Third world economies

By: Mary Anne Winslow
Submitted: 2007-01-17 16:17:22
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Financial development is one of the essential conditions for the growth and development of each nation. The government’s function in motivating economic intensification has been a contentious subject of open debates for ages. This article will attempt to give details on some of the most important financial concepts all through the history, and some of the economic models used in the growing world.

One of the first schools of economic thought was mercantilism. It emerged in the 16th century and influenced most of Western Europe. Mercantilists favored foreign trade and manufacture and viewed money (gold) as a source of prosperity of one nation. The state was considered both the regulator and enforcer of economic policies and the beneficiary of the achieved wealth. In 1776, a brilliant Scottish philosopher and economist Adam Smith published his book “The Wealth of Nations”, in which he proposed the concepts of free trade, market economy and less state involvement. A direct challenge to mercantilism, his theory marked a new era of economic thought and introduced political economy, a concept that later developed into a separate systematic discipline. The 19th century was marked with the ideas of Karl Marx, who advocated state ownership over the means of production and centrally planned economy. In the 20th century, Sir John Maynard Keynes emphasized the necessity of government investments in times of slow economy, even at the cost of budget deficit, to provide employment and keep economy vital. His ideas were embraced by President Roosevelt and helped to boost US economy after the Great Depression and World War II. Finally, laissez faire economy, a part of libertarian ideology of the 20th century involves minimal government involvement and relies primarily on market forces to determine economic policies.

In developing countries, weak economy, high poverty, dependence on global markets and limited investment power encouraged many governments to assume an active economic role. Some of the major economic models implemented and their impact on countries’ development are described further in this essay.

Command economy stemmed from Marxist ideology. Promising “great equality and social justice” and “freedom from dependency”, that system was appealing to many leaders of developing countries, especially where the difference between the rich and the poor was significant. The main feature of command economy is state ownership and management of the means of production – factories, banks, infrastructure and farms. Private sector is very limited. Production decisions are not governed by market forces, but are rather set forth by centralized state planning. At their start, command economies displayed surprising results in economic performance. GNP in Soviet Union grew 5% annually during the first few decades of industrialization. China showed even better results of 8.2% annual economic growth, far exceeding the norms even of industrialized democracies. Command economy also reduced income inequalities, distributed land through agrarian reform and implemented free health care and education. However, it showed its weaknesses soon. As the economy becomes more complex, it’s harder to manage centrally. Production and demand are not synchronized, primarily because the bureaucratic apparatus in charge of planning does not have the necessary skills or technology to conduct marketing surveys.

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