Economics

Evaluate the proposition that Economic development is best achieved through the market system:

Economic Development is a sustainable increase in living standards, that implies increased per capita income, better education and health as well as environmental protection. A market based system is an economy in which prices are largely determined by supply and demand and whose government has little direct control over the means of production or trade.

A market based system does offer potential for economic growth in certain cases. Primarily, most of the potential successes of a market based economy come through increased privatisation and increased levels of FDI by MNCs. The diagram below of a perfectly competitive market against a monopoly shows the effects of privatisation.

A breaking up of any state owned enterprises or an increased level of FDI will mean an increase in the number of firms operating within a given market. With more firms operating, it will mean a greater level of business competitiveness and with that, consumers will see a reduction in the price of goods and services within an economy as their will be a more efficient allocation of resources with the increased number of firms. This may also be complimented by a greater variety of choice for consumers because of the increase in firms. This may contribute to economic development because firms may not only compete on price of goods and service, but also better quality products. If consumers are able to buy better quality goods and services without a substantial increase in price of the goods then their living standards may increase with the consumption of better quality goods. For example in Chile there was a break up of state owned enterprises and an increased level of FDI by North American firms into Chile. The result was the country having the highest per capita income in South America by 1980 and a falling unemployment rate from 25% to 12% over a 15 year period. Therefore this is a case study which supports the declaration in the question.

There may also be problems with interventionist policies, whereby the Government of the country manipulates the economy, that fail to address economic growth. There is the possibility that if the government plays a very large role in the economy, that there may be increased inefficiencies and over staffing. This is because if the government takes a leading role in the economy, it may reduce the size of the private sector and mean many of those who previously worked in the private sector may come over to the public sector and potential over staffing. Furthermore, government expenditure may become excessive if they play a leading role in trying to achieve economic development as they will increase their spending to try and combat the issue nationally. If their is an increase in spending, this may contribute to a growing government deficit. A growing deficit may led to the need for borrowing and an increase in the money supply as a result of the government trying to resolve economic development. If there is an increase in the money supply then the value of money decreases and so more money will be needed to purchase goods and services in the economy, creating inflation. For developing countries, this will mean that those who are still in poverty or low income households will be less able to purchase goods and may contribute to a decline in living standards as a result of reduced ability to purchase goods and services. Therefore the interventionist approach may not achieve economic development.