Role of the State in Economic Development

Role of the State in Economic Development

The State plays an important role in the economic development of nations. Japan, after 1870 and soviet Russia after world war I are good examples. But the economic development of the U.K. and the U.S.A. took place under a system of market economy and laissez faire policy.

For underdeveloped countries, laissez faire policy is a luxury. The State has to play the role of an entrepreneur in the underdeveloped countries. Nowadays, it is agreed that the governments in these countries have to play a dominant role in implementing plans for economic government. In fact, government is regarded as a factor of production in poor countries. For example, India is a mixed economy with a public sector and private sector. Until recently, the public sector played a major role in economic planning.

Through Five Year Plans, the State has been making attempts to achieve the goals of increasing economic growth, rapid industrialization, expansion of employment opportunities and reduction of inequalities of income and wealth.

The government plays a very big role in the field of social services like education and health. Investment in education and health promote human capital formation, which is as important as physical capital formation. Education and health increase productivity of labour.

These are the days of globalization, liberalization and privatization. We invite foreign investment on a large-scale. But they want good physical infrastructure like good transportation, postal and telecommunications, power facilities, and water supply. All these things are referred to as social overhead capital. The government has to make huge investment in these things. Not only that, there is shortage of entrepreneurs in these countries. So the government has to encourage them.

There is shortage of foreign exchange in UDCs. The government has to take steps such as promotion of exports, making investment attractive for foreigners through fiscal measures.

If development is left to market forces, there will be not be balanced regional development. So the government formulates policies and programmes in such a way that there is a balanced regional development. And the State has to regulate and control monopolies. Thus, the State has to play a dominant role in economic development.