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Lecture

Government Failures in Development


Department
Political Science
Course Code
POL201Y1
Professor
Sophia Moreau

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Politics of Development: Week 8 - November 1st, 2010
Government Failures in Development
- Governments in Africa tax the output of farmers and subsidize agricultural outputs
o Produce economic inefficiencies like price distortions, non-competitive rents, violate
economic interests of most farmers, governments in Africa tend to undermine the
market
o Could otherwise be seamless market interaction
- Elements of Agricultural Policy:
o Cost of inputs
o Cost of outputs
o Cost of secondary/manufactured goods
- Inputs and manufactured goods are expenses, cost of outputs is income
o voÇ(}u]À}(Z(uU(}u(u[o]Ào]Z}}UÀ]]o]Ç
depends on these three things
- /vuvÇ}µv]]v(]UZZouv}v[v}vZulUZÇpend on
government policy
o Government intervention:
Depress the cost of outputs, decrease price farmer will get for final product
Increase the price of manufactured goods, under conditions of ISI, costs are
fairly high
To make up for previous two interventions, decreasing income while increasing
expenses, governments subsidize the cost of inputs
- Government depresses price of crops
o Do it through monopsonies, a marketing structure that sets the price for a crop, buys all
of the crop for a farmer, stores it, and resells it either domestically or on the
international market
No competition between farmers, farmers unable to export themselves, must
sell to marketing board that is state run
Everyone gets same price in a particular year for a particular product
Price set, price stable, no way to get a better price
Government use monopsonies to control domestic prices, particularly
controlling them downward, producers get prices that are less than those on
international market, use marketing boards to tax farmers
Farmers will receive far lower value for crops the produce for export than what
government is able to sell it for on the world market, government keeps huge
percentage of profits from crops
x Effectively, governments are taxing farmers
Governments justify this with the claim that the government, the state, will
accumulate money that they will use to cushion, subsidize suppliers in the years
when market prices of agricultural products fail
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x Depress price when world price is high, subsidize price of a good when
world price is low
o ^]o}u]ulU(u}v[ZÀ}}
sudden loss of income
Very rarely happens, governments most often spend
that money, farmers absorb volatility
x Money usually goes to state bureaucracies that
run the state monopsonies, mostly in the form
of higher salaries
x Into the urban industrial sector, favouring
strategy of economic development through
industrialization, funnelling state resources into
manufacturing sector
x Under ISI, government benefit industrial sector
at the expense of the agricultural sector by
overvaluing the exchange rate
o Makes it cheaper for industries to input
capital exchange rates
o Makes exports more expensive,
demand is pushed down
o Exports are mostly primary
commodities
o Dutch Disease
o Primarily hurting agricultural sector
- Most undervalued currencies: Asian exporting countries
- Big Mac Indicator, illustrates overvalued and undervalued exchange rates, based on rule of PPP,
exchange rates should move to make the price of goods the same in every country, Big Mac
available in almost every country in the world, convertible across countries, if Big Mac costs
$3.57 in the States and everywhere, you have purchasing power parity
- Undervaluing exchange rates depress price of exports
- Overvaluing exchange rates, mainly importer, want to make imports cheaper than they would
normally be
- Governments try to keep the domestic price of food low
o Depressing price of cash crops sold internationally, in so doing control the price of food
for domestic consumers
o Another reason is to control the price of food for domestic consumers, mainly to keep
food cheap for urban workers, to keep cost of labour down and prevent food riots
Keeps food prices down by overvaluing exchange rates, makes imports cheaper,
foreign food cheaper, depresses price of domestically produced food
When world food prices go up, governments can ban exports, to prevent food
shortages at home and keep food prices low
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