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

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

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