Market Failure in Developing Countries: Causes and Consequences

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Development Economics
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Introduction
A market is a place where producers and consumers exchange goods and services either
through barter trade or exchange for money. A market failure is a situation whereby the
allocation of goods and services in a certain economy is not efficient. This task will look at a
certain market failure in developing countries example Kenya (Solt, 2016). The task will also
describe and analyse the causes of that market failure and lastly look at the major consequences
of the market failure.
Market failure
Market economies in less developed countries face a problem of inequality whereby the
income and wealth are not well distributed (Helpman & Reddings, 2013). Income is the money
which is allocated to the factors of production while wealth is the asset’s value that is currently
owned by an individual or the community as a whole. Examples of incomes include the salaries
earned from jobs by people, saving’s interests and rental incomes from properties. Examples of
wealth include the shares in businesses, savings and pension schemes.
If a market has unequal distribution of these resources, it is said to have failed. This
inequality mostly affects the poor people because they may fail to receive any income when it is
distributed (Ostry, 2011). Incomes vary where some people receive high incomes, others
moderate incomes and others low incomes. Some people may also end up not receiving any
income at all hence being unable to purchase the basic goods and services they need. This brings
about the problem of income and wealth inequality in less developed countries. People likely to
receive less income include the unemployed, the underemployed, the sick and the disabled, the

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old people and workers of unofficial labor markets. Example of this country is Kenya which is
among the unequal countries in the world where the gap between the rich and the poor is large.
According to the report by the United Nations Development Programme, 60% of
Kenyans live in poverty conditions where they are unable to receive quality health services and
education. Among the 169 countries in Africa, Kenya is ranked 103 country in the inequality list
hence making it the 66th unequal country in the world. The quality life of Kenyans has been
diluted in the last five years according to the report by HDI (Corak, 2013). Even though the
country has a poor ranking, it finished ahead of the other EAC member states. Uganda finished
in position 143, Tanzania finished in position 148 and Rwanda finished in position 152. One of
the major challenge that Kenya has been facing is the distribution of benefits of economic
growth. In 2005 the economy of the country was 1.17 trillion which expanded to 1.39 trillion last
years. The problem is that 38% of the wealth remains in the hands of 10% of the whole
population hence 90% of the population being left to share the rest. This problem of income
inequality in Kenya has pushed 86% of people to live in poor conditions hence being unable to
access health and education facilities. This is the evidence of the widening gap between the rich
and the poor in the country (Kaplinsky, 2013). The problem is due to high unemployment rates,
corruption, lack of government intervention.
Policy interventions have either failed or not yet implemented example the youth
empowerment programmes and land reforms that may increase growth in agricultural sector.
Due to corruption and poor execution, the government has spent about 3.8 billion shillings on
small and medium sized firms. The problem of high unemployment rates has led to the widening
gap of income to increase. in this case, the youths are the most affected and hence suffer a 21%
unemployment rate excluding the college students. Tiberius Baraza of Institute of Policy