Proliferation of public sector institutions

Proliferation of government programmes
Proliferation of state-controlled enterprises
Proliferation of parastatals

Nature

Slow growth, lagging private savings and investment, high inflation, balance of payments deficits, heavy debt burdens, continued poverty and unemployment are, in part, the result of excessive growth of the public sector. Even in those cases where external events beyond the control of individuals countries are the cause of many difficulties, the actions of governments are often inappropriate and fail to mobilize effectively the resources of a country in response to a crisis.

Incidence

In developing countries the urgent infrastructure needs, the low levels of savings and investment, the need to foster economic growth through modernization, and the availability of concessional funding for public projects have all served to encourage the rapid expansion of public sector programmes. It is only with the economic stagnation resulting from the debt crisis that the weaknesses of this approach have been acknowledged. The late 1970s also marked a turning point in the centrally planned economies, where reliance on direct command by government and the use of state-controlled enterprises was increasingly seen as a drag on economic growth. By the end of 1989 the inadequacies of this approach, and the need to harness private interest and initiative to stimulate economic growth, were widely recognized.

Claim

Although the pursuit of private interests allocates resources efficiently in competitive markets, this generally does not occur when individuals use the monopolistic power of government to their own advantage. Politicians, bureaucrats, and many private interests gain from growing government involvement in society and greater government expenditure. Government's necessary role as a provider of public goods needs to be carefully circumscribed otherwise inefficient public and private provision of goods and services results.

Counter-claim

Since World War II the growing importance of the public sector is seen by many development economists and policy-makers as a natural and necessary ingredient of development. Governments need to intervene to foster development since the unmodified interaction of private agents does not achieve the goals of economic efficiency, growth, macroeconomic stability, and poverty alleviation. Imperfections in the action of free markets fail to meet these and other needs. Any mistakes made by government may indeed be a serious problem in practice, but are not inevitable or irreversible. Policy and administrative reforms can be elaborated to correct such inadequacies.