Resource Allocation in Developing Countries

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This chapter outlines the major topics of development strategy which describe the investment criteria for the allocation of resources
  Resource Allocation in Developing Countries Kashif Ali    Since we are all aware of this fact that in comparison to the needs of people the resources are scare, hence allocating these resources is the biggest challenge being faced by developing countries. This chapter outlines the major topics of development strategy which describe the investment criteria for the allocation of resources. Two important aspect of resource allocation are discussed here i.e.    Market Mechanism    Role of State Market Mechanism and Market Failures As Adam Smith says, resources are allocated by “Invisible Hand” in free -enterprise market. As the profitability of production of a commodity changes, the market prices behaves like a signal to producer to increase or decrease supply. It is not only allocation role of markets, but a creative function also, i.e. to provide an environment for change that expands production possibilities. Change means all the dynamic forces that lead to technical progress, innovation and ultimately investment. The Market mechanism is emphasized since the role of state has been criticized due to various reasons i.e.      Collapse of Soviet Union and Eastern Europe      Most Developing countries have failed to deliver fundamental public goods      Developing Countries are facing fiscal crisis      Fascination to copy the model of Asian Tigers Hence the way forward in most developing countries must be a judicious mix of market capitalism combined with state intervention. The Role of State The state is responsible for following major responsibilities    Provision of public goods    Correction of market imperfection    To protect the vulnerable and ensure equitable distribution of income.     Provision of institutional environment In 1997 World Development Report conveyed three principal messages de scribing “The State in changing World”      Effectiveness of State is vital for development, hence state should work to complement markets, not replace.    For sustainable development and reduction of poverty the good economic policies, well developed human capital and openness to the world economy are important    It is proved historically that a two part strategy of matching the role of the state to its capability, and improving that capability. The report further says that many countries are trapped in a vicious circle of declining state capability and thus declining credibility in the eyes of their citizens leading to increased crime and an absence of security affecting investment and growth. State credibility is particularly important if developing countries are to attract private foreign investment. The statistical evidence shows that in countries with sound policies and good governance, real per capita income grew at 3 per cent per annum on average over the period 1964-93, in countries with bad policies and bad governance per capita growth was a mere 0.4 per cent. The Wolrd Bank concludes that without an improvement in the economic and social welfare. The Governments should be very much decisive about    Law and order    Maintaining macroeconomic stability    Investing in basic social services and infrastructure    Protecting the vulnerable    Protecting the environment But the state doesn’t have to be the sole provider of all infrastructure and social services.  Neither does the state have to be the monopoly supplier of public utilities such as electricity, gas, telecommunication and so on. These activities can be privatized with state supervision. CORRUPTION In general poverty breeds corruption, and corruption can lead to severe inefficiencies in the function of economies. The World Bank defines corruption as ‘the abuse of public office for private gain including bribery, threats and kickbacks. These rents seeking behavior arises because decisions over the allocation of resources are in the hands of politicians and governments officials.  The World Development Report 1997 outlines three essential ingredients for improving the capabilities of the state.      To check public authority. Independence of Judiciary is important, and independent commission against corruption would be helpful      Opening up competition in employment in the delivery of services.      All government programmes are likely to work better if there is democracy, if power is devolved, and users are consulted. The state also has a duty to reduce bureaucracy and regulation to allow market to flourish. Development Plans A development plan is an ideal way for a government to set out its development objectives and demonstrate initiative in tackling the country’s development problems.  The World Development Report 1997 four economic and social objectives were set out    To achieve sustainable economic growth conducive to higher per capita income    To generate more employment opportunities    To achieve a more equitable distribution of income    To restore and control external financial imbalances Four basic types of models are mainly used in development planning: 1.   Aggregate models; that consist on number of equations representing effects of relevant variables on the economy. 2.   Sector models; that isolates major sectors. 3.   Inter-industry models; which shows transactions and interrelationships between producing sector of the economy. 4.   Models and techniques for allocation of resources. Policy Models Some of the important questions that need to be answered with the help of the structural equations are as follows:    Can capital be guaranteed in the quantities required?    Will exports and foreign assistance keep pace with the imports required?    Will the future demand for consumption goods, out of increases in per capita income exceed the supply and cause inflation?    Can the required interrelationships between industries be maintained so that bottlenecks do not arise?  The Allocation of Resources: The Broad Policy Choices Given the scarcity of resources in developing countries in relation to development needs, one of the central issues in development economics is the allocation of resources among competing ends. Apart from the decision of how much to invest, three broad types of allocation decision may be distinguished:    Which sectors to invest in    Which projects should receive priority given the factor endowments of country and its development goals    Which combination of factors of production should be used to produce a given vector of goods and services? INDUSTRY VERSUS AGRICULTURE: The issue of the choice between industry and agriculture and where the emphasis should lie, can be discussed very rapidly due to the two sectors are very much complementary to each other. Actually the fortunes of agriculture and industry are closely interlinked in that the expansion of industry depends to a large extent on improvements in agricultural productivity and improvements in agricultural productivity depends on adequate supplies of industry ‘inputs’ including the provision of consumer goods to act as incentives to peasant farmers to increase the agricultural surplus. THE COMPARATIVE COST DOCTRINE: It is closely related with the goals of the developing countries. It produces the optimum pattern of the production and trade for a country. Efficiency can be maximized when no commodity will produce that can be imported at low cost. As far as growth is concerned, it emphasis on the criteria for investment and saving. Like it may be disadvantageous to channel resources in such activities for which all income is consumed. So comparative cost doctrine provide an idea that efficiency in resource allocation will maximize present output and consumption but it may impair growth and future consumption. Present versus Future Consumption The choice between present and future consumption is the same as the choice between consumption and investment in the present. How much investment should be undertaken in the present depends on the time interval over which society wants to maximize consumption and what value it places on consumption in the future compared with consumption in the present. The answer to the question of how much to invest depends crucially on the planning horizon taken on discount rate chosen. Maximization of consumption within the horizon would mean consumption all income at the end of the horizon, leaving no saving for future investment and consumption.
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