Webnote 481: syllabus 4.8 Markets +Intervention

Market or government: what best promotes development?

Market: = resource allocation system outward oriented strategy market based strategy free enterprise strategy free trade approach to development strategy laissez faire (let the market do/ Adam Smith) market function in terms of " signalling and incentive" i.e. resource allocation mechanism Profit motive " incentive function of market". Market mechanism allocates resources effectively : better resource allocation Privatization (firms privately owned)- firms and households benefit from higher wages and higher profits More growth: more resources available for development Government receives more tax revenue FDI encouraged. MNC's are welcome to do business in the domestic nation Market based / outward oriented strategy promotes free trade ie reduction of trade taxes (tariffs) and membership of the WTO (World Trade Organization) that supports free trade Result: Growth Development (conditions necessary for) Employment Resource Allocation and efficiency

V

State: = resource allocation system Intervention by government is common planned/command economy is the extreme import substitution strategy common aid is key part of development strategy state owned monopolies are common (these are inefficient producers) Government dominates economy and restrictions in place on markets or even an outright ban on market activity ( command economy) Nationalization (state owned enterprises) common Low productivity (o/p per worker per hour low) Low growth in economy: consequence of this is low development Poverty common (including absolute poverty) Problems with corruption Result: Economy stagnates Relative (to comparable nations) and absolute poverty (lack of food, shelter and clothing) evident

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SECTION B 3. Study the extract below and answer the questions that follow.

Answer one question from this section.

Urban farms to feed Cuban cities

TheCubangovernmenthaslaunchedaprojecttosurrounditscitiesandtownswiththousands of organic farms to make the growing of fruit, vegetables and the raising of livestock low cost and environmentally friendly.

The government hopes this new approach to urban farming will make food cheaper and more abundant. It is also hoped that transport and fuel costs will be reduced and that urban dwellers will be encouraged to leave their city jobs and work in the farming sector. The farms are mostly privately-owned with some cooperatives, and more land has been leased to them. These private farmers and cooperatives own about 40% of Cuba’s farmland and produce about 70 % of food grown.

In the past farmers had to purchase their subsidized resources from the government. However, they can now purchase their own seed, equipment and other materials directly from suppliers. They can choose what they want to grow. Farmers are also allowed to sell some of their produce to licensed government sellers or sell directly to consumers at roadside stands. Farmers can also vary the price of the products they sell. These changes allow for greater reliance on the price mechanism and for a more efficient allocation of resources.

However, the Cuban government still plays a major role in production and support of the rest of the agricultural economy. It continues to hold a monopoly over essential foods such as rice, beans, pork and bananas by controlling the production, distribution and land use for these foods. Prices for these commodities are set by the government, which also provides infrastructure, schooling and overall direction to the economy. Nevertheless, poor planning and corruption continue to be obstacles to economic development.

Not all urban farmers can see the long term benefits of this and are concerned about greater competition between producers and the possibility of rising input prices which may result if subsidies end. However, they are encouraged that the reforms allow them to make more decisions about what to produce and how to sell. They believe that more food will be available for sale and consumption. Foreign and local experts welcome the project and expect that as the market mechanism becomes more important, economic growth and economic development will be stimulated.

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[Source: Source: adapted from The Guardian, 7 February 2010 ‘Cuba plans city farms to ease economy woes’ by Marc Frank]

(This question continues on the following page)

(a) (i) Define the term allocation of resources indicated in bold in the text (paragraph ). (ii) Define the term infrastructure indicated in bold in the text (paragraph). [2 marks]

(b) Explain why a “greater reliance on the price mechanism” might result in “a more efficient allocation of resources” (paragraph). [4 marks]

(c) Explain the relationship between economic growth and economic development. [4 marks]

(d) Using information from the text/data and your knowledge of economics, evaluate the view that a balance between market-oriented policies and government intervention is needed in order to promote economic development in Cuba. [8 marks]