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Role of Public Sector in Modern Economies

Forces of demand and supply control prices in modern capitalist economies, government intervention has been limited to provision of social services. Prices of goods and services as well as cost of production are determined with minimal government intervention. A perfect capitalist economy can only exist in an ideal situation and since there is no ideal situation, there are always some government controls, rules and regulations in an economy (Pigou, 2006). In general, government controls the performance of an economy through fiscal and monetary policies. These policies are aimed at changing or controlling certain factors in the economy to enhance or limit production. Government participation varies among countries were developing countries need a higher involvement than developed countries (Ceccacci, Marchesiani and Pecchi, 2007) This paper discusses the role of the public sector in modern economies and factors public sector consider when making financial decision.

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Political stability

The government is made up of political class, who control the economies of a country, they play the role of politicians and economic drivers, and however, political situation in the world is not stable. There have been changes and uncertainty in different countries. A country like Kenya in East Africa underwent tribal crashes in 2007 after a disputed election. The crisis affected the economy of the country. In November 2010, Ivory Coast in Central Africa had disputed election a move that have affected the country’s economic performance. In civilized countries like the United States of America, which is the world’s largest economy, the performance of the ruling class affects the economy positively and negatively. A country as China, which has the highest economic growth in the world, has a stable government (Dalton, 2003) from the above discussion, it is clear that one major functions of government is to ensure there is political stability in the country. If the political class maintains political harmony in an economy then growth and stability in the country is possible. One of the most surprising thing is that to destroy an economy that had been built for many years can take a matter of weeks in case of political unrests. For example, Zimbabwe was among Africans best performing countries, when there were disputed presidential economies in 2009; the country is now ranked as the poorest in the world. Other than local politics, international politics affects country economic, social and political performances. International policies and relations affect how economies conduct their business. There are times that goods from a certain countries have been limited to enter in the international market through tariff and non-tariff barriers (Buchanan, 1987).

Maintaining good International relations

Foreign ministry in different countries is given the responsibility of maintaining good international relations with different countries. Globalisation and international trade has opened the international market, assisted by transport and communication networks (Quigley, 2000). To ensure that a country participates in international trade effectively and reduce chances of international rivalry, it should ensure that there are good international relations. Switzerland has managed to be the world largest tourism country because of its political neutrality and maintaining of good relations with other countries. Sometime to be competitive, countries engage in economical alliances to be able to negotiate for better teams in the world markets. Such integration includes European Union, East African Community, and Pan African among others (Dietmar, 2000). Other than having a good international relations, it is the role of the government to ensure that its country have a good reputation. It should not be known for negative things like poverty, corruption and inequality. Such reputations are not built by word of mouth by through actions undertaken by the government.

Protection of citizens

The government has the mandate of ensuring that the constitutional rights of every human being are respected. These rights include rights to protection, where the government provides security to its citizens. Security is from foreign and internal attackers. There are times that the government sets minimum or maximum prices of goods to ensure that consumers are not exploited. On the other hand, the government also sets standards required in a country; this is in the move to ensure that it has protected its consumers against substandard goods and services provided by businesspersons. There was another move made by Chinese government, which has been seen as a new government move where the government aims at reducing the rate of economic growth in the country (Edward, McCaffery and Joel, 2006)


The government has the mandate of providing infrastructures like roads and communication networks, which cannot be left in the hands of individuals. These infrastructures ensure that an economy has social resources that can be used by society members without paying for them directly. In time of disaster, the public sector is called upon to assist. This is in case of terror attacks, drought and floods. The government should have adequate machinery and mechanisms to ensure that in case of a disaster, it has assisted its own citizens and sometimes extend the help to other nations. Other social economic factors affect an economy. They include inflation and deflation. The government has the mandate of ensuring that its economy has neither excess funds (inflation) or has limited funds (deflation) (Gabriele, 2009).

Leadership and strategic decision-making

The government is expected to make strategic decisions, which define the pathway that the country aims to follow over a certain period. This can be yearly or take a couple of years. Every year, governments make financial budgets to be followed when financing various projects in the country. These budgets contain yearly, monthly or projects that take more than one year. Such policies are the ones, which attract international investments in a country. In the 1990’s, many countries had Vision 2000, which they wanted to have attained certain economic, social and political goals. In the current 20th century, there are calls to Vision 2020, Vision 2015 and visi0n 2030 among others depending with a country and the goals it has for the economy (Wildasin, 2008)

Issues a government need to take into account when financing the activities adopted to fulfil the role set out in (a) above

The government control an economy using fiscal or monetary policies. They can be either direct or indirect. The kind of financing adopted, depends with the goal and objective the government want to attain in a particular time. To control the economy effectively, consideration must be made to ensure that the most appropriate measure is taken (Reed and Swain, 1997). Generally, there are factors that government need to consider when financing different projects in the economy they are:

The level of economic development in the country or locations

The government has the role of setting up infrastructures to be used by the public and private sectors in their efforts to grow the economy. Before certain infrastructures are made, the government need to analyse the project and ensure that it is economically viable. Priority should be given to those places that have potential yet the exploitation of such potential is hindered by lack of infrastructures like roads and communication networks. Investments in infrastructures is an expensive exercise where the government spend public resources to make such infrastructures, they should thus benefit the greatest majority in the country. In developing economies, the government has a more active role where it is expected to make a platform that international and national inventors can built on. Such infrastructures include electricity production plants, transport networks, taxation incentive and communication networks. Some countries like China have had the government cut down its public finance expenditure to ensure that the economic growth rate in the country slows down. It has opted to have higher taxation to companies and individuals to ensure that they have low income to spend in economic development (Schulte, 2000).

Countries competitive advantage sectors

Different countries have different economic potentials; the kind of products that can be produced effectively by a nation varies among different nations. There is need to understand the potential that a country has and investments should be skewed to that direction. For example is a country has a potential in natural resources like oil reserves or good climate, then the government should direct most of its finances to these sectors. This will ensure that high levels of efficiency have been attained for economic development. Absolute and competitive advantages are important when deciding the countries to make economic integrations. There are times that countries produce the same commodities, in such cases such countries can make good economic blocs to negotiate for better prices for their products. They though cannot make good trading partners since they make more the same products (Schumpeter , 1994).

The rate of inflation/deflation

The rate of inflation in country affects expenditure decision by the government. When an economy is facing high rate of inflation, then the government has the mandate of controlling the economy. Controlling inflation and deflation are monetary issues where the government devises measures to reduce money in circulation (in the case of inflation) or increase money in circulation (in the case of deflation). In inflation, the government can decide to sell government securities like bond and bills at an attractive interest rate where investors will be attracted to buy them and the money in circulation is reduced. On the other hand, it might decide to increase the lending rate to banks through central bank, which will be transmitted, to consumers making the cost of lending money expensive. This reduces the rate of money attractiveness thus, the growth of money in the economy reduces (Sheila, 2004).

In the case of deflation, the government devises measures to increase the flow of cash in the economy. If the government decides to reduce central bank’s lending rate, then banks will be more willing to lend money. This increases the money in circulation curing the deflation (Tresch, 2002).

Living standards

Different countries have different living standards. It is the dream of leaders to have citizens who have high living standards. To attain this need, the government takes deliberate measures to increase the living standards of its people. Such measures include wide investment in social facilities like public hospitals, building of roads, communication networks and education facilities. There are countries, which have opted to offer free medical and educational facilities to their citizens in the move to have increased living standards. Countries with high living standards do not require much invention of the government in their affairs but those that are underdeveloped and have reduced living standards the government intervention is highly required (Shinnick, 2008).

Some government have national libraries, some even mobile ones to ensure that its population has access to information for personal empowerment. Adoption of technology in different sectors has enabled a countries population have higher living standards as people are more informed of their rights that they can fight for (Shoup, 2006)

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Resources distribution

Resources in a country are not equally distributed; there are some parts, which have higher allocation of natural and manmade resources in a country. The in-equally bring about difference in social, economic and sometimes political. The government should ensure that its country have well distributed resources for a harmonious growth in all regions of the country. The differences make the government direct most of its resources to areas that are disadvantaged (Musgrave, 2008). They are given priorities in the efforts to see whether they can catch up with other areas. A country that has high levels of inequality is most likely to be in political disputes from time to time. This is when some people feel oppressed by the system. In the past, social rivalry in countries for example in French revolution, were brought about by inequality and oppression in the economy. To avoid a repeat of such things in an economy, the government should ensure there is equality in the economy. Equality can be brought through indirect measures like education, social amenities, and employment (Moore, 2009).

Unemployment level

Government has a role in creating employment in its country. If the economy is facing high levels of inflation, then the government must put on measures to ensure that the economy produces job opportunities. For an increased employment creation in country, the government should create an atmosphere where local and international investors feel attracted (Minea and Villieu, 2009). Such measures include reduce taxation, offer incentives to investors like tax holidays , investments deductions and offering land for factory settlements. Other than focusing on international and local major investors, the government can undertake different measures to facilitate small-scale investments through small traders and artisan. Finances can be directed to the areas where the government offer loans to deserving population to starts up their own business . Other than business, there are other individual talents that can be tapped and still create employment. This includes sporting activities and entertainment industry where the government can support youth to engage in such activities (McGee, 2004).

Security situation

It is the role of the government to ensure that its citizens are protected from internal and external security threats. The state of security in a country will determine the amount of investment that will be directed to this task. There are times that a country may be threatened of an attack, or the security system in the country is not good. In such cases, the budget for security should be increased appropriately. Different times require different security levels, for example, in times of political unrests, high security is required than in times of harmony in a country, so the amount of investment that a country makes in investment is determined by security level in the country (Martin, 2005).

Global environment

The international community affects the trend of spending in a government. There are times that international relation and trade may require a government to spend higher than in normal circumstances. Currently with globalisation, the world is facing an increased trade among countries. The trade calls for improved infrastructures, communication systems and security along borders. Although these factors benefit an economy, they require the government to make investments in the economy. To facilitate international trade, the government need to invest in good roads to transport goods produced within the country to the departure ports and those coming from abroad to their destinations (Kabelo, Khalo and Mafunisa, 2007). Communication is crucial in making trading negotiations and contracts where the government should lay good communication systems. International trade does not just happen without government intervention, there is need to control the flow of goods. Through customs department, the government imposes custom duties and tariffs to some imports and exports in its move to collect revenue and protect internal industries. Through borders, some goods that are harmful to a population can get their way; it is the role of the government to ensure that borders are free from such goods. For border security, revenue collection and national companies protection to be effective, the government has to make massive investment in detecting tools like scanners, personnel’s to patrol the borders and revenue collection officers. Making of ports is capital intensive and thus before such an investment is made the government should ensure that it has analysed the economic benefit of such a move. For example, the decision to make Suez Canal was for trading purposes, it has assisted North African countries like Egypt, however, maintaining high standards in such an entry is an expensive practice (Jürgen and Wagner, 2004)


Scientific innovation and inventions have resulted to an increase in technology in the world. Efficient technology assists a county to produce goods and services effectively with maximum utilisation of resources. The government has a role to play in technological development and adoption in the economy. This can be through its own adoption of technology in its systems or it can be creating an environment that enables companies to adopt technology. There are times that the government controls the rate of technological adoption in its economy. For example in Kenya, the government is opposing the use of tea plucking machines by tea growing factories since it believes that the number of jobs that will be lost as a result are going to harm the economy. To enhance adoption of technology, the government have sometimes offered incentives to those companies with high technology like tax incentives to facilitate further technology use (Hyman, 2007)

Environmental concerns

The world is having increased concerns about environmental damage. International bodies have enacted rules and regulations to be followed in its efforts to reduce environmental damage. Such international regulations include Kyoto protocol on green gas emission where signatories were expected to reduce their production of green house gasses (Howard, 1992). To facilitate moves that protect the environment, the government is involved in different activities that aim at corporate and to individuals. It has put on measure that reduces the amount of emission from industry. Such measures include taxation on carbon emission, having national environmental control policies and programs, offering tax incentive and facilitating technology adoption (Bradford, Auerbach and Shaviro, 2000).

The rate of investments in a country

The investment environment in countries determines the rate of investment in a country. When the environments are not attracting investments, then the government has to undertake strategic measures to ensure that it has facilitated investments. This can be through targeting certain industries, which are crucial for investment decisions in a country, and enhancing their capabilities in attracting investments (Gstoettner and Jensen, 2010). For example, the energy sector is important for economic development and attracting investment. The government can control prices in such an industry and cover the deficit. This will make investors attracted by the low rate of production cost offered by such moves. In countries like China, the government have used this consideration to devise measure that reduces the rate of investment. There are times that the government becomes the investor in come strategic industries, which are considered low income generating. This is in the move to ensure that all essential products and services are available in a country (Blanca and  Wodon, 2006)

Economic deficits and Balances of payments

There are times that a country may be facing economic and balance of payments deficits. The deficits harm an economy, the government requires to take strategic decisions to ensure these deficits are cured. In cases of economic deficits, it means that a government will not be able to finance all budget activities in a particular year or periods. It may be forces to offer some government bonds and bills, which are offered at a cost to the public. It may also decide to sell its products to raise money to finance its deficit. The right move to make in such case is determines the decision made by the government (Bastable, 2003)

International trade brings about balances of payments (B.O.P.). For a healthy economy without a deficit in balance of payment, then imports should be of a lower cost than exports. To facilitate an increase export, or reduce importation, the government have a role to play. In facilitation of exports, the government offers incentives to exporters to increase their exportation. These incentives may be subsidies in production. To discourage importation, the government can increase taxes charged to imports and empower local companies to produce goods that were otherwise imported. When a country has a healthy balance of payment, its currency is strong making its goods and services competitive in the international markets (Arye, 2003)


Modern economies are mostly capitalists, where forces of demand and supply determine prices. Government intervention in these economies is minimal but important. Government intervenes in economies to facilitate an appropriate economic growth rate and protect citizens from violation of their constitutional rights. It uses monetary and fiscal policies to control the economy. Before making an investment decision, government consider economic, political, social, global and environmental implication of such decision. Maintain political stability in a county is an important role of the government. The right decision to make is one that results to increased welfare of majority in the country.


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