Evaluating Market Orientated Approaches Versus Government Intervention

Pros & Cons of Market Oriented Approaches

Market orientated approaches aim to reduce government intervention and free up private-sector economic activity so that national output (real GDP) increases
As national output increases, the potential to break the poverty trap increases and this can lead to better economic development in a nation

Pros and Cons of Market-Orientated Approaches

Pros

Cons

Competitiveness: the more competitive the environment the more foreign firms are likely to invest as competition lowers costs and generates innovation
Efficiency: Less government intervention should result in better allocation of resources as the process is led by the market forces of demand and supply
Economic growth: free markets encourage entrepreneurship in the search of profit and this increases real GDP
Increased FDI: Multinational corporations prefer to invest in economies where the markets are more open, where there is less regulation and government intervention
Trade liberalisation: Removing the barriers to international trade such as tariffs and quotas increases economic growth, raising household income

Increased market failure: with less government intervention the amount of negative externalities will increase (both production and consumption)
Development of a dual economy: Many LEDCs have both a large informal sector and a thriving formal sector based around the activities of multinational corporations which contributes to growing income inequality
Increasing inequality: the benefits of free markets are increasingly concentrated in the hands of a few as those with assets continue to buy up the factors of production

Examiner Tip

You will notice a lot of similarities in the lists on this page with the pros and cons of supply-side policy, but there is one distinct difference. When evaluating supply-side policy, the focus is on increasing national output (real GDP). When evaluating pros and cons in the context of economic development, focus on how to market policies have the potential to improve lives and the standard of living.

One way to do this is to always link a policy to the poverty trap diagram - and then explain where the policy would intervene to break the poverty trap. Here is an example

5-2--poverty

More international trade increases national output → more workers are required to produce this output → employment increases → human capital increases as a result of employment → productivity increases → wages increase → health and education increase → leading to higher human development and a better standard of living

Pros & Cons of Government Intervention

Government intervention can be vital to the development of its citizens
Provision of services, merit goods, and public goods enhances the lives of a country's citizens

Pros and Cons of Government Intervention

Pros

Cons

Infrastructure: energy, transport, health and telecommunications infrastructure improves the standard of living
Investment in human capital: education increases skills leading to higher productivity in an economy
Provision of social welfare: support mechanisms for the most vulnerable in society helps to raise the standard of living
Stable economic growth: government intervention can even out the swings in the business cycle
Reduction in income inequality: governments are able to regulate the disparity between rich and poor through the use of policies such as progressive taxation
Institutional systems: Strong institutions such as police and defence forces can be used to deal with national emergencies such as earthquakes which helps a country to recover more quickly

Inefficiencies: The government focusses on services and not necessarily on generating profit. This can generate inefficiencies in resource allocation and the development of large, overstaffed organisations
Corruption: large amounts of money generated through taxation can prove tempting to those managing the budgets leading to the misuse of government funds and other forms of corruption
Government capture: powerful business people or large corporations can build such strong relationships with government ministers that they end up controlling the resources through the influence
Poor planning and decision-making: politicians are assigned to run departments in which they do to necessarily have any expertise and this can lead to poor planning and decision making
Fluctuating political agendas: government terms are relatively short and two party government systems tend to result in wild fluctuations of policy which can create instability

Evaluating Market Orientated Approaches Versus Government Intervention (SL IB Economics)

Revision Note

Pros & Cons of Market Oriented Approaches

Examiner Tip

Pros & Cons of Government Intervention

Author: Steve Vorster