The debate about the size and purpose of government has raged for many years throughout the world and is still the primary issue which separates political parties in modern industrialised countries. On the “left” are those who support increased Government involvement through regulation and higher welfare payments, while those on the “right” usually prefer free markets and lower taxes.
Although both sides make some valid arguments we need only look at the former Soviet Union to see that either extreme will ultimately fail. During the Communist era the USSR suffered from too much state interference, while modern Capitalist Russia has tended to suffer from too little regulatory supervision.
We need to realise on the one hand that a government which is involved in too many activities will probably not do any of them well. Such a government is more likely to be both inefficient and oppressive, two outcomes which do not serve the best interests of the people. On the other hand a stable, sound government is essential to provide a framework in which people can fulfil their potential.
The primary objectives of government should therefore include:
Achieving macroeconomic stability by keeping inflation and currency risk low so that investors and businesses can plan ahead with some degree of confidence;
Ensuring that infrastructure, such as transport and telecommunications links, is in place so that producers and consumers can communicate effectively with each other;
Providing quality education to all members of society so that their civilisation can make both social and economic progress; and
Filling the void when free markets fail. This can include regulating monopolies so that they do not abuse their power, enforcing legal obligations so that people can feel confident that their rights will be protected, and providing a safety net for the most vulnerable groups in society.
These suggestions are by no means exhaustive and are only a guide to the type of role that government should play.
Putting in place the best economic and political system will involve change throughout society, and as a result there will be many uncertainties for those who are affected. In recent decades the process of change has generally been poorly managed in developing nations, meaning that reforms which should have been beneficial have actually resulted in more poverty.
The International Monetary Fund (IMF) and World Bank (WB) have taken most of the blame for this, as they often made radical reform a precondition for receiving credit or aid.
While reforms are often necessary, history has taught us, from the French Revolution in the 1790s to the downfall of Communism in the 1990s, that a sharp shock is not the best way to produce constructive change.
China and India are the best examples in the modern world of how gradual reform can help developing nations to prosper. Both of these countries used to suffer from extreme poverty but in the last few decades they have implemented measured reforms, not revolution, and are now growing at a vibrant rate and lifting millions of their citizens out of deprivation.
In many cases it seems that rather than embarking on an ambitious agenda of immediate change, developing nations need to identify the few important binding constraints on their economies and reform these problems first. When their economies begin to grow they will then have more time and money to make gradual, effective changes to their system.
Reforming the size and scope of government will often be necessary in the long-term, but a more urgent requirement is to overcome corruption and mismanagement. A government which either deliberately steals aid and taxes, or simply mishandles them through incompetence, will make their citizens poorer and will discourage foreign investment.
Overcoming these problems is not an easy task as it requires a systematic change in practice. Commitment to reform may be lukewarm amongst those who actually have to change how they operate so there is a need to use both the carrot and stick approach by rewarding good work and punishing negligence or dishonesty.
In the fight against corruption it should be remembered that a free media which investigates sleaze makes it much harder for people to get away with their crimes. An audit system where government accounts are examined fairly and impartially, and an independent justice system which brings criminals to account, are also important players in the fight against bribery and fraud.
While corruption may be higher in developing nations, mismanagement is a problem which affects almost every organisation in every corner of the globe. Overcoming this problem requires continual training and education so that employees are more capable and skilled in their jobs. The use of targets and statistics may also be of some use so that employees know what standard they are expected to live up to, and may also make disciplinary action more effective.
All nations, but especially those in the early stages of development, need to establish a sound effective government by gradual reform which serves the people and not its own interests. Only then will its citizens, and foreign investors, feel that they can prosper.