Balance between markets and
intervention
• Learning outcomes
– Discuss the positivenegative outcomes of marketorientated 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:
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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:
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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