CHAPTER 9 Development Policymaking and the Roles of Market, State, and Civil Society

9.1 A Question of Balance

➢ National government have played an important role in the successful development experiences of the
countries in East Asia.
➢ In early years of development following the following World War II and decolonization, a perception of
the state as a benevolent supporter of development held sway, at least implicitly, but the record of
corruption, poor governance, and state capture vested interests in so many developing countries has
made view untenable.
9.2 Development Planning: Concepts and Rationale
The Planning Mystique
➢ National planning was widely believed to offer the essential and perhaps the only institutional and
organizational mechanism for overcoming the major obstacles to development and for ensuring a
sustained high rate of economic growth.
➢ To catch up with their former rulers, poor nations were persuaded that they required a comprehensive
national plan.
➢ The planning record, unfortunately, did not live up to its advance billing. But a comprehensive
development policy framework can play an important role in accelerating growth, reducing poverty,
and reaching human development goals.
The Nature of Development Planning
• Economic Planning – a deliberate and conscious attempt by the state to formulate decisions on how
the factors of production will be will be allocated among different uses or industries, thereby
determining how much of total goods and services will be produced in one or more ensuing period.
• Economic plan – A written document containing government policy decisions on how resources will
be allocated among various uses so as to attain a targeted rate of economic growth or other goals over
a certain period of time.
• Comprehensive plan – an economic plan that sets targets to cover all the major sectors of the
national economy.
• Partial plan – a plan that covers only a part of the national economy (e.g., agriculture, industry,
tourism).
• Planning process – the procedure for drawing up and carrying out a formal economic plan.
Planning in Mixed Developing Economies
➢ The private sector in developing countries typically comprises four traditional forms of private
ownership and a more recent emerging one:
1. The subsistence sector, consisting of small-scale private farms and handicraft shops selling a part
of their production to local markets.
2. Small-scale individual or family-owned commercial business and service activities in the formal and
informal urban sectors.
3. Medium-size commercial enterprises in agriculture, industry, trade and transport owned and
operated by local entrepreneurs.
4. Large jointly owned or completely foreign-owned manufacturing enterprises, mining companies,
and plantations, catering primarily to foreign markets but sometimes with substantial local sales
(capital for such enterprises usually comes from abroad, and a proportion of the profits tends to be
transferred overseas)
5. A growing number of relatively large, domestic-based firms, primarily locally managed and largely
locally owned, often listed on national stock markets in countries such as Brazil, Russia, Idia, and
China but much more common in middle-income than low-income countries and rare in the least
developed countries.
➢ In the context of such an institutional setting, we can identify two principal components of
development planning in mixed economies.
1. The government’s deliberate use of domestic saving and foreign finance to carry out public
investment projects and to mobilize and channel scare resources into areas that can be expected to
make the greatest contribution toward the realization for long-term economic objectives (e.g., the
construction of railways, schools, hydroelectric projects, and other components of economic
infrastructure, as well as the creation of import-substituting industries or projected future export
sectors)
2. Government economic policy (e.g., taxation, industrial licensing, the setting of tariffs, and the
manipulation of quotas, wages, interest rates, and prices) to stimulate, direct, and in some cases even
control private economic activity so as to ensure a harmonious relationship between the desire s of
private business operators and the social objectives of the central government.
The Rationale of Development Planning
➢ The early widespread acceptance of planning as a development tool rested on a number of
fundamental economic and institutional arguments.
1. Market Failure – a phenomenon that results the existence of market imperfections (e.g., monopoly
power, lack of factor mobility, significant externalities, lack of knowledge) that weaken the
functioning of a market economy.
2. Resource Mobilization and Allocation – development economies cannot afford to waste their very
limited financial and skilled human resources on unproductive ventures.
CHAPTER 9 Development Policymaking and the Roles of Market, State, and Civil Society
3. Attitudinal or Psychological Impact – it is often assumed that a detailed statement of national
economic and social objectives in the form of a specific development plan can have an important
attitudinal or psychological impact on an a diverse and often garmented population.
4. Foreign Aid – the formulation of detailed development plans has often been a necessary condition
for the receipt of bilateral and multilateral foreign aid.
9.3 The Development Planning Process: Some Basic Models
Three Stages of Planning
1. Aggregate Growth Models: Projecting Macro Variables
➢ A formal economic model describing growth of an economy in one or few sectors using a limited
number of variables.
2. Multisector Models and Sectorial Projections
➢ A much more sophisticated approach to development planning is to use some variant of the
interindustry or input-output model
➢ Input-output model (interindustry model) – a formal model dividing the economy into sectors and
tracing the flow of interindustry purchases (inputs) and sales (outputs)
3. Project Appraisal and Social Cost-Benefit Analysis
➢ Project Appraisal – the quantitative analysis of the relative desirability (profitability) of investing a given
sum or private funds in alternative projects.
Basic Concept and Methodology
➢ Cost-benefit analysis – a tool of economic analysis in which the actual and potential private and social
costs of various economic decisions and weighed against actual and potential private and social
benefits.
➢ Social Profit – the difference between social benefits and social costs, both direct and indirect.
➢ Shadow prices (or accounting prices) – prices that reflect the true opportunity costs of resources.
➢ Market prices – prices stablished by demand and supply in markets.
➢ There are many reasons for believing that in developing countries, market prices of outputs and inputs
do not give a true reflection of social benefits and costs. Five such reasons, in particular, are often
cited:
1. Inflation and currency overvaluation
➢ Exchange rate – rate in which the domestic currency may be converted into (sold for) a foreign
currency such as the U.S dollar.
2. Wages rates, capital costs, and unemployment
3. Tariffs, quotas, subsidies, and import substitution.
➢ Rent seeking – efforts by individuals and businesses to capture the economic rent arising from
prices distortions and physical controls caused by excessive government intervention, such as
licenses, quotas, interest rate ceilings, and exchange control.
4. Savings deficiency
5. The social rate of discount (social time preference)
➢ Social rate of discount – the rate at which a society discounts potential future social benefits to
find out whether such benefits are worth their present social cost.
➢ Net present value – the value of a future stream of net benefits discounted to the present by
means of an appropriate discount (interest) rate.
➢ Internal rate of return – the discount rate that causes a project to have a net present value of
zero, used to rank projects in comparison with market rates of interest.
9.4 Government Failure and Preferences for Markets Over Planning
Problems of Plan Implementation and Plan Failure
➢ To take the specific case of the market failure argument and the presumed role of governments in
reconciling the divergence between private and social valuations of social benefits and costs, the
experience of government policy in many developing countries has been one of often exacerbating
rather than reconciling these divergences.
➢ Government failure – a situation in which government interventions in an economy worsen outcomes.
➢ Some of the major explanations for this have to do with failures of the planning process itself; these
failures in turn arise out of certain specific problems.
1. Deficiencies in plans and their implementations.
2. Insufficient and unreliable date
3. Institutional weakness
4. Lack of political will
5. Conflict, post conflict, and fragile states
9.5 The Market Economy
Sociocultural Preconditions and Economic Requirements
➢ Markets accomplish many positive things, not least of which is delivering goods that consumers want,
where and when they want them, and providing incentives for innovation.
➢ To underpin a well-functioning market system requires special social, institutional, legal, and cultural
conditions that are often very limited, if not absent, in developing nations.
➢ Fraud, corruption, monopoly, and other market failures do not disappear with the wave of a magic
neoclassical wand.
➢ A well-functioning market systems depends on at least the following 12 market-facilitating legal and
economic practices:
CHAPTER 9 Development Policymaking and the Roles of Market, State, and Civil Society
1. Property rights clearly established and demarcated: procedures for establishing property rights and
transferring them
2. Commercial laws and an independent judiciary to enforce them, especially contract and bankrupt laws
3. Freedom to establish businesses in all sectors except those with significant externalities, without
excessive licensing requirements; analogous freedom to enter trades and professions and to attain
government offices (equal economic opportunity)
4. A stable currency and banking system, including a reliable and efficient system for making transfers
5. Public supervision or operation of natural monopolies (industries with increasing returns to scale) as
occurs in industries where technological efficiency requires that a firm be large enough to supply a
substantial fraction of the national market
6. Provision of adequate information in every market about the characteristics of the products offered and
the state supply and demand, to both buyers and sellers
7. Autonomous tastes – protection of consumers’ preferences from influence by producers and purveyors
8. Public management of externalities (both harmful and beneficial) and provision of public goods
9. Instruments for executing stabilizing monetary and fiscal policies
10. Safety nets – provisions for maintaining adequate consumption for individuals affected by certain
economic misfortunes, especially involuntary unemployment, industrial injuries, and work disabilities
11. Encouragement of innovation, in particular, issuance and enforcement of patents and copyrights
12. Security from violence, the most basic of all social foundations
9.6 The Washington Consensus on the Role of the State in Development and its Subsequent
Evolution
➢ This consensus, encapsulated by John Williamson, reflected the free market approach to development
followed in those years by the IMF, World Bank, and key U.S government agencies, along with some
other developed countries at that time.
➢ 10 elements of Washington Consensus:
1. Fiscal discipline
2. Redirection of public expenditure priorities toward health, education, and infrastructure
3. Tax reform, including the broadening of the tax base and cutting marginal tax rates
4. Unified and competitive exchange rates
5. Secure property rights
6. Deregulation
7. Trade liberalization
8. Privatization
9. Elimination of barriers to direct foreign investment (DFI)
10. Financial liberalization
9.7 Development Political Economy: Theories of Policy Formulation and Reform
1. Understanding voting patterns on policy reform
2. Institutions and path dependency
➢ Path dependency – a condition in which the past condition of an individual or economy,
measured by the level of one or more variables, affects future condition.
3. Democracy versus autocracy: which facilitates faster growth?
9.8 Development Roles of NGO’s and the Broader Citizen Sector
➢ NGO (Nongovernmental Organization) – non-profit organizations often involved in providing
financial and technical assistance in developing countries.
➢ There are at least seven partially overlapping and mutually reinforcing types of organizational
comparative advantage for international or national NGO’s or local organizations such as
federations or community-based organizations.
1. Innovation – NGO’s can play in the design and implementation of programs focused on
poverty reduction and other development goals.
2. Program flexibility – an NGO can address development issues that are viewed as an
important for the communities in which it works.
3. Specialized technical knowledge – national and international NGO’s may be greater
repositories of technical expertise and specialized knowledge than local governments (or
businesses).
4. Targeted local public goods – goods and services that are nonviral but excludable, including
those targeted to socially excluded populations, may be best designed and provided by
NGO’s that know and work with these groups.
5. Common-property resource management design and implantation – NGO’s including
federations of local CBO’s, can play an important role in common-property management and
targeted local public-good provision.
6. Trust and credibility – in practice, NGO’s may have other advantages over government in
gaining the trust of, and providing effective services to, groups with special needs-notably
those in extreme poverty.
7. Representation and advocacy – NGO’s may hold advantages in understanding the needs of
the poor, who otherwise are often excluded from political processes and even local
community deliberations.
➢ Voluntary failure – the inability of nongovernmental organizations and the citizen sector more
broadly to efficiently achieve social objectives in their areas of supposed comparative
advantage.
CHAPTER 9 Development Policymaking and the Roles of Market, State, and Civil Society
9.9 Trends in Governance and Reform
1. Tackling the Problem of Corruption
➢ Corruption – the appropriation of public resources for private profit and other private purposes
through the use and abuse of official power or influence.
2. Decentralization – has been a long-term trend in developed countries. The United States, Canada,
and Germany have had significant powers at the state and local level enshrined in their constitution.
3. Development participation – has been shown to make projects works better. With genuine and full
participation by beneficiaries on what projects are chosen and in the way that development assistance
gets used more generally, we would expect less corruption and greater development results per dollar
of aid spent.