Did you know that, when you go shopping, you are acting as a Budget-Constrained Utility Maximizer? Or, in common parlance, you are trying to maximize your happiness, welfare or living standard with the cash you have in your pocket.
Should we act any differently as groups of individuals, in other words, trying to maximize collective welfare using available funds? Barring some exceptions, the answer for most public programs is that we should indeed try to maximize the welfare returns based on a limited budget. So in the public sphere as well as the private, we need to frame the discourse in terms of what returns we are getting from our spending, or what is the “bang for the buck.”
Of course, trying to maximize collective welfare from tax dollars has many challenges. How do you define welfare? How do you practically measure it? How do you deal with distributional issues, when programs benefit some but not others? While these challenges are undeniably present, we should not however avoid trying to compare costs with returns to inform key public decisions.
In a previous blog, I cited a study that claims the health and time-loss impacts of inadequate water and sanitation are valued at least US$ 260 billion per year, the equivalent of 1.5% of the combined GDP of developing countries. I went on to highlight new evidence that indicates sanitation interventions generate an economic return of 5.5 times (globally) with many country case studies demonstrating simple sanitation solutions in rural areas have economic returns of upward of 7 times. By any investment standard, these promised returns are gigantic. However, the catch is that a large share of these returns are social and long-term gains for the beneficiary, but not necessarily cash in the pocket in the very short-term, which would help them pay for the investment.
On the other hand, these quoted returns are underestimates. While the cost side of the equation is generally complete, the benefits are significantly undervalued, as there are many environmental and larger-scale, economy-wide effects that are not captured. A new study, being launched at World Water Week in Stockholm in September 2013, attempts to monetize broader benefits of reducing surface freshwater pollution in West Java, Indonesia. Furthermore, some of the key reasons why people might invest in a toilet, such as privacy, dignity, social status and physical security, are very hard to quantify, let alone monetize.
Hence, decision makers need to be made more aware of the returns to sanitation. And once they are aware and convinced, they need to be able to compare different sanitation options in terms of the relative costs and benefits. If they want to do this, where can they go? If they can only access global studies, or studies from other countries or contexts, they may remain unconvinced of the recommended solution. Ideally then, they will conduct their own welfare analysis, comparing costs and benefits, as part of the regular budgeting and planning processes. But how many of these exercises draw on robust data and utilize appropriate economic methodologies? Probably very few in the developing world (even in the developed world, proper cost-benefit analyses are rarely conducted, compared to the number of resource allocation decisions that are made).
For this reason, the WSP has developed an “Economics Toolkit” – an Excel-based software that enables any decision maker – whether a bank, donor or government – to make simple but evidence-based assessments of the economic impacts of inadequate sanitation, the comparative benefits and costs of interventions, as well as assessing the business case for a private provider to enter the sanitation market. The Toolkit has undergone extensive testing in three countries with the support of five summer interns (see Daniel Zonenschein’s blog from Stanford University), and will be completed by the end of 2013 for wider application (check WSP website). While a tool is not a magic bullet, it will be a major achievement if it gets decision makers at all levels to discuss more openly the key role of improved sanitation in people’s lives, and think rationally (and critically) about the type of sanitation solutions that are locally appropriate, affordable and sustainable.