Chapter 11

Development
Policymaking
and the Roles of
Market, State,
and Civil Society

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

System of Economic Management

Mixed economy
• Private sector: profit maximizing business firms
• Public sector: employment maximizing
government agencies

Economic systems
• Capitalism: large private sector, but small public
sector
• Socialism: large public sector, but small private
sector
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-2
Economic Role of the State

• Protect private property and legal rights

• Produce public goods
• Improve market competition
• Improve income distribution
• Preserve the human environment
• Manage the economy

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-3

Development Planning

Economic plan: managing economic activity

• Specific set of quantitative targets

• Given time horizon (three or five years)
• Stated strategies for achieving the targets
• Comprehensive (the entire economy) or
partial (a specific sector or industry)
coverage

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-4

Component of Development Plan

• Government uses domestic saving and

foreign exchange to construct economic
infrastructure

• Government implements economic policy

(taxation, industrialization, foreign
exchange control, trade restriction)

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-5

Rationale for Planning

Reduce market failure:

• Income distribution
• Monopoly power
• Externalities of production and
consumption
• Insufficient information

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-6

Rationale for Planning

• Resource mobilization and allocation

• Psychological effect on achieving

development goals (e.g., reducing
poverty)

• Foreign aid: a requirement to obtain

loans and grants

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-7

Planning Methodology

Input-Output model

• Outputs of industries serve as inputs of other

industries

• Optimal input mix to produce maximum

output to satisfy the final demand

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-8

Reasons for Price Divergence

• Inflation and currency control

• Factor price distortions (prices, wages,

interest rates, exchange rate)

• Trade restrictions and import substitution

• Saving deficiency

• Social vs. private rate of return

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-9
Planning Consequences

• Factor price distortion, choice of technology

and employment creation
• Induced R-U migration

• Demand for educational certification leading

to employment problem
• Economic structure

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-10

Reasons for Failure of Planning

• Deficiencies in plans and their

implementations
• External and internal disturbances
• Insufficient and unreliable data
• Institutional weaknesses
• Lack of political will
• Corruption of public servants

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-11

Resurgent of Market Orientation

• Failure of planning

• IMF and World Bank policy requirements

for foreign aid and direct foreign
investment

• Joint ventures of domestic and foreign

enterprises

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-12

Requirements for Market Orientation

• Trust
• Law and order
• Security of private property rights
• Balancing between competition and
cooperation
• Division of responsibility and diffusion of
power
• Social safety net
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-13
Requirements for Market Orientation

• Social mobility
• Individualism and materialism
• Deferring gratification to create private
saving
• Rationality and efficiency
• Honesty of government
• Competition of business
• Availability and freedom of information
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-14
Planning & Market
Reconciliation
• Must achieve “effective” cooperation
• Must reduce market imperfections
• Must eliminate factor price distortions and
price controls
• Must reduce public ownership of economic
enterprises
• Must reduce corruption and red tape

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-15

Corruption and Planning

• 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-16