Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: A Survey

Zhuang, Juzhong; Liang, Zhihong; Lin, Tun; De Guzman, Franklin Working Paper Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: A Survey ERD Working Paper Series, No. 94 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Zhuang, Juzhong; Liang, Zhihong; Lin, Tun; De Guzman, Franklin (2007) : Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: A Survey, ERD Working Paper Series, No. 94, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/1853 This Version is available at: https://hdl.handle.net/10419/109296 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/3.0/igo Printed in the Philippines Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No. 050407 About the Asian Development Bank The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the people in Asia and the Pacific, particularly the 1.9 billion who live on less than $2 a day. Despite many success stories, Asia and the Pacific remains home to two thirds of the world’s poor. ADB is a multilateral development finance institution owned by 67 members, 48 from the region and 19 from other parts of the globe. ADB’s vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens. ADB’s main instruments for providing help to its developing member countries are policy dialogue, loans, technical assistance, grants, guarantees, and equity investments. ADB’s annual lending volume is typically about $6 billion, with technical assistance usually totaling about $180 million a year. ADB’s headquarters is in Manila. It has 26 offices around the world and has more than 2,000 employees from over 50 countries. About the Paper Juzhong Zhuang, Zhihong Liang, Tun Lin, and Franklin De Guzman survey theories and practices in the choice of the social discount rate for cost-benefit analysis of public projects. The issue of choosing an appropriate discount rate for intergenerational projects is also highlighted in light of recent debates on the economics of climate change. May 2007 ERD ECONOMICS AND RESEARCH DEPARTMENT Working Paper SERIES No. 94 Juzhong Zhuang, Zhihong Liang, Tun Lin, and Franklin De Guzman Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: A Survey Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: A Survey < 0 0 5 0 4 0 7 2 > ERD Working Paper No. 94 Theory and PracTice in The choice of Social diScounT raTe for coST-benefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzman may 2007 Juzhong Zhuang, Tun Lin, and Franklin De Guzman are Assistant Chief Economist, Economist, and Economics Officer, respectively, at the Economic Analysis and Operations Support Division, Economics and Research Department, Asian Development Bank (ADB); and Zhihong Liang is a Ph.D. candidate in Economics at the University of Guelph (Canada). The authors thank Ifzal Ali for guidance in preparing this paper and suggestions in finalizing it; David Dole for initiating this work; and Anneli Lagman-Martin for research assistance. Comments from Ramesh Adhikari, Richard Bolt, Eunkyung Kwon, Herath Gunatilake, Muhammad Ehsan Khan, Donghyun Park, Nigel Rayner, and Hyun Hwa Son are gratefully acknowledged. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ©2007 by Asian Development Bank May 2007 ISSN 1655-5252 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank. FoREWoRD The ERD Working Paper Series is a forum for ongoing and recently completed research and policy studies undertaken in the Asian Development Bank or on its behalf. The Series is a quick-disseminating, informal publication meant to stimulate discussion and elicit feedback. Papers published under this Series could subsequently be revised for publication as articles in professional journals or chapters in books. CoNtENts Abstract vii I. IntroductionI. Introduction 1 II. Theoretical �oundations for the Choice of a Social Discount RateII. Theoretical �oundations for the Choice of a Social Discount Rate 2 A. Approaches to Discounting �uture Bene��ts and Costs��A. Approaches to Discounting �uture Bene��ts and Costs�� Unsettled Debate 2 B. Social Rate of Time Preference 4 C. Marginal Social Opportunity Cost of Capital 9 D. Weighted Average Approach 10 E. Shadow Price of Capital Approach 12 �. Discounting Intergenerational Projects 14 III. The Social Discount Rate in Practice around the World 1III. The Social Discount Rate in Practice around the World 16 A. Countries around the World 1A. Countries around the World 16 B. MDBs and other Supra-National Agencies 19 I�. Concluding Remarks 2I�. Concluding Remarks 21 Appendix�� Estimating the Social Discount Rate Using theAppendix�� Estimating the Social Discount Rate Using the Weighted Average Approach 24 References 2References 26 �or the component of the utility discount rate related to the risk of not being alive in the future, the controversy is not on whether it should be considered; rather, it is on how to measure this risk. Some attempt to estimate individuals’ survival probability and risk of death using death rate statistics (Kula 1984, 1987, 2004). Others argue that individuals’ risk of death is not relevant to the derivation of the social time preference; what is relevant is the changing life chance for whole generations (Pearce and Ulph 1999). box 1 The debaTe on Pure Time Preference Many argue that the positive pure time preference, which implies valuing utility of future generations less than the present generation, is ethically indefensible (Ramsey 1928, Pigou 1932, Harrod 1948, Solow 1974). Others, while admitting that ethically all generations should be treated alike, point out that a zero rate of pure time preference implies a savings rate excessively higher than what we normally observe and contradicts real world savings behavior, leading also to other paradoxical results (Arrow 1995). There are also those who argue that the risk of death, or mortality, is a rational enough reason for positive pure time preference (Eckstein 1961). This argument, although more amenable to empirical investigation and less prone to fundamental disputes about value judgments, is also subject to disagreement about what precise risks are being discussed (Pearce and Ulph 1999). Dasgupta and Pearce (1972) highlight the problem of considering risk-of-death time preference in calculating the social discount rate, because the social time preference relates to society, and not to an aggregate of individuals; although individuals are mortal and society is not. Among more recent empirical studies, some authors look at the increasing risk of death, or changing survival probability, for an individual as one gets older (Kula 1985, 1987, 2004; Evans and Sezer 2004). Pearce and Ulph (1999) highlight problems of this approach, and argue that when dealing with very long-lived projects, the appropriate risks are not so much the increasing probability of death of a single individual, but what is happening to the life chances of whole generations. Newbery (1992) attempts to measure this risk by estimating the perceived risk of the end of mankind in 100 years. The Green Book of the UK HM Treasury refers to this as a catastrophe risk, that is, the likelihood that there will be some events so devastating that all returns from policies, programs, or projects are eliminated, or at least radically and unpredictably altered (HM Treasury 2003). The Stern Review de��nes this as the risk of extinction of the human race and argues that such risks could arise from possible shocks such as a meteorite, a nuclear war, or a devastating outbreak of some diseases. Empirical estimates of the elasticity of marginal utility of consumption (θ) also vary from one study to another. Three different approaches have been used�� direct survey methods; indirect behavioral evidence; and revealed social values (see a recent review by Evans 2005). The survey methods focus on measuring risk and inequality aversion7 from responses to specially designed survey questions. The indirect behavioral evidence is based on observed consumption behaviors from empirically estimated consumer demand models. The third approach in estimating θ involves inference from government behavior revealed through spending and tax policies. A survey of empirical estimates of θ based on the three approaches indicates that its values mostly fall within the range from 1 to 2%, except for a few outliers (Table 2). The differences suggest that the results 7 Risk aversion measures the reluctance of an individual to accept a bargain with an uncertain payoff rather thanRisk aversion measures the reluctance of an individual to accept a bargain with an uncertain payoff rather than another bargain with a more certain but possibly lower expected payoff. Inequality aversion measures an individual’s tolerance to income inequality. Risk aversion is closely related to inequality aversion, and both are closely related to the elasticity of marginal utility of consumption. SecTion ii TheoreTical foundaTionS for The choice of a Social diScounT raTe erd Working PaPer SerieS no. 94 5 are sensitive to model speci��cation, level of aggregation in the data, choice of estimators, sample size, and the length of sample periods. Table 1 emPirical eSTimaTeS of The uTiliTy diScounT raTe Source emPirical eSTimaTeS TheoreTical baSiS Scott (1977) 1.5% Component reflecting myopia is 0.5%, and that reflecting the changing life chance due to the risk of total destruction of a society is 1.0% Kula (1985) 2.2% Reflecting average annual survival probability in the UK during 1900−1975 Kula (1987) 1.2% Reflecting average annual probability of death in the UK in 1975 Scott (1989) 1.3% Component reflecting myopia is 0.3%, and that reflecting the changing life chance due to the risk of total destruction of a society is 1.0% Newbery (1992) 1.0% Perceived risk of the end of mankind in 100 years Dynamic Integrated Model of Climate and the Economy (DICE) model (Nordhaus 1993) 3% per year Utility discount rate reflecting pure social time preference, determined by calibrating the DICE model to match actual data Pearce and Ulph (1995) 1.1% Reflecting the average annual probability of death in the UK in 1991 Arrow (1995) 1% Utility discount rate reflecting pure social time preference, and matching the observed savings behavior OXERA (2002) Myopia = 0-0.5% Risk of death = 1.1% with a projected change in the near future to 1.0% Based on previous studies and projected and recent average annual death rates in the UK Evans and Sezer (2004) 1.0–1.5% 1% for EU countries and 1.5% for non-EU countries, reflecting catastrophe risks Kula (2004) 1.3% Reflecting the average annual death rate in India during 1965–1995 Evans (2006) 1% Based on the approximate average annual death rate in 2002–2004 in 15 countries of the European Union Stern Review (2006) 0.1% Probability of human race extinction per year Sources�� Compiled by authors. 6 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan Table 2 emPirical eSTimaTeS of The elaSTiciTy of marginal uTiliTy of conSumPTion Source emPirical eSTimaTeS daTeS A. survey Method Barsky et al. (1995) Amiel et al. (1999) Approximately 4.0 0.2−0.8 Reflecting risk aversion of the US middle-aged who were surveyed Reflecting inequality aversion of US students who were surveyed b. Indirect behavioral Evidence Constant elasticity demand models Kula (1984) Kula (1984) Evans and Sezer (2002) Evans (2004a) Kula (2004) Evans et al. (2005) Percoco (2006) Almost ideal demand system Blundell (1988) Evans (2004b) Lifetime consumption model Blundell et al. (1994) Quadratic almost ideal demand system Blundell et al. (1993) Banks et al. (1997) 1.56 1.89 1.64 1.6 1.64 1.6 1.28 1.97 1.33 1.2−1.4 1.06 1.06–1.37 1.07 Canada�� 1954–1976 data US�� 1954–1976 data UK�� 1967–1997 data UK�� 1965–2001 data India�� 1965–1995 data UK�� 1963–2002 data Italy�� 1980–2004 data UK�� 1970–1984 data �rance�� 1970–2001 data UK�� 1970–1986 data UK�� 1970–1984 data Aggregate model Micro models UK�� 1970-1986 data C. Revealed social Values Cowell and Gardiner (1999) Evans and Sezer (2004) Evans (2005) 1.28-1.41 1.5 1.25-1.45 UK�� 1999–2000 data UK�� 2001–2002 data �ive major OECD countries (�rance, Germany, Japan, UK, US)�� 2002– 2003 data Sources�� Evans (2005); compiled by authors. SecTion ii TheoreTical foundaTionS for The choice of a Social diScounT raTe erd Working PaPer SerieS no. 94 7 With estimates of ρ, θ, and g, SRTP can be calculated using the Ramsey formula. Box 2 provides an illustration. box 2 eSTimaTing SrTP uSing The ramSey formula Consider the following Ramsey growth model where the representative agent maximizes its life-time welfare subject to intertemporal constraints (Ramsey 1928)�� Maximize U c e dt t t ( ) ∞− ∫ 0 ρ (1) subject to  k f k c t t t = −( ) (2) where U(.) represents a time-invariant utility function with properties of U’(.)>0 (the marginal utility of consumption is positive) and U’’(.)<0 (the marginal utility of consumption diminishes); ρ is a utility discount rate reflecting pure time preference; ct is consumption at time t; f(.) represents a production function; and  kt is net investment at time t. Maximization requires ′ ( ) ′+′′ ( ) −′ ( ) =U c f k U c c U c t t t t t ( )  ρ 0 (3) where  ct is change in consumption at time t. Equation (3) can be simpli��ed to r f k g t = = +’( ) ρ θ (4) where r is the rate of return to savings; θ = − ′′ ′ U Uc is the elasticity of marginal utility of consumption representing preference and is also known as the coef��cient of relative risk aversion; and g c c t t =/ is the growth rate of per capita consumption. Equation (4) is the familiar Ramsey formula, which states that households choose consumption so as to equate the rate of return to savings to the rate of pure time preference plus the rate of decrease of the marginal utility of consumption due to growing per capita consumption. �ollowing Evans and Sezer (2004), the rate of pure time preference ρ is assumed to be 1.5%, elasticity of marginal utility of consumption θ is assumed to be 1.3, and the average growth rate of per capita real consumption g is the average annual growth rate of per capita real GDP from 1970 to 2004 (Penn World Tables 6.1). The Ramsey formula yields the following estimates of SRTP for four selected Asian countries (see box table). box Table emPirical eSTimaTeS of SrTP for SelecTed aSian counTrieS ρ (%) g (%) θSRTP (%) Indonesia 1.5 3.55 1.3 6.1 Malaysia 1.5 4.88 1.3 7.8 Singapore 1.5 4.48 1.3 7.3 Japan 1.5 2.34 1.3 4.5 8 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan A major criticism on using SRTP as the social discount rate is that it is purely a measure of the social opportunity cost in terms of foregone consumption and ignores the fact that public projects could displace or crowd out private sector investment if they cause the market interest rate to rise (Baumol 1968 and Harberger 1972). If additional public investment is made at the cost of displacing private investment, its marginal social opportunity cost should also reflect what the displaced private investment would otherwise bring to the society, which can be measured by the marginal social rate of return on private sector investment (SOC).8 Since SRTP is generally lower than SOC because of the wedge created by market distortions such as taxes, this raises the possibility that too many low-return investments in the public sector would be undertaken when SRTP is used as the social discount rate. C. Marginal social opportunity Cost of Capital The proposal for using the marginal social opportunity cost of capital (SOC) as the social discount rate, advocated by Mishan (1967), Baumol (1968), and Diamond and Mirrlees (1971a and b), among others, is based on the argument that resources in any economy are scarce; that government and private sector compete for the same pool of funds; that public investment displaces private investment dollar by dollar; and those devoted to public sector projects could be invested in the private sector. Therefore, public investment should yield at least the same return as private investment. If not, total social welfare can be increased by reallocating resources to the private sector, which yields higher returns. It has been suggested that SOC could be approximated by the marginal pretax rate of return on riskless private investments. A good proxy for this is the real pretax rate on top-rated corporate bonds (Moore et al. 2004). Box 3 provides an illustration of estimating the marginal rate of return based on Moody’s AAA bonds. Some have argued that SOC, as estimated in Box 3 should be adjusted downward for a number of reasons (Lind 1982, Boardman et al. 2001). �irst, in theory, the marginal pretax rate of return, rather than the average rate, should be used in estimating SOC. The marginal rate of return will be lower than the average rate as rational businessmen will make their best deal ��rst. Second, the rate of return on private investment includes premiums to compensate investors for risks that are generally higher than those for public sector investment. Third, returns on private investment as social opportunity cost of capital may also be contaminated by market distortions such as externalities and monopolistic pricing. box 3 eSTimaTing Soc from yieldS on corPoraTe bondS Based on the method used by Boardman et al. (2001), the average annual yield on Moody’s AAA long-term corporate bonds was estimated at 6.81% from January 1947 to December 2005 in the United States (US). Applying the 2004 corporate tax rate of 40% (KPMG 2004), the nominal pre-tax return on bonds was calculated at [0.0681 / (1- 0.38)] = 11.35 percent. A proxy for the expected rate of inflation is the average annual inflation rate, which was 3.78% between 1947 and 2005 in the United States. Therefore, the real pretax rate of return on top-rated corporate bonds in the US is [(0.1135 – 0.0378) / (1+0.0378)] = 7.29%, which approximates SOC. 8 This can be approximated by the pretax rate of return on private investment. See discussions in the next subsection. SecTion ii TheoreTical foundaTionS for The choice of a Social diScounT raTe erd Working PaPer SerieS no. 94 9 Dasgupta, Marglin, and Sen (1972), on the other hand, note that the argument for using SOC as the social discount rate is only justi��ed in the context of a two-period model where the total amount of capital available for investment is ��xed independently of project choice in the public sector. In this case, the public investment displaces (or crowds out) private investment dollar for dollar, and the marginal rate of return on private investment (inclusive of taxes) provides an adequate measure of SOC. But when either assumption (two-period model or ��xed amount of capital) is dropped, the argument would not hold anymore. If capital needed for ��nancing public projects is partially satis��ed by consumers postponing their current consumption, the return required by consumers usually is less than the marginal rate of return on private investment; hence, the social discount rate should be lower than SOC. D. Weighted Average Approach Previous discussions suggest that using SRTP to discount future costs and benefits is problematic since it does not take into account impacts of public projects on funds available for private investment. Using SOC as the social discount rate, on the other hand, assumes that public investment only displaces private investment and not private consumption, which is also not always true in reality. The weighted average approach, associated with contributions by, among others, Harberger (1972), Sandmo and Drèze (1971), and Burgess (1988), attempts to reconcile the SRTP approach with that of SOC. Proponents of the weighted average approach recognize that sources of funds available to public projects may come from displacing private investment, inducing consumers to postpone current consumption, and, in the case of an open economy, borrowing from international capital markets. The social opportunity costs of funds from these various sources are different because of market distortions such as taxes. Thus, the social discount rate should be the weighted average of SOC, SRTP, and the cost of foreign borrowing, with weights reflecting proportions of funds obtained from their respective sources. Harberger (1972) argues that SOC may differ from one productive sector to another and SRTP could also vary among different groups of savers (reflecting, for instance, different tax brackets); therefore, SOC and SRTP themselves should be the weighted average of those of various productive sectors or saver groups. Burgess (1988) suggests that the weights depend also on the degree of complementarity or substitutability between public and private investment, but points out that the positive externalities of public investment due to its complementarity can be considered as part of bene��t streams and, in that case, no adjustments to the weights are necessary. �or a closed economy, if the supply of funds is perfectly inelastic, a public sector project will displace only private investment, so the weight for SRTP will be zero and the social discount rate will be equal to SOC. If, on the other hand, the demand for funds is perfectly inelastic, a public project will only displace current consumption, the weight for SOC will be zero, and the social discount rate will be equal to SRTP. In general, it is believed that both the supply and demand of investible funds respond to changes in the market interest rate, so the social discount rate will lie somewhere between the two extremes. Harberger (1972), however, argues that the accumulated econometric evidence on investment functions clearly shows that many categories of investment are quite sensitive to changes in the interest rate, while evidence that savings are responsive to interest rate changes is only scanty. Hence, there is a reasonable presumption that the relevant weighted average will be reasonably close, if not precisely equal, to SOC. 10 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan �or an open economy where capital is mobile across countries, it is expected that the domestic interest rate will be related in some way to the interest rate at which the country can borrow in the world capital market (Sandmo and Drèze 1971, Edwards 1986, Lind 1990). In the extreme case of a small open economy with perfect capital mobility, risk neutrality, pegged exchange rate (with zero expected devaluation), and an in��nitely elastic supply of foreign capital, public projects will displace neither domestic consumption nor private investment. The weights for SOC and SRTP will, therefore, both be zero and the social discount rate will be equal to the international borrowing rate. However, Edwards (1986) argues that even a small economy with perfect capital mobility will face an upward-sloping supply curve of foreign capital. One justi��cation is that a higher level of foreign indebtedness could be related to a higher probability of default as perceived by lenders, and to a higher cost at which this particular country can borrow from the international capital market. In this case, a public project that is (partially) ��nanced with additional foreign debt will result in a higher rate charged on foreign loans, and perhaps, higher domestic interest rates as well since the two are linked. Therefore, a public project will be ��nanced partially by an increase in foreign debt, and partially by an increase in private savings and a reduction in private investment. Then, in the presence of country risk premiums, the social discount rate will be a weighted average of SOC, SRTP, and the international borrowing rate inclusive of risk premiums.9 In another extreme, if a country faces credit rationing from abroad, the new demand for public funds will be met fully by additional domestic private savings and displaced private investment. Then, the social discount rate will be a weighted average of only SOC and SRTP. A key challenge in the empirical estimation of the social discount rate using the weighted average approach is to determine the weights attached to SRTP, SOC, and the international borrowing rate, as well as weights for SRTPs of various saver groups and for SOCs of various productive sectors. Harberger (1972) provides a formula for calculating the social discount rate using the weighted average approach in the case of a closed economy, where the weights are estimated from interest derivatives (the responses of private investment and savings to changes in market interest rates), which can also be expressed in terms of elasticities. Sandmo and Drèze (1971) expands the formula to an open economy context by incorporating the international borrowing rate, with weights being estimated from the interest derivatives of the domestic and foreign supplies of funds. Based on Harberger and Jenkins (2002), Box 4 provides an example using the weighted average approach to estimate the social discount rate, assuming varying SRTP among saver groups, varying SOC among productive sectors, taxation on interest earnings (including withholding tax for foreign savers) and on investment returns, and an upward-sloping supply curve of foreign capital. A major criticism on the weighted average approach is that, while it recognizes that costs of public investment can displace private investment, it assumes that bene��ts will be consumed immediately and ignores the fact that they could also be reinvested in the private sector, generate future consumption, and bring more social value than if they were consumed immediately. Recognizing higher social cost of displaced private investment than displaced consumption, while ignoring the higher social value of project bene��ts that are reinvested than immediately consumed, leads to overdiscounting of project bene��ts. This overdiscounting will be higher the farther in the future 9 Edwards (1986) argued that whether this higher interest rate should be considered as a higher cost of borrowing will depend on the relationship between the probability of default as perceived by the lenders and by borrowers. If the perceived probability of default is the same for lenders and borrowers, the higher interest rate charged to the developing country will not represent a higher economic cost of foreign funds. But in general, the perceived probability of default is different between lenders and borrowers (the former is mostly greater than the latter); the risk premium does constitute economic cost for a borrowing country. SecTion ii TheoreTical foundaTionS for The choice of a Social diScounT raTe erd Working PaPer SerieS no. 94 11 the bene��ts occur. Therefore, compared to SRTP, the weighted average approach could be biased against long-term projects (Zerbe and Dively 1994). box 4 eSTimaTing The Social diScounT raTe uSing The WeighTed average aPProach According to the weighted average approach, also known as Harberger approach, the social discount rate can be expressed as δ α α β β = + − − +SOC i SRTP f ( )1 (1) where δ denotes the social discount rate, if is the government’s real long-term foreign borrowing rate, α is the proportion of funds for public investment obtained at the expense of private investment, β is the proportion of funds obtained at the expense of current consumption, and (1–α–β) is the proportion of funds from foreign borrowing. SRTP and SOC are measured, respectively, by the rate of real return on savings exclusive of (ii) and investments inclusive of (rj). Expressing the weights attached to different funding sources in terms of elasticities of demand and supply of funds with respect to changes in interest rates, equation (1) becomes�� δ ε ε ε ε ε = ( ) + ( ) − ( ) ( ) + ( ) − ∑ ∑ ∑ i i t i i f f t f j j t j j i i t i f f t S S i S S i I I r S S S S εε j j t j I I ( ) ∑ (2) where ε ε ε i f j , , are respectively elasticities of savings, supply of foreign capital, and private investment with respect to the interest rate. Si /St and Sf /St are the shares to the total savings by various groups of domestic savers and foreign savers. Ij /It is the investment share of various business sectors. Using Equation (2) and 1988–1989 data for Papua New Guinea, Harberger and Jenkins (2002) present an example of calculating the social discount rate, which they call economic opportunity cost of capital. The example assumes that there are four savers groups�� households, business, government, and foreign. �or each saver group, the real rate of return on savings was calculated from the nominal market interest rate by taking out the respective taxes and inflation. In estimating the real marginal cost of foreign borrowing, further adjustment was made by taking into consideration the effects of new borrowing on the country’s foreign borrowing rate. In the case of investors or demanders of funds, they were classi��ed into the following sectors�� housing, agriculture, manufacturing, government, and mining. The nominal pre-tax rate of return on investment for each sector was again calculated from the normal market interest rate by adding respective tax rates. These rates, together with the estimated saving shares and elasticities of various saver and investor groups, yield an estimated economic cost of capital, or the social discount rate, of 11.76 percent. Detailed calculations are in the Appendix. Source�� Harberger and Jenkins (2002). E. shadow Price of Capital Approach The shadow price of capital (SPC) approach, associated with contributions by �eldstein (1972), Bradford (1975), and Lind (1982) among others, also attempts to reconcile the SRTP approach with that of SOC and, at the same time, addresses the limitation of the weighted average approach. The 12 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan SPC approach recognizes that while costs of a public project can displace private investment, its bene��ts can also be reinvested in the private sector. In terms of generated future consumption streams, these bene��ts are worth more to society than if they are consumed immediately. Thus, the total cost of a public project is the sum of the current consumption that is directly displaced and those future consumption streams that are foregone due to the displacement of private investment. Similarly, the total bene��t of a public project is the sum of those immediately consumed and those future consumption streams generated from reinvestment. The SPC approach involves four steps. The ��rst is estimating SPC, which is the present value of streams of future consumption foregone arising from displacing one unit of private investment or the present value of future consumption streams generated from reinvesting one unit of project bene��ts in the private sector. The second step involves, for each time period, converting all the costs and bene��ts that either displace or generate private investment into consumption equivalents by multiplying them by SPC. The third step is adding these costs and bene��ts to the other portions of costs (in the form of directly displaced consumption) and of bene��ts (in the form of immediate consumption), respectively. �inally, discount the total cost and bene��t streams at SRTP to calculate the net present value (NP�) (see Box 5). Zerbe and Dively (1994) discussed a number of situations where costs and bene��ts need not be adjusted by SPC�� (i) �or a closed economy, if the fraction of bene��ts that return to private capital is equal to the fraction of costs that displace private investment, adjusting the costs and bene��ts by SPC does not change the sign of the NP� of a project. In this case, a project is socially desirable if the NP� is positive when applying SRTP as a discount rate to the ordinary costs and bene��ts. This is likely the case for many environmental projects where bene��ts are costs avoided whose ��nancing is similar to initial costs. (ii) �or an open economy, if the supply of capital is highly or perfectly elastic, the displaced and generated private investment will be small and be similar in size, or both, will be zero, and it is then suf��cient to discount bene��ts and costs by the international borrowing rate without adjusting them by SPC. (iii) �or least-cost analysis (also referred to as cost-effectiveness analysis), the goal is to compare the costs of alternative methods of producing the same output. As long as the ��nancing of the various alternatives is similar, adjustment by SPC is not warranted. When project costs and bene��ts need to be adjusted by SPC, empirical estimation of SPC is warranted, which requires information on the following parameters�� SOC, SRTP, depreciation rate, and marginal propensity to save. Lyon (1990) provides two alternative formulas to calculate SPC. One applies when the savings rate is expressed in terms of the gross return, and the other applies when the savings rate is expressed in terms of the return net of depreciation. Box 5 provides these formulas. The application of the SPC approach requires further information on proportions of displaced consumption and private investment due to project costs, and proportions of generated consumption and reinvestment due to project bene��ts. The SPC approach, although theoretically attractive (see �eldstein 1972, Bradford 1975, Lind 1982) is dif��cult to implement. The value of SPC is very sensitive to the values of SRTP and SOC, to how depreciation and reinvestment are assumed, and to the length of life of a project. Lyon (1990) shows that the value of SPC could vary from about one to in��nity, depending on different SecTion ii TheoreTical foundaTionS for The choice of a Social diScounT raTe erd Working PaPer SerieS no. 94 13 assumptions on the values of the various parameters. Harberger and Jenkins (2002) argue that if the SPC approach is employed, a different shadow price of capital has to be estimated for every project according to the length of life of the project. This could be very confusing for policymakers in the government decision-making process, many of whom are noneconomists. box 5 The ShadoW Price of caPiTal aPProach Consider a project with a lifespan of n years, bene��t streams, Bt, and cost streams, Ct. The net present value of the project will be NP� = B C i B V C V i t t t t nt b b t c c t * * ( ) ( ) − +=+ − ( )   − + − ( )    + = ∑1 1 1 1 0 φ φ φ φ tt n = ∑ 0 (1) where Bt * is the consumption equivalents of bene��ts at time t; Ct * is the consumption equivalents of costs at time t; φb is the fraction of bene��ts that return to the private sector for investment; φc is the fraction of costs that displace private investment; i is SRTP; and V is SPC. Lyon (1990) provides two alternative formulas to calculate V�� Vr sr i d sr =− + − (2) where r is the gross rate of return on private investment prior to depreciation, d is the depreciation rate, and s is the rate of savings from the gross return; and Vi =− − λ σλ σλ (3) where λ is the rate of return from private investment net of depreciation, and σ is the rate of saving from the net return. Source�� Zerbe and Dively (1994). F. Discounting Intergenerational Projects �rom the mid-1990s, with the growing concerns over climate changes, global warming, and other environmental problems, there has been a renewed interest on whether and how discounting should be applied to long-term projects, the effects of which spread over more than one generation (more than 30–40 years) or even hundreds of years, and whose present values are extremely sensitive to the choice of the discount rate. In evaluating intragenerational projects, it could be argued that the main issue is to achieve ef��cient allocation of scarce resources, thus the discount rate should reflect the economic opportunity cost of capital. When evaluating intergenerational projects, identifying an appropriate discount rate involves an additional challenge of considering intergenerational equity. What is common to the four approaches described above is that the discount rate, whatever it is, is time-invariant, implying that discounting would be exponential. With a constant discount rate, bene��ts and costs that occur in the distant future will become very small in terms of their 14 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan SecTion iv concluding reMarkS is taken into consideration in setting the social discount rate. Public funds, in general, have a higher marginal social opportunity cost in developing countries than in developed countries for a number of reasons, such as more scarcity of capital, poorer ��nancial intermediation, greater market distortions, and greater impediments in accessing international capital markets. Intergenerational equity is a newer issue in the public domain of developing countries than that of developed countries. Therefore, it is not surprising to see that developing countries generally use a higher social discount rate than developed countries. IV. CoNCluDINg REMARks The choice of the social discount rate plays a critical role in cost–bene��t analysis and project evaluation, and has been a subject of intense debate for the last several decades. In a perfectly competitive world without market distortions, the market interest rate is the appropriate social discount rate. In the real world where markets are distorted, there are four alternative approaches in the choice of the social discount rate�� SRTP, SOC, weighted average of SRTP and SOC, and SPC. Economists have not reached a consensus as to which is the most appropriate. The difference among the four approaches reflects largely the different views on how public projects affect the domestic economy�� whether public investment displaces current consumption, or private investment, or both, and whether bene��ts of projects are consumed immediately, or reinvested to generate more future consumption (see Table 5 for a summary). In cases of very long-term projects, an additional consideration is intergenerational equity, where the debate has centered on whether or not one should assume a positive pure time preference on the grounds that individuals are “impatient”, and whether a declining discount rate should be used to avoid problems associated with exponential discounting as implied by a constant discount rate. The recent controversy over the Stern Review focuses largely on what discount rate should be used in cost–bene��t analysis of policies to control global warming, which impacts on future generations. There are signi��cant variations in public discount rate policies in practice around the world, with developed countries applying lower rates (3–7%) than the developing countries surveyed (8–15%). These variations largely reflect different theoretical approaches to the choice of the discount rate followed by various countries. At a deeper level, however, the divergence also reflects differences in the perceived marginal social opportunity cost of public funds that the social discount rate tries to measure in order to ensure ef��cient allocation of resources, and differences in the extent to which the issue of intergenerational equity is considered. What conclusion can we draw from this survey? �irst, there is no one-size-��ts-all solution to the choice of the social discount rate. Countries differ in economic structure, capital scarcity, stage of ��nancial development, ef��ciency of ��nancial intermediation, impediments faced in accessing the international capital market, and social time preference. All these factors together determine a country’s social opportunity cost of capital, and should be taken into consideration in the choice of the social discount rate. Second, there is need for each country to regularly review the appropriateness of its social discount rate policy in light of changing domestic economic circumstances and international capital market conditions, and to adjust the social discount rate as necessary. Third, there is a strong case for considering the equity issue in discounting bene��ts and costs of intergenerational projects (e.g., those designed to address climate changes and other environmental problems) in addition to the economic ef��ciency issue, as opposed to intragenerational projects where ef��ciency should be the primary concern. �inally, for MDBs that provide development assistance to developing erd Working PaPer SerieS no. 94 21 countries through capital investment, there could be a case for reviewing their decades-old practice of applying a uniform discount rate of 10–12% to all projects to see whether this practice is still appropriate in a changing world. Table 5 alTernaTive aPProacheS To The choice of The Social diScounT raTe aPProach imPlied aSSumPTion Who uSeS iTmeThod of emPirical eSTimaTion maJor criTiciSm Social Rate of Time Preference (SRTP) Time-invariant Public projects only displace current consumption Mostly developed countries Apply “Ramsey formula” with the following parameters�� (i) utility discount rate, (ii) elasticity of marginal utility of consumption, and (iii) growth rate of real per capita consumption Approximated by aftertax rate of return on government bonds Ignores the fact that public investment could displace private investment Choice of utility discount rate involves normative value judgment, and estimation of the elasticity of marginal utility of consumption is sensitive to data and methodology Time-declining Public projects only displace current consumption, and discount rate declines over time as uncertainty increases. There is need to consider intergenerational equity. Mostly academic and policy researchers Typically estimated through experiments Leads to timeinconsistent planning Social Opportunity Cost of Capital (SOC) Public projects only displace current private investment Mostly developing countries Approximated by pretax rate of return on riskless private investments, such as top-rated corporate bonds Ignores the fact that public investment also displaces current consumption continued. 22 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan Weighted Average Closed economy or open economy with foreign capital rationing Public projects displace current consumption and private investment Mostly MDBs Weighted average of SRTP and SOC Ignores the possibility that project bene��ts could be reinvested Determining the weights attached to SRTP, SOC, and international borrowing rate could be dif��cult Open economy with upward sloping supply curve of foreign capital Public projects funded by displaced current domestic consumption, displaced domestic private investment, and foreign borrowings Weighted average of SRTP, SOC, and foreign borrowing rate Open economy with perfectly elastic supply of foreign capital Displacement of domestic consumption and investments would be small or negligible; the weighted average approach uses a discount rate equal to foreign borrowing rate International borrowing rate Shadow Price of Capital Appropriate when public investments displace current consumption and investment and generate not only future consumption, but also future investment Converts all costs and bene��ts into consumption equivalents using the SPC. Discount total cost and bene��t flows with SRTP to calculate NP� When the effects of displacement and generation of investments are the same, the SPC approach is equivalent to using SRTP as the discount rate Although considered as theoretically the most attractive approach, practical application could be dif��cult SecTion iv concluding reMarkS Table 5. conTinued. aPProach imPlied aSSumPTion Who uSeS iTmeThod of emPirical eSTimaTion maJor criTiciSm erd Working PaPer SerieS no. 94 23 APPENDIx EstIMAtINg thE soCIAl DIsCouNt RAtE usINg thE WEIghtED AVERAgE APPRoACh13 According to the weighted average approach, also known as Harberger approach, the social discount rate can be expressed as δ α α β β = + − − +SOC i SRTP f ( )1 (1) where δ denotes the social discount rate, if is the government’s real long-term foreign borrowing rate, α is the proportion of funds for public investment obtained at the expense of private investment, β is the proportion of funds obtained at the expense of current consumption, and (1 – α – β) is the proportion of funds from foreign borrowing. SRTP and SOC are measured, respectively, by the rate of real return on savings exclusive of (ii) and investments inclusive of (rj). Expressing the weights attached to different funding sources in terms of elasticities of demand and supply of funds with respect to changes in interest rates, equation (1) becomes�� δ ε ε ε ε ε = ( ) + ( ) − ( ) ( ) + ( ) − ∑ ∑ ∑ i i t i i f f t f j j t j j i i t i f f t S S i S S i I I r S S S S εε j j t j I I ( ) ∑ (2) where εi, εf, εj are respectively elasticities of savings, supply of foreign capital, and private investment with respect to the interest rate. Si /St and Sf /St are the shares to the total savings by various groups of domestic savers and foreign savers. Ij /It is the investment share of various business sectors. Using Equation (2) and 1988–1989 data for Papua New Guinea, Harberger and Jenkins (2002) present an example of calculating the social discount rate, which they call economic opportunity cost of capital. The example assumes that there are four savers groups�� households, business, government, and foreign. The assumptions and results of calculations are given in Appendix Table 1 below�� aPPendix Table 1 SaverS assumpTions houSeholdS buSineSS governmenT foreign Share (Si/St) 33.70% 44.90% 7.80% 13.60% Elasticity (εs, εf) 0.5 0.5 0 2 Nominal market interest rate (im) 14.50% 14.50% 14.50% Nominal cost of foreign borrowing (if) 18.00% Tax rate (ti, tw) 9.30% 30.00% 0% 17.00% Rate of inflation (g) 5.00% 5.00% 5.00% 5.00% Real return on savings(ii) 7.76% 4.90% 9.05% Real marginal cost of foreign borrowing 12.31% 13 This Appendix draws from Harberger and Jenkins (2002). 24 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan aPPendix The real return on savings for each domestic saver group is calculated by removing the respective tax rates from the nominal market interest rate and then removing inflation�� Real return on savings (ii) = [im * (1 – ti) – g] / (1 + g). �or the foreign savers group, the same procedure is applied as for domestic savers, but with a further adjustment to reflect the effect of additional foreign borrowing on the country’s overall borrowing costs. The adjustment involves the elasticity of supply of foreign funds (εf) as well as the rate of change in the foreign borrowing cost as the country becomes more indebted—which is assumed to be 0.6 by Harberger and Jenkins. Real marginal cost of foreign borrowing (if) = {[if * (1 – tw) – g] / (1 + g)} * [1 + 0.6 * (1 / εf)] The example further assumes that there are ��ve groups of investors or demanders of funds�� housing, agriculture, manufacturing, government, and mining. See Appendix Table 2 for the assumptions and calculations. aPPendix Table 2 inveSTorS or demanderS of fundS houSing agriculTure manufacTuring governmenT1mining Share (Ij/It) Elasticity (εj) Nominal Market Interest Rate (im) Tax rate (ti) Rate of inflation Real return on investment (rj) 14.40% –1 14.50% 15.00% 5.00% 11.43% 17.70% –1 14.50% 0.00% 5.00% 9.05% 65.80% –1 14.50% 30.00% 5.00% 14.95% 0% 0 0% 0% 0% 0% 2.10% –1 14.50% 35.00% 5.00% 16.48% 1No data was available on the government’s share of investment in Papua New Guinea. The real return on investment is calculated by adjusting the nominal pretax rate of return on investment for each sector (i.e., the nominal market interest rate) with tax rates and then taking out inflation, using the following formula�� Real return on investment (rj)= [im * (1 – tj) – g] / (1 + g) �ollowing equation (2), the social discount rate, which is the economic cost of capital, for Papua New Guinea is estimated at�� δ ε ε ε ε ε = ( ) + ( ) − ( ) ( ) + ( ) − ∑ ∑ ∑ i i t i i f f t f j j t j j i i t i f f t S S i S S i I I r S S S S εε j j t j I I ( ) = ∑11 76. % erd Working PaPer SerieS no. 94 25 REFERENCEs Amiel, Y., J. Creedy, and S. Hurn, S. 1999. “Measuring Attitudes Towards Inequality.” Scandinavian Journal of Economics 101��83–96. Arrow, K. 1995. “Intergenerational Equity and the Rate of Discount in Long-Term Social Investment.” Paper presented at the IEA World Congress, December, Tunis, Tunisia. Asian Development Bank. 1997. Guidelines for the Economic Analysis of Projects. Manila. Banks, J., R. Blundell, and A. Lewbell. 1997. “Quadratic Engel Curves and Consumer Demand.” Review of Economics and Statistics 79(4)��527–40. Barsky, R., M. Kimball, T. Juster, and M. Shapiro. 1995. Preference Parameters and Behavioral Heterogeneity�� An Experimental Approach in the Health and Retirement Survey. NBER Working Paper No. 5213, National Bureau of Economic Research, Massachusetts. Baumol, W. 1968. “On the Social Rate of Discount.” American Economic Review 58��788–802. Belli P., J. Anderson, H. Barnum, J. Dixon, and J. Tan. 1998. Handbook on Economic Analysis of Investment Operations. World Bank, Washington, DC. Blundell, R. 1988. “Consumer Behaviour�� Theory and Empirical Evidence—A Survey.” Economic Journal 98��16–65. Blundell, R., M. Browning, and C. Meghir. 1994. “Consumer Demand and the Life-Cycle Allocation of Household Expenditures.” Review of Economic Studies 61��57–80. Blundell, R., P. Pashardes, and G. Weber. 1993. “What Do We Learn About Consumer Demand Patterns from Micro Data?” American Economic Review 83(3)��570–97. Boardman, A., D. Greenberg, A. �ining, and D. Weimer. 2001. Cost–Benefit Analysis: Concepts and Practice, 2nd ed. Upper Saddle River, NJ�� Prentice-Hall. Bradford, D. 1975. ”Constraints on Government Investment Opportunities and the Choice of Discount Rate.” American Economic Review 65(5)��887–99. Burgess, D. 1988. “Complementarity and the Discount Rate for Public Investment.” The Quarterly Journal of Economics August 1988��527–41. Cline, W. 1992. The Economics of Global Warming. Institute for International Economics, Washington, DC. Cowell, �., and K. Gardiner. 1999. Welfare Weights. STICERD Research Paper No. 20, London School of Economics, London. Cropper, M., and D. Laibson. 1998. The Implications of Hyperbolic Discounting for Project Evaluation. World Bank Policy Research Working Paper Series 1943, Washington, DC. Dasgupta, P. 2006. “Comments on the Stern Review’s Economics of Climate Change.” Paper prepared for a seminar on the Stern Review’s Economics of Climate Change at the Royal Society, 8 November, London. Dasgupta, A., and D. Pearce. 1972. Cost–Benefit Analysis. UK�� Palgrave Macmillan. Dasgupta, P., S. Marglin, and A. Sen. 1972. Guidelines for Project Evaluation. United Nations Industrial Development Organization, �ienna. Diamond, P. 1968. “Opportunity Cost of Public Investment�� Comment.” Quarterly Journal of Economics 84��682–8. Diamond, P., and J. Mirrlees. 1971a. “Optimal Taxation and Public Production I�� Production Ef��ciency.” American Economic Review 61��8–27. . 1971b. “Optimal Taxation and Public Production II�� Tax Rules.” American Economic Review 61��261–78. Eckstein, O. 1961. “A Survey of the Theory of Public Expenditure and Criteria.” In Buchanan, J., ed., Public Finance: Needs, Sources and Utilization. Princeton, NJ�� Princeton University Press. 26 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan referenceS Edwards, S. 1986. “Country Risk, �oreign Borrowing and the Social Discount Rate in an Open Developing Economy.” Journal of International Money and Finance 5��S79–S96. European Commission. 2006. Guidance on the Methodology for Carrying Out Cost–Benefit Analysis. Working Document No. 4�� The New Programming Period 2007–2013, Brussels. Available�� http��//ec.europa.eu/regional_policy/sources/docof��c/2007/working/wd4_cost_en.pdf. Evans, D. 2004a. “The Elevated Status of the Elasticity of Marginal Utility of Consumption.” Applied Economics Letters 11��443–7. ———. 2004b. “A Social Discount Rate for �rance.” Applied Economics Letters 11��803–808. ———. 2005. “The Elasticity of Marginal Utility of Consumption�� Estimates for 20 OECD Countries.” Fiscal Studies 26(2)��197–224. ———. 2006. Social Discount Rates for the European Union. Working Paper No. 2006–20, �ifth Milan European Economy Workshop, Universita degli Studi di Milano, Italy. Evans, D., and H. Sezer. 2002. “A Time Preference Measure of the Social Discount Rate for the UK.” Applied Economics Letters 34��1925–34. ———. 2004. “Social Discount Rates for Six Major Countries.” Applied Economics Letters 11��557–60. Evans, D., E. Kula, and H. Sezer. 2005. “Regional Welfare Weights for the UK�� England, Scotland, Wales and Northern Ireland.” Regional Studies 39��923–37. �eldstein, M. 1972. “The Inadequacy of Weighted Discount Rates.” In R. Layard, ed., Cost–Benefit Analysis. Middlesex, UK�� Penguin Books. Harberger, A. 1972. Project Evaluation: Collected Papers. Chicago�� The University of Chicago Press. Harberger, A., and G. Jenkins. 2002. Cost–Benefit Analysis for Investment Decisions. Queen’s University, Canada. Hartman, R. 1990. “One Thousand Points of Light Seeking a Number�� A Case Study of CBO’s Search for a Discount Rate Policy.” Journal of Environmental Economics and Management 18(2)��S3–S7. Harrod, R. 1948. Towards a Dynamic Economics. London�� Macmillan. Henderson, N., and I. Bateman. 1995. “Empirical and Public Choice Evidence for Hyperbolic Social Discount Rates and the Implications for Intergenerational Discounting.” Environmental and Resource Economics 5��413–23. Henderson, N., and I. Langford. 1998. “Cross-Disciplinary Evidence for Hyperbolic Social Discount Rates.” Management Science 44(11)��1493–500. HM Treasury. 2003. Appraisal and Evaluation in Central Government (The Green Book). HM Treasury, London. Kay, J. 1972. “Social Discount Rates.” Journal of Public Economics 1��359–78. Kopp, R., and P. Portney. 1999. “Mock Referenda for Intergenerational Decision Making.” In P. Portney and J. Weyant, eds., Discounting and Intergenerational Equity. Resources for the �uture, Washington, DC. KPMG. 2004. Corporate Tax Rates Survey. Klynveld, Peat, Marwick, Goerdeler International, Switzerland. Available�� http��//www.us.kpmg.com/microsite/Global_Tax/CTR_Survey/2004CTRS.pdf. Kula, E. 1984. “Derivation of Social Time Preference Rates for the United States and Canada.” The Quarterly Journal of Economics November 1984��873–82. ———. 1985. “An Empirical Investigation on the Social Time Preference Rate for the UK.” Environment and Planning 17��199–217. ———. 1987. “Social Interest Rate for Public Sector Project Appraisal in the UK, USA and Canada.” Project Appraisal 2��169–74. ———. 2004. “Estimation of a Social Rate of Interest for India.” Journal of Agricultural Economics 55(1)��91– 9. Lesser, J., and R. Zerbe. 1995. “What Can Economic Analysis Contribute to the Sustainability Debate?” Contemporary Economic Policy 13(3)��88–100. erd Working PaPer SerieS no. 94 27 Lind, R. 1982. “A Primer on the Major Issues Relating to the Discount Rate for Evaluating National Energy Option.” In R. Lind, ed., Discounting for Time and Risk in Energy Policy. Resources for the �uture, Washington, DC. ———. 1990. “Reassessing the Government’s Discount Rate Policy in Light of New Theory and Data in a World Economy with a High Degree of Capital Mobility.” Journal of Environmental Economics and Management 18��S8–S28. ———. 1997. “Intertemporal Equity, Discounting, and Economic Ef��ciency in Water Policy Evaluation.” Climatic Change 37��41–62. Little, I. M. D., and J. A. Mirrlees. 1974. Project Appraisal and Planning for Developing Countries. New York�� Basic Books. Lyon, R. 1990. “�ederal Discount Rate Policy, the Shadow Price of Capital, and Challenges for Reforms.” Journal of Environmental Economics and Management 18��S29–S50. Marglin, S. 1963a. “The Opportunity Costs of Public Investment.” The Quarterly Journal of Economics 77(2)��274–89. ———. 1963b. “The Social Rate of Discount and the Optimal Rate of Investment.” The Quarterly Journal of Economics 77(1)��95–111. Mishan, E. 1967. “Criteria for Public Investment�� Some Simplifying Suggestions.” Journal of Political Economy 75��139–46. Moore, M., A. Boardman, A. �ining, D. Weimer, and D. Greenberg. 2004. “‘Just Give Me a Number!’ Practical �alues for the Social Discount Rate.” Journal of Policy Analysis and Management 23(4)��789–812. National Development and Reform Commission (NDRC) of the People’s Republic of China and Ministry of Construction. 2006. The Economic Analysis of Construction Projects: Methods and Parameters, 3rd version. Unpublished. Newbery, D. 1992. Long- Term Discount Rates for the Forest Enterprise. Paper commissioned by The Department of �orestry, �orestry Commission, Edinburgh. Nordhaus, W. 1993. “Rolling the ‘DICE’�� An Optimal Transition Path for Controlling Greenhouse Gases.” Resource and Energy Economics 15��27–50. ———. 1994. Managing The Global Commons�� The Economics of Climate Change. Cambridge, MA�� The MIT Press. ———. 1999. “Discounting and Public Policies that Affect the Distant �uture.” In P. Portney, P. and J. Weyant, eds., Discounting and Intergenerational Equity. Resources for the �uture, Washington, DC. ———. 2006. The Stern Review on the Economics of Climate Change. NBER Working Paper No. W12741, National Bureau of Economic Research, Cambridge. OXERA. 2002. “A Social Time Preference Rate for Use in Long-Term Discounting.” Report for the Of��ce of the Deputy Prime Minister, Department for Transport, and Department of the Environment, �ood and Rural Affairs, Oxford Economic Research Associates, Ltd., Oxford, UK. Pearce, D., and D. Ulph. 1995. A Social Discount Rate for the United Kingdom. CSERGE Working Paper GEC 95–01, Centre for Social and Economic Research on the Global Environment, University of East Anglia, Norwich, UK. ———. 1999. “A Social Discount Rate for the United Kingdom.” In D. Pearce, D., ed., Environmental Economics: Essays in Ecological Economics and Sustainable Development. Cheltenham�� Edward Elgar Publishing. Penn World Tables 6.1. Available�� http��//pwt.econ.upenn.edu/php_site/pwt61_form.php. Percoco, M. 2006. “A Social Discount Rate for Italy.” Applied Economics Letters. �orthcoming. Pigou, A. 1932. The Economics of Welfare. London�� Macmillan. Ramsey, �. 1928. “A Mathematical Theory of Saving.” Economic Journal 38��543–59. 28 May 2007 Theory and PracTice in The choice of Social diScounT raTe for coST–BenefiT analySiS: a Survey Juzhong zhuang, zhihong liang, Tun lin, and franklin de guzMan referenceS Rose, D. 2006. “The Public Sector Discount Rate.” Paper presented at the New Zealand Association of Economists Annual Conference, 26 June, Christchurch, New Zealand. Sandmo, A., and J. Drèze. 1971. “Discount Rates for Public Investments in Closed and Open Economies.” Economica 38��395–412. Sen, A. 1961. “On Optimizing the Rate of Saving.” Economic Journal 71��479–96. Schelling, T. 1995. “Intergenerational Discounting.” Energy Policy 23(4–5)��395–401. Scott, M. 1977. “The Test Rate of Discount and Changes in Base Level Income in the United Kingdom.” The Economic Journal 87(346)��219–41. . 1989. A New View of Economic Growth. Oxford, UK�� Clarendon Press. Solow, R. 1974. “Intergenerational Equity and Exhaustible Resources.” Review of Economic Studies 41��29– 45. Spackman, M. 2004. “Time Discounting and of the Cost of Capital in Government.” Fiscal Studies 25(4)��467– 518. ———. 2006. Social Discount Rates for the European Union: An Overview. Working Paper No. 2006–33, �ifth Milan European Economy Workshop, Universita degli Studi di Milano, Italy. Available�� http��//www. economia.unimi.it/uploads/wp/SPACKMAN-2006_33.pdf. Squire, L., and H. van der Tak. 1975. Economic Analysis of Projects. Baltimore�� The Johns Hopkins University Press. Stern, N. 2006. The Economics of Climate Change: The Stern Review. Cambridge, UK�� Cambridge University Press. Stiglitz, J. 1994. “Discount Rates�� the Rate of Discount for Cost–Bene��t Analysis and the Theory of the Second Best.” In R. Layard and S. Glaister, eds., Cost–Benefit Analysis. Cambridge University Press. Toman, M. 1999. “Reconciling Philosophy and Economics in Long Term Discounting.” In P. Portney and J. Weyant, eds., Discounting and Intergenerational Equity. Resources for the �uture, Washington, DC. US Environmental Protection Agency. 2000. Guidelines for Preparing Economic Analyses. Washington, DC. Available�� http��//yosemite.epa.gov/ee/epa/eerm.nsf/vwRepNumLookup/EE-0228C? OpenDocument. US General Accounting Of��ce. 1991. Discounting Policy. Washington, DC. US Of��ce of Management and Budget. 1992. Circular No. A-94: Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs. Revised January 2003. Washington, DC. United Nations International Development Organization (UNIDO) 1978. A Guide to Practical Project Appraisal. New York. Weitzman, M. 1994. “On the Environmental Discount Rate.” Journal of Environmental Economics and Management 26(2)��200–09. . 1998. “Why the �ar-Distant �uture Should be Discounted at its Lowest Possible Rate.” Journal of Environmental Economics and Management 36(3)��201–08. . 2001. “Gamma Discounting.” American Economic Review 91(1)��261–71. Zerbe, Jr., R. 2005. “Should Moral Sentiments Be Incorporated into Bene��t-Cost Analysis? An Example of Long-Term Discounting.” Policy Sciences 37(3–4)��305–18. Zerbe, Jr., R., and D. Dively. 1994. Benefit-Cost Analysis: In Theory and Practice. New York�� Harper Collins. erd Working PaPer SerieS no. 94 29 30 PUBLICATIONS FROM THE ECONOMICS AND RESEARCH DEPARTMENT ERD WORKING PAPER SERIES (WPS) (Published in-house; Available through ADB Office of External Relations; Free of Charge) No. 1 Capitalizing on Globalization —Barry Eichengreen, January 2002 No. 2 Policy-based Lending and Poverty Reduction: An Overview of Processes, Assessment and Options —Richard Bolt and Manabu Fujimura, January 2002 No. 3 The Automotive Supply Chain: Global Trends and Asian Perspectives —Francisco Veloso and Rajiv Kumar, January 2002 No. 4 International Competitiveness of Asian Firms: An Analytical Framework —Rajiv Kumar and Doren Chadee, February 2002 No. 5 The International Competitiveness of Asian Economies in the Apparel Commodity Chain —Gary Gereffi, February 2002 No. 6 Monetary and Financial Cooperation in East Asia—The Chiang Mai Initiative and Beyond —Pradumna B. Rana, February 2002 No. 7 Probing Beneath Cross-national Averages: Poverty, Inequality, and Growth in the Philippines —Arsenio M. Balisacan and Ernesto M. Pernia, March 2002 No. 8 Poverty, Growth, and Inequality in Thailand —Anil B. Deolalikar, April 2002 No. 9 Microfinance in Northeast Thailand: Who Benefits and How Much? —Brett E. Coleman, April 2002 No. 10 Poverty Reduction and the Role of Institutions in Developing Asia —Anil B. Deolalikar, Alex B. Brilliantes, Jr., Raghav Gaiha, Ernesto M. Pernia, Mary Racelis with the assistance of Marita Concepcion Castro- Guevara, Liza L. Lim, Pilipinas F. Quising, May 2002 No. 11 The European Social Model: Lessons for Developing Countries —Assar Lindbeck, May 2002 No. 12 Costs and Benefits of a Common Currency for ASEAN —Srinivasa Madhur, May 2002 No. 13 Monetary Cooperation in East Asia: A Survey —Raul Fabella, May 2002 No. 14 Toward A Political Economy Approach to Policy-based Lending —George Abonyi, May 2002 No. 15 A Framework for Establishing Priorities in a Country Poverty Reduction Strategy —Ron Duncan and Steve Pollard, June 2002 No. 16 The Role of Infrastructure in Land-use Dynamics and Rice Production in Viet Nam’s Mekong River Delta —Christopher Edmonds, July 2002 No. 17 Effect of Decentralization Strategy on Macroeconomic Stability in Thailand —Kanokpan Lao-Araya, August 2002 No. 18 Poverty and Patterns of Growth —Rana Hasan and M. G. Quibria, August 2002 No. 19 Why are Some Countries Richer than Others? A Reassessment of Mankiw-Romer-Weil’s Test of the Neoclassical Growth Model —Jesus Felipe and John McCombie, August 2002 No. 20 Modernization and Son Preference in People’s Republic of China —Robin Burgess and Juzhong Zhuang, September 2002 No. 21 The Doha Agenda and Development: A View from the Uruguay Round —J. Michael Finger, September 2002 No. 22 Conceptual Issues in the Role of Education Decentralization in Promoting Effective Schooling in Asian Developing Countries —Jere R. Behrman, Anil B. Deolalikar, and Lee- Ying Son, September 2002 No. 23 Promoting Effective Schooling through Education Decentralization in Bangladesh, Indonesia, and Philippines —Jere R. Behrman, Anil B. Deolalikar, and Lee- Ying Son, September 2002 No. 24 Financial Opening under the WTO Agreement in Selected Asian Countries: Progress and Issues —Yun-Hwan Kim, September 2002 No. 25 Revisiting Growth and Poverty Reduction in Indonesia: What Do Subnational Data Show? —Arsenio M. Balisacan, Ernesto M. Pernia, and Abuzar Asra, October 2002 No. 26 Causes of the 1997 Asian Financial Crisis: What Can an Early Warning System Model Tell Us? —Juzhong Zhuang and J. Malcolm Dowling, October 2002 No. 27 Digital Divide: Determinants and Policies with Special Reference to Asia —M. G. Quibria, Shamsun N. Ahmed, Ted Tschang, and Mari-Len Reyes-Macasaquit, October 2002 No. 28 Regional Cooperation in Asia: Long-term Progress, Recent Retrogression, and the Way Forward —Ramgopal Agarwala and Brahm Prakash, October 2002 No. 29 How can Cambodia, Lao PDR, Myanmar, and Viet Nam Cope with Revenue Lost Due to AFTA Tariff Reductions? —Kanokpan Lao-Araya, November 2002 No. 30 Asian Regionalism and Its Effects on Trade in the 1980s and 1990s —Ramon Clarete, Christopher Edmonds, and Jessica Seddon Wallack, November 2002 No. 31 New Economy and the Effects of Industrial Structures on International Equity Market Correlations —Cyn-Young Park and Jaejoon Woo, December 2002 No. 32 Leading Indicators of Business Cycles in Malaysia and the Philippines —Wenda Zhang and Juzhong Zhuang, December 2002 No. 33 Technological Spillovers from Foreign Direct Investment—A Survey —Emma Xiaoqin Fan, December 2002 37 No. 14 Small and Medium-Scale Manufacturing Establishments in ASEAN Countries: Perspectives and Policy Issues —Mathias Bruch and Ulrich Hiemenz, March 1983 No. 15 Income Distribution and Economic Growth in Developing Asian Countries —J. Malcolm Dowling and David Soo, March 1983 No. 16 Long-Run Debt-Servicing Capacity of Asian Developing Countries: An Application of Critical Interest Rate Approach —Jungsoo Lee, June 1983 No. 17 External Shocks, Energy Policy, and Macroeconomic Performance of Asian Developing Countries: A Policy Analysis —William James, July 1983 No. 18 The Impact of the Current Exchange Rate System on Trade and Inflation of Selected Developing Member Countries —Pradumna Rana, September 1983 No. 19 Asian Agriculture in Transition: Key Policy Issues —William James, September 1983 No. 20 The Transition to an Industrial Economy in Monsoon Asia —Harry T. Oshima, October 1983 No. 21 The Significance of Off-Farm Employment and Incomes in Post-War East Asian Growth —Harry T. Oshima, January 1984 No. 22 Income Distribution and Poverty in Selected Asian Countries —John Malcolm Dowling, Jr., November 1984 No. 23 ASEAN Economies and ASEAN Economic Cooperation —Narongchai Akrasanee, November 1984 No. 24 Economic Analysis of Power Projects —Nitin Desai, January 1985 No. 25 Exports and Economic Growth in the Asian Region —Pradumna Rana, February 1985 No. 26 Patterns of External Financing of DMCs —E. Go, May 1985 No. 27 Industrial Technology Development the Republic of Korea —S.Y. Lo, July 1985 No. 28 Risk Analysis and Project Selection: A Review of Practical Issues —J.K. Johnson, August 1985 No. 29 Rice in Indonesia: Price Policy and Comparative Advantage —I. Ali, January 1986 No. 30 Effects of Foreign Capital Inflows on Developing Countries of Asia —Jungsoo Lee, Pradumna B. Rana, and Yoshihiro Iwasaki, April 1986 No. 31 Economic Analysis of the Environmental Impacts of Development Projects —John A. Dixon et al., EAPI, East-West Center, August 1986 No. 32 Science and Technology for Development: Role of the Bank —Kedar N. Kohli and Ifzal Ali, November 1986 No. 33 Satellite Remote Sensing in the Asian and Pacific Region —Mohan Sundara Rajan, December 1986 No. 34 Changes in the Export Patterns of Asian and Pacific Developing Countries: An Empirical Overview —Pradumna B. Rana, January 1987 No. 35 Agricultural Price Policy in Nepal —Gerald C. Nelson, March 1987 No. 36 Implications of Falling Primary Commodity Prices for Agricultural Strategy in the Philippines —Ifzal Ali, September 1987 No. 37 Determining Irrigation Charges: A Framework —Prabhakar B. Ghate, October 1987 No. 38 The Role of Fertilizer Subsidies in Agricultural Production: A Review of Select Issues —M.G. Quibria, October 1987 No. 39 Domestic Adjustment to External Shocks in Developing Asia —Jungsoo Lee, October 1987 No. 40 Improving Domestic Resource Mobilization through Financial Development: Indonesia —Philip Erquiaga, November 1987 No. 41 Recent Trends and Issues on Foreign Direct Investment in Asian and Pacific Developing Countries —P.B. Rana, March 1988 No. 42 Manufactured Exports from the Philippines: A Sector Profile and an Agenda for Reform —I. Ali, September 1988 No. 43 A Framework for Evaluating the Economic Benefits of Power Projects —I. Ali, August 1989 No. 44 Promotion of Manufactured Exports in Pakistan —Jungsoo Lee and Yoshihiro Iwasaki, September 1989 No. 45 Education and Labor Markets in Indonesia: A Sector Survey —Ernesto M. Pernia and David N. Wilson, September 1989 No. 46 Industrial Technology Capabilities and Policies in Selected ADCs —Hiroshi Kakazu, June 1990 No. 47 Designing Strategies and Policies for Managing Structural Change in Asia —Ifzal Ali, June 1990 No. 48 The Completion of the Single European Community Market in 1992: A Tentative Assessment of its Impact on Asian Developing Countries —J.P. Verbiest and Min Tang, June 1991 No. 49 Economic Analysis of Investment in Power Systems —Ifzal Ali, June 1991 No. 50 External Finance and the Role of Multilateral Financial Institutions in South Asia: Changing Patterns, Prospects, and Challenges —Jungsoo Lee, November 1991 No. 51 The Gender and Poverty Nexus: Issues and Policies —M.G. Quibria, November 1993 No. 52 The Role of the State in Economic Development: Theory, the East Asian Experience, and the Malaysian Case —Jason Brown, December 1993 No. 53 The Economic Benefits of Potable Water Supply Projects to Households in Developing Countries —Dale Whittington and Venkateswarlu Swarna, January 1994 No. 54 Growth Triangles: Conceptual Issues and Operational Problems —Min Tang and Myo Thant, February 1994 No. 55 The Emerging Global Trading Environment and Developing Asia —Arvind Panagariya, M.G. Quibria, and Narhari Rao, July 1996 No. 56 Aspects of Urban Water and Sanitation in the Context of Rapid Urbanization in Developing Asia —Ernesto M. Pernia and Stella LF. Alabastro, September 1997 No. 57 Challenges for Asia’s Trade and Environment —Douglas H. Brooks, January 1998 No. 58 Economic Analysis of Health Sector Projects- A Review of Issues, Methods, and Approaches —Ramesh Adhikari, Paul Gertler, and Anneli Lagman, March 1999 No. 59 The Asian Crisis: An Alternate View —Rajiv Kumar and Bibek Debroy, July 1999 No. 60 Social Consequences of the Financial Crisis in Asia —James C. Knowles, Ernesto M. Pernia, and Mary Racelis, November 1999 38 No. 1 Estimates of the Total External Debt of the Developing Member Countries of ADB: 1981-1983 —I.P. David, September 1984 No. 2 Multivariate Statistical and Graphical Classification Techniques Applied to the Problem of Grouping Countries —I.P. David and D.S. Maligalig, March 1985 No. 3 Gross National Product (GNP) Measurement Issues in South Pacific Developing Member Countries of ADB —S.G. Tiwari, September 1985 No. 4 Estimates of Comparable Savings in Selected DMCs —Hananto Sigit, December 1985 No. 5 Keeping Sample Survey Design and Analysis Simple —I.P. David, December 1985 No. 6 External Debt Situation in Asian Developing Countries —I.P. David and Jungsoo Lee, March 1986 No. 7 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part I: Existing National Accounts of SPDMCs–Analysis of Methodology and Application of SNA Concepts —P. Hodgkinson, October 1986 STATISTICAL REPORT SERIES (SR) No. 8 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part II: Factors Affecting Intercountry Comparability of Per Capita GNP —P. Hodgkinson, October 1986 No. 9 Survey of the External Debt Situation in Asian Developing Countries, 1985 —Jungsoo Lee and I.P. David, April 1987 No. 10 A Survey of the External Debt Situation in Asian Developing Countries, 1986 —Jungsoo Lee and I.P. David, April 1988 No. 11 Changing Pattern of Financial Flows to Asian and Pacific Developing Countries —Jungsoo Lee and I.P. David, March 1989 No. 12 The State of Agricultural Statistics in Southeast Asia —I.P. David, March 1989 No. 13 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1987-1988 —Jungsoo Lee and I.P. David, July 1989 No. 14 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1988-1989 —Jungsoo Lee, May 1990 No. 15 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1989- 1992 No. 1 Poverty in the People’s Republic of China: Recent Developments and Scope for Bank Assistance —K.H. Moinuddin, November 1992 No. 2 The Eastern Islands of Indonesia: An Overview of Development Needs and Potential —Brien K. Parkinson, January 1993 No. 3 Rural Institutional Finance in Bangladesh and Nepal: Review and Agenda for Reforms —A.H.M.N. Chowdhury and Marcelia C. Garcia, November 1993 No. 4 Fiscal Deficits and Current Account Imbalances of the South Pacific Countries: A Case Study of Vanuatu —T.K. Jayaraman, December 1993 No. 5 Reforms in the Transitional Economies of Asia —Pradumna B. Rana, December 1993 No. 6 Environmental Challenges in the People’s Republic of China and Scope for Bank Assistance —Elisabetta Capannelli and Omkar L. Shrestha, December 1993 No. 7 Sustainable Development Environment and Poverty Nexus —K.F. Jalal, December 1993 No. 8 Intermediate Services and Economic Development: The Malaysian Example —Sutanu Behuria and Rahul Khullar, May 1994 No. 9 Interest Rate Deregulation: A Brief Survey of the Policy Issues and the Asian Experience —Carlos J. Glower, July 1994 No. 10 Some Aspects of Land Administration in Indonesia: Implications for Bank Operations —Sutanu Behuria, July 1994 No. 11 Demographic and Socioeconomic Determinants of Contraceptive Use among Urban Women in the Melanesian Countries in the South Pacific: A Case Study of Port Vila Town in Vanuatu —T.K. Jayaraman, February 1995 No. 12 Managing Development through Institution Building — Hilton L. Root, October 1995 No. 13 Growth, Structural Change, and Optimal Poverty Interventions —Shiladitya Chatterjee, November 1995 No. 14 Private Investment and Macroeconomic Environment in the South Pacific Island Countries: A Cross-Country Analysis —T.K. Jayaraman, October 1996 No. 15 The Rural-Urban Transition in Viet Nam: Some Selected Issues —Sudipto Mundle and Brian Van Arkadie, October 1997 No. 16 A New Approach to Setting the Future Transport Agenda —Roger Allport, Geoff Key, and Charles Melhuish, June 1998 No. 17 Adjustment and Distribution: The Indian Experience —Sudipto Mundle and V.B. Tulasidhar, June 1998 No. 18 Tax Reforms in Viet Nam: A Selective Analysis —Sudipto Mundle, December 1998 No. 19 Surges and Volatility of Private Capital Flows to Asian Developing Countries: Implications for Multilateral Development Banks —Pradumna B. Rana, December 1998 No. 20 The Millennium Round and the Asian Economies: An Introduction —Dilip K. Das, October 1999 No. 21 Occupational Segregation and the Gender Earnings Gap —Joseph E. Zveglich, Jr. and Yana van der Meulen Rodgers, December 1999 No. 22 Information Technology: Next Locomotive of Growth? —Dilip K. Das, June 2000 OCCASIONAL PAPERS (OP) 39 —Min Tang, June 1991 No. 16 Recent Trends and Prospects of External Debt Situation and Financial Flows to Asian and Pacific Developing Countries —Min Tang and Aludia Pardo, June 1992 No. 17 Purchasing Power Parity in Asian Developing Countries: A Co-Integration Test —Min Tang and Ronald Q. Butiong, April 1994 No. 18 Capital Flows to Asian and Pacific Developing Countries: Recent Trends and Future Prospects —Min Tang and James Villafuerte, October 1995 FROM OXFORD UNIVERSITY PRESS: Oxford University Press (China) Ltd 18th Floor, Warwick House East Taikoo Place, 979 King’s Road Quarry Bay, Hong Kong Tel (852) 2516 3222 Fax (852) 2565 8491 E-mail: [email protected] Web: www.oupchina.com.hk 1. Informal Finance: Some Findings from Asia Prabhu Ghate et. al., 1992 $15.00 (paperback) 2. Mongolia: A Centrally Planned Economy in Transition Asian Development Bank, 1992 $15.00 (paperback) 3. Rural Poverty in Asia, Priority Issues and Policy Options Edited by M.G. Quibria, 1994 $25.00 (paperback) 4. Growth Triangles in Asia: A New Approach to Regional Economic Cooperation Edited by Myo Thant, Min Tang, and Hiroshi Kakazu 1st ed., 1994 $36.00 (hardbound) Revised ed., 1998 $55.00 (hardbound) 5. Urban Poverty in Asia: A Survey of Critical Issues Edited by Ernesto Pernia, 1994 $18.00 (paperback) 6. Critical Issues in Asian Development: Theories, Experiences, and Policies Edited by M.G. Quibria, 1995 $15.00 (paperback) $36.00 (hardbound) 7. Financial Sector Development in Asia Edited by Shahid N. Zahid, 1995 $50.00 (hardbound) 8. Financial Sector Development in Asia: Country Studies Edited by Shahid N. Zahid, 1995 $55.00 (hardbound) 9. Fiscal Management and Economic Reform in the People’s Republic of China Christine P.W. Wong, Christopher Heady, and Wing T. Woo, 1995 $15.00 (paperback) 10. From Centrally Planned to Market Economies: The Asian Approach Edited by Pradumna B. Rana and Naved Hamid, 1995 Vol. 1: Overview $36.00 (hardbound) Vol. 2: People’s Republic of China and Mongolia $50.00 (hardbound) Vol. 3: Lao PDR, Myanmar, and Viet Nam $50.00 (hardbound) 11. Current Issues in Economic Development: An Asian Perspective SPECIAL STUDIES, CO-PUBLISHED (Available commercially through Oxford University Press Offices, Edward Elgar Publishing, and Palgrave MacMillan) Edited by M.G. Quibria and J. Malcolm Dowling, 1996 $50.00 (hardbound) 12. The Bangladesh Economy in Transition Edited by M.G. Quibria, 1997 $20.00 (hardbound) 13. The Global Trading System and Developing Asia Edited by Arvind Panagariya, M.G. Quibria, and Narhari Rao, 1997 $55.00 (hardbound) 14. Social Sector Issues in Transitional Economies of Asia Edited by Douglas H. Brooks and Myo Thant, 1998 $25.00 (paperback) $55.00 (hardbound) 15. Intergovernmental Fiscal Transfers in Asia: Current Practice and Challenges for the Future Edited by Yun-Hwan Kim and Paul Smoke, 2003 $15.00 (paperback) 16. Local Government Finance and Bond Markets Edited by Yun-Hwan Kim, 2003 $15.00 (paperback) FROM EDWARD ELGAR: Marston Book Services Limited PO Box 269, Abingdon Oxon OX14 4YN, United Kingdom Tel +44 1235 465500 Fax +44 1235 465555 Email: [email protected] Web: www.marston.co.uk 1. Reducing Poverty in Asia: Emerging Issues in Growth, Targeting, and Measurement Edited by Christopher M. Edmonds, 2003 FROM PALGRAVE MACMILLAN: Palgrave Macmillan Ltd Houndmills, Basingstoke Hampshire RG21 6XS, United Kingdom Tel: +44 (0)1256 329242 Fax: +44 (0)1256 479476 Email: [email protected] Web: www.palgrave.com/home/ 1. Labor Markets in Asia: Issues and Perspectives Edited by Jesus Felipe and Rana Hasan, 2006 2. Competition Policy and Development in Asia Edited by Douglas H. Brooks and Simon Evenett, 2005 3. Managing FDI in a Globalizing Economy Asian Experiences Edited by Douglas H. Brooks and Hal Hill, 2004 4. Poverty, Growth, and Institutions in Developing Asia Edited by Ernesto M. Pernia and Anil B. Deolalikar, 2003 40 1. Rural Poverty in Developing Asia Edited by M.G. Quibria Vol. 1: Bangladesh, India, and Sri Lanka, 1994 $35.00 (paperback) Vol. 2: Indonesia, Republic of Korea, Philippines, and Thailand, 1996 $35.00 (paperback) 2. Gender Indicators of Developing Asian and Pacific Countries Asian Development Bank, 1993 $25.00 (paperback) 3. External Shocks and Policy Adjustments: Lessons from the Gulf Crisis Edited by Naved Hamid and Shahid N. Zahid, 1995 $15.00 (paperback) 4. Indonesia-Malaysia-Thailand Growth Triangle: Theory to Practice Edited by Myo Thant and Min Tang, 1996 $15.00 (paperback) 5. Emerging Asia: Changes and Challenges Asian Development Bank, 1997 $30.00 (paperback) 6. Asian Exports Edited by Dilip Das, 1999 $35.00 (paperback) $55.00 (hardbound) 7. Development of Environment Statistics in Developing Asian and Pacific Countries Asian Development Bank, 1999 $30.00 (paperback) 8. Mortgage-Backed Securities Markets in Asia Edited by S.Ghon Rhee & Yutaka Shimomoto, 1999 $35.00 (paperback) 9. Rising to the Challenge in Asia: A Study of Financial Markets Asian Development Bank Vol. 1: An Overview, 2000 $20.00 (paperback) Vol. 2: Special Issues, 1999 $15.00 (paperback) Vol. 3: Sound Practices, 2000 $25.00 (paperback) Vol. 4: People’s Republic of China, 1999 $20.00 (paperback) Vol. 5: India, 1999 $30.00 (paperback) Vol. 6: Indonesia, 1999 $30.00 (paperback) Vol. 7: Republic of Korea, 1999 $30.00 (paperback) Vol. 8: Malaysia, 1999 $20.00 (paperback) Vol. 9: Pakistan, 1999 $30.00 (paperback) Vol. 10: Philippines, 1999 $30.00 (paperback) Vol. 11: Thailand, 1999 $30.00 (paperback) Vol. 12: Socialist Republic of Viet Nam, 1999 $30.00 (paperback) 10. Corporate Governance and Finance in East Asia: A Study of Indonesia, Republic of Korea, Malaysia, Philippines and Thailand J. Zhuang, David Edwards, D. Webb, & Ma. Virginita Capulong Vol. 1: A Consolidated Report, 2000 $10.00 (paperback) Vol. 2: Country Studies, 2001 $15.00 (paperback) 11. Financial Management and Governance Issues Asian Development Bank, 2000 Cambodia $10.00 (paperback) People’s Republic of China $10.00 (paperback) Mongolia $10.00 (paperback) Pakistan $10.00 (paperback) Papua New Guinea $10.00 (paperback) Uzbekistan $10.00 (paperback) Viet Nam $10.00 (paperback) Selected Developing Member Countries $10.00 (paperback) 12. Government Bond Market Development in Asia Edited by Yun-Hwan Kim, 2001 $25.00 (paperback) 13. Intergovernmental Fiscal Transfers in Asia: Current Practice and Challenges for the Future Edited by Paul Smoke and Yun-Hwan Kim, 2002 $15.00 (paperback) 14. Guidelines for the Economic Analysis of Projects Asian Development Bank, 1997 $10.00 (paperback) 15. Guidelines for the Economic Analysis of Telecommunications Projects Asian Development Bank, 1997 $10.00 (paperback) 16. Handbook for the Economic Analysis of Water Supply Projects Asian Development Bank, 1999 $10.00 (hardbound) 17. Handbook for the Economic Analysis of Health Sector Projects Asian Development Bank, 2000 $10.00 (paperback) 18. Handbook for Integrating Povery Impact Assessment in the Economic Analysis of Projects Asian Development Bank, 2001 $10.00 (paperback) 19.Handbook for Integrating Risk Analysis in the Economic Analysis of Projects Asian Development Bank, 2002 $10.00 (paperback) 20. Handbook on Environment Statistics Asian Development Bank, 2002 $10.00 (hardback) 21. Defining an Agenda for Poverty Reduction, Volume 1 Edited by Christopher Edmonds and Sara Medina, 2002 $15.00 (paperback) 22. Defining an Agenda for Poverty Reduction, Volume 2 Edited by Isabel Ortiz, 2002 $15.00 (paperback) 23. Economic Analysis of Policy-based Operations: Key Dimensions Asian Development Bank, 2003 $10.00 (paperback) SPECIAL STUDIES, IN-HOUSE (Available commercially through ADB Office of External Relations) Printed in the Philippines Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No. 050407 About the Asian Development Bank The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the people in Asia and the Pacific, particularly the 1.9 billion who live on less than $2 a day. Despite many success stories, Asia and the Pacific remains home to two thirds of the world’s poor. ADB is a multilateral development finance institution owned by 67 members, 48 from the region and 19 from other parts of the globe. ADB’s vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens. ADB’s main instruments for providing help to its developing member countries are policy dialogue, loans, technical assistance, grants, guarantees, and equity investments. ADB’s annual lending volume is typically about $6 billion, with technical assistance usually totaling about $180 million a year. ADB’s headquarters is in Manila. It has 26 offices around the world and has more than 2,000 employees from over 50 countries. About the Paper Juzhong Zhuang, Zhihong Liang, Tun Lin, and Franklin De Guzman survey theories and practices in the choice of the social discount rate for cost-benefit analysis of public projects. The issue of choosing an appropriate discount rate for intergenerational projects is also highlighted in light of recent debates on the economics of climate change. May 2007 ERD ECONOMICS AND RESEARCH DEPARTMENT Working Paper SERIES No. 94 Juzhong Zhuang, Zhihong Liang, Tun Lin, and Franklin De Guzman Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: A Survey Theory and Practice in the Choice of Social Discount Rate for Cost-Benefit Analysis: A Survey < 0 0 5 0 4 0 7 2 >