Presentation on theme: "The Role of the Market Mechanism, the State, NGOs and the Development Process ECON 3508 March 7 and 12. 2013 See text book, Chapter 11. pp. 511-516,"— Presentation transcript:
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 ,Weaknesses2. Overview on Public Planning and the State Sector.3. Development Roles of NGOs and the Broader Citizen Sector4. “Resurgence of the Market” 1980s and 1990s.5. The “New Consensus” or the “Santiago Consensus”6. Development Planning7. 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 purchasersAs “orchestration systems” coordinating innumerable economic actors and actionsCan 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 pluralismPermits genuine multi-culturalismDecentralization 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 marketsthe environment as a public good is not managed acceptably through markets.Coordination failures can occur when coordination is costly; e.g. with Big Push problemsCapital markets are particularly prone to failure
8 Legal and Economic Factors Facilitating the Functioning of Markets Clear Delineation of Property Rights and their TransferStable Currency and Macro-economic EnvironmentAppropriate Legal FrameworkContract law, Patent and copyright law, Commercial law4. “Freedom of Enterprise” i.e. Freedom to establish independent businessessubject 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 legislationProvision of Public Goods by various levels of GovernmentCompetition Policy, Control of Natural Monopolies13. 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 contractsMaintenance of a Level of TrustHonesty and Non-Corruption in Government and Enterprises, Public and PrivateDiffusion of Power, especially an Independent JudiciaryCompetition, not Monopoly ControlAltruistic or Public Action to Maintain the Relevant CommunitiesProvision of public goodsSocial policies and social safety netFree 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 societiesPost-War development planning; excessive expectations followed by disenchantment.
13 The Role of the State and Public Planning: Central Tasks Maintenance of a basic civilized order for the functioning of society and economyLaw and order and personal security;Provision of Public Goods and Services, including those necessary for basic human developmentAdjust for external costs and benefits;Environmental Protection;Achieve a more socially and politically acceptable distribution of incomeA 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 people6. Specific Weaknesses of “Development Planning”
18 Potential problems of government intervention in developing countries (Todaro) Individuals know more about their preferences, circumstancesGovernment 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 initiativeHard to replicate market incentive system within governmentsDifferent parts of government may be poorly coordinatedUnderground economy may place constraints on government (note cigarettes and taxes in Canada)Controls create incentives for rent seekingPlanning 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 managementLocal public goodsEconomic and productive ideasPossibly other activities that are either:Excludable but not rivalRival but not excludablePartly excludable and partly rival
21 Typology, continued Excludability: Rivalry Can others be prevented or “excluded” from consuming the product?High Excludability: YesLow: NoRivalryDoes Consumption by one person (or group) reduce the amount available for others?Non or Less Rivalrous: NoHighly Rivalrous: Yes
22 Development Roles of NGOs and the Broader Citizen Sector Potential comparative advantages of NGOsHarness a range of motives and incentivesInnovative design and implementationProgram flexibilitySpecialized technical knowledgeProvision of targeted local public goodsCommon-property resource management design and implementationTrust and credibilityRepresentation 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 problemsMay be selective and exclusionary, elitist, and or ineffectiveMay 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 resurgenceThe 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 DisciplineTax Reform, broadening base, cutting rates;Focused public expenditures: health, education and infrastructure;Unified and competitive exchange rates;Trade liberalizationLiberalize Direct Foreign InvestmentPrivatizationFinancial liberalizationDeregulationSecure property rightsSource: 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 conEconomic Prosperity and such policiesWeaknesses of the “Washington Consensus”De-emphasis on equity issues;Doctrinaire implementation in some casesOver-emphasis on the value of the market mechanism and undervaluation of the need for state actionLeading to:The “Santiago Consensus”
28 5. The “New Consensus” or the “Santiago Consensus” Development must be “Market-Based”But “Market Failures” occurDevelopment also must be Public Sector Based ,But “Public Failure” occurs3. Governmental Responsibility (National, Regional & Local) forProvision of fundamental public goods, e.g. legal structure, law and order, security of property rightsBasic public goods;Social Equity: and Inclusive growth;Fairness in income distributionPoverty reductionHealth and EducationMacroeconomic managementTech transferEnvironmental protectionHelp 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 casesAsian CasesLatin America: Co-existence ofSantiago Approach,Washington Approach andNeo-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 -1970sTypes of PlanWhat 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 weakUnrealistic planning documentsLogistical 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 CorruptionDemocracy 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 gainUse of public property for personal purposesInfluencing design or application rules regulations and permissions for personal gainTwisting or influencing by briber of public policy for personal gainDiscriminatory provision of public services (to home town or ethnic group or political supportersNepotism: 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 interestsSlow-down of investment and economic growthImpairs 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 reinforcementGenerally, the more democratic the country, the better the policies and the better the economic performance in terms of growth and incomesBut 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 authoritarianismDemocracies 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 democracyOR, as authoritarian regimes prosper, they produce the conditions for democratization (one hopes)Main conclusion?Development Democracy, andDemocracy Development
51 Note some varying historical cases: Singapore under Lee Kuan YewSouth Korea 1953 to +/- 1975China 2011 vis-à-vis IndiaChile under Pinochet and Frei