Current Issues in Project Analysis for Development
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Current Issues in Project Analysis for Development

Edited by John Weiss and David Potts

This major work brings together authors with experience of both academic and operational project work to focus on issues such as the shadow exchange rate, the shadow wage, the discount rate and assessment of poverty impact and risk, as well as problems relating to specific sectors covering environmental projects, transport, education and health. There are also general chapters on the experience of semi-input–output-based estimation of shadow prices and the relevance of shadow pricing techniques to the context of developed economies in the EU. An overview by the editors sets out the evolution of the literature and highlights current issues. The general conclusion is that project analysis techniques remain relevant, albeit within a very different development context to that in which they were originally envisaged to be applied.
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Chapter 3: Shadow Wages Rates in a Changing World

David Potts


3. Shadow wage rates in a changing world David Potts INTRODUCTION This chapter outlines the issues involved in determining the shadow wage rate for different categories of labour. It starts off by looking at the surplus labour and migration theories that influenced early debates about the need to use a shadow wage rate and the kind of values that might be expected. It then looks in more detail at the factors that might determine the shadow wage for unskilled labour and the ways in which these may be taken into account, focusing on literature relating to the developing country context. Next it considers the different categorisation of labour and the factors that might influence the shadow wage rate in different regions and for different skill levels. Finally it looks at the potential use of shadow wage rates in the context of countries not normally described as ‘developing’ and asks whether the methods applied in developing countries are equally applicable in such contexts. ORIGINS OF THE SHADOW WAGE CONCEPT: SURPLUS LABOUR THEORIES The case for using a shadow wage rate can be traced back to the dual economy models of the 1950s and in particular to the work of W. Arthur Lewis (1954), who postulated the existence of ‘unlimited supplies of labour’ in some countries due to extensive rural underemployment. Lewis attempted to explain the coexistence of underemployment in the rural areas and relatively high levels of wages for unskilled workers in the urban areas on the basis that the marginal...

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