In what ways can democracy help and hinder economic development?
Democracy can help as well as hinder economic development. Consequently, democracy is neither necessary nor sufficient for economic development for any nation. The reason for this is that there are non-democratic nations such as China that experience high rate of economic development. On the other hand there are also democratic nations such as India, Costa Rica, Botswana among others that are democratic and have high rates of economic development. There are various ways in which democracy can help promote economic development. Democracy ensures that there is freedom and autonomy, participation and deliberation that provide a conducive environment for development. In this sense, the reduction is social conflict, provision of more civil liberties, economic reform among others attracts more investment in various democratic nations. The result is an increase in the Gross Domestic Product (GDP) of a nation. According to Acemoglu et al. (2014), democracy has a significant as well as a robust positive impact on GDP because it increases a nation’s GDP by approximately 20 percent in the long run. Democracies additionally ensure that leaders are elected based on the agenda that they have for a nation and their track record. For this reason, the leaders in office ensure that they focus on economic development which is a crucial issue in various societies. In nations respective governments allocate sufficient capital and resources towards economic development to meet the manifestos that the leaders had promised the electorate. In order to extend government mandate by the electorate, leaders have to ensure they promote economic development in democratic nations or would be voted out in elections. In this sense, democracies enhance economic development. On the other hand, democracies hinder economic development in various ways. Elections take place frequently in democracies and in some cases, new leaders are elected. As a consequence, it disrupts long term planning and the various interventions that a previous regime had in place for economic development. In addition to that, during the electioneering period, many leaders engage in campaigning for re-election at the expense of focusing on economic development. Therefore there is a lot of uncertainty in democracies that affect the long term projects of economic development and disruptions of such strategies as different regimes have different objectives. Moreover, in cases of unaccountability by public officers, democracy takes a long time to hold such officers accountable due to its slow nature of resolving issues. The result is slow economic development.
Section B
4)
- High interest rates can be bad for economic growth in Developing countries. Discuss.
High interest rates are bad for economic growth in developing nations. The reason for this is that higher interest rates leads to the increase in the cost of borrowing. In this sense, there is high interest payments on loans and credit cards which would discourage people from spending as well as borrowing. Those who borrowed would have less disposable income as a result of spending more on payment of interests. The effect of this is that various sectors of consumption would experience difficulties in staying afloat hence fall. As a result, many people would opt saving more income as opposed to spending due to the attractive interest rates. Consequently, few people would spend income on various aspects of the economy. Additionally, high interest rates would lead to the increase in the value of currency of a given nation. When the value of the currency of a nation increases, its exports become less competitive which would lead to the reduction of its exports and on the other hand increase imports. Therefore, the aggregate demand in an economy would reduce. Moreover an increase in the interest rates would lead to a corresponding reduction in confidence. The reason for this is that interest rates usually affect the confidence of businesses and consumers. As a consequence a rise in the rates of interest would discourage investment because it makes consumers as well as firms become less willing to engage in any risky purchases or investments. Less investments in a nation has the effect of reducing the economic growth because investments play a crucial role of increasing the economic growth of nations. Moreover, the failing consumption sectors would lead to an increase in unemployment hence a reduction of various economic activities in a country. As a result, an increase in the rate of interests in developing nations would be detrimental in their economic development because of the disruptions of the economic activities that ensure growth of an economy. Shafik & Jalali (1991) found out that high interest rates may not affect the performance of growth in the more productive performance results although it negatively affects developing countries to a large extent. Due to the various effects that high interest rates would have on saving and investment in a developing nation, the effect would be slow economic growth rate hence high interest rates can be bad for a developing country.
- Explain the term “Interest rate ceiling” as encouraged by certain governments of developing countries and describe some of its perceived benefits and disadvantages.
Interest rate ceiling which is also known as interest rate cap refers to the various regulatory measures that governments of various nations usually take limit the interest levels. In this sense, financial institutions and banks cannot charge interest levels that are higher than the set interest levels. There are various reasons that make various governments to put a limit to the interest rates. These include the following; economic and political reasons which entail supporting a given area or industry in the economy after identification of a market failure. The government may find out that there are various financial institutions that charge exorbitant interests on their clients hence making excessive profits hence a market failure. It is the duty of the government to protect such clients from these unfair practices and thus governments achieve this by putting a limit on the interest rate. In this sense, there are perceived benefits of interest rate ceiling which include the following; reducing the overall cost of credit and thereby protecting the consumers or clients from the exorbitant interest rates set by various financial institutions (Ferrari, Masetti & Ren, 2018), providing support to some sectors in the economy as well as addressing market failure. Despite the intended intention of protecting various customers in the financial market from exorbitant interests, there are various negative effects that are associated with interest ceilings or caps. The existence of interest rates usually shrink the access of poor people to financial services. Additionally, interest rate ceiling presents challenges and difficulties for various semi-formal or formal financial institutions to cover their costs which usually drives them out of the financial market. The effect of this is leaving the customers to resort to informal credit markets that are usually very expensive. Furthermore, the existence of interest rate ceilings usually lead to the increase of various commissions as well as non-interest fees in a move to ensure that the financial institutions are able to meet the operation costs. Other negative effects associated with the existence of interest rate ceiling include lower supply of credit, a reduction in the price transparency, a reduced number of financial institutions, low profitability by the various financial institutions as well as lower loan approvals for customers as stated by Ferrari, Masetti & Ren in 2018. Subsequently, despite the various perceived benefits of interest rate ceiling in many developing countries, there are various adverse effects that are associated with interest rate ceiling in the economy.
5)
- What economic benefits might a developing country gain by reducing corruption? What are some measures that can be taken to reduce corruption?
There are various economic benefits that a developing nation might gain by reducing corruption. The reason for this is that corruption hinders economic growth especially in developing nations. Therefore reducing corruption would be beneficial to various developing nations. The various economic benefits that would accrue from reducing corruption include the following; First, reducing corruption would lead to the right value for quality of items in the market because there would be a reduction in oligopolies or monopolies in the economy caused by bribes. The presence of various providers of goods and services would ensure competition and provision of quality products that would stimulate the economy hence leading to its growth. Secondly, reducing corruption would ensure that resources are efficiently and appropriately allocated to the deserving organizations. Qualified organizations would provide quality services and products hence stimulate the economy as opposed substandard and failed projects of organizations that briber their way and ultimately fail to deliver. Reducing corruption would also lead to a more even distribution of resources. In this sense, various small business owners that are the majority in a developing nation would have enough and required resources to engage in economic activities that would boost economic growth and development. Additionally, reducing corruption would act as a stimulus to innovation where people who innovate things in society get the protection that they deserve. In this sense, more innovations would be initiated by people because of proper protection which would play an important role in stimulating economic growth especially in the modern era of technological advancements. Moreover, investors prefer nations that have low corruption rates hence reducing corruption would attract foreign investments. As a consequence, foreign direct investments would boost economic growth in developing nations.
There are various measures that governments can take in developing nations to reduce corruption. These include establishing independent and effective institutions that investigate and prosecute various cases of corruption without fear or favor. Those found to be corrupt should be heavily penalized to deter other people from engaging in corruption. Furthermore, governments should confiscate the various proceeds of corruption which would prevent the various corrupt people from benefiting from corruption. More importantly it engaging in measures that would prevent corruption such as educating the masses on the adverse effects of corruption and the need to avoid it (Langseth, 1999). The various leaders in influential positions should also engage in zero tolerance in corruption hence reducing corruption to a large extent.
- What are the key arguments for state intervention within the economy to solve the problems of developing countries?
Marxists economist usually argue that states or governments ought to intervene in various areas of the economy. The arguments for the state intervention within the economy to solve problems of developing nations include; state intervention would ensure there is a greater equality in the economy where the state would redistribute wealth and income for purposes of improving the equality of outcome and equality of opportunity. The reason for this is that in a free market wealth, income as well as opportunities are usually unevenly distributed and therefore there is a need for the state to intervene and redistribute these aspects of the market. Additionally, the state should intervene to reduce the cases of unemployment as well as address the issue of recessions in the economy. There are also cases of market failure and the state could intervene and provide subsidies or in some cases provide various goods with that have positive externalities because various markets usually fail to take into consideration externalities among others. Moreover, it is only the state that could intervene and provide solutions to various major crises in the markets such as pandemics hence provide disaster relief in the economy. Moreover, the government should intervene in the economy to ensure that it limits the monopolies that exist in the market because monopolies tend to take advantage of lack of competition. Moreover, state interventions ensure that they correct the market failures that exist in a free market. In this sense, the state intervention would lead to the improvement of the performance of the economy. Other benefits that the economy could gain from the intervention of the state in the economy encompass securing property rights of the various players, ensuring social justice exists and promote welfare opportunities for the market players among others. Consequently, it is important for governments or states to intervene in the economy for purposes of establishing stability and protecting consumers in the market (Yahaya, 1991). The result would be the growth and development of an economy due to its stability.
References
Yahaya, S. (1991). State Intervention versus the Market: A Review of the debate. Africa Development/Afrique et Développement, 55-74.
Langseth, P. (1999). Prevention: An effective tool to reduce corruption. United Nations Office for Drug Control and Crime Prevention, Centre for International Crime Prevention.
Ferrari, A., Masetti, O., & Ren, J. (2018). Interest rate caps: the theory and the practice. The World Bank.
Shafik, N., & Jalali, J. (1991). Are high real interest rates bad for world economic growth? (Vol. 669). World Bank Publications.
Acemoglu, D., Naidu, S., Restrepo, P., & Robinson, J. A. (2019). Democracy does cause growth. Journal of Political Economy, 127(1), 47-100.