Balance between markets and intervention

1. Balance between markets and intervention

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

3. Market-orientated Policies

4. 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

5. 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

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

7. 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

8. 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

9. 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

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

11. Interventionist Policies

12. 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

13. 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?

14. 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