Innovating in the assessment of regional economic impact: case study of the Colonial City

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Evaluating the economic effects of public investments is highly necessary. Through this, both national and subnational governments can understand the evidence of the potential economic, social, and financial benefits that may result from the projects to be funded. These evaluations, beyond assessing economic returns, show us how territorial investments catalyze regional and local economic and social development.

This is particularly useful in the realm of public finance, where contributing to economic growth is a fundamental metric. Therefore, being able to quantify those benefits is a key factor in justifying each intervention and ensuring efficient utilization of limited public resources.

Furthermore, evaluating the benefits of public investments at the regional level allows subnational governments to improve the targeting of programs aimed at promoting poverty reduction and economic development. On the other hand, from the perspective of national governments, regional impact evaluations are crucial to understanding how specific investments can generate multiplier effects throughout the economy. This analysis helps integrate regional financing into the national strategy, highlighting the importance of effective coordination among different levels of government.

With this vision, the Inter-American Development Bank (IDB), in collaboration with the Ministry of Economy, Planning, and Development (MEPyD), the General Directorate of Internal Taxes (DGII), and the Ministry of Tourism (MITUR) of the Dominican Republic, have embarked on an innovative pilot study that facilitates the evaluation of economic impact at the regional level, addressing a prevalent challenge in Latin America and the Caribbean. Through a detailed case study, the Comprehensive Program for Touristic and Urban Development of the Colonial City of Santo Domingo was examined, illustrating the effectiveness and practical value of the developed methodology.

What makes evaluations of regional economic impact complex?

One of the main challenges in public investment management lies in inadequate or deficient planning due to project evaluations based on unreliable data. In particular, the risk of investing in "white elephants," or unproductive projects, can be substantially mitigated through rigorous ex-ante evaluations. Analyzing the potential benefits of an investment in the initial design stage doubles its likelihood of achieving the intended outcomes.

However, evaluating the benefits of public investment is particularly complex at the regional and local levels. In OECD countries, around 57% of all public investment is carried out by subnational governments. In Latin America and the Caribbean, 35.2% of direct government investment expenditure was made at the local level in 2017. This percentage represents an increase of 5.4 percentage points since 2007. However, a study by the European Investment Bank revealed that only 50% of subnational governments conducted independent ex-ante evaluations of the social benefits of infrastructure investments. Of those that do, 60% do not incorporate the evaluation results into their decision-making processes, often due to a lack of coordination with relevant agencies.

This is because, in the regional context, data scarcity and limited resources for investment evaluation can present a challenge for economic benefits analysis.

A valuable methodology for regional projects that allows evaluation and planning based on evidence

The new IDB study has designed a scalable methodology that facilitates national and subnational governments to evaluate the regional benefits of public investments, allowing the construction and calibration of a regional input-output model for economic analysis. The tool improves decision-making in investment allocation by quickly communicating benefit evaluations during the design or early implementation phases. This tool, adaptable to various regions and countries, represents a significant advancement in regional economic planning.

The Colonial City of Santo Domingo has served as a case study to demonstrate the applicability of this methodology and to evidence the economic benefits of projects from their early phases. The analysis anticipates that the revitalization program will not only strengthen the tourism industry, supporting the creation of 970 jobs and contributing 8.6 million dollars to the annual GDP in the Colonial City but will also generate significant indirect effects in the Ozama region and throughout the Dominican Republic. It is estimated that for every dollar of direct value added in the Colonial City, an additional 19 cents will be created indirectly within the Ozama region. In this region, the sectors that would benefit the most from the indirect effects of the investment are manufacturing, financial services, and trade. Once the program is completed, the contribution to the gross domestic product could amount to up to 21.2 million dollars throughout the Dominican Republic, or approximately 0.015% of GDP in 2026, supporting the creation of up to 1,990 jobs.

Complement to cost-benefit analysis

Meanwhile, cost-benefit analysis (CBA) remains the predominant method for investment evaluations; its omission in recent projects highlights the need for complementary tools. The proposed methodology offers a quantitative evaluation of benefits at the regional and national levels, reinforcing the importance of CBA as an integral component in project evaluation, albeit suggesting a review of its practice to ensure a more rigorous benefit assessment.

This comprehensive approach to economic impact assessment reflects a commitment to sustainable economic development and efficient management of public resources. It serves as an inspiring model for other regions, demonstrating that improvement in decision-making and economic impact is feasible through innovative tools and detailed evaluations.

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