Global Cost-Benefit Analysis

What happens when you ask eight world class economists, "If the international community had an additional $50 billion, what would the priorities be?"

Global Crises, Global Solutions, Bjorn Lomborg (Editor)
Published by Cambridge University Press, Oct 2004, 670 pp.

In an article published several years ago, science fiction writer David Brin proposed a new idea for channeling massive amounts of capital into ambitious philanthropic projects. Brin described what he called the Eye of the Needle Foundation, a charitable group whose purpose would be to publish a catalog of projects for the world's rich to consider funding in exchange for a shot at having their names immortalized in human history. From a manned mission to Mars to providing water and energy to the world's poor, the Foundation would estimate the costs and chances of success for each of endeavor. The end result would be "an elite, gilt-edged catalog more exclusive and interesting to the mega-wealthy than anything by Niemann Marcus."

Brin's Eye of the Needle Foundation does not yet exist; however, the vision behind it serves as a useful introduction to another innovative project, the Copenhagen Consensus. Organized by Bjorn Lomborg, an associate professor of statistics at the University of Aarhus, Sweden, the Consensus holds the conclusions of eight world-class economists, coming together to consider a simple question: If there were an additional $50 billion designated solely to do good in the world, how could we best use that money? Their results are reported in the book Global Crises, Global Solutions, which serves as a catalog - minus the gilt-edging - of aid projects for governments to consider.

The Consensus began by creating a list of the greatest challenges facing the world today. From an initial list of thirty-one, only ten made the final cut:

climate change
communicable diseases
armed conflicts
access to education
financial instability
poor governance and corruption
malnutrition and hunger
migration
sanitation and access to clean water
and subsidies and trade barriers.

Next, for each challenge a selected expert economist exhaustively estimated the costs and benefits of each available solution. Two additional economists then wrote perspective papers including criticism and further information. Finally, the panel of eight renowned economists, which included three Nobel laureates, met for five days in Copenhagen to rank the various proposals, in order of greatest opportunity for success.

Skeptics confronted

A project this ambitious is bound to raise a few skeptical eyebrows. For starters, many people may wonder why the Copenhagen Consensus team was composed entirely of economists. Lomborg answers that his project is about prioritization, and prioritizing is what economists do best. A scientist studying climate change and an activist advocating more medical aid to the developing world can each give good reasons why their issues deserve attention, but they'll be unlikely to agree on which of theirs should be addressed first. Economists are professionally trained to weigh costs and benefits and inform us about how to get the greatest bang for our buck.

Why were all the participants in the Copenhagen Consensus economists? How could one possibly rank such issues of life and suffering? Why not also rank foreign and domestic spending?

A second objection confronts the very idea of prioritization. Ideally, every would problem would be addressed and every life would be priceless. Alas, as all economists know, we live in a world of scarce resources. In order to get the most out of our money, we have to adopt a marginal perspective and ask where our limited aid dollars will do the most good, even if that means putting a dollar figure on lives saved. Ill-informed choices lead to wasteful spending on issues that are often literally matters of life and death.

Lastly, a common objection is that the Copenhagen Consensus's scope is too limited. After all, if we're going to prioritize, why not weigh the good done by foreign aid against the money governments spend domestically on the military or expensive research? Again, Lomborg has thought of this objection and offers a straightforward response: such an analysis would not tell us anything interesting. We already know that we could save many more lives in the developing world than we can by spending it on ourselves, but transferring most of our wealth overseas is neither politically feasible nor desirable. The Consensus' decision to limit its purview to plausible increases in world aid keeps its conclusions relevant to actual policy discussion.

Prioritizing the challenges

With those initial concerns out of the way, we can turn to the truly interesting question: How did the dream team of economists rank the proposals? They considered four opportunities "very good," noting that they offer very favorable cost-benefit ratios. These are controlling the spread of HIV/AIDS, improving health through the addition of micronutrients to the food supply, liberalizing trade by eliminating subsidies and quotas, and preventing malaria by distributing insecticide treated bed nets. The team also classified developing new agricultural technologies and increasing access to clean water as additional "good" opportunities.

The expert panel ranked four opportunities as "bad" because of their high costs and low benefits. The least bad would be guest worker programs. While the panel favors migration as a way of increasing trade and productivity, this particular proposal ranks poorly because it does not encourage assimilation. The remaining three bad opportunities concerned reducing greenhouse gas emissions. The panel rejected the Kyoto Protocol and two proposals for carbon abatement taxes due to their costs far exceeding any likely benefits.

In fact, the final panel rejected fellow-panelist William Cline's proposed carbon taxes and graded climate change opportunities in terms of their discounted present value. On this basis, the proposed options for climate change abatement stacked up very poorly to opportunities for addressing more immediate problems. The Consensus recommended instead that we continue doing research and leave it to later, richer, better-informed generations to handle climate change.

Crises unaddressed

There are three challenge areas that the panel chose not to rank at all: preventing armed conflicts, increasing access to education, and mitigating financial instability. The panel agreed that all three of these challenges impose enormous costs on the developing world; however, proven ways of addressing them are not yet known. Thus, there was too much uncertainty regarding potential costs and benefits for these areas to be graded by the panel.

In general, all of the recommended opportunities share three characteristics: they yield positive results in the near or immediate future, cover problems that can be addressed with current knowledge, and can be accomplished without excessive government involvement or institutional change. Opportunities requiring long time horizons (climate change), further research (education, financial instability), or government implementation (scaling up basic health services) tended to fare less well.

In planning the Copenhagen Consensus, Lomborg originally hoped that the panel would be able to make its final ranking based entirely on numerically expressed benefit-cost ratios. Early in the process, however, the individual authors declined to be that exact. The ranking was instead "predominantly guided by economic costs and benefits" and determined by the mean ranking of each individual economist. Overall, this is a good result. As contributor Barry Eichengreen notes, comparing diverse issues on the basis of complex mathematical models would have hidden important assumptions and uncertainties and lead to a false sense of precision.

Lomborg and the consensus' contribution

As for the book itself, readers unfamiliar with economics will find it a difficult read. The tome weighs in at just under 650 pages of academic writing, including a three-page glossary of acronyms and abbreviations that readers will likely want to bookmark for easy reference. That said, the challenge papers and shorter response papers included in the book provide an invaluable survey of the literature regarding the world's most pressing problems. Casual readers may want to peruse only certain chapters; read the panelists' individual recommendations or wait on an upcoming version of the book aimed at high school students for a simplistic analysis.

The Consensus' findings are certainly not the last word in policy analysis. They are, however, an excellent starting point. The panel's innovative methodology reframes the way we debate international aid, shifting the focus from the scale of problems to the feasibility of solutions. This allows us to make better-informed decisions about how to spend our aid dollars and indicates where further research is needed. Even on the controversial issue of climate change the book proves thought-provoking and provides a much-needed economic perspective. Those who disagree with the panel's rankings are free to offer different interpretations or grounds for evaluation, but, thanks to the Consensus, cost-benefit analysis cannot be easily ignored.

Lomborg expressed hope that similar efforts will be made in other areas of policy analysis and that economists will reconvene in Copenhagen in 2008 to repeat the exercise with improved information. If the results are anywhere near as interesting as in 2004, those are both very worthy goals. Global Crises, Global Solutions is an excellent resource for anyone who wants to find ways to improve the world and for any policy makers who desire cost-effective solutions.

Article contributed by Jacob Grier, a freelance writer, close-up magician, and barista in Arlington, VA. Reprinted with permission from aBetterEarth.

To read another Global Envision article on the Copenhagen Consensus, see The $50 Billion Question.