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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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    3. Sjaastad, Larry A & Wisecarver, Daniel L, 1977. "The Social Cost of Public Finance," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 513-547, June.
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    6. MARCHAND, Maurice & PESTIEAU, Pierre, 1984. "Discount rates and shadow prices for public investment," LIDAM Reprints CORE 586, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    Keywords

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    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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