. Foreign aid, capital and current, is about twenty percent of total educational expenditure. Rkpublique de Cdte d’ivoire, Endget Ghndral de Fonctionnement, various years. “SETEF (1973, pp. 81-84). 18The job-rationing model is outlined in detail in Thurow and Lucas (1972). lYMinisttke du Plan (1969). passim.

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G.G. Pursell,

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Hypothesis 1

Hypothesis 2

University degree Secondary diploma Six years secondary Four years secondary

University degree Two years post-secondary Secondary diploma Four years secondary

Data to verify these relationships are sparse. The 1971 private sector labor force survey,20 indicates that 37 percent of skilled office workers had from one to four years of secondary education, 60 percent of supervisors had four to seven years of secondary education and 56 percent of technicians and 51 percent of management had at least completed secondary school.21 Given that this survey covered small and large enterprises and that the educational data were not broken down by nationality, it is probably true that expatriates employed in larger firms possess the educational credentials suggested in one of the hypotheses outlined above. We make an additional assumption concerning these equivalencies, namely that there is no substitution among occupations. Thus, for example, an expatriate engineer with a university degree cannot be replaced by two (or more) nationals with secondary school diplomas. We believe this strong assumption to be realistic for management, technicians, and supervisors, given the nature of the qualifications required for the highly skilled occupations in which expatriates are employed. However, it may be somewhat I.zss realistic for skilled office workers.22

3.3. Expatriate equivalents The equivalency ratio, R, measures the number of Ivorians required to replace one expatriate. It was calculated by first estimating time streams of income during an Ivorian’s working lifetime, then by comparing these streams to the cumulated wages paid expatriates in the same time period. Regression techniques were applied to data relating average yearly wages to 2oMinistere du Plan (1973). ‘*Modal educational levels for each occupation were: management = university (32 percent), technicians = university (38 percent), supervisors = four years secondary (35 percent), and office labor = primary (38 percent). ‘*An additional implication of the strict occupation-education correspondence is that the educational level attained determines a person’s occupation category over his lifetime. There is no occupational mobility. Of course this implication is unrealistic. Promotions between occupations will occur as on-the-job learning takes place or as enterprises provide further Waning. Unfortunately, data on upward occupational mobility were not available to refine our analysis further.

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length of service in the enterprise to estimate eq. (5L2’ Table 2 reports the estimated income stream equations and equivalency ratios under both occupation-education hypotheses. W,=W,+ita

or

lnW,+,=lnW,+,+alnt.

For various reasons,24 we do not place much confidence in the accuracy of these estimates. We therefore checked the sensitivity of the estimated DRC coefficients to variations in R by calculating a hypothetical equivalency ratio which, when inserted into eq. (4), would equate the DRC coefficient to unity a.r a discount rate of eleven percent. Except for office labor, the hypothetical R was at least seventy-live percent greater than our estimated R. The average difference was 136 percent. These results suggest that our results will not be altered significantly even if we severely underestimated the equivalency ratio. 3.4. Other elements of the DRC coefficients 3.4.1. Direct educational costs Job screening via educational credentials and the high failure raics25 found in the Ivorian educational system complicated the estimation of direct educational costs. As noted above, we assume a strict correspondence between educational and occupational levels, meaning that students had to complete a discrete unit of additional education in order to be eligible to enter the next higher occupation. 26 Consequently, except for failures during the first four years of secondary school, the costs of training students who fail are assigned to the preceding educational level. This was done by using data on failure and drop-out probabilities. From Ivorian budgetary data, education costs for each level were in turn decomposed into foreign exchange (FX,), domestic resource (C,), and tax elements. Omitting the tax elements we thus arrive at an estimate of the discounted Foreign exchange and domestic resource education costs per successful student for each occupational leve1.27 23Data used to estimate income streams were found in Ministere du Plan (1973. vol. 11, pp. 135 and 162). 24Namely, limited degrees of freedom, data reflecting experience only in the form surveyed. and larger act!uJ wage difierentials than implied by our estimates. 25About twenty percent of secondary school entrants successfully complete their secondary education in an average period of nine years. About forty percent of university entrants successfully complete their education. 26Thus for simplicity, we assume that failing students learn nothing to influence their future productkty while unsuccessfullyattempting further education. l’/Details on the procedures followed and the data used to estimate these and other elements of the DRC coefftcients are found in Monson and Purse11 (1976, ann. B-D). All data are for the years 1970-72.

5.81 19.43 never never

so.735 75.14s 58.374 32.813

so.445 68.839 50.176 32.813

Ivorian total incomea (FCFA milhons) H, H2

t = 2.808

1.031 1.047 1.267 1.381

1.031 1.043 1.136 1.3x1 83.259 78.362 66.313 45.322

H2

HI

S2.969 72.054 63.602 45.322

H2

HI

L2

Equivalency ratios

=0.594, t =

Expatriate incomeb (FCFA millions)

r2

r2=0.531, 1=2.128

rz =- 0.724,

‘From evaluation of j$+ 1 W,, , t”dt, where n is the lvorian’s working lifetime with the exception that the maximum yearly income received is no lzb,ger than the average expatriate income. After that time, expatriate and Ivorian incomes are equal. The time period at which incomes equalize is given in the first column. bAverage expatriate yearly income multiplied by the Ivorian’s working lifetime. These averages are: management FCFA 2,900,OOO;technicians FCFA 2,336,388; supervisors FCFA 1,909,3SS;office workers FCFA 1,221,300.

(1)

Management (2) Technicians (3) Supervisors (4) Office workers

Equivalency ratios

Time required to reach mean expatriate income

w I = 444 9pJ4493

Office workers . ._

I39,j @.6’5’J 1304+05673

w

Supervisors: Hypothesis Hypothesis 2

=2132.7t0.“46’ 1863*5t0.07623

thousands)

W

(2) Technicians

(1)

Income streams

Table 2 Elements of the equivalency ratio estimates.

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Foreign educational aid presented another problem. Ninety percent of the secofidary school staff are expatriates who are partially naid by donor countries. Similarly, expatriate salaries, financed partially bid Ivorian and foreign resources, account for one-half of university educational costs. Fon+gn aid constitutes about twenty percent of total secondary educational expenditures and fifty percent of university expenditures. Our estimates therefore, depend upon the extent to which these foreign resources finance marginal increments in educational expenditures. Accordingly, we made separate calculations of educational cost,s, lirst assuming the continuation of the present pattern of aid and then assuming that all costs are borne by the Ivory Coast. Table 3 summarizes the decomposition of educational costs as well as the decomposition of expatriate income. 3.4.2. Income diaerted from expatriates to I~:orkms The benefits from Ivorization consist of income previously paid to the expatriate and now diverted to Ivorians. These benefits consist of salaries directly received in the Ivory Coast and indirect payments in kind (housing, transportation, etc.). To decompose these benefits into their foreign exchange, domestic resource and tax elements, we subtracted estimated repatriated income transfers (26 percent)28 from average expatriate income, then deducted income taxes and allocated the remainder to domestic resources. foreign exchange and indirect taxes following available market basket data.‘Y Payments in kind were estimated from sample data for 469 expatriates employed in twenty-two manufacturing firms.“’ Table 3 summarizes our calculations. Ncte that payments in kind are quit. large for the first three occupations. For office labor, they are smaller since most expatriates in this category are women receiving transportation and housing benefits through the employment of their husbands. 3.5. The DRC estimates

Each of our measures are calculated at three different discount rates - 5, 1i and 17 percent, although we believe the central value of 11 percent to be most plausible. 31 The results of these calculations are given in table 4. For 28Planning Ministry project i;lcs use this percentage. However, this value may be an understatement. In 1972, the average repatriated transfer per expatriate employee was ahout one million FCFA or about one-third of the average wage paid management, the most skilled occupation considered here [Ripublique de CAte d’Ivoire (1974, table IX)]. “‘Association Interp-ofessionnelle des Employeurs de la CBte d’ivoire (1973). “These firms were included in the authors’ wider sample of Ivory Coast manufacturing firms [Purse11 and Monson (197511. Transportation and retirement benefits were considered to he entirely foreign exchange costs. Housing costs were decompused following amortitition coefficients used for educational capital expenditures. “This rate is the central value of an estimate of a shadow discount rate in the Ivory Coast based upon 1971 data [Purscll (1975, pp. 51-5711. F

2900. 2336 1909. 1221

Cn!sr-J I____,

Annual incomea

219 894

2748 2710 2681 83

Income in kind

41 459

Aid”

5648 5046 4590 1304

Total 32 36 36 19

Domestic resources

48 60

Domestic resources

‘FCFA 1000s. In 1972, the exchange rate was approximately FCFA 25O=$US I. bIncome taxes and indirect taxes of goods and services.

(1) Management (2) Technicians (3) Supervisors (4) Office labor

(a) Secondary (b) University

Total costs per student year”

-

54 54 54 61

Foreign exchange

Percentage of total

Foreign exchange

Percentage of total

14 10 10 20

Taxesb

15 12

Taxesb

-

Table 3 Decomposition ofeducational costs (upper part of the table) and expatriate incorn: (lower part)into foreign exchange and domestic resource costs.

T-D. MOWO~ and G.G. Pursesell,indigenizntiorr

programs

135

occupation, of aid continuation (continuation of the pres. at pattern or completely Ivorian financed), and for each occupationeducation equivalency (the current pattern and the up-graded version). As noted earlier, the negative coefficients shown in table 4 are the res!llt of negative domestic resource costs in the numerator, i.e., the total discounted domestic resource costs of training (C, +A, +K‘ are less than the discounted domestic r-source income benefits (D,) diverted lrom expatriates to Ivorians. Table 4 Domestic resource cost coefficients of indigenization rates.

Occupation

Occupy +ionaleducational hypothesis

Office labor

HI

11%

1.589 I .270

- 0.477 - 0.469 - 0.408 -0.395

-0.332 - 0.2445 -0.1768 -0.163

No Yes No Yes

-

0.382 0.370 0.397 0.383

-0.1801 -0.169 -0.127 -0.116

0.157 0.161 0.494 0.405

H,

No Yes

- 0.276 - 0.264

0.158 0.139

1.326 1.002

132

No Yes

-0.261 - 0.248

0.180 0.157

1.385 0.990

HI

0.762 0.679 0.896 0.790

17%

No Yes No Yes

HI

HZ Managers

5% 0.322 0.306 0.385 0.321

Hz Technicians

-

No Yes No Yes

HZ Supervisors

Aid?

efforts in the Ivory Coast, various discount

1.848 1.447 - 0.085 - 0.087 0.269 0.230

4. Implications for Sorian education policy 4.1. Education for expatriate replacement: An ejkienr

import substitution

policy?

In most cases, the estimates suggest that training for purposes of expatriate replacement is a hi,ghly desirable activity. For supervisors and technicians, the DRC coefficients are negative at discount rates of five and eleven percent. Even at discount rate of seventeen percent, the DRCs for these two occupations ar:. considerably less than one. For o&e labor and management training, the coefficients are acceptable except at the seventeen percent discount rate. For management, high training costs and the long educational period combine to give coefkients less satisfactory than those for supervisors

136

T.D. Monson and G.G. Pwsrll, lndigenizatiotr programs

and technicians. As the discount rate increases, there is a rapid decrease in di. rerted income benefits entering the numerator and denominator. For office labor, the high DRCs are due to the assumption that failures in the first four years of secondary school are incapable of replacing expatriates (they do not acquire the minimum level of education of expatriates). Since failure rates are high, costs per successful student are also high. The continuation of aid in its present pattern provides acceptable DRCs for all occupationa! training except office labor. As expected, aid continuation has its most noticeable effect in those occupations requiring university training (technicians and management). Aid to higher education covers approximately fifty percent of direct training costs. Since most of the DRC coefficients in table 2 are less than one, we can conclude that past and future resource allocation to secondary and university education in the Ivory Coast has been and will remain economically justifiable while the expatriate participation in the labor force remains high. The fact that the shadow exchange rate almost certainly exceeds the official rstc makes this conclusion even more convincing. However, as emphasized earlier, it would be desirable to supplement our analysis with a dynamic model in order to discuss long-term issues of educational policy. Having calculated DRCs of training for expatriate replacement, it is valuable to proceed one step further and compare these estimates to those of other foreign exchange generating activities in the Ivorian economy. In a very approximate manner, we can use this comparison to determine whether resource allocation at the margin is best directed toward the educational, agiicultural, or industrial sectors. We are in a position to make such a comparison using preliminary results of research in progress at the World Bank’s Development Research Center. Dirck Stryker (1875) has calculated DRCs for the agricultural sector using a measure similar to ours. His estimates for the southern zone, the most prosperous agricultural region of the Ivory Coast, ranged frlom 0.48 to 1.29 with the majority centered around a mean of 0.73. coffee and cocoa, the Ivory Coast’s t-wo largest agricultural exports had the lowest values (between 0.40 and 0.67 depending upon the methods of productio:n used). In the central region, the coefficients were slightly above one for two c~~ops and below one for cotton. In the northern region, DRCs for most products were close to unity. Our DRCs calculated at an eleven percent ratt of disclount fall in th; range for agricultural products. DRCs for supervisors and technicians are appreciably lower than the two lowest values of the DRC coefficients for Ivorian agriculture (coffee and cocoa). Therefore, we may conclude that marginal educational expenditure for expatriate replacement ranks approximately the same or slightly better than agricultural activities in their foreign exchange generating or saving capabilities.

T.D.

Monson

atzd G.C.

Pur.srll.

Indigetrixaiw~

prngrunrs

137

The authors have estimated DRCs for the manufacturing sector.3’ The reF:dts of these calcu.lations indicate that education for expatriate replacement is a more efficient activity than most manufacturing activities. For a sample of 83 manufacturing firms the weighted average DRC was 1.33. Nine of the 83 firms had negative foreign exchange earnings and twelve had coefficients in excess of 3.0. Our education DRCs are definitely superior to the average of the industrial sector although some industrL1 activities compare favorably to our estimates. Nonetheless, we can generally state that marginal expenditure upon education is a better allocation of Ivorian resources than upon industry. Consequently, education for expatriate replacement appears to be an eflicient import-substitution activity. 4.2. A/location qf resources within the educatiomd structwe Viewing the DRC estimates for each occupation, one is immediately struck by the negative DRC coefficients and low cost-benefit ratios for the occupations of supervisor and technician. The negative DRCs indicate that the training costs plus alternative earnings, C, i-E, + A,, are less than the domestic resources consumed by the expatriates to be replaced. They imply that educational resources are best allocated to upper secondary levels in the Ivory Coast, University education-at least for management training- has DRC coefficients less ihan one at lower discount rates but the coefficients are not nearly as favorable as ihose estimated for supervisors and technicians. Office labor training is marginally acceptable at the current exchange rate and at discount rates lower than seventeen percent. It is a marginal actil:rty at best when the occupation-education relationship is upgraded (hypothesis 2). The allocation of Ivorian educational financing in the 1960s and early 1970s -reflects an Ivorian estimation of costs and benefits which clDseiy corresponds to our estimated DRCs. Clearly, our estimates indicate that resources shouli be channeled to secondary schools, rather than to the university. In fact, most Ivcrian resources are directed toward the primary and secondary levels. For 1970, secondary schools received three and onehalf times more Ivorian funding than the university. However, F.ance and other donor countries have a differe,lt conception of educational returns and have divided aid evenly between the university and other forms of education. 4.3. Priuate and social returns to education As a crosscheck on our DRC results, we have rlso calculated social cost benefit ratios and social internal rates of return using the same discount “Pursell

and Monson (1975).

T.D. Monson and G.G. PurselI, Indigenizotion programs

138

rates for the cost-benefit calculations and assuming ratios between the shadow and official exchange rates of 1.0, ml.15 and 1.30.3s As would be expected, these results correspond quite closely to the DRC results reported above. We also allowed for the fact that the structure of educational finance in the Ivory Coast is such that individuals bear little, if any, of the direct training costs C, and FX,. Consequently, private cost-benefit ratios are at least fifty percent lower than social cost-benefit ratios. These differences suggest that a case can be made for requiring individuals enrolled in all levels of education, but especially those in upper secondary and university programs, to reimburse the state for a portion of direct educational costs. This conclusion is especially true at the university level where students now only pay modest direct costs (for subsidized food and housing facilities), and may receive sizeable scholarships (equivalent to US!!1164 monthly in 1975).34 5. Summary

In this paper, we have applied DRC analysis in a novel fashion to evaluate educational programs for indigenization purposes. Subject to our caveat regarding its marginal nature, this treatment could be applied to a wide range of LDCs which utilize imported skilled labor. It complements existing DRC studies of other economic activities as well as more conventional approaches to the analysis of educational costs and benefits. For the Ivory Coast, our results confirm that resource allocation to educatic;n and, in particular, to upper secondary education is warranted. Lower secondary education is useful in so far as it performs a conduit function for higher levels of training. The importance of university education will probably increase as the occupational-educational structure is upgraded through technological development. Finally, some empirical support is given to the argument that a system of tuition ch.arges should be implemented in order to reduce the disparity between social ;and private returns to education. j31gnoring

the discount

S(_‘BT, =

factor, the social cost-benefit

ratio is defined as:

R f(C,+E,)+ i A,+e’.’,:,Fk, ( > WI+1 ____ __ _.- -_... - . ._ _‘-- “._.~ \ C D,+e i (S,+M,),i. ( m+l III+1

The notation IS the same as that of section 2 above with the exception that e represents the ratio between the shadow and official exchange rate. The private cost-benefit ratio is obtained by removing the variables e, C, and F-Y’, from SCBT and adding an element T, to the denominator representing the indirect tax component of the re&zecl expatriate’s income. Social cost-benefit ratios were always less th.ln olrle for supervisors and technicians at all discount rates. For office labor and management, they were less than one for interest rates under seventeen percent. All private cost-benefit ratios we;‘e less than one. 34Various loan programs would need to be implemented in order to overcome capital market imperfections and to ensure the success of such a proposal.

TB.

AGW’A~W kd&d~

Monson and G.G. PurseII, Indigenization p~grarns

139

lt~tcrprofessiodnelle des Employeurs de la CBte d’ivoire, 1973, Consommation U.trop&ene (Abidjan, Ivory Coast). fi&b$a\ &itntir and Lance ‘Taylor, 1971, Foreign exchange shadow prices: A critical review of CWRrlt theories, Quarterly Journal of Economics, May. l@&5+t~ B&t and Daniel M. Schydlowsky, 1972, Domestic resource costs and effective p&WitrQ once again, Journal of Political Economy 80, 63-69. &11&%, B@l&, 1974, EPimating the shadow price of foreign exchange in project appraisal, Wood Bmornic Papers 26, July. l%xfllo, .Michael, 1972, Domestic resource costs and effective protection: Clarification and srathesis, jourrtal of Political Ecnaomy 80, 16-33. &obe4& PaNI and Yves Cologuegnes, 1973, L’Aide aux pays en voie de developpement (Faculte d&s%$# Economiques, Universiti: d’Abidjan, Abidjan, Ivory Coast). t%‘t%~, Louis (with contributions by Rene Vaurs and Penny Davis), 1977, Interdependence in &~~ing: Multilevel programming studies of the Ivory Coast, Ch;. 4 and 11 (Worlc! Bank, V’&hingtap, DC, and Johns Hopkins University Press, Baltimore, MD). &Wg&, Atloe 5, 1972, Evaluating restrictionist trade regimes: Theory and measurement, F0uhPdl of PolitjCal Economy 80,48-62. Cal, !&&ak, t974, Methods of project analysis: A review, World Bank Occasional Staff Papers, 1%0,36 U$UIS Hopkins University Press, Baltimore, MD). rM?$$%& ‘f&f& D. and Garry Pursell, 1976, An evaluation of expatriate labor replacement in the Iv?fy C&Q& CFED Discussion Paper Series, no. 49 (Center for Research on Economic C~@+~~prb@rt’t, Arm Arbor, MI). l%+&l, @Roy, 1975, Notes un a shallow discount rate for the Ivory Coast, Project Working Pap4r &B&D,, Washington, DC) mimeo. l%ks& Qarry aad Terry D. Monson, 1975. Structure des incitations et des colits reels dans I’b&trie, ch. III in: Incitations et coClts reels en CBte d’lvoire (I.B.R.D., Washington, DC). de developpement de RlF;rUbliype ds C&e d’lvoire, 1969, Ministere du Plan, Programme /‘&$&on et de la formation, 1971-75 (Abidjan, Ivory Coast). de developpement R&flbZiQf+cae We d’lvoire, 1971, Minis&e du Pl;tn. Plan quinquennial ~@&%i~~Je, soda1 et culturel, 1971-75 (Abidjan, Ivory Coast). P@$b\iQte de Cot@ d’Ivoire, 1973, Ministere du Plan, Le secteur prive et para-public en C&i: d’!tn& 1921: R&tats de l’enquite main d’oeuvre, 4 vol. (Abidjan, Ivory Coast). P&lrbligRe cje CBte d’Ivoirc, 1974, Mnusttre des Finances et de TEconomie, Balance des l@t&%ts ite I: k+ubl~que de. C6te d’lvoire 1972 (Abidjan, Ivory Coast). P&#$~~ de Cot@ d’Ivotre, varrous years, Budget general de fonctionnement (Abidjan, Ivory . $@flblit$rJe 4s Rraace, Secretariat d’Etat pour les Affaires Etrangeres, 1970. Structures et +&t.is&i~ae~ de l’easeignement pour 14 etats Africains e: Malagaches, 2 vol. (Paris). SI$RF, lY?t, _l_‘i.‘imsgebase 19’10: L’emploi, dosai,ers pour le long terme, elaboration d‘un acmes& lekrcntial ‘LUdtvelopp.:ment Ivoirien (&t-is). St KY&$,&, Pi&, 1975, Incitations et cc% reels dam I’agriculture, Ch. II in: Incitations et cotits %I% %RC&t%d’lvoire (I.B.R.D., Washington, DC) l--SO, mimeo. $-&r&k, katsr aad Robert E. Lucas, 1972, The American distribution of income: A structural f+r&l%h, A study prepared for the Joint Economic Committee, 92nd Congress, 2nd Session. &J& I? (%‘ashiagton, DC).