Role of State in Economic Development

By | on October 23, 2016 | 0 Comment

dt_1512015157_hinh1-anhBecause of the strong emotions involved as well as the changing nature of the views about it, discussing the role of state in the economic development of a country is a problematic issue. Pendulum keeps on changing with a 50+/- years cycle. Highly interventionist Mercantilists took the state control for granted irrespective of its necessity or desirability on logical grounds. They were followed by the minimalist Classical economists led by Adam Smith who opposed the role of state intervention in market mechanism as a rule. However, he advocated it as an exception and that too in very strong manner. Their views about the role of state were challenged by Keynes and dominated the economic thinking in most of the post war years till contended by the supply side economists led by Friedman. Keynes again became in fashion after the 2007/8 financial crises and so on.


Advocates of greater state role in economic management of a country base their arguments on the basis of historical evidence and its effectiveness in achieving the societal projects. State being a multifunctional institution, its role has been on the increase since its creation in almost all spheres of life and not only in economic field. When other institutions fail to perform their functions, it is the state that had to play its role. It was in this sense that Adam Smith advocated greater role of state.

State is the ultimate authority to provide the necessary environment for the attainment of society’s multi-dimensional objectives: economic development, political stability, social cohesion, cultural advancement besides protection from external threats and internal subversion. It has the necessary wherewithal to perform these functions, the bureaucratic machinery to mobilize the resources and carry out the tasks. Consequently, State not only increases the rate of capital accumulation through direct and indirect methods, it helps in increasing the welfare of the society through its re-distribution of wealth, income and opportunities. Left to itself, inequalities have an inherent tendency to accentuate which , besides being morally wrong, socially undesirably, politically unstable, is economically harmful through its tendency to increase savings and reduce effective demand.

On the other hand, critics of the greater role of the state maintain that plugging of one nut here and a bolt there is not state intervention but state function, for which state is created. Desirability of the state is also challenged on the ground that once it is accepted that the greater role of state is desirable, then it ends nowhere; the greater the desire, the greater role. Power corrupts and the absolute power corrupts absolutely. That is why all over the world, the level of corruption is the highest in the state-owned and state-run enterprises. In fact, they argue, if appropriate institutional framework and proper incentives are given, private enterprises would invest even in those sectors which are termed as risky, costly, and socially beneficial and so on. Lastly, when private sector fails, it is just failure of individuals; when state fails to provide the goods, it is the failure of the system as a whole.

Who Wins ?

Frankly speaking, it is a futile controversy, which has been going on for decades without any fruitful results. Society progresses as a whole, in which state and society, play their part according to their need in the overall context. When the private sector fails to perform its role, state comes forward, when it abdicates, private sector comes forward. If state is corrupt, society cannot be honest in its entirety. Only the corruption takes on different meanings.

Historically and in cross country analysis, role of both have been crucial and in almost every stage of economic development. No one can deny the crucial role played by the state in the economic development of so-called capitalistic economics of UK, USA, Japan and Germany. However, as they developed over a long period of time, the role of the state doesn’t seem to be a substantial one. But the new states of USSR, China, India, Brazil etc had to squeeze the time for catching up with the rich, the state became not only bigger but visible.

Unfortunately, strong ideological convictions of the advocates and the critics of the state have created this confusion. Greater role of state came to be identified with one brand of cultural pattern, which was opposed to another culture and the cross fire of arguments created an unnecessary confusion as if adopting one or the other was their only option.

Jury is still on whether the rapid economic development of the East Asian economies was entirely due to state intervention or due to private initiative. Generally, state provided the infrastructure while private sector built superstructure, with some over-lapping. It is this degree of over-lapping that has been the bone of contention between the advocates and the opponents of the role of state.


Although there is no universally acceptable or applicable formula for the right delineation between public and private participation in development, there is a general agreement that, irrespective of the degree of state intervention, development depends to a large extent on organization, good governance, institutions, and people’s participation in decision-making and political consensus. This environment can be created only by a well-functioning state. Within in this environment, it is the private sector winch is the real driver of economic growth.

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