Government Policy and Growth Government policies that hold down interest rates have adverse effects on economic growth in developing countries. Although low interest rates are intended to make it cheaper for local businesses to invest in new capital goods, they have the effect of drying up the supply of savings since savers can get a higher return by taking their money out of the country or by making less productive investments on their own. Similar policies are sometimes followed in other economic sectors, with similarly bad results.

For example, many developing countries require farmers to sell their crops to the government, which resells the food to city dwellers. To keep the city dwellers happy, the prices charged for food are set very low, as are the prices paid to farmers. Think about the farmers’ opportunity costs of growing food for sale and predict what is likely to happen to the food supply in countries adopting this policy.