Catalog

	Table of Contents
p. 2 of 74 BACK | NEXT I. Introduction II. Background III. The Economic Rationale of A Project IV. Macroeconomic and Sectoral Context V. An Integrated Approach To Economic Analysis VI. Identification and Quantification of Costs and Benefits VII. Valuation of Economic Costs and Benefits VIII. Large Projects, Linkages, and National Affordability IX. Least-Cost and Cost-Effective Analysis X. Investment Criteria: Economic Viability XI. Discount Rate XII. Uncertainty: Sensitivity and Risk Analysis XIII. Sustainability of Project Effects XIV. Distribution of Project Effects XV. Projects and Policies XVI. Appendices XVII. Others

Guidelines for the Economic Analysis of Projects

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II. Background

3. Several factors have combined in recent years to change the context within which Bank lending operations occur. The Report of the Task Force on Improving Project Quality (1994) recommended that the Banks guidelines and procedures for the economic analysis of projects be reviewed with the aim of strengthening project quality. At the same time, the Medium-Term Strategic Framework adopted by the Bank requires greater emphasis to be placed on social and environmental concerns. This has resulted in the need to widen the scope of economic analysis to account more fully for nonmarket benefits and costs.

4. Other factors include evolving changes in the theory and practice of development, and the role of the public sector; the related shift toward stronger support for environmental sustainability; and greater emphasis on organizational and institutional change and provision of social, legal, and institutional infrastructure to facilitate private economic activity.

5. The application of economic logic to the identification of appropriate investment operations and to the economic analysis of such projects derives from the prevailing views and theories on economic development, and on the most effective role for government in the economy. During the 1980s and 1990s, both of these bodies of theory experienced major and continuing change. Development is now seen less as a process of transferring physical capital, and more as assisting in human capital and institutional development. In economic management, government is seen as playing more of a facilitative, rather than a command and control, role. In particular, direct investment in government activities in industry, finance, and agriculture takes a decreasing share of the Banks loan portfolio. Instead, Bank investment in the form of loans and credits to these sectors is increasingly directed at facilitating private sector development.

6. The view that has emerged is that the facilitative role of government includes four primary sets of activities:

• providing the institutional framework within which market-based transactions can expand and appropriate government investments can be rationally made, such as, political stability, commercial codes, legal systems, budgeting and control systems, consumer protection, and respect for property;
• provision of an economic environment in which private investment can expand efficiently and equitably, for example, price and exchange rate stability, neutrality between sectors, access to global financial and capital markets, and access to export and import markets;
• development and maintenance of human capital and technological capability, for instance, an educated and healthy workforce, access to technology, and ability to adopt and adapt; and
• provision and maintenance of economic and social infrastructure, such as transport, communications, and health and welfare systems.

7. At the same time, project planning and project economics are now affected by environmental issues; various aspects of sustainability, including those of a financial, environmental, economic, social, and political nature; equitability; participation; and governance, including the role of women and nongovernment organizations in development. Economic analysis must facilitate the analysis of these additional issues whilst maintaining the basic focus on economic viability.

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