Government Failure and Preferences for Markets Over Planning

 Government Failure and Preferences for Markets Over Planning

Problems of Plan Implementation and Plan Failure

The results of development planning have been generally disappointing 
The widespread rejection of comprehensive development planning based on
poor performance has had a number of practical outcomes, the most import-
tan of which is the adoption in a majority of developing countries of a more
market-oriented economic system.
What went wrong? Why has the early euphoria about planning gradually
been transformed into disillusionment and dejection? We can identity two inter
related sets of answers-one dealing with the gap between the theoretical co-
gnomic benefits and the practical results of development planning, and the other
associated with more fundamental defects in the planning process, especially as
they relate to administrative capacities, political will, and plan implementation

Theory versus Practice The principal economic arguments for planning
briefly outlined earlier in this chapter-market failure, divergences between
private and social valuations, resource mobilisation, investment coordinator-
son, and the like- have often turned out to be weakly supported by the actual
planning experience. Commenting on this planning failure, Tony Click has

noted that

it is doubtful whether plans have generated more useful signals for the future than

would otherwise have been forthcoming governments have rarely, in practice
reconciled private and social valuations except in a piecemeal mannerly because
they have seldom become operational documents, plans have probably had only
limited impact in mobilising resources and in coordinating economic policies

To take the specific case of the market failure argument and the presumed
role of governments in reconciling the divergence between private and social
valuations of benefits and costs, the experience of government polity in many
developing countries has been one of often exacerbating rather than recon
ceiling these divergences-government failure rather than market failure
Government policy often tends to increase rather than reduce the divergences between private and social valuations. For example, public policies have raised the level of wages above labour's shadow price or scarcity value by

various devices such as mutagenic legislation, tying wages to educe
notional attainment, data restructuring rates ot remuneration at higher levels on
the basis of international satay scales. Similarly, investment depreciation and allowances, overvalued exchange rates, low elective rates of protection, and credit ingratiation at low interest rates all serve to drop the private quotas, cost of capital tar Del ow s Scarcity Or associate CO st. The net effect of these factor price distortions has been to encourage private and public enterprises to
adopt more capital-intensive auction methods than would exist if public
policy attempted to correct the prices.
As another example, we noted in Chapter 8 that economic signals and
incentives in many developing countries have served to exaggerate the private
valuations of the returns to education at the secondary and tertiary levels to
a point where the palate remand for ever more years of schooling greasy
exceeds the social payout. The tendency to ration scarce high-paying employ

men opportunities by level or completed education and the policy of most

government in the developing wog to subsidise the private costs of educ-
tin at the huger levels together have led to a situation in which the social

returns to vestment in further quantitative educational expansion seem
hardly justified in comparison with alternative investment opportunities.
in view ot the forgoing examples, we may oondude that the gap between the

theoretical economic benefits of planning and is practical results in most develop-

ing countnes has beenquite large. Ihe gap between public rhetoric arnd economic
reality has been even greater. While supposedly concemed with eliminating pov-

erty, reducing inequality, and lowering unemployment many planning policaies
in developing countries have in fact unwitingly contributed to their perpetua-

ton. some ot the major explanations for this have to do with failures of the plan-
ning process itselt; these failures in turn arise out of certain specific problems.

Deficiencies in Plans and Their lmplementation Plans are often overambi-
tious. Tfey try to acComplish too many objectives at once without consideration
that 'some of the objectives are competing or even contlicting They are often
greandiose in design but vagie on specihic policies tor achieving stated objecives.
in this they have much in commort with the excessive lists of 60 to 100 or more
1S8ue areas in conditionality agreements set out by the World Bank and the Inter-
national Monetary Fund (IMF). Finaly, the gap between plan formulation and
nplemerntation is often enormous (many plans, or reasons to be discussed, are
never implemerited).

Scient and Unrellable Data The economc value of a development
t aepends to a great extent on the quality and reliability ot the statistical
uata on which it is based. When these data are weak, urnreliable, or nonex-
et as 1in many poor countries, the accuracy and ntemal consistency of
Ony-wide quantitative plans are greatly ciminisned. Ana waen uinrell-
ata are compounded by an inadequate supply of quaifnecd economists,
Suclans, and other planning personnel (as 1s also tne situation n tost
ons), the attempt to formulate and carry Out a comprenensive ana
led development plan is likely to be frustrated at all levels.


Unanticipated Economic Isturbances, Cxternat ana Intérnal
most developing COuntes have open economies that are dependentduse
vicissitudes of international trade, aid, not $peculative capital ntlows
private foreign investment, it becomes exceedingy ditficult for them to eng nd

On the

in even short-term forecastilng 1et alone togtange planing. The oil
increases of the 1970S caused havoc in most aeveiopment plans. But the ene
crisis was only an extreme case or a general tendeney tor economic factors
which mOst govermments in the develOping worid nad little control to deter-

ine the success or failure ot their development policies.

Institutional Weaknesses The institutional weaknesses of the plannine r
cesses of most developing countries include the separation of the plann
agency rom the aay-to-cday decision-making machinery of govenment: t

failure of planners, adminis trators, and poiacal ieades to engage in continuous
dialogue and internal communication about goals and strategies; and the inter
national ransfer of institutiornal planning pracuces ana or8anlzaional arrange-
ments that may be inappropriate to local conditions. In addition, there has been
much concerm about incompetent and urnqualined Civil servants; cumbersome
bureaucratic procedures; excessive caution and resistalice to innovation and
change; interministerial personal and departmental rivalries (eg, tinance min
1stries and planning agencies are often corntiicting rather than cooperative forces
in governments); lack of commitment to national goals as opposed to regional,
departmental, or smply private objectives on the part or political leaders and
government bureaucrats; and in accordance with this lack ot national as oPposed
to personal interest, the polifical and bureaucratic corruption that is pervasive in
many governments.

Lack of Political Will Poor plan performance and the wide gap between plan
formulation and plan implementation are also attributable to a lack of commit
ment and political wiil on the part of many developing-country leaders and high-
level decCIsion makers. Poitical will entails much more than high-minded
purposes and noble rhetoric. It requires an unusual ability and a great deal or
political cOurage to challenge powerful elites and vested-interest groups and to
persuade them that development 1s in the long-run interests of all citizerns even
though some ot them may sufer short-term losses. In the absence of their sup"
port, be it freely otfered or coerced, a will to develop on the part of politicians1s
likely to meet with staunch resistance, frustration, and internal conflict.

Conflict, Postconflict, and Fragile States In extreme cases, violent co
fiict or the large-scale failure of a state to otherwise function meaningruly nas
resulted in catastrophic failure ot even the most basic development objecuves
in these cases, development assistance is usually ssential. This topic Wll D
examined in Chapter 14, section 14.6.

The 1980s Policy Shift toward Free Markets

As a result of the disenchantment with planning and the perceived falure
Or govemment intervention, many economists, some finance ministers


developing countries, and the heads of the major international development

wanizations advocated eteae O e market mechanism as a key
O ment for promoting greater etnCIency arid more rapid economic growth,
ns sident Ronald Keagan made a tamous reference to the "magic of t
J.s. ace" in a 1981 speech at Cancun, Mexico. If the decade of the 1970
mark ald be de escribed as a period of increased public-sSector activity in the pursuit
of more equitabie aevelopnen, the 1980s and 1990s witnessed the reeme
nce of free-market economicS.
genart of their domestic-market liberalization programs, a majority of
loning countries, with diftering degrees of seriousness of purpose, gener-

a Tht to reduce the role or tne puoe sector, encourage greater private
of se consumer goods. The intent of such changes was tO 1 1uDricate ua the the wheels prices

sector activity, an e tte cistortions in interest rates w Private-

of the market iecrdrusin, thereby achieving
investments. ln addition, these "liberalizino POauctive allocati
improve ther comparauve advantage in the international eco
ing exchange rates, promong exports, and eliminating trade barriers.
ong the international organzations preaching the virtues of the free
market were the IMF and the World Bank, in addition to several bilateral
donors such as U.S. Agency tor International Development (USAID). The
IMF required substantial market liberalization programs and policies to
improve comparative advantage and promote macroeconomic stabiliza-
tion as conditions for access to its higher credit windows. The World Bank
carefully scrutinized its project lending to ensure that the projects proposed
could not otherwise be undertaken by the private sector

ents. In addition, these detalzing aeveloping countries Sought top

Government Failure

Just as markets are permeated by imperfections, so too is government subject to
a variety of failures. Thus, while in theory government can correct a market
failure, sometimes in practice it fails to do so despite costly expenditureand
in some cases might only make matters worse. 1hus, government regulations
may improve industry efficiency, such as by breaking monop01y power, arnd it
may otherwise improve social welfare, such as by limiting polunon (as we saw
in Chapter 10). But poorly designed regulations could stifie emerging indus-
tries or even facilitate corruption. And once established, special interest groups
ay Spring up, which find ways to benefit from regulations through rent seek-
uch groups may resist modifications in regulations even long after condl-
tions that led to them have changed; this problem is examined in more detal

below in Section 11.7.

nere 1s a general presumption that when markets are functioning well,
gOvernment should not intervene-on efficiency grounds there is generauy
case for doing so. Instead, often there are great benefits to allowing ceiso
De dde on a decentralized basis. In general, individuals and families NiOW
ure about their preferences and conditions than govemment cat i
sE government failures are sametimes serious even regarng r s
aerventions, with overall development planning the scope o failure t is
etAs we saw in Chapter 4, government can help by pushing an e
aDetter equilibrium, which the unaided market cannot

ttaing

ut


govemment could potentially make things that much worte by pushing h
economy into a bad equilibrium. Similarly, governnent programs can redue
social risks; but it has been observed that developent plänning could increa
risks because of problems of correcting mistaks viarkets tnay make serin
mistakes; but through its decentralized dectsion making mechanisms, ote
markets can more easily self-correct. And while miarket generally cannot ove
come coordination failures (see Chapter 4), coordination acrons government
departments -or national and regional levels O govetent carinot always
be readily achieved.
More generally, development planning which sornetimes relies on see
ing broad consensus, may be more rigid than markets, Vwnich can have a more
agie response to unexpected shockS Such as changes in global markets. In
other cases, rather than resulting from consensus, development planning may
be heavily influenced by powerful interest groups. The result may be the aug
mentation of the pOwer ot elites, rather than achievement of more egaltarian
development goals. Development planning also faces the broad problemn of
incentive compatibility, meaning that the goäls and mechanisms of the plan may
be inconsistent with the self-interest of many of the key actors in the economy
Even when workers are employed directiy 1or government, their incentives for
hard or creative work may be less than lor private sector workers.
But just as market tailure does not always justify public intervention
(because govermments, as noted, can often make things worse), so too govem
ment failure is not necessarily an argument for private markets. For example,
in South Korea, the Pohang Steel Company was publicly operated and highiy
efficient until its privatization in 2000, whereas the Steel Authority in India,
also publicly owned and operated, has been a model of inefficiency. Subsi
dized interest rates exist in both East Asia, where growth accelerated, and n
Latin America, where it stagnated. Unproductive rent-seeking activities can
Just as easily be found in poorly functioning private markets as in inefficient
State operations, Simple judgements about the relative merits of public ves
private economic activities cannot therefore be made outside the context
specific countries and concrete situations. But for developing countries he
on extending market reforms, either because of their dissatisfaction woe e
Pe ce or their public sectors or because of IMF or World Bank presume
a number of horticultural preconditions and economic practices must