The Role of Public Sector

The Role of the Public Sector

Herisadel Flores FIC, PA 131 WFV

For class discussion onlyNot for quotation


Public Fiscal Administration Generally refers to the formulation,

implementation, and evaluation of policies and decisions on taxation and revenue administration; resource allocation, budgeting and public expenditure; public borrowing and debt management; accounting and auditing.

Public Sector Economics

Why does the gov’t engage in some economic activities and not others?

Why has the scope of its activities changed over the past hundred years, and why does it have different roles in different countries?

Does the government do too much? Does it do well what it attempts to do? Could it perform its economic role more

efficiently?

Mixed Economy

many economic activities are undertaken by private firms, others by the gov’t

government alters behavior of the private sector through regulations, taxes and subsidies

Evolution of the Role of the Government

Primitive Kings and God-Kings, Emperors and Slaves Medieval (Feudalism) Capitalism


Mercantilists (18th century French economists) Governments should actively promote trade and

industry

Adam Smith Wrote The Wealth of Nations (1776) Argued for a limited role for government Invisible Hand


“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain inalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed.”

-- U.S. Declaration of Independence (1776)


John Stuart Mill (1806-1873) Laissez faire doctrine

Karl Marx (1818-1883) Advocated greater role for the state in controlling the means of

production

Robert Owen (1771-1858) Solution is neither in the state nor in private enterprise, but in

smaller groups of individuals getting together and acting cooperatively for their mutual interest


Great Depression (1930s) Unemployment rate reached 25 percent National output fell by about a third Government was pressured to do something

John Maynard Keynes (1883-1946) Government should and could do something about

economic slumps

New Deal in the United States

Congressional acts and Presidential executive orders during the term of Franklin Roosevelt (1933-37)

A variety of legislation designed to alleviate many specific problems: unemployment insurance, social security, federal insurance for depositors, federal programs aimed at supporting agricultural prices, and a host of other programs aimed at a variety of social and economic objectives


War on Poverty (1960s) Pres. Lyndon B. Johnson Many Americans were trapped in poverty despite the economic

prosperity experienced by the U.S. Inadequate education, bleak job prospects Good intentions not necessarily produce good results Welfare system was massively overhauled in 1996 Government should not abandon efforts to solve major social

and economic problems, rather Greater care must be taken in the appropriate design of

government programs


Major Reasons for Government Failures

1. Limited information

Consequences of actions are complicated and difficult to foresee

E.g. health insurance


Major Reasons for Government Failures

2. Limited control over private market responses

Lack of control mechanisms E.g. tax incentives, smuggling


3. Limited control over bureaucracy

Congress writes the law Bureaucrats write the Implementing Rules

and Regulations (IRR) Principal-agent problem


4. Limitations imposed by political process

Varying political objectives despite full information

E.g. Special interest groups’ influence on legislators


Markets often fail, but governments often do not succeed in correcting the failures of the market.

Emerging Consensus Rethinking of the role of government has

been reflected in two initiatives: deregulation and privatization


Deregulation While there is a need for regulation, many

regulations were overly burdensome, their benefits less than their costs, and there might be more effective ways of obtaining the desired objectives

Downstream Oil Industry Deregulation Act of 1998 (RA 8479)


Privatization The turning over to the private sector

activities previously undertaken by government.

Some of the privatization initiatives of the Phil. government are:– Water services in Metro Manila– Various real estates of the government such as

Fort Bonifacio

Rethinking of the Deregulation and Privatization Policies of the Gov’t

In the Philippines, continuous debate hound the policies of deregulation and privatization

In the U.S., new perspectives emerge in light of important issues in deregulation and privatization such as the Financial Crisis and the Edward Snowden cases

References:

Joseph E. Stiglitz, Economics of the Public Sector, Third Edition (New York: W. W. Norton & Co., 2000), Chapter 1 “The Public Sector in a Mixed Economy”

Leonor M. Briones, Philippine Public Fiscal Administration, Vol. 1 (Manila: FAFI, 1996), Chapters 1 “Overview” and 2 “The Development of Public Finance Institutions.”

Next Meeting:

Jurado, Gonzalo. 2003. “Growth Models, Development Planning, and Implementation in the Philippines”. Philippine Journal of Development Vol. 30, No. 1. Makati City: Philippine Institute of Development Studies (PIDS).

Danilo Reyes, “The Crisis of Underdevelopment: A Reexamination of Economic Models in the Third World.” In Bautista, Victoria A., et al. (eds.), Introduction to Public Administration in the Philippines: A Reader. 1st edition (Quezon City: UP NCPAG, 1993) pp. 239-267.

The Role of Public Sector

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