Case Against State Planning
The fruits of development planning has been very
disappointing - after 40
years the process has simply failed to deliver higher output and income in
almost all cases. Why?
q
Government planning may be more rigid and inflexible than
private decision making because complex decision-making machinery may
be involved in government.
q
Governments may be incapable of administering detailed
plans.
q
Government controls may block private-sector individual
initiative if there are many bureaucratic obstacles.
q
Organizations and individuals require incentives to
work, innovate, control costs, and allocate efficiently, and the
discipline and rewards of the market cannot easily be replicated within
public enterprises and organizations. Public enterprises are often
inefficient and wasteful.
q
Different levels and parts of government may be poorly
coordinated
q
Controls create resource-using activities to influence those
controls through lobbying and corruption—often called rent seeking
or directly unproductive activities.
q
Planning may be manipulated by privileged and powerful
groups that act in their own interests, and
q
Governments may be dominated by narrow interest groups
interested in their own welfare and sometimes actively hostile to
large sections of the population. Planning may intensify their power.
How can planning ‘go wrong’
Government decides (or influences through subsidies,
tariffs etc) what how and for whom to produce. But this involves creating
a group of planners who may make key economic decision but often have
incomplete information or lack of experience resulting in:
q
‘wrong’ choice of investment projects
q
inefficient implementation and management of these projects
q
inappropriate pricing and costing of output thereby
distorting markets
For example:
Policy objective: growth by expanding
industry. Policy instruments:
q
tariff protection
q
cheap loans (loans at below commercial rates of interest)
q
generous foreign-exchange allocations to import capital
goods cheaply at overvalued exchange rates.
q
Result an excess capacity in the manufacturing sector
ie industry cannot sell all its output ‘profitably’
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