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TOPIC 8

TOPIC 8. Government Failure and the Resurgent Preference for Markets Over Planning. THE ISSUES. Problems of government intervention in LDCs The market economy sociocultural preconditions and economic requirements Role and limitations of the market in LDCs. Introduction.

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TOPIC 8

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  1. TOPIC 8 Government Failure and the Resurgent Preference for Markets Over Planning

  2. THE ISSUES • Problems of government intervention in LDCs • The market economy sociocultural preconditions and economic requirements • Role and limitations of the market in LDCs

  3. Introduction • Disenchantment with planning and perceived failure of government intervention have made many economists and politicians in developing countries to increase the use of market mechanism as a key instrument for promoting greater efficiency and more economic growth • This view is also shared by the heads of major international development organizations

  4. U.S president, Ronald Reagan in a speech in 1981 said “If the decade of the 1970s could be described as a period of increased public-sector activity in the pursuit of more equitable development, the 1980s and 1990s witnessed the reemergence of free-market economics as part of the ever changing development orthodoxy

  5. Among the early converts include the Latin American countries such as Chile (1973), Uruguay (1974) and Argentina (1976) • More recently other countries have also changed to more free-market style of planning • They include Kenya, Peru, the Philippines, India and the former Soviet Union

  6. The role of public sector has been reduced, through; • domestic market liberalization programs, such as elimination distortions in interest rates, wages, and prices of consumer goods • Improving their comparative advantage in the international economy, by lowering exchange rates, promoting exports and eliminating protections

  7. Among international organizations which have encouraged a more free market are the IMF and the World Bank • The IMF is requiring substantial market liberalization programs and policies to improve comparative advantage and promote macroeconomic stabilization as conditions for access to it high credit windows

  8. The World Bank is carefully scrutinizing its project lending to ensure that the projects proposes could not otherwise be undertaken by the private sector • It is also encouraging joint ventures between governments and private enterprises as part of its structural adjustment lending.

  9. The public sector in most developing countries has grown dramatically, • Accompanied by inefficiency and waste • Returns to public investments have been declining, due to factors such as; • Poor investment decisions • Delay in construction • Low-capacity utilization • Insufficient maintenance of public projects

  10. Table 16.1 provides a listing of the problems attributed to state intervention in developing countries

  11. Any discussion on the issue of free market versus state intervention must be made with care • Market failure does not always justify state intervention and government failure does not mean free market can do a better job

  12. For example, in South Korea, the Pohang Steel Company was publicly operated and highly efficient, until its privatization in 2000 • While the Steel Authority in India, also publicly owned and operated is a model of inefficiency • The solution to this issue is not straight forward and has to be looked at case by case

  13. LDCs could be pursuing market reforms for various reasons such as; • Dissatisfaction with the performance of their public sectors • IMF or the World Bank pressures • Before any reform could be made, there are some socialcultural preconditions and economics practices that must be present

  14. The market economy sociocultural preconditions and economic requirements • Market economies are embedded in a web of social institutions and habits. • Market activities are inseparable from the rational individuals who form the market. • institutions define the “rules of the game” in the society. • Institutions contextualize individual decision-making, especially with respect to risky decisions.

  15. Private property” is a social system to determine who is using what, and is a quick and easy way for strangers to tell what group/association/person is using what. • Culture may be defined as the total complex of spiritual, material, intellectual and emotional features that characterize a society or social group

  16. The following list gives 14 institutional and cultural requirements for the operation of effective private market; • Trust (in banks, insurance companies, suppliers) • Law and order (enforcement of contracts) • Security of persons and property • Balancing competition with cooperation (for a safe workplace and a cleaner environment)

  17. 5. Division of responsibility and diffusion of power (an independent judiciary). 6. Community alturism ( a social “safety net” for the impaired, chronically unemployed , the elderly, etc.) 7. Social mobility, legitimation of ambition and toleration of competitiveness 8. Materialistic values as a stimulus to greater production

  18. 9. Deferring gratification to generate private saving 10. Rationality unconstrained by tradition 11. Honesty in government 12. Efficient forms of competition, as opposed to monopolistic control 13. Freedom of information (along with protection of privacy) 14. Flows of information without restrictions or favoritism

  19. In conclusion, market reform involves much more than eliminating price distortion, privatizing public enterprises, • Attentions should be given in providing the necessary institutional preconditions.

  20. Role and Limitations of the market in LDCs • LDCs cannot really on the market mechanism as did developed countries during their early stages of development • one reason is that in most LDCs markets are imperfect • For example the lack of information and the presence of uncertainty most individual producers and consumers face

  21. The producers are often unsure about; • The size of the local markets • The presence of other producers • The availability of inputs • Consumers are unsure about the quality and availability of products and their substitutes

  22. Therefore, profit and utility maximizing behaviour may be based on the wrong information • And can lead to an inefficient allocation of resources

  23. Another reason why LDCs cannot really on the market mechanism is the existence of substantial externalities • Many good such as education and health service may have high social value that is not reflected in their market price • Thus government have to provide for such goods

  24. Market mechanism in LDCs can also result in unequal distribution of income • Governments have to intervene so that the rich with their monopoly dollar votes cannot make the situation worst. • Lastly, governments in LDCs have to intervene with the market mechanism to ensure the desired industries or sectors will get the chance grow for the benefit of the country in the long run.

  25. The following table compares the performance and limitations experienced by South Korea and Taiwan in their process of becoming NICs

  26. The end of topic 8

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