alternative approaches to economic analysis and the distribution

8/7/2019 Alternative Approaches to Economic Analysis and the Distribution

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Alternative Approaches toAlternative Approaches toEconomic Analysis and theEconomic Analysis and the

Distribution of Costs and BenefitsDistribution of Costs and Benefits

Presentation byPresentation byNirmal Kumar Raut (Group B)Nirmal Kumar Raut (Group B)

MPhil (Econ), Semester IIMPhil (Econ), Semester IIJune 24, 2009June 24, 2009


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Who Gets What?Who Gets What?

Identification of distribution EffectsIdentification of distribution Effects Distribution weighting approach proved difficultDistribution weighting approach proved difficult

because of value judgmentbecause of value judgment

Recent concerns with fiscal impact do notRecent concerns with fiscal impact do notnecessarily introduce weighting systemnecessarily introduce weighting system More difficult with world price numeraire approachMore difficult with world price numeraire approach

as units of costs and benefit differs with recipientsas units of costs and benefit differs with recipients Use of composite conversion factors also createsUse of composite conversion factors also creates

problemproblem Domestic price numeraire is preferable if directDomestic price numeraire is preferable if direct

estimation of distributional impact is to beestimation of distributional impact is to beundertakenundertaken


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Who Gets What?....contdWho Gets What?....contd

Assessing distributional impact of theAssessing distributional impact of theproject:project:

Identify the most important stakeholdersIdentify the most important stakeholders

Estimate both the direct income effectsEstimate both the direct income effectsand the indirect effects caused byand the indirect effects caused by

externalities and divergence of prices fromexternalities and divergence of prices fromeconomic valueseconomic values


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Who Gets What?...contdWho Gets What?...contd

EconomicEconomic NPVNPV ofof anyany projectproject cancan bebe divideddivided amongamong thethe variousvarious recipientsrecipients ofofbenefitsbenefits..

Example:Example:

AndAnd

Where, ENPV=economic NPVWhere, ENPV=economic NPVMP=Market pricesMP=Market pricesX =externalitiesX =externalitiesF=foreign exchangeF=foreign exchangeLi=Categories of laborLi=Categories of labor

Tj = Categories of transfer paymentsTj = Categories of transfer paymentsAF=adjustment factorsAF=adjustment factorsS=stakeholders affected directly, including owners of the projectS=stakeholders affected directly, including owners of the projectB=Bank or lenders to the projectB=Bank or lenders to the projectCT=government income from company taxesCT=government income from company taxesND=net debtorsND=net debtors

! j NPVAFi NPVAFNPVNPVNPVENPV TjLiLiFFXMP )*()*(

NDCTBSkMP NPVNPVNPVNPVNPVk

!


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Equation 1 identifies the economicEquation 1 identifies the economicanalysis adjustments to the market priceanalysis adjustments to the market priceNPVNPV

Equation 2 identifies the immediateEquation 2 identifies the immediatebeneficiaries from the financial analysisbeneficiaries from the financial analysis


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Fiscal ImpactFiscal Impact

ThoroughThorough economiceconomic analysisanalysis shouldshould provideprovide

informationinformation neededneeded toto identifyidentify thethe impactimpact ofof thetheprojectproject onon governmentgovernment incomeincome ii..ee.. fiscalfiscal impactimpact

TheThe equationequation impliesimplies thatthat anyany changechange inin foreignforeignexchangeexchange availabilityavailability hashas aa directdirect effecteffect onongovernmentgovernment incomeincome

! j jG )*(


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Impact on Poverty ReductionImpact on Poverty Reduction

Two effects: Direct income effects and Indirect effectsTwo effects: Direct income effects and Indirect effects

Direct income effects on stakeholders at market pricesDirect income effects on stakeholders at market prices Indirect effects in terms of their contribution to theIndirect effects in terms of their contribution to the

income of the workers, particularly through inducedincome of the workers, particularly through inducedemployment of unskilled labor.employment of unskilled labor.

Target poor groups have to be clearly defined;Target poor groups have to be clearly defined;

characteristics that define poor i.e. income, gendercharacteristics that define poor i.e. income, genderethnic group, age etc.ethnic group, age etc.

A methodology need to be developed to estimate incomeA methodology need to be developed to estimate incomeeffects such as UNIDO approacheffects such as UNIDO approach


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A Modified UNIDO ApproachA Modified UNIDO Approach

Possible to estimate income effect fromPossible to estimate income effect fromUNIDO approach but with modificationsUNIDO approach but with modifications

Income effect to be indicated on a yearIncome effect to be indicated on a year--byby--year basis. (needs disaggregation ofyear basis. (needs disaggregation ofcosts and benefits)costs and benefits)

Disaggregation should take account ofDisaggregation should take account ofdistributional implications of transferdistributional implications of transferpayments.payments.


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How much is Consumption worth?How much is Consumption worth?

Estimation of distribution weightsEstimation of distribution weights WeightingWeighting systemsystem couldcould bebe basedbased onon economiceconomic

principleprinciple ofof diminishingdiminishing MUMU..

ThisThis principleprinciple maymay bebe appliedapplied toto consumptionconsumption asasaa wholewhole andand toto comparisonscomparisons betweenbetween peoplepeoplewithwith differentdifferent levelslevels ofof consumptionconsumption..

WeightingWeighting systemssystems cancan bebe deviseddevised wherebywherebyprojectsprojects couldcould bebe selectedselected accordingaccording toto theirtheirimpactimpact onon incomeincome distributiondistribution..


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How much is ConsumptionHow much is Consumption

worth?...contdworth?...contd Estimating consumption weightsEstimating consumption weights

EstimatedEstimated inin relationrelation toto valuevalue ofofconsumptionconsumption atat thethe averageaverage levellevel ofof perpercapitacapita consumptionconsumption (c)(c)

ConsumptionConsumption atat thisthis levellevel maymay bebe providedprovided

weightweight ofof one,one, belowbelow thethe averageaverage greatergreaterthanthan oneone andand aboveabove thethe averageaverage lessless thanthanoneone..


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worth?...contdworth?...contd Estimating consumption weights.contdEstimating consumption weights.contd

Calculation of weight (dCalculation of weight (dii) for group i with an income) for group i with an income

level of clevel of cii isis

W

here e determines the rate at which the weightW

here e determines the rate at which the weightchanges with changes in the income level. whenchanges with changes in the income level. when ccii1 and whenand when ccii>c>c;;ddii


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worth?...contdworth?...contd Applying consumption weightsApplying consumption weightsTwo Approaches:Two Approaches:

AdjustAdjust thethe conversionconversion factorsfactors ofof thosethose itemsitemsincludingincluding significantsignificant elementselements ofof laborlabor costs,costs,particularlyparticularly thethe shadowshadow wagewage raterate forfor unskilledunskilledlaborlabor..

EstimateEstimate thethe distributiondistribution effectseffects (costs(costs andand

benefitsbenefits amongamong differentdifferent groups)groups) beforebeforeapplyingapplying weightsweights.. SeparateSeparate savingsaving andandconsumptionconsumption effectseffects.. RevalueRevalue consumptionconsumptioneffectseffects withwith thethe helphelp ofof distributiondistribution weightweight..


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worth?...contdworth?...contd Applying consumption weightscontdApplying consumption weightscontd A new distribution weighted conversion factor for unskilled labor isA new distribution weighted conversion factor for unskilled labor is

estimated using formula:estimated using formula:

Where, m=opportunity cost of laborWhere, m=opportunity cost of labor

a=conversion factor applying to the opportunity cost of labora=conversion factor applying to the opportunity cost of labor

d=distribution weight applied to the consumption of unskilled workersd=distribution weight applied to the consumption of unskilled workers

=CF applying to workers consumption (assumed to be SCF of 0.83)=CF applying to workers consumption (assumed to be SCF of 0.83)

v=value of a unit of savings in terms of a unit of consumptionv=value of a unit of savings in terms of a unit of consumption

F)1)(1( v

d

mma!


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Appendix: The Effects MethodAppendix: The Effects Method

DevelopedDeveloped inin FranceFrance andand usesuses nationalnational incomeincomeaccountingaccounting approachapproach

EconomistsEconomists regardregard thethe assumptionsassumptions mademadeunrealisticunrealistic.. HenceHence notnot thatthat popularpopular..

However,However, itit addressesaddresses directlydirectly thethe issueissue ofofdistributionaldistributional impactimpact andand havehave somesome valuablevaluable

insightsinsights intointo thethe wayway thethe projectproject analysisanalysis isisconductedconducted..

PossiblePossible toto arrivearrive atat resultsresults equivalentequivalent toto shadowshadowpricingpricing approachesapproaches..


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Appendix: The EffectsAppendix: The Effects

Method.contdMethod.contd StepsSteps

1.1. Estimation of value addedEstimation of value added with the projectwith the project

2.2. Estimation of value addedEstimation of value added without the projectwithout the project

3.3. Deduct the without the project situation fromDeduct the without the project situation fromwith the project situation to find incrementalwith the project situation to find incremental

effects of the project.effects of the project. The incremental VA provides an indication ofThe incremental VA provides an indication of

the distribution of income gains of the project.the distribution of income gains of the project.


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Method.contdMethod.contdStep 1(Estimation of value addedStep 1(Estimation of value added with thewith the

projectproject ))

Estimate direct value added consisting ofEstimate direct value added consisting ofwages, interest, taxes, depreciation andwages, interest, taxes, depreciation andprofits.profits.

Estimate indirect value added derivedEstimate indirect value added derivedfrom the purchases of goods and servicesfrom the purchases of goods and servicesfrom others.from others.


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Method.contdMethod.contdStep 2 (Estimation of value addedStep 2 (Estimation of value added withoutwithout

the project )the project )

ExportExport taxtax willwill bebe leviedlevied onon thetheintermediateintermediate goodgood thatthat willwill nownow bebeexportedexported..

The good now will have to be imported onThe good now will have to be imported onwhich import tax will be levied.which import tax will be levied.


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Method.contdMethod.contd DrawbacksDrawbacks

1.1. It is not clear how the indirect valueIt is not clear how the indirect valueadded associated with the investmentadded associated with the investmentcosts should be treatedcosts should be treated

2.2. Working capital does not appear in theWorking capital does not appear in the

analysisanalysis

alternative approaches to economic analysis and the distribution

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