Planning and Economic Development: changing role of Markets and Planning, Private-Public Partnership

"With the change in economic policies, relative role of market and state also changes."
Do you agree with the statement? Illustrate your answer with the help of suitable examples. (2007, I, 60)

BACKGROUND OF PLANNING

Post Second World War, the decolonisation process started which led to the creation of newer states. These countries
apart from facing distinct social challenges, faced several economic challenges:

1. The economies were backward and stagnant

2. Agriculture was the principal source of subsistence for the bulk of the population
3. Secondary and tertiary sectors were relatively insignificant
4. Lack of entrepreneurship was driven by instinct of survival, no initiative to growth (reconciliation with poverty)
5. Large scale unemployment and poverty

In addition, the countries in Europe were devastated by the Second World War. The state’s active role in the economy
and public ownership of key industries was widely accepted by developed countries as well after World War II,
especially in Europe

These problems could not have been solved by free market forces. Intervention of the government, particularly the
direct participation in the process of growth and development was the need of the hour. This implied recourse to
economic planning.

Economic Planning: It is the process by which a central authority defines a set of targets (related to growth and
development of the country) to be achieved within a specified period of time, keeping in view the needs and means of
the needs and means of the country. Economic planning means utilisation of country's resources in different
development activities in accordance to national priorities.

The dominant view in development economics in the fifties and sixties also laid stress on the planning by the State

Arguments in favour of planning:

1. Externalities: Positive externalities in terms of infrastructure development (indivisibilities concept included) and
negative externalities in terms of environment conservation. Coordination failure hypothesis.
2. Social goods and inclusion: Provide welfare to people excluded by markets. Financial inclusion as well.
3. Market imperfections: Unhealthy practices, weak unions, poor peasants. Asymmetric information, adverse
selection (fear of making bad loans makes them cautious and curtail lending and this reduced lending with the
pressure to maintain profits induces them to riskier projects) and moral hazard can also lead to market
inefficiency.
4. Mobilization of resources: Private sector may not be big enough or financial markets may not be big enough for
it to mobilize resources.

Fall of the Socialist Planning

1. Its drawbacks became evident when Soviet growth fell from 10% to 2% in 80s and it faced shortage of consumer
goods and social indicators began to worsen. Similar was the experience in E Europe. China was saved only as it
pursued reforms.
2. In socialist planning, the prices are distorted, resources are allocated inefficiently and firms have little incentive
to become efficient and improve quality.

ROLE OF STATE AND MARKETS

 1. State plays a central role in economic planning- Centralised Planning
2. The role of the State as an 'Interventionist State' is much larger than in neo-liberal economic policies. Here, the
state intervenes to regulate and control the market forces so as to maximise welfare of the relatively poorer
sections of the society.
3. Regulatory role of the State: There is regulated development of private sector, so as not to allow concentration
of economic power through private enterprises.
4. State led industrialisation: The development of heavy industry required high capital mobilisation as well as large
gestation period. Hence, in this form of economic planning, industries of strategic significance were developed on
a priority basis through public-sector enterprises.
5. High tariffs would protect domestic infant industries.
6. Restrictions on capital flow- so as maintain a low exchange rate to ease the imports of capital goods.
7. The markets of factors of production as well as final goods are distorted, due to state intervention, which affects
prices as well production/ consumption.
8. Due to the overbearing State, the creative forces of the market are not unleashed. This eventually led to
stagnation of the economy

Creative Function of Markets

Markets also have a role to provide an environment for change which expands the PPF. This is called the creative
function of markets.

Relative importance of State over markets

Neo- Classical Counterrevolution: Market Fundamentalism (the era of Neo-liberal economic policy)

From the late 1970s, economic policy shifted in some developed countries away from strong state intervention toward
greater reliance on free markets. The neo-liberals argue that permitting competitive free markets to flourish, privatising
state- owned enterprises, promoting free trade and export expansion and eliminating the plethora of government
regulations and price distortions in factor, product and financial markets. Both economic efficiency an economic growth
will be stimulated.

ROLE OF STATE AND THE MARKETS

 According to the neo-liberal economic policy, markets alone are efficient

 The role of the State is to facilitate the operations of markets through selective areas through selective
intervention. Government intervention is needed to address market failures that arise due to “externalities,”
“imperfect competition,” and “information asymmetry,” all making market solutions inefficient.
 The success and failure of developmental efforts depend upon the nature, existence and functioning of a
country's fundamental institutions. Good governance requires transparency, accountability, and wide citizen
participation; rule of law and political stability; and control of corruption. Good governance also requires strong
state capacity to design and implement good policies.
 Maintaining economic stability. In a modern market economy, the government plays an important role in
managing business cycles and maintaining macroeconomic stability through monetary and fiscal policies.

Changes in Planning due to Liberalization

1. Planning would only be partial.

2. Change in emphasis of direct government expenditure from economic sectors to social sectors.
 3. Planning to be based on consent and participation from multiple stakeholders. Instead of firm allocations, it
would amount to fixing broad targets and setting right policy environment.

PUBLIC PRIVATE PARTNERSHIP

(Use GS-3)

Welfare indicators and measures of growth - Human Development Indices.

The basic needs approach.

Distinguish between economic growth and economic development. What desirable changes are necessary for achieving
the objective of economic development? (2006, I, 60)

Development is seen as an improvement in incomes (and eradication of poverty), health, education,equality of incomes,
achievement of gender equality and good environment.

Evolution of the concept of development

Development a synonym for economic growth: In 1940-50's, development was viewed as progress of economic activity
in which countries move from traditional sector through a transition of industrialisation towards tertiary civilization,
where the service sector dominates. Hence, economic development was synonymous to economic growth.

In the 1960's and early 1970's, the development community increasingly believed that the state needed a bigger role
than simply being a source of capital (as envisioned in the balanced growth models). Hence, the role of economic
planning with the state as being the central authority for charting out plans and programs for economic development
became important. (Emergence of basic needs approach)

In the 1980s, the neo- liberal economic policy became popular, which focussed on less government and freer markets.
There was a slump in government spendings in the face of low GDP growth rates, which shifted the focus away from
equity to efficiency.

In 1990's, development slowly showed a human face again. Market fundamentalism was critiqued because they
produced socially unacceptable results and lacked attention to socio-economic problems on the marginalised sections.
UNDP launched the Human development report in 1990 which put people at the centre of development.

(Emergence of the capability approach)

Sustainable development approach: It addresses both intra generational as well as inter generational equity. It gives high
priority to poverty reduction, productive employment, social integration and environmental regeneration. Raising per
capita income is just one part of sustainable development. It has other more specific goals as well like bettering their
health and educational opportunities, giving a clean environment etc.

GDP as a measuring rod to capture the economic well-being of a nation

Two views

 GDP correlates well with the measures of economic development: better health, life expectancy, literacy follow
in some natural way from the growth of per capita GNP. Typically, the countries among the bottom of the HDI
are those belonging to low per capita income classification of the World Bank
 Another view is that the correlation between GDP and other measures of economic development is not
automatic. Hence, per capita GDP fails as an adequate measure and must be supplemented by other indicators
directly to get a complete picture on economic development.

World Bank's Concept of Development

During the 80s, WB championed economic growth as the goal of development. But in the 1991 report it admitted that
growth was not an end in itself and the challenge was to increase the quality of life of people.

Sen and Dreze on Freedom and Capabilities

1. One way of seeing development is in terms of the expansion of real freedoms that the citizens enjoy i.e. an
expansion of human capability.
2. Capability refers to the alternative combinations of functioning from which a person can chose. Even relative
poverty can lead to curtailment of absolute capabilities.

Index of Human Development

Importance:

1. To provide a quantitative measure to understand the socio-economic condition of the country

Intertemporal comparison: To gauge the improvement/ degradation in the social parameters of the country over a
period of time. The lessons may be useful in improving implementation of certain schemes and launching new schemes.

Inter-country comparison: Help learn best practices from other countries

2. "If you can't measure it, you can't manage it'.

What are the human development indices used for international comparison of status of development? Elaborate the
methodology used for developing the HDI.

 Physical Quality of Life Index ( Morris 1979)

A composite index from three indicators of development: infant mortality, literacy and life expectancy conditional on
reaching the age of 1.

What is HDI? Give its limitations as a measure of economic development and suggest improvements. (2009, I, 20)

 Human Development Index (1990) ( created by Mahbub-ul- Haq)

The Human Development Index (HDI) is a summary measure of achievements in three key dimensions of human
development: a long and healthy life, access to knowledge and a decent standard of living

Based on three measures of quality of life

 To measure a long and healthy life, life expectancy at birth is used. This measure will indirectly reflect infant and
child mortality.
 The second is a measure of educational attainment of the society.

This measure is itself a composite: mean schooling years in adult population (with weight 2/3) and Expected years of
schooling for school age children) (with weight 1/3). Earlier the criteria used to be adult literacy rate and gross
enrollment ratio.

 The last component is GNI per capita (PPP $), as a standard of living. It is adjusted somewhat after a threshold
(around $5,000 in PPP dollars, 1992) is crossed. Less weight is given to higher incomes after this point, on the
grounds that there is diminishing marginal utility to higher incomes.

The HDI is the geometric mean of normalized indices for each of the three dimensions.

Earlier, the HDI was calculated by taking a simple average of the three indicators.

Result Evaluation

1. HDI ≥ 0.800 indicates high human development.

2. 0.799 ≥ HDI ≥ 0.500 indicates medium human development.
3. HDI < 0.500 indicates low human development.

Limitations of Human Development Index

 The creation of composites from such fundamentally different indicators as life expectancy and literacy is a bit
like adding apples and oranges.
 There is formula for the calculation of HDI is ad-hoc. Why is it that all the three measures are given equal
weightage while calculating, and not per capita income more weight than education?
  The calculation of the HDI does not keep in mind the history of the development journey of the country. For
instance, the development journey of India has been different from say a homogenous society like Norway. In
addition, the size of population greatly varies.

PQLI Vs HDI

PQLI captures only physical and social wellbeing. HDI captures both economic and social well-being.

Human Poverty Index (HPI)

The Human Poverty Index (HPI) is an indication of the standard of living in a country, developed by the United Nations
(UN) to complement the Human Development Index (HDI). In 2010, it was supplanted by the UN’s Multidimensional
Poverty Index.

 Multidimensional Poverty Index (Began in 2010)

 MPI is based on the idea that poverty is not unidimensional (not just depends on income and one individual
may lack several basic needs like education, health etc.), rather it is multidimensional.
 It uses micro data from household surveys
 MPI uses three dimensions and ten indicators which are:
A. Education
B. Health
C. Standard of living

Each person is assigned a deprivation score according to his or her household’s deprivations in each of the 10 indicators.
The maximum deprivation score is 100 percent, with each dimension equally weighted; thus, the maximum deprivation
score in each dimension is 33.3 percent or, more accurately, 1/3.

The deprivation scores for each indicator are summed to obtain the household deprivation score. A cutoff of 1/3 is used
to distinguish between poor and nonpoor people. If the deprivation score is 1/3 or higher, that household (and everyone
in it) is considered multidimensionally poor.

People with a deprivation score of 1/5 or higher but less than 1/3 are considered to be vulnerable to multidimensional
poverty. People with a deprivation score of 1/2 or higher are considered to be in severe multidimensional poverty.

The headcount ratio, H, is the proportion of multidimensionally poor people in the population:
where q is the number of people who are multidimensionally poor and n is the total population.

The intensity of poverty, A, reflects the average proportion of the weighted component indicators in which
multidimensionally poor people are deprived. For multidimensionally poor people only (those with a deprivation score s
greater than or equal to 33.3 percent), the deprivation scores are summed and divided by the total number of
multidimensionally poor people: (similar construction to the income gap ratio)

where si is the deprivation score that the ith multidimensionally poor person experiences

MPI is significant as it recognizes poverty from different dimensions compared to the conventional methodology that
measures poverty only from the income or monetary terms.

- National Multi-dimensional Poverty Index

Human development dashboards

The dashboards allow partial grouping of countries by an indicator—rather than complete grouping by a composite
measure, such as the Human Development Index (HDI). For each indicator in the dashboards, countries are divided into
three groups of approximately equal size (terciles): the top third, the middle third and the bottom third. The intention is
not to suggest the thresholds or target values for the indicators but to allow a crude assessment of a country’s
performance relative to others.

 Gender Inequality Index

The Gender Inequality Index (GII) reflects gender-based disadvantage in three dimensions— reproductive health,
empowerment and the labour market. It shows the loss in potential human development due to inequality between
female and male achievements in these dimensions.

Gender Inequality Index

1. Reproductive health: As measured by MMR & adolescent fertility rate.

2. Empowerment: Proportion of women receiving secondary education to men receiving secondary education and
% representation in parliament.
3. Labor force participation.

There are two approaches that define poverty as a state of multiple deprivations.

A. BASIC NEEDS APPROACH

B. CAPABILITY APPROACH

As explained by Paul Streeten, the Basic Needs Approach aims to provide the opportunities for full physical, mental and
social development of the people. However, in operational terms, it focuses on the minimum requirements for a decent
life- health, nutrition, literacy. Under this approach, the state’s programs were designed to provide the basic minimum
needs to the people, such as shelter, sanitation, food, health services, safe water, primary education, housing and
related infrastructure.

The income approach recommends measures that raise the real incomes of the poor by making them more productive,
so that the purchasing power of their earnings is adequate to enable them to buy the basic needs basket. The basic
needs approach, in the narrow sense, regards the income-orientation of earlier approaches as inefficient because :

1. There is some evidence that consumers are not always efficient optimizers, especially concerning nutrition and
health, or when changing from subsistence farmers to cash earners. Additional cash income is sometimes spent
on food of lower nutritional value than that consumed at lower levels, or on items other than food.
2. The manner in which additional income is earned may affect nutrition adversely. Female employment, for
example, may reduce breast feeding and, therefore, the nutrition of babies, even though the mother's income
has risen, or more profitable cash crops may replace "inferior" crops grown at home.
3. There is maldistribution within households, as well as between households; women and children tend to be
neglected in favor of adult males

Two major themes:

1. How to provide the groups with enough resources (income): Two strategies
- Trickle down: Achieve such a high rate of economic growth such that due to multiplier approach, the poorest
target groups see a rise in incomes such that they can buy the basic needs without the need for explicitly
redistributive policies.
- Redistribution: This can be achieved through taxes on the rich, which are to provide income benefits to the poor.
It can be also achieved by redistributing existing productive assets (such as land)
2. The second major theme concerns the way in which individuals or families spend their income.
- Unless government does intervene directly in some way to regulate the pattern of demand and supply, then a
Basic Needs policy is, in its material needs' aspect, no more than a Minimum Incomes policy, with the minimum
requisite income set at that level at which consumers will in fact automatically choose to spend it in such a way
as to purchase the requisite minimum amounts of the specified Basic Needs.

The Basic Needs approach tends to put great emphasis on the usefulness of public participation in management of these
services

CAPABILITY APPROACH (Amartya Sen)

This approach presents a notion of poverty that goes beyond income and basic services. Poverty is seen in terms of
capability deprivation: income is just a means, while capabilities are an end people pursue and freedoms to achieve
those ends. However, low income is a major cause of capability deprivation. In this approach, low income is only
instrumentally significant while deprivations are intrinsically important.

Poverty is seen as the failure of some basic capabilities to function- a person lacking the opportunity to achieve some
minimally accepted level of these functionings.

1. Physical functionings: being well nourished, being adequately clothed and sheltered (this is covered under the
basic needs approach)
2. Social functionings : taking part in community life, being able to appear in public without shame (for instance,
caste system will lead to capability deprivation)
3. The opportunity to convert personal incomes into capabilities to function depends on a variety of personal
circumstances including age, gender, disability, social surroundings.