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It is shown that the correct way to evaluate a public project is to compare reductions in consumption arising from the investment outlay with the increase in wealth that the investment helps to create. Putting it in other words, projects should be accepted if they add to wealth, but not otherwise. It is also shown that for public projects this amounts to estimating the present discounted value (PDV) of the flow of the project's social profits. A project whose PDV is positive should be accepted; one whose PDV is negative should be rejected. The correct measure of social well‐being, even for purposes of project evaluation, is wealth. The finding unifies valuation and evaluation.

The sixth and seventh chapters that make up Part II of the book consist of one practical and much narrower application of the capability approach, namely, a discussion of how economic analysis (cost‐benefit analysis) and systematic qualitative information on human impacts can be combined in order to assess the relative effectiveness of particular development activities in expanding human capabilities. This sixth chapter on assessing capability change first gives an introduction to Part II. It goes on to defend the necessity of efficiency considerations, such as those that are incorporated in cost‐benefit analysis and in project evaluation, and then looks at capability set analysis by reviewing two prominent participatory assessment methodologies that have been developed to supplement economic considerations with social data: one by the World Bank (participatory social assessment), the other as a result of US legislation governing public expenditure (social impact assessment). Both of these lack a systematic method for identifying changes valued by participants themselves and for devolving real control over a decision to the lowest level capable of making it, and this lack increases the chance of significant bias in gathering and interpreting value judgements. In response, a novel method of impact assessment is described that would complement and improve available assessment tools; the method of impact assessment represents one way in which the framework of the preceding chapters could be used.

Single-period performance measures made popular by VBM vendors for the evaluation of a firm's ongoing operations can easily be misinterpreted and misused to evaluate period-by-period performance of new investment opportunities. Nothing is wrong with single-period measures of performance per se (e.g., EVA); the problem lies in the use of such measures as indicators of value-creation potential for long-lived projects. In this situation it is best to simply use project NPV, which, furthermore, is completely consistent with EVA when the present value of all future project EVA is considered. The chapter also discusses a modification of EVA that corrects for the problems that arise in the use of traditionally defined EVA in project analysis. However, the fix comes at a high cost in terms of the required information inputs.

Evaluation is the most direct tool that principals at all types of organizations use to manage the discretion they grant to their agents. Evaluations produce information about the outcomes of decisions and reduce uncertainty about cause-and-effect relationships. This chapter examines whether the results in project evaluations at the multilateral development banks have promoted selectivity in the allocation of environment-improving projects. Under pressure from donor countries to approve environment-improving activities, the multilateral development banks use information about success in evaluations to convince recipient countries to take on more environmental projects with clear local benefits. The same type of information is disregarded for projects that primarily have global benefits, since donor countries have pressured the multilateral development banks to rapidly scale up lending for these types of projects. These results suggest that much of the effort around project evaluation should be directed to meet the information needs of borrowing countries.

Based on previously untapped archival material, this chapter discusses the establishment of the operations-evaluation function at the World Bank between the mid-1960s and the early 1970s, and the conflicting visions that shaped it. The birth of the operations-evaluation function at the bank was far from linear: it involved various attempts, false starts, and discussions about the goal of project appraisal, the intellectual foundations of project evaluation, and the organizational solutions to establish an efficient and useful function. By reconstructing the long process through which the bank established its operations-evaluation function, this chapter highlights the organizational steps through which the bank tried to make this process reasonably efficient. Also, it discusses the tension between the organizational need for evaluation as a routine process and the intrinsically uncertain nature of the knowledge produced by this process.

In response to failures to protect local people from environmental harm in development projects, the multilateral development banks established safeguard procedures. These procedures require environmental reviews of all projects before they can be approved. Because staff at the multilateral development banks have strong incentives to avoid delays to the approval of projects, results from evaluations provide information about likely delays because of low borrower performance or commitment. Since staff and management have strong incentives to approve projects, safeguard procedures have caused both the World Bank and the Asian Development Bank to practice selectivity related to environmentally risky projects. This result does not hold for the African Development Bank, which did not implement strong safeguard procedures during the study period.

This chapter explores the varied practices through which donors assure their funders and themselves that their efforts have succeeded. NGOs that implement interventions to prevent HIV deploy three techniques to show that their efforts have been successful: testimonials from those whose lives they want to change, listing and counting the activities they conduct to produce change, and end-of-project evaluations. Many projects organize a celebration with speeches and testimonials when a donor visits or when the project has ended. Journalists are often invited by the NGO to attend the ceremony, with the understanding that they will write a feature story on the event. A key event in the celebration is when a beneficiary takes center stage and tells the audience a before-and-after story of the change that the NGO has made in her, or his, life.

Fragile states are highly dependent on foreign aid and are characterized by several features that impair their economic and social performance. This chapter reviews the literature on aid effectiveness and presents several stylized facts on aid flows to fragile states and exploits project-level data to provide evidence on aid effectiveness in fragile states. Comparing project success rates across fragile and other developing countries confirms that aid given to fragile states is less likely to be effective than elsewhere. Our results indicate that a project implemented in a fragile state is about 8 percentage points less likely to be successful than a similar project financed in another developing country. Our analysis does not imply that aid to fragile states should be reduced across the board, but points to several factors that could hamper the growth dividend of aid.

This chapter presents the principal-agent framework that will serve as the basis for the empirical research in the following chapters. Although a great deal of theoretical development has helped explain why international organizations do not always achieve the mandates given to them by states, less research deals with the mechanisms available to states to control international organizations after delegating authority and resources. This chapter puts forward the primary theoretical argument of the book, specifically that member states are able to manage discretion and promote selectivity when they (1) generate information about the outcomes of past decisions and (2) use that information to raise the costs of making decisions that have been unsuccessful or encourage decisions that have been successful. Both steps are difficult and are likely to arise only under certain circumstances, which form hypotheses for the following chapters.

Can the allocation of aid be made compatible with achieving good development and environmental outcomes? To this day, environmental and development aid remains largely stuck in a system that focuses on the approval of projects and the disbursement of funds. This book has shown that it is sometimes possible to channel or overcome these incentives and thereby give aid more effectively. There is not a uniform response to information about results across different types of projects and multilateral development banks. Information about performance must combine with incentives to be selective from donor countries, civil society groups, and recipient countries to change allocation decisions. This chapter discusses the implications of this result for the future of environmental and development assistance, including the creation of the Green Climate Fund and reforms to the allocation procedures at the multilateral development banks. Shifting focus from selectivity practiced at the level of countries to selectivity practiced within the portfolios of countries offers a way to give aid more effectively.

This chapter discusses the major contributions of local economy-wide impact evaluation (LEWIE) and contemplates its future role in impact evaluation studies. Evaluations focusing on treatment and control groups, when feasible, are essential; however, they provide an incomplete picture of total impacts and are not an option for impact evaluation in most instances. LEWIE fills this void in impact evaluation while documenting spillovers and total impacts that, in most cases, significantly exceed the direct impacts of government programs, policies, and other interventions. It also offers a new way to think about, and design, policies and programs, as well as a means to document impacts that may be critical to securing funding for development projects.

Focusing attention on disability and employment in low- and middle-income countries can be challenging because of high poverty rates and lack of availability of decent employment for large sectors of the population. When examining employment issues in low- and middle-income countries, it is also important to keep in mind the structure of the labor market, in which the majority of people—and especially those with low skills—are in the informal labor market, or even in informal employment within the formal sector. This chapter reviews some employment programs for people with disabilities in low- and middle-income countries, presenting a policy typology for programs and a set of policy recommendations that serve to guide interventions by actors in different sectors.

This chapter addresses how future benefits should be discounted in the context of project evaluation, or cost–benefit analysis, and addresses the role played by the choice of discount rate with respect to long-term policies. The chapter focuses on theoretical arguments for a declining discount rate (DDR) schedule, in which the rate used to discount benefits and costs declines over time. The governments of France and the United Kingdom use a DDR, but the United States does not. The chapter reviews models of long-term interest rates that have been estimated for the United States and used to forecast US DDR schedules. It then applies them to calculating the social cost of carbon emissions.

An important argument for the increased use of randomized control trial methods in development is that the evidence from these studies will encourage the uptake of effective programs and projects (both through discouraging ineffective projects and improving design of new projects) and this will lead to reduced poverty and improved human well-being. However, cross-national evidence shows that the four-fold transformation of national development, to higher productivity economies, to more responsive states, the more capable organizations and administration and to more equal social treatment produces gains in poverty and human well-being that are orders of magnitude bigger than the best that can be hoped from better programs. Arguments that RCT research is a good (much less “best”) investment depend on both believing in an implausibly low likelihood that non-RCT research can improve progress national development and believing in an implausibly large likelihood that RCT evidence improves outcomes.