Bjorn Lomborg is, undoubtedly, seriously concerned with poverty and inequality. Both in the work of the Copenhagen Consensus Center (CCC) and in his popular writings, this is a common theme. He has championed some very progressive ideas, including eradicating barriers to international migration. Unfortunately, he has also used rather distorted arguments and evidence about inequality to attack some of his favourite bugbears, such as subsidies for renewable energy.
The problem is that the central methodology of Lomborg and the CCC is at best blind to inequality and, in its application, could actually increase it. Moreover, there are good arguments to suggest that if we take a broader view of inequality to include intergenerational equality, the CCC methodology is not even equality-blind; it is equality-averse.
Simple analysis, simplistic outcomes
The basic idea, that of cost-benefit analysis (CBA), is straightforward and, indeed, literally high school-level economics. You work out the economic cost of a particular investment (or policy) and estimate its economic benefits (including estimates of indirect costs and benefits such as health). The idea of the CCC is that, with expert advice, policy interventions in climate change, international development, or other global challenges can be prioritised in terms of their benefit-cost ratio.
The methodology is, in itself, blind to inequality. This is because it is based on a Benthamite assumption that the objective is utility maximization irrespective of the distribution of that utility. Put simply, an investment of $100 that returns $1,000 accruing to an already rich person is, in these terms, better than an investment with the same cost that generates $800 return that accrues to a poor person.
As Duke University’s Matthew Adler has consistently argued, the CBA methodology can be adjusted relatively easily to incorporate “aversion” to inequality by simply weighting the calculation according to who pays, and whom it benefits. In a simplistic scenario in which the world is divided into “poor” and “rich”, we might for instance weight benefits accruing to “poor” people twice as highly as benefits accruing to “rich” people. Applying this weighting to our previous example would reverse the ranking of the investments.
I should stress that this is technically easy in the sense that it is quite a simple calculation, even in more realistic situations where you have gradations of wealth and poverty. But it is ethically more difficult. How much inequality aversion should we build in? This will necessarily be a somewhat arbitrary decision and subject to contested views, and indeed societies will expect to be free to make different value judgements about tolerable levels of inequality for different issues.
Cost-benefit and international development
Lomborg might assert that this doesn’t really matter because his centre is set up to look primarily at problems affecting the poor, so policies that benefit the rich are automatically ruled out. But this is insufficient defence because the world is not just divided into “rich” and “poor”. There are gradations of poverty, and while many individuals and families move in and out of poverty throughout their lives (in a process termed churning), there are many others who live in situations of “chronic poverty”, and it is these who are often missed or under-serviced by international development assistance.
It is my contention that a CBA approach to international development would simply exacerbate this problem, contributing to a widening divide between middle- and low-income countries and groups on the one hand, and those countries and groups trapped in chronic poverty on the other hand.
Let’s take the example of immunization against infectious diseases. CCC analyses of public health often return very sizeable benefit-cost ratios for such policies, and not surprisingly so: few international development experts would dispute that immunization is, in principle, a very cheap and effective way of improving livelihoods.
Such analyses, including the CCC papers on infectious diseases, are based on an estimated economic benefit expressed in terms of “disability-adjusted life years” (DALYs) – basically the monetary value on one year of healthy living for one individual. The CCC papers typically take a value of between US$1,000 and US$5,000 for a DALY.
Now suppose we agree with the 2012 CCC outcome that of a hypothetical budget of US$75 billion over four years, we would invest US$1 billion per year in child immunization. Where, geographically, would we invest it? Inevitably cost-benefit analysis would lead us to invest in relatively wealthy countries, because DALYs are necessarily worth more money in a place with higher economic standing.
Likewise, the costs for administering immunizations would probably be higher in poor countries, which typically have worse infrastructure, a comparative lack of trained health professionals, and are often bedeviled by insecurity and conflict.
Lomborg and his advocates might argue that their approach was never intended to be applied at this level of implementation (and, indeed, the CCC paper on infectious diseases argues for a single DALY for precisely this reason). But my example nevertheless shows how a cost-benefit approach without inequality aversion will almost inevitably prioritise marginal poverty rather than entrenched disadvantage. The consequences are clear: the poorest of the poor would still be left out and we would end up exacerbating inequality in the developing world.
The picture is complicated even more when considering issues where the benefits are deferred – such as taking action on climate change.
Cost-benefit calculations typically deal with this by using “discount rates”. Typically, humans are not good at deferred gratification; we would much rather have $100 today than next year, so discount rates place a lower value on returns the further they are in the future.
This approach is contentious, particularly in environmental economics, where the benefits of our investments accrue to future generations rather than ourselves. Do we have the ethical right to discount the value of the lives and livelihoods of future generations against our own shorter-term financial benefit?
In climate economics, the time horizons are so long that even a relatively low discount rate can generate apparently absurd conclusions. More generally, any discount rate can be interpreted as a preference for intergenerational inequality: it systematically values the welfare of future generations at a lower level than our own.
Cost-benefit analysis on the world stage
As we have seen, where cost-benefit analysis is applied to decisions that affect a diverse, disparate population (such as the global population), it is liable to entrench inequality unless we ask who benefits, rather than just how much.
Remember that cost-benefit analysis was originally developed to evaluate decisions that affect the same group that makes the decision. This might be a firm deciding how much to invest in R&D; a government choosing what infrastructure to build on behalf of the society it represents; or, at the extreme end, a person’s individual financial decisions that affect only themself.
But now imagine deciding on a major infrastructure investment in a developing country, and having to choose between road or rail. In this situation it would seem remiss not consider who benefits. Roads might generate a better overall economic return, but might also disadvantage those who are too poor to have a car.
The larger the scale of the decision-making, the more important these distributional considerations become. It is therefore crucial that the people affected by the decisions are represented in the decision-making process. But at the CCC, where the evaluation and ranking of priorities is made by an “expert panel” (however undoubtedly eminent in their fields), this is demonstrably not the case.
Thus the global aspirations of the CCC project are its Achilles’ heel. By calculating benefit-cost ratios at the global level, without the participation of those affected by the proposals, it risks favouring policies that will exacerbate, rather than overcome, global inequality.
This is an edited version of a blog post that originally appeared here.