Approaches to Developments and its influences Nepalese Development Plans

1. Approaches to Developments and its influences Nepalese Development Plans Rabi S. Sainju Joint Secretary Ministry of Commerce

2. Presentation Outline • The quest for development • Economic System • Development Plan and its necessity • Approaches to development • Growth Situation in Nepal • Conclusion

3. The quest for development • Economic development is the process that transforms a country’s capacity to provide for the material well-being of its people. • associated with economic growth; which needs to be sustained over time for successful development • success of process usually judged also by distributional effects • Concern for development was an outgrowth of the determination post-WWII to avoid a recurrence of the 1930s • Initial focus on recovery of war-ravaged economies; from mid-1950s, emphasis shifted to growth prospects of poorer countries

4. Economic System • Political ideology and economic system are connected • In countries where individual goals are emphasized free market economies are likely • There are three types of economic systems: • Capitalist or market economies • Socialist or command economies • Mixed or welfare economies

5. Capitalist Economy • In a capitalist economy all productive activities are privately owned. • Price systems are used in the market, which means price determines everything. • Production is determined by the interaction of supply and demand • The motivating force of Capitalism is self interest. • The role of government is to encourage free and fair competition between private producers • The distribution of goods in a capitalistic society is to each according to his/her quantity and value of contribution to society. • This distribution scheme causes an unequal spread of income and wealth.

6. Socialist Economy • In a socialist or command economy, the government plans the goods and services that a country produces, the quantity that is produced, and the prices as which they are sold • All businesses are state-owned, and governments allocate resources for “the good of society” • However, because there is little incentive to control costs and be efficient, command economies tend to stagnate • It is a planned economy in which resources are allocated by need. • The spread of wealth and income is more equal in a socialistic society, however the individuals tend to lose motivation because the pay off is vastly less. • This distribution scheme is a humane, but mostly an inefficient one.

7. Mixed Economy • Welfare Capitalism is a prime example of a mixed economy. • The principles of capitalism are followed, but with government involvement. • Certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning • Governments tend to own firms that are considered important to national security • The government will step in to take care of citizens and help to maintain a minimum standard of living.

8. Development Plan 8 A key tool which influences decisions about priorities and resource allocation, and aims to influence the direction, and pace of development Often involves linkages between different sectors of development and levels of government An opportunity to ensure micro-macro links An opportunity to integrate actions of different government and non-government agencies A major point where integration and the Sustainable Livelihoods principles of holism and partnerships can be fostered A set of actions to achieve a certain goal

9. Necessity of National Planning Depends on a country’s stage of development the political or administrative structure are also relevant Few high-developed countries have national planning systems Korea terminated its planning ministry a few years ago. Fragile countries generally have ineffective planning systems Their plans promise more than the government can deliver Developing countries have the most potential for national planning Their plans can prepare the way for investments and policy initiatives that stimulate development Current circumstances appear highly favorable The fact that many developing countries has indicated they can make effective use of formal planning systems 9 9

10. Approaches to Economic Development Literature on economic development is dominated by the following four strands of thought: • Linear-stages-of-growth model: 1950s and 1960s • Theories and patterns of structural change: 1970s • Neo-classical, free-market counterrevolution or market fundamentalism: 1980s and 1990s • New Approached to Development :Right based Approach/ Inclusive Development • Four major and often competing development theories, all trying to explain how and why development does or does not occur. • Newer models often draw on various aspects of these classical theories. 10

11. Approaches to development Approaches to development • In the 1950’s and 1960’s, linear-stages-of-growth models were popular. They described the process of development as a series of successive stages. • These models were replaced in the 1970’s by Structural Change and International Dependence models. • Structural change models emphasized the internal process of structural changes that a developing country must go through,

12. Approaches to development • In the 1980’s and 1990’s the neoclassical counterrevolution focused on the beneficial role of free markets, open economies and the privatization of public enterprises and suggested that the failure of some economies to develop is a result of too much government intervention and regulation. • In 2000s, much attention in this decade to other “solutions” to under-development and used various aspect of classical approach. Development economist are more focused on inclusive development approach and right based approaches

13. Linear-Stages-of-Growth Models • Assumed that the developing countries could learn a lot from the historical growth experience of the now developed countries. • Representative Models are: • Rostow’s Stages of Growth • Harrod-Domar’s Growth Model • Emphasis was on: • Central planning • Industrialization • Import substitution • Emphasized the role of: accelerated capital accumulation; augmented savings/investment; and adequate supplies of foreign exchange (for imports of capital goods). • Strong bias towards western model of modernization which tries to fit economic progress into a linear system . 13

14. Influence of Linear Growth Model in Nepal • Periodic Plans: • First Plan: 1956-61 • Second Plan: 1962-65 • Third Plan : 1965-71 • Started its initial plans under the complete absence of data and information and any infrastructure to begin with. • Plans focused mainly on growth led strategies giving priority to the expansion of infrastructures to develop industrial Sector. • Plans emphasized the role of capital formation and increase investment in the modern industrial sector. • Import substitution policy adopted failed to sustain economic development. In fact, reliance on external market increased due to growing needs of capital goods and intermediate inputs 14

15. Structural-Change Models In the 1970s • Representative examples of this strand of thought are • The Lewis theory of development • Chenery’s patterns of development • These models tend to emphasize the transformation of domestic economic structures from traditional subsistence agriculture economies to more modern, urbanized and industrially diverse manufacturing and service economies. Shift in emphasis: • basic needs and poverty reduction – McNamara, Nairobi 1973 • integrated area development • investment in social sectors – human capital • Concerns for the distributional consequences of growth; sharing benefits of development more equally 15

16. Influence of Structural-Change Model in Nepal Periodic Plans • Fourth Plan : 1971-76 • Fifth Plan : 1976-81 • Sixth Plan 1981-86 • During early 1970s, it had become clear that the modernization strategies of the initial plans could not induce industrial investment. • Adopted regional approach in development planning • Adopted distributive approach in development strategies • Nepal adopted the ideology of Basic Needs and Integrated Rural Development in this era. 16

17. The Neoclassical Counterrevolution: Market Fundamentalism • The debt build-up from the 1970s became burdensome as the developed countries took steps to eliminate inflation. Interest rates rose sharply, trade growth slowed, and further oil price increases. • Neoclassical counterrevolution in 1980s called for freer markets, dismantling of public ownership, and government regulations • Neo-classicist also obtained controlling power of the world’s two most influential international financial agencies –WB & IMF • Argued that underdevelopment is the result of poor resource allocation due to incorrect pricing policies and too much state intervention. • Four component approaches : • The Free Market Approach: markets alone are efficient and effective • Public-choice theory: Government can do nothing right • Market-friendly Approach: government need to facilitate the markets • New institutionalism: success or failure depend on fundamental institutions 17

18. Influence of The Neoclassical Counterrevolution in Nepalese Plan • Plan Period • Seventh Plan : 1986-1991 • Eight Plan : 1993-1998 • Ninth Plan : 1998 – 2002 • The failure of previous development strategies had created macroeconomic imbalance. • Accepted IMF Stabilization package and WB's Structural Adjustment Programme and shifted towards the ideology of liberalization and open market policies. • The main objectives of these plan were attainment of sustainable economic growth, poverty alleviation. • Efforts made to adopt the market based economy by promoting private sector participation and investment and by reducing the role of the state. 18

19. New Approaches to development Since 2000: • Much attention in this decade also to other “solutions” to under-development, including: • establishment of appropriate institutions (“more important than policy”) • promotion of better governance: • anti-corruption • democracy • bureaucratic competence • corporate oversight • And more proposed remedies that have something of the “silver bullet” about them: micro-credit; social entrepreneurship • Finally, renewed emphasis on human capital – partly a result of the focus on knowledge; distributional issues; and growing concern about environmental impacts of growth. 19

20. Influence of New Approaches in Nepalese Plan Plan Period • Tenth Plan 2002-2007 • Eleventh Plan 2007 – 10 • Twelfth Plan : 2010 – 13 • Thirteen Plan : 2013-2016 • These plans focused more on poverty alleviation, reconstruction, rehabilitations and peace mitigations. • Realized that that governments do fail, but so do markets; a balance is needed • Attentions to institutional and political realities • Focused on inclusiveness in planning 20

21. Economic Growth Situation in Nepal 21

22. Sectoral Growth Rate

23. HDI trends on new component and new methodology

24. Human Development Index Trend Nepal 2012 24 * 2006 data

25. Conclusions • In an environment of widespread institutional rigidities and severe socioeconomic inequality, both markets and governments will typically fail. • The linear-stages model emphasizes the crucial role of savings and investment. • The Lewis two-sector model emphasizes the importance of attempting to analyze the many linkages between the traditional sector and the modern industry • International dependence theories highlight the role of the structure and workings of the world economy and the impact of decisions made in the developed world on the growth prospects for LDCs. • The neoclassical economic models point to the promotion of efficient production and distribution through a proper functioning price system and the damaging effect of government-induced domestic and international price distortions.

26. Conclusion • There is a need to have a broad based and inclusive growth to benefit all sections of society and improve economic growth. • It is more challenging for the country to achieve inclusive growth than getting 8 to 10 per cent growth in GDP • There are strong social, economic and political reasons for achieving broader and inclusive growth. • Socially, lack of inclusive growth leads to unrest among many people. • There is also an economic argument. The measures which raise equity also promote economic growth. • Lastly, the political argument is that no government in a democracy can afford to ignore large sections of workers and non-working population. • If it is not inclusive it can generate very severe social tensions. Thus, politically, for having a stable and democratic society one needs to have inclusive growth.

27. Thank You Allfor your kind attention