ROLE OF THE STATE IN AN ECONOMY

The dilemma of searching the ideal way of organising an economy, as it

evolved, was also going to solve another riddle. This riddle was the role of the state in an economy.6 If we look back into the economic history of the world, we see three possible roles for the state/government in an economy:

(i) As a regulator of the economic system (where the state takes important economic decisions, announces the required kind of economic policies, takes the sole responsibility to get them implemented, and controlling and punishing those who don’t oblige to those economic decisions).

(ii) As a producer and/or supplier of ‘private goods and services’ (these include all those goods and services which constitute the part of market and which will be distributed among the needy according to the principles of market mechanism. Here the state earns profit as a private enterprise).

(iii) As a producer and/or supplier of ‘public goods’ or ‘social goods’ (these include goods and services which look essential from the perspective of social justice and well-being for the people. Education, healthcare, sanitation, drinking water, nutrition, caring for the differently abled and old, etc., come under this category. These goods which are generally distributed free of cost at times, might reach the beneficiaries at subsidised prices. The loss incurred by the state in this way is paid out of the public exchequer which means that the whole economy pays for the cause of a few people).

As different economies select different roles for the state according to their socio-political ideologies, the world had differing ways of organising the economy and had resulted in the establishment of different economic systems in the past.

On the issue of regulating the economy there has been no debate, as we see all economic systems being regulated by the state only. But the selection of other two functions of the state in an economy made the real difference. The economy which selected both the roles (ii and iii) for the state under monopoly we called them the state economies. This category of economy had two variants in the socialist economy at least the labour was not owned and exploited by the state unlike the other—the communist economy where labour used to be under complete state control. These economies had almost no market.

The economic system which left both the roles (ii and iii) as the sole responsibilities of the private sector was called the capitalistic economic system. Here the state had almost no economic role but played a passive role as the regulator.

Mixed economies had at least kept one economic role fixed for the state (i.e., iii), of supplying public goods to the needy people. In some of the mixed economies the state went on to take some of the roles of supplying the private goods (i.e., ii) even by carrying a heavy burden of subsidies.

The WB document—the World Development Report, 1999—was a judgement on the possible and suitable role of the state in the economy, which suggested a timely shuffling of state’s role in the economy as per the socio-economic and political needs of the economy. We may understand the moot question via Keynes for whom the political problem of mankind is to combine three things:

(i) economic efficiency,

(ii) social justice, and

(iii) individual liberty

In the process of realising the above-mentioned objectives, an economy cannot go for either allowing only state’s role in the economy or only the market’s role in the economy. These challenges could only be faced properly once the state and the market both are given a balanced role in an economy— the balance to be defined by its present condition and the direction of future goal of the economy. Striking the right balance between the role of the state and the market in the economies came to be known as the process of economic reform in the post-WTO world.

If we analyse the need of an economy, we see some compulsory roles for the state in it:

(i) If the regulation and control of an economy is left to private individuals or groups (i.e., firms) they will be using the regulatory powers to maximise their profits and returns at the cost of others. That is why this role must rest with the state. It looks more logical in the democratic political set-up, wherein the interest of the largest numbers is being represented in the regulatory provisions.

(ii) The responsibility of producing and distributing private goods to the people could be well handled by the private sector as this is a profit- fetching area. The state should not burden itself with this responsibility as this could be well taken up by the private sector. But in the absence of the proper presence of the private sector in an economy, many countries in the world gave this responsibility also to the state; India being one among them. But as the private sector became capable, in some countries this responsibility was given up by the state in favour of the private sector and better development has been possible in those economies. In this sense, India delayed this process while in Indonesia, Malaysia, Thailand and South Korea allowed entry of the private sector much earlier.

(iii) The responsibility of producing and supplying the social/public goods to the needy cannot be left to the private sector as this is a loss-making exercise. It means, the state will have to take the sole responsibility or may need to expand its role in such areas—as we see it in post-reform India.

As the private sector becomes capable of playing the proper role in producing and supplying the private goods, state saves its important human and economic resources which is transferred to take care of the production and distribution of public goods.

Basically, the WB study, the East Asian Miracle (1993), recognises the above-given shift of one kind of mixed economy to another kind of mixed economy—in the cases of the Malaysian, Thai and South Korean economies

—taking place since the mid-1960s. Experts believe that this shift could not take place in time in India. And once it started (1991–92) it was too late and this choice was not voluntary but obligatory. The East Asian economies had gone for the same kind of reform process but by their choice.