Chow Fah YEE1,2, Eu Chye TAN3 1Green Economics Institute, UK,; 2Universiti Teknologi MARA,Malaysia,; 3University Malaya, Malaysia

1. GRF DAVOS 2012
SOCIAL COST BENEFIT ANALYSIS: A
WAY TO OPTIMIZE NET ECONOMIC
BENEFITS
By: Chow Fah Yee, Ph D
Green Economics Institute
and
Eu Chye Tan, Ph D
Faculty of Economics and Administration
University of Malaya, Malaysia

2. GRF DAVOS 2012
Introduction
 Occupy Wall Street (OWS ) – the 17 Sept 2011 event
 OWS slogan : “99% vs 1 %”
- the wealthiest 1% is perceived to be the beneficiary
of a system ingrained in capitalism , laissez faire
and market reforms
 Globalization and Market reforms - a means of
ensuring not only growth and efficiency, but also
equity for the countries that join in the global system
(World Bank, 1999).

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Globalization and Market
Reforms
 Proponents of globalization : “market mechanism will
ensure that the most economically efficient projects are
selected and negative distributional consequences can
be off set by lump sum taxes and transfers.”
 Financial liberalization, part of the globalization process,
advocates liberalization of the country’s banking sector
to promote efficient investments
 But this promise of prosperity for all with free markets
have not materialized. (Mc Michael 2008, Stiglitz, 2001,
The Economist, 2011)

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Globalization and Economic Crises
 Recent economic crises (EAFC and the global
financial crisis) highlight the weaknesses of
globalization: instability and inequality (Stiglitz, 2010)
 An IMF database that tracks financial crises over the
last 30 years revealed – 124 crises
 Factors that contributed to the crises- financial
liberalization and increased in global capital flows
 Systemic risks and contagion have become common
terms

5. Some Statistics on Inequality
 Inequality among countries has increased too.
 According to Bende- Nabende (2002):
 1/5 of the world’s people living in the highest-
income countries had:
 86% of world’s GDP; bottom 1/5 just 1%
 82% of export market; bottom 1/5 just 1%
 68% of FDI ; bottom 1/5 just 1%

6. GRF DAVOS 2012
An Exploratory Study Using Social
Cost Benefit Analysis (SCBA)
 This paper employs SCBA to investigate whether
deregulation is indeed welfare enhancing for the
case of Malaysia.
 Method: To conduct an ex-post evaluation of loans
allocated by the banking sector for two time period.
(Malaysia embarked on financial liberalization in
1978; considered fully liberalized in Feb 1991.)
 Objective: To ascertain whether liberalization of the
Malaysian banking sector resulted in efficient use of
resources; increased social profits (net economic
benefits).

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Social Cost Benefit Analysis
(SCBA)
 A tool of welfare economics
 SCBA differs from the financial analysis tools
(like DCF) and also BCA; as SCBA adopts a
social perspective (Brent, 2001)
- effects on all individuals in the society are
included
- distributional effects are included
- market prices are not always good indicator
 Social price/shadow price/accounting price is
used instead

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Little & Mirrlees’s SCBA
Methodology
 Accepts that the market prices can be modified
using shadow prices
 Shadow price is a measure of the cost and
benefit of a good in terms of foreign exchange to
the national government.
 Little & Mirrlees’s methodology can be under
taken only if country parameters for shadow
pricing have been undertaken e.g for Malaysia:
- Veitch (1984), National Parameters for Project Appraisal
- Tan (1994), Shadow Prices for Malaysia ..

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Methodology
 Financial variables are the starting point for analysis
 Adjustments are made to the financial variables to
reflect the economic worth of a firm
 Derive the stream of benefits (A)
 Calculate the stream of capital costs (B)
 Net benefits = (A - B)
 Discount these net benefits by the economic
discount rate and compare it to the initial capital costs
to get the present social value (PSV)

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PSV - Comparing Net Benefits
and Capital Costs
PSV = (-APPI x C ) +
C = initial capital cost
NBn = net benefits in year n
i = accounting rate of interest / economic discount rate
n = number of years used in the discounting period
APPI = accounting price of private investment

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Data and Actual Computation
Data from 117 companies were obtained and keyed
into Excel worksheets for various computations to
obtain present social value (PSV):
 Total loans
 Revenue
 Profit before tax
 Total fixed assets
 Total current liabilities
 Depreciation allowance
 Corporate tax
 Interest payment

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Stratification of PSV For
Analysis
 The companies’ PSV is stratified :
I. Companies that obtained substantial
loans in the pre-liberalization period
II. Companies that obtained substantial
loans in the post-liberalization period
III. Companies that obtained substantial
loans in both the pre and post-
liberalization periods

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Rationale for Stratification
 Strata I and II are used to compare if there
exists any difference in the PSV between the
two time periods (pre and post).
 Strata III eliminates the factor of “different
management” in the comparison of the pre
and post liberalization PSV. (as in the
comparison of 1 and II)
 Strata III serves somewhat as a ‘control’.

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Table 1: Summary According to Strata
and Liberalization Period (APPI=0.72)
Strata Absolute Absolute Percentage PSV per PSV per unit
PSV PSV of Co. with unit of of loan
(total) (average) Positive loan(total) (average)
RM(‘000) RM(‘000 PSV RM(‘000 RM(‘000
I (Pre) 4419,007 129,973 91% 94.02 2.77
II (Post) 565,527 10,282 58% -46.67 -0.85
III (Pre) 2742,944 97,962 93% 86.89 3.10
III (Post) 6929,364 247,477 71% 36.68 1.32
All (Pre) 7162,201 115,516 92% 180.91 2.92
All (Post) 7494,891 90,300 63% -9.79 -0.12

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Table 2: Summary of Sensitivity
Analysis
Time APPI = 0.77 APPI =0.72 APPI = 0.67
Period Absolute PSV RM Absolute PSV RM Absolute PSV RM
(‘000) (‘000) (‘000)
Total Average Total Average Total Average
Pre 6864,394 110,716 7162,021 115,516 8060,799 130,013
Post 6994,386 83,547 7494,891 90,300 8057,472 97,078

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Concluding Remarks
 SCBA has been used to investigate the impact of
market reforms (from the welfare perspective).
 Results implied that the liberalization of the Malaysian
banking sector did not bring about increased net
economic benefits for the period studied.
 The findings are in line with what we have observed
from recent financial crises.
 Worthwhile adopting SCBA to allocate resources.
to lead to more equity and less systemic risks.

17. GRF DAVOS 2012
Thank You
 Have A Nice Day