1. Chapter 16 Slide 1 Copyright © 2003 Pearson Education, Inc.

2. Chapter 16 Slide 2 Copyright © 2003 Pearson Education, Inc. Development Policymaking and the Role of the State Chapter 16

3. Chapter 16 Slide 3 Copyright © 2003 Pearson Education, Inc. The Planning Mystique n In the past, few doubted the importance and usefulness of national economic plans n Recently, however, disillusionment has set in

4. Chapter 16 Slide 4 Copyright © 2003 Pearson Education, Inc. The Nature of Development Planning n Basic concepts n Planning in mixed developing economies

5. Chapter 16 Slide 5 Copyright © 2003 Pearson Education, Inc. The Rationale for Planning in Developing Economies n Market failure n Resource mobilization and allocation n Attitudinal or psychological impact n Foreign aid

6. Chapter 16 Slide 6 Copyright © 2003 Pearson Education, Inc. The Planning Process: Some Basic Models n Characteristics of the planning process n Planning in stages: 3 basic models –aggregate growth models

7. Chapter 16 Slide 7 Copyright © 2003 Pearson Education, Inc. Aggregate Growth Models WhereK(t) is capital stock at time t Y(t) is output at time t k is the average and marginal capital-output ratio (16.1)

8. Chapter 16 Slide 8 Copyright © 2003 Pearson Education, Inc. Aggregate Growth Models WhereI(t) is investment at time t s is the savings rate S is national savings  is the depreciation rate (16.2) If g is the targeted rate of output growth, then (16.3)

9. Chapter 16 Slide 9 Copyright © 2003 Pearson Education, Inc. Aggregate Growth Models (16.4) (16.5) Where n is the labor force growth rate and p is the growth rate of labor productivity (16.6)

10. Chapter 16 Slide 10 Copyright © 2003 Pearson Education, Inc. Aggregate Growth Models (16.7) (16.8) Where W and  are wage and profit incomes Where s  and s W are the marginal propensities to save from wage income and profit

11. Chapter 16 Slide 11 Copyright © 2003 Pearson Education, Inc. Aggregate Growth Models (16.9)

12. Chapter 16 Slide 12 Copyright © 2003 Pearson Education, Inc. The Planning Process: Some Basic Models n Characteristics of the planning process n Planning in stages: 3 basic models –aggregate growth models –multi-sector models and sectoral projections –project appraisal and social cost-benefit analysis

13. Chapter 16 Slide 13 Copyright © 2003 Pearson Education, Inc. Project Appraisal and Social Cost-Benefit Analysis n Basic concepts and methodology n Setting objectives n Computing shadow prices and social discount rates

14. Chapter 16 Slide 14 Copyright © 2003 Pearson Education, Inc. Project Appraisal and Social Cost-Benefit Analysis Net present value, or NPV is given by WhereBt is the expected benefit at time t Ct is the expected cost at time t r is the government’s social rate of discount

15. Chapter 16 Slide 15 Copyright © 2003 Pearson Education, Inc. Project Appraisal and Social Cost-Benefit Analysis n Basic concepts and methodology n Setting objectives n Computing shadow prices and social discount rates n Choosing projects: some decision criteria n Conclusions: planning models and plan consistency

16. Chapter 16 Slide 16 Copyright © 2003 Pearson Education, Inc. The Crisis in Planning: Problems of Implementation and Plan Failures n Theory versus practice –factor prices, choice of technique, and employment creation –rural-urban imbalances –demand for education –structure of the economy

17. Chapter 16 Slide 17 Copyright © 2003 Pearson Education, Inc. The Crisis in Planning: Problems of Implementation and Plan Failures, cont’d n Reasons for plan failures –deficiencies in plans and their implementation –insufficient and unreliable data –unanticipated economic disturbances –institutional weaknesses –lack of political will

18. Chapter 16 Slide 18 Copyright © 2003 Pearson Education, Inc. Government Failure and the Resurgent Preference for Markets Over Planning n Problems of government intervention in LDCs

19. Chapter 16 Slide 19 Copyright © 2003 Pearson Education, Inc.

20. Chapter 16 Slide 20 Copyright © 2003 Pearson Education, Inc. The Market Economy n The market economy sociocultural preconditions and economic requirements n Role and limitations of the market in LDCs

21. Chapter 16 Slide 21 Copyright © 2003 Pearson Education, Inc. The “Washington Consensus” on the State in Development n 1980s and 1990s n 10 points

22. Chapter 16 Slide 22 Copyright © 2003 Pearson Education, Inc.

23. Chapter 16 Slide 23 Copyright © 2003 Pearson Education, Inc. The “Washington Consensus” on the State in Development n 1980s and 1990s n 10 points n Toward a new consensus

24. Chapter 16 Slide 24 Copyright © 2003 Pearson Education, Inc. Development and Political Economy n Understanding voting patterns on policy reform n Institutions and path dependency n Democracy versus autocracy: which facilitates faster growth?

25. Chapter 16 Slide 25 Copyright © 2003 Pearson Education, Inc. Trends in Governance and Reform n Tackling the problem of corruption

26. Chapter 16 Slide 26 Copyright © 2003 Pearson Education, Inc. Figure 16.1 Corruption Is a Regressive Tax

27. Chapter 16 Slide 27 Copyright © 2003 Pearson Education, Inc. Figure 16.2 Better Rule of Law Is Associated with Higher per Capita Income

28. Chapter 16 Slide 28 Copyright © 2003 Pearson Education, Inc. Trends in Governance and Reform n Tackling the problem of corruption n Decentralization n Development participation

29. Chapter 16 Slide 29 Copyright © 2003 Pearson Education, Inc. Developing Planning and the State: Concluding Observations n Pragmatism is needed in dealing with the role and limitations of economic policies in LDCs n Regardless of ideology, governments in LDC have been heavily involved in the economy n LDC governments shouldn’t necessarily do less, but do better

30. Chapter 16 Slide 30 Copyright © 2003 Pearson Education, Inc. Concepts for Review n Accounting prices n Aggregate growth model n Comprehensive plan n Cost-benefit analysis n Economic infrastructure n Economic plan n Economic planning n Government failure n Input-output model n Interindustry model n Internal rate of return n Market failure n Market prices n Net present value

31. Chapter 16 Slide 31 Copyright © 2003 Pearson Education, Inc. Concepts for Review, cont’d n Partial plan n Path dependency n Planning process n Political will n Project appraisal n Rent seeking n Shadow prices n Social profit n Social rate of discount