Prof. Raj Kishore Panda* in Bhubaneswar, September 22, 2023: Debate on economic role of state versus market per se is an old one. Yet recent changes in the international political economy have deepened the debate.

Taking into account the available literature, while 18th and 19th centuries can be taken as the period of market economy with limited economic role of the state/ government, the 20th century may be considered as the era of large government in which there registered spectacular rise in the economic role of states/ governments.

During this period the ratio of government expenditure to GDP which was only 12 percent in 1913, showed a significant rise to 45 percent in 1995 in some industrialized countries. As studies reveal, in some individual countries the government’s economic role was found quite overarching -shifting from one that augmenting the market to that of replacing the market.

In contrast, in recent years because of the forces operating globally, the market has been gaining importance over the government. Studies show that in growing number of countries there has been gradual withdrawal of government intervention in resource allocation. Public enterprises are privatised. Trade restrictions are reduced to make free flow of goods and services.

Thus, in view of the rise and fall noticed in the government’s economic role from time to time we here present a historical perspective of such changes at the global level and factors contributed to such changes. Since public sector has been assigned to play a critical role in India’s economic development, in the light of current changes noticed in the governments’ economic role at the global level, we here intend to investigate whether public sector in the country has been reorganised to cope with the changing global development.

Going down by history, we find that contrary to ideas of the classical economists such as Adam Smith and others who advocated the free play of market forces and the government having the minimal role, it was Richard A Musgrave who in his 1939 paper ‘Voluntary Exchange Theory of Public Economy’ first advocated for state involvement in economic activities having three functions viz; resource allocation, income redistribution and macro-economic stabilisation.

Later his book The Theory of Public Finance written in 1959 corroborated the idea further and he argued that government intervention in the economy is inevitable to achieve community well-being as this role and responsibility of the community cannot be assumed by the private sector.

In this context he made reference to failure of market in allocating goods that are non-rival (having multiple users) and non-excludable (certain individuals or groups of individuals cannot be excluded from using). These goods are found under-supplied and under-consumed – the former because the cost is not covered and the latter because consumers are unable to pay the price of the commodity.

During 20th century two important events occurred which shook the world economy and thus paved way for public sector to play larger economic role? While the Great Depression of 1930s exposed the weaknesses of the market economy, development initiatives taken in the post-war (Second World War) years increased the role of government. A number of public works programmes were taken up in the United States and countries all over the world to stabilise their economies. It was Keynesian thinking that provided intellectual support in justifying the expansion in the economic role of the government in many countries.

However with the rise in the governments’ economic role there appeared deterioration in the quality of basic services promoting social welfare. Towards end of 20th century ( in 1991) the Soviet Union collapsed. The new millennium witnessed extraordinary financial crisis in 2008. The stock market nearly halved and the global financial system crashed. In view of all these changes a strong opinion emerged – limiting the government’s role and giving more freedom to the operation of private market forces.

Empirical studies of individual countries have shown how governments with larger economic activities have behaved quite contrary to promoting social well-being. Examining data these studies have inferred that the governments’ actions often have given rise to conflicting outcomes.

Added to this, the public finance economists in the post- Musgrave period explained divergence between normative (what state should do) and positive role (what state actually does) of the government and thus argued for limiting government economic activities.

These studies reveal how the policy makers follow policies that help their personal interest or their political party interest which may not be optimal in providing community welfare. This has led to rent-seeking, corruption etc on the part of policy makers. Quality of public administration which determines scope of effective government intervention has steadily declined.

Coming to the changes observed in the role of public sector in the Indian context it is well acknowledged that in the beginning years of planned development-in 1950s, and 1960s the public sector was given to play a critical role in key resource allocation and building production capacity while the private sector was confined largely to consumer goods segment.

During 1970s and 1980s policy preferences towards private sector was a little sporadic and with the economic reforms in 1990s a significant change in policy strategy towards privatisation was adopted. As a first step of reforms de-licensing was effected allowing private players entry into sectors exclusively reserved for public ownership.

Besides, disinvestment of government’s share and listing of Public Sector Enterprises in Stock Exchanges were taken up. However in spite of all such measures, public sector’s importance in the country’s development context has reduced marginally. The post-reforms period has seen rise in number of PSEs. Today output from PSEs accounts for 14 percent of country’s GDP. Reliance on public sector continues in a big way.

To conclude, it may be said that over the last two decades, economic role of governments at the global level have reduced considerably. Now economists and political scientists are trying to work out an optimum role for the government. To them neither the government’s economic role can be zero nor the government to take over the market.

As the economist Geoffrey Underhill writes state and market make up a matrix or an integrated ensemble of governance in order to move in a more welfare oriented and redistributive direction. The growth of state intervention should not be accompanied by dereliction of attention to core activities in the community interest. In this context there is need in reforming public administration.

  • Formerly Professor of Economics, Utkal University & Director , NKC Centre for Development Studies , Odisha, Bhubaneswar.

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