Chapter 18

Development,
Planning &
Policy Making:
The State and
the Market
CHAPTER 18 E.Wayne Nafziger Development Economics

Development Planning & Policy

Making: The State & the Market
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
The governments 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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CHAPTER 18 E.Wayne Nafziger Development Economics

Dirigiste debate

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.
CHAPTER 18 E.Wayne Nafziger Development Economics

Soviet planning

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.
CHAPTER 18 E.Wayne Nafziger Development Economics

Indian planning
In 1950, India was the first major mixed LDC to
have its own planning commission.
From 1951 through 1978, Indias 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

Before the 1991 reforms, the

Indian government awarded
materials and input quotas at
below-market prices, which
hampered private industrial
efficiency.
CHAPTER 18 E.Wayne Nafziger Development Economics

How Indias policies distorted firm

and entrepreneurial behavior
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 Indias policies distorted firm

and entrepreneurial behavior (cont)
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 1978:114119).

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Indias 1991 economic reform

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
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

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 LDCs
unique problems, & an econometrician who can construct
input-output tables.
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The input-output table

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.
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CHAPTER 18 E.Wayne Nafziger Development Economics

How to read the input-output table

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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CHAPTER 18 E.Wayne Nafziger Development Economics

Totals
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 tables uses

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

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

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
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Public policies & expenditures:

policies toward the private sector
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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CHAPTER 18 E.Wayne Nafziger Development Economics

Public policies toward the private sector

Investigating development potential through
scientific and market research, and natural
resources surveys.
Providing adequate infrastructure (water, power,
transport, and communication) for public and
private agencies.
Providing the necessary skills through general
education and specialized training.
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)
n Creating markets, including commodity
markets, security exchanges, banks, credit
facilities, and insurance companies.
n Seeking out and assisting entrepreneurs.
n Promoting better resource utilization
through inducements and controls.
n Promoting private and public saving.
n Reducing monopolies and oligopolies
(Lewis 1966:1324).
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Public expenditures
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
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