1. Chapter 11
Development Policymaking and the Roles of Market, State, and Civil Society

2. The Planning Mystique
In the past, few doubted the importance and usefulness of national economic plans
Recently, however, disillusionment has set in
But a comprehensive development policy framework can play an important role in accelerating growth and reducing poverty
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3. The Nature of Development Planning
Basic concepts
Planning in mixed developing economies
Resource mobilization for public investment
Economic policy to control private economic activity according to social objectives of the government
Private sector in such economies comprises
The subsistence sector
Small scale businesses
Medium size enterprises
Large joint or foreign owner enterprises
Large domestic firms
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4. The Rationale for Development Planning
Market failure
Resource mobilization and allocation
Attitudinal or psychological impact
Foreign aid
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5. The Planning Process: Some Basic Models
Characteristics of the planning process
Planning in stages: 2 basic models
Aggregate growth models
Multisector input-output, social accounting, and CGE models
3 stages of planning
Aggregate
Sectoral
Project
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6. Aggregate Growth Models: Projecting macro Variables
(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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7. 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)
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8. 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
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9. 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
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10. Aggregate Growth Models
(11.9)
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11. Multisector Models and Sectoral Projections
Interindustry or input-output models
Can be extended in 2 ways
SAM models where data from national accounts, BOP, and flow-of-funds databases is supplemented with household survey data.
CGE models where utility and production function are estimated and impacts of policies are simulated.
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12. Project Appraisal and Social Cost-Benefit Analysis
Basic concepts and methodology
Specify objective function
Compute social measures (shadow prices)
Establish decision criterion
Setting objectives
National cohesion, political stability, income distribution etc.
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13. Project Appraisal and Social Cost-Benefit Analysis
Computing shadow prices and social discount rates
Calculating the social rate of discount or social time preference
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14. 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
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15. Project Appraisal and Social Cost-Benefit Analysis
Choosing projects: some decision criteria
NPV rule
Compare the internal rate of return with an interest rate
Conclusions: planning models and plan consistency
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16. Problems of Plan Implementation and Plan Failure
Theory versus practice
Reasons for plan failure
Deficiencies in the plan
Insufficient unreliable data
Unanticipated economic disturbances
Institutional weaknesses
Lack of political will
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17. Problems of government intervention in developing countries
Government Failure and the Resurgent Preference for Markets over Planning
Problems of government intervention in developing countries
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18. The Market Economy
Sociocultural preconditions and economic requirements
Trust in banks etc.
Law and order
Security of property and persons v
Balance between competition and cooperation
Division of responsibility and diffusion of power
Social mobility
Materialistic values as a stimulus to greater production
Deferring gratification to generate private saving
Rationality
Honesty
Efficiency
Freedom of information
Free flows of information
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19. The Market Economy Well functioning market economy requires
Clear property rights
Laws and courts
Freedom to establish business
Stable currency
Public supervision of natural monopolies
Provision of adequate information
Autonomous tastes
Public management of externalities
Stable monetary and fiscal policy instruments
Safety nets
Encouragement of innovation
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20. The Market Economy Role and limitations of the Market in LDCs
Imperfections, lack of information and uncertainty
Presence of externalities
Resource constraints
Income distribution
Structural change
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21. The “Washington Consensus” on the Role of the State in Development and its Limitations
The consensus reflected a free market approach to development espoused by the IMF, the World bank, and key Government agencies
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22. Table 11.1 The Washington Consensus and East Asia
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23. The “Washington Consensus” on the State in Development
Toward a new consensus
New emphasis on government's responsibility toward poverty alleviation
Importance of health and education
A recognition that markets can fail
Governments can secure conditions for an effective market based economy
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24. 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
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25. Figure 11.1 Typology of Goods
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26. Development and Political Economy
Comparative advantages of NGOs in
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
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27. Trends in Governance and Reform
Tackling the problem of corruption
Abuse of public trust for private gain
Good governance enhances capability to function
Effects of corruption fall disproportionately on the poor
Good governance is broader than simply an absence of corruption
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28. Figure 11.2 Corruption as a Regressive Tax: The Case of Ecuador
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29. Figure 11.3 The Association between Rule of Law and Per Capita Income
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30. Trends in Governance and Reform
Decentralization
Development participation- alternate interpretations
Genuine participation and role of NGOs
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31. 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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32. Case Study: The BRAC Model in Bangladesh
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33. 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
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34. 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
Voluntary failure
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