4.8+The+balance+between+markets+and+intervention

 What is the role of governments, in the promotion of development?

The government plays an important role in the process of development. The precise role of government depends on the type of economic systems selected to resolve the economic problem of what goods and services to produce, how to produce them and who is to receive them In a free market economic system, governments take the view that markets work, assume a laissez faire (let alone) approach, step back, and allow the forces of supply and demand to set prices and allocate resources. Governments can encourage market led development by: In a planned economic system government takes the view that markets fail and therefore assume an interventionist, planning approach. Governments mobilise resources and coordinates production usually within the framework of a 5 year plan. The general view based on experience is that markets work better than planning. In practice most economies are mixed with private sector firms organising production in the expectation of profits.Public sector industries owned and managed by the government and funded/subsidised out of taxation e.g. schools. The appropriate balance of interventionist or laissez faire for government in the development process is highly controversial. As economists students are expected to offer a balanced view on the merits and defects of each approach. Do not be afraid to adopt a critical view of the validity of views in this area. For example whilst low taxes may increase incentives they may also increase inequality and poverty. There is a role for Governments in development certainly in terms of:
 * using the tax system as an incentive for enterprise
 * creating a stable macroeconomic environment through balanced budgets, balance of payments and manageable national and foreign debt. Stable macroeconomic environment means stable prices and high confidence amongst domestic firms and overseas competitors
 * encouraging competition through privatisation and anti-monopoly laws.
 * Enforcing private property rights and commercial contract through a fair and impartial legal system and police force
 * Protecting workers by defining maximum working hours and minimum wages
 * Protecting consumers through price regulation and subsides
 * Minimising market failure e.g. though competition laws and providing public goods funded from general taxation (infrastructure important).
 * Subsidising merit goods and taxing demerit goods.
 * Offering a welfare safety net for those who struggle through illness or temporary unemployment. Reducing inequality (but to what extent?).
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Encouraging entrepreneurship through upholding (intellectual) property rights.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Promoting macroeconomic stability

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Conclusion: How do economic system affect the development process? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The development experience of free market (capitalist) and command (socialist/communist countries) is very different. The evidence seems clear: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">•Command economies have been unable to deliver sustained economic development and democracy. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">•China has experienced huge increases in economic growth through transforming it’s economy from a planned economy to a market economy. However it has not always improved the quality of life for everyone. A key evaluative point may be that market liberalisation is needed for economic growth but it does not ensure development. Think about the rising inequality in China. Also is the economic growth environmentally unsustainable? What I found amazing coming to China is the lack of social medicine, as even healthcare is now allocated by the private sector. Is this desirable? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[|Extension reading:The invisible hand and development]

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Student task: Now do some research on the 2011 US Debt crisis. This was basically about the two sides disagreeing over the strategies required for economic growth. The Republicans do not want to reduce Government debt by raising taxes as they believe in the free market and believe taxes reduce efficiency and incentives. But higher taxes are fairer as the rich pay more. The Republicans want the budget deficit to be cut by cutting Government expenditure. But who would be most affected by this? Would that be fair?

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">A good starting point is here for your research…..

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[]

= = =<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Extension Reading: Cramp Development chapters- = <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">