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Estimation of Economic Opportunity Cost of Capital: An Operational Guide for Mozambique

Author

Listed:
  • Abdallah Othman

    (Cambridge Resources International Inc.)

  • Glenn P. Jenkins

    (Department of Economics, Queens University, Kingston, Ontario, Canada, K7L3N6 and Cambridge Resources International Inc.)

  • Mikhail Miklyaev

    (Department of Economics, Queens University, Kingston, Ontario, Canada, K7L3N6 and Cambridge Resources International Inc.)

Abstract

In this paper, an analytical framework and a practical approach are developed to measure the economic opportunity cost of capital (EOCK). This national parameter is an essential determinant for practical application to the economic appraisal of investment projects in a consistent manner for a country. An application of the model is carried out for Mozambique since Mozambique is a small open economy and is also integrated into the global capital market. Estimate of the EOCK is based on the hypothesis that when funds are raised in the capital market to finance any investment project, those funds are likely to come from displaced investment, newly stimulated domestic savings, and newly stimulated foreign capital inflows. It can then be estimated as a weighted average of the opportunity cost of each of the three alternative sources of funds. The EOCK is the most appropriate rate used to discount the economic benefits and costs of a project to see if the project is economically viable for society as a whole.

Suggested Citation

  • Abdallah Othman & Glenn P. Jenkins & Mikhail Miklyaev, 2022. "Estimation of Economic Opportunity Cost of Capital: An Operational Guide for Mozambique," Development Discussion Papers 2022-04, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:4582
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    References listed on IDEAS

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    1. Marchand, Maurice & Pestieau, Pierre, 1984. "Discount rates and shadow prices for public investment," Journal of Public Economics, Elsevier, vol. 24(2), pages 153-169, July.
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    4. Chun-Yan Kuo & Glenn Jenkins, 2007. "The Economic Opportunity Cost Of Capital For Canada - An Empirical Update," Working Paper 1133, Economics Department, Queen's University.
    5. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    6. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
    7. World Bank, 2015. "World Development Indicators 2015," World Bank Publications - Books, The World Bank Group, number 21634, December.
    8. Harberger, Arnold C & Wisecarver, Daniel L, 1977. "Private and Social Rates of Return to Capital in Uruguay," Economic Development and Cultural Change, University of Chicago Press, vol. 25(3), pages 411-445, April.
    9. Edwards, Sebastian, 1986. "Country risk, foreign borrowing, and the social discount rate in an open developing economy," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages 79-96, March.
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    More about this item

    Keywords

    Capital Market; Discount Rate; Investment Funds; Investment Projects; Economic Growth; Mozambique;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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