The role of markets and the state in the development process
The debate about the role of the state and the role of the markets in the process of development has gone through many stages. A growing consensus is now being formed which considers the role of the market and state to be complimentary.
Why are markets and prices important?
• Because they provide signals for the allocation of resources.
• Because they create incentives
• Because they permit choice
• Because profit oriented entrepreneurs can spot opportunities and use resources efficiently
• Because competition leads to lower prices and better quality and forces firms to innovate.
Why is an effective state required for cheap development?
• Because infrastructure which is necessary for growth and development is a public good in the sense that the private sector will not provide it.
• Because an appropriate institutional environment is necessary for markets to operate. At the very least, the state has to protect property rights and guarantee the rule of law.
• Because basic education and healthcare creates very significant positive externalities and would be underprovided if left to the market.
• Because markets cannot guarantee an equitable distribution of income between individuals, groups, regions or time.
• Because markets cannot guarantee effective protection of the environment.
• Because it is necessary to create a stable, macroeconomic environment for economic activity to grow.
Overall, markets and state should be partners in a process of growth and development with the private sector providing the necessary labour and the state the framework within which economic activity can take place, rectifying market failures and enhancing the resources available.