Income Distribution and Project Selection
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INCOME DISTRIBUTION AND PROJECT SELECTION In a previous article the author argued that considerations cremental net benefit). The team's results of income distribution should be included in the analysis of were published and comments were sought development projects. Here he illustrates the from various experts inside and outside application of the method to an appraisal of the site for the United Kingdom. The fourth stage was primarily to clear the proposed Third London Airport. up all technical issues raised by the re- V. C. Nwaneri search team and other experts. The fifth and final stage was a series of public The economic theory of project analysis the research team at this stage were noise, hearings concentrating on the research is only a branch of the general theory of defense, and surface access costs. The team's findings. In fact, however, the U. K. resource allocation which is the core of medium list of 29 was further reduced to Government eventually rejected the Com- welfare economics. This theory prescribes 15 after considering more factors such as mission's choice of Cublington and selected a simple test for project selection: under land and site preparation and air traffic Foulness instead. the existing pattern of income distribution control costs. Finally, by means of sensi- only those projects should be selected tivity tests on these cost factors, the 15 Deciding the stage of application which—assuming the beneficiaries could proposals were reduced to 9 and subse- Project selection is a continuous process compensate the sufferers—make no one quently to a short list of 4 that excluded of sifting from a whole spectrum of possi- worse off, and at least one person better the original controversial choice of bilities. At each stage in this process the off. However, even if this "efficiency" test Stansted. converitional criteria themselves are often can be satisfied the fact that it ignores the The 4 short-listed sites were the little watered down to simplify the task. The equity issues of existing income distribu- Villages of Cublington (Buckinghamshire), World Bank's selection process, for ex- tion strips such a criterion of its policy Foulness (Essex Coast), Nuthampstead ample, embraces project identification prescriptive value. Of course, the modi- (Hertfordshire), and Thurleigh (Bedford- work (in which other international or local fication of the criterion to meet equity shire). These were carried forward to-the government agencies contribute), project considerations is more easily said than second stage of the investigation whose preparation (which is a long tedious task done. For one thing such modification purpose was to give the public, especially usually undertaken by international con- raises a whole complex of political and local residents, the occasion, through a sulting firms), project preappfaisal (to social questions to which few, if any, series of local hearings, to voice its views settle the preliminary issues), the appraisal political leaders, even in the advanced and criticisms of the Commission's work itself, and the concluding negotiations countries, can provide a ready answer. The thus far. During these local hearings, the (during which a whole complex of under- economist will simply have to fill in the Commission debated such topics as site standings are translated into legal obliga- gaps because the equity issues are too location and alignment, noise, urbanization, tions). The first practical problem is decid- important to be ignored. regional planning, existing infrastructure, ing at which stage in this chain the income agriculture, fishing and ornithology, distribution criteria should be applied. The Selecting a site for the airport amenity, employment, and water and answer seems to be as early as possible— The selection of a third London Airport drainage. i.e., at the identification stage—when one's did not specifically consider income dis- In the-third stage of the selection process, choice of objective function can exert tribution as one of the major issues influ- the Commission's own research team con- strong influence. But quantification of the encing the decision. But it illustrates how ducted its analytical investigation into the distributional effects may become possible noneconomic issues and income distri- four short-listed sites using the conven- only at the appraisal stage when the nec- bution can be introduced along with the tional technique of cost benefit analysis essary numbers become available. Diagram efficiency criterion at a very early stage of modified to take into account such non- A sets out the stages involved in incor- project selection. economic issues as noise, meteorology, air- porating income distribution criteria in the The search for the third London Airport space movements, air safety, defense, edu- final selection of a project. site officially began in 1961. An original cation, health, and recreation in addition to decision for a site at Stansted (about 30 the purely economic costs and benefits re- Incorporating income distribution miles northeast of London), made without • lated to construction, air passenger and criteria consideration of noneconomic issues, was freight, land transport, housing, agricul- Having decided at which stage of project later revoked when public outcry showed ture, commerce, and industry. The in- investigation to apply distribution criteria, that such issues could not be ignored. In cremental costs and benefits (on the above the next problem is to decide the extent of May 1968, the Roskill Commission was economic and noneconomic issues) for such application. A development project appointed to re-examine the choice ob- each of the four sites were computed and affects a large Variety of people within and jectively. While its first public hearings used for ranking the sites. The income outside the country of location; it has pri- were proceeding, a long list of 78 possible distribution factor was not included. The mary, secondary, and tertiary effects and sites was reduced to a medium list of 29 little village of Cublington, about 30 miles each of these creates its own multiplier sites by the Commission's own research northeast of London, was chosen by the effects. It is Utopian, therefore, to expect team using the conventional least cost research team as the site involving the an analyst even using only conventional criterion. The main factors considered by lowest incremental cost (or highest in- analysis to fully investigate all the effects 27 ©International Monetary Fund. Not for Redistribution and the affected people. Only the main Subgrouping avoids the difficulty of measuring the so- groups of sufferers and beneficiaries, and Next, the beneficiaries and the sufferers called consumers' surplus (the difference the principal costs and benefits can be must be subgrouped under income classes. between what some consumers would be analyzed by the conventional and the modi- It is usually quite difficult to obtain reliable willing to pay and the lower price they fied methods. In the London Airport study, data on incomes not only because there is may actually pay for a given good or for example, every taxpayer will be affected a lack of unpublished data but also be- service). On this assumption the following unfavorably and every potential air travel- cause of the different types of wage and elements of net benefits were allocated to ler within or outside the United Kingdom nonwage incomes. Some other index such the beneficiaries (1-6 above): Airport will be affected favorably by the project. as value of property occupied by benefi- construction costs, airport services, meteor- However, only those groups bearing the ciaries or sufferers could achieve the same ology, airspace movements, passenger user heaviest and most direct impact of the purpose, assuming that the level of incomes costs, road and rail capital costs, and project can be considered. (wage and nonwage) determine the type finally, air safety costs. As to the sufferers, My proposed method of incorporating of property occupied by most people. In the net costs to them (i.e., costs not income distributional considerations in the the airport study, data on property values readily recoverable from air travelers) appraisal of development projects (see were more reliable than those on incomes. include such items as additional expendi- Finance and Development, March 1973) Therefore, the local communities affected ture on defense and public scientific estab- assumes that the unweighted costs and were subgrouped into low, medium, and lishments as a result of the airport deci- benefits have been quantified and considers high income households including rented sion. In addition, the local residents bear only the problems of classification and and owner-occupied accommodations. The the net costs resulting from the effect of weighting. Let us consider the application evidence collected by the research team the airport on private airfields, residential of these two steps in turn. showed that the average air traveler has a property destroyed or subjected to noise, higher income than the average person in on schools, hospitals, local authority build- Classification—identification of the United Kingdom. It can therefore be ings, on agriculture, local commerce and project beneficiaries and sufferers assumed that the majority of taxpayers industry, and on recreation and urbaniza- In investigating the income distribution belong to the low income group and that tion. issues arising from the