Govt Failure Assignment Feb 10th

8/2/2019 Govt Failure Assignment Feb 10th

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Introduction

Our Task is to present to you the meaning of Government Failure and External

Shocks and to express our thoughts on the contribution of these two factors to

the unsuccessful development planning in the Caribbean.

Government failure refers to situations where allocative efficiency may have

been reduced following Government intervention in markets designed to

correct market failure.

External Shocks on the other hand refers to events that produce a significant

change within an economy due to changes of factors outside of the economy.

Shocks of this nature have unpredictable and typically impact supply or

demand throughout the markets.

The failure of governments to provide the needed public goods (such as law

and order, schools, health facilities, the basic factors etcetera, for

development) may result in increases in the proportion of inequality in the

country, which will result in the poor not being able to access certain facilities

for a better standard of living and development of human capital.

Economics in its simplest term is defined as the allocation of scarce resources

to unlimited wants. Therefore, there will always be a disproportionate

distribution of resources as a result of differing wants.

According to Rostow the first stage of economic development is the traditional

society where subsistence provision is the central factor of satisfying ones

needs and wants. Subsequent stages of Rostow explained that the

subsistence society evolves into market for exchanges and trading, thus

economic growth and development. This would mean that there would be

increased competition in the level and distribution of resources and thus the

control of these resources. Thus conflict arises between the society and the

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government. Therefore the role of Government comes into focus which as a

result of inefficient resources allocation causes failures.

The Caribbean countries are categorized as least developed/developing

countries and produces mainly primary goods (agricultural in nature); as such

these countries are marginalized in terms of international trade, particularly in

manufactured goods. Having a low weight in international trade and heavy

dependence on international trade and imported goods makes them

extremely vulnerable to external shocks.

The following structure follows:

Definition and causes of Government failure and external shocks

Justification whether the mentioned factors contributed to the

unsuccessful development of planning in the Caribbean

Conclusion Introduction

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Government Failure

Lets think about a nation without a government for a second. There is no

system to administer justice, no central provision and maintenance of national

defence, no police or fire protection, and no roads or schools.

For each of these elements one would need to provide for individually, make

direct payments, or to take action according to ones free will. In this regard,

private individual(s) will be catering for such needs. However, as like any

private good or service there provisions are significantly base on the

interaction of supply and demand where profit making is the primary objective

and focus. As a result there will be the existence of competition in the short

or long term since the theory of Perfect Market or Perfect Competition does

not hold in reality.

Individuals seek to pursuit self interest which leads to results that are not

efficient. The concept of Market Failure comes into focus, where there is an

inefficient allocation of resources in a free market. Bator (1958) has defined

Market Failure as a failure of a system of price market institutions to stop

undesirable activities, where the desirability of an activity is evaluated

relative to some explicit economic welfare maximization problem. That is,

market failure is an equilibrium allocation of resources that is not Pareto

optimal. The effects of such, results in market power, imperfect information,

externalities or public goods, and natural monopoly.

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These results all have significant negative impacts on the society and the

nation at large.

As a reaction to such failure, the government will often provide goods and

services directly that is usually free at the point of use and paid for out of

general taxation. These may include Education, Waste Disposal, National

Health Service and National Defense. These are defined as Public Goods that

is there are non exclusive (everyone enjoys its benefits whether they pay for it

or not) and non rival (benefits can be derived by additional users at zero

marginal cost).

One can therefore assume that the thought of non government would be

dreadful. We therefore can appreciate the need for government and how

much we rely on the government to provide a range of services each day.

Benefits from government activities and expenditures can be seen almost at

every angle in our society and daily activities. In Guyana, during the past

decade government annual expenditures have been in excess of 40 percent of

its Gross National Product (GDP).

Government in its simplest form is defined as an organization formed to

regulate and exercise authority over the actions of persons who live together

in a society and to provide and finance essential services catering for

everyone (the haves and the have nots). The extent of individuals right to

participate in decisions that determine what governments do varies from

society to society, how much they spend and how they obtain the means to

finance their functions reflect political interaction of citizens

However, as a result of our individuality, our views differ about what the

governments should and should not be doing in part because our valuations of

the benefits derived differ, also the variations in the amount of taxes and

other costs each of us pay yet bearing in mind the existence of market failure.

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Government may provide goods and services because often people do not

realize or underestimate the benefits of certain services such as health and

education (Merit Goods), private sector may cut costs by cutting the quality of

products, economies of scale in providing National Service, and the issue of

positive externalities where the consumption of health care for example, has

benefits to the rest of society therefore it will be underprovided in the private

sector. This does not mean that governments are immune to mistakes and

more so failures.

As the issues of market failure exist, government failure also exists. Non

Market Failure or commonly known as government failure is the public sector

equivalence to market failure that occurs when a government interventioncauses a more inefficient allocation of goods and resources than would occur

without that intervention. That is, government enacting policies that produce

inefficient and/or inequitable results as a result of the rational behavior of

participants in the political process. It either increases the severity of market

failure or causes a new failure to arise. The impacts of government failure

have damaging long term consequences, cause more problems than solve

problems and its policies are ineffective.

The Public Choice Theory as it relates to government failure is important for

two reasons:

i. The fact that the market is inefficient does not imply that government

will do any better, that is government intervention will make a bad

situation worse

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ii. Governmental decisions depend on procedures and institutions in the

political process and on the incentives created for participants in the

process.

There is a demand and supply side that exist in Government failure. The

supply side of government results from agent or principle problem while the

demand side includes preference-revelation problems and the illogics of

voting and collective behavior.

Causes of Government Failure

i. Regulatory Capture government agencies appear to operate in favour

of the vested interests of producers rather than consumers. The

Common Agricultural Policy (CAP) is widely criticized as a classic

example of government failure and that the current reform process does

not go far enough.

ii. Political Interest pursuit of self interest amongst politicians and civil

servants often lead to misallocation of scarce resource. Deciding where

to build new roads, by passes, schools and hospitals may be decided

with at least one eye to the political consequences.

iii. The law of unintended consequences government policy will always

lead to at least one reaction from either consumers or producers that

are unanticipated or unintended. There is a popular saying Wiser the

Government smarter the people this means that people find ways to

evade laws; shadow markets develop to demoralize an official policy;

people act in unexpected ways either because of ignorance or by error.

iv. Government intervention and evasion increase taxes on de-merit

goods (cigarettes) might lead to an increase in attempted tax

avoidance, tax evasion, smuggling and the development of black

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markets where trade takes place between consumers and suppliers

without paying tax.

v. Government intervention and disincentive effects national minimum

wage for example, can lead to real wage unemployment, also higher

rates of income taxes have negative effects on the incentives of wealth

creators in the economy and generally acts as a disincentive to work

longer hours or take a better paid job. On the opposite side lack of

effective government policies reduce the scale of income and wealth

inequality is also a cause of government failure since inequality can,

over the longer term create many deep rooted problems for society

once social cohesion starts to break down.

vi. Policy decisions base on imperfect information government will choose

to go ahead with a project or policy without having the full amount of

information required for a proper cost benefit analysis resulting in

misguided policies and damaging long term consequences.

Government failure can also occur in a non market economy

Fall of the Soviet Union in the Late 1980s and 1990s marked the failure of

command or planned economies as a means of allocating resources among

competing uses. In such system central planners supplied products that are

simply not wanted by consumers resulting in loss of allocative efficiency since

there are no price mechanism to signal changes in consumers preferences

and demand.

Most planned economies have been moving towards the Western Mixed

economy. Czech Republic, Poland and Hungary are all said to be moving

towards a market based system for the allocation of resources for example

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through programmes of privatization and market liberalization. Many have

enjoyed fast rates of economic growth and a rise in relative living standards

both before and since their accession to become members of the European

Union.

What is external shock?

External shock refers to events that produce a significant change within aneconomy due to changes of factors outside of the economy. Shocks can be

climatic or economic in nature. Shocks of this nature have unpredictable and

typically impact supply or demand throughout the markets and development

as a whole.

Causes of external shocks

External shocks can be caused by my factors beyond the control of anyone.

The following are some of the key causes of external shocks:

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Fluctuation in commodity prices- changes in commodity prices of oil,

gas; industrial metal, food, etc. can have significant negative impact on

the development of the Caribbean nations. Since, both the oil producing

and non-oil producing Caribbean nations are heavily dependent on the

importation of these commodities from the industrialized countries. As

in the case of oil or gas, an increase in the price of these commodities

(which is a form of substance that produces energy for the many

machines and factories in the Caribbean, countries) can result in higher

prices on the goods produced for export, which can result in a decline in

demand for the Caribbean goods on the world market and in many

trading blocks. Thus, will result in the Caribbean nations having a

smaller capacity to buy the relevant capital equipments and technology

to boost their export capacity and most of all be unable to earn an

income for their main their people.

Wars and terrorism-phenomenon of this nature do have dire

consequences on the Caribbean nations since; they are so dependent on

the industrialized nations for food, oil, remittances, etc. These

phenomena tend to develop some degree of economic contraction, in

that, the Golf war of 1990, where Iraq was invaded by a U.N.-authorized

coalition force from 34 nations. This during this war oil fields and oil

refinery plants were on fire; Iraq dumped 400 million US gallons

(1,500,000 m3) of crude oil into the Persian Gulf1. While in the

Caribbean and other parts of the world experienced an increase on the

price of oil on the world market.

Natural Disasters-this refers to hurricanes, earth quakes, floods,

Droughts, Famine, etc. phenomenon of this nature do have significant

effects on developmental planning. In that, this can cause serious

damages to capital investment, lost of human capital, etc. The

Caribbean region is vulnerable to these phenomenons when taking into

1 http://en.wikipedia.org/wiki/Gulf_War#cite_note-1189


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account climate change and global warming. Thus, depending upon the

extent, size etc. of the shock; if the size of the shock is large it can

through the whole economy into a state of depression or cause major

set backs for development if the size and duration of the shock is

minimal. Due to this volatile situation many of the Caribbean nations are

unable to attract adequate foreign direct investment (FDI) to boost

production and hence, development. Natural disasters affect the

production base of Caribbean economies and have strong effects on

household consumption. Given the small geographic size of many

Caribbean countries, natural disasters can sometimes have nation-wide

effects. Empirical analysis for the LAC region suggests that natural

disasters significantly affect the growth of output, consumption and

investment (Auffret, 2003)2.

Economic Policies- These are policies that comprised a collection of

rules and regulations which pertain to economic development (such as

interest rates, taxation, labour market policies,trade policies, etcetera),

where trade inter-alia plays a vital role. Every nation has some form of

trade policy in place, with public officials formulating the policy which

they think would be most appropriate for their country. The purpose of

trade policy is to help a nation's international trade run more smoothly,

by setting clear standards and goals which can be understood by

potential trading partners. In many regions, groups of nations work

together to create mutually beneficial trade policies3. Thus, let us look at

the trade policies created by the government to boost and nurture

infant industries who are unable to compete with producers on the world

market. These policies took the forms of tariffs, quotas and other trade

barriers for the protection of the infant industries. The removal of these

barriers due to trade agreements with other trading block has resulted

2 Auffret, Philippe. 2003. High Consumption Volatility: The Impact of NaturalDisasters? Policy Research Working Paper No. 2962. The World Bank: Washington DC.

3 www.wisegeek.com/what-is-trade-policy.htm10


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in the infant industries going under. Since, they will be unable to

produce goods at a lower price, better quality etc. given the level of

technology at their disposal as is noted in the modernization theory

developing countries were endowed with obsolete technology which is

sold them at a high price (while the developed a more industrialised

countries has real time technologies which can earn them economies of

scale, better product packaging, etc.). Hence, people are unable to earn

an income to cover their basic needs, repay their loans, etc. As can be

seen in the documentary entitled Life and Debt4 story based on

Jamaicas unsuccessful development of their economy through their

infant industries, which was cause by agreements entered into by the

government with the IMF, World Bank, WTO, etcetera.

4 Life & Debt Produced and directed by Stephanie Black, narration written by Jamaican

Kincaid based on aA Small Place 198711


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Justification

Throughout the Caribbean there are varying levels of unsuccessful development

planning. I would like to focus my attention on Jamaica to bring to you an example of

the effects of government failure and external shocks have on many Caribbean

nations. This was brought out by a documentary produced and directed by Stephanie

Black. This documentary touched upon Jamaicas government being unable to finance

their local and foreign expenditure. They had to turn to the International Monetary

Fund (IMF) and the World Bank (WB). Enshrined in the loan agreement were clauses

that forced the Jamaican government to alter their economic policy.

First, they had to devalue their currency making their dollar cheaper to encourage

exports, as such, this caused the Jamaican people to have to pay more to buy foreign

goods and since they are heavily dependent upon foreign goods, they had to pay

more for their raw materials-oil, gas, etcetera which in turn enable them to produce

less. Hence, the infant industries were stifled in the process.

Secondly, the Jamaican government was allowed to lend loans to their farmers at

high interest rate, which enables them to borrow less, reducing their capacity to

expand for export.

Thirdly, the trade barrios were reduced or removed in some cases so that the infant

industries were allowed to compete with foreign producers who were able to produce

products at a lower cost than the Jamaicans, this again reduced their capacity to exist

in the market.

Fourthly, the WTOs ruling that the preferential prices received by the banana

producers of the African Caribbean & Pacific countries (ACP) must be removed so that

they can have a level playing field for competition. This, in fact pushes the banana

industry to produce less. Since, they are other banana producers owned by

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Americans who are able to produce at a lower cost due to the use of fertilizers and

other modern techniques to gain higher yield at a shorter time.

All in all, there is one trend, which is the decline of the Jamaican domestic producer

ability to produce and export to earn the much needed foreign currency to buy therelevant capital goods for further investment.

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Conclusion

This research paper found that government failures and external shocks

are two major factors that contributed to the unsuccessful development

planning in the Caribbean since most of the Caribbean nations were

unable develop and impose relevant laws, etc. for the protection of its

citizens.

Operating a planned economic system where they can protect and

nurture their infant industries from the more technologically inclined

competitors (Multinational Corporations, etc.) most of the Caribbean

nations were forced to do away with is type of planning and was literally

manipulated by the IMF and WB through the free market system (on the

behalf of the multinational corporation who are seeking cheap labour at

the expense of the Caribbean nations).

Through the liberation of the trade barriers, many Caribbean nations

were placed in a worse off position being unable to earn the livelihood

expected for their citizens. Most of the Caribbean nations are instead,

dependent on the industrialized countries and are in some serious debt

traps which they cannot come out.

The external shocks have lots of negative impacts on these Caribbean

nations; they suffer many setbacks when they strike; despite there is so

much opportunity in the Caribbean, yet there is a lack of foreign direct

investment in many of the Caribbean nations.

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Bibliography

Intermediate Microeconomics 8th edition, Walter Nicholson 200,

Harcourt Inc. USA

www.wisegeek.com/what-is-trade-policy.htm

Auguste Kouame & Maria Ivanova Reyes. 2011. The Caribbean Region

Beyond the 2008-09 Global Financial Crisis. The World Bank:

Washington DC.

Auffret, Philippe. 2003. High Consumption Volatility: The Impact of

Natural Disasters? Policy Research,Working Paper No. 2962. The World

Bank: Washington DC.

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http://www.wisegeek.com/what-is-trade-policy.htmhttp://www.wisegeek.com/what-is-trade-policy.htm


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Life & Debt Produced and directed by Stephanie Black, narration

written by Jamaican Kincaid based on aA Small Place 1987

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Govt Failure Assignment Feb 10th