What is Economic Engineering?
Why Apply Economic Engineering to the Fishery Industry?
To what Type of Fisheries can Economic Engineering be Applied?
What are the Limitations of the Approach Proposed?
How to Use this Manual?
Economic engineering is a specialized field, incorporating a knowledge of engineering and basic micro-economics. Its main function is to facilitate decision-making based on the economic comparison of different technological alternatives for investment. Its techniques, ranging from use of 'standard spreadsheets for evaluating cash flow to more elaborate methods such as risk analysis, can be applied to personal investments and to industrial enterprises.
The authors followed the approach of many Food Technology and Chemical Engineering Schools of American Universities, that normally offer one or more courses, usually at MSc level, where micro-economic analysis of food or chemical industries is included. They freely adapted this approach to the characteristics and perceived needs of the fishery industry, and particularly of developing countries.
In many developing countries there are real difficulties with practical understanding and application of key concepts like depreciation, financing and cost formation, particularly when dealing with small-and medium-scale fishery industry, including artisanal fish processing. This situation certainly hinders the possibility of self-sustained activities, very often prevents the introduction of necessary technical improvements and contributes to the wastage of human and financial resources. Certainly, fish technologists working in production, extension or assisting in the development of investment projects, should be prepared to assist.
Fish technologists involved in designing and operating fish plants are frequently faced with the following questions:
Which design, among the various investment alternatives, should be selected?
Should the equipment currently being used be replaced by new equipment? And if so, how soon?
Are the expected benefits sufficient to justify investment?
Is a conservative and more secure project preferable to a more risky one that could bring greater benefits?
These questions have elements in common: 1) each involves a choice between technical options; and 2) all involve economic considerations. Other less evident factors are the need for sufficient data, and awareness of the technological restrictions in order to define the problem, identify possible solutions and determine the best. Consequently, it must be ensured that the design, operation, and economic evaluation form a cohesive whole.
Finally, the term "investment" is used in this manual in a broad context; it can be aimed at a large plant, a processing line, a change in a processing line, development of a new product, the decision between two or more different technologies to obtain the same product, at the analysis of a single operation (e.g., icing fish), the introduction of a new quality control system, etc. At the same time, the term "investment is intended independently of the level of investment and the source of financing.
The fishery industry is involved in many activities covering all aspects of the business spectrum: buying inputs, applying for loans, paying for labour, planning for the future and making profits. These exist throughout a fisheries system: in capture, processing and marketing. Also, as in any industry, artisanal or industrial fisheries have characteristics which must be identified in order to better understand the fishery industry overall.
A business is a project which has different objectives. In principle, the objectives can be divided between those which must be fulfilled to assure complete self-sustainability, and those which are important, but not essential to such an end.
An essential objective, from an economic viewpoint, is to be economically self-sustained, i.e., to pay back the resources invested and generate a profit within a reasonable time. Accomplishment of this objective is a necessary condition because without it the project will not be viable, and will fail when the initial capital finishes, or when the subsidies cease. Most of the manual is devoted to the analysis of this objective. However, it is not forgotten that in the case of the fishery industry there are other necessary conditions for self-sustainability.
The most obvious is the need for a rational management of fishery and environmental resources. The relationship between the whole economics of a fishery and the management of the resources linked to it, is reviewed in section 5.5. Fish as food, the ultimate objective of the fishery industry, should also be safe and of the quality required by consumers and public regulations. This is also a necessary condition, interacting with the economics of a company; and as such is analysed in Chapter 8.
Neither the economic soundness of a project nor its actual operation is in itself a sufficient condition for investment; they are, however, both necessary (sine qua non) conditions. In this context, economic engineering applied to the fishery industry appears to be a suitable contribution to assist the management and sustainability of the sector, particularly in developing countries.
The world's fisheries have a common characteristic; that is, the existence of industrial fisheries alongside artisanal fisheries. Developing countries, to whom this manual is particularly addressed, have both types of fisheries, with a mix and a relative importance, that should be studied case-by-case, and in some countries even region-by-region.
Based on general historical considerations (e.g., in Europe), fisheries development means an evolution from the subsistence to artisanal stage, then to the small-scale and finally to the semi-industrial and industrial stages. This development usually implies external investment and/or reinvestment and a redistribution of human resources (for instance, in the development of the industrial fisheries in Uruguay during the 1970s).
Development also means avoiding obsolescence, and keeping abreast of new technologies, procedures, market requirements, etc. A characteristic of the dynamics of sustainable development is the need for an endless chain of techno-economic decisions. In both developed and developing countries static fisheries systems are found (e.g., the "tonnara" in Italy), unchanged and stable for centuries. These issues are not discussed here since many other factors (e.g., culture, politics, employment, tourism) may contribute to them.
Whereas industrial fisheries could be identified according to the technologies utilized and investment, there is no universally-accepted definition of small-scale fisheries. Existing fisheries are classified into several groups: artisanal and industrial or commercial; small and large scale; operating range of vessels (near or far from shore); or types of nets used (Thailand), size of vessels (Indonesia, Philippines) or distance from shore (Hong Kong) or a combination of the three (Malaysia). What one country considers large-scale, is often regarded as small-scale by another. It is generally accepted though, that large-scale fisheries operate in deep waters, whereas small-scale fisheries have limited catch capacity, operate in an adverse socio-economic environment, are confined to a narrow strip of sea and land, and are utilized by a community which has limited options and is dependent on local resources (Panayotou, 1982).
This manual does not make a separate and comparative study of small-scale and industrial fisheries, but attempts to present a consolidated picture of the actual situation.
A global analysis is made of the most important factors in fishery production and processing structures and in the design of associated operations and processes, with particular emphasis on the economic aspects of the fishery industry. Investments in capital goods, the costs of production and their profitability are considered qualitatively and quantitatively. Also, a brief micro-economic analysis of production is included. This analysis, which enables fishery products to be produced with maximum efficiency, can be applied to single production lines, plants or the evaluation of an entire national sector.
Fish consumers are changing attitudes both in developed and developing countries. This has many implications for the fishery industry, in particular the need to compete in markets that require safer sea foods of increasing quality, without great changes in relative prices. A close study and monitoring of safety and quality costs are needed in a way which simple accountancy cannot provide. This type of study and monitoring implies a close interlink between technology and economics. The aim is to achieve safer and better fishery products at lower cost through changes in processes, management, storage and distribution.
Analysis of micro-economics depends on models (and/or ideologies) and is therefore limited in the way that models are limited, or in the way conditions for application of such models do not apply to a given situation. Policies can differ even in countries that refer to the same nominal political system, and thus affect the economic analysis in different ways (e.g., how depreciation is allowed, or how taxation is applied). An in-depth discussion of all the possibilities is outside the scope of this manual, although some aspects are discussed.
As fish is a natural resource and fisheries are deeply linked to the environment, readers could expect an "alternative" micro-economics approach. The authors support the view of Pearce and Turner (1990) that many, but not all, of the environmental and natural resource concerns can be treated and analysed by applying a conventional approach, rather than developing "alternative" micro-economics. Such an approach has the advantage, at least initially, that it will be better understood by public administrators and the industry. Probably, in the near future, most of the quality-of-life and environmental considerations could be incorporated into the micro-economic analysis as costs of non-conformance; this means costs incurred because a specified condition of raw material, product or processing cannot be achieved. Examples of this possible approach are discussed in Chapter 8.
From a strict economic viewpoint, there is no conceptual or theoretical development (e.g., an "existence theorem") that can assure us "that whatever economy we devise will be sustainable ecologically. The only way to be sure of this sustainability is to ensure that economic models have sustainability conditions built into them" (Pearce and Turner, 1990).
In fisheries it is very easy to fall into the discussion "practice vs. theory". As the late Gordon Eddie (1983) wrote, referring to the controversial objectives in capture: "Underlying such situations is the uncomfortable fact that, where fishing is for profit rather than for food, the objectives of the fisherman are not necessarily quite the same, at least in the short term, as the objectives of those who discuss fisheries management in terms of biomass, yield and catch".
Without dismissing the importance of practical knowledge, it is clear that in most fisheries it is not enough to keep business going on a short-term sustainable basis. The main reason is that the horizons of "mid" and "long" terms are nearer than they used to be, as can be seen from the brief historical account presented in section 1. 1. As Dale and Plunkett (1992) comment, proposed quality improvements without clear reference to short-term efficacy, may be taken as a blind act of faith, and opposed to the current mentality of western businessmen and managers.
The authors are aware that the conventional approach used may give the false impression that changes in the fishery industry happen gradually and smoothly. This means in a situation that can be reversed by proper management if proved wrong. Unfortunately, this is not always the case, as can be seen from the recent collapse of shrimp farming in China or overfishing in the Grand Banks. Fishery fate is linked to a biological resource and to consumer preference, changes of an output variable (e.g., landings, profit) may vary gradually against a control variable (e.g., fishing effort), but only up to a point. Once this point has been reached, changes in the output variable are completely disproportionate to or insensible of the changes in the control variable. This situation, relatively common in the physical and biological world, could be interpreted through the "catastrophe" model (or theory) (e.g., Woodcock and Davies, 1982), and seems to apply to fish stock collapses both in the wild and in aquaculture, but it may also be used, for instance, to analyse fish market changes due to perceived lack of safety or quality. The authors have avoided, as much as possible, pure theoretical considerations.
The space devoted to optimization techniques (Chapter 6) may seem relatively limited. Importance of optimization techniques is growing, and will be an essential tool in the near future for most of the fishery industry, but the authors considered that the detailed description of techniques, development of examples and numerical models (optimization depends on the formulation of an objective function) would exceed the scope of the manual. In American universities optimization is usually discussed in a separate course.
Finally, it should be recognized that to run a business means to take risks, since uncertainties cannot be avoided. The manual can help to reduce the number of it uncertainties", particularly those that can be tackled in a rational way. Unfortunately, no book exists that can explain how to eliminate them or how to become a successful entrepreneur.
This publication is intended primarily as a training manual and not as a handbook: it is hoped that interested readers may find it useful. A course, incorporating all this manual, would require about 40-45 hours of lectures, including 10-12 hours of general applied seminars, plus around 45 hours of guided practical work (that in formal courses could be homework). Shorter courses could be organized depending on the previous knowledge of the target group. Some chapters, in particular 5 to 8, could eventually be used separately. For instance chapter 8 could be the basis for a seminar on quality and safety costs.
Readers in general should have a good knowledge of fish technology and basic algebra. Previous knowledge of financial mathematics would be helpful, although not strictly necessary. The mathematics level has been kept to a minimum, except (e.g., in section 7.9 when discussing the influence of inflation on profitability) where there was no alternative to present the topic more simply. The manual could thus be directly used in Fishery Schools (Diploma Courses) as they exist in some African, Asiatic and Caribbean Countries, or in Technical High Schools and Vocational Courses (at tertiary level) in Latin America. It could also serve as a basis for a university level course, although here a more formal treatment would be required (e.g., the inclusion of calculus and statistics and use of appropriate computer software).
A large number of tables and information can be used directly in calculations. There are data that can be updated easily for actual calculations (e.g., cost of machinery, energy and water, taxes, salaries) and data that should be checked in case of doubt (e.g., yield of a given species of fish, productivity of workers sitting or standing in different positions). During the workshops in which this document has been used, the first step of practical work was to find out the actual values of parameters involved in calculations. This is an excellent practical exercise in itself, and can generate information about the actual situation of a country and its fisheries.
People in developed countries (and in a few developing countries) can now have access, through Internet, to computer databases (e.g., national bureau of statistics) in which they can find easily and cheaply some of the information necessary for calculations (e.g., average level of salaries, construction indexes, series of exchange currency rates). Unfortunately, those databases are not available to all, and it is not possible to have information on all countries, in particular developing countries.
Advice to fish technologists in developing countries is to construct little by little their own "database". A small computer would be useful but not essential. A notebook with an index (e.g., following more or less the chapters of this manual) will suffice for most practical purposes (provided the level of information does not become too great). Information could come from personal research (e.g., asking for costs, number of people employed in a plant, actual salaries paid, yield of a given species), from information published officially (e.g., statistics) or through books, journals (e.g., exchange rates) and magazines.
Finally, fish technologists will become aware that there is still need of applied research in a number of subjects, for instance in the areas of energy and water consumption.