Chapter 18
Development,
Planning &
Policy Making:
The State and
the Market
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Development Planning & Policy
Making: The State & the Market
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Development Planning
Dirigiste Debate
Soviet Planning
Indian Planning
The Market versus Detailed Centralized
Planning
Indicative Planning
Limitations of Planning Models
The Input-Output Table
Public Policies and Expenditures
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Development planning
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The government’s use of coordinated policies
to achieve national economic objectives such
as reduced poverty or accelerated economic
growth.
Economists have recently emphasized that the
planning commission should be directly
responsible to politicians and integrated with
government departments of industry, finance,
commerce, petroleum, agriculture, health,
education, and social welfare, as well as with
regional and local government departments and
planners.
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Dirigiste debate
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Criticism of LDC state planning and public
enterprise partly because of frequent soft
budget constraint, an absence of financial
penalty for enterprise failure.
Lal (1983) criticizes development
economists’ dirigiste dogma, a view that
standard economic theory does not apply to
LDCs.
Lal’s description of their views is a
caricature.
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Soviet planning
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Controlling plan that authorized what each
key sector enterprise produced and how
much it invested.
Yet these enterprises still faced much local,
extraplan discretion: government could not
control all operations details, even with
computers.
Trotsky (1931), an opponent of Stalin,
contended that “Economic accounting is
unthinkable without market relations.”
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Indian planning
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In 1950, India was the first major mixed LDC
to have its own planning commission.
From 1951 through 1978, India’s plans
suffered from the paradox of inadequate
attention to public sector programs and too
much control over the private sector.
The choice of public sector investments were
frequently based on incomplete reports, with
few cost-benefit calculations, and a lack of
necessary detailed technical preparations.
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Indian planners influenced private
investment & productions through
licensing and other controls
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Before the 1991 reforms, the Indian
government awarded materials and input
quotas at below-market prices, which
hampered private industrial efficiency.
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How India’s policies distorted firm
and entrepreneurial behavior
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They subsidized some firms and forced others to buy
inputs on the black market or do without.
Favoring existing firms discouraged new-firm entry.
And inefficient manufacturers sold controlled inputs
on the free market for sizable profit.
Businesspeople were unproductive, because they were
dealing with government agencies and buying and
selling controlled materials.
Capital was often underutilized, because government
encouraged building excess capacity by awarding
more materials to firms with greater plant capacity.
Entrepreneurs inflated materials requests, expecting
allotments to be reduced by a specific percentage.
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How India’s policies distorted firm
and entrepreneurial behavior (cont)
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Businesspeople used or sold all materials within the
fiscal year to avoid quota cuts the following years.
A shortage of controlled inputs could halt
production, because the application process took
several months.
Large companies, which were better organized and
informed than small enterprises, took advantage of
economies of scale in dealing with the public
bureaucracy.
Entrepreneurial planning was difficult because of
quota delay and uncertainty (Bhagwati and Desai
1970; Nafziger 1978:114–119).
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India’s 1991 economic reform
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Budget, debt, and balance-of-payments crises
woke the Indian government to the stifling nature
of licensing and the need for liberalization
reforms.
Growth rates accelerated after 1991, with rupee
devaluation, increasing convertibility, import
barrier reductions, widespread privatization,
industry deregulation, decreased restrictions on
foreign investment, liberalization of capital
markets, and cutbacks in income and wealth
taxes.
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The market versus detailed
centralized planning
Pro-market arguments:
1. The market efficiently allocates scarce resources
among alternative ends.
a. Consumers receive goods for which they are willing to
pay.
b. Firms produce commodities to maximize profits, so that
consumption and production are socially efficient if the
resulting income distribution is acceptable.
c. Production resources hire out to maximize income.
d. The market determines available labor and capital.
e. The market distributes income among production
resources and, thus, among individuals.
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Pro-market arguments (cont)
2. The market provides incentives for
innovation and economic growth.
3. The market stimulates growth and
efficiency automatically, without a large
administration on centralized decision
making.
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Pro-planning arguments:
1. Market decisions do not produce the best
results when the market fails, as with
environmental degradation, HIV/AIDS
prevention, measles vaccinations, and labor
training. Social profitability exceeds private
profitability when external economies are
rendered free by one economic unit to
consumers or producers.
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Pro-planning arguments:
2. Social and private profitability diverge in a market
economy when there are monopolistic restraints and
other market failures.
3. Government needs to produce the public or
collective goods, schools, defense, sewage disposal,
and police and fire protection that the market fails to
produce.
4. The free market may not produce so high a saving
rate as is socially desirable.
5. The planning agency can disseminate information
to make the market work more effectively.
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Indicative plans
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Most mixed or capitalist developing countries
are limited to an indicative plan, which indicates
expectations, aspirations, and intentions, but
falls short of authorization.
Indicative planning may include economic
forecasts, helping private decision makers,
policies favorable to the private sector, ways of
raising money and recruiting personnel, and a
list of proposed public expenditures – usually
not authorized by the plan, but the annual
budget.
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Limitations of planning models
1.
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5.
LDCs may not be able to afford the complexity of many
macroeconomic models.
Policy control in mixed and capitalist LDCs is too limited
for a comprehensive aggregate model to have much
practical value.
Consistency and ability to dazzle do not mean that the
plan is right.
Of little value if planners have not consulted with
economic departments and private firms.
Models are of less importance than adequate preparatory
work for projects & professionals: one with treasury
experience, a practical economist familiar with an LDC’s
unique problems, & an econometrician who can construct
input-output tables.
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The input-output table
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Illustrated by Table 18-1, showing
interindustry transactions in Papua New
Guinea in 1974.
When divided horizontally, the table shows
how the output of each industry is
distributed among other industries and
sectors of the economy.
When divided vertically, the table shows
the inputs to each industry from other
industries and sectors.
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How to read the input-output table
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1. To find the amount of purchases from one
sector by another, locate the purchasing industry
(e.g., 7 Eh) at the top of the table, then read down
the column until you come to the processing
industry ($4.80 million from 5 Transport,
communication).
2. To find the amount of sales from one sector to
another, locate the selling industry (e.g., 4
Building construction) along the left side of the
table, then read across the row until you come to
the buying industry (Building construction sells
$0.36 to 3 Mfg).
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Totals
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Intermediate inputs from the upper left plus
primary inputs from the lower left equal total
inputs, for example, $114.71 million, the total
output for agriculture (a typo).
The sum of the outputs from all individual rows,
$2,752.62, is far in excess of GNP for the same
year, $952.68 million. Because the input-output
table measures all transactions between sectors
of the economy, the value of goods and services
produced in a given year (that is, an
accumulation of value added at each stage of the
production process through final demand) is
counted more than once.
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The input-output table’s uses
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Sectoral information from data gathered.
If the plan sets final demand and the sectors to
produce it, detailed interrelationships &
deliveries can be approximated by tracking
through the table the direct and indirect
purchases needed.
Implications of alternative development
strategies for economic structure, import
requirements, balance of payments,
employment, investment demand, and
national income through using high-speed
electronic calculations.
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Problems of the input-output table
1.
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5.
6.
Technical coefficients fixed, so no substitution between
inputs.
Input functions are linear, so that output increases by the
same multiple as inputs.
The marginal input coefficient is equal to the average,
implying no economies of scale.
There are no externalities, so that the total effect of
carrying out several activities is the sum of the separate
effects.
There are no joint products. Each good is produced by
only one industry, and each industry produces only one
commodity.
There is no technical change, ruling out reduced inputs
required per output unit.
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Assessments of input-output
tables: additional comments
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Errors may not be substantial during a
period of 5 years of less (when relative
factor prices and level of technology
may be relatively constant).
Unfortunately, input-output tables in
both DCs and LDCs are not timely,
sometimes more than 10 years out of
date.
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Public policies & expenditures:
policies toward the private sector
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The private sector is larger than the public
sector, and is usually outside the purview of
planners.
Private sector planning means government trying
to get people to do what the would otherwise not
do – invest more in equipment or improve their
job skills, change jobs, switch from one crop to
another, adopt new technologies, and so on.
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Public policies toward the private sector
1. Investigating development potential through
scientific and market research, and natural
resources surveys.
2. Providing adequate infrastructure (water,
power, transport, and communication) for
public and private agencies.
3. Providing the necessary skills through general
education and specialized training.
4. Improving the legal framework related to land
tenure, corporations, commercial transactions,
and other economic activities.
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Public policies toward the
private sector (cont)
5. Creating markets, including commodity
markets, security exchanges, banks, credit
facilities, and insurance companies.
6. Seeking out and assisting entrepreneurs.
7. Promoting better resource utilization
through inducements and controls.
8. Promoting private and public saving.
9. Reducing monopolies and oligopolies
(Lewis 1966:13–24).
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Public expenditures
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Planners should ask each government
department to submit proposals for
expenditures, with estimation of financial costs
and benefits, based on feasibility studies, during
the plan period.
Government must estimate the effects of current
(noncapital), recurrent (spending on continuing
programs), new capital programs and their
future, recurrent expenditures. Current costs of
government are typically several times capital
costs yearly.
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Public expenditures
 Planners must set priorities, including size
and timing.
 Government needs competent executives,
administrators, and technicians experienced
in conceiving projects, starting them,
keeping them on schedule, amending them,
and evaluating them, prerequisites for
successful development planning.
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