The Role of the State in Economic Development - Essay Example

According to Peter Evans, the state plays several roles in economic development. First, the government designs, implements, and enforces both legal and institutional frameworks aimed at protecting property rights and preventing market exploitation. These frameworks should encourage production and eliminate diversion of output through expropriation, corruption, theft, and litigation. Second, the state designs economic policies to stir up economic development. These policies aim at creating stable microeconomic conditions like predictable and low inflation competitive and stable exchange rate, and sustainable budget balance. Thirdly, the government redistributes wealth spending on public goods and services. Useful and effective public spending is necessary for increased growth and development of the country. Fourth, the government facilitates international trade through encouraging openness and trade policies. This is achieved through bilateral trade agreements with other countries to facilitate import and export of goods and services. Trade liberalization eliminates economic distortions while creating new opportunities to private investors.

Comparison of Evans Arguments and Neoliberal Theory of the State

The neoliberal theory considers the state as the central institution which regulates and coordinates market operations. In fact, neoliberalists argued that the state should act only as a deregulator and not a producer. This argument is different to that of Evans that the state regulates economic activities through setting laws and regulations that prohibit exploitation of the market participants. In addition, neoliberalists do not view the state as an enabler, inducer, protector, and producer in early phases of economic development. In fact, neoliberalism argued for the minimal intervention of the state in various ways. First, the state should stop inducing scientific and technological development and productive investment. Second, the state should stop regulating financial markets which were assumed to be self-regulatory. Unlike Evans ideas on the maximum involvement of the state in market operations, neoliberalists argued for self-regulated markets with minimal state engagement.

Import substitution industrialization (ISI)

ISI is one of the economic strategies followed by developing nations to be on the same level with developed economies. In particular, ISI focusses on strengthening local production of previously imported goods. The strategy is developed by the state and thus indicates the internal decision making of government in fostering economic development. This implies that the state prohibits the importation and provides incentives to boost domestic production. Examples of ISI approaches include substitution of consumer durables; overvaluing the exchange rate to encourage the accumulation of capital and attract investment; and introducing trade barriers like import-licenses and quotas (Cypher, 2014).

Consumer goods are preferred in ISI because of the fewer costs compared to other intermediate or capital goods. In addition, consumer goods are regarded as nonessential in the development process and thus rise in their costs will have no impact on other units of production. Since the population in developing countries is high, the demand for these consumer goods is assured (Cypher, 2014). ISI strategies offering special incentives, increasing quotas and tariffs and designing credit policies that favor domestic production of consumer goods that were previously imported. Therefore, capital goods are discriminated against the consumer products during early development stages in developing economies.

ISI suffers from various drawbacks. First, it creates the import substitution syndrome characterized by capital underutilization, overvalued exchange rate, and less concern for agriculture. Second, it may lead to industrial inefficiencies. The excessive restrictions and tariffs resulting from ISI strategy leads to unhealthy internal competition and thus inefficient production. Besides, industry proliferation in the resulting closed economy deprives the developing countries their economies of scale and specialization advantages (Cypher, 2014).

References

Cypher, J. M. (2014). The Process of Economic Development (4th ed.). London: Routledge.