2.8 Market failure - externalities, common pool resources, public goods, asymmetric information Questionbank

Liberia’s Growth and Sustainability

Liberia is a low-income country in West Africa, historically relying on primary commodities such as rubber, iron ore, and timber for export earnings. Despite a significant decline in real GDP growth during the global economic downturn from 2020 to 2021, Liberia has gradually rebounded, registering an estimated 3.5% real GDP growth in 2022. Yet, inflation remains high at about 11% in the same year, pushing up the cost of living and exposing vulnerabilities in Liberia’s reliance on imported goods.

To boost economic activity, the Liberian government provides subsidies on fertilizers and basic food items. These subsidies aim to reduce production costs for smallholders and stabilize household spending. However, the fiscal burden of these expenditures has raised concerns about the sustainability of government finances, especially as external debt reached 54% of GDP in 2021. Moreover, subsidies have sometimes been criticized for benefiting larger commercial farms more than subsistence farmers.

In an effort to expand local manufacturing, Liberia maintains moderate tariffs on selected imported consumer goods, especially processed foods. Officials argue that these tariffs protect emerging local industries from external competition. However, critics claim they also raise prices for consumers. Meanwhile, trade relations within the Economic Community of West African States (ECOWAS) have led to discussions on gradually lowering tariffs to promote regional trade.

Foreign direct investment (FDI) has been a significant driver of Liberia’s economic recovery. In mining and forestry, multinational firms have partnered with local businesses to upgrade infrastructure and technology. Despite a growing presence of investors in rubber processing, some local entrepreneurs struggle to gain access to financing. Government policymakers have also begun to explore new sectors, such as light manufacturing and tourism, to diversify the economy.

Environmental challenges, especially deforestation and soil erosion, have intensified. Liberia’s vast forests are at risk due to logging and surge in farmland expansion. Many small-scale gold mining operators also create negative externalities through water pollution. International organizations have urged stronger environmental regulations, but enforcement remains weak. Policymakers debate whether stricter rules might discourage inflows of FDI, a key pillar of the national development strategy.

Amid these challenges, the government launched the National Agriculture Development Initiative (NADI) in 2019. The program includes farm modernization projects, education in sustainable farming practices, and credit facilities for small and medium-sized enterprises. By 2021, agricultural productivity grew by 6%, according to official estimates. The authorities aim to increase Liberia’s self-sufficiency in staple crops, lessening dependency on volatile global commodity prices.

Liberia’s social indicators reflect both progress and persistent inequality. Official data suggest unemployment reached 14% in 2020, disproportionately affecting young people in urban centers. Although per capita income remains low, the Gini coefficient dropped slightly from 0.37 in 2018 to 0.35 in 2021, indicating mild improvements in income distribution. Critics note that many residents still work in informal sectors, lacking social protections.

Looking forward, the government plans to strengthen institutions, reduce tariff barriers within ECOWAS, and encourage private investment in infrastructure. Supporters of these initiatives see potential for enhanced export competitiveness and job creation. On the other hand, some analysts worry that overreliance on foreign borrowing and a narrow export base could expose the country to external shocks. As Liberia transitions from post-conflict recovery to a more stable growth path, balancing fiscal sustainability, social welfare, and environmental integrity remains a central policy challenge.

Table 1: Liberia’s Selected Macroeconomic Indicators (2018–2021)

Table 2: Data on the National Agriculture Development Initiative (NADI)

Cambodia’s Economic Transition

Cambodia, located in Southeast Asia, has experienced significant economic transformation over the past decade. Prior to 2018, its economy relied heavily on the garment sector and agriculture, but more recently, rapid growth in tourism, microfinance, and construction has contributed to gross domestic product (GDP) expansion, which averaged about 6.8% annually from 2018 to 2021. Despite this robust growth, pockets of poverty remain, and the government has promoted both infrastructure development and targeted social welfare policies to reduce rising income inequality.

One of the main drivers of growth is the garment industry, accounting for over 65% of total merchandise exports in 2021. However, environmental concerns have arisen due to waste disposal and water pollution from garment factories. In response, the Ministry of Environment has tightened factory inspection procedures and is considering a tradable (emissions) permits scheme for large industrial polluters. Although Cambodia’s capacity to implement environmental regulations is modest, proponents argue that clearer standards could reduce negative externalities and encourage industries to adopt greener technologies.

Tourism has also become a vital component of the economy, comprising about 26% of total service exports before recent global downturns affected international travel. In 2021, over 1.3 million visitors arrived, a sharp decline compared to prior years, but the authorities anticipate a rebound as global travel normalizes. To diversify income, the government supports small and medium enterprises (SMEs) through microfinance programs, focusing on rural households engaged in hospitality or artisanal crafts. Critics maintain that high microfinance interest rates can trap borrowers in debt, underscoring the need for regulatory oversight and financial literacy programs.

Monetary policy in Cambodia is complex, as the local currency (riel) circulates alongside the US dollar. Over 70% of transactions are dollarized, reducing the National Bank of Cambodia’s ability to influence the money supply. Nonetheless, the government has periodically intervened in currency markets to limit volatility in the riel exchange rate. Inflation rates declined from a peak of 3.8% in 2019 to 2.7% in 2021, partly due to global factors and stable domestic demand.

Fiscal policy has emphasized infrastructure, particularly rural roads and modernizing the energy grid. Officials claim these investments will enhance productivity and attract foreign direct investment (FDI), which reached US$3.2 billion in 2021. However, concerns persist about rising external debt levels, mainly financed by bilateral loans. The government maintains some subsidies on electricity and fertilizer to support agricultural producers, but budget pressures have led to debates over gradually phasing out these price supports to fund more targeted social programs.

In terms of international trade, Cambodia benefits from tariff reductions under the Association of Southeast Asian Nations (ASEAN) framework. Recent bilateral trade agreements with China and regional economies are expected to further increase Cambodia’s exports of rice, textiles, and electronics. Yet, local businesses claim that non-tariff barriers, such as administrative requirements for exporters, hinder their competitiveness. Advocates call for streamlined procedures and better infrastructure at ports, which could lower trade costs and boost export diversification.

Income inequality, reflecting urban-rural disparities, remains a concern. The official Gini coefficient stood at 0.34 in 2018, then rose slightly to 0.36 by 2021. The government introduced a minimum wage in the garment sector to raise real incomes for laborers, sparking debates on whether higher labor costs might deter investment. Proponents argue that robust growth and rising productivity can accommodate moderate wage increases without jeopardizing competitiveness. Meanwhile, rural regions continue to rely on agriculture, and recurring floods pose challenges to harvests.

Going forward, Cambodia’s economic trajectory depends on balancing social welfare with fiscally sustainable spending. Policymakers must weigh the costs and benefits of further debt accumulation, the possible implementation of environmental taxes, and persistent attempts to manage the exchange rate. If the nation effectively addresses its infrastructure gaps and diversifies away from garments and tourism alone, Cambodia could see inclusive, long-term development.

Table 1: Cambodia’s Selected Macroeconomic Indicators (2018–2021)

Table 2: Cambodia’s Export Distribution by Sector (2021)

Pakistan’s Economic Recovery Challenges

Pakistan faces persistent economic challenges as a developing nation with a rapidly growing, youthful population. The country’s fiscal position remains precarious, characterized by a large budget deficit fueled by rising defense spending and debt servicing costs, with interest payments consuming approximately 40% of total government revenue. This fiscal strain is further aggravated by persistent current account deficits and a dependence on external financial assistance from international institutions.

In response, the Pakistani government has engaged with the International Monetary Fund (IMF) and other multilateral lenders. Under its latest IMF bailout program, Pakistan has committed to a set of structural reforms, including the privatization of state-owned enterprises to improve efficiency, reforming energy subsidies to lower government expenditure, enhancing tax collection mechanisms to increase revenue, tightening monetary policy to control inflation, and maintaining a market-determined exchange rate to stabilize the external sector.

Government officials stress that international financial support is critical for economic recovery, as it restores investor confidence, attracts Foreign Direct Investment (FDI), and facilitates access to additional funding from institutions like the Asian Development Bank (ADB) and World Bank. However, critics argue that IMF programs often lead to austerity measures that can slow economic growth and disproportionately impact low-income households.

Pakistan has a long history of engagement with the IMF, having participated in more than twenty IMF programs since the 1980s. A recurring pattern has emerged: temporary improvements in external balances followed by economic reversals, raising questions about the effectiveness of IMF-led reforms and Pakistan’s ability to sustain long-term economic stability.

Beyond macroeconomic stabilization, development economists emphasize the need for human capital investment to unlock Pakistan’s demographic dividend. Key policy recommendations include expanding education and vocational training programs to improve workforce productivity, promoting gender equality in labor markets to increase economic participation, and encouraging youth employment initiatives to leverage Pakistan’s young population.

While multilateral development banks support initiatives like green energy projects, infrastructure development, and digital transformation, concerns remain about policy implementation, governance challenges, and environmental sustainability. Some critics argue that economic stabilization efforts often overshadow long-term development goals, leading to an ongoing policy dilemma: how should Pakistan balance short-term fiscal stability with long-term economic development?

Table 1: Pakistan’s Government Expenditure and Debt Servicing

Table 2: Foreign Direct Investment and Current Account Balance in Pakistan

Cuba is an island nation in the Caribbean with a long history of state-led economic policies and a continued trade embargo imposed by the United States since 1960. The Cuban economy is heavily dependent on two key sectors: sugar and tourism. Sugar has traditionally been Cuba’s largest export, accounting for over 70% of export revenues, although inefficiencies and outdated technology have constrained growth in output. Meanwhile, tourism has become an increasingly important source of foreign exchange, representing nearly 24% of the nation’s gross domestic product (GDP). However, environmental concerns have arisen from rapid growth in visitor arrivals, including water pollution and congestion in popular coastal areas.

Cuba’s real GDP grew modestly from 2021 to 2022, although high inflation and global supply chain disruptions presented serious challenges. The government has attempted some economic reforms, including allowing limited private enterprise and trying to attract modest amounts of foreign direct investment (FDI). Nevertheless, significant barriers to trade remain in place due to the decades-long embargo, as do restrictions on access to many imported goods.

The Cuban government operates a progressive tax system to finance public healthcare, education, and subsidized food programmes. Alongside this, it has announced a new subsidy plan to boost sugar production and modernize processing facilities. Policymakers hope that these measures will generate both export revenues and improved economic prospects.

Below are selected data from the Cuban economy:

Table 1: Key Macroeconomic Indicators for Cuba (2021–2022)

Table 2: Demand for Sugar in Cuba

Table 3: Tourism in Cuba

Table 4: Selected Cuban Tax Rates