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Economic Analysis and Knowledge Agenda: Keeping the World Bank Group at the forefront?

Sudharshan Canagarajah's picture

Over the past sixty years, the World Bank has been at the forefront of economic analysis through the projects and programs it has designed and financed in the developing world. The robust economic analysis that was carried out for many early infrastructure and later social sector projects helped client countries to learn the key cost and benefit parameters that underlay these projects. When I was at university, cost benefit analysis (CBA) publications of World Bank were used to illustrate how to carry out economic analysis of projects, including what factors to consider, the limitations of standard methods, the nuances which need to be considered, and the sensitivity analysis that needed to be carried out to ensure that the analysis is technically robust.

Recently, various reviews of Bank projects have found that economic analysis is now one of the weaker areas of our project design. CBA is often not prioritized; instead it is treated as a low profile activity and even s as an after-thought. The results of CBA are not considered upfront in the project design stage, as they should be. As a result, a few months ago, the World Bank Operations Policy Unit (OPCS) came out with new guidelines and tools to help Bank teams prioritize and implement CBA in a robust manner. In addition to making the guidelines more robust and expansive to cover all types of projects (including  infrastructure, social sector, and institutional reform projects), the new guidelines also helps teams to provide more useful analysis  on the impact of proposed projects on fiscal sustainability and to make the case for bank comparative advantage in any given project. However, we have seen very little progress on the latter two aspects of economic analysis in recently prepared project documents.

In my own experience at the World Bank as a country economist, I have found economic analysis of investments a weak area in most client countries. There is also often a lack of public discourse about the costs and benefits of “transformational” public investment projects. In the context of projects we prepared or public expenditure reviews (PERs) we carried out, country authorities always asked us to help their staff (mainly from Ministries of Finance and Planning) to learn the tools and techniques of robust CBA. I was fortunate that I had excellent country economists in the field offices that were able to help me provide workshops to train client ministry staff. This clearly shows that the client demand for technical assistance in the economic analysis of projects is very high and, as such, we need to do much more to provide this service to our clients. At a time when many of our clients are scaling up public investment in infrastructure without necessarily having the technical capacities within their line ministries to properly assess and choose from alternative investment or to design and evaluate projects, the Bank could play a crucial role in enhancing the capacities of our clients for public investment management analysis, including in the case of providing “Reimbursable Advisory Services” (RAS). It is essential that we are on the cutting edge of CBA knowledge, but we also need to promote more transparency within the client countries about public investment decisions, especially those involving large projects. Feasibility studies of large public investment projects should be made public and  debated by legislatures before the countries approve these projects in their budgets and approve the loans to finance them. Greater transparency and public debate about “transformational” projects will provide some safeguard against not too uncommon “white elephant” projects, which end up costing countries more than they are worth.

As a first step, it is necessary that we, as the WBG, carry out a systematic quantification of the stream of costs and benefits related to a project – both tangible and intangible – and then show how we use that information to carry out a technically robust CBA that estimates Net Present Value (NPVs), Internal Rate of Return (IRRs), Cost Benefit (CB) ratios, least cost options etc. By doing this we will be able to show how the current design is superior to any alternative design or financing modality for the proposed project.

In many low income countries, which now have access to much larger volumes of non-traditional donor “cheaper” aid, the lack of economic analysis of investment and reforms has become a critical area of deficiency in project planning. Client countries do not do rigorous economic analysis nor do the non-traditional donors in many of these projects; greater benefits are “assumed”. WBG can help in this regard. This will also help address the fiscal sustainability aspects of new projects in poverty-stricken IDA countries.

There are three reasons why economic analysis needs to be an integral part of WBG services:

1. Improve project effectiveness on the ground:  As we advise governments to implement new projects and critical reforms, it is essential that WBG does a systematic cost benefit analysis so that we and the client can clearly understand all the elements of costs, benefits, and related risks and constraints. This will reduce the number of problem projects with disbursement delays and implementation problems. It will enable teams to take appropriate actions that will help achieve lasting results on the ground.

2. Meet Client Demand: Many client countries express the desire to build their capacity for economic analysis. During my time as country economist, I found that not only IDA but also IBRD countries wanted to improve their capacity for analysis of investment projects and expenditures. In most cases, the country economics team was able to organize workshops during our missions to meet this demand and provide on the job training for client staff.

3. Develop a niche knowledge product: Economic analysis of projects is a niche knowledge product that can be delivered to clients of all types. However, we can only sell this product if we demonstrate we are good at it. This means doing good economic analysis in the projects we prepare and in policy reforms we help design,  support, and implement. It also means that we must be expeditious; clients will not use WBG services if project planning is to suffer inordinate delays.

Therefore, the WBG needs to quickly invest to enhance the skills of its operational staff to carry out systematic CBA that is “state of the art”. This highlights the need for hands-on training for team leaders and key staff working on investment projects. Without this, we may be slowly losing a comparative advantage we have enjoyed for a very long time.  Can the WBG rise up to the challenge and continue to lead in providing high quality economic analysis?

Comments

Submitted by Theresa Osborne on

What bracing idealism on an important topic I long thought dead. Unfortunately, taken by itself, it would be naive for the Bank to invest in CBA -- economic analysis -- skills without accompanying institutional measures. In the absence of any institutional incentives for objective and careful CBA -- or to connect such analysis to program design and decision-making, any such investment will merely depreciate rapidly, just as it seems to have done in the past. Careful CBA, integrated in the design and decision process, entails thinking skeptically and broadly about causes and "solutions," considering available evidence and context, and projecting benefit streams realistically rather than according to some project proponent's imagined ideal. Taking it seriously also entails an institutional tolerance for "bad" news -- low estimated ERRs -- which does not currently exist. Neither the Bank as an institution nor its staff have any incentive beyond professional integrity (to counter prevailing incentives) to conduct careful and objective CBA. If used for decision-making (rather than as after-dressing) CBA could provide an opportunity to identify key weaknesses in program logic, consider and discuss alternatives with country stakeholders, and improve the chances of successful interventions. Yet there are no mechanisms to help a TTL to ensure that economic analysis is objective. Consultants who depend on TTLs for their next consultancy surely are not going to risk a less than favorable economic analysis. With all the internal review mechanisms that exist, who will ask the TTL's or their managers about the objectivity of the economic analysis? Managers themselves "know" that TTLs lack the time and financial resources in many cases to produce more careful analysis and solutions. The Board is unlikely to seriously question the basis of a high or acceptable ERR, and if it did, would anyone be at the Board meeting to answer their questions? If an intrepid economist, perhaps unaware of the perils to his or her career, estimated returns to be low, how long before they were labeled a "trouble maker"? "too tough"? or "too critical/negative"?

Although the Bank has issued a new policy saying that economic analysis matters and shall be done -- more often, better, and more systematically perhaps than before, there is no discernible discussion of how to do this. There is no explicit discussion (at least in public) connected to the Bank reform agenda on the institutional factors which would support the new policy. Not only are skills lacking, but so is a clear understanding of what it would take to implement the new policy, the links between CBA to the science of delivery, or to better M&E, learning, and results. When a skill or sphere of knowledge is not valued, it depreciates. When it depreciates, the credibility that its practitioners have also does. The importance of the exercise is devalued, and the cycle continues. It is thus difficult to envisage the Bank building capacity elsewhere in a skill set that it has so badly lost. While I am sure that receiving the message that a favored project has low expected returns is frustrating for some staff, it is preferable to wasting public resources, or even worse -- wasting opportunities to provide better, more cost-effective solutions sooner. Ineffective solutions sincerely embraced only delay a more serious search for effective ones, especially if we never learn that they are ineffective. This holds for HD interventions as well, if not more so.

Other institutions have experimented with different institutional arrangements to incentivize improved CBA and CBA-based decision-making. DfID's Chief Economist's office has a serious review function (which encompasses the whole "business case"). Other entities, such as MCC, are still figuring this out with little to no supporting institutional structures as well. Still, all MCC project teams have an economist with an independent reporting line (and ultimately job security) whose job it is to conduct objective CBA and explain the analysis to anyone who might, one day, care.

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