Balance between markets and intervention

Learning outcomes – Discuss the positivenegative outcomes of market- orientated policies, including a more allocation of resources. – Discuss the strength/weaknesses of the interventionist policies

Market-orientated Policies

Strength It offers the method to answer of what to produce, how to produce and for whom to produce questions of resource allocation in the best possible way Thus achieving allocative efficiency Pursuit of self-interest (Adam Smith) by consumers, producers and resource owners will give incentive for hard work, innovation And therefore econ growth. Which will lead to a better standard of living

Policies: – Encouraging competition – Trade linearization – Deregulation – Privatization – Free floating ER – Liberalized capital flow/absence of exchange control Allows residents to purchase foreign currencies without restriction

Weaknesses Market Failure – Negative and positive externalities – Insufficient provision of merit goods – Lack of public goods – Asymmetric knowledge – Abuse of monopoly power

Co-ordination failure – Failure of firms to be set up Firms can increase output if they began producing in a market requiring skilled labor. However, firms don’t enter this market due to the lack of available skilled labor. In this case, the workers will not acquire the necessary skills

Example Farmers can increase their production of agriculture for sale in the market, to achieve this they need a ‘middlemen’ to represent them in the distance markets Without the middlemen, farmers can not produce for the markets and as long as the agricultural output for the market is not produced, the middleman will not become available. Therefore farmers will produce less and the potential need for the middleman in the economy will not merge

Missing Market institutions To be able to function effectively: – The institutional and legal enviroment is oftem missing in the LEDCs – It must enforce: Property rights Legal contracts Stable currency Effective infrastructure system Available information Quantity and quality goods and services

Development of dual economies – Existence of two separate economic sector within one country Income inequalities Inefficient credit for the poor

Interventionist Policies

Strength Correcting market failures Investment in human capital – Specially education and health care Provision of infrastructure – Broad range of goods and services with significant positive externalities Provision of stable macroeconomic provision – PL – Employment – Reasonable Balance of trade

Provision of a social safety net – A system where the gov transfers cash or goods to vulnerable to ensure socially acceptable minimum standard of living Redistributing income Industrial policies – Supply-sided policies to support small/meduim as well as infant industries?

Weaknesses Excessive bureaucracy – Administrative structure of an organization involving rules that determines how the organization functions – which means too many rules in governing procedures – Inefficiency Poor planning Corruption – Abuse of public office for private gain