Economics

Study Notes

Market-Led versus State-Led Development

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Two leading economists debate market-led versus state-led development strategies

Danny Quah (LSE)

  • Market led development is built on a family of three foundations or principles - appropriate incentives, private property and a stable macro-economic environment.
  • Development is the processing of empowering people to give them the capacity to pursue goals to improve their well-being, their environment and their destiny.
  • Empowerment requires putting capital and labour together to create products that add value. Market-led development means leveraging this and influencing how productive factors accumulate. Incentives are vital for market forces to operate properly. Private property and stability matter too because without them, promised rewards fail to materialize.
  • China has worked out how to implement a market based economy. Over 600 million people have been brought out of extreme poverty and the country has become a key source of growth for the world economy. Median wages have doubled every decade In contrast to a real and relative decline in median wages in the United States. China is leading the world in innovating towards green energies. Much of this is happening through a market-led development process even though it does not have a western style liberal democracy.
  • Market economic systems inevitably carry baggage - notably social injustice and rising inequality and the power of extractive elites enjoying monopoly profits - these have to be addressed for trust in the market system to be maintained
Does size matter? Debate on the state - Newsnight (February 2015)

Ha Joon Chang (University of Cambridge)

  • Development is a difficult process, markets are the most powerful vehicle yet invented for delivering economic progress but it needs to be properly regulated
  • Markets are means not ends. A well-functioning state is needed to promote sound markets and the consumers and producers that inhabit them.
  • The market rules that exist can have different effects. For example. Import protectionism, tax relief on investment, restrictions on speculation on property. The rules are politically constructed and decided, the state ultimately sets the boundaries for where markets can exist and can influence the final outcomes of markets such as the share of income that goes to the top 1% of income earners or the share of national income allocated to investment.
  • Motives and capabilities matter hugely in the growth and development process.
  • Motives: When producers are creating outcomes that threaten to harm development the state can and should intervene on pragmatic grounds e.g. Land reforms, progressive taxation, direct provision of public and merit goods. Rules can govern CEO pay or corporate takeovers, the use of pesticides in farming.
  • Capabilities: Fledgling industry protection tries to create the space from which developing countries can build capabilities, the state needs to invest in productivity enhancing factor inputs. Development can be sustained by investing in social capabilities, some of which might require constraining certain parts of the market

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