Role of Public Finance in a Developing Economy
Role of Public Finance in a developing economy
There are several motives why the State must play a significant function in a emergent nation. The vast and varied natural resources have yet to be exploited and this is obviously beyond the capacity of individual citizens or group of them forming corporations. The technical know-how is lacking; means of transport and communication are under-developed; and irrigation and power need rapid development. Who can do these things except the State? Low ratio of savings to national income in under-developed countries is another compelling reason for the State to step in to promote capital formation. The State must control and regulate economic activity.
But in a democratic society, there is an inherent dislike for direct (physical) controls and regulation by the State. The entrepreneurs would not like to be ordered about to produce this or that, how much to produce or where to produce. Incentives in the form of tax concessions, rebates or subsidies are, therefore, preferable. Similarly, the consumers would not like to be told directly to curtail their consumption pr to consume this and not to consume that. Taxation of articles the consumption of which is to be disheartened is, as a result, preferable. Therefore, a democratic State have to depend on indirect techniques of regulation and control and this is completed via monetary and fiscal policies. Also, under a democratic constitution, a State cannot commandeer resources and it must operate through price-mechanism which is susceptible to the influence of public finance.
Thus, in democratic countries, public finance is the most powerful and the least undesirable weapon on which the states can rely for promoting economic development.
Moreover, capital formation is of deliberate significance in the subject of rapid economic growth and the under-developed economies experience from capital insufficiency. It is consequently, essential to accomplish an advanced ratio of savings to national income. In early days of capitalism, payment of low wages and the existence of inequality of income helped capital formation. But no democratic country can adopt this method in modern times; the effort rather is to raise wages and reduce inequalities of income and wealth. Under a regime of socialist dictatorship, capital formation is brought about by ruthlessly curtailing consumption and keeping down the standard of living. But, in modern democracies, to raise the standard of living is the first concern of the State.
It is quite clear that it is only through fiscal and monetary measures—the chief instruments of public finance—that the financial plan can be implemented and balances in money terms achieved.