BOOKS OF RtfiDIfGS - PAHO/WHO

I Klarman
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benefits that for the time being remain difficult to value and pure public goods, which are
not traded on the market and therefore cannot be valued.
Tbhe dilemnmas of valuation can be escaped by retreating from cost-benefit analysis to
cost-effectiveness analysis. The latter i the less demanding approach, since it does not
require the valuation of all benefits in terms of a common numéraire. Cost-effectiveneu
analysis requires only that benefits be measured in physical terms. Once an objective or
output is specified, the aim is to minimiz e the cost of attaining it. The cost data required
for cost-effectiveness analysis are, however, the same as for cost-benefit analysis (29).
Retreating from the valuation of benefits to measurement alone entails a substantial
loss: analysis can no longer assist in setting priorities among several fields of public
activity. The reason is simple. While cost-benefit analysis cuts across diverse objects of
public expenditure, cost-effectiveness analysis can only help in choosing among alternate
means of achieving a given, presumably desired, outcome (30). It is cost-effectiveness
analysis that was incorporated as a major element in the planning, program, and
budgeting (PPB) systems of the federal government. After its initial development by the
Rand Corporation, PPB was introduced by the Department of Defense in 1961 and
extended to other departments and agencies by Executive Order in 1965 (31, 32).
Both cost-benefit analysis and cost-effectiveness analysis imply the measurement of
outcomes that are associated with particular projects or programs of service. Presumably
there is a link between inputs and outputs that is measurable and known. It does not
matter whether bc.,avior follows a deterministic or probabilistic pattern. In the
development of water resources the design of a particular project almost guarantees the
emergence of certain physical outcomes-so much land will be lost to flooding, so much
more land will be protected from flooding, so much land will be irrigated, etc. In national
defense the outcome of a proposed course of action is much more uncertain, since other
countries can take evasive and retaliatory action. In the health field, as will be shown, the
presumed link between inputs and outputs is sometimes tenuous (33). Too often, the task
of measurement, which necessarily precedes valuation, has been neglected.
The Rate of Discount
There is wide consensus in economics that a dollar is worth more today than it will be
worth a year or two from now; this holds true when overall price level remains constant.
As long as assets are safe, consumers are believed to have a positive time preference, that
is, prefer to consume now rather than later. For producers investment may be productive
through either the lapse of time, as in wine making, or the adoption of more round-about
methods of production. Borrowers are therefore willing to pay interest for the use of
capital, and lenders, in a capitalist economy, expect to receive interest. In a socialist
economy an accounting or imputed rate of interest is employed to help allocate resources
over time. The interest rate that calculates the present values of future streams of benefits
and future streams of costs for public projects or programs is the well-known discount
rate of cost-benefit analysis (18, p. 165).
Although economists agree that a discount rate is necessary for rendering
commensurate benefits accruing and costs incurred at different times, they do not agree
on the size of the discount rate. Marked differences of opinion prevail for a number of
reasons. One is that a diversity of interest rate structures exists in the real world, owing to
capital market imperfections, differences in risk, and governmental monetary