Evaluating the Cost Effectiveness of Adopting OA in PRC, Thailand, and Sri Lanka

Ideally, we would like to compare the costs of adopting OA with the benefits. In other papers in the same series, we have estimated the gains from OA in terms of income, and the various MDGs. Here we bring the two sets of results together to see what we can say about the cost-effectiveness of the OA programs.

We start by looking at increases in income, resulting from adoption of OA. Other research has shown that households can expect increases in income if they adopt OA (Setboonsarng and Markandya 2009). The range of estimates varies, but approximate figures are given in Table 7 [ PDF 17.9KB | 1 page ] under “Gain in Net Income per annum.

In order to estimate the cost per household taken out of poverty, we need to make some assumptions about the distribution of households below poverty line, and how the increase in incomes affects each of them. If we make the simplifying assumptions that (i) the distribution of households below the poverty line is rectangular,⁷ and (ii) incomes of all households are increased by the same proportion, we can estimate the increase in the percentage brought out of poverty (given the percentage that are in poverty). The method is explained in the appendix of this paper. The table reveals some interesting findings:

1. In all four cases, the gains in income per household exceed the amortized cost of adoption of OA. The margin is greatest for PRC and smallest for Sri Lanka. In fact, at the lower end of the range of income increases (particularly for Sri Lanka), the costs of adoption and the gains are similar in value. As noted, however, we consider the costs of adoption of OA in Sri Lanka to be unrealistically high.
2. The cost per household taken out of poverty can only be calculated for the PRC and Thailand cases; in Sri Lanka, no households (conventional or organic) are classified as poor. In the other two cases, the costs of taking one household out of poverty are remarkably similar, ranging from US$136 to US$169. This translates into a cost of US$32 to US$38 per individual.

If we compare these costs with those presented in Section II of this chapter, we see that they are considerably lower. Based on the World Bank study referred to earlier (Devarajan, Miller and Swanson 2002) the cost of achieving the MDG goals of halving the percentage of households in poverty comes out to around US$554 to US$880 per head. The costs of poverty reduction through the adoption of OA in these two countries are about one-twentieth of that amount. Of course, the investment and growth approaches to meeting the MDG also provide other benefits of growth (e.g., increases in incomes of non-poor), which should be taken into account. On the other hand, the OA program also provides non-income poverty benefits, which are not measured here.

The purpose of the comparison is to show how the two sets of costs match up against each other and to note that OA does in fact come out as cost-effective. We must, however, interpret these findings with some caution. The estimates in both the World Bank's study and our own are very rough, and we are certainly aware of the possible ranges for both the estimates of the costs of adoption, as well as the gains in net income.⁸ Nevertheless, we believe the figures do indicate that OA can contribute to poverty reduction in a reasonably cost-effective way. In addition to the direct impact on poverty, we have also noted elsewhere in this report the gains in terms of other MDGs. In particular, there are notable benefits in employment generation and income diversification. Although these cannot be quantified in terms of the MDGs directly, they undoubtedly contribute to income and food security, and thereby also to poverty alleviation, as well as in improving education, health, and environmental sustainability. Table 8 [ PDF 17.5KB | 1 page ] summarizes the additional benefits as far as they are directly related to the other MDGs.

The table shows benefits from OA in the following areas:

• Higher educational spending (Wanzai and Ubon Ratchathani).
• Greater gender equality (Kandy and Ubon Ratchathani)
• Child and maternal health (Wanzai and Kandy)
• Environmental Sustainability (all four but especially Wanzai and Kandy)
• Global partnership for development (all four case studies).

While these benefits are almost impossible to quantify in terms of the MDGs and targets as outlined in Section I, they are nonetheless very real and important. Moreover, these benefits are in addition to the gains in net income and the reductions in poverty detailed above. The World Bank study described in Section II made the unsubstantiated assumption that an expenditure of US$40–60 million, if used to finance income growth would also finance the achievement of the other MDGs; it also claimed that if a similar amount were used to finance MDGs 2-8, the required reduction in poverty would result. In contrast, this study quantifies the contribution to poverty alleviation and provides qualitative evidence of its contribution to the other MDGs. To be sure, we cannot say quantitatively in every case how much OA will lead to the attainment of those goals, but we can say that there will be some direct impact (as described in Table 8).

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Comment(s)

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1. Prof. J. George
   (posted 19 February 2010 / 07:17:28 PM)
   
   The authors needs to be complimented for this study that is first of its kind particularly in so much as relating it to MDG. It is unfortunate that the UNESCAP-ADB-UNDP trio did not take cognisance of it while reviewing MDGs recession during the recent global financial crisis. The study is timely as it indicates the way out for rationalizing inclusive growth strategy in a region that is characterised by not only a larger proportion but also growing numbers of hungry and poor people in the world.
   Secondly, the paper completely compliments the UNEP-UNCTAD's path breaking longitudinal study in African and the Central American continents as well as trade and environment review of 2006 and and 2009.
   Thirdly, The study is also contemporary as it is a one shot answer to the the vexing question of climate change related mitigation and adaptation strategies.
   
   Fourthly, the study does reinforce that food security as enshrined in MDGs 1C is fully attainable at a cost effective manner. ADB need to take conscious decisions to explicitly reinforce it as its thrust area given that the strategy 2020 sounds hallo in the absence of a credible alternative. The paper provides a good indication to that pathway. The strategic economic management initiative as defined necessarily must be based on inclusiveness and organic agriculture restores that power in the hands of the producers for a number of opportunities for autonomous income enhancement amongst the poorer segments of the population, among other associated reform measures.