Chapter 11. Development Policymaking and the Roles of Market, State, and Civil Society. Copyright 2009 Pearson Addison-Wesley. All rights reserved.

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

Often, Large Industries are State Owned Often, Import Substitution Industrialization (ISI): High

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

Externalities (Private Value Social Value) Sometimes, Plan Required To Receive Foreign

5 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: g Y / Y s / k 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved. 11-5

How to mobilize that saving? Recall the Harrod-Domar growth model of Chapter 3: g Y / Y s / k 2.

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

have in fact unwittingly contributed to their pe

7 Deficiencies In The Plans Grandiose Talk but Lack of Detail Insufficient and/or Unreliable Data What to Produce: Steel (What kind: Rolled, Rebar, 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?) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 11-7

How to Produce: What Technology and Mix of Capital and Labor? For Whom to Produce: Consumers (what do they want?

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

10 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

Tertiary Level Real Interest Rates Set Too Low (Little Incentive for S) Misallocation Between Sectors, esp.

11 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

The Consensus Reflected A Free Market Approach To Development Espoused By The IMF, The World

13 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

Currency Public Supervision Of Natural Monopolies Public Management Of Some Externalities

15 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) Copyright 2009 Pearson Addison-Wesley. All rights reserved

Of Health And Education A Recognition That Markets Can Fail New Emphasis On

16 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

Colonial Regimes in Latin America and parts of Africa; North Korea and Congo today Inclusive:

17 Inclusive Economic Institutions Secure Property Rights Rule of Law Public Services (esp. Education) Freedom to Contract All Provided by Good Government Copyright 2009 Pearson Addison-Wesley. All rights reserved

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

19 2. (Quick) Case Studies 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

20 2. (Quick) Case Studies c. India : 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

after Exchange Rate Crisis: 1992 Reduced Trade Barriers, Reduced Regulation

21 2. (Quick) Case Studies 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

22 3. Democracy and Growth Does Democracy promote Growth? Democracy => Growth Does Capitalism (and Growth) promote Democracy? Capitalism => Democracy Copyright 2009 Pearson Addison-Wesley. All rights reserved

23 3. Democracy and Growth 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

24 3. Democracy and 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

25 3.5 Capitalism and Democracy Milton Friedman (1962) Economic Freedom (Capitalism) leads to Political Freedom (Democracy) Capitalism => Democracy Copyright 2009 Pearson Addison-Wesley. All rights reserved

26 3.5 Capitalism and 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? Copyright 2009 Pearson Addison-Wesley. All rights reserved

27 3.5 Capitalism and Democracy Evidence Many Countries: Adopted Capitalistic Reforms 1970s-90s Adopted Democratic Reforms in 1970s-90s Causality? Copyright 2009 Pearson Addison-Wesley. All rights reserved

28 Democratic Trends Freedom House Index

29 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

30 Trends in Economic Freedom Fraser Institute

31 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

32 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 Copyright 2009 Pearson Addison-Wesley. All rights reserved

CHAPTER 11: The Problem of Global Inequality

CHAPTER 11: The Problem of Global Inequality MULTIPLE CHOICE 1. The claim that poverty is unethical is essentially a. Normative c. political b. theoretical d. scientific 2. Self-interest is an important