The relevance and feasibility of economic cost-benefit analysis in economies in transition with special reference to Uzbekistan

This paper questions the relevance and applicability of economic cost-benefit methods in economies in transition. It draws on insights gained in teaching project appraisal methods to practitioners and trainers from Uzbekistan, some of the other Central Asian Republics (Kazakhstan, Kyrgyzstan) and Azerbaijan. The specific institutional, economic and geo political context is therefore that of relatively poor and land-locked primary export economies that -as former Soviet Republics- go through a process of transition which has as its point of departure the particular system of central planning that was in force in the Soviet Union until 1991.

The paper shows that economic cost-benefit methods are in principle highly relevant in transitional economies as prices tend to be even more highly distorted than in the less developed market economies for which these methods were originally developed. It also shows, however, that the nature and origin of these distortions imposes severe limitations on the practical applicability of standard cost-benefit methods. The haphazard nature of distortions makes it impossible to use short-cut methods such as the standard conversion factor. or its equivalent the premium on foreign exchange. Use of specific conversion factors is in practice also very difficult as prices tend to be highly volatile. Direct estimation of economic prices, and repeated re-estimation of these prices for each new project, seems the only solution.
The paper finally also identifies a number of fundamental pricing problems that cannot be solved within the context of standard methods of economic appraisal. These are primarily related to the pricing of "non-traded" goods and services (including primary factors such as labour and land).