Changing role of government

INTRODUCTION
The market was the most appropriate instrument for realizing economic growth &
improving human welfare. The state’s role was thus to be restricted to certain
core function – providing public good such as defence & highways, maintaining
law & order to ensure security of person & property, enforcing contracts &
providing primary education to the people. In 19th century the government role in
redistributing income was limited & tax system were used entirely for revenue
raising, state thus remained small by modern standards until world war first.
In developed economies of the west, the policy makers by & large agreed on
three principles. First, there was agreement on the limitations of the private
enterprise & thus mixed public-private economy was regarded as desirable. This
implied nationalizing a wide range of strategic industries. Secondly, need for a
coordinated macroeconomic policy was recognized because market alone failed
to ensure macroeconomic stability that is that is needed for sustained growth of
business. Finally, reliance entirely on market
For the welfare of the people was a questionable proposition.
In the three and a half decades between 1960 & 1995, government western
economies assumed new role & expanded existing ones. By the mid-1990s the
range of tasks performed by the government & its agencies included not only
maintaince & development of infrastructure & utilities but also much more support
for education, health care & social security. As a result, in the 35 year period
from 1960 onwards the central government expenditure rose from less than 20%
of GDP to over 30%.
Between 1977 & 1991 the process of relaxing control started. However obth
open & hidden subsidies went on increasing. In this period fiscal deficit become
unsustainable and the country was in deep economic crisis in 1990-91, In
response to this crisis the reform process began in this country. Most of the
controls dismantled and the state’s role changed from that of principal investor to
that of facilitator pf entrepreneurship.

ECONOMIC ROLES OF THE GOVERNMENT

1. Regulation
2. Promotion
3. Planning
4. Production
As regulator

Government world over made a body of laws and policies to assure that
competition is at least maintained if not enhanced. The antitrust laws passed in
different countries commit the Government to preventing monopoly and
maintaining competition. These laws are generally concerned with six specific
areas: price discrimination, exclusive and tying contracts, intercorporate stock
holdings, interlocking directorates, mergers and trade practices that injure
independent retailers and wholesalers.
I developed countries, now-a-days industrial activity is not regulated. In contrast,
some of the developing countries are persisting with individual licensing. There
are also restrictions on industrial location. Production of certain goods is reserved
for small scale units. However, in recent years even developing countries have
withdrawn many stringent regulations. Import controls, foreign exchange
regulations, and price controls are now rare. The Government today prefers to
rely more on fiscal and monetary measures to regulate business activity. Modern
business is aware that regulatory structure will never be dismantled completely.
Today’s regulatory structure consists of ‘old’ and ‘new’. The older economic type
of regulation focuses on specific industries, markets and business practices. The
newer, social type of regulation focuses on products, production and public
issues.

As promoter

Promotional role of the Government in a capitalist economy is determined by the

limitations of the business. Since business firms are profit maximizes, they have
virtually no interest in making investments in sectors where return is either small,
because of long gestation periods of projects, quite uncertain.
The governments have thus accepted the responsibility of infrastructure
development. It has been observed that not only in developing countries but also
in some of the developing countries, business suffers from a failure to use the
most advanced management technique, to cope with the scarcity of scientist and
engineers, to introduce promptly advanced technical processes and to spend
enough on research and development. The efforts in the field of research and
development improve labour efficiency and industrial productivity.
The Government’s promotional role is most pronounced in the field of finance. In
developing countries, new issues by corporate enterprises are generally
unsuccessful due to inadequate development of capital markets. Under the
circumstances, resource mobilization by the Government owned financial
institutions assumes great importance. Development banks are special industrial
financing institutions.
In developing countries, the government felt the need for setting up special
industrial financing institutions due to inadequate development of capital markets.
The normal channels of finance being ill developed, industrial development had
suffered for long time in these countries and the Governments committed to
accelerate the pace of industrialization thus decided to create special financial
institutions which could function as development agencies.

As planner

The Government plays important role as a planner, especially in developing

countries. During the post world war II period, many developing countries
adopted economic planning for achieving higher growth rate and better standard
of living.
Market forces fail to attain efficient allocation of resources in most developing
countries due to imperfections in the product and factor markets. Hence,
governments adopt economic planning for obtaining efficient allocation of
resources.
Private investors usually ignore the dynamic externalities which account for the
differences between social benefit and private benefit. Government in developing
countries follow for removing the differences between social benefit and private
benefit that is considered being necessary to obtain optimal allocation of
resources.
Institutional reforms are sometimes necessary for realizing rapid economic
growth. A market economically usually does little to carry out institutional
reforms. In contrast, economic planning permits the governments introduce
necessary institutional reforms which in turn create condition for more rapid
growth.
Developing countries lacking productive resources such as capital, skilled
manpower, and foreign exchange want to use them in the most productive way
and this can only be achieved if the whole economy is covered under an overall
planning mechanism.

As producer
In most capitalistic countries, the bulk of production is done in the private sector.
Small scale manufacturing, commerce and agriculture are mostly in private
hands, while large scale manufacturing mining and finance are under the control
of transnational, domestically owned corporate and public sector enterprises. In
developing countries, state-owned utilities provide electricity, gas and water.
Public enterprises also play a significant role in transport and communications. In
contrast, pattern of ownership differs substantially in different countries in mining
and manufacturing.
Public sector enterprises have been set up in various countries for a variety of
reasons. Whereas in former East European socialist countries, state owned
Enterprises were set up for ideological reasons, In some other countries
governments acquired control of basic enterprises from foreign owners as from
minority ethnic groups. In most cases, however, government set up public
enterprises because of the weakness of private entrepreneurs.
Theoretically there is no reasons why public enterprises should not operate at the
highest possible efficient level. But in practice there has been a great difference
between what is theoretically feasible and what actually happened. Explaining
the reasons why efficiency levels are in the state owned enterprises (SOEs) the
world development report 1983 stated,” As a commercial entity, an SOE must
sell in the market place. As a public organization, it is given other objectives and
is exposed to pressure from politically powerful sectional interest SOEs are often
operated as public bureaucracies, with more attention to procedures than to
results; and ready access to subsidies can erode the incentive for managers to
minimize costs.

CONSENSUS ON FUNCTIONS OF THE STATE

There are activities that will not be undertaken at all without state intervention. At
the other extreme one finds activities in which the state plays an activist role in
coordinating markets or redistributing assets. In between these minimal and
activist functions are intermediate functions, such as regulation of monopolies
and addressing externalities.