1. The Role of the Market Mechanism, the State, NGOs and the Development Process ECON March 7 and See text book, Chapter 11. pp , and

2. Agenda: 1. Overview of the Market Mechanism
Functioning, History, Strengths ,Weaknesses
2. Overview on Public Planning and the State Sector.
3. Development Roles of NGOs and the Broader Citizen Sector
4. “Resurgence of the Market” 1980s and 1990s.
5. The “New Consensus” or the “Santiago Consensus”
6. Development Planning
7. Political Economy of Planning

3. The Market Mechanism: Role, Advantages and Disadvantages
Historical Background
- Ubiquity of markets, though not necessarily the “market mechanism.”
- Independently invented in all parts of the world;
- Within older civilizations, long predating contact with “the west;”;
- Within centrally planned economies;
Emergence of market-oriented societies in recent decades or the last few centuries

4. What Markets Do:
Resource Allocation: determination of what is produces, how, and for whom;
Market prices as “communications systems” communicating demands of producers to suppliers of goods and services;
As “incentive systems” providing suppliers or producers with the incentives and means to fulfill the demands of purchasers
As “orchestration systems” coordinating innumerable economic actors and actions
Can serve as “mechanisms for the social control of economic activity.”

5. Advantages or Strengths of the “Market Mechanism”
Spontaneity of functioning; automaticity;
Makes possible “consumer sovereignty;”
Makes possible socio-cultural pluralism
Permits genuine multi-culturalism
Decentralization of economic decision-making; permits immense varieties of goods and services;
Incentive structures permit and encourage self-activation by all economic actors;
Enforces “economic discipline” on market actors: the “hard budget constraint.”
Permits private, co-op, & state (all levels) enterprise , micro, medium and large to co-exist

6. Weaknesses or Disadvantages: “Market Failures”
public goods are not provided acceptably (free rider problem) ;
undesirable results as measured by social objectives (e.g. public health)
income distribution and equity are not generated in socially acceptable ways;
external costs and benefits from individual actions generate socially and economically inappropriate results;

7. Weaknesses or Disadvantages: “Market Failures” continued:
producers and not consumers may (try to) exercise “sovereignty”
tendencies towards monopoly, oligopoly or collusion may weaken the social control of economic activity exercised through markets
the environment as a public good is not managed acceptably through markets.
Coordination failures can occur when coordination is costly; e.g. with Big Push problems
Capital markets are particularly prone to failure

8. Legal and Economic Factors Facilitating the Functioning of Markets
Clear Delineation of Property Rights and their Transfer
Stable Currency and Macro-economic Environment
Appropriate Legal Framework
Contract law, Patent and copyright law, Commercial law
4. “Freedom of Enterprise” i.e. Freedom to establish independent businesses
subject to the regulatory environment

9. 6. An Appropriate Regulatory Environment (to reduce negative externalities and for social protection)
Environmental law;
Health and safety legislation;
Labour legislation
Provision of Public Goods by various levels of Government
Competition Policy, Control of Natural Monopolies
13. Social Policy, Social Safety Net

10. Legal, Institutional, Cultural and Social Factors Relevant for the Effective Functioning of Markets
Maintenance of Law and Order;
Personal security;
Enforcement of contracts
Maintenance of a Level of Trust
Honesty and Non-Corruption in Government and Enterprises, Public and Private
Diffusion of Power, especially an Independent Judiciary
Competition, not Monopoly Control
Altruistic or Public Action to Maintain the Relevant Communities
Provision of public goods
Social policies and social safety net
Free Flows of Information
?Rationality unconstrained by Tradition?
Source: Todaro, citing Keyfitz and Dorfman, modified by A. Ritter

11. II. The State and Development Processes: Role, Advantages and Disadvantages
Historical Background:
ubiquity of “Planning “ since time immemorial;
provision of public goods and in all complex civilizations as well as simpler societies
Post-War development planning; excessive expectations followed by disenchantment.

12. Teotehuacan, Mexico

13. The Role of the State and Public Planning: Central Tasks
Maintenance of a basic civilized order for the functioning of society and economy
Law and order and personal security;
Provision of Public Goods and Services, including those necessary for basic human development
Adjust for external costs and benefits;
Environmental Protection;
Achieve a more socially and politically acceptable distribution of income
A regulatory framework

14. Strengths of the Public Sector
May represent the Commonweal;
No reasonable alternatives often for the provision of public goods;
Capacity to improve equity and social justice in ways markets can not achieve;
Macro-flexibility:” the capacity to mobilize resources rapidly and in large magnitude for collective action.

15. Weaknesses of the Public Sector: “Public Sector Failure”
1. “Weaknesses of Public purpose:”
Is Government in fact incorrupt, altruistic, benevolent and public-spirited?
Or is it corrupt, predatory, kleptocratic?
Is it privilege-protecting, class-based or ethnically based?
2. Susceptibility to capture by pressure groups, vested interests, especially the economically and politically powerful?

16. 3. General Problems Intrinsic to Bureaucracy:
Deformation of incentive structures;
Inexorable tendencies to expansion;
Absence of “Hard Budget Constraints” or clear financial discipline;
Tendencies towards rigidity, inflexibility and sclerosis over time.

17. 4. Promotion of “Rent-Seeking Behavior:” shaping rules, policies, taxes and expenditures for private gain;
5. Possible Imposition of Centrally-Determined preferences on people
6. Specific Weaknesses of “Development Planning”

18. Potential problems of government intervention in developing countries (Todaro)
Individuals know more about their preferences, circumstances
Government may increase risks by moving in same direction on a large scale rather than via trial and error;
Government may be more rigid and inflexible in decision making;
Governments may lack capabilities to administer detailed plans;
Bureaucratic obstacles may block private sector initiative
Hard to replicate market incentive system within governments
Different parts of government may be poorly coordinated
Underground economy may place constraints on government (note cigarettes and taxes in Canada)
Controls create incentives for rent seeking
Planning may be manipulated by narrow, privileged groups

19. 3. Development Roles of NGOs and the “not for profit” and Cooperative Sector
Definitions:
“Not-for-profit voluntary citizens group at local, regional national or international level aimed at providing goods, services, analysis, advocacy, or humanitarian functions”
Potentially important roles in:
Cooperatives in many areas;
Common property resource management
Local public goods
Economic and productive ideas
Possibly other activities that are either:
Excludable but not rival
Rival but not excludable
Partly excludable and partly rival

20. Typology of Goods
More
Less
Less
More

21. Typology, continued Excludability: Rivalry
Can others be prevented or “excluded” from consuming the product?
High Excludability: Yes
Low: No
Rivalry
Does Consumption by one person (or group) reduce the amount available for others?
Non or Less Rivalrous: No
Highly Rivalrous: Yes

22. Development Roles of NGOs and the Broader Citizen Sector
Potential comparative advantages of NGOs
Harness a range of motives and incentives
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

23. Limitations: NGO or “voluntary failure”
Have their own self-interest and agendas to push regardless of need or results; Captured by goals of funders rather than intended beneficiaries;
May be less significant, owing to small scale and reach.
Lacking necessary local knowledge to develop and implement an appropriate mix of programs to address relevant problems
May be selective and exclusionary, elitist, and or ineffective
May lack adequate incentives to ensure effectiveness

24. Limitations: NGO or “voluntary failure”
7. Fund-raising may become an end in itself, providing salaries with less regard for results. 9. Lacking immediate feedback (as private firms get in markets, or elected governments receive at the polls); this may let the weaknesses go on for some time before being corrected 10. Single-purpose organizations may not see the bigger picture 11. May substitute for domestic government or NGO action

25. 4. “Resurgence of the Market” 1980s and 1990s.
Following the 1950s s (when the “market mechanism” was de-emphasized)
Reasons for this resurgence
The so-called “Washington Consensus”
a free market approach to development espoused by the IMF, the World bank, and key U.S. government agencies

26. The “Washington Consensus”
Fiscal Discipline
Tax Reform, broadening base, cutting rates;
Focused public expenditures: health, education and infrastructure;
Unified and competitive exchange rates;
Trade liberalization
Liberalize Direct Foreign Investment
Privatization
Financial liberalization
Deregulation
Secure property rights
Source: Todaro & Smith, from Dani Rodik, JEL 34 March 1996.

27. Leading to: Politics and History of the Washington Consensus
Polemics re “Neo-Liberalism”, pro and con
Economic Prosperity and such policies
Weaknesses of the “Washington Consensus”
De-emphasis on equity issues;
Doctrinaire implementation in some cases
Over-emphasis on the value of the market mechanism and undervaluation of the need for state action
Leading to:
The “Santiago Consensus”

28. 5. The “New Consensus” or the “Santiago Consensus”
Development must be “Market-Based”
But “Market Failures” occur
Development also must be Public Sector Based ,
But “Public Failure” occurs
3. Governmental Responsibility (National, Regional & Local) for
Provision of fundamental public goods, e.g. legal structure, law and order, security of property rights
Basic public goods;
Social Equity: and Inclusive growth;
Fairness in income distribution
Poverty reduction
Health and Education
Macroeconomic management
Tech transfer
Environmental protection
Help private sector overcome “co-ordination failures”
Source: Text; Santiago Chile: UN and Chilean example; and World Bank pronouncements

29. Is the pendulum swinging to the “left” ? African cases Asian Cases
Currently:
Is the pendulum swinging to the “left” ?
African cases
Asian Cases
Latin America: Co-existence of
Santiago Approach,
Washington Approach and
Neo-Populist/Socialist Approach: ALBA
(Alianza Bolivariana para los Pueblos de Nuestra América)
Or back to the “right”?

30. 6. Development Planning Definition
The Potential and Promise of “Planning: in the 1950s -1970s
Types of Plan
What was in a Plan?
Planning and Budgeting

31. Specific Weaknesses of Development Planning
Politics of Planning was often ignored
(See accompanying Charts)
Implementation was often weak
Unrealistic planning documents
Logistical weaknesses (staffing, information, implementation mechanisms)
Assumption of Good Governance was nit always correct

32. 7. Political Economy of Planning
The Politics of Policy Making
(See charts below)
See the text.
The Problem of Corruption
Democracy and Development

35. B. The Problem of Corruption
Definition:
Appropriation of public – or private – resources for private profit or use through the use of official power, influence, or access.
Abuse of public – or private – trust, position or access for private gain;

37. 2. Varieties of Corruption
Theft of public property, goods or services;
Illicit payments to suppliers or supporters for political gain
Use of public property for personal purposes
Influencing design or application rules regulations and permissions for personal gain
Twisting or influencing by briber of public policy for personal gain
Discriminatory provision of public services (to home town or ethnic group or political supporters
Nepotism: hiring from family or friends

38. 3. Consequences of Corruption
Unfairness;
Impact on income distribution
(Corruption as a regressive tax on the poor); See chart 11.2)
Sacrifice or general well-being for personal interests
Slow-down of investment and economic growth
Impairs ability of government to function in all areas due to erosion of “trust”
Deformation of public policy

39. Figure 11.3 Corruption as a Regressive Tax: The Case of Ecuador

40. Figure 11.4 The Association between Rule of Law and Per Capita Income

41. 4. Solutions to Corruption?
Free media for shining lights in dark corners;
Open Democracy, for scrutiny, criticism and rejection of corrupt leaders;
An independent judiciary;
Reduce immunity of members of the executive, legislative and judicial branches from prosecution for wrong-doing;
Separate financing of political parties from general government expenditures;

42. 4. Solutions to Corruption?
Make public expenditures and procurement transparent ;
Eliminate unnecessary regulations and rules and make others simpler, more transparent;
Promote civil service professionalism with adequate pay scales;
Meritocratic promotion policies in civil service;
Avoid large monopolies (e.g. as in petroleum);
Promote competition and entry into the economy;

43. C. Democracy and Development
Democracy versus autocracy: which facilitates faster growth?
What is the relationship between Democracy and Development?
Does democracy promote development?
Does development promote democracy?
Central conclusion: Strong correlation; circular causation or mutual reinforcement
Generally, the more democratic the country, the better the policies and the better the economic performance in terms of growth and incomes
But what is cause and what is effect?

44. The Economist Democracy Index
The Economist Democracy index map for 2011, with lighter colours representing more democratic countries. Countries with DI below 3 (clearly authoritarian) are black.
Methodology and Source:

46. Figure 11.1 Global Trends in Governance, 1946-2008

47. Note: “Anocracy”:
A society in which central authority is weak (or doesn't exist at all).
Power is not vested in public institutions but spread amongst elite groups who are constantly competing with each other for power. Examples of anocracies in Africa include the warlords of Somalia, the shared governments in Kenya and Zimbabwe, and the spread of power between political executive, the transnational mining companies (especially those from China), and criminal elements in the DRC.
By another definition an “anocracy” lies mid way between a democracy and an autocracy.

48. Does Authentic Democracy Promote Development?
How might democracy promote development?
Note that Democracies are vital for their own sake.
Genuine Democracy may ensure that policies promote the common well being more so than authoritarianism
Democracies are more accountable.
Peaceful regime change is possible when governments mess-up, or when times and conditions change.
Citizens can “throw the rascals out” when performance is weak.
Policy adjustment , improvement and evolution can occur

49. 5. In democracies, individual economic rights are protected better than in authoritarian regimes where the rule of law is dubious. But on the Contrary: Might special interests dominate and pervert policies towards their own interests?, Yes but…. Can autocracies mobilize resources for change, investment and development more effectively than democracies? Yes , but…… How often is democracy genuine and effective?

50. Does Development Promote Democracy.
Yes!
How? Higher GDPpc  better education, more urbanization, more organized with independent civil organs of society, better communications … stronger demands for political inclusion and eventually democracy
OR, as authoritarian regimes prosper, they produce the conditions for democratization (one hopes)
Main conclusion?
Development   Democracy, and
Democracy   Development

51. Note some varying historical cases:
Singapore under Lee Kuan Yew
South Korea 1953 to +/- 1975
China 2011 vis-à-vis India
Chile under Pinochet and Frei