The Economic Analysis of Sector Investment Programs
17 Pages Posted: 20 Apr 2016
Date Written: November 4, 1998
Economic analysis of sector investment programs should use appropriate criteria - including a clear public rationale for the expenditure, motivated by a desire either to correct a market failure or to alleviate poverty. Otherwise public spending simply crowds out private supply, resulting in few net benefits to the economy.
One of the main objectives of a sector investment (or expenditure) program is to improve the development impact of public spending in a 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 analysis emphasizes using standard principles of public expenditure analysis to identify desirable changes in a sector spending program and to evaluate the degree to which the planned spending program incorporates those changes.
One of the most important criteria is that such planned expenditures should have a clear public rationale, motivated by a desire either to correct a market failure or to alleviate poverty. Otherwise public spending simply crowds out private investments, resulting in few net benefits to the economy. Cost recovery may be considered desirable, for example, because it alleviates the government's fiscal constraint, ensures that a good or service yields a minimum level of benefits, and encourages a supply response from the private sector. But if the private benefits of the service are less than the costs, it would be better to transfer the resources representing the cost of the service directly to the poor (subsidizing inefficient services is not propoor). The good or service subsidized should be consumed more by the poor than by others, and within those services there should be a self-selection mechanism that targets the services to the poorest. If subsidized goods and services fail to meet these criteria, spending should be directed toward other activities more likely to alleviate poverty.
There should be a reasonable relationship between spending and outcomes. Sometimes it is easiest to assess expenditure tradeoffs by looking at costs relative to other benchmark interventions (such as the cost of educating a child). In Kenya, for example, the budget for agricultural extension alone was double the entire budget for the Ministry of Transport and Communications.
Key economic indicators should reflect the key rationale: Correcting for market failures or alleviating poverty. Performance indicators should also be assessed relative to a specific counterfactual (what would the outcome have been without that expenditure). Control groups should be incorporated into program design from the outset.
This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to improve the analysis of public expenditures and projects.
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