Models of Economic Planning - Essay Example

Economic Development Introduction: In many of the developing nations, economic planning has become necessary tool for development strategy. Ithelps the government to initiate corrective measures about market failures and other decisions. In short economic planning is a governmental method to tackle the economic decision-making and economic outcomes. The aim of economic planning is also to rearrange the financial and manpower resources. The popular models of planning are: 1. Input-Output models 2. Applied macroeconomic growth models 3. Project appraisal in context with shadow prices and decision criteria. The development planning in practice does not prove fruitful in reality. This is because of the facts that the objectives are not well defined; the plans are over ambitious and the relevant data are insufficient or incorrect. The undesired circumstances may hamper the desired results of the plan. There are several factors, which affect the role of Government in the development. Some of them are: Requirement of education and employment issues, migration for employment between rural and urban areas, choice of techniques and creation of employment, structure of economy. In view of these issues, market liberalization has an upper edge over the administrative planning in the economic development. There has been an attempt to reduce the role of public sector and encourage the growth in private sector. (Michael P. Todaro) Development in a broad sense is an ambiguous concept and it is highly subjective, specific and widely debatable. The developed countries (DCs) and the less developed countries (LDCs) have differences in many aspects in relation to the development issue. The DCs have higher- income levels, capital stocks, education, technology, industries, infrastructure as compared to the LDCs. Even the economic and political institutions in DCs are more stable, effective and democratic. There is major concern of the relevant factors such as GNI, purchasing power-parity (PPP) in relation with GDP, Human Development Index in the Economic development of a nation. After World War II many theories emerged for the economic development of the nations. (Olli Varis, 2006) Various factors and their concern with the economic development: Technology and Poverty: Technological up gradation has a direct impact on the employment and poverty of the country. In a developing economy goods are produced by the skilled and unskilled labour. The unskilled labours are the poor population of the country who are uneducated. Any technological progress increases the demand for skilled or educated labour and thus generates unemployment for the poor/uneducated people. Government has to take care of such advancements and efforts are required for the utilization of unskilled labours and the subsequent rise in their wages proportionate to those of skilled labours. (Maurizio Bussolo, John Whalley, OECD 2003) Public Health: The developing economies are facing the problem of widening the gap between rich and poor. The economic development has caused to rise the economic extremities. Out of the top ten poor countries of the developing economies, which are situated in Sub Saharan Africa (SSA), most of them have average GNI per capita of US$ 251. An average life expectancy of these nations is 43.9. The further health problems due to epidemics of HIV/AIDS may lower down the average life expectancy. Insufficient education level, low quality and insufficient food, inability to afford better healthcare services can produce weaker human resource. The weaker human resource has negative effect on the productivity of the country. Though the governments of the developing economies are making efforts to provide better health services and implementing projects to improve the quality of life of all sections of society, the results are not encouraging. (Inderscience) Climate Change: The Clean Development Mechanism (CDM) proposed the participation of Developed Countries (DCs) and Less Developed Countries (LDCs)/Developing Countries to prevent climate change. The CDM along with Global Environment Facility (GEF) by developing countries can help the prevention of climate change. As per the Berlin Mandate, developed countries are bound to transfer the climate friendly technology to developing countries and also to provide them financial resources. The efforts towards CDM are helping the developing countries to make technological up gradation, better industrial resources and funding. However the GEF resources are not sufficient in terms of the cost of climate change. The governments are also acting in coherence with the CDM but their resources are limited and needs the help of developed countries. Private sector companies are encouraged to participate in the GEF to help the developing countries to prevent climate change. (iepe, Climate Change) Security and Crime: The crime rates in the developing countries are rising. The crime and security has a direct correlation with the global political economy. The globalisation process has created insecurity of jobs in the global labour market. The restructuring of Soviet Union, the economic opportunities in India, capitalist transformation in China and dynamic change in the third world economy has made more than 500 million additional workers available in the global labour market. The western developed countries have a major command on the International Monetary Fund (IMF). The World Bank along with IMF have forced the developing countries to reduce the participation of government bureaucracy in the market and to privatize the state sectors. This helped the western debtors to serve for extended period and also to generate new openings in market. This kind of setup of democracy and market has produced socially non-uniform society. More than half of the global population remains aloof from the regular market, where law of the state holds good. The development process has thus caused irregularity and lawlessness in the developing markets. Most of the developing countries have huge supply of human resource in a market which is already oversupplied. Simultaneously there is threat of outsourcing and destroying of existing jobs in the global wage competition. All these factors have a combined effect of perpetual crime rate rise and lesser security to individuals and market goods. The governments can implement policies for employment generation and also to protect the economic and social interests of its population. Such measures can reduce the crime rate up to some extend. (Crime and Violence) Consumer Protection: Considering the interests of the consumers in the developing countries and others, United Nations has provided guidelines for consumer protection. Consumer faces inequality in economic terms, bargaining power and educational levels. Consumer shall have right to access non-hazardous goods as well to have right to promote economic and social development. As per the directives, the governments shall assist to facilitate production and distribution of goods as per the requirements of the consumers. Ethical practices are to be promoted among the people involved in the process of production and distribution of the goods and services to the consumers. Developing market conditions that can provide better choice to the consumer at a lesser price for the goods. Government shall maintain a strict consumer protection policy as per the guidelines set internationally. Every government shall consider economic, environmental and social circumstances of the country and the requirements of the population along with the cost of the goods while prioritizing the consumer protection. The legitimate requirements of the consumers' are- protection from hazards; protection of economic interests; access to adequate information for making informed choices; education about social, economic and environmental impacts of individual choices; redress mechanism; opportunity to form consumer forum or approach such organizations. There is lack of education, insufficient information and unequal priority of choice for the consumers in developing countries. The governments of developing countries shall make efforts to implement consumer protection in line with international agreement. (UN, Consumer Protection) Poverty Eradication: It was expected since decades that the economically well established west and north shall assist the economically depressed south for economic development. It was decided that developed countries should contribute 0.7 % of their gross domestic product as an official development assistance (ODA). It is obvious that developing countries can get rid of their dependencies on economically potential nations only when their own governments can mobilize domestic resources to establish essential public goods and services. The developing countries lose billions of dollars of their income every year. The causes for these losses are- Failure of tax systems as a result of corrupt financial administration; Frequent tax exemptions for foreign investors; globalization process has made it easy for the corporate to manipulate prices of internal transactions so as to make profits accountable in countries where taxes are less; trade liberalization and tariff reduction also causes major loss of revenue to the developing countries. To reduce the financial poverty, the developing countries needs to take corrective measures - by improving their financial administration they can add billions of dollars in their economy every year. The false declared import-export prices can bring sizeable income after proper regulation. On a global scale the loss of revenue on taxation ground amounts to USD 255 billion a year. Twenty percent of this amount caters for the developing countries. If the governments of developing countries start implementing the above discussed methods, there can be effective reduction in their financial poverty. (Peace Journalism, May 2007) Financial Regulation: The capital flow volatility can have major impacts on the economy of the developing countries. The reduction in capital inflows reflects into reduction of the overall demand of domestic assets. This can lead to increase in interest rates and rise in prices of the goods and assets. To tackle such problems "clusters" of reforms have been identified for the developing countries. First cluster permits liberalization of interest rates and unlocking the credit controls. The second cluster provided the mechanism for improving the regulatory and supervisory frameworks. Still there were financial crisis due to financial inflows. Prudential regulatory policies are primarily of two types. The first aims at controlling financial aggregates like liquidity expansion and credit growth. The second targets the "pricing risk right" which provides incentives to financial institutions to avoid unnecessary risk taking activities. This regulation makes the financial institutions to manage the costs internally, which are associated with particular risks of the economic environment where they operate. The regulation also suggests high reserve requirement for developing countries. The high reserve serves as the cushion in the situation of sudden withdrawal of deposits and reversal of capital inflow. The implementation of the above financial regulations by the governments shall definitely augment the economy of developing countries. (Liliana Rojas- Suarez, 2004) Law and Order: The requirement of law and order in a developing country is mainly concerned with the administration, quality of bureaucracy, level of corruption, government expropriation, repudiation of contracts by the government. The implementation of law is essential for growth rates and influential investment rates. The land and property rights are also to be protected. The land tenure system and privatization also makes it customary to have different dealings in a legal way to have new forms of property rights in the land. After world war II the Asian nations like Taiwan, Korea and Japan implemented land redistribution system which enhanced their agricultural productivity and decreased the economic inequalities. For commercial purposes and to have long-term dealings, well established contact law and civil court system are very much essential. With respect to taxation, reforms are necessary for reducing the rise of income tax rates and increasing reliance on value added tax systems. In developing countries there is huge corruption in tax administration and collection. Law is also crucial for maintaining certain degree of administrative control over the crime and violence. The crime can affect- stock of physical capital; human capital; social capital; government capacity.( Kevin Davis & Michael J Trebilcock, 1999) Now we shall be considering some other important parameters as a measure of Economic development for the developing countries. Corruption Perceptions Index (CPI): It is an important parameter; it calculates the degree of corruption as noticed by the financial market/ business. It ranges between 0 and 10, the higher the value of CPI, the lesser the corruption. These can be studied in Table 1. It is seen from the Graph 1 (see Appendix) that the countries with better GDP per capita PPP and higher value of CPI score are the developed countries like Denmark, Singapore and Germany. On the other hand the lesser GDP per capita PPP and lower CPI score countries are less developed countries e.g. Kenya, Tanzania, India and Vietnam. CPI score provides a strong measure of Economic development of the nation. Index of Economic Freedom: Another important measure of the Development of the economy of a country is the Index of Economic Freedom. While calculating the Index of Economic Freedom, several parameters are taken into consideration such as Freedom to trade in foreign lands, security of property rights and legal protections. The Index runs from 0 to 10. Higher the Index value, more the degree of freedom. We shall study the degrees of freedom from the Table 2. It is seen from the Graph 2 that countries with higher GDP per capita PPP and more degree of freedom have more developed economies such as Botswana, Gabon, Namibia. The countries having lesser GDP per capita PPP and low degree of freedom are the Less developed countries like Congo, Sierra Leone, Madagascar. (Michael P. Todaro) Domestic borrowing plays a crucial role in the development process. In economic context it is termed as original sin, which refers to the inability of developing nations to borrow abroad in their own currencies. This depreciates the domestic currency and in effect the capacity to invest in the foreign land. Government's role, domestic policies and institutions are important for countries ability to borrow abroad in their own currencies. (Brian Kahn) Summary and Conclusion: The economic progress in developing countries has taken an upward swing after World War II, but the results are not sufficient to boost the on going efforts. Poverty and unemployment has become structural flaws in the economy of developing countries. Technological up gradation and financial assistance to developing countries has become a prime concern with respect to the climate change. The governments of developing countries can make financial regulations to protect the financial institutions and inflow of capital into the market. The government can also keep vigil on taxation and improve administration to reduce corruption and mal-practices which can help generation of revenue and also to reduce the financial dependency on other developed countries, IMF and World Bank. The government of these countries has made efforts to reform land and property rights, this can help in the development of industries and businesses. The government needs to augment efforts for consumer protection and their specific needs. Law and order maintenance by the governments not only controls the crime but protects the market goods and the business objectives. Policies regarding redistribution of wealth, assets, access to adequate health services and food supply can certainly generate a stronger human resource which can help to progress the economic development. Appendix Country GDP per capita PPP($) CPI Score Azerbaijan 2850 2 Botswana 6872 6 Canada 26251 8.9 Costa Rica 8860 4.5 Denmark 25869 9.5 El Salvador 4344 3.6 Germany 23742 7.4 Honduras 2340 2.7 India 2248 2.7 Italy 22172 5.5 Kenya 1022 2 Malawi 586 3.2 Moldova 2037 3.1 Nicaragua 2279 2.4 Panama 5875 3.7 Portugal 16064 6.3 Singapore 20767 9.2 South Korea 15712 4.2 Tanzania 501 2.2 Turkey 6380 3.6 Uruguay 8879 5.1 Vietnam 1860 2.6 Table 1. Graph 1. Country GDP per capita PPP($) Index of Economic freedom Benin 896 4.9 Botswana 6554 6.6 Cameroon 1529 5.1 Central African Republic 1106 4.3 Chad 842 4.5 Congo, Dem Rep 834 3.1 Congo Rep 1019 4.8 Cote d'Ivoire 1627 5.7 Gabon 6553 5.1 Ghana 1792 6.4 Guinea-Bissau 894 4 Kenya 1037 6.8 Madagascar 786 3.9 Malawi 574 4.6 Mali 723 4.7 Namibia 5385 6.4 Niger 729 4.8 Nigeria 830 4.7 Senegal 1342 4.7 Sierra Leone 506 3.2 South Africa 8993 7.3 Tanzania 484 5.6 Togo 1471 4.6 Uganada 1081 6.1 Zambia 784 5.5 Zimbabwe 2811 5 Table 2. Graph 2. References Economic Development, Michael P. Todaro, Stephen C. Smith, Chapter 16 http://wps.aw.com/aw_todarosmit_econdevelp_8/0,6111,284834-,00.html Kevin Davis & Michael J Trebilcock, What Role Do Legal Institutions Play in Development http://www.imf.org/External/Pubs/FT/seminar/1999/reforms/trebil.pdf Regional Development Policy vs. Industrial Policy http://www.cherry.gatech.edu/TRP/proceedings/2001/01Lee.doc Import Substitution Policy after World War II http://mit.edu/jinhua/www/GEBible/Exam_Rajendra.pdf Evan Lewis, Trade Liberalization and Development http://cme-mec.ca/pdf/trade.pdf Olli Varis (2006), Development Theories http://global.tkk.fi/Kirja_PDF/Chapter%203.2%20Development%20Theories.pdf Olu Ajakaiye, Role of the State in Financial Sector Development in Sub Saharan Africa http://www.fondad.org/publications/africaworld/Fondad-AfricaWorld-Chapter7.pdf Brian Kahn, "Original Sin" and Bond Market Development in Sub-Saharan Africa http://www.microsoft.com/isapi/redir.dllprd=windows&sbp=mediaplayer&plcid=&pver=6.1&os=&over=&olcid=&clcid=&ar=Media&sba=RadioBar&o1=&o2=&o3= Inderscience Publishers, Human and economic development in developing countries http://www.inderscience.com/offer.phpid=5510 Maurizio Bussolo and John Whalley, OECD working paper No 219, Nov 2003 http://www.oecd.org/dataoecd/59/22/2503649.pdf iepe, How could developing countries participate in climate change prevention. http://webu2.upmf-grenoble.fr/iepe/textes/Cahier21bis.PDF Crime and Violence: Global Economic Parameters http://www.libertysecurity.org/article940.html United Nations Guidelines for Consumer Protection http://www.un.org/esa/sustdev/publications/consumption_en.pdf Peace Journalism, May 2007 http://peacejournalism.com/ReadArticle.aspArticleID=19970 Liliana Rojas- Suarez, Oct 2004, Domestic Financial Regulation In developing Countries http://www.new-rules.org/docs/ffdconsultdocs/rojas-suarez.pdf Read More