Session 2
Anne O. Krueger, “Government Failures in Development,” Journal of
Economic Perspectives, Summer 1990, pp. 9-23
In a nutshell: The view of development economists in past decades was that government should
play an active role in economic development. Proved faulty by colossal government failures, the
new line of thinking recognizes self-interest in government bureaucrats and advocates
intervention only in cases of market failure where the government has a clear plan and set of
rules for it’s involvement.
In this article, Krueger outlines lessons learned from development literature on
government involvement in the economy. In the context of the states versus markets debate,
Krueger believes in free-markets with clearly outlined government intervention accepted in the
case of market failures.
A government intervention is defined as a failure if the outcome is worse than what would
have occurred under laissez-faire. Government failures fall into two categories: omission and
commission. An example of a commission failure is the public sector running enterprises. The
failure to maintain existing infrastructure typifies an omission failure.
Four main points:
 Government is not run by selfless bureaucrats, but by a mélange of people with
competing pressures and interests. Despite their competence or lack thereof, the
administrative frustrations can prove overwhelming and detract from their performance.
 The public sector possesses a comparative advantage in large scale activities that the
private sector doesn’t focus on, such as ensuring law and order and providing basic
services like roads, education, and communications. Government entry into other fields
best served by the private sector is costly and detracts from other government services.
 Three features of government intervention are:
o Rent seekers take advantage of government offering things for less than their
value and try to gain rights to the valuable items.
o Beneficiaries and victims of government policies will organize and lobby to
increase their benefits or decrease their losses, regardless of where the policies
came from.
o There is a dichotomy between ministries of the government that want to spend
money on their particular program and the finance ministry, which is more likely
to economize in the public interest.
Guidelines for policy makers:
 Any government action has costs. Any government action that involves economic
activity, regulates private economic activity, or affects resources allocation should not be
implemented without procedures for deciding action and administrative capability to enact
it.
o Feasibility, resultant political pressures, and administrative cost must also be
considered.
 Policies and programs that minimize use of government resources should be prioritized.
 Policies that reduce rent-seeking opportunities should be prioritized.
 Foster policy development that results from trade-offs or cooperation between
administrators and executors.
 Choose the most transparent policies.
In sum, one must be realistic about the capabilities of government, support government action in
the areas where it possesses a comparative advantage, and look cautiously upon government
interventions in economic matters without a clear reason, plan, and outcome strategy.