Development that Works
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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.
  • Tag: cost-benefit

    Found 6 posts.

    In the long run we are all dead

    By - 31 de May de 2013, 11:02 am


    Discounting future flows is a critical step in Cost Benefit or Cost Effectiveness. Many institutions still use relatively high discount rates, which might not be applicable to projects where benefits-or costs- will happen way in the future in a world of rapidly declining cost of capital. Is it time to reconsider discount rates estimates for development projects, particularly in light of climate change and historically low interest rates?

    If you work in climate change or education interventions, where benefits and costs materialize a long time from now, the choice of a discount rate is of critical importance. The background papers commissioned for the Stern Review concluded that this rate – which they base on the inter-temporal value of an extra unit of consumption (marginal rate of substitution) – is very low (on average 1.4%) and declines over time.

    This approach is in sharp contrast with that typically taken by many governments and international agencies which base their discount rates on a uniform opportunity cost of capital and enforce its use across the board for all of investments. This typically yields discount rates in the 7-14% range which were first estimated in the 1960s.

    But this tension on the estimation of a discount rate goes way back: from Arrow to Feldstein or from Sen to Harberger, the rate – reflecting which constraint was binding – ebbed and flowed, fluctuated and moved. But as economists do have more than two hands, in his classic 1982 article “Discount Rates” J. Stiglitz argued that the rate should vary from project to project, depending on which constraints are binding.

    But this hot debate around the discount rate fizzled in the real world. Read more…

    White elephants

    By - 12 de February de 2013, 6:53 am

    elefantes eng

    John Kay’s column in the Financial Times is always an interesting read. In one of his last columns (ungated here) he pungently questioned the pertinence and value of Cost Benefit Analysis.

    His point: if the London sewerage system had been subject to present-day Cost Benefit rules it would never had been built. The Thames would still be a fetid cesspool and leisure walkers, distracted tourists and Treasury mandarins would not have been able to enjoy the wonderful Embankment views from the Queen’s walk in the South Bank.

    According to Kay, the civil servants of the time (good to remind one-self that the Her Majesty´s civil service is also a Victorian creature) would have been required to analyze the impact of the stench on property values and health, in an era when medicine was still a scary combination of chance, quackery and torture, and when the urban terror that was the 1854 cholera epidemic had only very recently been attributed to polluted waters.

    Even if they had read Jules Dupuit, the French engineer who is generally considered the father of Cost Benefit analysis,

    Their estimates would have been completely wrong and irrelevant anyway. The salient fact is that London could never have become a great business and financial capital if its residents felt an urge to vomit every time they went outdoors.

    Although (economists always have two hands)

    It is perfectly proper to demand a detailed rationale, and quantification of that rationale when quantification is possible. Specific quantification is often bogus, however, and beside the point; there would have been no modern world without railways or with the great stink.

    Is Kay right?

    No. Read more…

    The cost of inaction

    By - 6 de November de 2012, 6:52 am

    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? Read more…

    The best investment

    By - 25 de October de 2012, 6:00 am

    the economics of child well-being

    A few weeks ago, we published a short blog on the critical importance of early childhood development.  A recent paper by James Heckman and Gabriella Conti explores the economics of child well-being that: Read more…

    3 good examples of the impact of impact evaluations

    By - 19 de July de 2012, 8:16 pm

    examples of impact of impact evaluationsA few weeks ago, I published a blog post on some of the unsettling implications of this paper that suggested that some interventions lose their punch when done by public agencies.

    One of the takeaways was the need to “go up the bureaucratic supply chain” as nicely put by Justin Sandefur in a tweet on the post.

    In other words, the need to jump over the “challenge of implementation” hurdle as Gabriel Demombynes described in his excellent blog.

    Just as Esther Duflo has argued that we need to understand that the environment in which people make decisions is very different for the poor than for the rich, we also need to understand that institutions (in a general sense) are endogenous in impact evaluations.

    Just as we know that most vaccines will not be as effective (and sometimes even harmful) when they are not kept frozen or refrigerated, it is important to acknowledge that many interventions could backfire when incentives differ significantly from the experimental setting.

    Understanding institutional frameworks seems critical if impact is to have any scale.

    So, how do we build that capacity to evaluate impact in challenging institutional settings?

    Let me suggest one direction. Read more…