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The balance between markets and intervention
Terms in this set (11)
Ways to achieve economic development
1) Market based policies
2) Interventionist policies
3) Combination of both
Market based policies
Policies that aim to minimise the role of the government and allow market outcomes to be determined by supply and demand
Advantages of market-based policies
- Has worked before e.g. export promotion in South East Asia
- No debt ∴ no foreign debt problems
- Increases efficiency:
allocative - free trade
productive - deregulation/efficiency
Disadvantages of market based policies
- Trade liberalisation does not work on its own
- Without government intervention, market failure occurs
- Inequality → if the government is not providing education and healthcare, the poor cannot afford it.
Conclusion of using market based policies
They only work if there is already a comparative advantage in a secondary product and if there is sufficient infrastructure. There needs to have been some government intervention from before.
Policies that involve the government actively intervening to manipulate market outcomes
Advantages of interventionist policies
- Provides infrastructure [LRAS] and leads to diversification
- Overcomes market failure (especially in healthcare and education) [Externality diagram]
- Improves equity in distribution income
(cheaper education and healthcare) [Lorenz curve or poverty cycle]
- Provides stability as there is less volatility (increases investment)
Disadvantages of interventionist policies
- Government spending leads to debt
- Government failure (may lack skills to provide high quality education, healthcare, infrastructure)
- Economies that are more interventionist are more likely to have corrupt governments
Conclusion of interventionist policies
If there is already infrastructure, then we should be liberalising to increase efficiency. However, if there is no infrastructure then this is needed. It also depends on the government budget - if causes debt, leads to long-term problems. If the money is coming from aid then there is no strain on the government budget.
Why does there need to be a balance between markets and intervention?
Because too much intervention leads to inefficiency and debt but too little intervention leads to market failure. The countries with lack of infrastructure should be interventionist and countries with it already in place should liberalise e.g. through export promotion.
What does intervention need to be successful?
- good allocation of government funds
- Equal distribution of income
- Confidence (increases investment)
THIS SET IS OFTEN IN FOLDERS WITH...
Measuring economic development
The role of domestic factors
The role of international trade
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