Development Policymaking and the Roles of Market, State,•Government Not Better At “Getting...

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

Chapter 11

Development

Policymaking

and the Roles of

Market, State,

and Civil Society

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 11-2

Outline

1. Pendulum Swings in Theory and Practice

2. Some (Brief) Case Studies

3. Democracy and Growth

4. NGOs


1a. Pendulum Swings Left

After World War II: Planning

• Governments Adopt 5 Year Plans for Development of Various Industries/Sectors

• Governments “Mobilize” Resources (particularly S) and Direct Allocation (I)

• Often, Large Industries are State Owned

• Often, Import Substitution Industrialization (ISI): High Barriers to International Trade and Capital Flows


The Rationale for Planning

• Soviet Union Under Lenin-Stalin Became an

Industrial Economy In One Generation

• Capitalism “Failed” During Great Depression

• Other Market Failures: Incomplete Markets,

Externalities (Private Value ≠ Social Value)

• Sometimes, Plan Required To Receive

Foreign Aid From e.g. World Bank

• England Did (Roughly) The Same Thing!


Three Levels of Planning

1. Aggregate: How much saving is needed to finance the investment level required to reach some target level of growth? How to “mobilize” that saving?

Recall the Harrod-Domar growth model of Chapter 3:

2. Sectoral: How should investment be allocated across various sectors: steel, autos, schools, etc.?

3. Project: Which specific projects within each sector are the most desirable: Cost-Benefit Analysis

/ /g Y Y s k


Plan Failures

• “While supposedly eliminating poverty and reducing inequality, and lowering unemployment, many LDC planning policies have in fact unwittingly contributed to their perpetuation.” p. 544


Deficiencies In The Plans

• Grandiose Talk but Lack of Detail

• Insufficient and/or Unreliable Data – What to Produce: Steel (What kind: Rolled, Re-

bar, I-beam?), Highways, Education (What Level?), Clean Water, TP?

– How to Produce: What Technology and Mix of Capital and Labor?

– For Whom to Produce: Consumers (what do they want?), Capital Goods and Inputs to other Industries (How much of what type to which ones?)


Plan Failures

• Institutional Weaknesses: – Incompetent And Unqualified Civil Servants

– Lack of Agency Funding e.g. Census

– Cumbersome Bureaucratic Procedures

– Inter-agency Competition

– Regional/Tribal/Family Loyalties

– Corruption


Figure 11.2 Corruption as a Regressive

Tax: The Case of Ecuador


Problems of Planning

• Government Not Better At “Getting Prices Right”

– Raised Formal Sector Wages Above Equilibrium

– Excessively Capital Intensive Production Methods

– Ag Prices Set Too Low

– Private Returns To Education >> Social At Tertiary Level

– Real Interest Rates Set Too Low (Little Incentive for S)

– Misallocation Between Sectors, esp. Industry v Consumer

– In USSR and Eastern Europe, enormous Pollution


1b. Pendulum Swings Right

• 1980s: Government Failure and the Preference for Markets over Planning

• 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


Table 11.1 The Washington

Consensus and East Asia


The Market Economy

• A Well-Functioning Market Economy Requires “Institutions”

– Clear Property Rights

– Unbiased Laws And Courts To Enforce Contracts

– Freedom To Establish Business

– Stable Currency

– Public Supervision Of Natural Monopolies

– Public Management Of Some Externalities

– Stable Monetary And Fiscal Policy


Figure 11.3 The Association between

Rule of Law and Per Capita Income


1c. The Pendulum Swings

• Toward a New Consensus?

– Governments Must Secure Conditions For An

Effective Market Based Economy

– Importance Of Health And Education

– A Recognition That Markets Can Fail

– New Emphasis On Government's Responsibility

Toward Poverty Alleviation (T-S)

Why Nations Fail (2012) Daron Acemoglu and James Robinson

• Extractive versus Inclusive Economic

Institutions

• Extractive: Intended to Remove Wealth, e.g.

Colonial Regimes in Latin America and parts

of Africa; North Korea and Congo today

• Inclusive: Provide Incentives and

Circumstances to Create Wealth; United

States and South Korea


Inclusive Economic Institutions

• Secure Property Rights

• Rule of Law

• Public Services (esp. Education)

• Freedom to Contract

• All Provided by “Good” Government



2. (Quick) Case Studies

a. Central Planning v. Market

• North Korea v. South Korea

• West Germany v. East Germany

• Of course, Not just Planned but also Politically

Autocratic.



b. Asian Tigers (Korea, Taiwan, Thailand,

Malaysia, China, Vietnam)

– Private Property Rights and Many Private Firms

– Produce for Export (v. Import Substitution), But

– Substantial Barriers to Trade and Capital Flows

– Substantial State-Owned Industries

– Government “Targeting” of Certain Industries

– Government Investments in Health and Education



c. India

• 1948-92: Planning, High Trade Barriers. Huge

Corrupt Bureaucracy Develops

• Slow Growth (but Green Revolution)

• Liberalized after Exchange Rate Crisis: 1992

• Reduced Trade Barriers, Reduced Regulation

• Economy Grown Much Faster



• Other Countries Were “Forced” (By World

Bank, IMF, USAID) To Adopt Washington

Consensus, But Economies Continued To

Stagnate

• Eastern Europe Got Rid Of Central Planning

With Mixed Results

• Importance Of Institutions To Support

Markets



• Does Democracy promote Growth?

– Democracy => Growth

• Does Capitalism (and Growth) promote

Democracy?

– Capitalism => Democracy



• Acemoglu and Robinson:

– Inclusive Political Institutions more likely

to provide Inclusive Economic Institutions

– Autocratic Political Institutions more likely

to provide Extractive Economic

Institutions

– In other Words, Democracy more likely to

result in Economic Growth



• But There Is No Robust Relationship

Democracy => Growth

– China: Autocratic and Fast Growth

– Korea: First Autocratic, then Democratic and

Fast in both Periods

– India: Democratic, Initially Slow but Faster after

1992 Reforms

– Many: Autocratic And Slow

• It isn’t so Simple …

3.5 Capitalism and Democracy

• Milton Friedman (1962)

• Economic Freedom (Capitalism) leads to

Political Freedom (Democracy)

• Capitalism => Democracy



Evidence

• Chile:

– Capitalistic Reforms under (Dictator) Pinochet

were followed by Democratic Reforms

– But Chile was Democratic before Pinochet

• S. Korea

• Taiwan

• What will happen in China?



Evidence

• Many Countries:

– Adopted Capitalistic Reforms 1970s-90s

– Adopted Democratic Reforms in 1970s-90s

– Causality?


Democratic Trends

Freedom House Index http://en.wikipedia.org/wiki/Freedom_in_the_World 11-28

http://en.wikipedia.org/wiki/Freedom_in_the_World

http://en.wikipedia.org/wiki/Freedom_in_the_World

“Economic Freedom” as measured

by The Fraser Institute

1. (Smaller) Size of Government

2. Legal System and Property Rights

3. Sound Money (Low and Stable Inflation)

4. Freedom to Trade Internationally

5. (Less) Regulation

Fraser Institute http://www.freetheworld.com/release.html 11-29

http://www.freetheworld.com/release.html

Trends in “Economic Freedom”

Fraser Institute http://www.freetheworld.com/release.html 11-30




4. Nongovernmental Organizations

• Nonprofit (But Sometimes Run Businesses And

Generate Surpluses)

– Innovative Design And Implementation

– Program Flexibility

– Specialized Technical Knowledge

– Common-property Resource Management

– Representation And Advocacy

Read Case Study: BRAC

Doug’s Observations - 1

• Economic Development all Over the World

(from USA and Europe to East Asia) has

Public and Private Sector Components, in

Various Combinations

– Public: Private Property, Courts, Freedom to

Contract, Education, Public Health,

Infrastructure

– Private: Most of What, How and For Who

(Production of Goods and Services), Innovation



Case Study:

The BRAC

Model in

Bangladesh

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