What is the most effective way of organising an economy in order to achieve development?
Chronologically, within the last 50 years the following have been the preferred options of development economists.
- Centralised planning (60s-70s)
- Free market economy (80s)
- Market-friendly economy (90s)
The following model is not a description of actual economies since economies will show variety in their details. Rather it depicts an idealised economy; the economy economists have in mind when proposing how centralised planning might operate.
- There is a dominant state owned sector that represents manufacturing industry.
- A smaller private sector focused on agriculture.
- A weak financial sector (due to limited savings in developing economies) but state-owned banks dominate.
- This is a model of an economy in the early stages of development due to the low savings ratio.
- State owned agricultural marketing boards exploit their monopsony (a market with one single buyer) power to force down prices, making food cheaper for urban consumers.
- Low prices of food keep wage rates in urban areas lessens the wage pressure on urban industry leading to lower costs of production and so production of goods and services at a lower cost.
- State owned banks would direct most savings to government and state owned enterprises to finance preferred investment at low interest rates.
- Industrialisation is synonymous with development so funds invested into agriculture will be cut, as savings are very scarce.
- Maintaining a high exchange rate cheapens the cost of necessary capita goods imported from developed economies.
- Protectionism may be used to support the development of import-subsidising industries.
It should be noted than a centrally planned economy is not necessarily a command economy like Cuba, the Soviet Union or North Korea as there is a small private sector in the economy.
Government control of resources allows the government to control and improve development.
These notes are from a lesson on 01/11/2004.