Should the government be the leader of economic growth and development?

The latest main argument among economists is that the government’s involvement to promote economic growth and development has been slowly declining, since this approach is being more influenced by political democratization and economic liberalization. Less government involvement is the gateway to globalization, which causes a higher level of integration with the global economy and more foreign investment and trade opportunities are created for all countries.  For example in 1973 when Chile establishment of a free market approach, the country had significantly high inflation rates of almost 600 percent.  Then after 8 years it declined to 9.5 percent.  Through the country’s attempt to remove government intervention, in 1983 it led to the high economic growth of 9.5 percent.

In the absence of state intervention, Eastern Europe used macroeconomic policy instruments to remove price controls, currency convertibility, balanced state budgets, trade liberalization, privatization, wage control, demonopolisation and to control inflation.  This led to economic growth, since 1980 the GDP of countries in Eastern Europe have shown steady growth.  See the graph on the world economic forum. In the early 1960s the majority of the financial, commercial and financial sectors were nationalized by the government of Egypt. During the 1970s these stated owned sectors underperformed and the deficit of investment capital increased, which raise the demand for the introduction of liberal economic policies.

In 1990 the economy of Egypt improved significantly after the arrangements with the International Monetary Fund (IMF) and the implementation of fundamental economic reforms including elimination of price controls, the privatization of certain amount of industries owned by the government and subsidies were decreased.  From 1991 the inflation of 20 percent decreased to 5 percent in 1997, which made it possible for Egypt’s economy to recover from a previous recession.  Furthermore since then, the country was able to obtain positive growth rates, diminish budget deficit, inflation has been minimized, while gross domestic product (GDP) has averaged yearly growth of 4.5 percent.

Most economists are convinced that debt crises, inflation and bankruptcy are created by excessive money supply and over-investment.  General after a financial crisis or war the government of countries took the lead to ensure economic growth and development.  However, after a certain time it was unsuccessful and they restricted government involvement, which gave the countries access to the global market. Therefore the government should not be the leader of economic growth and development, but it can create a fertile environment to enhance market growth.

T. van Niekerk



One comment

  1. You have some good cases of how liberalisation and a market approach can benefit growth. I would like to see a bit more on what you mention in the final paragraph – how can governments create an environment for growth? It is exactly the sort of stuuf we will be discussing for topics 4 and onward.

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