Enquiry question

Are market based or interventionist approaches to development the most effective or might a combination of both provide the most effective formulae for development?

Lesson time: 2 hours

Lesson objectives:

Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation), including a more efficient allocation of resources and economic growth.

Discuss the negative outcomes of market-oriented strategies, including market failure, the development of a dual economy and income inequalities.

Discuss the strengths of interventionist policies, including the provision of infrastructure, investment in human capital, the provision of a stable macroeconomic economy and the provision of a social safety net.

Discuss the limitations of interventionist policies, excessive bureaucracy, poor planning and corruption.

Explain the importance of good governance in the development process.

Discuss the view that economic development may best be achieved through a complementary approach, involving a balance of market oriented policies and government intervention.

Teacher notes:

Activity 1: Reading activity - brief history of development approaches

Between the end of the second world war and the beginning of the 1980s, development within LEDCs was primarily focused on interventionist approaches.  The trade policy promoted by the IMF, as well as development economists, centred on import substitution, interventionist policies, regulation and the nationalisation of state assets. This became the standard policy of choice for many LEDCs, many of whom where governed by 'strong dictatorial leaders'.

In the 1980s, however, saw a move towards free market, supply side economics in many developed nations, which then influenced macroeconomic thought within Developing economies.  This school of thought was championed by Margaret Thatcher in the UK as well as Ronald Reagan in the USA.  This process was further influenced by other factors.  

The first of these was that by the beginning of the 1980s, a number of heavily indebted nations were looking for a further release of development funds to repay the interest on initial loans collected in the 1970s.  Mindful that Mexico and a number of other LEDCs had by now either defaulted on earlier loans or were in danger of doing so, the IMF insisted that as a precondition all new development funding, LEDCs would have to implement a set of SAPs in order to be eligible for the finance.

The second factor was collapse of the Soviet Union during this period.  With the USSR and its satellite systems abandoning state intervention, this undermined the effectiveness of state controlled economic systems.  This also meant that a source of funds was removed, leaving the USA and its allies as the only source of finance available for LEDCs in need of funds.

Lastly, and perhaps most significantly a number of Developing economies in Asia, the so called Asian tigers of Japan, Taiwan, Singapore, Hong Kong and South Korea had successfully employed export led policies and encouraged FDI.  This then became the model of best practise for other ambitious Developing nations wishing to progress.

By the end of the 20th century, however, while market based development approaches remain the model of best practise, many economists have started to raise concerns over an entirely free market approach.  These include doubts over the ability of a completely free market approach to provide LEDCs with the adequate infrastructure to develop.  Another concern was that while economists still promote an export led approach, there was a recognition that agricultural subsidies and tariff barriers within many Developed nations remain a significant barrier to development. 

Concerns also rose about some of the negative externalities associated with a free market approach.  While this approach may increase economic growth it may do less for promoting development.  An example of this being Nigeria which has seen significant economic growth in recent years but remains a nation with very high levels of poverty and low HDI.  It was also noted that by adopting an entirely free market approach almost all of the development is concentrated on urban areas, doing little to alleviate poverty in rural areas, one of the primary millennium goals.  This focus on urban environments also contributes to the externalities in urban cities, such as the growth of slum areas and the degradation of air and water quality in many cities within LEDCs.

Lastly, it was noted that while the Asian tigers benefited from an export growth policy and an increase in FDI, it was also observed that each of those nations also employed significant interventionist approaches in areas such as developing specific products for exports.

Lastly there was a recognition that the one size fits all approach to the SAPs of the 1980s should instead be replaced by policies appropriate to each individual LEDC.  Furthermore that any development policy much recognise the importance of areas such as fair trade, debt relief, more effective targetted aid and effective governance and political stability.