PSAF – Nov 2015 – L2 – Q6b – Fiscal Policy and Public Finance

Discusses three allocation roles of government in developing economies to support resource distribution.

Question

Discuss THREE allocation “roles of government” in the context of a developing economy.

Answer

Provision of Public Goods: In developing economies, governments often allocate resources to provide essential public goods, such as infrastructure (roads, rail lines, power supply) and basic services (healthcare and education). These goods are typically non-profitable, so the private sector may not provide them, necessitating government intervention to promote public welfare.
Human Capital Investment: Governments in developing economies invest heavily in education and healthcare to build human capital. This investment not only supports individual growth but also yields positive externalities and high social returns, fostering overall economic development and productivity.
Strategic Development Projects: Developing countries may need the government to undertake large-scale projects, such as steel production, irrigation, and energy projects, which are essential for rapid industrialization and economic growth. Such projects often have long gestation periods and require significant capital, which the private sector may be unable or unwilling to provide.