Interrelationship between Shadow Prices, Project Investment and Policy Reforms: An Analytical Framework

Publication | November 1990

Augmenting capital accumulation was considered to be the central challenge for achieving growth in the developing countries in the 1960s and 1970s. Project investment constituted the cutting edge of development. To facilitate rational decision making for public sector investment, a vast literature on project evaluation emerged. Shadow prices defined as the ultimate effect on society's welfare resulting from a change in the net supply of an input or output featured prominently in this literature. A project that showed a profit at these shadow prices made a positive contribution to society's welfare. The debt crisis of the 1980s led to a decline in investment in many developing countries and attention shifted to the importance of macro and microeconomic policies in affecting growth. This shift was reflected in the growing recognition in the 1980s that policies, and not projects, were the cutting edge of development.


  • Foreword
  • Introduction
  • Shadow Prices and Policy Environment: An Overview
  • Analytical Framework for Integrating Shadow Prices and Policies
  • Projects, Shadow Prices and Policies: Some Stylized Cases
  • Shadow Prices in Practice
  • Public Choice Between Project Investment and Policy Reforms
  • Major Research Issues for Implementation
  • Summary and Conclusion

Additional Details

  • Finance sector development

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