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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The Nature of Development

Planning

Basic concepts
Planning in mixed developing economies

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The Rationale for Planning in

Developing Economies

Market failure
Resource mobilization and allocation
Attitudinal or psychological impact
Foreign aid

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The Planning Process: Some

Basic Models

Characteristics of the planning process

Planning in stages: 3 basic models
Aggregate growth models

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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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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)
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Aggregate Growth Models

K kK kK / 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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Aggregate Growth Models

W Y

(11.7)

Where W and are wage and profit incomes

s sW W I

(11.8)

Where s and sW are the marginal propensities

to save from wage income and profit

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Aggregate Growth Models

k ( g ) ( s sW )( ) sW
Y

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(11.9)

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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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Project Appraisal and Social CostBenefit Analysis

Basic concepts and methodology

Setting objectives
Computing shadow prices and social
discount rates

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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 governments social rate of
discount

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Project Appraisal and Social CostBenefit 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
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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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The Crisis in Planning: Problems of

Implementation and Plan Failures (contd)

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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Government Failure and the Resurgent

Preference for Markets Over Planning

Problems of government intervention in

LDCs

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The Market Economy

The market economy sociocultural

preconditions and economic requirements
Role and limitations of the market in LDCs

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The Washington Consensus on

the State in Development

1980s and 1990s (see Table 11.1)

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Table 11.1

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The Washington Consensus on

the State in Development

1980s and 1990s

Toward a new consensus

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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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Figure 11.1

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Trends in Governance and Reform

Tackling the problem of corruption

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Figure 11.2

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Figure 11.3

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Trends in Governance and Reform

Tackling the problem of corruption

Decentralization
Development participation- alternate
interpretations
Genuine participation and role of NGOs

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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 shouldnt necessarily do
less, but do better

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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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Concepts for Review (contd)

NGOs
Partial plan
Path dependency
Planning process
Political will
Project appraisal

Rent seeking
Shadow prices
Social profit
Social rate of discount

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