In developing countries, why do governments intervene in trade and investment?

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justaguide eNotes educator| Certified Educator

A free market system works to the advantage of everyone only when the possibility of a small group of participants manipulating the system to their advantage does not exist.

In developing countries, the level of industrial development is relatively small. There is a small group of companies playing the role of producers. This makes it easy for them to manipulate the system; the result of which is disadvantageous to other participants. The buyers of products produced by the companies are forced to pay higher prices and suppliers of the companies have to accept a price lower than what they could have got in a free market. To level the playing field it is usually essential for governments to intervene and impose restrictions on the price that products can be sold at and raw material can be bought at.

Investment also requires government intervention due to the low liquidity in developing economies. It is very difficult here for people eager to start companies from procuring the required capital. On the other hand in situations where the amount of liquidity rises slightly the result is a high inflation rate. This makes it essential for governments to keep liquidity in a very tight range, something that is usually done on their behalf by the central bank of the countries.