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It is obvious that the usual policy instruments at the disposal of the government to address various sectors (education, health, etc.) and macro-economy (fiscal, monetary, etc.) cannot be pressed into service even theoretically before the major decision is made about the remit of the public and private sectors. This is particularly so in a mixed economy because of the welfare implications. There is little disagreement that an unregulated market economy tends to be not only unstable but at the same time provision of public goods and services suffers neglect or is given less priority by it. This makes the role of the government to correct the shortcomings and failures of market inevitable through manipulation of macro-economic variables and direct intervention. This is the objective reality in the short-run. In the long-run the situation becomes even more critical. Various arguments have been made to the effect that growth and development will be retarded if excessive reliance is made on market forces. One of the most persuasive of these arguments points to the existence of vicious circle (Nurkse) or a low-level equilibrium trap (Leibenstein) in which poverty will become self-perpetuating. This argument postulates that saving as a fraction of national income is a rising function of per capita income in developing countries as a result of which they have low saving rates. Being under-developed they also have small markets rendering returns on investment small and the ability to attract foreign investment limited. Exports may offer and escape routes but developing countries compete with each other with the same exportables reducing their external incomes. Population growth only serves to compound the problem. The policy conclusion of this analysis is that left to itself, the economy will remain caught in a 'poverty trap' for an indefinite period. What is needed in these circumstances is a massive mobilization of resources which only the government can undertake to attain 'a critical minimum effort' (Leibenstein) or a 'big push' (Rosenstein-Rodan) to get the economy to the point of 'take off' (a la Rostow). This is the main justification according to this argument for an active role of the state. There is a second argument which is less gloomy than the 'trap theory'. This is concern with the failure of the price mechanism of free market to provide an adequate basis for making decisions about the failure of price signals for making decisions about the production of goods and services according to demand. It is pointed out that the price system may be efficient for reaching decisions about allocation of resources for current use (to meet current demand) but today's prices will be a poor basis for savings and investment decisions for the future. This is because today's prices reflect today's pattern of demand. A potential investor analysing current demand may receive signal that exaggerate the future potential for investment on a particular item (say, food) but ideally what is needed is a system of price mechanism that includes future demand not for not only one but all items (food, non-food) so that savers and investors have a firmer basis on which to make decisions. In the absence of such market, investors faced with uncertainties will feel discouraged and will not be interested in promoting growth through investment. A decentralised and fragmented market system will make this even more complicated, leaving each investor to make his own decision separate from others resulting in over-investment in some and under-investment in others. More seriously, lack of information in a decentralised market about future expansion will make an investor less incline to invest.
A final criticism of the long-term deficiencies of the market is that while it may be quite efficient in allocating resources at the margin it is inefficient in effecting changes in the structure of the economy. Since development is a process of structural change this is a serious shortcoming of free market. The shortcoming of price mechanism as a signal to produce goods in future mentioned above and the failure to effect structural change for growth point to the imperfections of the free market system. Therefore, in reality there is no such thing as a perfect market, the theory about it notwithstanding.
These arguments, along with the need for 'provision of public goods' according to social welfare function, make out a strong case for active government involvement in economic decision making and for a thriving public sector. By pooling information about likely future trends and by adopting a conscious strategy towards the structural development set as a goal planners can provide a superior set of signals to reduce uncertainty and steer the economy along the chosen growth path.
But not all these criticisms of the long-term deficiencies of free market are wholly correct. For instance, the 'poverty trap's prediction that developing countries will be unable to sustain rising per capita income has not turned out to be true in many countries. Some of the least developed countries (LDCs) are poised to graduate out of their present status in the wake of economic growth achieved over time. Bangladesh has been held up as a test case in this respect. According to World Bank, developing countries achieved even faster growth than developed countries during 1965-1973 (World Bank, 1973). The report may be old but the trend continues at present. As regards the 'big push' and 'take off' theories it is now recognised that there is far more to the achievement of growth than merely maximising investment. When misused, a large volume of investment can be accompanied by stagnation while modest injection of resources can generate growth when well utilised.
There appears to be no overwhelming evidence for the superiority of either the public or the private sector. But the criticism about market imperfections resulting from incorrect and inadequate price signal to produce goods in future, the failure of free market to provide public goods and services and finally, the failure of free market to effect structural changes are not without any empirical basis. Though exaggerated, they have been found to be true in many countries, and even today. On the basis of these criticisms and actual experiences a strong case has been made out for a robust role of government both as a regulator and an active participant in the economy. In a mixed economy the moot point has been the allocation of respective roles and functions of the two sectors. To avoid an arbitrary decision on this, the principle of subsidiary (letting an entity/sector do what it does best) has been adopted in some cases (European Union's decision about the role of member states and the European Commission is a case in point). However satisfactory and elegant the principle may appear, it is hard to be applied in practice using efficiency criteria. How can efficiency be compared between two entities when one is performing a task to the exclusion of the other? Cost and benefit analysis may yield either positive or negative results but this too is not helpful in comparing the efficiency of two entities when an action is taking place in one with the other not participating in the same. If the non-participating entity/sector is allowed to undertake the same task, the cost and benefit results will not be amendable for comparison with the sector that was involved with it earlier because the passage of time has changed the parameters making comparison untenable. So the subsidiarity principle cannot be adopted on the basis of economic efficiency criteria. It is a political expediency when decisions are made about allocation of business. Similar is the case with the public goods argument which is based on moral philosophy and not economics. But whether more efficient or not, government has provided public goods and services for a long time, particularly after the second world war on moral and political grounds. In many developing countries, including Bangladesh, this policy has come up against a 'wall' in recent times. The 'wall' comprises capacity of the government to deliver. Faced with increasing demand, government has yielded the space for provision of public goods and services to private sector incrementally. Even before policies were formulated private universities, medical collages and hospitals have been allowed to be established by private sector to meet the gap on the supply side. Only in respect of infrastructures a public-private partnership agreements followed a deliberate policy. There being no control on pricing, private universities and hospitals are being run purely on profit motive, charging exorbitant rates. Access of the poor and even the middle class to these new-fangled providers of public goods is either absent or limited. The poor recipients of the public goods and services from the private sector have to pay through their noses. On the other hand, the quality of services provided leaves much to be desired, as is reported by print media from time to time. Ground reality has rendered discussion on decisions regarding allocation of role and functions between public and private sectors in these key areas irrelevant. Mixed economy of Bangladesh has been taken over by free market for the benefit of the few. No policy decision led to this and nor is one on the cards. Thus major policy decisions regarding the roles of the private and public sector have been surrendered by default. What now remain are the policy instruments of annual budget, monetary policy, etc., as routine functions of the government. Can these ensure the establishment and promotion of an equitable and just society? The question does not beg for an answer.