Preface

This book was written to provide those responsible for agricultural investments in developing countries with sound analytical tools they can apply to estimate the income-generating potential of proposed projects.

Scope and Methodology

The book has not been written only for a narrow grouping of agricul-tural economists. Rather, it is intended for all who must share in shaping agricultural projects if these undertakings are to be high-yielding invest-ments: agronomists, livestock specialists, irrigation engineers, and many others. All these people are meant when the term "analyst" is used. To the existing resources of these diverse professionals, the book adds a tool for multidisciplinary use so that many with many skills can work together in applying their knowledge to analyze proposed projects.

The formal economic theory underlying the analytical system outlined here is not complicated; it certainly is not so technical as to cause problems for noneconomists. For those not already familiar with it, I have discussed the necessary economic theory in the course of the pre-sentation and have defined technical terms both in the text and in the glossary-index at the end of the book. The mathematical techniques used are also simple; they are limited to addition, subtraction, division, multiplication, and the simplest algebra. The computations needed for project analysis, however, are too tedious to be done by hand. A simple elec-tronic calculator is a virtual necessity (see chapter 10 under "Calculator Applications in Project Analysis"), but there is no need for advanced calculators or computers.

The analytical system outlined in this book is a consistent statement of the general methodology currently employed by the World Bank for all but a few of its project analyses (Gittinger, Garg, and Thieme _1982). (The details of World Bank analyses vary somewhat according to the sector and the views of individual analysts.) With minor variations, the system is also used by most international agencies concerned with capital trans-fer, including the African Development Bank, the Asian Development Bank, and the Inter-American Development Bank. The economic analy-sis in this system is based on "efficiency prices"-prices that show effects on national income broadly defined. The system enables us to judge which among project alternatives is most likely to contribute the largest amount to national income. The system underlies millions of dollars of investment decisions made every year. Thick volumes of economic analy-sis backing up proposed investments usually involve nothing more com-plicated than what is discussed in the following pages-although large investments may require much elaboration and may involve intermedi-ate steps to accommodate all the "ins" and "outs" of a complex agri-cultural project.

In recent years several analytical systems have been proposed that extend the methodology outlined here to take into account not only the contribution a project makes to national income but also the effect of a project on income distribution and saving. Most notable are those of Little and Mirrlees _(1974), the United Nations Industrial Development Organization _{(UNIDO) (1972a),} and Squire and van der Tak _(1975). These analytical systems, which remain the subject of much professional dis-cussion, are far more complex than the one I have presented. The system outlined here, however, is compatible with these more complex systems; in fact, Squire and van der Tak recommend the same methodology for project identification and valuation. The difference is that, once Squire and van der Tak have determined economic values on the basis of efficiency prices, they then proceed to weight those values to account for income distribution and saving. In the analytical system given here, we will stop with the efficiency price analysis. We will then suggest making a subjective decision to choose among the high-yielding alternatives the one that has the most favorable effects on income distribution, saving, and other national objectives. The system outlined here is not im-mediately adaptable to the Little and Mirrlees or the _UNIDO systems, but there are no major conceptual differences up to the point we carry the analysis. Both Little and Mirrlees and _UNIDO recommend further refine-ments to allow for the effects on income distribution and saving that are not incorporated in the formal analytical scheme recommended here.

Revised Edition

Compared with the first edition, published in 1972, this second, revised edition has an expanded discussion of the project approach that incorpo-rates more recent experience and provides more detailed and rigorous treatment of identifying, pricing, and valuing costs and benefits. The basic analytical system, however, is unchanged. Much additional mate-rial has been added on farm budgets and other aspects of financial analysis, and a bit more on the methodology of comparing costs and benefits.

In the Economic Development Institute _(EDI), the first edition has been extensively used for teaching project analysis. The sequence of topics taken up in _EDI courses on agricultural and rural development, rural credit, livestock, and irrigation projects generally follows the order found here. Thus, the overall concept of a project is presented first, followed by farm budgets and financial analysis, and then by economic analysis. (For a more detailed description of the process of project analy-sis, and of the organization of the chapters in this book, see the last section of chapter 1, "Steps in Project Analysis.") In practice, however, the methodology of comparing costs and benefits discussed in chapters 9 and 10 is usually taught in parallel with the topics on financial and economic analysis. This both permits a change of pace in the teaching and gives course participants more time to practice using methodologi-cal tools before proceeding to case studies in which they are asked to apply their knowledge of financial and economic analysis and their methodological skills. _EDI has prepared a number of case studies and other training materials to teach agricultural and rural development project analysis, and these are available to others teaching these sub-jects. (See the last page of this book for information about how to obtain these materials.)

Acknowledgments

I could never have written a book such as this without extensive help from many, many people. The book grows out of lectures and training materials prepared for EDI courses, and its style reflects its origin. I have benefited enormously from, and this revised edition has been informed by, participants in these courses both at EM headquarters and in develop-ing countries. Readers will note I have made liberal use of training materials prepared by my colleagues.

It is impossible to acknowledge all the individuals who have helped me, but special appreciation should be expressed to Hans A. Adler, George B. Baldwin, Maxwell L. Brown, Colin F. M. Bruce, Orlando T.Espadas, F. Leslie C. H. Helmers, P. D. Henderson, William I. Jones, Klaus Meyn, Frank H. Lamson-Scribner, David H. Penny, Walter Schaef-er-Kehnert, Arnold von Ruemker, Jack L. Upper, and William A. Ward, all presently or formerly with the _EDi; to numerous present and former staff working with agricultural projects in the World Bank, especially Graham Donaldson, Lionel J. C. Evans, John D. Von Pischke, Gordon Temple, Willi A. Wapenhans, and A. Robert Whyte; and to Frederick J. Hitzhusen, Ohio State University, and John D. MacArthur, University of Bradford.