Download Chapter 11

Chapter 11
Development
Policymaking
and the Roles of
Market, State,
and Civil Society
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
System of Economic Management
Mixed economy
• Private sector: profit maximizing business firms
• Public sector: employment maximizing
government agencies
Economic systems
• Capitalism: large private sector, but small public
sector
• Socialism: large public sector, but small private
sector
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-2
Economic Role of the State
• Protect private property and legal rights
• Produce public goods
• Improve market competition
• Improve income distribution
• Preserve the human environment
• Manage the economy
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-3
Development Planning
Economic plan: managing economic activity
• Specific set of quantitative targets
• Given time horizon (three or five years)
• Stated strategies for achieving the targets
• Comprehensive (the entire economy) or
partial (a specific sector or industry)
coverage
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-4
Component of Development Plan
• Government uses domestic saving and
foreign exchange to construct economic
infrastructure
• Government implements economic policy
(taxation, industrialization, foreign
exchange control, trade restriction)
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-5
Rationale for Planning
Reduce market failure:
• Income distribution
• Monopoly power
• Externalities of production and
consumption
• Insufficient information
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-6
Rationale for Planning
• Resource mobilization and allocation
• Psychological effect on achieving
development goals (e.g., reducing
poverty)
• Foreign aid: a requirement to obtain
loans and grants
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-7
Planning Characteristics
• Governmental goals and objectives
• Strategies for achieving goals and objectives
• Government agency for planning
implementation
• Planning coverage: comprehensive or partial
• Planning horizon: medium or long-term
• Planning methodology (macroeconomic mode
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-8
Planning Methodology
Aggregate growth model (Harrod-Domar)
• Investment demand = National saving
• Foreign aid and direct foreign investment
to fill-in the saving gap
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-9
Planning Methodology
Input-Output model
• Outputs of industries serve as inputs of other
industries
• Optimal input mix to produce maximum
output to satisfy the final demand
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-10
Project Appraisal
• Weigh the costs of plans/projects against
their benefits over the planning horizon
• Discount the costs and benefits and
compare their present values
• Find an appropriate “discount factor” above
the internal rate of return”
• “Net” at which present value equal to zero
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-11
Project Appraisal
Net present value, or NPV is given by
Bt  Ct
NPV  
t
t (1  r )
Where
Bt is the expected benefit at time t
Ct is the expected cost at time t
r is the government’s social rate of
discount
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-12
True vs. Actual Market Value
• True market value in the demand-supply
price or scarcity value = shadow price
reflecting social costs and benefits
• Actual market value is the market
exchanged price reflecting private costs
and benefits or the controlled price
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-13
Reasons for Price Divergence
• Inflation and currency control
• Factor price distortions (prices, wages,
interest rates, exchange rate)
• Trade restrictions and import substitution
• Saving deficiency
• Social vs. private rate of return
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-14
Planning Consequences
• Factor price distortion, choice of technology
and employment creation
• Induced R-U migration
• Demand for educational certification leading
to employment problem
• Economic structure
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-15
Reasons for Failure of Planning
• Deficiencies in plans and their
implementations
• External and internal disturbances
• Insufficient and unreliable data
• Institutional weaknesses
• Lack of political will
• Corruption of public servants
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-16
The Planning Mystique
• In the past, few doubted the importance and
usefulness of national economic plans
• Recently, however, disillusionment has set
• But, a comprehensive development policy
framework can play an important role in
accelerating growth and reducing poverty
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-17
Resurgent of Market Orientation
• Failure of planning
• IMF and World Bank policy requirements
for foreign aid and direct foreign
investment
• Joint ventures of domestic and foreign
enterprises
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-18
Requirements for Market Orientation
• Trust
• Law and order
• Security of private property rights
• Balancing between competition and
cooperation
• Division of responsibility and diffusion of
power
• Social safety net
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-19
Requirements for Market Orientation
• Social mobility
• Individualism and materialism
• Deferring gratification to create private
saving
• Rationality and efficiency
• Honesty of government
• Competition of business
• Availability and freedom of information
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-20
Need for Government
Intervention
• Income redistribution through progressive
taxation and transfer payments
• Excess market imperfection on behalf of
domestic and foreign business
• Substantial negative externalities
(pollution and decay)
• Investment in social and human capital
• Structural transformation
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-21
Planning & Market
Reconciliation
• Must achieve “effective” cooperation
• Must reduce market imperfections
• Must eliminate factor price distortions and
price controls
• Must reduce public ownership of economic
enterprises
• Must reduce corruption and red tape
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-22
Non-Government Organizations
• Comparative advantages of NGOs in
–
–
–
–
–
Innovative design and implementation
Program flexibility
Specialized technical knowledge
Provision of targeted local public goods
Common-property resource management design and
implementation
– Trust and Credibility
– Representation and advocacy
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-23
Corruption and Planning
• Corruption: Abuse of public trust for private gain
• Good governance enhances capability to function
• Effects of corruption fall disproportionately on the
poor
• Good governance is broader than simply an
absence of corruption
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-24
Corruption as a Regressive Tax:
The Case of Ecuador
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-25
The Association between Rule of Law
and Per Capita Income
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
11-26