4.8 The balance between markets and intervention

1. Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation), including a more efficient allocation of resources and economic growth. market-led strategies, e.g. in terms of a belief in the free operation of markets, a minimum role for the state in economic affairs, trade liberalization, privatization, foreign direct investment (FDI) advantages of market-led strategies, e.g. in terms of more efficient resource allocation along the lines of comparative advantage, benefits of MNCs, benefits of free trade, flexible labor and capital markets, greater consumer choice, a reduction in government budget deficits

market-led strategies / export-led growth strategies such as: 1. Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation), including a more efficient allocation of resources and economic growth. market-led strategies / export-led growth strategies such as: trade liberalization/low levels of protectionism an emphasis on private enterprise rather than state intervention a floating exchange rate encouragement of FDI privatization use of supply-side policies flexible labor markets. enterprise zones free trade agreements free movement of capital and labor

the advantages of the market system in terms of: enhancing development 1. Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation), including a more efficient allocation of resources and economic growth. the advantages of the market system in terms of: enhancing development more efficient resource allocation greater productivity greater consumer choice increased business competitiveness export led economic growth problems of state planning/interventionist policies

Characteristics of outward-oriented strategies: 1. Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation), including a more efficient allocation of resources and economic growth. Characteristics of outward-oriented strategies: emphasis on comparative advantage specialization encouragement of free trade emphasis on supply-side policies to improve the flexibility of markets e.g. reduction of regulations on labor and business development/encouragement of markets such as capital markets exchange rate policies: use of floating rates encourages Foreign Direct Investment

1. Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation), including a more efficient allocation of resources and economic growth. the advantages of export-led growth strategies, e.g. in terms of more efficient resource allocation from specialization, benefits of MNCs, benefits of free trade, flexible labor and capital markets, greater consumer choice, a reduction in government budget deficits examples of countries that have used export-led growth e.g. Japan, Hong Kong, Taiwan, Singapore, South Korea

2. Discuss the negative outcomes of market-oriented strategies, including market failure, the development of a dual economy and income inequalities. disadvantages of market-led strategies, e.g. in terms of market failure, increased likelihood of structural unemployment, problems associated with MNCs, greater wealth and income inequality, problems of capital outflows (e.g. profit repatriation) and a general vulnerability with regard to external fluctuations and shocks.

enhancing development under provision of merit goods 2. Discuss the negative outcomes of market-oriented strategies, including market failure, the development of a dual economy and income inequalities. the disadvantages of the market system in terms of: enhancing development under provision of merit goods over provision of demerit goods positive and negative externalities over use of common resources under provision of public goods income inequality Market Power (Loss of efficiency)

2. Discuss the negative outcomes of market-oriented strategies, including market failure, the development of a dual economy and income inequalities. the disadvantages of export-led growth strategies, e.g. in terms of exposure to the instability of world markets, vulnerability to foreign competition, over- dependence on a narrow range of exports, over- dependence on primary production, market failure such as the problem of environmental pollution, increased likelihood of structural unemployment, problems of MNCs, problems of structural adjustment programs, greater wealth and income inequality, problems of capital outflows, vulnerability to international economic cases

3. Discuss the strengths of interventionist policies, including the provision of infrastructure, investment in human capital, the provision of a stable macroeconomic economy and the provision of a social safety net. interventionist strategies, e.g. in terms of the state playing an active role in the management of the economy, economic planning, import and exchange controls, nationalization of industries advantages of interventionist strategies, e.g. in terms of greater diversity of economic activity, supply-side improvements as a result of investment in health care and education and training, protectionism allowing existing industries breathing space to grow and infant industries to achieve economies of scale, a more equal distribution of income and wealth, less inequality between rural and urban sectors, higher levels of employment

Characteristics of inward-oriented strategies: 3. Discuss the strengths of interventionist policies, including the provision of infrastructure, investment in human capital, the provision of a stable macroeconomic economy and the provision of a social safety net. Characteristics of inward-oriented strategies: emphasis on government intervention to regulate markets import substitution the infant industry argument encouragement of domestic industries through constraints on imports: – subsidies – tariffs – quotas – other regulations exchange rate policies: use of fixed/managed rates

3. Discuss the strengths of interventionist policies, including the provision of infrastructure, investment in human capital, the provision of a stable macroeconomic economy and the provision of a social safety net. an explanation of import substitution strategies, e.g. in terms of protectionism, exchange controls, subsidies to domestic firms, the state playing an active role in the management of the economy, nationalization the advantages of import substitution, e.g. in terms of the infant industry argument, greater diversity of economic activity, supply-side improvements as a result of investment in health care and education and training, a more equal distribution of income and wealth, less inequality between rural and urban sectors, higher levels of employment, protection of local cultural heritage, protection from MNC dominance examples of countries that have used import substitution. e.g. India prior to 1990’s

4. Discuss the limitations of interventionist policies, including excessive bureaucracy, poor planning and corruption. disadvantages of interventionist strategies in terms of possible growth of the public sector and government spending, inability to benefit from the gains from free trade, inefficient resource allocation, growth of inefficient monopolies, drawbacks of planning, possible bias against exports, potential for corruption.

4. Discuss the limitations of interventionist policies, including excessive bureaucracy, poor planning and corruption. the disadvantages of import substitution, e.g. in terms of possible slower growth of the economy, inability to benefit from the gains from free trade such as greater choice and lower prices, inefficient resource allocation, preservation of inefficiency, drawbacks of government planning

5. Explain the importance of good governance in the development process. Governance and Good Governance: Varying Definitions Governance “The traditions and institutions by which authority in a country is exercised” – Kaufman et al The way “ in which power is exercised through a country’s economic, political, and social institutions.” – the World Bank’s PRSP Handbook. “The exercise of economic, political, and administrative authority to manage a country’s affairs at all levels. It comprises mechanisms, processes, and institutions through which citizens and groups articulate their interests, exercise their legal rights, meet their obligations, and mediate their differences.” – UNDP.

5. Explain the importance of good governance in the development process. Good governance It is “… among other things participatory, transparent and accountable. It is also effective and equitable. And it promotes the rule of law.”  – UNDP It “… encompasses the role of public authorities in establishing the environment in which economic operators function and in determining the distribution of benefits as well as the relationship between the ruler and the ruled.” .”  – OECD (www.oecd.org/dac/) It is “… epitomized by predictable, open and enlightened policy making; a bureaucracy imbued with a professional ethos; an executive arm of government accountable for its actions; and a strong civil society participating in public affairs; and all behaving under the rule of law.” – World Bank 1994: Governance: The World Bank’s Experience. Mechanisms for assuring good governance have three key elements: Internal rules and restraints (for example, internal accounting and auditing systems, independence of the judiciary and the central bank, civil service and budgeting rules); “Voice” and partnership (for example, public-private deliberation councils, and service delivery surveys to solicit client feedback); and Competition (for example, competitive social service delivery, private participation in infrastructure, alternative dispute resolution mechanisms, and outright privatization of certain market-driven activities). – WDR 1997

5. Explain the importance of good governance in the development process. Key attributes of good governance The concept of good governance has been clarified by the work of the former Commission on Human Rights. In its resolution 2000/64, the Commission identified the key attributes of good governance: transparency responsibility accountability participation responsiveness (to the needs of the people) By linking good governance to sustainable human development, emphasizing principles such as accountability, participation and the enjoyment of human rights, and rejecting prescriptive approaches to development assistance, the resolution stands as an implicit endorsement of the rights-based approach to development.

6. Discuss the view that economic development may best be achieved through a complementary approach, involving a balance of market oriented policies and government intervention. It is increasingly being acknowledged that good governance is a key element in the development process of any country, and in ensuring that globalization benefits all in society. The State, in partnership with civil society and the private sector, has a major role to play in the quest for peace, greater freedom, social equity and sustainable Development Improving and reforming public administration and governance systems is critical in addressing a number of issues, including making globalization work for all; alleviating poverty and income inequality; advancing human rights and democracy; protecting the environment and promoting sustainable development; and managing violent conflict and combating international crime. States can either guarantee people’s freedom and a measure of social justice, or can hold back development. How the public sector is structured, administered and operated, as well as what policies are pursued, has therefore a great impact on people’s well-being.

6. Discuss the view that economic development may best be achieved through a complementary approach, involving a balance of market oriented policies and government intervention. In brief, to label globalization in absolute terms as either a totally positive or negative phenomenon is a simplistic approach. Ultimately, globalization benefits society at large in countries that enjoy some degree of political stability, that have in place adequate infrastructure, equitable social safety nets and in general strong democratic institutions. Experience has shown that globalization requires strong, not weak States. Thus, one of the main preconditions to ensure that the benefits of globalization are evenly spread throughout the developed and the developing world and within a given country is good governance, including an efficient and effective public administration.

Classic Theories of Development: A Comparative Analysis 6. Discuss the view that economic development may best be achieved through a complementary approach, involving a balance of market oriented policies and government intervention. Classic Theories of Development: A Comparative Analysis

Using information from the text/data and your knowledge of economics, evaluate the view that a balance between market-oriented policies and government intervention is needed in order to promote economic development in Cuba. M13/3/ECONO/SP2/ENG/TZ0/XX/M Command term “Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Responses may include: explanation of market-oriented policies explanation of government intervention/interventionist policies explanation of economic development. Advantages of market-oriented policies: greater opportunity/reward for innovation by producers greater efficiency in production freedom for producers to choose what to produce freedom to vary price improvement in efficiency of allocation of resources the possibility that competition will lead to lower prices for consumers reduction in the need for imports of food the incentive function of the price mechanism may lead to a greater output of food

Disadvantages of market-oriented policies: Using information from the text/data and your knowledge of economics, evaluate the view that a balance between market-oriented policies and government intervention is needed in order to promote economic development in Cuba. M13/3/ECONO/SP2/ENG/TZ0/XX/M Disadvantages of market-oriented policies: possibility of greater competition leading to lower incomes for farmers could lead to market failures could lead to inflation could lead to unemployment increase in income inequality the ending of subsidies will raise costs to producers

Advantages of government intervention: Using information from the text/data and your knowledge of economics, evaluate the view that a balance between market-oriented policies and government intervention is needed in order to promote economic development in Cuba. M13/3/ECONO/SP2/ENG/TZ0/XX/M Advantages of government intervention: purchase of subsidized seed and equipment from the government reduces costs for farmers a monopoly over essential foods may ensure equity of distribution fuller employment of resources due to planned production provision of needed infrastructure provision of social safety net possibility for income redistribution can redistribute income encourages investment in human capital possibility to correct market failures.

Disadvantages of government intervention: Using information from the text/data and your knowledge of economics, evaluate the view that a balance between market-oriented policies and government intervention is needed in order to promote economic development in Cuba. M13/3/ECONO/SP2/ENG/TZ0/XX/M Disadvantages of government intervention: set prices for resources and goods and services possibly leading to inefficiency lack of incentives for economic participants poor planning and corruption remain a problem excessive bureaucracy may be a feature of the economy.