Control System Modeling for Investment Planning

Abstract

One of the very old debates in the areas of investment planning for development concerns the allocation of resources between the agricultural and the industrial sectors. The traditional argument, as an offshoot from the Mahalanobis-Feldman model (Mahalanobis, 1953; Feldman, 1929, 1964) was that for the better rate of growth of the national economy more should be invested in the capital-goods-producing sectors. Our purpose here is to examine that argument by applying stochastic optimal control techniques in a two-sector, macro-econometric model for India. The two sectors are the modern industrial sector and the traditional agricultural sector. We will try to examine what should be the appropriate allocation of investment between these two sectors over the first 20 years of planning (from 1951 to 1971) in order to attain the target rate of growth of the national economy (this is a much-revised version of Basu & Lazaridis, 1980 using the method elaborated in Basu & Lazaridis, 1983, 1984, 1986).