Chapter 11
Development
Policymaking and
the Roles of Market,
State, and Civil
Society
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The Planning Mystique


In the past, few doubted the importance and
usefulness of national economic plans
Recently, however, disillusionment has set
in
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11-2
The Nature of Development
Planning


Basic concepts
Planning in mixed developing economies
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11-3
The Rationale for Planning in
Developing Economies



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Market failure
Resource mobilization and allocation
Attitudinal or psychological impact
Foreign aid
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11-4
The Planning Process: Some
Basic Models


Characteristics of the planning process
Planning in stages: 3 basic models
– Aggregate growth models
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11-5
Aggregate Growth Models
K (t )  kY (t )
(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
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11-6
Aggregate Growth Models
I (t )  K (t  1)  K (t )K (t )  sY  S (t )
(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
Y (t  1)  Y (t ) Y (t )
g

Y (t )
Y (t )
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(11.3)
11-7
Aggregate Growth Models
K kK kK / Y Y



K
K
K /Y
Y
sY  K s
g
 
K
k
s
n  p  
k
(11.4)
(11.5)
(11.6)
Where n is the labor force growth rate and p
is the growth rate of labor productivity
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11-8
Aggregate Growth Models
W   Y
(11.7)
Where W and  are wage and profit incomes
s   sWW  I
(11.8)
Where s and sW are the marginal propensities
to save from wage income and profit
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11-9
Aggregate Growth Models

k ( g   )  ( s  sW )( )  sW
Y
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(11.9)
11-10
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
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11-11
Project Appraisal and Social CostBenefit Analysis



Basic concepts and methodology
Setting objectives
Computing shadow prices and social
discount rates
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11-12
The Social Rate of Discount
Net present value, or NPV is given by
Bt  Ct
NPV  
t
t (1  r )
(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
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11-13
Project Appraisal and Social CostBenefit Analysis



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Basic concepts and methodology
Setting objectives
Computing shadow prices and social
discount rates
Choosing projects: some decision criteria
Conclusions: planning models and plan
consistency
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11-14
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
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11-15
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
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11-16
Government Failure and the Resurgent
Preference for Markets Over Planning

Problems of government intervention in
LDCs
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11-17
The Market Economy


The market economy sociocultural
preconditions and economic requirements
Role and limitations of the market in LDCs
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11-18
The “Washington Consensus” on
the State in Development

1980s and 1990s (see Table 11.1)
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11-19
Table 11.1
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11-20
The “Washington Consensus” on
the State in Development


1980s and 1990s
Toward a new consensus
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11-21
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)
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11-22
Figure 11.1
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11-23
Trends in Governance and Reform

Tackling the problem of corruption
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11-24
Figure 11.2
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11-25
Figure 11.3
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11-26
Trends in Governance and Reform


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Tackling the problem of corruption
Decentralization
Development participation- alternate
interpretations
Genuine participation and role of NGOs
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11-27
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
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11-28
Concepts for Review

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Accounting prices
Aggregate growth
model
Comprehensive plan
Cost-benefit analysis
Development
Participation
Economic
infrastructure
Economic plan
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Economic planning
Government failure
Input-output model
Interindustry model
Internal rate of return
Market failure
Market prices
Net present value
11-29
Concepts for Review (cont’d)
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NGOs
Partial plan
Path dependency
Planning process
Political will
Project appraisal
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Rent seeking
Shadow prices
Social profit
Social rate of discount
11-30