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Submitted by Jordan Z. Schwartz on
Thank you for the good post and the request for clarification! We differentiate between the benefit-cost analysis (also known as economic rate of return analysis) during project appraisal and the Impact Evaluation of projects. There are two main differences: 1) Future versus Past: Calculating the Economic Benfit-Cost Ratio of a potential project is a forward-looking assessment that estimates the economic returns that a particular investment might generate under a given social discount rate. It looks to the future and is built upon assumptions and forecasts about revenues and costs as well as external benefits (such as productivity gains or health improvements) which it attempts to value. Impact Evaluation, by contrast, is the measurement of the economic benefits that a real investment or policy intervention has achieved. It looks backwards, rather than foreward. 2) The second difference is methodological. For economic valuation during project appraisla, the IDB book that you reference is one excellent resource among many on the topic that international financial institutions and aid agencies have published. You can Google any sector (transport, water, energy, telecom, etc.) and "project appraisal" or "benefit-cost analysis" or "EIRR" and find a wide range of World Bank, regional development bank, OECD and donor agency publications on the mechanics of conducting this sort of analysis. For Impact Evaluation, the methodology is quite different. It grows out of epidemeology and laboratory work where there is a clear counterfactual, a control group and a study group, and randomization of the populations under study. This is why it has been hard to apply to infrastructure where the investments are large, lumpy and carefully pre-selected. How do you randomize a highway? Still, we are experimenting using difference-in-difference and geo-spatial information to find natural breaches in time or investment so as to proxy a counterfactual and the literature is growing slowly but steadily. A colleage in the Bank's research dept., David McKenzie, wrote a great blog on the topic with lots of references. Here is the link: