Chapter 11 Development Policymaking and the Roles of Market, State, and Civil Society Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The Planning Mystique In the past, few doubted the importance and usefulness of national economic plans Recently, however, disillusionment has set in Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The Nature of Development Planning Basic concepts Planning in mixed developing economies Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The Rationale for Planning in Developing Economies Market failure Resource mobilization and allocation Attitudinal or psychological impact Foreign aid Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The Planning Process: Some Basic Models Characteristics of the planning process Planning in stages: 3 basic models Aggregate growth models Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Aggregate Growth Models (11.1) Where K(t) is capital stock at time t Y(t) is output at time t k is the average and marginal capital-output ratio Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Aggregate Growth Models (11.2) Where I(t) is investment at time t s is the savings rate S is national savings  is the depreciation rate If g is the targeted rate of output growth, then (11.3) Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Aggregate Growth Models (11.4) (11.5) (11.6) Where n is the labor force growth rate and p is the growth rate of labor productivity Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Aggregate Growth Models (11.7) Where W and  are wage and profit incomes (11.8) Where s and sW are the marginal propensities to save from wage income and profit Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Aggregate Growth Models (11.9) Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The Planning Process: Some Basic Models Characteristics of the planning process Planning in stages: 3 basic models Aggregate growth models Multi-sector models and sectoral projections Project appraisal and social cost-benefit analysis Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Project Appraisal and Social Cost-Benefit Analysis Basic concepts and methodology Setting objectives Computing shadow prices and social discount rates Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The Social Rate of Discount Net present value, or NPV is given by (11.10) 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 © 2006 Pearson Addison-Wesley. All rights reserved.

Project Appraisal and Social Cost-Benefit Analysis Basic concepts and methodology Setting objectives Computing shadow prices and social discount rates Choosing projects: some decision criteria Conclusions: planning models and plan consistency Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Problems of Plan Implementation and Plan Failure Theory versus practice Factor prices, choice of technique, and employment creation Rural-urban imbalances Demand for education Structure of the economy Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Reasons for plan failures The Crisis in Planning: Problems of Implementation and Plan Failures (cont’d) Reasons for plan failures Deficiencies in plans and their implementation Insufficient and unreliable data Unanticipated economic disturbances Institutional weaknesses Lack of political will Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Problems of government intervention in LDCs Government Failure and the Resurgent Preference for Markets Over Planning Problems of government intervention in LDCs Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The Market Economy The market economy sociocultural preconditions and economic requirements Role and limitations of the market in LDCs Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The “Washington Consensus” on the State in Development 1980s and 1990s (see Table 11.1) Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Table 11.1 Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

The “Washington Consensus” on the State in Development 1980s and 1990s Toward a new consensus Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Development and Political Economy Understanding voting patterns on policy reform Institutions and path dependency Democracy versus autocracy: which facilitates faster growth? Role of NGOs in development and the broader citizen sector (see Figure 11.1) Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Figure 11.1 Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Trends in Governance and Reform Tackling the problem of corruption Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Figure 11.2 Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Figure 11.3 Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Trends in Governance and Reform Tackling the problem of corruption Decentralization Development participation- alternate interpretations Genuine participation and role of NGOs Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Developing Planning and the State: Concluding Observations Pragmatism is needed in dealing with the role and limitations of economic policies in LDCs Regardless of ideology, governments in LDC have been heavily involved in the economy LDC governments shouldn’t necessarily do less, but do better Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Concepts for Review Accounting prices Aggregate growth model Comprehensive plan Cost-benefit analysis Development Participation Economic infrastructure Economic plan Economic planning Government failure Input-output model Interindustry model Internal rate of return Market failure Market prices Net present value Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

Concepts for Review (cont’d) NGOs Partial plan Path dependency Planning process Political will Project appraisal Rent seeking Shadow prices Social profit Social rate of discount Copyright © 2006 Pearson Addison-Wesley. All rights reserved.