Development Policy As Public Finance

This is a graduate text on the use of public economics in formulating development policy. How to raise and spend revenues in order to promote development in practice involves second-best considerations, which the analysis of the role of international trade, liberalization, and other economic reforms must take into account. Particular emphasis is placed on social cost-benefit analysis as a means to discipline public expenditure decisions. Summaries and exercises are included.

Clive Bell is Professor of Economics at Heidelberg University. Having obtained his D.Phil. from the University of Sussex in 1976, he has since held positions at the World Bank (1974-85), Johns Hopkins University (1985-6), Vanderbilt University (1986-95), and Regensburg University (1991-4).

Introduction

1

(8)

1. International Trade: Theory

9

(29)

1.1. Received Theory

10

(13)

1.2. Market Failure

23

(6)

1.3. Policy-imposed Distortions

29

(2)

1.4. Public Finance

31

(2)

1.5. Summary

33

(1)

Recommended Reading

34

(1)

Exercises

34

(4)

2. International Trade: Practice

38

(28)

2.1. Protectionist Policies

39

(2)

2.2. A Measure of Protection

41

(4)

2.3. The Costs of Departures from First-best

45

(6)

2.4. Openness and Growth

51

(11)

2.5. Summary

62

(2)

Recommended Reading

64

(1)

Exercises

64

(2)

3. International Trade: Liberalization

66

(35)

3.1. Ranking Policies

67

(8)

3.2. Reductions in Tariffs When Wages are Rigid

75

(9)

3.3. A Relaxation of Quotas

84

(2)

3.4. Adjustment and Import Starvation

86

(3)

3.5. A Reduction in the Regulated Wage

89

(1)

3.6. Devaluation

90

(6)

3.7. Summary

96

(2)

Recommended Reading

98

(1)

Exercises

98

(3)

4. Taxation

101

(35)

4.1. Tax Instruments

102

(2)

4.2. The Level and Sources of Revenue

104

(3)

4.3. Optimal Taxation: Preliminaries

107

(7)

4.4. Optimal Commodity Taxation

114

(8)

4.5. The Diamond-Mirrlees Model

122

(4)

4.6. Effective Taxes: Pakistan, 1975/6

126

(5)

4.7. Summary

131

(1)

Recommended Reading

132

(1)

Exercises

132

(4)

5. Tax Reform

136

(27)

5.1. Quotas into Tariffs

137

(4)

5.2. Tariffs and Excises into a VAT

141

(4)

5.3. Reforming Commodity Taxes

145

(7)

5.4. The Inverse Optimum Problem

152

(2)

5.5. Intermediate Inputs

154

(4)

5.6. Summary

158

(1)

Recommended Reading

159

(1)

Exercises

160

(3)

6. Seigniorage and Debt

163

(24)

6.1. Seigniorage

165

(6)

6.2. Financing Deficits: Accounting

171

(2)

6.3. The Dynamics of Debt

173

(7)

6.4. Explosive Trends in Debt?

180

(3)

6.5. Summary

183

(2)

Recommended Reading

185

(1)

Exercises

185

(2)

7. Other Dynamic Pitfalls

187

(25)

7.1. Costly Reversals of Policy

189

(5)

7.2. Self-fulfilling Expectations and Crises

194

(7)

7.3. The Introduction of a VAT

201

(4)

7.4. Countermeasures

205

(1)

7.5. Investment

206

(3)

7.6. Summary

209

(2)

Recommended Reading

211

(1)

Exercises

211

(1)

8. An Introduction to Social Cost-Benefit Analysis

212

(25)

8.1. The Private Project

213

(2)

8.2. The Public Project and Social Profitability

215

(2)

8.3. Estimating Shadow Prices: A Partial Equilibrium Approach

217

(4)

8.4. The Shadow Prices of Tradables

221

(3)

8.5. The Limitations of a Partial Equilibrium Approach

224

(1)

8.6. 'Cookbook' Rules

225

(4)

8.7. Evaluating Private Projects

229

(1)

8.8. Summary

230

(1)

Recommended Reading

231

(1)

Exercises

232

(5)

9. Shadow Prices

237

(31)

9.1. The Principles of Shadow Prices

237

(2)

9.2. The Social Welfare Function

239

(3)

9.3. Shadow Prices in a Simple Model

242

(6)

9.4. Shadow Prices and Policies

248

(4)

9.5. A Regulated Wage

252

(6)

9.6. Tax Reform When There are Distortions in Production

258

(2)

9.7. Shadow Prices and Tax Reform

260

(2)

9.8. Summary

262

(2)

Recommended Reading

264

(1)

Exercises

264

(4)

10. Time: The Social Discount Rate

268

(27)

10.1. Defining the Social Discount Rate

269

(1)

10.2. Estimating the Social Discount Rate

270

(7)

10.3. The Consumption Rate of Interest

277

(2)

10.4. A Simple Inter-temporal Model

279

(7)

10.5. The Premium on Government Income

286

(3)

10.6. The Inter-temporal Structure of Shadow Prices

289

(1)

10.7. Summary

289

(2)

Recommended Reading

291

(1)

Exercises

291

(4)

11. Space: Transportation Costs

295

(23)

11.1. The Model

296

(9)

11.2. Shadow Prices

305

(7)

11.3. Transportation Projects

312

(1)

11.4. Summary

313

(2)

Recommended Reading

315

(1)

Exercises

315

(3)

12. Risk and Uncertainty

318

(20)

12.1. The Risk Profile of a Project

318

(4)

12.2. Shadow Prices Under Risk

322

(1)

12.3. A Decision Rule

323

(5)

12.4. Some Reservations

328

(5)

12.5. Summary

333

(2)

Recommended Reading

335

(1)

Exercises

335

(3)

13. Large Projects

338

(37)

13.1. The Approach

339

(6)

13.2. The Social Profitability of a Large Project

345

(5)

13.3. An Example: A Bridge

350

(4)

13.4. Congestion and Tolls

354

(4)

13.5. Changes in Factor Prices: An Irrigation Project

358

(8)

13.6. Evaluating Muda

366

(3)

13.7. Summary

369

(2)

Recommended Reading

371

(1)

Exercises

371

(4)

14. Land Reform and Tenancy

375

(40)

14.1. Property Rights in Land

376

(4)

14.2. Redistributing Private Holdings

380

(8)

14.3. The 'Market' Solution

388

(2)

14.4. Land Reform as a 'Large' Project

390

(7)

14.5. Tenancy

397

(6)

14.6. The Political Economy of Land Reform in Historical Perspective

403

(5)

14.7. The Prospects for Reformism

408

(4)

14.8. Summary

412

(1)

Recommended Reading

413

(1)

Exercises

413

(2)

15. Small-Scale Credit

415

(32)

15.1. The Demand for Credit

416

(6)

15.2. Lenders' Costs

422

(4)

15.3. Evaluating a Credit Programme

426

(2)

15.4. Competition Between Formal and Informal Lenders

428

(6)

15.5. Reforming Public Policy

434

(10)

15.6. Summary

444

(1)

Recommended Reading

445

(1)

Exercises

445

(2)

Appendix. A Primer in Duality Theory

447

(14)

A.1. Technology

447

(2)

A.2. The Profit Function

449

(2)

A.3. The Cost Function

451

(2)

A.4. The Envelope Theorem

453

(3)

A.5. The Revenue or GNP Function

456

(2)

A.6. The Indirect Utility Function

458

(1)

A.7. The Expenditure Function

459

(2)

References

461

(10)

Index

471

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Development Policy As Public Finance

Summary

Author Biography

Table of Contents

Supplemental Materials