ECONOMIC ANALYSIS

WHY UNDERTAKE THIS ANALYSIS? :

OCCURRENCE OF MARKET FAILURE;
MONOPOLIES; MERIT/DEMERIT GOODS;

GOVERNMENT FAILURE; DIFFERENCE BETWEEN PRIVATE AND SOCIAL VALUATION OF COSTS AND BENEFITS;

IDENTIFY INTERNAL AND EXTERNAL COSTS AND BENEFITS: ECONOMIC FOCUS.xls

ECONOMIC ANALYSIS (CONTD.) DOES THE PROJECT GENERATE NET BENEFITS FOR THE COUNTRY? VALUING COSTS AND BENEFITS FROM THE NATIONAL PERSPECTIVE; SHADOW-PRICING; RE-CALCULATING PROJECT WORTH

ECONOMIC ANALYSIS (CONTD.) THE NUMERAIRE USED IN MEASURING VALUE; CONVERSION FACTOR V/S THE SHADOW FOREIGN EXCHANGE RATE APPROACH; COMPARING THE RESULTS; RATIONALE FOR CHOOSING THE CONVERSION FACTOR APPROACH.

SOCIAL PERSPECTIVES
SO THE COUNTRY GAINS; BUT .WHO EXACTLY GAINS? . .THE POOREST OF THE POOR? . . OTHER DISADVANTAGED GROUPS? WOMEN, YOUTHS, RURAL PEOPLE? ?

ECONOMIC COSTS
CONSISTS OF:
PROJECT COSTS (FROM FINANCIAL ANALYSIS) EXTERNAL COSTS ( INCLUDING SYSTEM COSTS) VALUED IN TERMS OF OPPORTUNITY COST: THE NEXT-BEST ALTERNATIVE THAT IS SACRIFICED IN ORDER TO USE RESOURCES FOR THE PROJECT.

ECONOMIC BENEFITS
1. IDENTIFY THE BENEFITS 2. QUANTIFY, IF POSSIBLE 3. IF NOT QUANTIFIABLE EVALUATE IN QUALITATIVE TERMS EG.: THAT THE BENEFITS GO MAINLY TO THE TARGET GROUP DURING IMPLEMENTATION AND DURING OPERATIONS JOBS/PROVISION OF INPUTS, ETC.

CONCEPTS
INCREMENTAL ANALYSIS: ANALYSE THE WITH AND WITHOUT PROJECT SCENARIOS; BASED ON A THOROUGH ANALYSIS OF WHAT IS MOST LIKELY TO OCCUR.

KEY CONCEPTS(CONTD)
SUNK COSTS:
THE PROJECT USES FACILITIES THAT WERE IN EXISTENCE PRIOR TO APPRAISAL OF THE PROJECT INVESTMENTS THAT INFORM THE DECISION ON THE PROJECT THE FACILITIES HAVE NO ALTERNATIVE USE, AND CONSEQUENTLY THEIR USE IN THE PROJECT INVOLVES NO OPPORTUNITY COST.

KEY CONCEPTS (CONTD.)

TRANSFER PAYMENTS: FINANCIAL COSTS THAT REPRESENT A SHIFT IN CLAIM OVER REAL RESOURCES, BUT NOT A CHANGE IN THE AVAILABILITY OF REAL RESOURCES. EG.: TAXES, A/C RECEIVABLES AND PAYABLES.

KEY CONCEPTS (CONTD.)

EXTERNALITIES:
PROJECT COSTS AND/OR BENEFITS THAT GO BEYOND THE BOUNDERIES OF THE PROJECT. NEED TO INTERNALISE THEM.)

KEY CONCEPTS (CONTD.)

CONSUMER SURPLUS:
ARISES WHEN THE PROJECT OUTPUT LEADS TO A REDUCTION IN THE PRICE OF THE OUTPUT. THIS RESULTS IN A SAVING TO CONSUMERS BECAUSE OF THE DIFFERENCE BETWEEN WHAT THEY ARE WILLING TO PAY AND WHAT THEY ACTUALLY PAY. THIS BENEFIT ARISES BECAUSE OF THE PROJECT, BUT IS NOT REFLECTED IN THE PROJECT ACCOUNTS.

KEY CONCEPTS (CONTD.)

VALUATION OF COSTS AND BENEFITS:
BORDER PRICES THE WORLD PRICE NUMERAIRE (LITTLE & MIRRLEES)

KEY CONCEPTS (CONTD.)

TRADED GOODS:
DOMESTIC COST OF PRODN > CIF PRICE (IMPORTS); DOMESTIC COST OF PRODUCTION<FOB PRICE (EXPORTS)

NON-TRADED GOODS:
CIF PRICE>DOM. COST>FOB PRICE

KEY CONCEPTS (CONTD.)

STANDARD CONVERSION FACTORALL DOMESTIC PRICES EXPRESSED IN THEIR WORLD PRICE VALUES, AT OFFICIAL EXCHANGE RATE: SCF =BORDER PRICES/DOM. PRICES

KEY CONCEPTS (CONTD.)

MORE ELABORATELY: SCF= M(cif) + X(fob) divided by M(1+tm-sm) + X(1-tx+sx), Where tm=tax on imports and tx=tax on exports, and sm=subsidy on imports and sx=subsidy on exports.

REFERENCES
J. PRICE GITTINGER: ECONOMIC ANALYSIS OF AGRICULTURAL PROJECTS; WARREN C. BAUM AND STOKES M. TOLBERT: INVESTING IN DEVELOPMENT.

References (contd.)
Little: I. M. D. and Mirrlees, J. A. : Project Appraisal and Planning for the Developing Countries. London: Hinemann Educational Books, 1974. Squires, Lyn, Van der Tak, H.G.: Economic Analysis of Projects, Baltimore, Md.: Johns Hopkins University Press (1975).