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SCBA also called economic analysis, is a methodology developed for evaluating investment projects from the point of view of the society as a whole. Used primarily for public investment q SCBA aids in evaluating individual projects q Spell out broad national economic objectives q Allocation of resources to various sectors q SCBA is concerned with tactical decision making within the framework of broad strategic choices defined by planning at the macro level.
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Benefits refers to the addition to the flow of national output occurring from a project. Real & Nominal Benefits Direct & Indirect Benefits Tangible & Intangible Benefits
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Project Cost Associated Costs Real & Nominal Costs Primary or Direct Costs Indirect or Secondary Costs
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In SCBA the focus is on the social costs & benefits of the project. These often tend to differ from the monetary costs & benefits of the project. The principles sources of discrepancy are: Market Imperfection Externalities Taxes & Subsidies Concern for Savings Concern for redistribution Merit Wants
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MARKET IMPERFECTION: Market prices reflect social values only under condition of perfect competition which are really realized in developing countries. COMMON SOURCES OF MARKET IMPERFECTION IN DEVELOPING COUNTRY
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Approaches of SCBA
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UNIDO Approach
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3. 4. 5.
Calculation of financial profitability measured at market prices Obtaining the net benefit of the project measured in terms of economic (effective) prices Adjustment for the impact of the project on savings & investment Adjustment for the impact of the project on income distribution Adjustment for the impact of the project on merit goods & demerit goods
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Also referred to as shadow prices Market prices represent shadow prices only under conditions of perfect markets So, shadow prices need to be developed & economic benefit need to be measured in terms of these prices
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Shadow Pricing
Choice of Numeraire l The unit of account in which the value of inputs or outputs is expressed
What unit of currency (domestic or foreign)? Current values or constant values? With reference to which point- present or future? In terms of consumption or investment? With reference to which group?
UNIDO Numeraire: net present consumption in the hands of people at the base level of consumption in the private sector in terms of constant in domestic accounting unit. 5/30/12
Concept of Tradability
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For tradable goods, the international price is a measure of its opportunity cost to the country
Substitute import for domestic production & vice versa Substitute export for domestic consumption & vice versa
Hence, the international price, also referred to as the border price, represent the real value of the good in terms of economic efficiency
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Increase/ decrease of Consumer consumption Willingness to pay Increase/ Decrease of Cost of production production Increase / Decrease of Foreign exchange export / import value
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Non tradable input & outputs: When import price is greater than its domestic cost of production & export price is less than its domestic cost of production. Tradable inputs & outputs Externalities
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Externalities
Characteristics
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It is not deliberately created by the project sponsor but is an incidental outcome of legitimate economic activity It is beyond the control of the persons who are affected by it, for better or for worse It is not traded in the market
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Externalities
Examples of Beneficial External Effect: l An oil company drilling in its own fields may generate improve the transport system in that area l The approach roads built by a company may improve the transport system in that area l The training program of a firm may upgrade the skills of its workers thereby enhancing their earning power
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Externalities
Can be measured by indirect means: l What the neighboring oil fields would have spent to obtain the information l The value of better transport may be estimated in terms of increased activities & benefits derived from these l Benefit from the training program may be estimated in terms of the increased earning power of workers
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A factory may cause environmental pollution & people living adjacent to it may be exposed to health hazards Airport in a certain area may raise noise level considerably in the neighborhood A highway may cut a farmers holding in two adversely affecting his physical output
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Difference between the shadow price & the market price of each input or output
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Can be determined directly by the planner For different income groups relative weights can be assigned Using elasticity of marginal utility of income wi=(b/Ci)n
Where Wi = Weight attached to income at Ci level b= base level of income that has a weight of I n = elasticity of the marginal utility of income
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Adjusting for the difference between social value & economic value
Estimate the economic value Calculate the adjustment factor as the difference between the ratio of social value to economic utility Multiply the economic value by the adjustment factor to obtain the adjustment Add the adjustment to the net present value of the project
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