4.8 The Balance Between Markets And Intervention

Question 1

What are market orientated policies?

Answer 1

Dynamic, outward looking, macroeconomic policies used to stimulate economic growth and development via market forces.

Question 2

What do market oriented policies focus on?

Answer 2

Increasing the productive capacity of the economy by improving healthcare, education and infrastructure to achieve economic development. They also focus on improving the supply side f the economy by using the price mechanism and liberalised capital flows between countries.

Question 3

What are advantages of market oriented policies?

Answer 3

Market forces allocate resources efficiently thus enhancing economic development such policies also create incentives to invest in the economy.

Question 4

What are examples of market oriented policies?

Answer 4

Deregulation
Trad liberalisation
Privatisation
Labour market reforms
Tax reforms

Question 5

What is deregulation?

Answer 5

Refers to the reduction or removal of rules and regulations in a particular industry therefore creating a grater degree of competition and encouraging market forces to allocate resources.

Question 6

What is trade liberalisation?

Answer 6

Refers to policies that encourage free trade, including the free movement of capital flows, by removing barriers to international trade. The IMF believes that trade liberalisation promotes economic growth, development and poverty reduction.

Question 7

What is privatisation?

Answer 7

Process of transferring ownership of public sector assets to private sector ownership. Private sector firms driven by financial motives are argued to be more economically efficient than bureaucrats running public sector organisations.

Question 8

What are labour market reforms?

Answer 8

Policies that remove inefficiencies in the labour market thereby creating greater flexibility and productivity.

Question 9

What are tax reforms?

Answer 9

Lower rates of income tax and corporation tax create incentives to work and to supply, tax reforms ca motivate people to seek employment opportunities and firms give greater incentives for firms to raise output thus achieving growth and development.

Question 10

What are strengths of market orientated policies?

Answer 10

Efficiency
Competitiveness 
Economic growth 
Benefits of free trade 
Investment opportunities

Question 11

What are the benefits of efficiency?

Answer 11

Resources are allocated more efficiently than through government intervention in economic activity.

Question 12

What are the benefits of competitiveness?

Answer 12

These policier help to improve labour market flexibility and productivity resulting in a more internationally competitive labour force.

Question 13

What are the benefits of economic growth?

Answer 13

The profit motive in free market encourages people to work hard and firms to take entrepreneurial risks . Thus market orientated policies have a positive impact on economic growth.

Question 14

What are the benefits of free trade?

Answer 14

Can lead to increased consumer choice, lower prices and improved quality they also enable firms to sell to more customers befog the borders of the country this inevitably contributes to growth and development.

Question 15

What are the benefits of investment opportunities ?

Answer 15

The liberalisation of trade and capital flows reduces barriers to international trade and exchange. This is an important factor in attracting FDI.

Question 16

What are the weaknesses of market orientated policies?

Answer 16

Market failure
Development of a dual economy
Income inequalities

Question 17

What is the weakness of market failure?

Answer 17

Inability of any market oriented policy to deal with market failure is its main weakness. LEDCs also lack sufficient provision of merit goods.

Question 18

What is the weakness of development of a dual economy?

Answer 18

occurs when two distinct economic sectors exist within a country with different level of development. It is common in LEDCs with a low income sector catering for local demand and another for export driven international markets.

Question 19

What is the weakness of income inequalities?

Answer 19

Advantages of economic development do not automatically trickle down to benefit the poorer member of society so government intervention is required to tackle the problems of income inequalities. Tax reforms can also cause income inequalities.

Question 20

What are interventionist orientated policies?

Answer 20

Refer to the use of government involvement to stimulate or regulate economic growth and development.

Question 21

What do interventionist policies focus on?

Answer 21

To correct market deficiencies such as providing adequate housing to ensure a minimum social safety net for all members of society this is highly unlikely to occur in the absence of government intervention. The provision of merit goods and public goods help to improve the economic development for the majority of people in society.

Question 22

Why is government intervention needed?

Answer 22

To provide appropriate infrastructure, needed to encourage FDI to support economic development.

Question 23

Why are interventionist policies used?

Answer 23

Used to protect the welfare of workers, also used to protect the welfare of consumers.

Question 24

What are the strength of interventionist policies?

Answer 24

Provision of infrastructure
Investment in human capital
Provision of a stable macroeconomic economy
Provision of a social safety net

Question 25

What are the strength of provision of infrastructure?

Answer 25

Without government intervention there wold be a lack of infrastructure which are the physical structured required for the effective operation of society.

Question 26

What are the strength of investment in human capital?

Answer 26

The private sector is unlikely to provide sufficient investment in human capital through education and training especially in LEDCs. Thus interventionist policies are required to encourage more provision of such merit goods.

Question 27

What are the strength of provision of a stable macroeconomic economy?

Answer 27

Development requires government intervention to provide a safe and stable economic environment to protect the interest of the economy by interventionist demand and supply side policies.

Question 28

What are the strength of provision of a social safety net ?

Answer 28

Interventionist polices throng direct government provision and a social welfare system ensure that all members of society have access to basic necessities thus preventing absolute poverty in the economy.

Question 29

Why is intervention needed?

Answer 29

Interventionist policies can be used to tackle inequalities which hinder the development and prosperity of LEDCs - cultural and historical context in many coteries mean that women are not given the same opportunities as men thus intervention is necessary. Intervention is also required when a country faces a major emergency or disaster. Without intervention the productive capacity of the country will decline along with a fall in FDI and standard of living.

Question 30

What are the weaknesses of interventionist policies?

Answer 30

Excessive bureaucracy
Poor planning
Corruption

Question 31

What is the weakness of excessive bureaucracy?

Answer 31

Refers to administrative systems, structure and regulations. There is over regulation in many LEDCs which leads to ioncmic inefficiencies rather than economic growth and development.

Question 32

What is the weakness of poor planning?

Answer 32

Political instability and conflict, common in many LEDCs can cause major delays in production thus limiting opportunities for economic development. Th lack of market signals means that the planning is often unrealistic.

Question 33

What is the weakness of corruption ?

Answer 33

Dishonest governments that misuse sources of finance reduce the effectiveness of policies intended to promote economic development. Corruption reduces trust between individuals, firms and governments the acting as a deterrent to FDI.

Question 34

What is good governance?

Answer 34

Refers to the moral conduct of public affairs and the management of public resources. It can be seen as the opposite of corruption, so is important for the development process of an economy. Good governance applies to anyone in a position of responsibility with decision making power including government officials, lawmakers, the military, scientific researchers and religious leaders.

Question 35

What does good governance require?

Answer 35

Transparency in government policies and government affairs.
Determined effort to limit corrupt practices such as enforced fines and sanctions.
Provision os a welfare safety net for citizens who suffer from ill health and/or unemployment.
Accountable and law abiding policies.

Question 36

Why may a complementary based approach be best?

Answer 36

Due to the advantages of interventionist oriented policies and market oriented policies a complementary approach many be the best way to achieve economic development ie. a balanced used of both market oriented development policies and government intervention.