What is economic analysis?
The economic analysis of a project helps select and design projects that contribute to the welfare of a country. Various tools of economic analysis help determine the economic and fiscal impact of the project, including the impact on society and the major stakeholders involved, as well as the project’s risks and sustainability. A good economic analysis answers the following questions:
- What is the objective of the project?
This helps identify tools for the analysis. A clearly defined objective also helps in identifying the possible alternatives to the project.
- What will be the impact of the project?
This question concerns a counterfactual as the difference between the situation with or without the project is crucial for assessing the incremental costs and benefits of the project.
- Are there any alternatives to the project? If so how would costs and benefits of the alternatives to achieve the same goal compare to the project in question?
- Is there economic justification of each separable component of the project?
- Who gains and who loses if the project is implemented?
The analysis has to make sure that the most benefit accrues to the poor.
- What is the fiscal impact of the project?
- Is the project financially sustainable and what are the risks involved?
- Are there any other externalities? What is the environmental impact of the project?
(Adapted from Belli, P. et al (1998) Handbook on Economic Analysis of Investment Operations )
Why is economic analysis important?
All countries face the problem of allocating limited resources such as capital, skilled and unskilled labor, land and other natural resources to a variety of different uses such as production of consumer goods, investment in industry, infrastructure, education, health etc. with an aim to reach a more fundemantal goal of reducing poverty, accelerating economic growth and/or reducing income inequalities. Given limited resources, choices have to be made between alternative uses of these resources such that the benefit to the economy and society is as large as possible. Therefore, all World Bank projects must meet certain selection criteria, including economic justification.
The World Bank's Ten Dimensions of Economic Analysis are used as an organizing framework to represent categories necessary for sound economic analysis for education projects. Information on these ten dimentions are available from "Key Issues".