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Reviving project appraisal at the World Bank

Author

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  • Devarajan, Shantayanan
  • Squire, Lyn
  • Suthiwart-Narueput, Sethaput

Abstract

The authors focus on two broad questions: 1) what is the proper role for project evaluation in today's world, where countries have reduced major economic distortions and are reconsidering the role of the state? and 2) besides project evaluation, how else can economic analysis ensure high-quality projects? The authors argue for a shift in the emphasis of project evaluation away from a concern with precise rate of return calculations to a broader examination of the rationale for public provision. In this context, three areas critical for proper project appraisal are the counterfactual private sector supply response, the fiscal impact, and the fungibility of lending. (1) Counterfactual private sector supply response. Any type of cost-benefit analysis - be it in the public or the private sector - requires the project evaluator to specify the counterfactual: what wouldthe world have looked like in the absence of the project? Since World Bank projects are public sector projects, the relevant counterfactual involves assessing what the private sector would have otherwise provided, and the relevant magnitude for evaluation purposes is the net contribution of the public project. Failure to consider explicitly the private sector counterfactual during evaluation biases the lending mix of the Bank away from projects with strong public good characteristics toward projects with private good characteristics. (2) Fiscal impact. Applying the private sector couterfactual would lead the Bank to undertake projects with a reasonable case for public intervention, such as basic infrastructure, primary education, and rural health. These projects typically share the characteristics that costs are borne by the public sector while benefits are enjoyed by the private sector. But in the absence of nondistortionary, lump sum taxes, there is likely to be a positive marginal cost of taxation and a premium on public income. Since the Bank has not used such a premium and treats public costs and private benefits equally, it has systematically overestimated the net benefits of these projects. (3) Fungibility of lending. Project-specific appraisal can at best assess only the rate of return and the acceptability of the project being appraised. This limitation is problematic because the project might have been undertaken even without Bank financing. If that is the case, the Bank is actually financing some other project - one not subject to appraisal by the Bank - that would not have been in the investment program without Bank financing. This problem arises because financial resources are fungible to some extent. One way to alleviate this concern is to conduct public expenditure reviews before embarking on the appraisal and financing of specific projects. Furthermore, financing a portion of the government's sectoral investment program may be more effective than project-specific lending.

Suggested Citation

  • Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1995. "Reviving project appraisal at the World Bank," Policy Research Working Paper Series 1496, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1496
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    References listed on IDEAS

    as
    1. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
    2. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
    3. Kaufmann, Daniel & Wang, Yan, 1995. "Macroeconomic policies and project performance in the social sectors: A model of human capital production and evidence from LDCs," World Development, Elsevier, vol. 23(5), pages 751-765, May.
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    Citations

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    Cited by:

    1. Rama,Martin G., 1997. "Efficient public sector downsizing," Policy Research Working Paper Series 1840, The World Bank.
    2. Kumar, Sanjay, 2002. "Does "Participation" in Common Pool Resource Management Help the Poor? A Social Cost-Benefit Analysis of Joint Forest Management in Jharkhand, India," World Development, Elsevier, vol. 30(5), pages 763-782, May.
    3. James E. Anderson, 1996. "Trade Reform with a Government Budget Constraint," NBER Working Papers 5827, National Bureau of Economic Research, Inc.
    4. Belli, Pedro, 1996. "Is economic analysis of projects still useful?," Policy Research Working Paper Series 1689, The World Bank.
    5. Stefano Paternostro & Anand Rajaram & Erwin R. Tiongson, 2007. "How Does the Composition of Public Spending Matter?," Oxford Development Studies, Taylor & Francis Journals, vol. 35(1), pages 47-82.
    6. Lachler, Ulrich & Aschauer, David Alan, 1998. "Public investment and economic growth in Mexico," Policy Research Working Paper Series 1964, The World Bank.
    7. Shlomo Yitzhaki, 2001. "A Public Finance Approach to Assessing Poverty Alleviation," NBER Working Papers 8062, National Bureau of Economic Research, Inc.
    8. Can Erbil, 2004. "Trade Taxes Are Expensive," International Trade 0409002, University Library of Munich, Germany.

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