Evolving work of State in economy

Rice farmer

Residents of Gaturi in Murang’a county harvest rice on November 25, 2022. 

Photo credit: George Odiwuor | Nation Media Group

The role of governments in the social economic sphere has changed considerably over time. As society's development becomes complex, heterogeneous and specialised, the necessity for agreements or contract rules grows.

Therefore, governments across countries have assumed greater significance in their role towards the economy. The growing complexities and problems associated with market failure necessitate the need for government intervention in economic activities through direct and indirect channels, such as direct provision of certain goods and services, regulation of industries, and trade through various rules and regulations.

Post WWII the government was regarded as vital for provision of goods and services, and for establishment of rules and institutions that would allow efficient market functioning, and ensure sustainable social and economic development. Expansion in government spending was driven by postwar confidence in States, and a gradual move towards the mixed economy system in many of the industrial countries.

In underdeveloped and developing countries, the process of social and economic development requires an effective government rule that could play a catalytic role in encouraging and complementing activities of the market, and at the same time act as a provider of key social and economic goods and services.

Success of a mixed economic system requires effective coordination between the government and market forces. The role of the State is no longer static. Global integration of economies, technological changes, poverty, unemployment and climate change have necessitated the need for an effective government intervention programme that undertakes and promotes collective actions efficiently.

After the Russian invasion of Ukraine, many countries who primarily depended on Ukraine and neighbouring region for wheat and gas are grappling for supplies, this is where governments have to focus on an alternate supply source.

Law and order

Going back in time, prior to the First World War, the role of the government was limited to activities such as the maintenance of law and order, ensuring internal and external security, and the provision of important public goods. The great depression of 1930 laid the foundation for the participatory role of the government in economic activities, in terms of promoting aggregate demand and ensuring a higher rate of employment.

Since States across countries have been instrumental forces in promoting economic development and securing economies from economic vulnerabilities, they are increasingly involved in almost every aspect of the economy, such as administrating prices, financial markets, regulations, and other social economic areas.

The recent international economic downturn and the subsequent government intervention programmes for uplifting the economies from the downturn are prime examples in this regard. Some important features highlight the government's role in the economy. Firstly, the simultaneous existence of the public and private sectors, and effective coordination between the two.

Allocation of resources through price mechanism and government directives. Protection of consumers’ choice, and their sovereignty. The arrangement of definite economic planning for the public sector enterprises. The government intervention and regulation of profits of the private sector.

Musgrave, in 1959 (The Theory of Public Finance) classified the functions performed by the governments into three categories; allocation of resources, redistribution of income, and stabilisation of economic activity. Another important role that can be added is the promotion of growth and employment.

Market activities

The government is involved in the allocation of resources through the provision of public and merit goods, such as defense, health, and education. The degree of government intervention is determined by the level of achievement in all these tasks, and by the nature of externalities.

Under the distribution function, the government undertakes activities that ensure equity and efficiency. Market activities, often promote the inadequate distribution of income and, therefore, government intervenes through its taxation and subsidy programmes to correct the market failure.

The stabilisation branch is concerned with programmes that aim to ensure economic stability conditions such as employment, stable prices, and a desirable macroeconomic environment. In certain economies, the government is responsible for the provision of certain goods and services, such as roads, ports, and items of national defense. It also takes production activities along with private firms such as electricity generation.

Government is also responsible for provision of services, including healthcare, and education at reasonable prices in rural areas. It also purchases goods and services from the market meant for further production, or for subsidised distribution. For example, the government procures food from the market, and sells it among the poor at rationed prices in another example, the government buys goods to provide for national defense.

Subsidies are provided by the government to specific industries as well with the aim of keeping the prices of products and services low for people to be able to afford them and also to encourage production and consumption.

A prime example is the fuel and maize flour subsidies in Kenya last year, which were subsequently scrapped. Another important aim of the government is to curb monopolistic tendencies of the market and ensure reasonable prices of goods and services. It aims to correct the market failure associated with externalities and public goods.

The regulations also aimed to protect the interest of the consumers, workers, and the environment. Thus, the government regulates the activities of private organizations through regulatory measures, such as quotas, taxes, and other such measures. For example, a carbon tax is imposed on factories that emit greenhouse gases.

Taxes

It also collects taxes, and that alters economic behavior for instants taxes on labor influence the incentives to work, while taxes on specific goods such as diesel influence the production and consumption decisions. Governments also aim to regulate trade, which at times becomes contentious such as Russia wooing China and selling France nuclear fuel inspite of sanctions.

The right mix of cooperative and competitive forces is an essential requirement of the efficient allocation of scarce resources and for smooth and stable operations of government and market agencies. The justification for the government intervention lies in the problem associated with operations of the market. Equity is an important objective to maximise social welfare. The markets are often criticised for promoting unequal distribution of income thus the government intervenes to solve the problem of inequality and to raise the standard of living. Another important role played by the government in a mixed economy system is to provide a legal framework within which all economic transactions between firms and individuals can take place.

The patterns of income distribution depend upon a number of factors, such as ownership of assets and financial resources, the propensity to save, skill level, demographic factors, and risk-taking behavior of individuals and so on. The consequent distribution may or may not match the society's acceptable level of inequality. Thus out of the concern for equity, poverty, and unemployment, the government is expected to intervene in the social economics sphere.

Ritesh Barot is a business and financial analyst. [email protected]

Welcome!

You're all set to enjoy unlimited Prime content.