Chapter 11: Development Policymaking and the Roles of Market, State, and

Civil Society
Nature of Development
Economic planning
- Government plans how FOP is utilized by different industries and how much
should be produced
Economic plan
- Written document containing policy decisions
- Could be comprehensive or partial
- Created through the planning process which is now considered as essential to
economic stability
Planning in Mixed Developing Countries
- Institutional: mix of private and public ownership
Forms of Private Ownership
1. Subsistence
2. Small-scale individual/family-owned
3. Medium-size commercial enterprises
4. Large jointly owned/family-owned firms that are geared towards foreign markets
5. Relatively large, domestic-based firms listed in their countrys national stock
markets
Components of Planning
1. Public investment to realize long-term economic objectives
2. Creation of policy to affect private sector activity in relation to economic
objectives
Rationale for Development Planning
Market Failure
- Markets are imperfect government as arbiter
- Forms
o Not functioning properly or non-existent
o Inefficient allocation
o Undesirable social outcomes
- Happens when public and private benefits differ
o Public goods: free riders
o Externalities: inefficient use of resources
o Coordination failure: number of decision makers affecting the quality of the
decision
- Other reasons
o Structure not made for long-term sustainability
o Capital markets likely to fail due to information asymmetry
o Distribution and merit goods seen as outside the issue of economic
efficiency
o Some official prioritizing private interests over public ones

Resource Mobilization and Allocation

- Investing limited resources in the most efficient way possible
Attitudinal and Psychological Impact
- Could be used to bring people together
Foreign Aid
- Plans as prerequisites for foreign aid
Three Stages of Planning
Aggregate Growth Model
- Creates a 3-5 year forecast of the economy given a limited set of variables
- Uses the Harold-Domar model

K ( t )=cY (t)

I ( t )=K ( t+1 ) K (t ) +K ( t )
sY
S (t)
Y ( t+1 )Y (t) Y (t)
=
Y (t )
Y (t)
K
( ) Y
K cY
Y
Y
=
=
=
K
K
K
Y

K(t) = capital stock at

time t
Y(t) = total output (GDP)
at time t
c = capital-output ratio
I(t) = gross investment at
time t
= fraction of capital
depreciated in each
period
s = constant share of
output

g=

g=

g = targeted rate of
growth of output

W + =Y

s + sW W =I

Assume that a constant

share (s) of output (Y) is
always saved (S)

Given growth rate g,

capital must growing at the
same rate

This leads us back to the

basic Harrod-Domar
growth formula with the
capital depreciation
parameter

sY K s
=
K
c

s
n+ p=
c

Assume that the ratio of

total output to
reproducible capital is
constant

n = labor force growth

p = rate of growth of
labor productivity
W = wage income
= profit income
s = propensity to save
out of profit income

Output growth can also be

expressed as the sum of
labor force growth (n) and
the rate of growth of labor
productivity (p)
Previous equation can be
used to estimate whether
domestic savings will be

s W = propensity to save
out of wage income

c ( g+ ) =( s sW )

+s W
Y

( )

sufficient to provide an
adequate number of new
employment opportunities
to a growing labor force
and this can be done by
showing output as equal to
propensity to save out of
wage income (W) and
profit income (
This leads to a modified
Harrod-Domar growth
equation

Multisector Models and Sectoral Projections

- Variant of the interindustry/input-output model where interrelations between
industries are seen
- Industries are producers of output and users of inputs from other industries and
so, planned changes will definitely affect all industries
- Can be used to determine requirements in the creation of an economic plan that
is consistent with production levels and resource requirements
- What distinguishes it is the attempt to formulate an internally consistent,
comprehensive development plan for the entire economy
- Extended by the creation of a social accounting matrix (SAM)
o Provides a quantitative description of all economic interrelations within a
given point in time
o Can be used for creating economic policy decisions
o Elaborated with computable general equilibrium models (CGE) assumes
households and firms maximize benefits
Project Appraisal and Social Cost-Benefit Analysis
- Project appraisal is used to determine how profitable an investment will be if it
were to be invested in alternative projects
- Cost-benefit analysis is used to determine the weight of pros and cons of a social
investment in relation to society
o If we look only at profitability, divergences are expected occur balanced
out by public policy
- Social profit differences between social benefits and social costs
Government Failure and Preferences for Markets Over Planning
- Of course, economic planning has also failed in some ways
Problems
1. Theory versus practice
o Theories have been weakly supported

2.
3.
4.
5.
6.
7.

o For instance, government intervention has often led to worsened outcomes

(government failure)
Deficiency in plans and implementation
Insufficient and unreliable data
Unanticipated economic disturbances
Institutional weaknesses
o Lack of communication and local appropriation
o Personal rivalries and lack of commitment exacerbate the problem
Lack of political will
o Lack of political authority to achieve economic objectives through reforms
Conflict, postconflict, and fragile states

1980s Shift to Free Markets

- Due to failure of planning, many advocated for the free market approach such as
the IMF, WB, and USAID
Market Economy
- Accomplish many things, but is not a neoliberal magic wand only effective in
the presence of certain conditions that are absent in developing countries
Washington Consensus
- Held sway in the 80s to the 90s
- Had a free market approach to development followed by the IMF, WB, and US
government agencies
- Held the view that government intervention would make things worse and that
poverty would be alleviated with growth
Points
1. Fiscal discipline
2. Redirection of public expenditure priorities toward health, education, and
infrastructure
3. Tax reform
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
Toward a New Consensus
- Various East Asian examples have shown that the state can be effective in
regulating the market
- Gave rise to the New Consensus that described an expanded and more balanced
consensus
Points of the New Consensus
1. Market-based development while acknowledging large market failrues
2. Government should not be a direct producer
3. The government has a broad, eclectic role:
o Stable macro environment

o
o
o
o
o
o
o
o
o
o

Infrastructure
Public health
Education and training
Technology transfer
Environmentally sustainable development and ecological protection
Provide export incentives
Help the private sector overcome coordination failures
Allowing for shared growth
Supervision and regulation of the financial sector
Provision of fundamental public goods

Development Roles of NGOs and the Broader Citizen Sector

Nongovernment organizations (NGOs)
- Involved in providing financial and technical assistance in developing countries
- Has civil society actors that work voluntary to promote their values and further
development
- NGOs provide local public goods, productive ideas and common-pool goods
o Public goods are nonexcludable (nothing to stop people from using them)
and nonrival (consumption by one does not reduce consumption for others)
o NGO activities are usually partially rival, rival but not excludable, or
excludable but not rival
o If they offer their activities at low cost or high quality, they could expand
into private/public goods
Comparative Advantage of NGOs
1. Innovation
2. Program flexibility
3. Specialized technical knowledge
4. Targeted local public goods
5. Common-property resource management design and implementation
6. Trust and credibility
7. Representation and advocacy