Current Issues in Project Analysis for Development

Current Issues in Project Analysis for Development

Elgar original reference

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.

Chapter 1: Editors’ Introduction

David Potts and John Weiss

Subjects: development studies, development economics, economics and finance, development economics


David Potts and John Weiss UNDERLYING THEORY Project cost–benefit analysis (CBA) in the context of developing countries has its practical roots in the work on water resource planning in the US in the 1930s and its theoretical foundation in the new welfare economics of the 1940s (Little, 1950).1 The key feature is the insight that in any economy ‘social value’ in the sense of the contribution of any item to social welfare need not be represented by an observable market price – either because real world features of markets depart from competitive optima or because a market does not exist for the item concerned. In this framework holding everything else constant, the social value (P) for item i becomes: Pi 5 dW/dQi (1.1) where W is a measure of welfare, Q is output quantity and d denotes a small change. Social values in this sense have been variously termed shadow prices, economic prices or accounting prices to reflect their unobservable nature. In this chapter we use the term ‘shadow prices’ although other chapters in the book sometimes use the other terms. Social welfare itself needs defining. From its origins in welfare economics most project economic analysis takes as its starting point the individualistic social welfare function where total social welfare is the aggregation of individual preferences. Thus where consumers have access to more goods, their willingness to pay to obtain them defines social value.2 Two exceptions to this rule have been incorporated into the literature although they are rarely...