What is the role of the state should be in the development process? Why has there been a neoliberal backlash against government involvement in development?….
This paper looks at the role of government in economic development. It also looks at various reasons that have been advanced by opponents of state involvements in economic matters of the country. Whereas government incentives are crucial for economic development, economic and political liberalizations have been found to strengthen governments’ incentives. Government interventions should be on the selective sectors of economies that will bring desired economic growth and technology, leaving market forces of invisible hand to play its economic role.
Role of Government in development
One of the major roles played by government is the creation of legal and institutional frameworks necessary for the smooth running of businesses in the country. This are meant to protect property rights, enforce private contracts and solve business dispute to provide favorable business environment. Developing working legal institutions that cannot be abused by government determines the success and failure of governments’ roles in economic development, and bad economic policies have been associated with institutional failures, more so political institutions of the country, (Rodrik, 2003).
Governments have obligations of providing basic social goods, redistribute income and opportunities and correct market failures, (Tabellini, 2004). Public goods such road networks, electricity, security and social amenities cannot be easily provided by private firms because of their high capital investments and their sensitivity, for instance security of the public cannot be entrusted into private hands. Income redistribution by the government is attained through efficient allocation of country resources. These are aimed at improving the living standards of majority poor population in most countries and eradicate poverty, (Tabellini, 2004).
Correcting marketing failures is another crucial role of the state, as was recently witnessed by many governments during global financial crisis. Market forces alone are subject to challenges which results into market failures. Most governments make regular use of fiscal and monetary policies to stabilize economic and financial markets. Promoting and protecting local industries is undertaken by governments to create employment opportunities and increase country’s exports. This has helped in creating employment, reducing rural urban migration and stabilizing balance of trade and payments.
Essential economic sectors with insufficient investors, government as the last resort have a duty to undertake investments in those sectors. Lack of willing entrepreneurs may be occasioned by high capital requirements, (an example is mineral exploration) or slow growth which may yield little or no return to invested capital, or non profit making ventures.
Why has there been a neoliberal backlash against government
involvement in development
State involvements in economic affairs have been found to distort the economy and in most cases have led to market inefficiencies. For instance, the use of fiscal instruments to regulate foreign exchange fluctuations is likely to result into an increase in the rate of interest and inflation which will slow down economic growth and developments. Accordingly, government intervention cannot attain market equilibrium, (Rodrik, 2002). On the other, subsidies and protection of local industries have resulted into production of substandard goods and services and inefficiencies occasioned by to lack of serious competition from foreign firms.
State involvement is subject sectional interests by government leaders who may formulate policies in favor of their personal and political interests hence the need to allow the invisible hand to regulate economic condition of any nation. Proponents of free economy rejected the idea that state is a benevolent and wiser ruler, arguing that several governments have plunged their economies into recession and dismal economic performances, and that most government business have a history of poor performances, (Tabellini, 2004).
The role of government in economic development cannot be underestimated especially in developing economies. Combinations of state interventions and free market economy have benefits, as was experienced in eastern Asia economies, but finding the appropriate combinations strategy has been the main problem. For markets to be efficient, they have to be created, regulated and stabilized, and this calls for appropriate policies, formulated by state institutions.
Rodrik, D. (2003), “Growth Strategies”, mimeo, Harvard University.
Rodrik, D. (2002): After neoliberalism, what? Harvard University
Tabellini, G. (2004): The role of the state in economic development
Cesifo working paper no. 1256; Category 5: fiscal policy, macroeconomics and growth. August 2004
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