Introduction

Our Task is to present to you the meaning of Government Failure and External Shocks and to express our thoughts on the contribution of these two factors to the unsuccessful development planning in the Caribbean. Government failure refers to situations where allocative efficiency may have been reduced following Government intervention in markets designed to correct market failure. External Shocks on the other hand refers to events that produce a significant change within an economy due to changes of factors outside of the economy. Shocks of this nature have unpredictable and typically impact supply or demand throughout the markets. The failure of governments to provide the needed public goods (such as law and order, schools, health facilities, the basic factors etcetera, for development) may result in increases in the proportion of inequality in the country, which will result in the poor not being able to access certain facilities for a better standard of living and development of human capital. Economics in its simplest term is defined as the allocation of scarce resources to unlimited wants. Therefore, there will always be a disproportionate distribution of resources as a result of differing wants. According to Rostow the first stage of economic development is the traditional society where subsistence provision is the central factor of satisfying ones needs and wants. Subsequent stages of Rostow explained that the This would mean that there would be subsistence society evolves into market for exchanges and trading, thus economic growth and development. increased competition in the level and distribution of resources and thus the control of these resources. Thus conflict arises between the society and the
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government. Therefore the role of Government comes into focus which as a result of inefficient resources allocation causes failures. The Caribbean countries are categorized as least developed/developing countries and produces mainly primary goods (agricultural in nature); as such these countries are marginalized in terms of international trade, particularly in manufactured goods. Having a low weight in international trade and heavy dependence on international trade and imported goods makes them extremely vulnerable to external shocks. The following structure follows: Definition and causes of Government failure and external shocks Justification whether the mentioned factors contributed to the

unsuccessful development of planning in the Caribbean

Conclusion Introduction

Government Failure Lets think about a nation without a government for a second. There is no system to administer justice, no central provision and maintenance of national defence, no police or fire protection, and no roads or schools. For each of these elements one would need to provide for individually, make direct payments, or to take action according to ones free will. In this regard, private individual(s) will be catering for such needs. However, as like any private good or service there provisions are significantly base on the interaction of supply and demand where profit making is the primary objective and focus. As a result there will be the existence of competition in the short or long term since the theory of Perfect Market or Perfect Competition does not hold in reality. Individuals seek to pursuit self interest which leads to results that are not efficient. The concept of Market Failure comes into focus, where there is an inefficient allocation of resources in a free market. Bator (1958) has defined Market Failure as a failure of a system of price market institutions to stop undesirable activities, where the desirability of an activity is evaluated relative to some explicit economic welfare maximization problem. optimal. That is, market failure is an equilibrium allocation of resources that is not Pareto The effects of such, results in market power, imperfect information, externalities or public goods, and natural monopoly.
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These results all have significant negative impacts on the society and the nation at large. As a reaction to such failure, the government will often provide goods and services directly that is usually free at the point of use and paid for out of general taxation. These may include Education, Waste Disposal, National Health Service and National Defense. These are defined as Public Goods that is there are non exclusive (everyone enjoys its benefits whether they pay for it or not) and non rival (benefits can be derived by additional users at zero marginal cost). One can therefore assume that the thought of non government would be dreadful. We therefore can appreciate the need for government and how much we rely on the government to provide a range of services each day. Benefits from government activities and expenditures can be seen almost at every angle in our society and daily activities. its Gross National Product (GDP). Government in its simplest form is defined as an organization formed to regulate and exercise authority over the actions of persons who live together in a society and to provide and finance essential services catering for everyone (the haves and the have nots). The extent of individuals right to participate in decisions that determine what governments do varies from society to society, how much they spend and how they obtain the means to finance their functions reflect political interaction of citizens However, as a result of our individuality, our views differ about what the governments should and should not be doing in part because our valuations of the benefits derived differ, also the variations in the amount of taxes and other costs each of us pay yet bearing in mind the existence of market failure. In Guyana, during the past decade government annual expenditures have been in excess of 40 percent of

Government may provide goods and services because often people do not realize or underestimate the benefits of certain services such as health and education (Merit Goods), private sector may cut costs by cutting the quality of products, economies of scale in providing National Service, and the issue of positive externalities where the consumption of health care for example, has benefits to the rest of society therefore it will be underprovided in the private sector. This does not mean that governments are immune to mistakes and more so failures. As the issues of market failure exist, government failure also exists. Non

Market Failure or commonly known as government failure is the public sector equivalence to market failure that occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention. That is, government enacting policies that produce inefficient and/or inequitable results as a result of the rational behavior of participants in the political process. It either increases the severity of market failure or causes a new failure to arise. The impacts of government failure have damaging long term consequences, cause more problems than solve problems and its policies are ineffective.

The Public Choice Theory as it relates to government failure is important for two reasons:
i.

The fact that the market is inefficient does not imply that government will do any better, that is government intervention will make a bad situation worse
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ii.

Governmental decisions depend on procedures and institutions in the political process and on the incentives created for participants in the process.

There is a demand and supply side that exist in Government failure.

The

supply side of government results from agent or principle problem while the demand side includes preference-revelation problems and the illogics of voting and collective behavior.

Causes of Government Failure

i.

Regulatory Capture government agencies appear to operate in favour of the vested interests of producers rather than consumers. The Common Agricultural Policy (CAP) is widely criticized as a classic example of government failure and that the current reform process does not go far enough.

ii.

Political Interest pursuit of self interest amongst politicians and civil servants often lead to misallocation of scarce resource. Deciding where to build new roads, by passes, schools and hospitals may be decided with at least one eye to the political consequences.

iii.

The law of unintended consequences government policy will always lead to at least one reaction from either consumers or producers that are unanticipated or unintended. There is a popular saying Wiser the Government smarter the people this means that people find ways to evade laws; shadow markets develop to demoralize an official policy; people act in unexpected ways either because of ignorance or by error.

iv.

Government intervention and evasion increase taxes on de-merit goods (cigarettes) might lead to an increase in attempted tax avoidance, tax evasion, smuggling and the development of black
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markets where trade takes place between consumers and suppliers without paying tax.
v.

Government intervention and disincentive effects national minimum wage for example, can lead to real wage unemployment, also higher rates of income taxes have negative effects on the incentives of wealth creators in the economy and generally acts as a disincentive to work longer hours or take a better paid job. On the opposite side lack of effective government policies reduce the scale of income and wealth inequality is also a cause of government failure since inequality can, over the longer term create many deep rooted problems for society once social cohesion starts to break down.

vi.

Policy decisions base on imperfect information government will choose to go ahead with a project or policy without having the full amount of information required for a proper cost benefit analysis resulting in misguided policies and damaging long term consequences.

Government failure can also occur in a non market economy Fall of the Soviet Union in the Late 1980s and 1990s marked the failure of command or planned economies as a means of allocating resources among competing uses. In such system central planners supplied products that are simply not wanted by consumers resulting in loss of allocative efficiency since there are no price mechanism to signal changes in consumers preferences and demand. Most planned economies have been moving towards the Western Mixed economy. Czech Republic, Poland and Hungary are all said to be moving towards a market based system for the allocation of resources for example
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through programmes of privatization and market liberalization.

Many have

enjoyed fast rates of economic growth and a rise in relative living standards both before and since their accession to become members of the European Union.

What is external shock? External shock refers to events that produce a significant change within an economy due to changes of factors outside of the economy. Shocks can be climatic or economic in nature. Shocks of this nature have unpredictable and typically impact supply or demand throughout the markets and development as a whole.

Causes of external shocks External shocks can be caused by my factors beyond the control of anyone. The following are some of the key causes of external shocks:
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 Fluctuation in commodity prices- changes in commodity prices of oil,

gas; industrial metal, food, etc. can have significant negative impact on the development of the Caribbean nations. Since, both the oil producing and non-oil producing Caribbean nations are heavily dependent on the importation of these commodities from the industrialized countries. As in the case of oil or gas, an increase in the price of these commodities (which is a form of substance that produces energy for the many machines and factories in the Caribbean, countries) can result in higher prices on the goods produced for export, which can result in a decline in demand for the Caribbean goods on the world market and in many trading blocks. Thus, will result in the Caribbean nations having a smaller capacity to buy the relevant capital equipments and technology to boost their export capacity and most of all be unable to earn an income for their main their people.
Wars

and terrorism-phenomenon of this nature do have dire

consequences on the Caribbean nations since; they are so dependent on the industrialized nations for food, oil, remittances, etc. These phenomena tend to develop some degree of economic contraction, in that, the Golf war of 1990, where Iraq was invaded by a U.N.-authorized coalition force from 34 nations. This during this war oil fields and oil refinery plants were on fire; Iraq dumped 400 million US gallons (1,500,000 m3) of crude oil into the Persian Gulf1. While in the Caribbean and other parts of the world experienced an increase on the price of oil on the world market.
Natural Disasters-this refers to hurricanes, earth quakes, floods,

Droughts, Famine, etc. phenomenon of this nature do have significant effects on developmental planning. In that, this can cause serious damages to capital investment, lost of human capital, etc. The Caribbean region is vulnerable to these phenomenons when taking into
1

http://en.wikipedia.org/wiki/Gulf_War#cite_note-118

account climate change and global warming. Thus, depending upon the extent, size etc. of the shock; if the size of the shock is large it can through the whole economy into a state of depression or cause major set backs for development if the size and duration of the shock is minimal. Due to this volatile situation many of the Caribbean nations are unable to attract adequate foreign direct investment (FDI) to boost production and hence, development. Natural disasters affect the production base of Caribbean economies and have strong effects on household consumption. Given the small geographic size of many Caribbean countries, natural disasters can sometimes have nation-wide effects. Empirical analysis for the LAC region suggests that natural disasters significantly affect the growth of output, consumption and investment (Auffret, 2003)2.
Economic Policies- These are policies that comprised a collection of

rules and regulations which pertain to economic development (such as interest rates, taxation, labour market policies, trade policies, etcetera), where trade inter-alia plays a vital role. Every nation has some form of trade policy in place, with public officials formulating the policy which they think would be most appropriate for their country. The purpose of trade policy is to help a nation's international trade run more smoothly, by setting clear standards and goals which can be understood by potential trading partners. In many regions, groups of nations work together to create mutually beneficial trade policies3. Thus, let us look at the trade policies created by the government to boost and nurture infant industries who are unable to compete with producers on the world market. These policies took the forms of tariffs, quotas and other trade barriers for the protection of the infant industries. The removal of these barriers due to trade agreements with other trading block has resulted
2

Auffret, Philippe. 2003. High Consumption Volatility: The Impact of Natural Disasters? Policy Research Working Paper No. 2962. The World Bank: Washington DC.
3

www.wisegeek.com/what-is-trade-policy.htm

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in the infant industries going under. Since, they will be unable to produce goods at a lower price, better quality etc. given the level of technology at their disposal as is noted in the modernization theory developing countries were endowed with obsolete technology which is sold them at a high price (while the developed a more industrialised countries has real time technologies which can earn them economies of scale, better product packaging, etc.). Hence, people are unable to earn an income to cover their basic needs, repay their loans, etc. As can be seen in the documentary entitled Life and Debt4 story based on Jamaicas unsuccessful development of their economy through their infant industries, which was cause by agreements entered into by the government with the IMF, World Bank, WTO, etcetera.

Life & Debt Produced and directed by Stephanie Black, narration written by Jamaican Kincaid based on aA Small Place 1987

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Justification
Throughout the Caribbean there are varying levels of unsuccessful development planning. I would like to focus my attention on Jamaica to bring to you an example of the effects of government failure and external shocks have on many Caribbean nations. This was brought out by a documentary produced and directed by Stephanie Black. This documentary touched upon Jamaicas government being unable to finance their local and foreign expenditure. They had to turn to the International Monetary Fund (IMF) and the World Bank (WB). Enshrined in the loan agreement were clauses that forced the Jamaican government to alter their economic policy. First, they had to devalue their currency making their dollar cheaper to encourage exports, as such, this caused the Jamaican people to have to pay more to buy foreign goods and since they are heavily dependent upon foreign goods, they had to pay more for their raw materials-oil, gas, etcetera which in turn enable them to produce less. Hence, the infant industries were stifled in the process. Secondly, the Jamaican government was allowed to lend loans to their farmers at high interest rate, which enables them to borrow less, reducing their capacity to expand for export. Thirdly, the trade barrios were reduced or removed in some cases so that the infant industries were allowed to compete with foreign producers who were able to produce products at a lower cost than the Jamaicans, this again reduced their capacity to exist in the market. Fourthly, the WTOs ruling that the preferential prices received by the banana producers of the African Caribbean & Pacific countries (ACP) must be removed so that they can have a level playing field for competition. This, in fact pushes the banana industry to produce less. Since, they are other banana producers owned by 12

Americans who are able to produce at a lower cost due to the use of fertilizers and other modern techniques to gain higher yield at a shorter time. All in all, there is one trend, which is the decline of the Jamaican domestic producer ability to produce and export to earn the much needed foreign currency to buy the relevant capital goods for further investment.

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Conclusion
This research paper found that government failures and external shocks are two major factors that contributed to the unsuccessful development planning in the Caribbean since most of the Caribbean nations were unable develop and impose relevant laws, etc. for the protection of its citizens. Operating a planned economic system where they can protect and nurture their infant industries from the more technologically inclined competitors (Multinational Corporations, etc.) most of the Caribbean nations were forced to do away with is type of planning and was literally manipulated by the IMF and WB through the free market system (on the behalf of the multinational corporation who are seeking cheap labour at the expense of the Caribbean nations). Through the liberation of the trade barriers, many Caribbean nations were placed in a worse off position being unable to earn the livelihood expected for their citizens. Most of the Caribbean nations are instead, dependent on the industrialized countries and are in some serious debt traps which they cannot come out. The external shocks have lots of negative impacts on these Caribbean nations; they suffer many setbacks when they strike; despite there is so much opportunity in the Caribbean, yet there is a lack of foreign direct investment in many of the Caribbean nations.

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Auguste Kouame & Maria Ivanova Reyes. 2011. The Caribbean Region Beyond the 2008-09 Global Washington DC. Auffret, Philippe. 2003. High Consumption Volatility: The Impact of Natural Disasters? Policy Research,Working Paper No. 2962. The World Bank: Washington DC.
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 Life & Debt Produced and directed by Stephanie Black, narration written by Jamaican Kincaid based on aA Small Place 1987

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