_5_ and more informative. Such an analysis, summarized in Box 2, was done in the case of the Mauritius Higher and Technical Education project.

## **Box 1: Who gets the Premium on Foreign Exchange?**

Take a country with a uniform import duty of 15 percent and no taxes or subsidies on exports. Let us say that in this country the exchange rate is market determined and that it is 5:1 with respect to the US dollar. For every dollar of imports, every importer surrenders 5.75 units of domestic currency (5 units to purchase dollars plus 15 percent to pay for import duties). Exporters, on the other hand, receive 5 units of domestic currency for every dollar of exports. The import duty introduces a distortion that drives a wedge between what importers must pay in order to import one dollar's worth of goods and what exporters receive when they export one dollar's worth of goods. Because of this difference, the economic price of foreign exchange is not equal to the market rate.' Let us assume that the economic price of foreign exchange is 5.60, i.e., that there is a premium on foreign exchange of 12 percent over the market rate. A project that uses foreign exchange will cost the economy 5.6 units of domestic currency for every dollar of exports, yet importers will only pay 5.0, What happens to the difference?

In this particular case, it can be shown that the difference is a loss of revenue to the government. Of course, since all imports pay 15 per cent duty, for every unit of foreign exchange imported by the project, the government will recover 15 cents. The net fiscal impact would be a positive 3 cents in foreign currency (or 15 cents in domestic currency).

In all cases where the premium stems from taxes (and subsidies) on international trade, the premium accrues to the government. But if the premium stems from other sources, it could accrue to other groups in society. If the premium stems from QRs, for example, it would accrue to those who enjoy the benefits of the QRs.

# **Economic Evaluation of Education and Health Projects**

Like projects in other sectors, education and health projects involve flows of expenditures and benefits over time. Unlike other sectors, however, the measurement of benefits is particularly difficult. Since the early 1960s, and increasing number of economists are treating expenditures on education as investment in human capital. Viewed as such, education can be subjected to the same type of economic analysis as any other type of investment that has identifiable costs and benefits that are measurable in monetary terms.

Education increases people's productivity. If the labor market works well, higher productivity will result in higher income. Comparing the earnings of individuals with say, a university education to the eamings of an appropriate control group with only a high school education, then, would be one way of measuring the benefits of a university education in dollar terms. In general, the net benefits of an education for an individual can be measured by assessing the value of his/her incremental earnings over his/her It is important to note that as long as there are taxes and subsidies on foreign trade, a difference between the financial and economic cost of foreign exchange could exist even in a country with a marketdetermined exchange rate.