State Versus Market Debate UPSC – Intervention of State

State Vs Market Debate

State Versus Market Debate 

The ‘ State versus market debate’ is an ongoing debate about the role of the  State  584+63+-and the market in society and the economy. Historically, this debate has been going on since the time of Adam Smith, the ‘father of economics’. Recently, this debate has once again become important in the context of Liberalisation, privatization and Globalisation. These Economic reforms and structural adjustments ongoing in developed and developing countries. Furthermore, the World Bank reports of 1991, 1997 and 2000–2001 have suggested a reappraisal of the roles of the state and the market in the contemporary Development process worldwide.

Theoretical Base

The Keynesian theoretical basis for the rise of the state versus market debate lies in the public choice approach of the 1960s and 1970s. This approach to public Administration argues that there should be ‘institutional pluralism’ (a plurality of agencies) in the process of providing  public  goods and services to promote consumer preferences. It says that administrators and politicians are concerned with self-interest. It questioned the central role of the government and the very basis of the state. Therefore, it advocated minimizing the role of the state, reducing the scope of work of government agencies, and handing over many functions of government to the market.

The Public choice approach gave birth to a new paradigm in public administration with effective market determination, which was called ‘New Public Administration‘ or ‘Entrepreneurial Government’. This transformation called for the government to play more and more an ‘enabling’ role rather than a ‘doing’ one. In other words, the government should be transformed from a ‘performer’ of  Public  activities to a ‘distributor’ of public benefits and a ‘facilitator’ and ‘promoter’ of change in society and the economy. Thus, this new thinking emphasizes the central role of the market rather than the state as the principal regulator of society and the economy.

Intervention of  State

State  intervention in society and the economy is characterized by four dramatic events of the twentieth century. These are-

  •  The Russian Revolution in 1917, which resulted in state control of all economic activities.

  •  The ‘Great Depression’ of the 1930s, which demonstrated the widespread failure of the market system.

  • The severe devastation caused by the Second World War, which resulted in the need for large-scale socio-economic reconstruction in the West.

  • Emergence of newly independent countries which adopted state-controlled Development strategies.

The period from 1950 to 1980 was the golden age of state intervention in society and economy. In the developed countries of Western Europe and America, the state intervened to implement Keynes’s theory of macroeconomics. Keyes said that to ensure full employment, huge investment through state intervention was necessary, because in capitalism, full employment is spontaneous. is not born

in the former Soviet Union and Eastern European socialist countries. The state interfered with the monolithic apex centralized planning and completely subjugated the market apparatus. The success of state planning in achieving rapid industrialization in these socialist countries, especially the Soviet Union, greatly influenced policy makers in favor of state intervention.

In the newly independent countries of Asia, Africa and Latin America, the state intervened to increase the pace of socio-economic development. The preconditions for development were not even present in these countries. These countries were characterized by widespread poverty, high unemployment, poor health, illiteracy, malnutrition, inequality, small and unbalanced industrial base, lack of infrastructure, and improper land relations. As a result, the state took on the responsibility not only of redistributing wealth and alleviating poverty, but also of producing goods for investment and consumption.

Failure of  State

Critical review of the role of the state began after the 1980s due to the following reasons-

  1. Huge increase in public expenditure and consequent inflation and high rate of taxes in both developed and developing countries.

  2. Financial crisis of the welfare state in most of the developed and developing countries.

  3. Failure of the state to provide even basic goods and services like law and order, education, health, housing, transport in many developing countries.

  4. The collapse of command and control economies in the former Soviet Union and Eastern Europe. This contributed to the increasing degradation and marginalization of the state.

  5. High growth rates were achieved by Japan, South Korea, Singapore, Hong Kong and Taiwan, which adopted a policy of limited state intervention.

  6. Poor performance of public enterprises in developing countries and huge losses associated with it.

  7. State collapse due to civil war in many parts of the world like Afghanistan, Somalia, Liberia etc.

  8. Excessive state intervention in the economies of developed countries resulting in asymmetric priorities, market distortions, widespread corruption and degenerate bureaucracy.

Market-Friendly Approach

The above changes led to liberalisation, privatization and globalisation. These economic reforms and structural adjustments favor a smaller role for the state and a greater role for the market in society and the economy. In other words, they indicate general trends of ‘state reductionism’ (government contractionism) and ‘market-adaptability’ (more openness to the market).

While the role of state intervention in  Development cannot be denied, it has been argued that this intervention should be ‘market-friendly’. A 1991 World Bank report described “market-friendly” king intervention as follows:

  •  Intervene reluctantly. That is, let the market function until it is obviously better to intervene.

  •  Implement checks and balances i.e. make frequent interventions to discipline international and domestic markets.

  •  Intervene openly, that is, make interventions simple, transparent and rule-bound rather than officially arbitrary.

But still, there are many problems with the market controlled system. Mishra and Puri have identified four such problems-

  •  widespread in the markets of developing economies; imperfections.

  •  Market decisions do not ensure the best distribution of resources.

  •  The market cannot ensure the equilibrium between aggregate demand and aggregate supply.

  •  Market mechanism ignores equality.

Hence State intervention is necessary to compensate for market failures, to deal with market inefficiencies and most importantly to promote ‘public interest’, which no market philosophy can replace.

State Vs Market Debate

A Balanced View

Thus the approach emerging in the theory of  Development is that wherever the market can function effectively it should be allowed to do so and where the market cannot do so the state should intervene promptly and effectively. To put it in the words of a World Bank report (1981), “Governments need to do less in those areas where markets either work well or can be made to work well. Also, The government should do more work in those areas where the market cannot be completely relied upon.

The World Bank Report (1997) also supports this approach. When she says, “The State has a central place in economic and social Development, not as a direct provider of growth, but as a partner, catalyst and enabler, the State must put in place the appropriate institutional foundations for markets.” According to the report, at the heart of every government campaign are five actions, without which sustainable, shared and anti-poverty Development is impossible. These are-

  1. To lay a foundation of law.

  2. Maintaining long term economic stability.

  3. Investing in basic social services and infrastructure.

  4. To protect the weaker sections.

  5. Protection of Environment.

State  Vs Market Debate

We now conclude our state versus market debate with the observation of the World Bank Report (1991)-

“A central issue in development is the relationship between governments and markets. It is not a question of intervention versus free trade – a popular but misguided dichotomy. The best way so far discovered to organize the production and distribution of goods and services is through competitive markets. Domestic and external competition provides the stimulus that limits entrepreneurial and technological progress. But markets can’t work alone – they need a legal and regulatory framework that only governments can provide. And, in many other ways, markets sometimes prove inadequate or fail altogether. That is why, for example, governments should invest in infrastructure and provide basic services to the poor. It is not a question of the state or the market, each has its own comprehensive and essential role to play.

State Vs Market Debate

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