Evolution of the State in governance
process.
•
•
•
•
State and Development
Role of the State in Economic Development
Economic system
Experienced from the Developing and African
Countries
State and Development
• What is the role of state in development?
• Public finance economist distinguish between
two type of role of the state.
– The normative role of the state
– The positive role of the state
State and Development
"government should provide basic healthcare to all
citizens" is a normative economic statement.
There is no way to prove whether government
"should" provide healthcare; this statement is based
on opinions about the role of government in
individuals' lives, the importance of healthcare and
who should pay for it.
State and Development
"government-provided healthcare increases
public expenditures" is a positive economic
Statement.
it can be proved or disproved by examining
healthcare spending data in countries like
Canada and Britain where the government
provides healthcare.
The normative role of the state
• Normative role of the state out line what the
government should do to maximize welfare
• The normative role determine the guidelines,
principles or norms for welfare enhancing
public sector intervention in the economy
• Normative role attempt to define what the
government should do to correct market
imperfection to compliment the market.
The normative role of the state
• These normative roles are affected by the
political setting of the country (constitution)
• In playing this role the state can not have
objective different from its citizen.
• In ideal world the role of the state would tend
to merge but in real world they diverge and
some times they diverge greatly.
The normative role of the state
• They diverge because of reasons such as:
• Difference of interest between those who
govern and those who are governed
• Mistakes and misconception on the part of
policy markers
• In adequate control on the part of policy
markers over the policy instrument
• The residual effect of the past decision
The Positive role of the state
• Positive role is what the government or state
actually does.
• The positive role of the state is also influenced
by the experience and history of the state
• For the western world which mostly followed
market economy, it is influenced by great
depression, major wars, threat of
communism.
• For the developing world it is their experience
as colonies of foreign power.
Role of state in economic development
• State role is also influenced by other factors
such as:
• Social attitude determined by culture and
religion
• Level of economic development(more or less
state intervention)
• Degree of openness of the economy
• Technological development (create or destroy
natural monopoly)
Role of state in economic development
• state intervention is essential for four main
purposes;
1. The governance of the states economic policy
i.e. the collection of taxes
2. The enforcement of laws such as property
rights and contracts;
10
Role of state in economic development
3. Protection of state economy through macroeconomic policy such as international trade
restrictions and exchange rate policies
4. The organization of infrastructure i.e.
transport systems, schools and health care.
The private sector has little incentive to fulfil
these purposes where as the state prioritises
public requirements and future development
over private business desire.
11
Role of state in economic development
• in principle there are many more things that
governments could and should do:
• provide public goods,
• correct market failures,
• reduce inequalities in income and
opportunities,
• stabilize excessive economic fluctuations.
The ways government play its roles
1. Inform: or persuade
consumers/providers/suppliers to act in a
certain way.
–
–
Publicize health risks (smoking)
Disseminate information on disease patterns
(swine flu), or risks of medical procedures.
13
The ways government play its roles
2. Regulation: determines how a private
activity may be undertaken.
–
–
–
At extreme gov’t can prohibit goods or activities.
Setting standards for doctors and drug trails
Regulate insurers to provide certain
interventions.
Includes mandates: obliges someone to do
something, and (usually, though not always) pay
for it.
–
•
E.g. employers of a certain size must provide health
insurance, children must be immunized at schools
14
The ways government play its roles
Regulation and mandates appeals to legislators
– b/c tackles problems without incurring
government spending.
•
Affects spending of those that are regulated e.g. two
day hospital days after delivery.
3. Finance: health care with public funds.
–
Delivery can still be public.
15
The ways government play its roles
4. Provide: or deliver health services using
publicly-owned facilities and civil service
staff.
–
–
–
Usually publicly financed and provided
More typical of developing countries
Developed countries usually provide a lot of
autonomy if publicly provided (crown
corporations).
5. Taxes/subsides on goods e.g. cigarettes
–
With diabetes increasing so quickly should
certain foods be taxed more?
16
Against the role of state
• The role of the state in the economy has
always been a controversial issue in public
debate, but it has become more so in the last
quarter of a century with the rise of neoliberal
thinking that preaches the virtues of
unregulated markets and recommends deregulation, opening-up, and privatization
Against the role of state
• This push for a minimal, pro-business state,
especially in developing countries, has been
further intensified with both the rise of
globalisation and the many radical neoliberal
“reforms” implemented, often under pressure
from multilateral agencies (such as the IMF,
the World Bank, and the WTO).
Against the role of state
• The World Bank is a major critic of state
intervention emphasizing from an experiencebased argument the negative economic effects it
has witnessed.
• A primary argument from the World Bank is that
operational state 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 over employment and often the
public sector is witnessed to make a loss.
Against the role of state
• Critics argue governments may not know
individuals own 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
But
• 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).
All Economic Systems Must Consider the
Following Questions:
1.
2.
3.
4.
What goods and services to produce?
How will they produce them?
Who will get them?
How much will they produce now, and how
much later?
•
Each economic system answers these
questions in a DIFFERENT WAY.
Types of Economic Systems
There are 4 basic types of economic systems.
1. Traditional Economy
2. Command Economy
3. Free Market Economy
4. Mixed Economy
1. Traditional Economy
• Economic questions are answered by habits
and customs (the way it has always been
done)
• Children work the same jobs parents worked,
often farming or hunter/gatherer
• Fear Change!
• Ex. Eskimos, the Amish,
Pigmies, Bush People
Planned Economy
(Command Economy)
• Economic questions are answered the
government.
• Economy directed by the government
• All means of production (land, labor,
capital) are state owned and controlled.
• The government makes all economic
choices of what to produce, how to
produce, how to distribute.
Rise of the Planned Economy
• People believed that other economic systems
were exploiting the working class.
• Came as a response to the industrial
revolution.
• Some people believed that if the government
controlled the economy and chose what
should be produced, how and for whom;
there would be greater economic equality.
3. Free Market Economy
• Economic questions are answered by
individual buyers and sellers.
• Supply and demand influence economy
• People act out of self interest; motive for
profit (money) drives the economy
• Also known as FREE ENTERPRISE or
CAPITALISM
• Ex. The United States, Western
Europe, Japan
3. Free Market Economy
• Thus in market economy the role of
development is much more of the citizen
effort. The role of the state is minimal.
• In a market economy individual vote with
their dollars, where in a democracy they vote
with their vote to promote their political goal.
Mixed Economy
• Mixed Economy: No economy is pure market,
pure command or pure traditional, elements
of each appear in all economies, some have
more elements of one economy than another.
Market
Mixed
Command
USA
Great Britain
China
CASE STUDY
Central Planning in the Former USSR
FIVE KEY ELEMENTS OF
CENTRAL PLANNING IN THE
FORMER SOVIET UNION
1. NATIONALIZATION
Nationalization
– The taking over of ownership of a company by the
government.
• No individual owns capital (mines, mills, machines,
railways).
• Government controls them and appoints managers
to manage them.
• No one can make a profit from the nation’s
resources.
2. COLLECTIVIZATION OF
AGRICULTURE
Collectivization
– The practice of working together in groups supposedly for the
good of all.
• During the 1920’s & 30’s privately owned farms were
seized by the government and made into large state
owned farms. (Kulaks)
• 97% of farmland was government owned.
• Workers worked on immense government owned farms.
(500-700 workers)
• State farms also set up to test new agricultural methods.
(operated by government but workers were paid on a
wage basis.
3. CONTROLLED DISTRIBUTION OF
WEALTH
• Controlled planners decide how to distribute the goods produced.
(Gossnab determined how commodities were distributed.)
• Soviet Union used price controls to influence buying practices based
on what was in the best interest of the country.(i.e. low prices on
school books, high prices on vodka)
• Standard of living in the USSR lagged behind other major countries
because…
– Planners believed in economic equality, those who were efficient
producers had their efforts used to provide income for others.
– Planners concentrated on needs for the future rather than wants
for the present.
4. COMPREHENSIVE PLANNING
Gosplan
– The economic planning commission for the
former USSR.
• With the best experts, advisors, computers
available it was Gosplan’s task to decide…
– What to produce?
– How to produce?
– For whom to distribute to?
• Major advantage of central planning was it
allowed the govt. to determine which goods the
country needed/equality in distribution.
Disadvantages to Central Planning
–Slow to respond to changes
–Shortages
–Absence of initiative/incentive
–One bad decision effected the whole
nation
5. CONTROL BY THE COMMUNIST PARTY
• Gosplan was the economic planning committee
for the former Soviet Union.
• Gosplan took orders from the Communist
Party.
• The Communist Party established the national
goals and it was Gosplan’s task to achieve these
goals.