The Role Of Government Intervention In Developing Nations Economy

2102 words - 9 pages

All nations can get the benefits of free trade by being specialized in producing

goods they have a comparative advantage and then trade them with goods produced

by other nations. This is evidenced by comparative advantage theory.

Trade depends on many factors, country's history, institution, size and

geographical position and many more. Also the countries put trade barriers for the

exchange of their goods and services with other nations in order to protect their own

company from foreign competition, or to protect consumers from undesirable

products, or sometimes it may be inadvertent. And even though the tariff barriers have

been reduced significantly but the other ...view middle of the document...


economic development in these countries expands the potential markets

products. Most studies suggest that the developing countries with the highest initial

tariff rates stand to gain most from reducing their tariff

The reason that developing nations generally have higher existing levels of

protection is the barriers such as high import tariffs that makes imported goods

more expensive than domestically products. That means that while the potential

benefits of cutting tariffs are more in the long-term, the short-term adjustment

costs may also be greater if the full scoop for reducing protection is exploited

("Organization for economic," 2008).

Countries have more opportunity to make industry more efficient and

competitive if they cut high tariffs on imports. But this process creates some

losers and some winners. The experience of developing nations indicate they

have greater challenges than those for developed nations because of their

different policy environment and adjusting to change.

Developing countries rely heavily on exports to developed countries. However,

customs and administrative procedures are more concern in trade among

developing nations than in trade between developing and developed nations.

Fees and charges on imports are also important barriers in trade among

developing nations (Love & Lattimore, 2009).

Role of Governments Intervention in Trade Market

Governments play an important role in free trade, it has to enforce and maintain

competition and should put policies that ease new investors access the markets.

Government intervention should be present where there is natural monopolists exist

and competition is not possible. Government has an obligation to ensure that trade

produces fair results (Divounguy, 2010). With government intervention, whatever

activity subsidized it will be getting more of it because of lowering the cost.

One of the main issue in economics is the extent to which the government should

intervene in economy. Free market economists argue that government intervention

should be strictly limited as government intervention tends to cause an inefficient

allocation of resources. They argue that the government liable to make wrong

decisions due to influence by political pressure groups and that they spend on

inefficient projects leading to inefficient outcome. Government interventions also

takes personal freedom away and intervene in individual decisions. Argument against

government intervention see that market is the best at deciding how and when to


In the other hand, other economists argue there is a strong justification for

government intervention. They see that government intervention gives greater

equality by redistributing income and wealth to improve equality of opportunity and

equality of outcome. Another reason is that governments can subsidise or provide

goods with positive externalities...

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