Anandarup Ray and Herman G. van der Tak
The World Bank lends for projects that contribute to the development objectives of the borrowing countries—primarily faster economic growth and the alleviation of extreme poverty. The economic analysis of a project assesses its likely impact on the relevant development objectives by comparing the various ways in which the scarce resources required by the project might be used instead. These resources may include different types of labor and skills, land, imported and domestic equipment and materials, and so on. The costs of the project are the forgone benefits which these resources would have produced elsewhere, which must of course be less than the project benefits if the project is to be a sensible one.
Cost-benefit calculations also help to identify the critical parameters of a project. In an agricultural project, for example, the key measures that determine the outcome, and therefore need to be closely examined, might be the yield per hectare, the labor intensity of farm operations, or the expected prices for the project’s output. This identification helps to improve the project design, or at least to indicate the chances of the project having its expected benefits. Trade-offs between different policy objectives are analyzed by testing how a project’s net benefits increase or decrease as, say, the project design is changed to give more benefits to poorer income groups.
The framework for cost-benefit analysis along these lines has been extensively discussed in recent years within and outside the World Bank, resulting basically in two types of improvements. First, some of the old concepts of analysis, such as the shadow exchange rate, have been redefined and in the process made more precise. Second, an attempt has been made to make the framework more relevant to policy objectives in developing countries, stressing the flexibility needed to adapt the analysis to the great diversity of situations to which it is to be applied. This article is concerned especially with this second aspect.