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.