ECON FINAL REVIEWER

GROUP 1- Trade Policy Debate: Export Promotion, Import Substitution, And, Economic Integration

INTRODUCTION

 Trade as a weapon to end global poverty

 Those who are open to int’l trade

 grow faster

 innovate

 improve productivity

 provide higher income and more opportunities to the people

 However, globalization and trade also possess it negative side

 Developing countries struggle

 Serious implications for the world’s poor

 WORLD BANK GROUP (WBG)- supportive of a system which is:

 open
 rule-based
 predictable multilateral trading system

 Trade policies for development

 Outward-looking development
 Encourages exports
 Free movement of capital, worker, enterprises, and students
 Multinational corporations
 Open Communications

 Inward-looking development
 Economic self reliance
 Domestic development of technology
 “Learn by doing”
 Develop technologies with the country’s capabilities
 Debate in the 1950s between the free traders and the protectionists.
 The inward-looking approach predominated into the 1970s.
 The outward-looking approach became prominent in the 1980s and early 1980s.

 Import Substitutions
 substitute first the imported basic goods then the more sophisticated ones.
  protection of high tariffs and quotas on these imports.
 balanced growth
 Domestic prices will be competitive with world prices.

 Export Promotions

- Advocates gave emphasis on the:

 Importance
 Growth benefits
- Countries who have experienced tremendous success
 South Korea
 Taiwan
 Singapore; and
 China
- A great learning for developing countries
 United States
 Japan
 And other developing-countries

 STRONG EXPORT PROMOTION

 Geared to expansion exports
 Production of domestic industries
 WEAK EXPORT PROMOTION
 Emphasizes free trade
 Promotes exports compared to previous import substitution.
 EMPLOYING BOTH AT THE SAME TIME!
 1950-1960, inward-looking of Latin American and Asian Countries including Philippines
were heavily Import Substitution (IS) oriented
 1970, switched to Export Promotion (EP)
 Early Export promotion adherents also switched to Import Substitution

BACKGROUND OF THE STUDY

 Trade is a significant engine of economic development

 It expands the manufacturing potential of a region, improves international exports and
offers exposure for goods.
 It helps in encouraging improved foreign and domestic development by equalizing factor
rates, rising real trade-country income and allowing efficient use of the capital.
 It allows countries to achieve development by encouraging and rewarding parts of the
economy in which individual countries have a comparative advantage.
 Throughout a system of free trade, international prices and manufacturing costs decide
how frequently a country can export to improve its national well-being.
 Taiwanese total exports, for instance, increased by more than 20 % annually over
decades
 South Korea exports developed more steadily.
  Manufactured exports rose from 6% of overall exports of products in 1950 to nearly
64% by 2000 in the developing world as a whole.
 In 2011, the low- and middle-income countries combined accounted for nearly 29% of
world exports, with China gaining a steadily growing portion.
 Countries with small wages make up just 1 % of the world 's total
 Economic Pessimist Argument
 a small growth in global primary export demand;
 a secular downturn in exchange for primarily industrial nations;
 a rise in the "current protectionism" against imported and refined agricultural goods
from developed countries
 presence of market failures which minimize developing countries' ability to shift towards
higher-value export products.
 Economic Optimist Argument
 focus on the relationship between trade policy, export performance, and economic
growth.
 claim that trade liberalization (including export promotion, devaluation of currency,
elimination of trade controls and simply 'correct prices') results in rapid production
growth and economical development as free exchange provides some advantages.
 Advantages of Free Trade
1. Encourages competitiveness, efficient distribution of capital and economies of scale in
regions with a competitive advantage to developed countries.
2. It induces incentive to increase efficiencies, improve goods and adjust methods, thereby
growing the competitive aspect and thus reducing manufacturing costs.
3. This accelerates economic activity in general, which boosts income and encourages
higher savings and spending, thereby boosting productivity.
4. It attracts foreign capital and expertise, which are in scarce supply in most developing
countries
5. Provides the necessary foreign exchanges that can be used to purchase food if there is a
famine or other natural catastrophe in the agriculture sector
6. It also removes wasteful economic distortions induced both by government interference
in both the export and foreign-exchange markets, and substitutes market allocation for
the corruption and rent-seeking activities that typically result from an overactive
government sector.
7. It promotes more equal access to scarce resources, which improves overall resource
allocation.
8. It enables developing countries to take full advantage of reforms under the WTO.
 Tariffs, Infant Industries and the Theory of Protection
 Import substitution strategy's key mechanism is the installation of protective tariffs
(importation taxes) or quotas (importation quantity limits) that enable IS industries to
function behind.
 It plays a significant role in economies as it allows the now higher-priced domestic
producers enough time to learn the business and to achieve the economies of scale in
production and the external economies of learning by doing that are necessary to lower
unit costs and prices.
  For many developing-country companies, the IS strategy is potentially a requirement for
an EP strategy.
 The IS Industrialization Strategy and Results
 Secure behind protective tariff walls and immune from competitive pressures, many IS
industries (both publicly and privately owned) remain inefficient and costly to operate.
 The main beneficiaries of the import substitution process have been the foreign firms
that were able to locate behind tariff walls and take advantage of liberal tax and
investment incentives.
 Most import substitution has been made possible by the heavy and often government-
subsidized importation of capital goods and intermediate products by foreign and
domestic companies.
 Impact on traditional primary-product exports.
 Import substitution, which may have been conceived with the idea of stimulating infant-
industry growth and self-sustained industrialization by creating “forward” and
backward” linkages with the rest of the economy, has often inhibited that
industrialization.
 Four Major Components of Tariff Protection in Developing Countries
 Trade duty is a key source of government revenue in most developing countries because
it is a reasonably simple form of taxation to impose and easier to collect.
 Import constraints are a clear response to the chronic balance of payments and debt
issues.
 Protection against imports is said to be an appropriate means for fostering economies of
scale, positive externalities, and industrial self-reliance as well as overcoming the
pervasive state of economic dependence.
 Through implementing import restriction policies, developed countries will obtain
further influence over their economic destinies, thus allowing multinational corporate
interests to invest in local import substitution sectors, producing high revenues and
therefore greater opportunities for savings and sustainable development.

 The Uruguay Round Agreement

- From the viewpoint of developed countries, the three main clauses are:
 Developed countries cut tariffs on manufactures by an average of 40% in five equal
annual reductions. In exchange, the developing nations have decided in recent trade
reforms not to raise tariffs by "binding".
 Trade in agricultural products came under the authority of the WTO and were to be
progressively liberalized. Also if there were improvement at first, agricultural subsidies
were later returned to record highs.
 For textiles and apparel, the Multifiber Arrangement quotas, which long penalized
exports of developing countries, were phased out in 2005, with most of the progressive
reductions taking effect toward the end of the period. But tariffs on textile imports were
reduced only to an average of 12% three times the average level of tariffs on other
imports.

DEFINITION OF TERMS
  Outward-looking development policies
 Inward-looking development policies
 Import substitution
 Export promotion
 International commodity agreement
 Multifiber Arrangement (MFA)
 Trade deficit
 Infant industry
 Official exchange rate
 Free-market exchange rate
 Overvalued exchange rate
 Nontariff trade barrier
 Nominal rate of protection
 Effective rate of protection
 Value added
 Exchange control
 Dual exchange rate (parallel exchange rate)
 Devaluation
 Depreciation (of currency)
  Appreciation
 Flexible exchange rate
 Economic union
 Regional trading bloc
 Customs union
 Free-trade area
 Common market
 Autarky
 Trade creation
 Trade diversion
 Manage floats
 Wage-price spiral
 Undervalued exchange rate
 Trade optimists
 Trade pessimists
 New protectionism
 Trade liberalization
 Industrialization
 strategy approach
 Economic integration

REVIEW OF RELATED LITERATURE

 Title: The effects of trade strategies on growth: Export promotion achieves more than import
substitution
 Author: Anne O. Krueger
 The determinants of a country’s rate of economic growth are numerous, and there is no
universally accepted method of quantifying the contribution of any particular factor to
the growth rate.
 Export-oriented strategies have generally generated higher growth rates than have
import substitution. Export promotion, by its nature, avoids some of the costs of the
import substitution strategy.
 Title: Strategies of Regional Economic Integration and WTO Accession in Central Asia
 Authors: Simon W. TAI & Jung Wan LEE
 This study debates the roles of trade liberalization and regional economic cooperation
for the sustainable economic growth of the Central Asian countries.
 In general, factors that enhance regional trade development and regional economic
integration include improving business environment, increasing trade policy
coordination, accelerating trade liberalization, and increasing economic cooperation.
 Central Asia has made considerable progress in expanding market-based trades with
international communities and gradually integrates into the global economy.
 Title: Export Promotion, Import Substitution and Economic Integration in Nigeria
 Authors: Tunde G. Monogbe & O. John Okah
 This paper empirically integrates the interplay between import substitution and export
promote on the Nigerian economy in conjunction with the theoretical position of the
protectionist and the free trade activist and how this has helped in promoting the
Nigerian economy over the years.
 The result of the causality test shows that before any nation could attract foreign
inflows, the economy must be in good form as foreign investor only invests in an
economy whose receiving capacity can sustain their investment.
 The study therefore concludes that before any nation could embrace liberalization,
there must have been a level of threshold of industrial development in such nation.
 Title: The trade policy effect in international trade: case of Pakistan
 Authors: Alassane D. Yeo & Aimin Deng
 The economic policy of restricting imports and the economic policy of opening exports
remain two critical measures of international trade.
 This study uses the gravity model to investigate the impacts of trade policy measures on
trade flows between Pakistan and its dominant trading pattern for the period 2006 to
2015.
 Trade policy affects Pakistan’s trade with its major partners, but the degree of influence
depends on the geographical location and the organization to which the trading partner
belongs.
 The main political implication is that the proliferation of free trade agreements can have
a positive impact on international trade.
 Title: Trade Policy Reform, Regional Integration and Export Performance in the ECOWAS Sub-
Region
 Authors: Musibau, Adetunji B.
  This study examined the impact of trade policy reform and regional integration on export
performance in the ECOWAS (Economic Community of West African States) sub-region adopting
the gravity model.
 The study therefore concluded that unilateral trade barrier reductions and participation in
preferential trade agreements can enhance export performance within the ECOWAS sub-region.

CONCLUSION

 Trade Pessimists view

- Trade pessimists therefore conclude that trade opportunities are limited and even hurt
developing countries for four reasons:
 The slow growth in demand for their traditional exports means that export expansion
results in lower export prices and a transfer of income from poor to rich nations.
 Without import restrictions, the high elasticity of developing countries’ demand for
imports, combined with the low elasticity for their exports, means that developing
countries must grow slowly to avoid chronic balance of payments and foreign-exchange
crises.
 Developing nations have their “static” comparative advantage in primary products,
which means that export-promoting free-trade policies tend to inhibit industrialization,
which is in turn the major vehicle for the accumulation of technical skills and
entrepreneurial talents.
 Trade pessimists view trade liberalization under the WTO as limited in practice, with
developing economies, particularly the least developed countries lacking the high-
powered lawyers and other resources needed to pry developed markets open.
 Trade Optimists view
- Trade optimists tend to underplay the role of international demand in determining the gains
from trade. Instead, they focus on the relationship between trade policy, export performance,
and economic growth. They argue that trade liberalization (including export promotion,
currency devaluation, removal of trade restrictions, and generally “getting prices right”)
generates rapid export and economic growth because free trade provides a number of benefits.
- Trade optimists argue, finally, that even though export promotion may at first be difficult with
limited gains, especially in comparison with the easy gains of first-stage import substitution over
the longer run, the economic benefits tend to gain momentum, whereas import substitution
faces rapidly diminishing returns.

GROUP 2 - Foreign Finance, Investment, Aid, and Conflict: Controversies and Opportunities
 - With the number of migrants worldwide now reaching almost 200 million . . ., remittances are
an important way out of extreme poverty for a large number of people. - François Bourguignon,
former chief economist, World Bank, 2008
 The international flow of financial resources
 Private foreign direct and portfolio investment
 foreign “direct” investment
 foreign portfolio investment
 Remittances of earnings by international migrants
 Public and private development assistance (foreign aid)
 individual national governments and multinational donor agencies
 private nongovernmental organizations (NGOs)

MULTINATIONAL CORPORATION (MNC) - is most simply defined as a corporation or enterprise that

conducts and controls productive activities in more than one country.

FOREIGN DIRECT INVESTMENT (FDI) - Overseas equity investments by private multinational

corporations.

ARGUMENTS AGAINST FDI AND ACTIVITIES OF MNCs

 Although MNCs provide capital, they may lower domestic savings and investment rates.

 Although the initial impact of MNC investment is to improve the foreign exchange position of
the recipient nation, its long-run impact may be to reduce foreign-exchange earnings.

 Transfer pricing

 The management, entrepreneurial skills, ideas, technology, and overseas contacts provided by
MNCs.

PRIVATE PORTFOLIO INVESTMENT: BENEFITS AND RISKS

Portfolio investment - consists of foreign purchases of Bond, Shares, Certificates, and commercial
papers.

- PRE-REQUISITES’ for portfolio investment

 Liberalization of domestic financial market
 Opening up of the market for foreign investors
- Benefits and Risks of Portfolio investment 
 Benefits: Raise capital for domestic firm
 Risks: Destabilize financial and overall Economy

REMITTANCES - A remittance refers to money that is sent or transferred to another party. The term is
derived from the word remit, which means to send back. Remittances can be sent via a wire transfer,
electronic payment system, mail, draft, or check.

Remittances can be used for any type of payment including invoices or other obligations. But the term is
typically used to refer to money sent to family members back in a person's home country.
Each year, billions of dollars are sent by migrant workers to their home countries. Like us in the
Philippines. According to the World Bank, in 2019 the total value of remittances reached a record $554
billion. Remittances are funds transferred from migrants to their home country. They are the private
savings of workers and families that are spent in the home country for food, clothing and other
expenditures, and which drive the home economy. For many developing nations, remittances from
citizens working abroad provide an import source of much-needed funds.

Conceptual and measurement problems –

 Developing countries received two other major sources of foreign exchange: public(official) and
private (unofficial) assistance.

 Both are forms of foreign aid but public aid is usually measured in official statistics.

 In general, all governmental resource transfers from one country to another should be included
in the term foreign aid, yet, it increases a number of problems.

 There is consequently a net gain for developing countries and a net loss for developed countries
that amounts to a real resource transfer to the developing world.

 We should not include all transfers of capital to developing countries, particularly the capital
flows of private foreign investors.

 Private flows amount to normal commercial transactions and therefore not part of foreign aid.

 Commercial flows of private capital are not a form of foreign assistance.

 Foreign aid as defined by Economists, are any flow of capital to a developing country that meets
two criteria: (1) objective should be non-commercial from the point of view of the donor, and
(2) it should be characterized by concessional terms.

 Military aid is excluded from international economic measurements of foreign aid flows.

 The concept of foreign aid now widely used is one that encompasses all official grants and
concessional loans, in currency or in kind, that are openly aimed at transferring resources from
developed to less developed nations on development, poverty, or income distribution grounds.

 There are measurement and conceptual problems in the calculation of actual development
assistant flows.

 3 Major Problems in Measuring Aid: (1) cannot simply add up the dollar volumes of grants and
loans, (2) aid can be tied either by source or by funds and (3) we always need to distinguish
between the nominal and real value of foreign assistance.

 Aid flows are usually calculated at nominal levels and have a tendency to show a stable rise over
time.
Amounts and allocation: public aid

 The money volume of official development assistance (ODA), which includes bilateral grants,
concessional loans, and technical assistance, as well as multilateral flows, grew from an annual
rate of under $5 billion in 1960 to $50 billion in 2000 and to over $128 billion in 2008.

 It remains to be seen how the long recession and fiscal crises in many high-income countries will
affect these ratios in the coming years.

 Although the United States remains the largest donor in absolute terms, it provides the lowest
percentage of GNI-0.18% in 2008.

 Only five countries are currently providing ODA in excess of the Un target of 0.70%: Sweden,
Norway, Denmark, the Netherlands, and Luxembourg.

 In 2012 however, the developed countries spent about $120 billion on aid, they also spent triple
this amount, some $360 billion on agricultural subsidies that often harmed developing-country
exports.

 In 2008, by far the largest recipient was Iraq, with $9.9 in aid, or approximately $321 billion per
Capita.

 Some 20 countries received at least $1 billion in aid. But India, with by far the largest number of
extremely poor people in the world, received just $2 per person in aid.

 Niger, considered the poorest country in the world, received just $41 per person.

 It is clear that the allocation of foreign aid is only partly determined by the relative needs of
developing countries. Much bilateral aid seems to be based largely on political and military
considerations.

 Multilateral aid is somewhat more economically rational, although here, too, the rich often
seem to attract more resources per capita than the poor.

Two Foreign-Aid Motivations

 Political Motivations - have been by far the more important for aid-granting nations, especially
for the largest donor country, the United States.

 Economic Motivations - Within the broad context of political and strategic priorities, foreign-aid
programs of the developed nations have had a strong economic rationale.

Two gap model - A model of foreign aid comparing savings and foreign-exchange gaps to determine
which is the binding constraint on economic growth.

Three gap Model

 Savings gap- domestic real resources

 Foreign-exchange gap - are unequal in magnitude and that they are essentially independent.
  Fiscal gap - deficiencies of government investments including infrastructure and human capital
that are complementary to raise the rate of return from private investment.

 Technical Assistance - Financial assistance needs to be supplemented by technical assistance in

the form of high-level worker transfers to ensure that aid funds are used most efficiently to
generate economic growth.

THE ROLE OF NONGOVERNMENTAL ORGANIZATIONS IN AID

Non-governmental organization (NGOs) - Nonprofit organization that is often involved in providing

financial and technical assistance to developing countries.

2 IMPORTANT ADVANTAGES OF NGOs

1. Being less constrained by political imperatives

2. By working directly with local people’s organizations

 It is estimated that NGOs in developing countries are affecting the lives of some 250 million
people

 Voluntary failure-  rejects the view that this sector is merely a residual response to failures of
government and the market

THE EFFECTS OF AID

 Aid has indeed promoted growth and structural transformation in many developing countries

 Critics who argue that Aid does not promote faster growth

 Official Aid is further criticized for focusing on, and stimulating the growth of, the modern
sector, thereby increasing the gap in living standards between the rich and the poor in
developing countries

 Foreign Aid has been a force for antidevelopment in the sense that it both retards growth
through reduced savings and worsens income inequalities.

 Critics on the right charge that foreign aid has been a failure because it has been largely
appropriated by corrupt bureaucrats

 One major trend is to encourage evaluation through randomized trials

 External Validity Problem-  refers to how well the outcome of a study can be expected to apply
to other settings

 Aid weariness, polls have shown that the public is increasingly willing to support increases in
government aid budgets and to donate development assistance via NGOs

 The improvements in accountability and evaluation of aid that have taken more shape since the
Paris Declaration, and some enhancement of resources are hopeful signs that aid will become
more effective and more targeted toward people living in poverty.
 Conflict and Development

 Intrastate/civil conflict- refers to violence between a government and at least one non-
governmental party within a sovereign country

 Interstate conflict -refers to violence between two or more governments.

 Internationalized-internal conflict-A internal conflict is regarded as internationalized if one or

more third party governments are involved with combat personnel in support of the objective of
either side.

 Extra-state or extra-systemic violent conflict between one non-state and one state actor outside
of the existing state’s borders

The Consequences of Armed Conflict

Health- it is the most visible effect of war

Destruction of wealth- Violent conflict destroys capital, and some of what is not destroyed is diverted to
destructive activities

Hunger and Poverty- It is not surprising that in many conflict countries, food production drops and it
leads to hunger. Poverty increases through declines in opportunities to earn incomes but also through
direct outcomes of fighting.

Loss of Education- The education rate decreases when there is an armed conflict in a country, some
educational infrastructure where destroyed and fear to walk to school is inevitable because of concern
for the children’s and also teacher’s safety and security.

A Torn Social Fabric - Violent conflict or its imminent threat creates refugees— one estimate is an
additional 64 refugees per 1,000 people on average from a civil war, 45 per 1,000 from coups, and 30
per 1,000 from guerrilla warfare

The causes of armed conflicts and risk factors for conflict

 Horizontal Inequalities

 Natural Resources for Basic Needs

 Struggle to Control Exportable Natural Resources

The Resolution and Prevention of Armed Conflicts

RELATED STUDIES

CASE STUDY: Costa Rica, Guatemala, and Honduras: Contrasts and Prospects for Convergence

Costa Rica (CRI),

Guatemala (GTM), and

Honduras (HND):

 Former Spanish colonies

  Common geographic features

 Not identical triplets

 CRI has enjoyed much better development performance

 Major themes of the topic

 Key roles – roles of institutions, education, health, poverty, and inequality.

INCOME AND HUMAN DEVELOPMENT

 GNI – reflect CRI’s much higher economic growth rate over the last 60 years.

 CRI is also high in Life Expectancy, School Years

 Under 5-morality –GTM has the high risk because it is also severe in Under-5 malnourishment.

 The differences in income and human development are mirrored in the poverty statistics: HND
has about 9 times the incidence of below-$1.25 per day poverty, and GTM has 10 times the
poverty incidence of CRI.

 Fertility - High fertility in GTM, where 41%of the population is under age 15—the youngest
population in Latin America.

 CRI has been ranked 15th in the world’s happiest country.

INEQUALITY

 Hardly low in CRI

 In Guatemala, inequality is sharply along ethnic lines “horizontal inequalities” - defined

as inequality 
among groups, typically culturally defined – e.g. by ethnicity, religion or race

 Land Inequality - Honduras has farms that is too small to adequately support a family.

 Gender Inequality – Gender inequality is a smaller problem in CRI than the other countries.

ECONOMIC GROWTH AND STRUCTURE

 GDP per capita more than quadrupled in CRI between 1950 and 2008; it less than doubled in
GTM and is just 1.75 times higher in HND.

 The three countries produce similar agricultural products like coffee and bananas, reflecting
their similar climates (tropical climates with distinct dry and rainy seasons)

 As a result of active industrial policies, CRI has significantly diversified, including into new high-
tech industries.

 CRI also has much better roads and other infrastructure than the other countries.
  CRI has attracted more than twice the stock of Foreign Direct Investment (FDI) than the other
economies, despite its smaller population. This has followed from CRI’s better education,
infrastructure, environment, and ongoing economic growth performance.

CONFLICT

 Guatemala - has had very high levels of often violent conflict and genocidal campaigns
(intentional action to destroy a people—usually defined as an ethnic, national, racial, or religious
group—in whole or in part);

 Honduras - has a lower but still serious history of conflict or military domination, and

 CRI has had comparatively little conflict, particularly over the last 65 years.

GROUP 3 - DEVELOPMENT POLICY AND THE ROLE

INTRODUCTION

A core goal of public policy should be to facilitate the development of institutions that bring out the best
in humans. —Elinor Ostrom

NATIONAL GOVERNMENTS HAVE PLAYED AN IMPORTANT ROLE IN THE SUCCESSFUL DEVELOPMENT

EXPERIENCES OF THE COUNTRIES IN EAST ASIA. - This chapter examines the balance of and relationships
between states and markets in the process of economic development.
THE PLANNING MYSTIQUE - Until the 1980s, few people in the developing world would have questioned
the advisability or desirability of formulating and implementing a national development plan. Planning
had become a way of life in government ministries, and every five years or so, the latest development
plan was paraded out with great fanfare.
THE PLANNING RECORD, UNFORTUNATELY, DID NOT LIVE UP TO ITS ADVANCE BILLING. BUT A
COMPREHENSIVE DEVELOPMENT POLICY FRAMEWORK CAN PLAY AN IMPORTANT ROLE IN
ACCELERATING GROWTH, REDUCING POVERTY, AND REACHING HUMAN DEVELOPMENT GOALS.
THE NATURE OF DEVELOPMENT PLANNING
ECONOMIC PLANNING- A deliberate governmental attempt to coordinate economic decision making
over the long run and to influence, direct, and in some cases even control the level and growth of a
nation’s principal economic variables to achieve a predetermined set of development objectives.

ECONOMIC PLAN - A specific set of quantitative economic targets to be reached in a given period of
time, with a stated strategy for achieving those targets.

a. Comprehensive Plan
b. Partial Plan
THE PLANNING PROCESS - An exercise in which a government:

a. Chooses social objectives

 b. Sets various targets

c. Organizes a framework for implementing,

coordinating, and monitoring a development plan.

PLANNING IN MIXED DEVELOPING ECONOMIES

Mixed economies are often distinguished by a substantial amount of government ownership and
control.

There are five forms of private ownership such as:

1. Subsistence sector

2. Small-scale individual or family-owned commercial business

3. Medium-size commercial enterprises

4. Large jointly owned or completely foreign-owned manufacturing enterprises, mining

companies, and plantations

5. Relatively large, domestic-based firms

TWO PRINCIPAL COMPONENTS OF DEVELOPMENT PLANNING IN MIXED COUNTRIES

 Government’s deliberate use of domestic saving and foreign finance to carry out public
investment projects.

 Governmental economic policy.

THE RATIONALE FOR DEVELOPMENT PLANNING

- Four of the most prominent Fundamental Economic and Institutional Arguments

MARKET FAILURE - A phenomenon that results from the existence of market imperfections that
weaken the functioning of a market economy.

GENERAL FORMS IN WHICH MARKET FAILURE CAN BE OBSERVED:

1. The market cannot function properly, or no market exists.

2. The market exists but implies an inefficient allocation of resources.

3. The market produces undesirable results as measured by social objectives other than the allocation of
resources.

RESOURCE MOBILIZATION AND ALLOCATION - This argument stresses that developing economies
cannot afford to waste their very limited financial and skilled human resources on unproductive
ventures.

ATTITUDINAL OR PSYCHOLOGICAL IMPACT - It is often assumed that a detailed statement of national

economic and social objectives in the form of a specific development plan can have an important
attitudinal or psychological impact on a diverse and often fragmented population.
FOREIGN AID - With a list of projects, governments are better equipped to solicit foreign assistance and
persuade donors that their money will be used as an essential ingredient in a well-conceived and
internally consistent plan of action.

AGGREGATE GROWTH MODEL: PROJECTING MACRO VARIABLES

A formal economic model describing growth of an economy in one or a few sectors using a limited
number of variables. It is the first and most elementary planning model used in almost every developing
country.

ALMOST ALL SUCH MODELS REPRESENT SOME VARIANT OF THE BASIC

HARROD-DOMAR (OR AK) MODEL.

K(t) = cY(t)

Where:

K(t) = capital stock at time (t)

Y(t) = total output (GDP) at time (t)

c = average (equal to the marginal) capital-output ratio

MULTISECTOR MODELS AND SECTORAL PROJECTIONS - A much more sophisticated approach to

development planning is to use some variant of the interindustry or input-output model, in which the
activities of the major industrial sectors of the economy are interrelated by means of a set of
simultaneous algebraic equations expressing the specific production processes or technologies of each
industry.  

A formal model dividing the economy into sectors and tracing the flow of interindustry purchases
(inputs) and sales (outputs).  

EXAMPLE: The agricultural sector is both a producer of output (e.g., wheat) and a user of inputs from
the manufacturing sector (e.g., machinery, fertilizer).

PROJECT APPRAISAL AND SOCIAL COST-BENEFIT ANALYSIS The vast majority of day-to-day operational
decisions with regard to the allocation of limited public investment funds are based on a microeconomic
technique of analysis known as project appraisal. It is the quantitative analysis of the relative desirability
(profitability) of investing a given sum of public or private funds in alternative projects. On the other
hand, the methodology of project appraisal rests on the theory and practice of social cost-benefit
analysis, a tool of economic analysis in which the actual and potential private and social costs various
economic decisions are weighed against actual and potential private and social benefits.

FIVE REASONS FOR BELIEVING THAT IN DEVELOPING COUNTRIES,

MARKET PRICES OF OUTPUTS AND INPUTS DO NOT GIVE A TRUE REFLECTION OF SOCIAL BENEFITS
AND COSTS:

 
 1. Inflation and currency overvaluation

2. Wage rates, capital costs, and unemployment

3. Tariffs, quotas, subsidies, and import substitution

4. Savings deficiency

5. The social rate of discount

GOVERNMENT FAILURE AND PREFERENCES FOR MARKETS OVER PLANNING

Problems of Plan Implementation and Plan Failure

The widespread rejection of comprehensive development planning based on poor performance

has had a number of practical outcomes, the most important of which is the adoption in a majority of
developing countries of a more market-oriented economic system.

What went wrong? Why has the early euphoria about planning gradually been transformed
into disillusionment and dejection?

THEORY VERSUS PRACTICE

DEFICIENCIES IN PLANS AND THEIR IMPLEMENTATION

INSUFFICIENT AND UNRELIABLE DATA

UNANTICIPATED ECONOMIC DISTURBANCES (INTERNAL AND EXTERNAL)

INSTITUTIONAL WEAKNESS

LACK OF POLITICAL WILL

CONFLICT, POST-CONFLICT, AND FRAGILE STATES

THE 1980s POLICY SHIFT TOWARDS FREE MARKETS

• Many economists, some finance ministers in developing countries, and the heads of the major
international development organizations advocated increased use of the market mechanism as
a key instrument for promoting greater efficiency and more rapid economic growth.

• As part of their domestic-market liberalization programs, a majority of developing countries,

with differing degrees of seriousness of purpose, generally sought to reduce the role of the
public sector, encourage greater private sector activity, and eliminate distortions in interest
rates, wages, and the prices of consumer goods.

• Among the international organizations preaching the virtues of the free market were the IMF
and the World Bank, in addition to several bilateral donors such as U.S. Agency for International
Development (USAID).
• GOVERNMENT FAILURE

• Government regulations may improve industry efficiency, such as by breaking monopoly power;
and it may otherwise improve social welfare, such as by limiting pollution. But poorly designed
regulations could stifle emerging industries or even facilitate corruption.

• Similarly, government programs can reduce social risks; but it has been observed that
development planning could increase risks because of problems of correcting mistakes: Markets
may make serious mistakes; but through its decentralized decision making mechanisms, often
markets can more easily self-correct.