Development economics and the compensation principle

How does development economics address the issue of gains and losses from the displacement that inevitably accompanies many development processes? This paper argues that economists have struggled mightily between the core criterion of a “Pareto improvement”, which vests individuals with infinite rights in their current standard of living, and its deeply conservative implications—both that it would prevent redistribution away from the rich, and that it would stop most projects from ever taking place. Where they have got to conceptually is a compromise, through using distributionally sensitive weights to evaluate the gains and losses of a project. In practice, however, systematic use of such weights in project appraisal or cost-benefit analysis is rare. Apart from advocating such use, which is true to the spirit of the conceptual position reached in economics, the paper argues that specific compensation mechanisms and generalised safety nets will reduce tensions between protecting the vulnerable and supporting projects that produce aggregate net benefits—including benefits for the vulnerable themselves.