development policy - the role of governments
The role of governments
The government plays a pivotal 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.
Free market economic system - policies
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 and encourage market led development by:
- Using the tax system as an incentive for enterprise and a tool for income redistribution
- 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 eg though competition laws and providing public goods funded from general taxation
- Offering
a welfare safety net for those who ‘fail’ through
illness or temporary unemployment
Policies in a planned economic system
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 ability of a government to manage the economy and promote development is constrained by internal and external factors.
Internal Constraints on Government Action in Less Developed Countries ("LDC's"):
-Have limited domestic resources to accelerate the development of their country
- In a democracy, the authority of a government to pass laws - its mandate - comes from having won an election which allows say up to 5 years in power. To win re-election governments may follow policies popular with the electorate eg price limits on essentials.
· Current government budget, the size of the national debt, foreign debt and ability to meet interest payments constrain action.
External Constraints on Government Action
LDC's face external factors beyond their control:
- Globalisation: LDC's are part of a global, increasingly integrated and competitive international economy
- Conditionality: If seeking loans from the World Bank or IMF LDC's must implement structural adjustment programmes (SAPs)
- Open Economy: LDC's must accept the trade rules laid out by the World Trade Organisation if they are avoid facing high tariffs and restrictions on their exports
- World Business cycle: LDC's dependent on exports will
suffer during a world recession
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