Economic and social analysis of projects : a case study of the Yalavou Project in Fiji

Abstract

This study explores the relative merits of incorporating equity (income distributional) considerations into the appraisal of projects within a specific project-country context. The Squire and van der Tak method of social cost benefit analysis is applied to the Yalavou Project (an integrated rural development project) in Fiji to ascertain whether or not project selection and design based on economic analysis would be significantly affected by social analysis. The usefulness and limitations of integrating into the appraisal the distributional impact of projects and the practical relevance of such methods to Fiji are discussed. Developments in project appraisal methodologies designed specifically for developing countries are reviewed and a detailed outline of the Squire and van der Tak approach is presented. The major features of the macro-economic environment of the Fijian economy are identified and provide the background to the estimation of the national economic and social parameters. These national parameters are estimated in accordance with the general approach of the Squire and van der Tak methodology and studies by the World Bank. An outline of the project is presented and the project specific parameters estimated. The results of this study showed that the Yalavou Project was an economically inefficient use of resources but was acceptable on social grounds. Allowance for a greater redistribution of income to poorer families increased the social rate of return. The study concludes that social analysis is useful in terms of: allowing for the incorporation of and tradeoff between various government objectives in project analysis; and the selection and design of projects, particularly those oriented towards the poorer income groups. Moreover, the proper specification of the distributional impact of a project can be vital to its acceptability and design. The correct specification is relatively more important with projects where a large proportion of benefits go to the private sector and when the project is on the borderline of the accept/reject decision. The study further concludes that the Squire and van der Tak method is practically relevant to countries: where the government has not only adopted income distribution as a national objective but has made deliberate efforts to implement projects contributing to this objective; where the government has a controlling rather than a supporting role in the process of capital accumulation and growth; where the government's investment programme is project oriented rather than programme oriented; and which have open economies. In most developing countries the administrative capacity of the government may place severe limitations on the practical relevance of the methodology in terms of the availability and reliability of data and the availability of time and manpower resources.