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Friday, 22 April 2011

A Poverty of Cost Benefit Analysis

An interesting excerpt from Paul Collier's book The Plundered Planet:

The challenges of implementing a large public investment program go far beyond corruption. First, the program has to be designed : what should be included and what excluded? Both technically and politically this is difficult. Technically, how can the government work out the likely return on different investments and choose the best projects? The conventional answer has to subject projects to the discipline of cost-benefit analysis. The technique has, however, been pretty useless in guiding public investment in low-income countries. For larger projects it misses out on many of the benefits because they accrue across the economy in ways that are immeasurable....

Cost-benefits analysis is also impractical for most of the countries of the bottom billion because it requires the services of a small army of economists. The typical civil service has nowhere near the manpower to undertake such analysis except for a few large projects, and these are precisely the projects that are least suited to the technique. Even where there are sufficient technocrats to perform cost-benefit analysis, their results are only good as their independence. The typical government ministry in the societies of the bottom billion provides little protection for technocrats who cross the pet priorities of a minister. Yet countering politically driven priorities is half the purpose of cost-benefits analysis.
I sort of agree with what he is saying, but this appears to miss some crucial points. 

It seems to me the problem is not that Cost Benefit Analysis is difficult for "large projects" (What is meant by "large" anyway?). It is largely the problem of what is understood by cost benefit analysis (CBA). Collier seems to have in mind not cost benefit analysis but quantification or monetisation of impacts i.e. putting Kwacha signs on the impacts we identify from a given hydro-electric power project or road. That is not actually the purpose of cost benefit analysis. A good CBA seeks to identify the central economic problem; whether intervention is warranted; and the feasibility of the options for intervention. Numbers are important but only as part of the detail in the "story telling" and not because they are the story.  

That brings us to the second dimension. There's a poverty of tools and research, not necessarily people. What do I mean by this? There are a number of economists working say on road / rail projects in Zambia, but they don't have multi-modal models that are able to simulate transport demand or possess a detailed configuration of the transport network. These models are expensive to assemble and require research. So at present even if we want to build a new railway line, we simply don't know how much that would de-congest the main roads and more importantly what economic value that would generate. The same would be necessary if we want to decide whether to build a new satellite town for Lusaka or new prisons. 

There's also the problem of distorted incentives. Foreign funding for many things in our nation has distorted the appraisal system. I say this because many of the donors do not even undertake proper cost benefit analysis. Do we really think for example when DfID spent millions on the Task Force on Plunder it had undertaken a cost benefit analysis? On what basis would it have done that? Now if you are Zambia and are deciding whether to accept DfiD funding for the Task Force would you have undertaken a CBA? No! When the money is not yours you have less of an incentive to undertake CBA because in most cases the "cost" element is zero. Now one might say, well they should still do CBA to see if they would have used the money on something else. Unfortunately, that is not possible because donors usually are inflexible. They make their minds to spend money on something and rarely alter their position. The donors face their own poor incentives for analysis so we end up with no one really in need for serious CBA. It always comes back to whether incentives for evidence exist.

This bring us to the final issue of "foreign influence". Many of the projects undertaken in Zambia actually are forced on the Zambian people one way or another. Whether through political capture or just general ignorance of the public. This is usually done by "investors" and foreign governments (all roads lead back to the campaign finance pot). A good example is the Multi Facility Economic Zones (MFEZs). No clear cost benefit analysis has ever been undertaken on the MFEZs policy. The reason is not that it can't be done but because we are "locked in" through the "partnership deals" we have with the Chinese and others. The State House with its many visits abroad appears to dictate much of what goes on in the country. Investors go straight to State House rather than the ministries. They sign the deal and by the time Zambians ask questions and wait for government to consult them, its too late. This is especially the case for things like land acquisitions. They are political decisions driven by foreign interests at the expense of the Zambian people.

So it seems again that the poverty of economic analysis is also a poverty of our national consciousness.  

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A Poverty of Economic Analysis

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