Week 12

Development Policymaking and the Roles of Market, State and Civil Society

The Planning Mystique

- In the past, few doubted the importance and usefulness of national economic plans
- Recently, however, disillusionment has set in
- But a comprehensive development policy framework can play an important role in accelerating
growth and reducing poverty.
The Nature of Development Planning
● Basic concepts
● Planning in mixed developing economies
- Resource mobilization for public investment
- Economic policy to control private economic activity according to social objectives of the
government
● Private sector in such economies comprises
- The subsistence sector - small scale private farms, handicrafts shops
- Small scale business - family owned commercial business and service activities in the formal
and informal sector
- Medium size enterprises - commercial enterprises ; operated by local entrepreneurs
- Large joint or foreign owned enterprises - tends to be transfer overseas
- Large domestic firms - locally owned and managed
The Rationale for Development Planning
- Market failure - government absence will lead to misallocation of present and future resources
- Resource mobilization and allocation - economic planning is assume to help by recognizing the
particular constraints ; investment project
- Attitudinal or psychological impact - economic planning can provide best incentives to
overcome inhibiting and open the basic forces of sectionalism and traditionalism
- Foreign aid - country is helping other country ; international movement of money, services or
goods ; physical, military, humanitarian ; CHINA gives largest foreign aid followed by US,
GERMANY, UK, JAPAN
Problems of Plan Implementation and Plan Failure
● Theory versus practice
● Reasons for plan failure
- Deficiencies in the plan
- Insufficient unreliable data
- Unanticipated economic disturbances
- Institutional weaknesses
- Lack of political will - there’s no vision
Government Failure and the Resurgent Preference for Markets over Planning
- Problems of government intervention in developing countries
The Market Economies
● Sociocultural preconditions and economic requirements
- Trust in banks etc - Security of property and persons
- Law and order
 - Balance between competition and - Deferring gratification to generate
cooperation private saving
- Division of responsibility and diffusion of - Rationality
power - Honesty
- Social mobility - Efficiency
- Materialistic values as a stimulus to - Freedom of information
greater production - Free flows of information
● Well functioning market economy requires
- Clear property rights - Autonomous tastes
- Laws and courts - Public management of externalities
- Freedom to establish business - Stable monetary and fiscal policy
- Stable currency instruments
- Public supervision of natural monopolies - Safety nets
- Provision of adequate information - Encouragement of innovation
● Roles and limitations of the market in LDCs
- Imperfections, lack of information and - Resource constraints
uncertainty - Income distribution
- Presence of externalities - Structural change
Development and Political Economy
● Understanding voting patterns on policy reform
● Institutions and path dependency
● Democracy versus autocracy : which facilitates faster growth?
● Roles of NGOs in development and the broader citizen sector
● Comparative advantages of NGOs in
- Innovative design and implementation - Trust and credibility
- Program flexibility - Representation and advocacy
- Specialized technical knowledge
- Provision of targeted local public goods
- Common-property resource
management design and
implementation
Trends in Governance and Reform
● Tackling the problem of corruption ● Good governance is broader than simply
- Abuse of public trust for private gain an absence of corruption
● Good governance enhances capability to ● Decentralization
function ● Development participation - alternate
● Effects of corruption fall disproportionately interpretations
on the poor - Genuine participation and role of NGOs
Week 13

Trade Policy: Issues, Debates and Effects

Trade Policy
- Regulations and agreements that control imports and exports to foreign countries
Trade Strategies for Development: Export Promotion versus Import Substitution
● Export promotion: looking outward and seeing trade barriers
- Primary - commodity export expansion
- Primary - commodity export expansion, limited demand
- Low income elasticities
- Low population growth rates in developing countries
- Decline in prices implies low revenue (some periods of price spikes, including
recent years, but very long-run trend has been downward)
- Lack of success with international commodity agreements
- Development of synthetic substitutes
- Agricultural subsidies
- Primary - commodity export expansion, supply rigidities
- Expanding manufactured good exports
- Greater successes, particularly China; unevenly distributed across the developing world
● Import substitution: looking inward but still paying outward
- Tariffs, infant industries, and protection
Export
- To ship a product outside a country or region
Import
- To have a product shipped into a country or region, opposite of export
Tariffs
- Tax imposed by a government on goods and services imported from other countries that serves
to increase the price and make imports less desirable, ar at least less competitive, versus
domestic goods and services.
Why tariffs?
- A government revenue
- Foster economies of scale
- Effective rate of protection
Infant industry
- Describes an industry that is in its early stages of development
- Newly established industry
- Lack the experience and size to compete against establish competitors abroad
Effective rate of protection
- Measures how much protection a tariff or other trade policy provides domestic producers
- It represents the change in value that firms in an industry add to the production process when
trade policy changes
- It differs from tariff rates because tariff affect sectors other than protected sector, causing
indirect effects on the prices and value added for the protected sector
Trade pessimists
- Slow growth of demand for primary products - low income elasticity/ increased efficiency/
synthetics
- Terms of trade deterioration over time
- More developed country import barriers
Trade optimists
- Competition -> efficiency
- Economies of scale for efficient sectors
- Attract foreign capital
- Generate foreign exchange
Propels Growth – When World Demand is Strong
The industrialization strategy
- Focus on government interventions to encourage exports, especially those with higher skill and
technology content
- Problem: without proper attention to incentives, industrial policies may be counterproductive too
- WTO rules and industrial policies - gray areas remain
- Problem: level of competence and political authority of governments to carry out policies
effectively
- Example: Taiwan and South Korea
Economic Integration: Theory and Practice
- The growth of trade among developing countries
- Integration encourages rational division of labor among a group of countries and increases
market size
- Provides opportunities for a coordinated industrial strategy to exploit economies of scale
- Trade creation
- Trade diversion
South-South trade
- Trade between developing economies including the east European and Asian economies in
transition from centrally-planned Communist systems to market economies, is a vibrant
marketplace reality.
South-South cooperation
- Broad framework of collaboration among countries of the South in the political, economic,
social, cultural, environmental and technical domains
- Involving two or more developing countries, it can take place on a bilateral, regional,
intraregional or interregional basis
Economic integration
- Regional trading blocs and the globalization of trade
- NAFTA - North American Free Trade Agreement - treaty between Canada, Mexico, and
the US that eliminates most tariffs between the countries. It was replaced by the US-
Mexico-Canada Agreement [USMCA] on July 1, 2020
- MERCOSUR - economic and political bloc comprising Argentina, Brazil, Paraguay,
Uruguay, and Venezuela
- SADC - Southern African Development Community is a regional economic community
comprising 16 member states: Angola, Botswana, Comoros, Democratic Republic of
Congo, Eswatini, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia,
Seychelles, South Africa, Tanzania, Zambia, and Zimbabwe
 - ASEAN- Association of SouthEast Asian Nation - intergovernmental organization of ten
southeast asian countries: Brunei, Cambodia, Indonesia, laos, Malaysia, Myanmar, PH,
Singapore, Thailand, and Vietnam - promoting economic integration among members
- Local conditions matter
Advantages of economic integration
1. Trade Creation: member countries have
a. Wider selection of goods and services not previously available
b. Acquire goods and services at a lower cost after trade barriers due to lowered tariffs or
removal of tariffs
c. Encourage more trade between member countries the balance of money spend from
cheaper goods and services, can be used to buy more products and services
2. Employment opportunities
3. Creation of trading blocs - can increase trade barriers against non-member countries
4. Trade Diversion: Because of trade barriers, trade is diverted from a non-member country to a
member country despite the inefficiency in cost. For example, a country has to stop trading with
a low cost manufacture in a non- member country and trade with a manufacturer in a member
country which has a higher cost.
5. National sovereignty - requires member countries to give up some degree of control over key
policies like trade, monetary and fiscal policies. The higher the level of integration, the greater
the degree of controls that needs to be given up particularly in the case of a political union
economic integration which requires nations to give up a high degree of sovereignty.

Week 14

Balance of Payments, Debt, Financial Crises, and Stabilization Policies

The Debt Dilemma: Extent and Consequences

● The balance of payment account
● Financing and reducing payment deficits
● The debt crisis of 1980s
International Finance and Investment: Key Issues
● How major debt crises emerged during the 1980s
The Balance of Payments Account
● General considerations:
- Balance of Payments (BOP)
- Current Account
- Surplus and Deficit
- Capital Account
- Cash Account or International Reserve Account
- Three forms: • Hard currency • Gold • Deposits with IMF
Balance of Payment Account
- Systematic record of all economic transactions between residents of a country and the rest of
the world carried out in a specific period of time
- Summary of international transactions of a country for a given period
Current account
- Records the value of exports and imports of both goods and services and international transfers
of capital
Surplus and deficit
- The BoP statement of a country indicates whether it has a deficit or surplus of funds
- If a country’s export is higher than its import, there is a surplus in the balance of payments
- A BoP deficit can arise if a country’s imports amount to more than its total exports
Capital Account
- On a national level, represents the balance of payments for a country
- Keeps track of the net change in a nation’s asset and liabilities during a year
- Capital account’s balance will inform economists whether the country is a net importer or net
exporter of capital
International Reserves
- Any kind of reserve funds, which central banks can pass among themselves, internationally
- Acceptable form of payment among these banks
- Reserve themselves can either be gold, or a specific currency such as the dollar or euro
Hard currency
- Not likely to depreciate suddenly or fluctuate greatly in value
- USD, euro, canadian dollar, british pound sterling, japanese yen, australian dollar, swiss franc
7 Countries with largest gold reserves as of nov 2020 UGIFRCS
- US - Russia
- Germany - China
- Italy - Switzerland
- France
Deposits with IMF
- International monetary fund - organization of 189 countries working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world

The Balance of Payment Account

● A hypothetical illustration: deficits and debts
- Current Account
- Capital Account
- Inflow
- Outflow
- Amortization
The Issue of Payment Deficits
● Some initial policy issues
- International reserves
- Restrictive fiscal and monetary policies
 - Structural adjustment
- Stabilization policies
- Special drawing rights (SDRs)
Structural adjustment
- Set of economic reforms that a country must adhere to in order to secure a loan from the IMF or
World bank
- A set of economic policies including reducing government spending, opening to free trade and
so on
Stabilization policy
- Strategy enacted by govt or central bank
- Aimed at maintaining a healthy level of economic growth and minimal price change
- Requires monitoring the business cycle and adjusting fiscal and monetary policy as needed to
control abrupt changes in demand or supply
Special drawing rights/ SDRs
- Supplementary foreign exchange reserve assets defined and maintained by IMF
- Units of account for the IMF and not a country per se.
- They represent a claim to currency held by IMF member countries for which they may be
exchanged
The Issue of Payment Deficits
- Trends in the Balance of Payments
Accumulation of Debt and Emergence of the Debt Crisis
● Background and analysis
- External debt
- Debt service
- Basic transfer
● Origins of the 1980s Debt Crisis
- OPEC oil price increase
- Increased borrowing
- Excess of imports
- Lagging exports
● Origins of the Debt Crisis (cont’d)
- Debt-servicing obligations
- Debt-service payments
- Debt-servicing difficulty
- Oil shocks
- Developing countries’ two options: Curtail imports and restrictive fiscal and monetary
measures and More external borrowing
External debt
- Portion of a country’s debt that is borrowed from a foreign lenders including commercial banks,
governments, or international financial institutions
- Loans, including interest, must be paid in the currency in which the loan was made
Debt service
- Cash that is required to cover the repayment of interest and principal on a debt for a particular
period
Monetary policy
- Central bank activities that are directed toward influencing the quantity of money and credit in
an economy.
- By contrast, fiscal policy refers to the government's decisions about taxation and spending.
- Both monetary and fiscal policies are used to regulate economic activity over time.
Attempts at Alleviation: Macroeconomic Instability, Classic IMF Stabilization Policies, and Their Critics
● The IMF stabilization program
- Macroeconomic instability
- Stabilization policies
- Four basic components of IMF stabilization program:
○ Liberalization of foreign exchange and imports control
○ Devaluation of the official exchange rate
○ Stringent domestic anti-inflation program
○ Opening up of the economy to international commerce
- Such policies can be politically unpopular because they hurt the lower- and middle-income
groups.
- Less radical observers view the IMF as neither a developmental nor an anti developmental
institution.
- Tactics for debt relief:
○ Debtors’ cartel
○ Restructuring
○ Brady Plan
○ Debt for equity swaps
○ Debt for nature swaps
○ Debt repudiation
Brady plan
- Called for the U.S. and multilateral lending agencies, such as the International Monetary Fund
(IMF) and the World Bank, to cooperate with commercial bank creditors in restructuring and
reducing the debt of those developing countries that were pursuing structural adjustments and
economic programs supported by these agencies.
Debt/equity swap
- A transaction in which the obligations or debts of a company or individual are exchanged for
something of value, namely, equity
Debt-for-nature swaps (DNS)
- Can mobilize resources for protecting nature while reducing the debt burden of developing
countries
Repudiation of Debt
- The government does not recognize its obligations and refuses to pay the interest as well as the
principal.
- Repudiation is not paying off a loan but destroying it.
Odious debt
- Sovereign debt used by an undemocratic government in a manner contrary to the interests of its
people should be deemed invalid.
- In international law, odious debt, also known as illegitimate debt, is a legal theory that says that
the national debt incurred by a despotic regime should not be enforceable.
- Such debts are, thus, considered by this doctrine to be personal debts of the regime that
incurred them and not debts of the state.
The Global Financial Crisis and the Developing Countries
● Causes of the crisis and challenges to lasting recovery
● Economic impacts on developing countries
- Economic growth
- Exports
- Foreign investment inflows
- Developing-country stock markets
- Aid
● Economic impacts on developing countries
- Distribution of influence among developing countries
- Worker remittances
- Poverty
- Health and education
- General policy framework
● Differing impacts across developing regions
- China and the exchange rates controversy
- East Asia and Southeast Asia except China
- India
- Latin America
- Africa
● Prospects for recovery and stability
● Opportunities as well as dangers?
Key takeaways
The public debt is the amount of money that a government owes to outside debtors.
Public debt allows governments to raise funds to grow their economy or pay for services.
Politicians prefer to raise public debt rather than raise taxes.
When public debt reaches 77% of GDP or higher, the debt begins to slow growth.

Week 15

Finance and Fiscal Policy

Finance & Fiscal Policy: Roles and Functions

1. The role of financial system
2. Fiscal policy for development
3. State-owned enterprise
Financial system
- Helps efficiently direct the flow of savings and investments in the economy
- Financial institutions like banks play a major role
- These savings are then channelized by the banks to provide credit to different business entities,
which are involved in production and distribution.
The role of the financial system in economic development
● Six major functions of the financial system
 - Providing payment services
- Matching savers and investors
- Generating/distributing information
- Allocating credit efficiently
- Pricing, pooling, and trading risks
- Increasing asset liquidity
● Differences between developed and developing- country financial systems
Risk pooling
- Process of combining the risks facing individuals into large groups
- Can be used effectively to transfer individual risks to the entire group
- Makes it possible to calculated the risks for the group
- Standard technique that enables the provision of insurance services
Market risks
- Exists because of price changes
- Price volatility - the standard deviation of changes in the prices of stocks, currencies or
commodities
Types of market risks IECC
- Interest rate risk
- Equity risk
- Currency risk
- Commodity risk
Macroeconomic stability
- Describes a national economy that has minimized vulnerability to external shocks, which in turn
increases its prospects for sustained growth
The painful road to macroeconomic stability
● Macro stabilization has three main objectives
- Controlling inflation
- Restoring fiscal balance by reducing government spending and by raising government tax
revenues
- Eliminating the current account deficit by means of devaluation and export promotion
Financial systems and monetary policy
● Differences between MDC and LDC financial systems
● The role of central banks
Fiscal Policy for Development
● Macro stability and resource mobilization
● Taxation: direct and indirect
● Personal income and property taxes
● Corporate income taxes
● Indirect taxes on commodities
● Problems of tax administration

Fiscal policy
- Use of government spending and tax policies to influence economic conditions and borrowing
to affect the level and growth of aggregate demand, output and jobs.
- Used to change the pattern of spending on goods and services
- Means by which a redistribution of income and wealth can be achieved. By changing tax rates
on different levels of income or wealth
- Instrument of microeconomic government intervention to correct for free-market failures such as
pollution or the sub-optimal provision of public and merit goods
- Changes in fiscal policy affect aggregate demand and aggregate supply
Some key roles for fiscal policy
- Financing key areas of govt spending
- Altering the distribution of income and wealth
- Providing a welfare state safety-net for families
- Managing the macroeconomic cycle
- Improving country’s competitiveness
- Tackle market failures through intervention
Direct taxation
- Levied on income, wealth, and profit. It includes income tax, inheritance tax, national insurance
contributions, capital gains tax, and corporation tax
Indirect taxation
- Taxes on spending - such as excise duties on fuel, cigarettes and alcohol and VAT on many
different goods and services
Five factors of the taxation potential of a country
1. Level of per capita real income
2. Degree of inequality in the distribution of that income
3. Industrial structure of the economy and the importance of different types of economic activity
4. Social, political, and institutional setting and the relative power of different groups
5. Administrative competence, honesty, and integrity of the tax-gathering branches of
government
State-owned enterprise
- Public corp and parastatal agencies owned and operated by the govt
- Improving the performance of SOE
- Privatization: theory and experience
Privatization
- A government owned business operation or property becomes owned by a private,
non-government party
- Transition of a company from being publicly traded to become privately held
Is privatization good or bad?
- Privatization helps in keeping the consumer needs uppermost, it helps the governments pay their
debts, it helps in increasing long term jobs and promotes competitive efficiency and open
market economy
- It generally helps governments save money and increase efficiency, where private companies
can move goods quicker and more efficiently.
Private sector
- Part of the economy that is run by individuals and companies for profit and is not state
controlled.
- It encompasses all for-profit businesses that are not owned or operated by the government.
Public sector
- Companies and corp that are govt run
Voluntary sector
- Charities and non profit org

Week

Key Issues for the 21st Century

● Global independence and the growth of developing world markets
○ Least Developed Countries have long been dependent on developed countries
○ Developed countries are increasingly dependent on LDCs for natural resources and raw
materials, and markets for developed-country products
○ Global interdependence - mutual dependence at a global level. International trade
has made countries depend on one another for economic survival.
○ Global Independence - It means freedom of trade with any nation by crossing the
borders of one’s own nation by which the world is a market for every country. It refers to
worldwide mutual dependence between countries. There shouldn't be restrictions.
● The global environment and the developing world
○ Pollutants and their consequences for the global environment
○ MDC and LDC contributions to greenhouse gasses
○ The Global Environment Facility (GEF) was established on the eve of the 1992 Rio Earth
Summit to help tackle our planet's most pressing environmental problems. It unites 184
countries in partnership with international institutions, civil society organizations (CSOs),
and the private sector to address global environmental issues while supporting national
sustainable development initiatives.
○ The World Summit on Sustainable Development 2002, took place in South Africa, from 26
August to 4 September 2002. It was convened to discuss [sustainable development]
organizations, 10 years after the first Earth Summit in Rio de Janeiro.
○ August 27, 2019 - Leaders of Canada, France, Germany, Italy, Japan, UK and the US,
comprising the Group of 7 or G7. The French Presidency undertook an innovative format
for the G7, involving partner countries, particularly African countries, and members of
civil society.
○ G7 leaders underscored the importance of women’s participation in the labor market
and education for girls and women, especially in developing countries.
○ Climate change, biodiversity loss, and ocean and land degradation were highlighted
as interconnected global challenges that threaten peace, security, development,
health, and economic stability.
○ The Economic Crisis in Sub-Saharan Africa
■ Economic dimensions of the problem
■ Social dimensions of the problem
- Severe cuts in health and educational expenditures
- Declines in school enrollments
- Increases in malnutrition, maternal and child mortality
- Spread of HIV
■ Causes of the crisis are many and varied, but include:
- Drought
- Low community prices
 - Foreign capital withdrawal
- Reduced foreign aid
- Poor government policies
- Rapid population growth
● Globalization and intentional financial reforms
○ National economies are increasingly integrated into the global economy
○ Globalization has three main effects:
- A lessening of the power and influence of individual nation-states, esp in the
developing world
- An increased risk of financial instability
- An increase in illegal immigration from the South to North
○ Effective Management of new Global Challenges include:
- Debt relief for LDCs
- The creation of new LDC-funding sources, such as a tax on international currency
transactions (Tobin tax); curb hot money flows
- Creation of formal national bankruptcy procedure for severely indebted
countries.
- Reform of the IMF and the World Bank
○ Tobin tax
- Originally defined as a tax on all spot conversions of one currency into another.
○ Hot money
- the flow of funds (or capital) from one country to another in order to earn a
short-term profit on interest rate differences and/or anticipated exchange rate
shifts.
- These speculative capital flows are called "hot money" because they can move
very quickly in and out of markets, potentially leading to market instability.
-