Market-oriented and interventionist strategies for development

Market-oriented strategies

• Trade liberalisation: cut tariffs to gain from comparative advantage, cheaper inputs and competition. Risk: infant industries wiped out, lost tariff revenue.
• Promoting FDI: tax incentives, special economic zones; brings capital, technology and jobs. Risk: profit outflows, footloose firms.
• Removing government subsidies: lets prices reflect costs and frees money for other uses. Risk: hardship if subsidies on food or fuel are removed.
• Privatisation: profit motive raises efficiency and attracts investment. Risk: private monopolies, job losses, sale at low prices.
• Floating exchange rates: avoid overvaluation and loss of reserves defending a peg. Risk: volatility.
• Microfinance: small loans to poor entrepreneurs (often women) without collateral, encouraging enterprise and self-reliance. Risk: high interest rates and over-indebtedness; small scale.

Interventionist strategies

• Developing human capital: state spending on education, training and health raises productivity (education has positive externalities, so markets underprovide it).
• Protectionism: shelter infant industries while they grow (import substitution).
• Managed exchange rates: keep the currency competitive and stable for exporters.
• Infrastructure development: roads, ports, power and broadband are public or quasi-public goods that markets underprovide.
• Promoting joint ventures with global companies: local firms partner with TNCs to gain technology and keep some profits at home.
• Buffer stock schemes: buy a commodity when its price is low and sell when high, to stabilise prices and producers' incomes. Problems: cost of storage, need to guess the long-run price, schemes collapse if the target price is set too high.

Evaluating

Many economists argue that the most successful developers combined both approaches: open to trade and FDI but with a strong state investing in education and infrastructure. Judge strategies by: the country's starting point (institutions, skills, resources), time scale, distribution of gains, and the risk of government failure (corruption, poor information) versus market failure (externalities, public goods, inequality).

Worked example

A buffer stock scheme sets a price band of $2.00 to $2.40 per kg for coffee. A bumper harvest pushes the market price to $1.70. What does the scheme do?

1. The price is below the floor of $2.00.
2. The scheme buys coffee and stores it, increasing demand.
3. This raises the price back to $2.00, protecting farmers' incomes.

Answer: It buys surplus coffee into storage until the price returns to the $2.00 floor.

Check yourself

1. Microfinance helps development mainly by
   • funding large infrastructure projects
   • giving small loans to poor entrepreneurs who lack collateral
   • providing loans to governments
   • fixing the exchange rate
   Show answer

   giving small loans to poor entrepreneurs who lack collateral. It extends credit to people excluded from banks.

2. Which is an interventionist strategy?
   • Privatising the state airline
   • Removing fuel subsidies
   • Floating the exchange rate
   • Building a state-funded national power grid
   Show answer

   Building a state-funded national power grid. Infrastructure development by the state is interventionist.

3. A buffer stock buys 40,000 tonnes of cocoa at $2,500 per tonne to support the price. Calculate its spending in $ million.
   Show answer

   $100 million. 40,000 x 2,500 = $100,000,000 = $100 million.

4. The scheme later sells the 40,000 tonnes at $2,900 per tonne. Ignoring storage costs, calculate the surplus in $ million.
   Show answer

   $16 million. 40,000 x 400 = $16 million.

5. Explain why governments may need to provide education rather than leave it to the market.
   Show answer

   Education has positive externalities (a more productive workforce, better health), and poor households cannot afford it, so the free market would underprovide it.. Market failure justifies intervention.

6. Explain one reason why buffer stock schemes often fail.
   Show answer

   If the target price is set above the long-run equilibrium, the scheme keeps buying and runs out of money and storage, so it collapses; storage is also costly and some goods are perishable.. Guessing the long-run price is hard.

7. Which is a risk of privatisation as a development strategy?
   • A state monopoly becomes a private monopoly that raises prices
   • Efficiency always falls
   • Government receives no money
   • FDI becomes impossible
   Show answer

   A state monopoly becomes a private monopoly that raises prices. Without competition or regulation, a private monopoly can exploit consumers.

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Sources

• Pearson Edexcel International Advanced Level in Economics specification (issue 2)

Last updated 8 November 2026. Spotted a mistake? Tell us.