Project evaluation and social‐cost benefit analysis in LDCs: Awkward issues for a useful approach∗

This is a slightly revised version of a paper presented to an interdepartmental seminar at the University of Witwatersrand. I wish to thank senior participants for their helpful comments, especially Professor D Botha. Professor A D Reekie and Dr Hazel Suchard.

Abstract

This paper outlines some limitations of social cost‐benefit analysis (CBA) and reviews the advocacy of its use in LDCs. It argues that account should be taken in social CBA of the optimality of imperfect decision‐making and the costs of information gathering and processing. This supports the view that simple may be optimal. It is pointed out that because of informational requirements and institutional factors, the technique may lead to bias against small projects, small countries and to urban bias. Furthermore, in the past the technique has overstressed the (economic) evaluation phase of the project cycle in comparison for instance, to the identification phase. The importance of taking account of environmental spillovers and externalities in LDCs in project evaluation has not been recognized in the past by a number of economic analysts but this is changing. Many criticisms of social CBA appear to be based upon unreasonable expectations about the perfectability of decision‐making. The technique has social value if it ensures that socially unsatisfactory projects are not selected and that those selected are satisfactory, if not optimal.

Notes

This is a slightly revised version of a paper presented to an interdepartmental seminar at the University of Witwatersrand. I wish to thank senior participants for their helpful comments, especially Professor D Botha. Professor A D Reekie and Dr Hazel Suchard.

Professor of Economics, University of Newcastle, 2308, Australia.