Understanding the local economic impacts of projects and policies

In central Africa, the World Food Program is shifting from aid in kind to cash and vouchers in the refugee camps that it runs. The hope is to create benefits for the surrounding host-country economies as well as for the refugees, themselves.

In West Gonja, Ghana, the UN Food and Agricultural Organization is investing in cassava processing and marketing, in the hope of stimulating incomes, employment, and welfare in one of the country’s poorest regions.

In a small-scale fishery in the Philippines, the government hopes to introduce new regulations to ensure the fishery’s long-term sustainability. The long-term gains are clear, but in the short run, nobody knows what limiting access will mean for an economy in which most fisher households are poor, and income from fishing is vital to these as well as other poor households with whom they interact.

These are classic situations in which local economy-wide impact evaluation (LEWIE) methods can be incredibly useful. These methods model the way local economies function, and can be used to simulate how these economies might behave under shifting conditions. In cases such as those mentioned above, impacts depend critically on how local economies adjust. For example, if local supply responses around refugee camps or in the cassava-producing communities of West Gonja are low, policies that simulate demand could raise prices and harm people they intend to benefit, with collateral damage on other linked sectors and household groups.

For those designing or evaluating a policy or program, LEWIE methods can highlight impacts not only on those directly affected by the intervention, but also the spillover impacts around them. Policy makers and donors want to know what sorts of complementary interventions might be needed in order to make sure that their programs are successful. Often, answers are needed before programs and policies are put into place. LEWIE methods were designed to provide such answers.  The stakes are high, and as always, time and resources are limited.

We find that LEWIE often has impacts far beyond what we anticipate when we begin an evaluation. Often, it reveals benefits missed by other approaches. Documenting likely impacts beyond those affected directly by an intervention ex-ante can tip the cost-benefit scale in favor of funding the intervention. More and more, governments and donors want to know that a development project not only benefits targeted households and sectors but also creates positive economic spillovers—and they want to know what can be done to enhance those spillovers. Documenting impacts beyond the treated can be critical in order to garner political and institutional support for projects and policies.

Here’s a recent example: Our LEWIE of LEAP, Ghana’s flagship social cash-transfer program, found that each cedi transferred to a poor household increases local income by as many as 2.5 cedi. (A summary of this evaluation can be found at the UN-FAO’s From Protection to Production website.

Ghana’s President John Dramani Mahama, opening the Pan-African Conference on Inequalities last April, stated: “LEAP has had a positive impact on local economic growth. Beneficiaries spend about 80 percent of their income on the local economy. Every GH1 transferred to a beneficiary has the potential of increasing the local economy by GH2.50.” His goal was clear: to demonstrate that social protection and economic growth can be complements. It appears that LEAP accomplishes both. Read the President’s speech.

Understanding LEWIE is basic to designing rigorous and innovative RCTs. Development projects are likely to create spillovers within treated localities as well as with neighboring ones. LEWIE gives us a way of thinking about these spillovers so that RCTs capture them and avoid control-group contamination and other problems that often raise questions about the validity of experimental results.

Most practitioners and policy makers do not construct LEWIE models or carry out RCTs, but they often find themselves involved in designing interventions and coming up with strategies to evaluate their impacts. Insights from LEWIE studies, which have been carried out for a wide variety of interventions in diverse contexts, can inform their work, at a time when more and more donors include “local economy impacts” in their list of evaluation criteria. LEWIE changes the way we think about impacts, direct or indirect, on people who are so vulnerable that we cannot risk being wrong.

Headline image credit: Highway Fruit Stall, by flöschen. CC BY-NC-SA 2.0 via Flickr