Price Policies and Economic Growth

Price Policies and Economic Growth

Price Policies and Economic Growth

Price Policies and Economic Growth

Synopsis

An understanding of price structures and their impact on trade, productivity, and other related factors will aid in formulation of price policies promoting economic growth and development. Price formulation issues are examined within the context of nonmarket and imperfect market conditions, providing insightful linking of exchange rates and domestic prices to a wide array of factors that determine economic growth. Different facets of primary commodity price formation are explored, arriving at such conclusions as the fact that the dramatic rise in oil prices during the 1970s had little to do with the Latin American debt crisis or with the world recession that followed. Some new techniques for analysis are used, and commonly used techniques in price comparison studies are discussed.

Excerpt

As we editors have cited in chapter 3, the price system has specific functions of its own in the area of economic growth and development. These are far less commented upon in the literature than the conventional role played by the price system in the efficient allocation of scarce resources, the transmittal of economic information, the signaling of available opportunities, and the related task of serving as a criterion by which to measure economic success or failure.

It is crucial to realize that, ultimately, the functions of a rational price system are different in an advanced market economy from what they are in a developing market economy. Also, the order of the functional priorities involved will radically vary in both cases. The reason for the variation in question resides in the nature of the differing long-term goals of the developed and less developed market economies. Whereas in the former case, maximum aggregate satisfaction of the consumer is postulated as the standard goal or raison d'être of a modern, liberal economy; in the latter case, in an ambience characterized by poverty and acute scarcity, a more production-oriented or mercantilistic approach is called for, as Joseph Schumpeter noted long ago.

On the other hand, for advanced or relatively advanced socialist economies seeking to transform themselves into market economies, the primary goal is to substantially increase their factor productivity and overall productive efficiency. To that effect, rational prices are required to eliminate biases in factor and commodity pricing and to approximate optimal resource allocation among sectors, activities, and projects throughout the economy, as well as to attain cost-minimizing factor combinations in the relevant production functions and in the choice of technologies. By contrast, less developed socialist economies travelling the road to market have to be mindful of other objectives, such as stimulating economic development by creating attractive investment opportunities, by reducing risk and promoting the stability of the economy. Their governments have to devise diversification strategies, hedge against sharp fluctuations in world market primary commodity prices, insure continuity of a domestic flow of investment resources, induce a net inflow of external capital resources and technology, and many other related objectives.

In effect, almost by definition, less developed, open and lop-sided . . .

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