In the late 1960s there was considerable development of methods for applying social cost–benefit analysis to investment in developing countries. In the 1970s, these methods began to be applied. From 1974 to 1982 there were massive public-sector investment booms in many of the developing countries. It appears that much of this investment yielded little or nothing. Were the methods flawed in principle? Were they ignored? And if so, why? Was the possible effect of project appraisal swamped by unforeseen events that rendered potentially valuable investments useless? We do not provide definitive answers to these questions, but we hope to contribute to their answers by discussing the current state of the theory of project appraisal and the current practice and influence of social cost–benefit analysis, particularly within the World Bank.

REFLECTIONS ON THE PRINCIPLES OF PROJECT APPRAISAL

In our book (Little and Mirrlees, 1974) we provided a method for social investment decisions. In brief, we proposed the following techniques:

1. Measuring the values of outputs (benefits) and inputs (costs) with shadow prices

2. Using border prices as shadow prices for traded inputs and outputs, or – in cases where demand or supply is not independent of price – using the marginal revenue or cost to the country in foreign exchange, as a first approximation

3. Where possible, using costs, themselves measured at shadow prices, as shadow prices for non-traded inputs

4. […]