I

NTRODUCTI
ON

Inr ecenty ears,anemphasi songov er

nmentf ailur
ehasr eplacedtheprevi
ousconcer nf ort he
mar ketf ailur
e.Thedr amati
csuccessoft heEastAsi an Newly-I
ndustr
iali
sed Countri
esi n
achi evi
ng sust ained economi c gr
owth provided confl
icti
ng ev i
dence on the rol
e ofst ate
i
nt erventi
on.Forsomewhi l
e,itwaswi del
y-
bel i
evedthattheseeconomi esdemonst r
atedt he
effectivenessoft hefreemar ketinpromot i
ngeconomi cdev el
opment,withHongKongbei ng
viewedast hepr imeexampl e.Inanysuchat tempttoev aluatestatei
nterventi
on,i
tiscl ear l
y
i
mpor tanttohav eclearly-
expr
essedcr i
teri
awhi chmaybeusedt ojudge«success»or« f
ail
ur e» .

Evensett
ingasi
dethemeasur ementprobl
ems,dif
fer
entsoci
eti
esmayhav edif
fer
entobject
ives
andshouldbejudgedr el
ati
vetothei
rownai msSmi t
h.HumanDev el
opmentIndex.Secti
on4
examinesthecaseoftheOPECcount ri
es.Sect
ion5usesadiffer
entindi
cat
orfordevel
opment
tostudyt
hesamei ssue.

1Economi
csandt
her
oleoft
hest
ate

Thebr eakdownoft hecent r

all
y-plannedr egimesoft heFor merSov ietUnionandEast ernEurope
hascastdoubtont hev al i
dit
yoft hisappr oach,wher east hehi ghunempl oy menti nWest ern
Europe dur i
ng the 1980s has cal led the free-mar ketappr oach i nt
o quest ion.Wi thi
nt hi
s
perspectiv
e,questionsconcer ningt her oleoft hest at
ei neconomi cdev el
opmentbecome
questionsofthebalancebet weenpubl icandpr i
vat esectors,betweenst ateinterventi
onandt he
mar ket.Wemayper hapsi dentifytwor ati
onalesf orstateinterv
ent i
oni neconomi cacti
vity
.Fi
rst,
i
tmi ghtbear guedonef f
iciencygr oundst hatgov ernment smaybej ust
if
iedini nter
veninginthe
economyt ocorr
ectf orsomef orm ofmar ketfai
lure.

Second,itcoul
dbear guedonequit
ygroundsthatt hestat
eshoul dinter
venetoaf
fectthe
di
stri
buti
onofr esources,i
nordert
oprotectcertai
ngr oupswi t
hinsociet
y.Iti
sdebateabl
e
whethert
hismayal soberegar
dedasbei
nganinstanceofmar ketfai
l
ure.

For
msofst
atei
nter
vent
ion

Thi
smaybebecauseofsomei
mper
fect
ioni
napar
ti
cul
armar
ket-ormayr
efl
ectt
heabsence
ofmar ketsf orsomecommodi ti
es.Suchintervent
ionwilltendtobei nt heform oft
axesor
subsidies.Theexistenceofimperfectcompetit
ionmayr equir
eadi f
ferentsortofi
nter
venti
on.
Wher eamar ketisanaturalmonopoly,nat
ional
isat
ionmaybei ndi
cated,alt
houghthegrowing
wav eofpr i
vati
sati
onar oundthewor ldsuggestst hatthi
sar gumentmayhav ebeenov er-
regardedinthepast.

Alt
ernat
ively
,somesor tofcompetit
ionpoli
cymayber equi
redtocurbi mperf
ectcompet i
ti
on
thr
oughmar ketregul
ati
on.Furt
hergovernmentinter
v enti
onmayber equi
redtoensur ethe
opti
malpr ovi
sionofpubli
cgoods.Thisneednotentaildir
ectgovernmentproducti
on,al
though
thi
sisonesol uti
ontothi
ssortofmarketfai
l
ure.Theidentifi
cat
ionoftheappropri
atequanti
ti
es
ofpubli
cgoodst obeproducedmaybepr obl
ematic.

Thi
smayi ncl
udestabi
isat
ionpol
i
cytoensurest
abi
li
tyi
npri
ces.Hel
pingt oensur
etheeffi
ci
ency
ofal
locati
onofresour
cesmaynotbetheonl yt
aski
nwhichstat
eintervent
ionmaybej ust
if
ied.
Thedistr
ibut
ionofresour
cesbetweengroupsinsoci
etymayalsor equir
eappropri
atepolicy
measures.

Thest
atei
ndev
elopi
ngcount
ri
es

Fi
rst,itshoul
dbenot edt hatt hemar ketmechani sm itselfmaybel essdev el
opedi nthe
devel
opingcountri
es.Ar elativel
yhighpr oport
ionoft r
ansactionsmayt akeplaceoutsidethe
conventi
onalmarketsystem,sot hatmar ketpri
cescannotf ull
yandef f
ecti
vel
yguideresource
al
locati
on.A fundamentalr oleofgov ernmenti nsuchasi tuati
onmaybet oencour agethe
devel
opmentofmar ket
s.Ithasal sobeenal l
egedinthepastt hatindi
vi
dualeconomicagentsin
devel
opingcountri
esdonotr espondtomar ketsignal
s,oratleastthatt
heyrespondonlyslowl
y.

Otherev i
dencesuggest sthatt
hisisill
usion,andthatwheremar ketpri
cesdor ef
lectrel
ati
ve
scarcit
y,i
ndividual
shav ebeenpreparedt orespond,andtakegooddeci si
ons.Manufacturi
ng
activ
ityhasof tenbeenseenascent r
altoeconomi cgrowth.Itmaynotbebenef ici
alforthe
statetoinsistonencour agi
ngcompet it
ioninamar ketwheret hi
swoulddenypr oducersthe
opportuni
tyt oexploiteconomiesofscal e.Priv
ateeconomi cactiv
ityi
sl i
kel
yt obegr eatl
y
hinderedinamar ketenvi
ronmentlacki
ngi nphysi
cali
nfr
astr
ucture.

Theav
ail
abi
l
ityofr
eli
abl
epowersuppl
i
es,good t
ranspor
tat
ion l
i
nksand communi
cat
ions
sy stems i n part
icularmaybe seen as cr ucialifa count ryist o under go the structural
transf or
mat ion which has been seen as a keypar toft he developmentpr ocess.Many
dev elopingcount r
iesar echaract
eri
sedbyanespeci all
yskeweddi stributi
onofi ncome,weal t
h
andeducat i
onaloppor t
unit
iesIti
sli
kelythatresourceal l
ocat
ionisbi asedt owardscateringfor
theneedsofhi gherincomegr oupsEshag.I fthealleviat
ionofextremepov ert
yisseenasone
oft heobj ectiv
esoft hedevelopmentprocess,thensomer edi
str
ibutiv
epol icywil
lber equiredto
protectpoorgr oupsi nsociet
y.GDPpercapi ta,al
thoughi mprovi
ngt hecapabi l
iti
esoft hepoor
mayhav edirecteffectsonhumandev elopmentandi ndir
ectbenefi
tsi ntermsofpr oductivit
yin
thel ongr un.

Previ
oussecti
onsoft hi
spartofthepaperhav ei
denti
fi
edanumberofway sinwhicht hestate
maybeseent obejustif
iedinint
erveni
ngi neconomicacti
vi
ty.Manyofthesepol i
ciesentai
l
questi
onsofpubli
cfinance-ei
therexpendit
ureundert
akenbygover
nment,
ort axat
ionpolicy
.It
i
salsoclearthatsomeaspectsofgov ernmentexpendi
tur
emaybeexpectedt ohav eagreater
i
mpactongr owthanddev el
opmentthanothers.

Ev
aluat
ingst
atei
nter
vent
iont
hroughpubl
i
cfi
nance

So,ithasbeenarguedthatgover
nmenti
nterventi
onintheeconomymaytakeanumberof
for
ms.Thispaperwi
llf
ocusontheuseoff
iscalinst
rument
sinseeki
ngt
oev
aluat
ethepastr
ole
ofgovernmenti
ndevel
opment.

Public expendi
ture can st i
mul ate economi c pr oducti
vit
y by prov i
ding assist
ance fort he
establi
shmentofnewi ndust
r i
esort heintroductionofact i
vit
iesnoty etlaunchedbythepr i
vate
sector.Thispaperwi llpresentempi r
icalev i
dencet hatattemptst oexpl or
et heimpactoft he
component s ofpubl ic expenditure and r evenue on economi c developmentin developing
countri
es.Ofcour se,acommi tmentofexpendi tur
ebygov er
nmenthast obef i
nanced.I n
developingcountr
ies,thepot enti
ali
ti
esofgov ernmentr evenuesarel i
mited.

Thest ructur
eofr ev
enuemayhav easubst
antiali
nfl
uenceondev el
opment.Thisst
udywillt
hus
focusont axati
onpoli
cyaswellasonexpendi t
ureit
ems.Inaddi t
ion,t
axesonincomeai m at
attainingamor eequit
abl
eincomedist
ri
buti
oni nthesoci
ety.Thi
spapersetsouttoexpl
orethe
dif
f erentiali
mpactofthecomponentsofgovernmentexpendit
uresandrevenuesonthepaceof
economi cdev el
opmentindevel
opi
ngcountr
ies.
Giventhatsocieti
eswi sht oachiev eimprovement sinthequal ityofli
feoftheirciti
zens, andar e
notonlyconcernedaboutt hequant it
yofr esour
ces, t
hei nvestigati
onfocusesnotonl yupont he
growthofr ealGDPpercapi ta,butal soupont helev elofhumandev el
opmentachi ev ed,as
measuredbyt heUNDP' sHumanDev el
opmentI ndex.Thi soffersamor ebr oad-basedi ndicator
ofa soci ety
'sl evelofdev elopment .The r esults confir
m t hatdiff
erentcomponent s of
governmentexpendi turesandr ev enueshav everydifferentimpact sondev elopment ,soi tcan
notbesi mplyar guedt hat«gov ernmentexpendi turei sbenef ici
alfordev elopment»,ort hat
i
ndiscri
minateinterventioni
sm ist ober ecommended.Rat her,theanalysi
si ndicat
est hatt here
aresomei ntervent
ionsbygov ernmentwhi chcanbebenef i
cial,butthatgov ernmentsneedt o
pl
ant heirexpenditurescar ef
ully,andt ogi vesomet houghtt othemodeoff mancingt obe
adopted.