COLLEGE OF ACCOUNTANCY

LEARNING MODULES - 3 IN CAS 7

(ECONOMIC DEVELOPMENT)
Lesson 4 Problems and Policies (continued…)
LEARNING TASKS
At the end of the lesson, the students were able to:
 Understand how human capital, agricultural and rural development and environment and
development affect the growth of the economy and how it affects human development;
 Make a conclusion on how do these factor become a problem and how policies are drafted
due to these factors
 Make a difference among these factors across the different type of economy

KEY CONCEPTS
Chapter 8: Human Capital: Education and Health in Economic Development
8.1 The Central Roles of Education and Health
o Education and health are basic objectives of development; they are important ends in
themselves.
o Health is central to well-being, and education is essential for a satisfying and rewarding life;
both are fundamental to the broader notion of expanded human capabilities that lie at the
heart of the meaning of development
Human capital
¬ Productive investments embodied in human persons, including skills, abilities, ideals, health,
and locations, often resulting from expenditures on education, on-the-job training programs,
and medical care.
 Human capital must be given direct attention in its own right, even in economies that are
growing rapidly.
 Health and education may be distributed very unequally, just as income and wealth are.
But improved health and education help families escape some of the vicious circles of
poverty in which they are trapped.

 dual impacts of the effects of health spending on the effectiveness of the educational system and
vice versa
1. Education and Health as Joint Investments for Development
Important facts
 greater health capital may improve the return to investments in education, in part because
health is an important factor in school attendance and in the formal learning process of a
child.
 A longer life raises the return to investments in education; better health at any point during
working life may in effect lower the rate of depreciation of education capital.
 greater education capital may improve the return to investments in health, because many
health programs rely on basic skills often learned at school, including personal hygiene and
sanitation, not to mention basic literacy and numeracy; education is also needed for the
formation and training of health personnel
 an improvement in productive efficiency from investments in education raises the return on a
lifesaving investment in health

2. Improving Health and Education: Why Increasing Income Is Not Sufficient

Important facts
 Health and education levels are much higher in high-income countries.
o With higher income, people and governments can afford to spend more on education
and health, and with greater health and education, higher productivity and incomes
are possible.
 People will spend more on human capital when income is higher
o But the evidence shows clearly that even if we were able to raise incomes without a
large improvement in health and education, we could not count on that income
increase being used to adequately invest in children’s education and health.

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The income elasticity of the demand for calories (that is, the percentage change in calories
consumed for a percentage change in family incomes) among low-income people range from near
zero to about 0.5, depending on the region and the statistical strategy used by the researchers. This
less than proportional response is due to two factors:
i. Income is spent on other goods besides food, and
ii. part of the increased food expenditures is used to increase food variety without necessarily
increasing the consumption of calories.

o There is considerable evidence that the better the education of the mother, the better
the health of her children. There are still opportunities for improving health through
simple activities in school that have not been utilized.
o Health status, once attained, also affects school performance, as has been shown in
studies of many developing countries. Better health and nutrition lead to earlier and
longer school enrollment, better school attendance, and more effective learning. Thus,
to improve enrollments and the effectiveness of schooling, we must improve the health
of children in developing countries.

 important spillover benefits to investment in one’s health or education

An educated person provides benefits to people around him or her, such as reading for them
or coming up with innovations that benefit the community; it results to market failure.
a healthy person is not only less contagious but also can benefit the community in many
ways that a sick person cannot. Because of such spillover effects, the market cannot be
counted on to deliver the socially efficient levels of health and education

8.2 Investing in Education and Health: The Human Capital Approach

¬ The analysis of investments in health and education is unified in the human capital
approach. Human capital is the term economists often use for education, health, and other
human capacities that can raise productivity when increased.
¬ the basic human capital approach focuses on the indirect ability to increase wellbeing by
increasing incomes.
investments in physical capital:
¬ After an initial investment is made, a stream of higher future income can be generated from
both expansions of education and improvements in health. As a result, a rate of return can
be deduced and compared with returns to other investments.
health and education also contribute directly to well-being
¬ education increases empowerment and autonomy in major matters in life, such as capacity
for civic engagement, making decisions concerning one’s own health care, and freedom to
choose one’s own spouse over an arranged marriage

The impact of human capital investments in developing countries

a. age-earnings profiles across the populations
 incomes vary over the life cycle for people with various levels of education
b. income gains
 future income gains from education must be compared with the total costs incurred to
understand the value of human capital as an investment
c. trade-offs involved in the decision to continue in school (educational costs)
 It is assumed that the individual works from the time he or she finishes school until he or
she is unable to work, retires, or dies. This is taken to be 66 years.
 The trade – offs between the indirect cost and direct cost. Direct cost examples are the
books, uniforms and tuition fees while indirect cost example is the income supposedly
earned while going to school.
d. Social rate return
 is found by including the amount of public subsidy for the individual’s education as part
of the direct costs, because this is part of the investment from the social point of view

8.3 Child Labor

 Child labor is a widespread problem in developing countries. When children under age 15
work, their labor time disrupts their schooling and, in a majority of cases, prevents them
from attending school altogether
 The International Labor Organization (ILO), a UN body that has played a leading role on
the child labor issue
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 o According to ILO, there was a total of 306 million children between ages 5 and 17
doing some kind of work, but about one-third of this is considered permissible work
based on national laws and existing ILO conventions
“child laborers”
¬ because they “are either under the minimum age for work or above that age [through age 17]
and engaged in work that poses a threat to their health, safety, or morals, or are subject to
conditions of forced labor.
Child Labor Issues across the World
 Among children doing hazardous work, over 48 million live in Asia and the Pacific, nearly 39
million live in sub-Saharan Africa, and over 9 million live in Latin America.
 Child labor remains a problem in the Arab states, where the issue has been largely ignored
until very recently.
 And major progress has been made in some countries such as Brazil and some regions such
as Kerala in India.

Worst Scenarios of Child Labor

 more than half of child laborers toil for nine or more hours per day.
 The worst forms of child labor endanger health or well-being, involving hazards, sexual
exploitation, trafficking, and debt bondage
 ILO reported that every year, about 22,000 children die as a result of work-related accidents.
 Clearly, child labor is not an isolated problem but a widespread one, especially in Africa and
South Asia

To model child labor, we make two important assumptions:

i. First, a household with a sufficiently high income would not send its children to work.
ii. Second, child and adult labor are substitutes.

four main approaches to child labor policy current in development policy

a) child labor as an expression of poverty and recommends an emphasis on eliminating poverty
rather than directly addressing child labor; this position is generally associated with the
World Bank
b) strategies to get more children into school, including expanded school places, such as new
village schools, and conditional cash transfer (CCT) incentives to induce parents to send
their children to school
Conditional cash transfer (CCT) programs
¬ Welfare benefits provided conditionally based on family behavior such as children’s regular
school attendance and health clinic visitations.
c) child labor inevitable, at least in the short run, and stresses palliative measures such as
regulating it to prevent abuse and to provide support services for working children.
- This approach is most commonly associated with UNICEF, which has prepared a
checklist of regulatory and social approaches that could meet the “best interest of the
child.”
d) favors banning child labor.
- If this is not possible, however, and recognizing that child labor may not always result
from multiple equilibria problems, this approach favors banning child labor in its most
abusive forms.

8.4 The Gender Gap: Discrimination in Education and Health

Education and Gender
2- profound issues
⓿ gender inequalities
⓿ educational discrimination
Issues
 Young females receive less education than young males in most low-income developing
countries. While youth literacy is now much higher than it was as recently.
 The educational gender gap is especially great in the least developed countries in Africa,
where female literacy rates can be less than half that of men in countries such as Niger, Mali,
Guinea, and Benin.
 In most low-income countries and many middle-income countries, women make up a
minority—sometimes a small minority—of college students.
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  School completion is also subject to gender inequalities, and the gap is often particularly
large in rural areas.
 educational discrimination against women hinders economic development in addition to
reinforcing social inequality
Health and Gender
 an issue where women are mostly deprived of and a widespread issues in the low-income
countries.
 health spending on men is often substantially higher than that on women.

Female genital mutilation/cutting (FGM/C)

¬ it is a health and gender tragedy
¬ is most widely practiced in sub-Saharan Africa and the Middle East and is believed to have
affected about 130 million women.
¬ This practice, which is dangerous and a violation of the most basic rights, does not only
result from decisions made by men
Consequences of Gender Bias in Health and Education
1) expansion of basic education of girls earns among the very highest rates of return of any
investment—much higher, for example, than most public infrastructure projects.
2) Education of girls has also been shown to be one of the most cost-effective means of
improving local health standards.
3) Inferior education and health care access for girls shows the interlinked nature of economic
incentives and the cultural setting.
4) The bias toward boys helps explain the “missing women” mystery
5) Greater mothers’ education, however, generally improves prospects for both their sons’ and
daughters’ health and education, but apparently even more so for girls

8.5 Educational Systems and Development

Much of the literature and public discussion about education and economic development, in
general, and education and employment, in particular, revolves around two fundamental economic
processes:
(1) the interaction between economically motivated demands and politically responsive supplies
in determining how many quality school places are provided, who gets access to these places,
and what kind of instruction they receive, and
(2) the important distinction between social and private benefits and costs of different levels of
education, and the implications of these differentials for educational investment strategy.

The Political Economy of Educational Supply and Demand:

The Relationship between Employment Opportunities and Educational Demands
On the demand side
the two principal influences on the amount of schooling desired are
(1) a more educated student’s prospects of earning considerably more income through future
modern-sector employment (the family’s private benefits of education) and
(2) the educational costs, both direct and indirect, that a student or family must bear. The
amount of education demanded is thus in reality a derived demand for high-wage
employment opportunities in the modern sector.
Private benefits
¬ The benefits that accrue directly to an individual economic unit. For example, private
benefits of education are those that directly accrue to a student and his or her family.
Derived demand
¬ Demand for a good that emerges indirectly from demand for another good.

On the supply side

 the quantity of school places at the primary, secondary, and university levels is determined
largely by political processes, often unrelated to economic criteria.
 Because the amount of education demanded largely determines the supply (within the limits
of government financial feasibility), let us look more closely at the economic (employment-
oriented) determinants of this derived demand
The amount of schooling demanded that is sufficient to qualify an individual for modern-sector jobs
appears to be related to or determined by the combined influence of four variables:
o the wage or income differential,
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 o the probability of success in finding modern-sector employment,
o the direct private costs of education, and
o the indirect or opportunity costs of education.

Social benefits of education

¬ Benefits of the schooling of individuals, including those that accrue to others or even to the
entire society, such as the benefits of a more literate workforce and citizenry.
Educational certification
¬ The phenomenon by which particular jobs require specified levels of education.

Note that the political economy process pulls scarce public resources away from the limited and
often low-quality basic education available for the many and toward more advanced education
for the few. This is both inequitable and economically inefficient.

Social versus Private Benefits and Costs

 Typically, in developing countries, the social costs of education (the opportunity cost to
society as a whole resulting from the need to finance costly educational expansion at higher
levels when these limited funds might be more productively used in other sectors of the
economy) increase rapidly as students climb the educational ladder.
 The private costs of education (those borne by students themselves) increase more slowly
or may even decline.
Distribution of Education
 Countries that have developed successfully have generally ensured that educational benefits
are more broadly available in the economy—to the poor as well as the rich, in the rural areas
as well as the urban
 Certainly, educational quality is higher in high- than in low-income countries—higher in
Europe than in Africa, for example.
 Although quality differs from school to school in developed countries as well, the differences
are not as extreme, on average, as they are in developing countries. The quality of education
(the quality of teaching, facilities, and curricula) matters at least as much as its quantity
(years of schooling) for differential earnings and productivity.

Countries
South – Asia (also most developing countries)
Due to the issue of income inequality – there is a wide gap between the distribution of
education from those low – and – high income earner family. Due to lack of finances it can
worsen the income inequality. Thus, incomes are clearly dependent on years of completed
schooling, which could reinforce income inequality and income mobility
rapid proliferation of private schools for non-elites in South Asia and other developing regions
– their quality is generally not high, and their teacher qualifications are often lower than
those in the public schools
cost of quality education – becomes prohibitive to lower-income families, who are often
unable to borrow funds to finance their children’s middle and secondary school education
Child labor – substitute for a loan as a way to bring money to the family now at later cost

Developed countries
Lower income inequality
Child labor is minimal
Good quality of education
Funds are available and most families can finance the education of their children

8.6 Health Measurement and Disease Burden

The World Health Organization (WHO), the key UN agency concerned with global health matters,
defines health as “a state of complete physical, mental, and social well-being and not merely the
absence of disease and infirmity.

Disability-Adjusted Life Year (DALY)

 It is the alternative measure promoted by WHO to measure health and disease which is to
compare health across countries is controversial.
Outcomes
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 o Using a DALY measure, a World Bank study calculated that about one-quarter of the global
burden of disease was represented by diarrhea, childhood diseases including measles,
respiratory infections, parasitic worm infections, and malaria—all major health problems in
developing countries.
o the children of the poor are much more likely to die than those of the rich
o The proportion of children under age 5 who are underweight is far higher for poorer quintiles
than for richer quintiles.
o Health inputs are also very unequal, even when they are provided by public authorities
rather than procured privately
 Higher-quality medical facilities are concentrated in urban and richer areas, where the
more affluent have the political clout to secure them.
 Even when public clinics are available in poor rural areas, they are typically
underequipped and understaffed.
o Developing countries face a much more crippling disease burden than developed countries,
especially regarding infectious diseases.
 AIDS, malaria and parasites are three major problems that we consider in this section

Health Challenges Faced by Developing Countries

• Absolute poverty. Poverty plays such a central role in most health problems faced by developing
countries that it has its own designation in the International Classification of Diseases: code Z59.5
—extreme poverty.
• Malnutrition. Many deaths attributed to a proximate cause of disease—particularly among
children—have as their root cause malnutrition, which can weaken the immune system. About 800
million people suffer undernourishment, and up to 2 billion suffer one or more micronutrient
deficiencies.
• AIDS. Now the leading cause of death of working-age adults in the developing world, if unchecked
it may condemn many countries in sub-Saharan Africa, the hardest-hit region, to continued
grinding poverty.
• Malaria. Once in retreat, its most deadly strain is now making a big comeback, particularly in
Africa; it still kills well over 1 million people each year, 70% of them children under age 5.
• Tuberculosis. TB currently claims about 2 million lives each year. One-third of the world’s
population is infected with the TB bacillus, and each year, about 8 million new cases result from
this “reservoir of infection.” New multi-drug-resistant strains of TB, difficult and expensive to treat,
are spreading in “TB hot zones” in the developing world.
• Acute lower respiratory infections. Lung infections, primarily pneumonia—generally
preventable and curable—cause about 20% of all deaths in children under age 5. • Hepatitis B.
Hepatitis B may now kill as many as 1 million people each year.
• Ascariasis. Ascaris roundworm parasites affect some 10% of the population of the developing
world, possibly as many as 1.2 billion people. The parasites most commonly infect children ages 3
to 8 years. The worst infections cause about 60,000 deaths per year, the overwhelming majority of
whom are children.
• Cholera.
• Dengue.
• Leprosy (Hansen disease)
• Dracunculiasis (guinea worm disease). afflicts the poorest of the poor, who lack access to even
minimally safe water.
• Chagas disease
• Leishmaniasis. it causes tens of thousands of deaths each year.
• Lymphatic filariasis (elephantiasis). seriously incapacitate and disfigure people

o Malnutrition among children is particularly consequential. Although child hunger has been
declining in all developing regions, the rate of improvement is too slow to achieve even the
fundamental Millennium Development Goal

SEVERE CASES AROUND THE WORLD

HIV/AIDS
The AIDS epidemic has been threatening to halt or even reverse years of hard-won human and
economic development progress in numerous countries.
Sub-Saharan Africa
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  Remains most severely affected, with nearly 1 in every 20 adults (4.9%) living with HIV and
accounting for 69% of the people living with HIV worldwide.
 But new infections in newborn children had the most dramatic drop among any group,
including adults and children—a result of better medical care and practices for HIV-positive
women
UNAIDS
 An organization in-charge of overseeing the different disease across the world.
 AIDS is equally an issue of economic development. Acquired immunodeficiency syndrome
(AIDS) is the final and fatal stage of infection with the human immunodeficiency virus (HIV).

 In the developing countries as a whole, AIDS is transmitted primarily through heterosexual

intercourse; contact with infected blood and drug needles, both by drug abusers and in
hospitals; and perinatal transmission (from mother to fetus).

 In low-income countries, without proper treatment, average survival once AIDS symptoms
appear has been under one year.

Neglected tropical diseases

 Thirteen treatable diseases, most of them parasitic, that are prevalent in developing
countries but receive much less attention than tuberculosis, malaria, and AIDS.

⓿ Initially, AIDS was widely perceived as a disease of developed countries, primarily affecting
men who have sex with men. But in fact, more than 95% of all HIV cases and AIDS deaths
occur in the developing world

8.7 Health, Productivity, and Policy

Productivity
 Careful statistical methods have shown that a large part of the effect of health on raising
earnings is due to productivity differences: It is not just the reverse causality that higher
wages are used in part to purchase better health.
o Height = which could affect the health as presented by some studies in the developing and
developed country such as Bangladesh and United States

 Thus, the preponderance of the evidence is that health and nutrition do affect employment,
productivity, and wages, and very substantially so among the poorest of the poor. This
finding magnifies the policy priority of health in development; not only is health a major goal
in itself, but also it has a significant impact on income levels.

Health Systems Policy

 In the WHO’s definition, a health system is “all the activities whose primary purpose is to
promote, restore, or maintain health.” Health systems include the components of public
health departments, hospitals and clinics, and offices of doctors and paramedics. Outside
this formal system is an informal network used by many poorer citizens, which includes
traditional healers, who may use somewhat effective herbal remedies, or other methods that
provide some medical benefits, such as acupuncture, but who also may employ techniques
for which there is no evidence of effectiveness beyond the placebo effect (and in some cases
could cause harm).

Five performance indicators to measure health systems in the 191 WHO member states:
(1) the overall level of health of the population,
(2) health inequalities within the population,
(3) health system responsiveness (a combination of patient satisfaction and system performance),
(4) the distribution of responsiveness within the population (how well people of varying economic
status find that they are served by the health system), and
(5) the distribution, or fairness, of the health system’s financial burden within the population

Lesson 5 Development Policymaking and the Roles of Market,

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 State, and Civil Society

LEARNING OUTCOMES
At the end of the topic, the students were able to:
 to find a balance between markets, government, and other institutions, including not-for-
profits and cooperatives, and that the successful countries were those that had found that
balance
 to understand how does development policy making important in the market and in the
development of the country

LEARNING CONCEPTS
Chapter 11
11.2 Development Planning: Concepts and Rationale
The Planning Mystique
 the pursuit of economic development was reflected in the almost universal acceptance of
development planning as the surest and most direct route to economic progress

National planning
 was widely believed to offer the essential and perhaps the only institutional and
organizational mechanism for overcoming the major obstacles to development and for
ensuring a sustained high rate of economic growth.

The Nature of Development Planning

 Economic planning may be described as 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 (income, consumption,
employment, investment, saving, exports, imports, etc.) to achieve a predetermined set of
development objectives.
o An economic plan is simply a specific set of quantitative economic targets to be reached
in a given period of time, with a stated strategy for achieving those targets. Economic
plans may be comprehensive or partial.
o A comprehensive plan sets its targets to cover all major aspects of the national economy.
o A partial plan covers only a part of the national economy—industry, agriculture, the
public sector, the foreign sector, and so forth.
 Finally, the planning process itself can be described as an exercise in which a government
first chooses social objectives, then sets various targets, and finally organizes a framework
for implementing, coordinating, and monitoring a development plan

Planning in Mixed Developing Economies

Mixed Economies
¬ These economies are characterized by the existence of an institutional setting in which some
of the productive resources are privately owned and operated and some are controlled by the
public sector. The actual proportionate division of public and private ownership and control
varies from country to country, and neither the private nor the public sector can really be
considered in isolation from the other.

The private sector in developing countries typically comprises four traditional forms of private
ownership and a more recent emerging one:
1. The subsistence sector, consisting of small-scale private farms and handicraft shops
selling a part of their production to local markets
2. Small-scale individual or family-owned commercial business and service activities in
the formal and informal urban sectors
3. Medium-size commercial enterprises in agriculture, industry, trade, and transport
owned and operated by local entrepreneurs
4. Large jointly owned or completely foreign-owned manufacturing enterprises, mining
companies, and plantations, catering primarily to foreign markets but sometimes with
substantial local sales (the capital for such enterprises usually comes from abroad, and a
good proportion of the profits tends to be transferred overseas)
5. A growing number of relatively large, domestic-based firms, primarily locally
managed and largely locally owned, often listed on national stock markets in countries
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 such as Brazil, Russia, India, and China but much more common in middle-income than
low-income countries and rare in the least developed countries

two principal components of development planning in mixed economies:

1. The government’s deliberate use of domestic saving and foreign finance to carry out public
investment projects and to mobilize and channel scarce resources into areas that can be expected to
make the greatest contribution toward the realization of long-term economic objectives (e.g., the
construction of railways, schools, hydroelectric projects, and other components of economic
infrastructure, as well as the creation of import-substituting industries or projected future export
sectors)
2. Governmental economic policy (e.g., taxation, industrial licensing, the setting of tariffs, and the
manipulation of quotas, wages, interest rates, and prices) to stimulate, direct, and in some cases
even control private economic activity so as to ensure a harmonious relationship between the
desires of private business operators and the social objectives of the central government

11.3 The Development Planning Process: Some Basic Models

Three Stages of Planning
Such economy-wide planning models can be divided into two basic categories:
(1) aggregate growth models, involving macroeconomic estimates of planned or required
changes in principal economic variables, and
(2) multisector input-output, social accounting, and computable general equilibrium
(CGE) models, which ascertain (among other things) the production, resource,
employment, and foreign-exchange implications of a given set of final demand targets
within an internally consistent framework of inter-industry product flows.
(3) Finally, probably the most important component of plan formulation is the detailed
selection of specific investment projects within each sector through the technique of
project appraisal and social cost-benefit analysis.

A. Aggregate Growth Models: Projecting Macro Variables

¬ It deals with the entire economy in terms of a limited set of macroeconomic variables deemed
most critical to the determination of levels and growth rates of national output: savings,
investment, capital stocks, exports, imports, foreign assistance, and so on.
B. Multisector Models and Sectoral Projections
¬ A much more sophisticated approach to development planning is to use some variant of the
inter-industry 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.
¬ Inter-industry models range from simple input-output models, usually consisting of 10 to
30 sectors in the developing economies and 30 to 400 sectors in advanced economies, to
more complicated linear programming or activity analysis models where checks of feasibility
(what is possible given certain resource constraints) and optimality (what is best among
different alternatives) are also built into the model.

C. 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.
¬ The intellectual as well as the operational linkage among the three major planning
techniques, however, should not be overlooked. Macro growth models set the broad
strategy, input-output analysis ensures an internally consistent set of sectoral targets, and
project appraisal is designed to ensure the efficient planning of individual projects within
each sector.

 The methodology of project appraisal rests on the theory and practice of social cost-benefit
analysis, which is also used in the United States and other developed countries. The basic
idea of cost-benefit analysis is simple: To decide on the worth of projects involving public
expenditure (or, indeed, in which public policy can play a crucial role), it is necessary to
weigh the advantages (benefits) and the disadvantages (costs) to society as a whole.
o The point of departure for social cost-benefit analysis is that it does not accept that
actual receipts are a true measure of social benefits or that actual expenditures are a
true measure of social costs.
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  social profit in any period as the difference between social benefits and social costs where
these are measured both directly (the real costs of inputs and the real value of outputs) and
indirectly (e.g., employment effects, distributional effects).

three-step process
1. We must first specify the objective function to be maximized
2. To arrive at calculations of net social benefit, we need social measures of the unit values of
all project inputs and outputs
o social measures are often called accounting prices or shadow prices of inputs and
outputs to distinguish them from actual market prices
3. Finally, we need some decision criterion to reduce the stream of projected social benefit and
cost flows to an index, which is the value of which can then be used to select or reject a
project or to rank it relative to alternative projects

5 – Reasons of 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.
 The social rate of discount (also sometimes referred to as social time preference) is
essentially a price of time—the rate used to calculate the net present value of a time
stream of project benefits and costs

11.7 Development Political Economy:

Theories of Policy Formulation and Reform
Problems of Plan Implementation and Plan Failure
 the experience of government policy in many developing countries has been one of often
exacerbating rather than reconciling these divergences—government failure
A. Understanding Voting Patterns on Policy Reform
Sometimes reform is designed to maximize the benefits of the few. It is natural that the majority
would oppose this, if they have the power to do so.
o risk-neutral voters may rationally vote against a policy from which a majority will benefit.
The basic idea is that if a significant number, but still a minority, of voters know with
certainty that they will gain from a policy, they will vote for the policy.
B. Institutions and Path Dependency
 The framework suggested by Nobel laureate Douglass North is useful for understanding
qualitative differences in policy formulation across countries. North distinguishes between
institutions and organizations.
o Institutions are “formal and informal rules of the economic game.” These are
humanly devised constraints, such as contract enforcement, that define incentives for
savings, investment, production, and trade.
o organizations spring up around the property rights, designed to help those who
control the organization prosper under these existing property rights. Organizations
emerge that are in large part defined and shaped by the incentives that emerge from
these rules.
 path dependency is a condition in which the past condition of an individual or economy
affects future conditions. Such as colonial origins of comparative development, poverty and
low productivity traps, Malthusian traps, child labor traps
C. Democracy versus Autocracy: Which Facilitates Faster Growth?
 Under democracy, politicians seeking reelection have an incentive to reflect the will and
interests of a majority of the people. On the other hand, a looming election gives an incentive
to pursue short-term accomplishments that can be pointed to during a campaign, rather
than what is necessarily good for long-term development.
 Under autocracy, there are fewer constraints on what can be stolen and for how long. But the
politician who is reasonably confident of remaining in power for a long time can pursue long-
term development strategies (at the very least, to have more to steal from).
o The positive effect of autocracy on growth-enhancing policies seems to have worked
best when a regime sees that its greatest chance of remaining in power lies in
achieving a maximum rate of growth; this is the case with South Korea
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11.8 Development Roles of NGOs and the Broader Citizen Sector
 It is increasingly recognized that development success depends not only on a vibrant private
sector and an efficient public sector but on a vigorous citizen sector as well. Relying on the
former sectors alone has been compared to trying to sit on a two-legged stool. Organizations
of the citizen sector are usually termed nongovernmental organizations (NGOs) in the
development context but are also referred to as nonprofit, voluntary, independent, civil
society, or citizen organizations.
 A wide range of organizations fall under the NGO banner. The United Nations Development
Programme defines an NGO as
o any non-profit, voluntary citizens’ group which is organized on a local, national or
international level. Task-oriented and driven by people with a common interest, NGOs
perform a variety of services and humanitarian functions, bring citizens’ concerns to
governments, monitor policies and encourage political participation at the community
level. They provide analysis and expertise, serve as early warning mechanisms and
help monitor and implement international agreements. Some are organized around
specific issues, such as human rights, the environment or health

 Cooperatives also play significant and important roles in economic development in many
developing countries; but the experience has been mixed. In some countries and regions co-
ops have assisted farmers with getting more reliable and lower-cost inputs, better access to
credit, and higher prices and better marketing channels for their output. In other regions, co-
ops have been subject to manipulation by the state, paving the way for corruption as well as
inefficiency.

 In contrast to private goods, public goods are non-excludable (it is impossible to prevent
individuals from consuming them except at excessive cost) and non-rival (consumption by
individuals does not reduce the amount of the good available for consumption by others).

typology that includes

a) “private goods” (high excludability, high rivalry) in the upper right hand corner, referred to
here as Type I goods, and
b) “public goods” (low excludability, low rivalry) in the lower left-hand corner, referred to here as
Type III goods.

The production and distribution of these Type I and Type III goods are generally assigned to
the market and the public sector, respectively. The other two corners represent goods that
are hybrids of the other two
c) In the lower right-hand corner are found common-pool (or common-property) resources,
characterized by low excludability but high rivalry. Examples of such Type II goods are
natural resources such as fisheries, pastures, and forests, with open access.

Common-property resources can be allocated through institutions in both public and private
sectors, but NGOs play an important and growing role. Historically, common-property
resources were allocated by traditional (e.g., tribal) mechanisms, but these often broke down
under colonialism and postcolonial government control in many developing countries
d) upper left-hand corner are found another hybrid, Type IV goods. For example, productive
ideas can be used by all without their becoming used up or degraded and so are nonrival,

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 but they can often be effectively kept secret, so they are excludable. A related example is
technology transfer to developing countries.

Technical knowledge is not a rival good once it is transferred and absorbed into the local
economy, as ideas may often spread rather freely across firms within a locality, but it is
excludable in that without active intervention, productive ideas often do not cross national
boundaries

A special form of public good that operates at the local level or in a specialized subgroup of a
wider society is known as a local public good. Under some conditions, a decentralized
solution to allocation problems for such goods may be found. Local public goods are
excludable from those outside the area but generally not for those in the local area.
NGOs are helping community-based organizations (CBOs) reclaim this role in common-
property resource allocation. Because they are organizations based on trust rather than
coercion (government) or individual self-interest (market), NGOs may be able to arrive at
efficient and socially acceptable allocations of common-property resources at relatively low
transaction costs.

There are at least seven partially overlapping and mutually reinforcing types of organizational
comparative advantage for international or national NGOs or local organizations such as federations
of community-based organizations
1. Innovation. NGOs can play a key role in the design and implementation of programs focused
on poverty reduction and other development goals. For example, NGOs that work directly
with the poor may design new and more effective programs that reach the poor, facilitated by
this close working relationship.
2. Program flexibility. An NGO can address development issues that are viewed as important for
the communities in which it works. In principle, an NGO is not constrained by the limits of
public policy or other agendas such as those of donor-country, foreign-assistance priorities
or by domestic national or local governmental programs.
3. Specialized technical knowledge. National and international NGOs may be greater repositories
of technical expertise and specialized knowledge than local governments (or businesses).
4. Targeted local public goods. Goods and services that are rival but excludable, including those
targeted to socially excluded populations, may be best designed and provided by NGOs that
know and work with these groups.
5. Common-property resource management design and implementation. NGOs, including
federations of local CBOs, can play an important role in common property management and
targeted local public-good provision. Throughout the developing world, both governments and
the private sector have a poor track record in ensuring sustainability of forests, lakes, coastal
fishing areas, pasturelands, and other common-property resources, also known as
“commons.” But a large fraction of the world’s people still relies on local natural resources for
most of their income and consumption.
6. Trust and credibility. In practice, NGOs may have other advantages over government in
gaining the trust of, and providing effective services to, groups with special needs, notably
those in extreme poverty.
7. Representation and advocacy. NGOs may hold advantages in understanding the needs of the
poor, who otherwise are often excluded from political processes and even local community
deliberations. NGOs may play a role in the aggregation of preferences and hence of
representation of community needs.

Sometimes exceptional failures of either government or the private sector create situations
under which NGOs can, and perhaps should, temporarily step in to fill the void through
“sector extension.”
Short of embezzlement or other outright lawbreaking, NGOs are also vulnerable to
weaknesses, termed voluntary failure. Instead of realizing their potential, NGOs may be
insignificant (owing to limited resources or small scale and reach), selective and exclusionary,
elitist, and or ineffective.
o Voluntary failure. The inability of nongovernmental organizations and the citizen
sector more broadly to efficiently achieve social objectives in their areas of supposed
comparative advantage.
One potential pitfall is the lack of adequate incentives to ensure effectiveness, which requires
careful organizational design. Another is the ever-present danger of capture by the goals of
funders rather than intended beneficiaries. This can reach the point where NGOs change
their priorities from one year to the next
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11.9 Trends In Governance and Reform
Tackling the Problem of Corruption
Corruption is the abuse of public trust for private gain; it is a form of stealing. Indexes of
corruption regularly rate the incidence of corruption far higher in developing countries than in
developed countries. This is understood to reflect both cause and effect. An absence of corruption
encourages investment and efforts to expand the pie rather than merely fight over its distribution,
and thus encourages growth; to this extent, improvements in governance, in general, and reduction
of corruption, in particular, could be means to accelerate the process of development.

Poor governance practices, such as bribery, controls over the press, and limits on civil liberties, are
often found together and are clearly mutually reinforcing

The elimination of corruption is important for development for several reasons

 honest government may promote growth and sustainably high incomes. In addition, the
association of eliminating corruption with public empowerment suggests that it is a direct
objective of development. Finally, the effects of corruption fall disproportionately on the poor
and are a major restraint on their ability to escape from poverty
 The elimination of corruption and improvement of governance, in general, can thus also be
viewed as part of an antipoverty strategy. While the rich may pay large bribes under corrupt
regimes, the poor generally pay much larger fractions of their incomes in bribes and other
forms of extortion. In other words, corruption may be viewed as a regressive tax on the
absolutely poor. In addition, government for sale means government for the highest bidder.
 Countries that have avoided or successfully tackled corruption have tended, on average, to
promote competition and entry in the economy, avoiding too much power in the hands of
large monopolies such as those in the energy sector in many countries, and have ensured
that privatized firms faced competition; promoted civil service professionalism, with improved
pay and incentives for public servants; made public expenditures more transparent, with
clearer rules of procurement and budgeting; reduced immunity from prosecution of
executive, legislative, and judicial figures; provided judicial independence; established and
enforced meritocratic, transparent promotion policies; and eliminated inefficient regulations
and made needed ones more transparent
Decentralization
¬ Decentralization has been a long-term trend in developed countries.
¬ Having a significant powers at the state and local level enshrined in their constitutions.
¬ trends toward decentralization and greater urban self-government have been growing in the
developing world as democracy has spread in Latin America and elsewhere, and the political
process has allowed for providing greater autonomy, notably more fiscal autonomy, for
regional and local levels of government
¬ In Asia, decentralization has proceeded apace with democratization, while long-standing
democracies such as India have also provided greater local control, notably under India’s
74th Constitutional Amendment. In China, decentralization has occurred to some extent

 The constitutional reform that has frequently accompanied democratization has in many
cases provided an opportunity to codify greater local autonomy. A major motivation of the
central government has often been to share fiscal burdens with regions and cities, but
decentralization has sometimes taken on a life of its own that has been difficult to contain.
Development Participation
¬ If the goal of economic growth is human development, then without participation, we could
have economic growth without development. Indeed, participation—a say in development
policies by the people most affected by them—is arguably in itself a chief end of development.
¬ Development participation has been shown to make projects work better. With genuine and
full participation by beneficiaries on what projects are chosen and in the way that
development assistance gets used more generally, we should expect less corruption and
greater development results per dollar of aid spent

 Sarah White reports on an NGO in the Philippines that was committed to genuine
participation in theory and enabled local people to develop and control their own
organization. But when this organization wanted to bypass the NGO and interact directly
with donors, the NGO would not allow it to do so. Victoria Michener reports on a non-formal
education project run by an NGO (Save the Children/FDC in Burkina Faso).

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