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What role should the state play in encouraging economic growth? Essay


Introduction

Despite the call for minimization of the role of the state in regulating trade and other economic activities by proponents of trade liberalization following the demise of the Cold War in 1980s and 1990s,it is evident that the state has a critical role to play in encouraging economic growth. It is even safe to argue that however much we may get liberalized in terms of trade and otherwise, the state naturally retains a significant role of facilitating economic growth and development let alone encouraging its growth.

The purpose of this task is to determine the role that the state should play in encouraging economic growth. In doing so we shall find out if East Asia is indeed a successful model of state-led capitalism, the role that different governments in East Asia has played in encouraging economic growth and development in their countries and the lessons that developing countries can learn from East Asian countries.

The role of the state in encouraging Economic growth

The state in contemporary political life is a central institution whose functionalism in fact determines whether a country is recognized by the international community or not.

It is therefore important that we start by finding out what is state. To be sure just like other many sociopolitical concepts, the term state does not have a universally accepted definition. Broadly speaking the state is understood by many scholars as the binding political institution of a national government that upholds a monopoly of the legitimate use of force within a certain territory.[1]

Conventionally, the state refers to a major feature of the modern polity or political system known as a country or nation-state in political studies that enjoys the monopoly use of force. The force we are referring to here is coercive but it is important to note that it is morally acceptable by the majority in the society.[2] It is one of the main sources of power that the state relies up on in making the people do what many would not have otherwise done.

The state like any other societal institution has had a long history of evolution. Kirkpatrick, Katsiaficas and Emery argue that the state came into being alongside the city and civilization when tribal arrangement and transfer of property was replaced by organization based on locality in stead of kinship. What role should the state play in encouraging economic growth?

Irrespective of the many benefits that accrue from trade liberalization and the resultant reduction of the state in interference with the economic activities of the individual citizens as well as communities, the state has a decisive role to play in encouraging economic growth and development.

Trade liberalization to mention but briefly is underpinned by the principle of liberal democracy which holds that individuals are free to develop themselves social-economically as they wish through exchange of goods, services and ideas. Similarly communities are free to manage their development affairs as they wish. This sentiment by far rejects strict interference of the state or any other institution in the economic activities of the individual, organizations and communities.

There is however a consensus among economists beginning with Adam Smith that the state (importance of trade liberalization not withstanding) has a role to play in stimulating economic growth and development. John Maynard Keynes himself who is regarded as the father of modern economics stressed the unavoidability of necessary state’s economic intervention because there is no individual who can afford to take risks.[3]

According to Keynes as cited in Sharma, one of the main roles of the state is to pump out money into an economy that is hit by depression which certainly no other individual businessman who can do. So that the state has a mandatory role to intervene and pump out money through a variety of incentive packages to enlarge lessening demands in such an economy.

Therefore, the state is a critical savior during times of economic depression because unlike individual citizens it has to spend more in order to enlarge demands at a time that is characterized by an unusually low economic activity with an oddly high rate of joblessness.[4]In this case, the state acts as a catalyst to encourage growth or speed up the process of economic growth.[5]

Keynes according to Sharma like many other New Rightist neo-liberals believed that the economy is a too complex and important thing to be left alone at the mercy of the corporate class and petty and largely selfish politicians. Sharma unlike socialists calls for a balanced state intervention in the economy.

He argues that the intervention of the state must be there as and when necessary to protect the economy as an always watchful regulator of free market economy. He cautions that the state should recognize its proper role in encouraging economic growth, that is, as an observant regulator of the economy and not its strangulator or the agent that squeezes life out of it .[6]

Sharma asserts that extreme intervention of the state in the economy is as worse as a lack of proper intervention because both scenarios lead to the dangerous growth of corruption, and inefficiency leading in the long run to an unavoidable economic collapse. He therefore concludes that a modest and well judged interventionist role of the state holds the key to a sustained and inclusive economic growth of a country as evidenced by many countries world .[7]

Apart from the important role that the state plays during times of economic depression and recession the state has critical roles to play during normal relative economic growth.[8] Mahler argues that governments are looked up on to promote economic growth, and that the states are acceptably able to do this by all means at their at their disposal like catching the attention of foreign as well as domestic investors and thus fostering state industry ,agriculture among other industries.[9]

Chakravarti concurs with Mahler by observing that the means to economic development is to found in liberating the productive energies of individuals and organizations which in economic terms implies that private investment both national and foreign must be made possible and promoted.[10]

Vane and Showdon observe that there are many strategies that the government can adopt to encourage education and training, capital formation, research and development which is requisite to economic growth and development.[11]

Education and training is critical because it provides the needed skilled labour to drive and boost economic growth and development while capital formation provides economic foundation up on which economic growth takes place and research and development in various industries and particularly in technology comes up with new socioeconomic and technological ideas and also improves up on the existing ones in order to make economically viable.

To be sure, even where liberal economists and other scholars and experts call for a minimized intervention of the state, the state plays the all important role of creating an enabling environment in which the individuals and organizations can go about their economic activities satisfactorily and productively.

The state shoulders the role of maintaining security within the economy by upholding law and order without fear or favour. It also has the responsibility of availing and maintaining socioeconomic infrastructure, that is, transport and communication infrastructure as well as good social amenities. The state also has a duty of ensuring political stability in the country in order to win the confidence of investors both domestic and foreign.

This line of argument is anchored on the premise that individuals would like to invest in economies where they are guaranteed of the security of their property and thus return on the same. In the modern welfare capitalist economies the government plays the role of providing economic assistance to those that economy has no ability of protecting.

The state ensures that the majority can access good quality social services like education, health care, transport, housing and even communication. This acts to reduce socioeconomic frustrations for the majority which can easily lead to social unrest which is not conducive to economic growth and development. What role has the state played in encouraging economic growth and development in East Asia?

The roles played by different Governments in encouraging Economic development in East Asia

Even though majority of countries world over have embraced capitalism and its accompanying political values and ideals like trade liberalization, majority of societies in the Eastern Asia have chosen to go the communist way or to adopt a state-led or regulated capitalism. As a result, the state in majority of the East Asian countries has continued to enjoy a strict control of trade, industrialization and business.

Ramesh (as cited in Faulks) argue that even though world economic organizations like IMF and World Bank claim that the state should play an auxiliary and restricted facilitating role in support of economic development they under look the fact that in East Asia the state has always played a more direct development role in economic growth.[12]

Surprisingly a world development report prepared by the World Bank in 1997 observed that the state was by and large viewed as effective in that it took part in useful partnership with the private sector.[13] The report argues that even though unproductive authoritarian states have been the main cause of economic decline in most Africa countries, many countries in East Asia have realized significant economic growth under authoritarian governments.

This report points out that the connection between authoritarianism and economic decline which is self explanatory in Africa has been inexistent in the authoritarian East Asian states fundamentally because the East Asian states have been powerfully committed to speedy economic growth and development, firm administrative competence and institutionalized relations with stakeholders like private companies and their capability to provide other socioeconomic basics viz sound economic management, essential education and health care and infrastructure.[14]

China, Japan, Korea and Taiwan are normally given as perfect examples of successful stories of state-led economies. Chia points out that host governments is East Asia promote FDI inflows to supplement domestic savings, to encourage technological transmission to stimulate economic growth and development and to acquire access to global markets for their exports.[15]

Theories of developmental state asserts that the success stories of the East Asian countries is attributable to role that the governments of these countries played in encouraging economic growth and development. Gilpin and Gilpin for instance argue that the governments of Taiwan, South Korea and other NIEs designed an arrangement of stimulus that promoted private venture in strategic industries.[16]

In addition, these governments through various methods, played critical role in creating an entrepreneurial class, singling out vital economic areas for development and exposed priority sectors to international competition that made them to become efficient.

These authors conclude that the state policies promoted development of an industrial and economic organization that would not have otherwise emerged in response to market signals.[17] What lessons can the developing countries borrow from the East Asian developmental states?

Lessons for other developing countries in the world

Even though scholars differ in their explanations of whether it is unrestricted state intervention in the economic activities or other factors that have encouraged economic growth in East Asia, majority in various fields of study concur that there are numerous lessons that developing countries can learn from the main East Asian success stories like China, Singapore, Korea, Japan, Hong Kong and Taiwan.[18]

For instance, Mbaku argues that one of the vital development lessons that Africa and by extension other developing countries can learn from the East Asian countries is to put emphasis on education and human capital formation.[19]

This argument is anchored on the fact that as argued earlier general education facilitates creation of skilled labour. According to Mbaku, it has been established through research that East Asian countries placed a lot of emphasis on education during their initial stages of emergence as new industrializing economies.[20]

Dani Rodrik as cited in Mbaku argues that human capital makes investment more fruitful, enhances the transmission and adoption of sophisticated technology from overseas and facilitates the establishment of meritocratic, competent and able government or administration.[21] The developing countries should also take advantage of the superior training provided by several universities abroad and now at home in building and maintaining imperative institutions for economic growth and development.

This can be ensured by providing attractive salaries and working conditions to the graduates so that they can be willing to return home after completion of their studies abroad. Taking such economic steps will prove handy in curbing brain ordain which is largely unfriendly to meaningful and sustainable economic growth and development.

Also the developing countries should learn to establish and maintain peaceful relations between the governments and the industry. Stepanek (as cited in Mbaku) for example argues that in most of the successful East Asian countries large firms and prioritized industries did not act in isolation instead they were part and parcel of a focused and a ‘less-than-transparent public structure’[22].

These cooperative relations should be extended to the interactions between the governments of the developing countries and foreign investors or Multinational Corporations (MNCs). In addition, like the East Asian countries the developing countries should learn to enhance the ability of their domestic markets while at the same time putting in place measures that can encourage Foreign Direct Investment (FDI) which plays a critical role in encouraging economic growth.[23]

Finally, like in Taiwan the government should undertake public entrepreneurship which largely entails provision of economic infrastructure which is a prerequisite to economic growth and development[24].

Also it should take part in provision of services as well as goods which if left to the private sector alone can lead oppression of the weak as well as inequitable distribution. An economy that has reliable economic infrastructure facilitates the growth and development of the private entrepreneurship which is the main driver of economic growth and development.

Conclusion

It is evident that the state plays very significant role in promotion of economic growth and development even in the most liberalized societies.

It is even arguable that in the modern society economic growth and development is elusive in the absence of a functional state which apart from creating an enabling environment within its boundaries plays the critical role of providing security from national as well as international threats.

As argued by Sharma a well judged state intervention is the key to sustainable economic growth and development. Also as demonstrated by the successful cases of development in East Asia developmental states, states that are fully committed to rapid development can encourage economic growth and development in the developing countries.[25]

Bibliography

Berger, Mark T. The battle for Asia: from decolonization to globalization .London: Routledge, 2004.

Chakravarti, Ashok. Aid, institutions and development: new approaches to growth, governance and poverty. Cheltenham: Edward Elgar Publishing, 2005.

Dobson, Wendy, Chia, Siow Yue, International Development Research Centre (Canada), Institute of Southeast Asian Studies. Multinationals and East Asian integration. Ontario, Canada: IDRC, 1997.

Faulks, Keith. Political sociology: a critical introduction. Edinburgh,
Midlothian: Edinburgh University Press, 1999.

Gilpin, Robert and Gilpin, Jean M. Global political economy: understanding the international economic order. Princeton, New Jersey: Princeton University Press, 2001.

Hoffman, John. Citizenship beyond the state New York: SAGE, 2004.

Huang, Xiaoming. The political and economic transition in East Asia: strong market, weakening state. New York: Taylor & Francis, 2001.

Kirkpatrick, George R., Katsiaficas George N, and Emery, Mary Lou. Introduction to critical sociology. New York: Ardent Media, 1987.

Kitchen, Martin. The political economy of Germany, 1815-1914.New York: Taylor & Francis, 1978.

Mahler, Gregory S. New dimensions of Canadian federalism: Canada in a comparative perspective. Madison, New Jersey: Farleigh Dickinson Univ Press, 1987.

Mbaku, John Mukum. Institutions and development in Africa. Trenton, NJ: Africa World Press, 2004.

Scalapino, Robert A. The politics of development: perspectives on twentieth-century Asia. London: Harvard University Press, 1989.

Sharma, Sourabh Jyoti. Is Socialism the Answer to the present Global Economic Crisis? In Pratiyogita Darpan. New Delhi: Pratiyogita Darpan, 2009.

Snowdon, Brian and Vane, Howard R. Modern macroeconomics: its origins, development and current state. Cheltenham: Edward Elgar Publishing, 2005.

World Bank. World development report. New York: World Bank Publications, 1997.

Footnotes

  1. John Hoffman, Citizenship beyond the state (New York: SAGE, 2004),21.
  2. George R. Kirkpatrick, George N. Katsiaficas, and Mary Lou Emery, Introduction to critical sociology (New York: Ardent Media, 1987), 288.
  3. Sourabh Jyoti Sharma, Is Socialism the Answer to the present Global Economic Crisis? In Pratiyogita Darpan (New Delhi: Pratiyogita Darpan, 2009),169.
  4. Ibid. p.169
  5. Ibid. p.169
  6. Ibid. p.169
  7. Ibid. p.169
  8. Martin Kitchen, The political economy of Germany, 1815-1914(New York: Taylor & Francis, 1978), 63.
  9. Gregory S. Mahler, New dimensions of Canadian federalism: Canada in a comparative perspective (Madison, New Jersey: Farleigh Dickinson Univ Press, 1987), 123.
  10. Ashok Chakravarti, Aid, institutions and development: new approaches to growth, governance and poverty (Cheltenham: Edward Elgar Publishing, 2005), 168.
  11. Brian Snowdon, Howard R. Vane, Modern macroeconomics: its origins, development and current state (Cheltenham: Edward Elgar Publishing, 2005), 703.
  12. Keith Faulks, Political sociology: a critical introduction. (Edinburgh,
    Midlothian: Edinburgh University Press, 1999),82.
  13. World Bank, World development report. (New York: World Bank Publications, 1997), 163.
  14. Ibid p.163
  15. Wendy Dobson, Siow Yue Chia, International Development Research Centre (Canada), Institute of Southeast Asian Studies, Multinationals and East Asian integration. (Ontario, Canada: IDRC, 1997), 3.
  16. Robert Gilpin and Jean M. Gilpin, Global political economy: understanding the international economic order. (New Jersey: Princeton University Press, 2001),317.
  17. Ibid.p.31
  18. Mark T. Berger, The battle for Asia: from decolonization to globalization (London: Routledge, 2004),6.
  19. John Mukum Mbaku, Institutions and development in Africa. (Trenton, NJ: Africa World Press, 2004),98.
  20. Ibid.p.98
  21. Ibid.p.98
  22. Ibid.p.98
  23. Ibid.p.98
  24. Xiaoming Huang, The political and economic transition in East Asia: strong market, weakening state (Ney York: Taylor & Francis, 2001), 193.
  25. Robert A. Scalapino, The politics of development: perspectives on twentieth-century Asia (London: Harvard University Press, 1989), 95.
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