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 7: Discounting: Does it Ensure Intergenerational Equity?

Erhun Kula

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


Erhun Kula INTRODUCTION The social rate of discount is one of the most important parameters in economics since it is required in a number of situations. First, it is required for determining the optimal rate of saving or how much a utility-enhancing society should save out of the income that it generates (Ramsey, 1928). Second, it is needed to determine the depletion rate of non-renewable resources, such as fossil fuel deposits. This is sometimes referred to as the cake-eating model (Hotelling, 1931; Solow, 1974). Third, it is required for the calculation of the social opportunity cost of public resources used for a multitude of purposes (Marglin, 1963). Last but not least, in cost– benefit analysis, it is needed for the appraisal of public sector projects. For example, a project may qualify by yielding a positive net present value at a 5 per cent discount rate, but the same project may fail at a 6 per cent rate. There are a number of important issues in the discounting debate such as the distinction between private and social rates of discount, determining the correct magnitude of the social rate, taking account of the interests of both present and future generations and, last but not least, determining the theoretical foundation for the social rate. There have been many contributions and a number of different viewpoints expressed on these issues. It can be argued that in a world of perfect competition a single interest rate can equate the marginal time preference rate of savers...

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