Institutional economics - Essay Example

AL ECONOMICS One size fits all policy entails a set of policies that are deemed to be applicable across the board within a given region or country. They are assumed to have the same impact on everyone within that region. Some of the policies that can be classified under the one size fits all policy includes monetary policy, exchange rate policy, theory of the firm and growth rate policy. The one size fits all policies base their arguments on an assumption that the affected persons fall in the same wealth bracket.

This is unrealistic especially in the developing economies where the disparity between the poor and the rich is very wide. The exchange rate policy also faces the problem of fluctuation of local currencies especially in the less developed countries where governments easily manipulate the local currencies. The pricing system has been of a great achievement as a tool used to operate the economic system for quite some time. The system is perceived to be of huge significance in the developing countries since it works best in a decentralized system which exists in most of the third-world or developing countries.

However, this system has some limitations as noted by Adam Smith, making it less effective. The system bases its argument on how prices are determined using the forces of demand and supply. However, it ignores to state the kind of goods and services a particular market deals in whose prices are functions of demand and supply. The system is, therefore, seen to be basing its arguments on theories and not facts therefore it is not a true representation of what occurs in the real world. The theory of economics applied by many in their analysis of various economic phenomena has been criticized to be short in the subject matter which they seek to address.

The various economics variables keep changing with time but the economic theories seeking to address them are remain constant over time. Another flaw in economics of one-size-fits-all policy is the case of the theory of the firm. The conclusions drawn from this theory are from a study of a single firm and are assumed to be applicable to all firms. This may not be true as firms defer in several area such as their level of output, their tax brackets and cost of production among others (World Bank, 2009).

Monetary policy can be viewed to be suitable for application in less developed countries in the sense that it is uniform and does discriminate between the social classes. It is also relatively cheap to apply in the sense that just a single policy applies to all hence reducing the level of man power required to carry out the duties. The process is also managed professionally and cannot be easily manipulated by upper class members of the community. However, this policy also has several limitations hindering its application in developing countries.

In developing countries, there is a high disorganization in the markets and financial institutions. This makes it difficult to apply the monetary policy instruments since their economies tend to operate in dual monetary systems. The commercial banks in these countries are quite insensitive to cash regulation as they find themselves with excess cash due to low levels of borrowing and few viable projects. These commercial banks are mainly branches of foreign banks hence do not borrow from the central bank but from their parent branches.

This makes the instrument of interest rates ineffective. There is also the issue of people not saving their money with banking institutions making it very difficult for the central bank to apply its traditional instruments of monetary policy. Another limitation arises from the fact that people in these countries make investment decisions, which are insensitive to interest rate movements; hence, there is no link between expanded outputs, high investments, and low interest rates (Coase, 1998). These issues adversely affect the operations of the monetary policy making it less effective in developing countries.

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Dinello, V.P.G.D.N., 2009. Political Institutions and Development: Failed Expectations And Renewed Hopes. London: Edward Elgar Publishing. Vincent, C., 2009. Social Justice, Education, and Identity. New York: Routledge. Williamson, O.E., 1994. Visible and Invisible Governance. The American Economic Review, 84(2), pp.323-26. World Bank, W.B.G., 2009. The World Banks Country Policy and Institutional Assessment: An IEG Evaluation. Washing, D.C: World Bank Publications.