Question

Explain why an effective facilitating state is considered essential to economic development and what pitfalls a highly state-investment approach to development may have

Answer 1

The role of the state is to provide incentives for investors to invest and create purchasing power among individuals to consume by offering employment opportunities. Both these things go hand in hand. It is government's responsibility to create the requisite infrastructure, offer low interest loans to investors and make the business procedure hassle free. Government must also intervene in improving the quality of health and education in the economy so as to create an able workforce to drive the economy to high growth and better standards of living. However, if the government completely controls the production activities in the economy, it will crowd out all private investment and it may also put a huge responsibility on government's shoulder to control corruption and inefficiency in the economy. Government must interfere in areas where there might be market failure and allow private investment in financially viable industries.