PROJECT EVALUATION 5 prices in LDGs inadequate indices of the social value of resources and outputs, project evaluation requires the use of "shadow" or "accounting" prices at which inputs and outputs are to be valued.4 These shadow prices are developed by applying corrections to market prices. The specificity of a particular method of project evaluation then consists in the specific method used to derive these shadow prices from given market prices and clearly identified imperfections. While each project has its own peculiar mix of inputs and outputs, a specific method of project evaluation must formulate general principles whereby the shadow prices are derived from project data and relevant extraneous economic data. Further, there are certain inputs that are common to many projects, and are "wrongly" valued by the market in most less developed countries. Labour and foreign exchange are the most important of these. Finally, given the inadequacy of capital markets in the LDCs, the market rate of interest does not properly reflect the intertemporal considerations in evaluating a project. Hence one needs an accounting or shadow rate of interest. To sum up, the major elements of project evaluation are the general methods for derivation of shadow prices of inputs and outputs, the specific methods for deriving shadow prices for labour and foreign exchange, and the method for a shadow rate of interest. There are, of course, other elements of project evaluation that are briefly discussed or mentioned in passing. Shadow-pricing Inputs and Outputs In both Little and Mirlees (LM) and Sen, Dasgupta and Marglin (SDM) the relevant notion for shadow-pricing non-labour inputs and outputs is that of "opportunity cost". Their differences lie in the identification of the relevant opportunities. LM take the position that for most of the inputs and outputs typically involved in projects, the relevant opportunity is that of international trade. Accordingly, they classify non-labour resources into "traded" and ^non-traded" goods. ^'Traded" goods must not be narrowly conceived as only those that actually figure in the international trade of the LDC, but must be broadly defined to include "tradeables", that is those commodities that would have been traded, if the LDC was pursuing "optimal" trade policies. For "traded" goods, the relevant shadow price is not the prevailing domestic market price, but the "world price^, prevailing in the world market. Thus if a resource used in a project is currently being imported at the margin (even if not directly for the project under consideration, but elsewhere in the economy), its shadow price is the import price (c.i.f). For a resource that is being exported at the margin, the relevant shadow price is the export price (f.o.b). A resource has, of course, the same shadow price regardless of whether it is an input or an output. It is often argued that for the LDC to export more of a commodity, it must accept a lower price, and for it to} import more it has to