Sethaput Suthiwart-Narueput

Reviving project appraisal at the World Bank

The authors focus on two broad questions: 1) what is the proper role for project evaluation in todays world, where countries have reduced major economic distortions and are reconsidering the role of the state? and 2) besides project evaluation, how else can economic analysis ensure high-quality projects? The authors argue for a shift in the emphasis of project evaluation away from a concern with precise rate of return calculations to a broader examination of the rationale for public provision. In this context, three areas critical for proper project appraisal are the counterfactual private sector supply response, the fiscal impact, and the fungibility of lending. (1) Counterfactual private sector supply response. Any type of cost-benefit analysis - be it in the public or the private sector - requires the project evaluator to specify the counterfactual: what would the world have looked like in the absence of the project? Since World Bank projects are public sector projects, the relevant counterfactual involves assessing what the private sector would have otherwise provided, and the relevant magnitude for evaluation purposes is the net contribution of the public project. Failure to consider explicitly the private sector counterfactual during evaluation biases the lending mix of the Bank away from projects with strong public good characteristics toward projects with private good characteristics. (2) Fiscal impact. Applying the private sector couterfactual would lead the Bank to undertake projects with a reasonable case for public intervention, such as basic infrastructure, primary education, and rural health. These projects typically share the characteristics that costs are borne by the public sector while benefits are enjoyed by the private sector. But in the absence of nondistortionary, lump sum taxes, there is likely to be a positive marginal cost of taxation and a premium on public income. Since the Bank has not used such a premium and treats public costs and private benefits equally, it has systematically overestimated the net benefits of these projects. (3) Fungibility of lending. Project-specific appraisal can at best assess only the rate of return and the acceptability of the project being appraised. This limitation is problematic because the project might have been undertaken even without Bank financing. If that is the case, the Bank is actually financing some other project - one not subject to appraisal by the Bank - that would not have been in the investment program without Bank financing. This problem arises because financial resources are fungible to some extent. One way to alleviate this concern is to conduct public expenditure reviews before embarking on the appraisal and financing of specific projects. Furthermore, financing a portion of the governments sectoral investment program may be more effective than project-specific lending.

The Whys and Why Nots of Export Taxation

The authors review the arguments for taxing imports, considering two cases: one in which a country has market power in the export commodity, and one in which it does not. They conclude that for countries having market share there are strong analytical and practical arguments for an export tax. While the optimal level of the export tax may depend on the strategic behavior of other exporting and importing countries, on such practical issues as long-run market power, on whether smuggling exists, or on general equilibrium effects, these factors do not reverse the desirability of export taxation for countries with market share. Neither do alternative instruments such as export quotas and cartels, which could potentially yield a better outcome, negate this conclusion. The authors also find that countries without market share are not similarly situated to those with it. To the contrary, for most small, open economies that do not have market power in export markets, taxing imports is harmful not only to imports but also to general economic welfare and growth. Export taxes generate serious economic distortions and disincentives and are a poor instrument for encouraging higher-value-added activities. And in revenue generation, they are likely to be dominated by other tax instruments, and should be viewed as a transitional measure at best, to be replaced as soon as tax administration improves.

The economic analysis of sector investment programs

This paper discusses the economic analysis of sector investment or expenditure programs, collectively referred to as SIPS. There are many different views as to what actually constitutes a SIP. For the purposes of this paper, the essential feature of a SIP that is focused on is that the Government, World Bank, and other donors jointly finance an agreed-upon forward sectoral expenditure program. A SIP may also have many different objectives. Again, for the purposes of this paper, a critical objective of a SIP is to improve the development impact of public expenditures in the sector. Suthiwart-Narueput focuses on how to use economic analysis to help sector investment programs improve the development impact of public spending. He uses Kenya as a case study. The paper is organized as follows. Section 2 proposes a methodology for the economic analysis of SIPS which emphasizes evaluating the sectoral expenditure program based on principles of public expenditure analysis. Particular emphasis is placed on identifying the rationale for public intervention and improving cost-recovery. Section 3 discusses alternative methodologies, e.g., cost-benefit analysis. Section 4 applies the proposed methodology to the Kenya Agricultural SIP. Section 5 concludes.

Preferential Trading and Real Wages

Following the Stolper-Samuelson type of logic, the general impression is that freeing up trade, whether preferentially as in the North American Free Trade Agreement (NAFTA) or on a nondiscriminatory basis as in the Uruguay Round, must lower real wages in one set of countries and raise them in the other set of countries. An increase in the real wage in all countries as a result of freeing up of trade either relies on gains via an improvement in the terms of trade or requires special assumptions such as increasing returns, complete specialization or asymmetries in production technology. This paper shows that even within a standard three-country, three-good, small-union model, preferential trade liberalization can lead to increased real wages in both partner countries without necessarily relying on terms-of-trade improvements, increasing returns, complete specialization, or asymmetries in production technology. Copyright 1998 by Blackwell Publishing Ltd.

Regional integration and the environment

This paper explores the interaction between regional integration and the environment in a formal three-country, three-good model which incorporates pollution. Our main findings are: (1) whether preferential trading improves welfare depends critically on the level of domestic pollution charge extant and the direction of trade; (2) the introduction of preferential trading may lower welfare even when the pollution policy is chosen optimally; and (3) coordination of environmental policies only makes sense when pollution is transnational.