You are an economic advisor to a less developed nation.  This nation?s
government would like to improve the per capita GDP and bring it in
line with that of middle-income economies.  However, the government is
divided on the merits of two competing economic strategies: heavy
government involvement in the economy, including the nationalization
of key industries, the imposition of tariffs on imports in order to
protect industry and agriculture, and the establishment of controls
over multinational investment; or limited government involvement in
the economy, including the advancement of privately owned industry,
the reduction or elimination of tariffs on imports, and the
implementation of an open-door policy on multinational investment. 
Your challenge is to assess each strategy and decide which one would
allow the nation to improve its standard of living, taking into
consideration its economic potential and current problems.

Would you either choose the first option, or the second one? And
please explain it as well. I am interested in what other people think.

Thanks!

Personally, I would choose option number two.  One only need to look
at the problems and benefits China is experiencing as it gradually
transitions from heavy government involvement in the economy to a
freer economy to see the clear benefits of option number two.

Since the Communist takeover, China has primarily experienced option
number one, with considerable government involvement in the economy. 
For many years, China experienced very sluggish economic growth
because of a lack of foreign investment, access to foreign
technologies, and inefficient allocation of capital.  Governments also
rarely do a good job of selecting winning companies and technologies
because they are frequently as focused on political considerations as
they are on economic ones.

More recently, as China has begun to liberalize its economy, economic
growth has exploded.  However, the country continues to struggle with
vestiges of option number one.  For example, the state-owned banks are
saddled with bad loans that they made for political reasons rather
than for economic reasons.  The misallocation of capital has also
resulted in overcapacity in many industries and a shortage of capital
in others.  Inefficient state-owned companies have access to funds
whereas rapidly growing small, private enterprises are starved of
capital.

Permitting foreign investment with fewer restrictions has resulted in
many foreign companies entering the Chinese market.  They have brought
new technologies that China could not have afforded to develop on its
own.  Even more importantly, they have brought management skills and
are training Chinese managers, many of whom go on to become
entrepreneurs.

Finally, lowering tariffs and permitting free trade allows people to
purchase goods more cheaply, thereby improving their standard of
living.  They may also be able to purchase better goods in some
categories than they can purchase domestically.  In addition, foreign
competition can promote domestic companies to become better and more
competitive, benefiting both the economy and consumers.

In conclusion, I would choose option two because I strongly believe in
the power of markets to allocate capital far more efficiently than a
government can.  Allowing the development of a motivated entrepreneur
class is considerably superior for driving economic growth than is the
promotion of frequently inefficient state-owned companies.

Sincerely,

Wonko

Thanks! This is the answer that I would have chosen myself, as well.