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