Publication: Making Informed Investment Decisions in an Uncertain World : A Short Demonstration
Loading...
Date
2014-02
ISSN
Published
2014-02
Author(s)
Editor(s)
Abstract
Governments invest billions of dollars annually in long-term projects. Yet deep uncertainties pose formidable challenges to making near-term decisions that make long-term sense. Methods that identify robust decisions have been recommended for investment lending but are not widely used. This paper seeks to help bridge this gap and, with a demonstration, motivate and equip analysts better to manage uncertainty in investment decisions. The paper first reviews the economic analysis of ten World Bank projects. It finds that analysts seek to manage uncertainty but use traditional approaches that do not evaluate options over the full range of possible futures. Second, the paper applies a different approach, Robust Decision Making, to the economic analysis of a 2006 World Bank project, the Electricity Generation Rehabilitation and Restructuring Project, which sought to improve Turkey's energy security. The analysis shows that Robust Decision Making can help decision makers answer specific and useful questions: How do options perform across a wide range of potential future conditions? Under what specific conditions does the leading option fail to meet decision makers' goals? Are those conditions sufficiently likely that decision makers should choose a different option? Such knowledge informs rather than replaces decision makers' deliberations. It can help them systematically, rigorously, and transparently compare their options and select one that is robust. Moreover, the paper demonstrates that analysts can use the same data and models for Robust Decision Making as are typically used in economic analyses. Finally, the paper discusses the challenges in applying such methods and how they can be overcome.
Link to Data Set
Citation
“Bonzanigo, Laura; Kalra, Nidhi. 2014. Making Informed Investment Decisions in an Uncertain World : A Short Demonstration. Policy Research Working Paper;No. 6765. © http://hdl.handle.net/10986/17310 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Geopolitics and the World Trading System(Washington, DC: World Bank, 2024-12-23)Until the beginning of this century, the GATT/WTO system worked. Economic research provided a compelling explanation. It showed that if governments maximize the well-being of their own countries broadly defined, GATT/WTO principles would facilitate mutually beneficial cooperation over their trade policy choices. Now heightened geopolitical rivalry seems to have undermined the WTO. A simple transposition of the previous rationalization suggests that geopolitics and trade cooperation are not compatible. The paper shows that this is only true if rivalry eclipses any consideration of own-country well-being. In all other circumstances, there are gains from trade cooperation even with geopolitics. Furthermore, the WTO’s relevance is in question only if it adheres too rigidly to its existing rules and norms. Through measured adaptation to the geopolitical imperative, the WTO can continue to thrive as a forum for multilateral trade cooperation in the age of geopolitics.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Global Poverty Revisited Using 2021 PPPs and New Data on Consumption(Washington, DC: World Bank, 2025-06-05)Recent improvements in survey methodologies have increased measured consumption in many low- and lower-middle-income countries that now collect a more comprehensive measure of household consumption. Faced with such methodological changes, countries have frequently revised upward their national poverty lines to make them appropriate for the new measures of consumption. This in turn affects the World Bank’s global poverty lines when they are periodically revised. The international poverty line, which is based on the typical poverty line in low-income countries, increases by around 40 percent to $3.00 when the more recent national poverty lines as well as the 2021 purchasing power parities are incorporated. The net impact of the changes in international prices, the poverty line, and new survey data (including new data for India) is an increase in global extreme poverty by some 125 million people in 2022, and a significant shift of poverty away from South Asia and toward Sub-Saharan Africa. The changes at higher poverty lines, which are more relevant to middle-income countries, are mixed.Publication Global Socio-economic Resilience to Natural Disasters(Washington, DC: World Bank, 2025-05-22)Most disaster risk assessments use damages to physical assets as their central metric, often neglecting distributional impacts and the coping and recovery capacity of affected people. To address this shortcoming, the concepts of well-being losses and socio-economic resilience—the ability to experience asset losses without a decline in well-being—have been proposed. This paper uses microsimulations to produce a global estimate of well-being losses from, and socio-economic resilience to, natural disasters, covering 132 countries. On average, each $1 in disaster-related asset losses results in well-being losses equivalent to a $2 uniform national drop in consumption, with significant variation within and across countries. The poorest income quintile within each country incurs only 9% of national asset losses but accounts for 33% of well-being losses. Compared to high-income countries, low-income countries experience 67% greater well-being losses per dollar of asset losses and require 56% more time to recover. Socio-economic resilience is uncorrelated with exposure or vulnerability to natural hazards. However, a 10 percent increase in GDP per capita is associated with a 0.9 percentage point gain in resilience, but this benefit arises indirectly—such as through higher rate of formal employment, better financial inclusion, and broader social protection coverage—rather than from higher income itself. This paper assess ten policy options and finds that socio-economic and financial interventions (such as insurance and social protection) can effectively complement asset-focused measures (e.g., construction standards) and that interventions targeting low-income populations usually have higher returns in terms of avoided well-being losses per dollar invested.Publication From Patriarchy to Policy(Washington, DC: World Bank, 2025-05-29)Legal institutions play an important role in shaping gender equality in economic domains, from inheritance to labor markets. But where do gender equal laws come from? Using cross-country data on social norms and legal equality, this paper investigates the socio-cultural roots of gender inequity in the legal system and its implications for female labor force participation. To identify the impact of social norms, the analysis uses an empirical strategy that exploits pre-modern differences in ancestral patriarchal culture as an instrument for present-day gender norms. The findings show that ancestral patriarchal culture is a strong predictor of contemporary norms, and conservative social norms are associated with more gender inequality in the de jure legal framework, the de facto implementation of laws, and the labor market. The paper presents evidence for a political selection mechanism linking norms to laws: countries with more conservative norms elect political leaders who are more hostile to gender equality, who then pass less progressive legislation. The results highlight the cultural roots and political drivers of legalized gender inequality.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Agreeing on Robust Decisions : New Processes for Decision Making under Deep Uncertainty(World Bank, Washington, DC, 2014-06)Investment decision making is already difficult for any diverse group of actors with different priorities and views. But the presence of deep uncertainties linked to climate change and other future conditions further challenges decision making by questioning the robustness of all purportedly optimal solutions. While decision makers can continue to use the decision metrics they have used in the past (such as net present value), alternative methodologies can improve decision processes, especially those that lead with analysis and end in agreement on decisions. Such "Agree-on-Decision" methods start by stress-testing options under a wide range of plausible conditions, without requiring us to agree ex ante on which conditions are more or less likely, and against a set of objectives or success metrics, without requiring us to agree ex ante on how to aggregate or weight them. As a result, these methods are easier to apply to contexts of large uncertainty or disagreement on values and objectives. This inverted process promotes consensus around better decisions and can help in managing uncertainty. Analyses performed in this way let decision makers make the decision and inform them on (1) the conditions under which an option or project is vulnerable; (2) the tradeoffs between robustness and cost, or between various objectives; and (3) the flexibility of various options to respond to changes in the future. In doing so, they put decision makers back in the driver's seat. A growing set of case studies shows that these methods can be applied in real-world contexts and do not need to be more costly or complicated than traditional approaches. Finally, while this paper focuses on climate change, a better treatment of uncertainties and disagreement would in general improve decision making and development outcomes.Publication Scaling Up Renewable Geothermal Energy in Indonesia(Washington, DC, 2014-05)Pertamina Geothermal Energy (PGE) is leading Indonesia s effort to scale-up geothermal, attempting a globally unprecedented expansion of over 1,000 MW of capacity. The World Bank is helping kick-start PGE s investment program through the development of the Ulubelu (Units 3 and 4) and Lahendong (Tompaso) (Units 5 and 6) geothermal fields. Loans totaling US$ 300 million are being extended from the World Bank s facility for lending to middle-income countries through International Bank for Reconstruction and Development (IBRD) loans and from the global Clean Technology Fund (CTF) established to promote climate-friendly investments. To justify public support and evaluate the viability of this green finance investment, an integrated approach to decision making was utilized based on the combined assessments of financial-economic-stakeholder-risk impacts.Publication Leveling the Field for Renewables : Mexico's New Policy Framework for Incorporating External Costs of Electricity Generation(Washington, DC, 2014-04)Mexico has started a number of efforts to develop adequate policy frameworks in several areas including the energy sector, transportation and industrial policies, and forestry and natural resources management. Its Climate Change Law and the National Strategy on Climate Change envision is changing the upward trend of its carbon dioxide emissions towards a total decline of emission of thirty percent by 2020, and fifty percent by 2050. Achieving these ambitious policy goals is challenging for the country and will require many distinct efforts to mainstream climate change in policy design. Careful economic analysis will be critical to effectively reduce emissions while allowing for sustainable development. The policy evaluated in the study is part of Mexico's policy framework to promote renewable energy. The Ministry of Energy in Mexico, SENER, has issued a Methodology to incorporate external costs of electricity generation. While external costs are not privative of fossil energy, the Mexican government has started this process by focusing on the external costs on health and climate change, two of the main impacts of energy use. The study analyzes the potential of this new policy to help Mexico in its energy and environmental goals. It is organized into five chapters: (i) Introduction; (ii) Mexico s Policy Context for Incorporating Externalities; (iii) Valuation of Externalities; (iv) Internalizing Externalities; and (v) Conclusion. Included are four annexes: Method to Value Externalities for Mexico's Electricity Generation; Investment Plan in the Power Sector in Mexico; Modeling Framework and Methodology; and Project Valuation with Environmental Externalities.Publication Planning for a Low Carbon Future(Washington, DC, 2012-11-01)Developing countries are faced with the dual challenge of reducing poverty while improving management of natural capital and mitigating the emission of greenhouse gases (GHGs) and local pollutants. The challenge is particularly acute for large, rapidly growing economies, such as India, China, and Brazil. In response to this challenge, Energy Sector Management assistance Program (ESMAP) and the World Bank began in 2007 to provide support to countries to develop long term frameworks for reducing GHG emissions in a way that is compatible with economic growth objectives and tied to national and sectoral plans. In total, seven studies were conducted between 2007 and 2010, for the following countries: Brazil, China, India, Indonesia, Mexico, Poland, and South Africa. This report collates the lessons learned from these studies and is intended as a practical guide for government officials, practitioners, and development agencies involved in low carbon development planning. The low carbon studies were tailored to the individual needs of each country involved. In Brazil, India, Indonesia, Mexico, and Poland the studies took the form of an economy-wide analysis of low carbon growth potential, employing a range of data and modeling tools. The governments of China and South Africa conducted their own analyses, but requested the assistance of ESMAP and the World Bank for peer review and to get international expertise on specific focus areas, such as energy efficiency and renewable energy. The combined outputs, and the modeling tools developed as part of the program, represent a significant contribution to international efforts on climate change mitigation and low carbon development.Publication Climate Vulnerability Assessments : An Assessment of Climate Change Vulnerability, Risk, and Adaptation in Albania’s Power Sector(World Bank, 2009-12-01)Energy security is a key concern in Albania, which relies on hydropower for about 90 percent of its electricity production. While renewable energy resources like hydropower play a fundamental role in moving the world towards a low-carbon economy, they are also vulnerable to climatic conditions. Climate variability already affects Albania's energy production to a considerable extent, and climate change is bringing further challenges. This report summarizes work conducted in partnership with stakeholders in Albania's energy sector and other closely related sectors. It aimed to build greater understanding of the climate risks faced by the energy sector and of priority actions that could be taken to reduce vulnerabilities. The remainder of this report is set out as follows: section two describes the context for this assessment, covering the Albanian energy sector, observed and projected climatic conditions and Albania's adaptive capacity. Section three outlines the climatic vulnerabilities, risks, and opportunities facing Albania's energy sector. Section four describes the key adaptation options identified for managing climate risks to the energy sector. Section five provides the cost-benefit analysis of physical adaptation options. Section six sets out next steps for improving the climate resilience of Albania's energy sector. Finally, section seven includes references and lists of annexes and appendices.
Users also downloaded
Showing related downloaded files
Publication Digital Progress and Trends Report 2023(Washington, DC: World Bank, 2024-03-05)Digitalization is the transformational opportunity of our time. The digital sector has become a powerhouse of innovation, economic growth, and job creation. Value added in the IT services sector grew at 8 percent annually during 2000–22, nearly twice as fast as the global economy. Employment growth in IT services reached 7 percent annually, six times higher than total employment growth. The diffusion and adoption of digital technologies are just as critical as their invention. Digital uptake has accelerated since the COVID-19 pandemic, with 1.5 billion new internet users added from 2018 to 2022. The share of firms investing in digital solutions around the world has more than doubled from 2020 to 2022. Low-income countries, vulnerable populations, and small firms, however, have been falling behind, while transformative digital innovations such as artificial intelligence (AI) have been accelerating in higher-income countries. Although more than 90 percent of the population in high-income countries was online in 2022, only one in four people in low-income countries used the internet, and the speed of their connection was typically only a small fraction of that in wealthier countries. As businesses in technologically advanced countries integrate generative AI into their products and services, less than half of the businesses in many low- and middle-income countries have an internet connection. The growing digital divide is exacerbating the poverty and productivity gaps between richer and poorer economies. The Digital Progress and Trends Report series will track global digitalization progress and highlight policy trends, debates, and implications for low- and middle-income countries. The series adds to the global efforts to study the progress and trends of digitalization in two main ways: · By compiling, curating, and analyzing data from diverse sources to present a comprehensive picture of digitalization in low- and middle-income countries, including in-depth analyses on understudied topics. · By developing insights on policy opportunities, challenges, and debates and reflecting the perspectives of various stakeholders and the World Bank’s operational experiences. This report, the first in the series, aims to inform evidence-based policy making and motivate action among internal and external audiences and stakeholders. The report will bring global attention to high-performing countries that have valuable experience to share as well as to areas where efforts will need to be redoubled.Publication Nepal Country Climate and Development Report(World Bank, Washington, DC, 2022-09)This Country Climate and Development Report (CCDR) identifies ways that Nepal can achieve its overall development objectives while fostering its strategic ambition to transition to a greener, more resilient, and inclusive development pathway. This report is organized as follows: Chapter 1 captures the current situation in the country with respect to climate impacts and risks, emission sources, and opportunities for integrated climate change adaptation and mitigation. Chapter 2 describes the government’s response, through sectoral and economywide commitments, laws, and regulations. Chapter 3 assesses the impacts of climate change on the macroeconomy and road transport systems, given their critical role to connectivity. It also analyzes the links between climate change and air pollution, poverty, health, social inclusion, and community resilience. Chapter 4 presents pathways to transition to resilience, looking at integrated management of landscape systems comprising water, agriculture, and forests as well as strengthening climate and disaster risk management governance. Chapter 5 analyzes pathways to transition to decarbonization, primarily the potential for hydropower expansion domestically and in the region. It also looks at transport and urban opportunities to reduce emissions while enhancing resilience and adaptation co-benefits. Chapter 6 discusses how to scale up financing for resilience, hydropower, and other opportunities, given the limitations of the country’s fiscal space. Chapter 7 presents a prioritization framework for the most transformational climate action with seven ‘policy packages’—one for each priority transition and each key enabler—that contain specific recommendations for how to move from analysis to action.Publication South Asia Development Update, April 2025: Taxing Times(Washington, DC: World Bank, 2025-04-23)Growth prospects for South Asia have dimmed. The global economic environment has become more challenging and is a source of heightened downside risks. After a decade of repeated disruptions, South Asia’s buffers to cushion new shocks are slim. Tackling some of its greatest inefficiencies and vulnerabilities could help South Asia navigate this unusually uncertain outlook: unproductive agricultural sectors, dependence on energy imports, pressures from rising global temperatures, and fragile fiscal positions. For most South Asian countries, increased revenue mobilization is a prerequisite for strengthening fiscal positions. Even taking into account the particular challenges of collecting taxes in South Asian economies—such as widespread informal economic activity and large agriculture sectors—South Asian economies face larger tax gaps than the average emerging market and developing economy (EMDE). This suggests the need for improved tax policy and administration. Until fiscal positions have strengthened, the burden of climate adaptation will disproportionately fall on the private sector. If allowed sufficient flexibility, private sector adaptation could offset about one-third of the likely climate damage by 2050. This may, however, require governments to remove obstacles that prevent workers and firms from moving across locations and activities. As growth prospects dim, the challenge grows to create jobs for South Asia’s rapidly expanding working-age population. South Asia’s large diasporas could become a source of strength if their knowledge, networks, and other resources can be better tapped for investment and trade.Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.Publication World Development Report 2011(World Bank, 2011)The 2011 World development report looks across disciplines and experiences drawn from around the world to offer some ideas and practical recommendations on how to move beyond conflict and fragility and secure development. The key messages are important for all countries-low, middle, and high income-as well as for regional and global institutions: first, institutional legitimacy is the key to stability. When state institutions do not adequately protect citizens, guard against corruption, or provide access to justice; when markets do not provide job opportunities; or when communities have lost social cohesion-the likelihood of violent conflict increases. Second, investing in citizen security, justice, and jobs is essential to reducing violence. But there are major structural gaps in our collective capabilities to support these areas. Third, confronting this challenge effectively means that institutions need to change. International agencies and partners from other countries must adapt procedures so they can respond with agility and speed, a longer-term perspective, and greater staying power. Fourth, need to adopt a layered approach. Some problems can be addressed at the country level, but others need to be addressed at a regional level, such as developing markets that integrate insecure areas and pooling resources for building capacity Fifth, in adopting these approaches, need to be aware that the global landscape is changing. Regional institutions and middle income countries are playing a larger role. This means should pay more attention to south-south and south-north exchanges, and to the recent transition experiences of middle income countries.