Ma­jor projects need rig­or­ous eco­nomic analy­ses

New Straits Times - - Business - The writer is the Malaysian In­sti­tute of Eco­nomic Re­search chair­man

days of abun­dant, read­ily avail­able re­sources may, per­haps be over. Thus re­source hus­bandry be­comes im­por­tant. Given this, we need rig­or­ous anal­y­sis of de­ci­sion-mak­ing in pol­icy mat­ters.

Malaysia as a de­vel­op­ing na­tion is be­com­ing in­creas­ingly con­cerned with higher so­cial needs, such as for cleaner en­vi­ron­ment and for bet­ter so­cial gover­nance.

We can ex­pect the so­ci­ety to de­mand a more ef­fi­cient al­lo­ca­tion of re­sources to gen­er­ate greater so­cial re­turns. This be­ing the case, a thor­ough eco­nomic analy­ses of pub­lic poli­cies and pro­grammes is nec­es­sary.

An­a­lyt­i­cal in­stru­ments like the cost ben­e­fit anal­y­sis (CBA) and cost ef­fec­tive­ness anal­y­sis as well as ex-post eval­u­a­tions may need to be used by pol­i­cy­mak­ers to en­sure the most ef­fi­cient al­lo­ca­tion of re­sources for bet­ter re­turns and value for money.

Now that our econ­omy is just ex­pand­ing at be­tween four and five per cent per an­num, much lower than the rates achieved in the 70s and 80s, it has be­come vi­tal us to economise our re­source use to max­imise their so­cial im­pact and add ex­tra mileage to the growth of the econ­omy.

It is more needed now, given the weak pub­lic rev­enue and re­duced ex­port earn­ings from petroleum.

With the gov­ern­ments in­ten­tion to con­cen­trate on the do­mes­tic econ­omy, and in par­tic­u­lar to en­hance lo­cal in­fra­struc­ture, so as to cre­ate long term sources of growth, greater use of an­a­lyt­i­cal in­stru­ments is called for, to en­able us to gauge the real im­pact of these projects on so­ci­ety.

The CBA will help quan­tify real ben­e­fits to the econ­omy, hav­ing re­gard for both fi­nan­cial and so­cial costs and ben­e­fits.

Econ­o­mists fa­mil­iar with these tech­niques will try to es­ti­mate both neg­a­tive and pos­i­tive ex­ter­nal­i­ties of the pro­grammes or projects be­ing im­ple­mented.

The es­ti­mates of the real ben­e­fits di­vided by the real costs borne by so­ci­ety gives the ra­tio of ben­e­fit to the cost. A ra­tio higher than one means the project has pos­i­tive so­cial re­turns.

What does it in­volve to es­ti­mate real cost or ben­e­fit? The CBA will try to es­ti­mate prices re­flect­ing the so­cial cost and ben­e­fit to the so­ci­ety us­ing bor­der pric­ing or op­por­tu­nity costs.

If costs of im­ports are cheap then the prices of goods pro­duced must be based on global pric­ing.

If sub­si­dies are pro­vided to fa­cil­i­tate pro­duc­tion, the sub­si­dies must be treated as cost and not as in­come to the en­ter­prise. If un­em­ploy­ment is very high, then the cost of labour may ap­proach zero (us­ing shadow pric­ing— the max­i­mum price that man­age­ment is will­ing to pay for an ex­tra unit of a given lim­ited re­source), mean­ing it does not in­volve op­por­tu­nity costs al­though the work­ers re­ceive wages.

CBA also en­tails quan­ti­fy­ing all the spill-over and spinoff ac­tiv­i­ties, both up­stream and down­stream, brought about by a pro­gramme or project that is be­ing im­ple­mented.

These can be costs or ben­e­fits too. Econ­o­mists mea­sure these by ex­am­in­ing the In­put-Out­put (I-O) Ta­ble un­der­taken by depart­ment or bureau of sta­tis­tics. I-O Ta­ble is an­other pow­er­ful in­stru­ment used by econ­o­mists.

Ad­di­tion­ally, the CBA will try to es­ti­mate the ex­ter­nal­i­ties of the projects, neg­a­tive in the case of pol­lu­tion, or pos­i­tive in cases of in­creases in land or rental val­ues, when the project or pro­gramme re­sults in bet­ter qual­ity of life in the neigh­bour­hood.

To­talling all these costs and com­par­ing them with the ben­e­fits, we can ar­rive at the cost­ben­e­fit ra­tio (CB Ra­tio). If the ra­tio ex­ceeds the value of one, the ben­e­fits out­weigh the costs.

The gov­ern­ment should un­der­take the CBA for ma­jor projects, in­clud­ing the high speed rail­way,

Now that our econ­omy is just ex­pand­ing at be­tween four and five per cent per an­num, much lower than the rates achieved in the 1970s and 1980s, it has be­come vi­tal for us to economise our re­source use.

the Pan-Bor­neo high­way, the MRT and the pro­posed East Coast Rail Link.

These projects will def­i­nitely have sig­nif­i­cant spinoff and spillover ac­tiv­i­ties ben­e­fit­ing the re­gions and ar­eas they are lo­cated in (or passed through), cre­at­ing am­ple op­por­tu­ni­ties for new jobs and en­trepreneur­ship.

We also need to ex­am­ine and es­ti­mate their so­cial costs. Know­ing these two and their net costs and ben­e­fit will al­low the au­thor­i­ties to know the im­pli­ca­tions of their de­ci­sions and to mount com­pen­sat­ing mea­sures if the costs ap­pear to out­weigh the ben­e­fits.

Fi­nally, it is also good prac­tice, once the projects are im­ple­mented, and are on an even keel, ex­post eval­u­a­tion of them be un­der­taken to com­plete the cy­cle of plan­ning, and that the feed­back on the projects’ ben­e­fits and costs as well as re­lated ex­pe­ri­ences are doc­u­mented for the ben­e­fit of fu­ture plan­ning of sim­i­lar projects.

The un­der­stand­ing of these mat­ters is a part of the tool-kit of econ­o­mists and project plan­ners. Let us re-em­pha­sise them, lest we for­get. They help our de­ci­sion mak­ing pro­cesses.

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