Key Areas of Economic Analysis of Investment Projects

An Overview

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• Publisher: Asian Development Bank
• Year: 2013
• Print ISBN: 9789292543068
• eBook ISBN: 9789292543075
• Edition: 1
• Topic: Economía
• Subtopic: Economía del desarrollo

This pamphlet outlines the key areas of economic analysis. It emphasizes that analysis begins at the first stages of project identification, during country partnership strategy preparation, and continues iteratively throughout the project cycle. Economic analysis must be coordinated with institutional, financial, environmental, social, and poverty analyses, forming an integral part of investment appraisal. The pamphlet is intended to help staff and consultants of the Asian Development Bank, and their counterpart staff in developing member countries apply the principles of project economic analysis at each stage of the project development process.

PART I:
Scope of Project Economic Analysis

Macroeconomic Context

What macroeconomic factors influence target sectors and vice versa?

A project cannot be designed and implemented in isolation from the rest of the economy. An understanding of an economy’s overall performance and outlook and how macroeconomic factors may affect project performance is important. This includes understanding how the sectors of an economy contribute to the overall growth and development process and influence macroeconomic performance. Key macroeconomic factors include, for example, exchange rate changes that affect the price and competitiveness of traded goods, and economy-wide structural policies that influence prices and affect consumer and producer incentives and behaviors. The fiscal management situation needs to be understood for the purposes of assessing and ensuring sustainability of projects that draw on public resources.

Sector Context

What are the binding constraints to the functioning of markets and efficient and equitable provision of public services?

Where markets provide private goods and services, one needs to understand dimensions of the sector setting including: production and supply systems, prices and incentives that affect consumer and producer behavior, and the supporting market and public institutional framework. The following needs to be assessed:

• the conduct and performance of industry and market structures;

• the international market context of traded goods and services;

• policy-caused price distortions, which are often the main reason for differences between financial and economic prices; and

• key factors that influence private sector performance, including the function and performance of market-related institutions and the state of the legal and enabling environment and their effects on the costs and risks of doing business.

In cases where markets fail to provide goods and services that society wants, public provision may be justified. Public goods may include services such as health care, basic education, and law and order. Understanding the role and performance of public institutions in, for example, service delivery, also requires careful assessment. The structure, conduct, and performance of public institutions can greatly affect the costs of and access to public goods and services. Thus, the policy and legal framework, public goods delivery mechanism and performance, fiscal and public expenditure management, and benefit incidence and distribution must be assessed. Where public institutions and agencies fail to effectively provide public goods or deliver services, the causes need to be identified.

Sector analysis is an essential step to identifying key problems—usually market or institutional failure or underperformance—their causes and effects, and the reason, or rationale, for a project and its objectives. A diagnostic analysis at the sector level can help identify and prioritize challenges and can be the key to understanding the context ...

Table of contents

• Front Cover
• Title Page
• Contents
• Introduction
• Part I: Scope of Project Economic Analysis
• Part II: Key Areas of Analysis
• Part III: Areas of Economic Analysis in ADB’s Project Processing Cycle
• Back Cover