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    This blog highlights effective ideas in the fight against poverty and exclusion, and analyzes the impact of development projects in Latin America and the Caribbean.
  • The cost of inaction

    6
    Nov
    2012

    By

    The Cost of Inaction, Case Studies from Rwanda and Angola I just finished reading The Cost of Inaction, Case Studies from Rwanda and Angola by Sudhir Anand and others. T

    he Foreword, by Amartya Sen, is worth the whole price-tag. According to Professor Sen this is a far-reaching book that goes well beyond the two case studies and its “modest title” and provides

    a good occasion to think about some foundational issues in the evaluation of public policy. 

    For me, an economist that works primarily in Cost Benefit topics, it is refreshing that Professor Sen (re)turns to Cost Benefit Analysis to illustrate these issues (interestingly enough as one of his first books was the 1972 UNIDO Guidelines for Project Evaluation).

    And even more interestingly, 40 years ago he raised very similar issues in his seminal article Control Areas and Accounting Prices: An Approach to Economic Evaluation

    In Cost Benefit analysis there are two key issues which are often ignored or treated superficially: the complexity of benefits foregone by not doing something (called opportunity costs), and the bundling of diverse benefits and costs to reach an overall judgment (benefit measurability).

    By not doing a project, one forgoes its potential benefits.  Cost Benefit is intrinsically then about choosing an alternative among many options and one of those options is doing nothing at all, when

    all the things that could have been done instead become potential sources of cost

    But the opportunity cost is not the cost of inaction, but is relevant to understanding it.  When one does nothing, “common sense” tell us that there are no costs to be incurred and no benefits to be harvested. No harm done.

    No harm done?

    Cost of Inaction argues differently, asking what is the harm of doing nothing? What is the opportunity cost of doing nothing, when something could have been done?

    The complications of this approach are significant and according to Sen,

    Sudhir Anand and his colleagues have provided a response of magnificent reach and strength 

    On the second topic, benefit measurability, the issues are no less complex but the ideas are more suggestive and innovative.  The book separates what it calls “constitutive” from “consequential” benefits, the former direct and the latter indirect that stem from intended and unintended consequences.

    Conventional Cost Benefit analysis typically bundles them into a measure derived from applied welfare economics and expressed as a demand curve – observed or elicited.

    This book takes a radical departure from this approach and disputes that it needs to be done at all. If a person prefers cereal and coffee to ham and eggs for breakfast, the decision does not have to be reduced to some common metric.

    Health, education, time savings are all good things and policy choice can be reasoned without necessarily reducing them to their “equivalent money value”. In vintage welfare economics terms,  there is no need to reduce them to a numeraire.

    The question to discuss is this: must we start with getting some numbering system that puts the multidimensional bundles into a common metric and then count [ … ] or scrutinize and decide on the relative merits of the different bundles (and then of course some – Indeed many possible – numerical representations will follow from this)? The preferred alternative bundle would have a higher number in either case [ … ]

    This approach clarifies that decisions are not easy to reach and introduces incentives for more open public discussions on complex challenges with a caveat. Despite that in the two case studies, according to Sen both costs and benefits emerge sharp and clear, in some cases the picture that emerges could be unmanageable baroque.

    Sen concludes:

    If the world is unduly complacent about not doing things that can be easily done, with huge benefits […], the reason cannot be on the intractability of benefits of the neglected actions. […] It would be hard to praise the book too much.

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