Economic Project Evaluation, Part 1

Some Lessons for the 1990s

Abstract

As countries reduce the size and extent of policy-induced distortions in their economies, the proper accounting for such distortions becomes just one among many aspects of economic project evaluation rather than its main purpose. Matters neglected in the past thus assume greater importance, such as the proper treatment of expected future changes in relative prices, and improving our calculation of expected benefits and costs through assigning probabilities to alternative future outcomes. It is also time to recognize the shortcomings of distributional weights (especially weights that decline exponentially with income) for cost-benefit analysis. The alternative schema of “basic needs externalities” is shown to be far less vulnerable. Special topics of interest for future work are: (a) the fact that there is now far less reason than earlier to turn to calculations in terms of border prices (which are often cumbersome and stilted); (b) the fact that the use of time preference rates to discount benefits and costs has vast implications for the analysis of current (in addition to capital) expenditures; (c) the proper accounting for externalities in cases where public-sector projects compete with or even displace similar private-sector operations; and (d) the appropriate ways in which cost-benefit analysis can be adapted in cases where pure economic efficiency is not the sole objective.