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- W2023689611 abstract "This paper attempts to summarize some of the ways in which the field of economic project evaluation has advanced since the great explosion of literature on the subject that occurred in the late 1960s and early 1970s. That explosion can almost be thought of as the genesis of the field as a subdiscipline of academic economics. It focused on evaluating projects or programs not on the criterion of their financial or commercial profitability but rather on the net benefit that they bring to the “economy as a whole”. Quite obviously, this focus led to questions like: a) how to value benefits and costs that are not reflected in financial flows to the project or program in question, b) how to take into account a project’s general equilibrium effects on the economy, and c) how to recognize the consequences of economic distortions in creating important gaps between the direct financial benefits and costs of a project and its true economic benefits and costs. From the outset in the 1960s, the literature of economic project evaluation pursued these questions. Important items of discussion during the “explosion” period were: i) the choice of the appropriate discount rate for deriving present value of benefits and costs, ii) the choice of an “economic opportunity cost of foreign exchange” (EOCFX) that reflected the full economic cost of a project’s buying foreign exchange (and the full economic benefit of generating it), and iii) the appropriate way to recognize circumstances where the economic opportunity cost of labor (EOCL) differed significantly from the market wage rate. Methodological controversies centered on three points. First was the issue of how capital market distortions were to be reflected. One group, to which I belong, advocated incorporating these intertemporal costs in the discount rate. The discount rate would ask that “our” project yield a rate of return sufficient to cover the future productivity that was lost, as other investments were displaced by our project’s drawing funds from the capital market. The other view advocated the use of a lower rate of discount, based on the net returns received by savers in the economy. It used this rate to get a present value of the future productivity of displaced investments, and employed this present value as a “shadow price of investible funds” (SPIF). A simple example shows the difference between the two approaches. Suppose that the typical investment yields 12% per year and that, owing to corporate, property and personal taxes the typical saver receives 4%. Suppose, too, that funds drawn from the capital market come 3/4 from displaced investment and 1/4 from newly stimulated savings. These facts would lead the Cuadernos de Economia, Ano 40, No 121, pp. 579-588 (diciembre 2003)" @default.
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- W2023689611 date "2003-12-01" @default.
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- W2023689611 title "SOME RECENT ADVANCES IN ECONOMIC PROJECT EVALUATION" @default.
- W2023689611 doi "https://doi.org/10.4067/s0717-68212003012100027" @default.
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