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Role of the state in Economy


Three possible roles for the State/Government in the economy: 

(i) 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 the ‘private goods and services’ (these include all those goods and services which constitute the part of market and which will be distributed among the people according to the principles of the market mechanism. Here the state earns profit as a private enterprise). 

(iii) As a producer and/or supplier of the ‘public goods’ or the ‘social goods’ (these include the goods and services which look essential from the social justice and well-being perspective for the people. Education, healthcare, sanitation, drinking water, nutrition, caring for the handicapped and old etc. come under this category. These goods which are generally distributed free of cost at times might reach the beneficiaries at the 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). 

  • Different economies have different economic roles for states based on socio-political ideology. 
  • Every economy is being regulated by the state itself. 
  • A capitalist economy rejects both 2 & 3, state economy uses both while  a mixed economy uses only 3. 

A timely shuffling of state’s role in the economy as per the socioeconomic and political needs of the economy is required. 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. 

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 conditions and the direction of the future desire of the economy.  Striking the right balance between the roles of the state and market in the economies came to be known as the process of economic reforms in the post-WTO world. 

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

March 2024