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Introduction
Our Task is to present to you the meaning of Government Failure and External
Shocks and to express our thoughts on the contribution of these two factors to
the unsuccessful development planning in the Caribbean.
Government failure refers to situations where allocative efficiency may have
been reduced following Government intervention in markets designed to
correct market failure.
External Shocks on the other hand refers to events that produce a significant
change within an economy due to changes of factors outside of the economy.
Shocks of this nature have unpredictable and typically impact supply or
demand throughout the markets.
The failure of governments to provide the needed public goods (such as law
and order, schools, health facilities, the basic factors etcetera, for
development) may result in increases in the proportion of inequality in the
country, which will result in the poor not being able to access certain facilities
for a better standard of living and development of human capital.
Economics in its simplest term is defined as the allocation of scarce resources
to unlimited wants. Therefore, there will always be a disproportionate
distribution of resources as a result of differing wants.
According to Rostow the first stage of economic development is the traditional
society where subsistence provision is the central factor of satisfying ones
needs and wants. Subsequent stages of Rostow explained that the
subsistence society evolves into market for exchanges and trading, thus
economic growth and development. This would mean that there would be
increased competition in the level and distribution of resources and thus the
control of these resources. Thus conflict arises between the society and the
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government. Therefore the role of Government comes into focus which as a
result of inefficient resources allocation causes failures.
The Caribbean countries are categorized as least developed/developing
countries and produces mainly primary goods (agricultural in nature); as such
these countries are marginalized in terms of international trade, particularly in
manufactured goods. Having a low weight in international trade and heavy
dependence on international trade and imported goods makes them
extremely vulnerable to external shocks.
The following structure follows:
Definition and causes of Government failure and external shocks
Justification whether the mentioned factors contributed to the
unsuccessful development of planning in the Caribbean
Conclusion Introduction
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Government Failure
Lets think about a nation without a government for a second. There is no
system to administer justice, no central provision and maintenance of national
defence, no police or fire protection, and no roads or schools.
For each of these elements one would need to provide for individually, make
direct payments, or to take action according to ones free will. In this regard,
private individual(s) will be catering for such needs. However, as like any
private good or service there provisions are significantly base on the
interaction of supply and demand where profit making is the primary objective
and focus. As a result there will be the existence of competition in the short
or long term since the theory of Perfect Market or Perfect Competition does
not hold in reality.
Individuals seek to pursuit self interest which leads to results that are not
efficient. The concept of Market Failure comes into focus, where there is an
inefficient allocation of resources in a free market. Bator (1958) has defined
Market Failure as a failure of a system of price market institutions to stop
undesirable activities, where the desirability of an activity is evaluated
relative to some explicit economic welfare maximization problem. That is,
market failure is an equilibrium allocation of resources that is not Pareto
optimal. The effects of such, results in market power, imperfect information,
externalities or public goods, and natural monopoly.
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These results all have significant negative impacts on the society and the
nation at large.
As a reaction to such failure, the government will often provide goods and
services directly that is usually free at the point of use and paid for out of
general taxation. These may include Education, Waste Disposal, National
Health Service and National Defense. These are defined as Public Goods that
is there are non exclusive (everyone enjoys its benefits whether they pay for it
or not) and non rival (benefits can be derived by additional users at zero
marginal cost).
One can therefore assume that the thought of non government would be
dreadful. We therefore can appreciate the need for government and how
much we rely on the government to provide a range of services each day.
Benefits from government activities and expenditures can be seen almost at
every angle in our society and daily activities. In Guyana, during the past
decade government annual expenditures have been in excess of 40 percent of
its Gross National Product (GDP).
Government in its simplest form is defined as an organization formed to
regulate and exercise authority over the actions of persons who live together
in a society and to provide and finance essential services catering for
everyone (the haves and the have nots). The extent of individuals right to
participate in decisions that determine what governments do varies from
society to society, how much they spend and how they obtain the means to
finance their functions reflect political interaction of citizens
However, as a result of our individuality, our views differ about what the
governments should and should not be doing in part because our valuations of
the benefits derived differ, also the variations in the amount of taxes and
other costs each of us pay yet bearing in mind the existence of market failure.
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Government may provide goods and services because often people do not
realize or underestimate the benefits of certain services such as health and
education (Merit Goods), private sector may cut costs by cutting the quality of
products, economies of scale in providing National Service, and the issue of
positive externalities where the consumption of health care for example, has
benefits to the rest of society therefore it will be underprovided in the private
sector. This does not mean that governments are immune to mistakes and
more so failures.
As the issues of market failure exist, government failure also exists. Non
Market Failure or commonly known as government failure is the public sector
equivalence to market failure that occurs when a government interventioncauses a more inefficient allocation of goods and resources than would occur
without that intervention. That is, government enacting policies that produce
inefficient and/or inequitable results as a result of the rational behavior of
participants in the political process. It either increases the severity of market
failure or causes a new failure to arise. The impacts of government failure
have damaging long term consequences, cause more problems than solve
problems and its policies are ineffective.
The Public Choice Theory as it relates to government failure is important for
two reasons:
i. The fact that the market is inefficient does not imply that government
will do any better, that is government intervention will make a bad
situation worse
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ii. Governmental decisions depend on procedures and institutions in the
political process and on the incentives created for participants in the
process.
There is a demand and supply side that exist in Government failure. The
supply side of government results from agent or principle problem while the
demand side includes preference-revelation problems and the illogics of
voting and collective behavior.
Causes of Government Failure
i. Regulatory Capture government agencies appear to operate in favour
of the vested interests of producers rather than consumers. The
Common Agricultural Policy (CAP) is widely criticized as a classic
example of government failure and that the current reform process does
not go far enough.
ii. Political Interest pursuit of self interest amongst politicians and civil
servants often lead to misallocation of scarce resource. Deciding where
to build new roads, by passes, schools and hospitals may be decided
with at least one eye to the political consequences.
iii. The law of unintended consequences government policy will always
lead to at least one reaction from either consumers or producers that
are unanticipated or unintended. There is a popular saying Wiser the
Government smarter the people this means that people find ways to
evade laws; shadow markets develop to demoralize an official policy;
people act in unexpected ways either because of ignorance or by error.
iv. Government intervention and evasion increase taxes on de-merit
goods (cigarettes) might lead to an increase in attempted tax
avoidance, tax evasion, smuggling and the development of black
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markets where trade takes place between consumers and suppliers
without paying tax.
v. Government intervention and disincentive effects national minimum
wage for example, can lead to real wage unemployment, also higher
rates of income taxes have negative effects on the incentives of wealth
creators in the economy and generally acts as a disincentive to work
longer hours or take a better paid job. On the opposite side lack of
effective government policies reduce the scale of income and wealth
inequality is also a cause of government failure since inequality can,
over the longer term create many deep rooted problems for society
once social cohesion starts to break down.
vi. Policy decisions base on imperfect information government will choose
to go ahead with a project or policy without having the full amount of
information required for a proper cost benefit analysis resulting in
misguided policies and damaging long term consequences.
Government failure can also occur in a non market economy
Fall of the Soviet Union in the Late 1980s and 1990s marked the failure of
command or planned economies as a means of allocating resources among
competing uses. In such system central planners supplied products that are
simply not wanted by consumers resulting in loss of allocative efficiency since
there are no price mechanism to signal changes in consumers preferences
and demand.
Most planned economies have been moving towards the Western Mixed
economy. Czech Republic, Poland and Hungary are all said to be moving
towards a market based system for the allocation of resources for example
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through programmes of privatization and market liberalization. Many have
enjoyed fast rates of economic growth and a rise in relative living standards
both before and since their accession to become members of the European
Union.
What is external shock?
External shock refers to events that produce a significant change within aneconomy due to changes of factors outside of the economy. Shocks can be
climatic or economic in nature. Shocks of this nature have unpredictable and
typically impact supply or demand throughout the markets and development
as a whole.
Causes of external shocks
External shocks can be caused by my factors beyond the control of anyone.
The following are some of the key causes of external shocks:
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Fluctuation in commodity prices- changes in commodity prices of oil,
gas; industrial metal, food, etc. can have significant negative impact on
the development of the Caribbean nations. Since, both the oil producing
and non-oil producing Caribbean nations are heavily dependent on the
importation of these commodities from the industrialized countries. As
in the case of oil or gas, an increase in the price of these commodities
(which is a form of substance that produces energy for the many
machines and factories in the Caribbean, countries) can result in higher
prices on the goods produced for export, which can result in a decline in
demand for the Caribbean goods on the world market and in many
trading blocks. Thus, will result in the Caribbean nations having a
smaller capacity to buy the relevant capital equipments and technology
to boost their export capacity and most of all be unable to earn an
income for their main their people.
Wars and terrorism-phenomenon of this nature do have dire
consequences on the Caribbean nations since; they are so dependent on
the industrialized nations for food, oil, remittances, etc. These
phenomena tend to develop some degree of economic contraction, in
that, the Golf war of 1990, where Iraq was invaded by a U.N.-authorized
coalition force from 34 nations. This during this war oil fields and oil
refinery plants were on fire; Iraq dumped 400 million US gallons
(1,500,000 m3) of crude oil into the Persian Gulf1. While in the
Caribbean and other parts of the world experienced an increase on the
price of oil on the world market.
Natural Disasters-this refers to hurricanes, earth quakes, floods,
Droughts, Famine, etc. phenomenon of this nature do have significant
effects on developmental planning. In that, this can cause serious
damages to capital investment, lost of human capital, etc. The
Caribbean region is vulnerable to these phenomenons when taking into
1 http://en.wikipedia.org/wiki/Gulf_War#cite_note-1189
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account climate change and global warming. Thus, depending upon the
extent, size etc. of the shock; if the size of the shock is large it can
through the whole economy into a state of depression or cause major
set backs for development if the size and duration of the shock is
minimal. Due to this volatile situation many of the Caribbean nations are
unable to attract adequate foreign direct investment (FDI) to boost
production and hence, development. Natural disasters affect the
production base of Caribbean economies and have strong effects on
household consumption. Given the small geographic size of many
Caribbean countries, natural disasters can sometimes have nation-wide
effects. Empirical analysis for the LAC region suggests that natural
disasters significantly affect the growth of output, consumption and
investment (Auffret, 2003)2.
Economic Policies- These are policies that comprised a collection of
rules and regulations which pertain to economic development (such as
interest rates, taxation, labour market policies,trade policies, etcetera),
where trade inter-alia plays a vital role. Every nation has some form of
trade policy in place, with public officials formulating the policy which
they think would be most appropriate for their country. The purpose of
trade policy is to help a nation's international trade run more smoothly,
by setting clear standards and goals which can be understood by
potential trading partners. In many regions, groups of nations work
together to create mutually beneficial trade policies3. Thus, let us look at
the trade policies created by the government to boost and nurture
infant industries who are unable to compete with producers on the world
market. These policies took the forms of tariffs, quotas and other trade
barriers for the protection of the infant industries. The removal of these
barriers due to trade agreements with other trading block has resulted
2 Auffret, Philippe. 2003. High Consumption Volatility: The Impact of NaturalDisasters? Policy Research Working Paper No. 2962. The World Bank: Washington DC.
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in the infant industries going under. Since, they will be unable to
produce goods at a lower price, better quality etc. given the level of
technology at their disposal as is noted in the modernization theory
developing countries were endowed with obsolete technology which is
sold them at a high price (while the developed a more industrialised
countries has real time technologies which can earn them economies of
scale, better product packaging, etc.). Hence, people are unable to earn
an income to cover their basic needs, repay their loans, etc. As can be
seen in the documentary entitled Life and Debt4 story based on
Jamaicas unsuccessful development of their economy through their
infant industries, which was cause by agreements entered into by the
government with the IMF, World Bank, WTO, etcetera.
4 Life & Debt Produced and directed by Stephanie Black, narration written by Jamaican
Kincaid based on aA Small Place 198711
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Justification
Throughout the Caribbean there are varying levels of unsuccessful development
planning. I would like to focus my attention on Jamaica to bring to you an example of
the effects of government failure and external shocks have on many Caribbean
nations. This was brought out by a documentary produced and directed by Stephanie
Black. This documentary touched upon Jamaicas government being unable to finance
their local and foreign expenditure. They had to turn to the International Monetary
Fund (IMF) and the World Bank (WB). Enshrined in the loan agreement were clauses
that forced the Jamaican government to alter their economic policy.
First, they had to devalue their currency making their dollar cheaper to encourage
exports, as such, this caused the Jamaican people to have to pay more to buy foreign
goods and since they are heavily dependent upon foreign goods, they had to pay
more for their raw materials-oil, gas, etcetera which in turn enable them to produce
less. Hence, the infant industries were stifled in the process.
Secondly, the Jamaican government was allowed to lend loans to their farmers at
high interest rate, which enables them to borrow less, reducing their capacity to
expand for export.
Thirdly, the trade barrios were reduced or removed in some cases so that the infant
industries were allowed to compete with foreign producers who were able to produce
products at a lower cost than the Jamaicans, this again reduced their capacity to exist
in the market.
Fourthly, the WTOs ruling that the preferential prices received by the banana
producers of the African Caribbean & Pacific countries (ACP) must be removed so that
they can have a level playing field for competition. This, in fact pushes the banana
industry to produce less. Since, they are other banana producers owned by
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Americans who are able to produce at a lower cost due to the use of fertilizers and
other modern techniques to gain higher yield at a shorter time.
All in all, there is one trend, which is the decline of the Jamaican domestic producer
ability to produce and export to earn the much needed foreign currency to buy therelevant capital goods for further investment.
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Conclusion
This research paper found that government failures and external shocks
are two major factors that contributed to the unsuccessful development
planning in the Caribbean since most of the Caribbean nations were
unable develop and impose relevant laws, etc. for the protection of its
citizens.
Operating a planned economic system where they can protect and
nurture their infant industries from the more technologically inclined
competitors (Multinational Corporations, etc.) most of the Caribbean
nations were forced to do away with is type of planning and was literally
manipulated by the IMF and WB through the free market system (on the
behalf of the multinational corporation who are seeking cheap labour at
the expense of the Caribbean nations).
Through the liberation of the trade barriers, many Caribbean nations
were placed in a worse off position being unable to earn the livelihood
expected for their citizens. Most of the Caribbean nations are instead,
dependent on the industrialized countries and are in some serious debt
traps which they cannot come out.
The external shocks have lots of negative impacts on these Caribbean
nations; they suffer many setbacks when they strike; despite there is so
much opportunity in the Caribbean, yet there is a lack of foreign direct
investment in many of the Caribbean nations.
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Bibliography
Intermediate Microeconomics 8th edition, Walter Nicholson 200,
Harcourt Inc. USA
www.wisegeek.com/what-is-trade-policy.htm
Auguste Kouame & Maria Ivanova Reyes. 2011. The Caribbean Region
Beyond the 2008-09 Global Financial Crisis. The World Bank:
Washington DC.
Auffret, Philippe. 2003. High Consumption Volatility: The Impact of
Natural Disasters? Policy Research,Working Paper No. 2962. The World
Bank: Washington DC.
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Life & Debt Produced and directed by Stephanie Black, narration
written by Jamaican Kincaid based on aA Small Place 1987
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