What Role Should The State Play In Development Policy
The debate concerning what role the state should play in development policy and what strategies bear most credence has been incessantly charged since the kill of 1940s. (Matinussen, 1997, p. 257). Whilst the free-marketers argue otherwise, this essay intends to prove that the plot should play an interventionalist role in development policy.
The state refers to a country’s governance. For the purpose of this essay focus will primarily surround developing countries governance and development will be defined economically unless specified otherwise.
“Historically, no country has entered economic growth without the states targeted intervention…” (Shapiro and Taylor 1990).
The states main objectives must be mass welfare and scope for growth within an economy. One theory of achieving this just is the Marxist theory summarised in D. Hunt’s Economic Theories of Development P18 where by the means of achieving mass welfare are summarized as societies comprising of “…communal ownership of the means of production…”. Marxist theory also recognises in order to attain this transformation state intervention would be a fundamental component.
Both arguments against and evidence for state intervention, along with market failure and historical occurrences must be analysed in order to address this question.
The common western view is the free market economy provides greater economic development using the failure of central planning in Eastern Europe and the Soviet Union in the gradual twentieth century as evidence opposing site intervention. This differs from the South where the view is more in favour of the free market economy due to necessity, through no choice but to increase integration on the international market. (Berthoud, 2003, p. 70).
There have been numerous economic theorists such as those of the Neo-classical school of thought, Toye (1987), Bela Balassa (1982) and Ian Little (1982), whom highlight state failures and argue sustained economic growth can only occur through a free market economy. The founding classical theorist Adam Smith argued the need to liberalise trade in order to expand the market to achieve increased development. (Hunt, 1989, p. 34).
A primary argument against state intervention concerns corruption. It is claimed the free market economy allows less power for individuals to abuse and that the government command of the economy gives opportunity for self interest and ultimately produces predatory elitist governance. Though government corruption has been witnessed historically it is not universal. Impartial non-corrupt governance can be seen in Chile where there are means of tackling corruption without denying state intervention. The state must ensure large monopolies do not have power over the government; this is especially notable for the energy sector. Increased professionalism in private sector jobs through incentive and job satisfaction may induce less desire and space for corruption and public expenditures must be of public knowledge disallowing individuals to prosper their own desires. An independent juridical system must be implemented to prosecute against acts of corruption and form promotion policies and market regulations public knowledge and clear for all to see whilst eliminating inefficient regulations. With these policies implemented corruption within the state can be avoided. (Todardo, 1992, p. 552).
Jagdish Bhagwati highlights the results of state corruption in the form of government rent seeking by exploiting the scarce resources its own intervention has created. Bhagwati’s ananlysis is largely based on the long-established ‘invisible hand’ theory whereby the self-seeking nature of many individuals would through the markets supply and demand be the inherent common trustworthy. (Bagwati, 1982)
Critics argue governments may not know individuals acquire requirements and circumstances and is inflexible, not catering for diversity across regions and groups where it is claimed the market will through demand cater for specific and varied social needs. (Todardo, 1992, p. 533). However this issue may be combated by greater political incorporation, which can be realized by decentralization of the state. When implemented efficiently decentralization in the form of deconcentration and devolution allows governments to address the specific and often diverse cultures of a nation. Policies that address community’s specific needs be it tribal, rural or urban can be recognized and applied. (Todardo, 1992, p. 536. Martinussen, 1997, p. 210-211).
Neo-liberal British economist Ian Little advices a micro-economic come and claims the theories surrounding the role of an interventionist location in developing countries to sustain economic development does not occur in reality due to a deficiency in proficient administrators with the needed business economics understanding, lack of knowledge of the functioning of the private sector along with highly inefficient information and that due to the self seeking nature of state employees, often a discrepancy of official policies and implemented policies was apparent. (Martinussen, 1997, p. 262). However this is not the case universally if East Asian high performers such as South Korea are examined where effective governance has proven growth five times that of Sub-Saharan South Africa.
The World Bank is a major critic of state intervention emphasizing from an experience-based argument the negative economic effects it has witnessed. (Martinussen, 1997, p. 259). A critical argument from the World Bank is that operational space controls have undesirable side effects such as uncompetitive industries operating at a loss. It is also disputed that state intervention in the production sector is not cost effective due to overemployment and often the public sector is witnessed to manufacture a loss. (Martinussen, 1997, p. 260).
With cramped regard for evidence of successful development cases the Washington Consensus depicts a strong free-market arrive to development planning with no emphasis on eliminating poverty or protecting the position. This is of great contrast to countries with successful economic development such as South Korea and Taiwan who practised shared growth to eradicate absolute poverty; did not liberalize trade early on; continued to establish public enterprises; kept direct foreign investment subject to government control and financial liberalization remained limited throughout their development until the 1980’s. Countries with successful development have shown state intervention not depicted in the Washington Consensus, is fundamental. In order for a country to assist from remarkable of the Washington Consensus, prior state infrastructure and future state protection is vital. (Todardo, 1992, p. 538).
However the later Santiago objectives take more consideration for the needed state intervention, for example the New Santiago Consensus recognises the need for human capital prior to liberalization. (Todardo, 1992, p. 539). An area of market failure which can be witnessed in India after it’s liberalization in the early 1990’s as a result India still suffers poor nutrition and basic health care. India’s economic development reflects the earlier lack of human capital provided by the state when compared to China whom had relatively high human capital prior to liberalization and subsequently high economic growth. (Todardo, 1992, p. 540).
Both the World Bank and Neo-classical views are based on assumptions that do not necessarily occur in reality such as perfect information and unrestricted competition. (Martinussen, 1997, p. 263).
The market is prone to a variety of limitations and failures such as economic dualism, fluctuating prices, un-stable markets and low levels of employment. Economic dualism is especially prolific in Third World countries whereby the economy is segregated into peasant subsistence agriculture and cash production of commodities for exportation. This lack of diversity may limit the potential for technological advance and future economic growth, resulting in a subsistence economy labour force for international capitalist economies.
The free market allows an opigolistic private sector and results in monopolies distorting prices and producing gigantic in-equalities. This also leaves the national economy at risk to private companies cashing in regardless of future economic growth for the whole country. A prime example is the Russian oil industry where four major private oil companies provide 66% of production and 57% of exports. This has left Russia’s economy vulnerable to a monopoly and rapid exportation to increase the value of oil assets as a short-term cash stripping strategy for private gain whilst the vast majority has no gain and no control over the countries economic resources. Locatelli, C. (2004).
The free-market economy segregates the nation allowing ample disparities of wealth and encourages individuals to prosper their own desires even if the costs are widespread. (Todardo, 1992, p. 521). An adequate market system is dependant on socio-cultural pre-conditions and economic requirements which developing countries often do not posses. Moreover the private industry encourages individual find at the cost of community or widespread communities. This is depicted in Adam Smith’s ‘tragedy of the commons’; a good example is the depletion in fish stock due to excessive fishing. Each individual strives to increase his profits regardless of the widespread cost.
A frequent Neo-classical argument is that the free market through supply and demand will generate the correct prices to allocate resources guided by producers and consumers. (Hunt, 1989, p. 32). However Todardo argues in order for a developing country to earn sustained economic development the location must harmonize the market and govern the relevant prices of goods, services and resources to avoid the market giving an unrealistic stamp on commodities in relation to their actual cost to society. (1992, p. 519). Moreover the market often allocates resources inefficiently, falling short to social and private value that is neither proficient in the present nor sustainable for the future. (Todardo, 1992, p. 520).
In contrast, the states targeted intervention may provide a common goal for every race, religion or culture working together to combat poverty and aid development in diverse and often fragmented nations. (Todardo, 1992, p. 521).
Both market and government failure can be observed internationally, however in order to attain sustained economic development state intervention is essential for four main purposes; the governance of the states economic policy i.e. the collection of taxes and the enforcement of laws such as property rights and contracts; protection of station economy through macro-economic policy such as international trade restrictions and exchange rate policies; and the organization of infrastructure i.e. transport systems, schools and health care. The private sector has exiguous incentive to fulfil these purposes where as the location prioritises public requirements and future development over private business desire. (Todardo, 1992, p. 518, Martinussen, 1997, p. 258). The private sector neither has the incentive in profits or the capital required by any one firm to provide the previously mentioned primary policies. (Martinussen, 1997, p. 259).
In order to ensure the trade of goods is resource effective the state must protect the nation’s economy by restricting imported goods where the market demands competitive pricing. The American farming subsidies are a prime example of the need for state protectionism. The heavy subsidies awarded to American farmers over recent years have resulted in American crops selling cheaper than developing countries can produce at. For example though relative good conditions for cotton farming are available in Mozambique, in recent years, several stout cotton companies have gone out of business as a result of being undercut by American farmers. Oxfam has estimated that between 2001 and 2003 alone, U.S. financial assistance in agriculture, cost African cotton growers approximately $400 million. Beaubien, J. (2006) U.S., European Subsidies Undercut African Farmers.
The state can think global economies; it can predict and prevent repercussions the market causes e.g. resources being used on examine from the rich encouraging private investment in low priority areas. Even if the market functions mobilizing current resources relatively effectively, state planning is principal to allocate resources for the future. Economic development requires capital formation and private savings are extremely low in developing countries therefore the government must intervene in order to accumulate capital. (Todardo, 1992, p. 536).
State intervention can control balance between primary and secondary sectors ensuring the country is not dependant on low production agriculture but composed is not put in a vulnerable position being entirely dependant on industry risking the nation’s domestic subsistence. This operational control over the private sector is principal in economic policy to maintain a balance between economic sectors; to ensure growth and income are dispersed both to meet social needs and geographically. (Martinussen, 1997, p. 259).
Capital is a valuable component required if either private or public sectors are to invest in area infrastructure. This is crucial for any future investment. The market has no narrate incentive to provide state infrastructure, as this minimum welfare such as basic health care and education, does not gain instant capital. Another crucial factor is increasing labour productivity through government education and training in order to construct human capital. (Todardo, 1992, p. 536).
The market has little motivation for environmental protection, as there are little short-term returns. Conversely for long term sustained growth protection of the environment is vital and the state may ensure this through law and policy. ” You would think that protecting the ultimate capital asset upon which all future income depends- in other words this fragile planet- was worth investing in.” Prince Charles, (01/05/2008) London Metro, p.4).
It is paramount development policy be considered as a process of structural changes. The market may be unable long term to provide required structural changes leading to necessary plot intervention to ensure crucial development sectors evolve for a sustainable economic future.It is true the states targeted intervention can be inefficient as well as effective but this is no reason to generally disagree with state intervention per see. Charles K. Wilber argues misallocation can be just as proliferate in the free market economy. (1983, p. 326). Indeed the varsity of resources means the spot could not possibly control all effectively and the governance must assess which areas are best region hasten and which the market operates in a socially super manor for economic development. (Todardo, 1992, p. 536). However the market economy is not kindly for the primary task of developing countries that; it does not provide a minimum of irreducible goods mobilized in an effective manor to provide the necessary structural changes required for sustained growth. Given the complexity and current conditions of developing countries economies it would be impossible for sustained growth to occur without the states targeted intervention. (Martinussen, J. P258).
Ultimately state intervention gives opportunity for relative equality with no class and little individual desires. “…all individuals work, each according to their ability, for the good of society and are rewarded according to their need.” (Karl Marx).
References
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