Lecture 3: Variation Of Modern Global Economic Strategies PDF

# LECTURE 3 ## VARIATION OF MODERN GLOBAL ECONOMIC STRATEGIES ### Q.3.1 Theoretical background for macroeconomic policies One of the most important components of economic strategy is economic policy. Of particular importance is the development of an adequate socio-economic realities of national...

# LECTURE 3 ## VARIATION OF MODERN GLOBAL ECONOMIC STRATEGIES ### Q.3.1 Theoretical background for macroeconomic policies One of the most important components of economic strategy is economic policy. Of particular importance is the development of an adequate socio-economic realities of national macroeconomic policies. In order to determine the optimal model of the national economic strategy, one must deeply grasp the scientific macroeconomic theories and analyze the effectiveness of their practical implementation in different countries. It is advisable to trace the evolution of views on the goals and mechanism of macroeconomic policy. #### Mercantilism (T. Mun, A. Montchrestien) The notion of national wealth is reduced to the stock of money in the form of silver or gold. A background for policies to facilitate accumulation of money and keep it in the country. Main mechanisms include active government's position, control over external trade, stimulation of exports, protectionism policy. The aim is to achieve active current account balance. Representatives of late mercantilism to ensure a positive balance of trade balance considered it necessary to support the development of the manufactory in every possible way in order not to depend on the imports of certain goods. It is important that the raw material is not exported, but processed at home into finished goods. In the development of the manufactory the leading role belongs to the government, which provides subsidies and other benefits to national manufacturists. A. Montchrestien expressed the view that the country would only be rich if it had its own industry. At the same time, he defended the interests of merchants, justifying the legitimacy of gaining trade profits. Thomas Mun believed that balance of foreign trade was regulator of national wealth. However, he did not protest against the export of money abroad, if the money exported would "earn" more money for the country. Thus, early mercantilism was based on the theory of monetary balance: the main goal was to attract as much money to the country and save them at home. For this purpose, imports were restricted and the export of noble metals from the country was prohibited. Late mercantilism is based on the development of the manufactory. The prevailing trade balance theory is the main purpose of which is to stimulate exports and restrict imports. The mechanism of such a policy is protectionism, which in a modified form has survived as one of the elements of economic policy in our time. #### Classic theory of economic self-regulation (A. Smith, D. Ricardo, J. Mill, S. Sismondi, J-B Sey) The core of classical theory is that the market itself regulates the balance between supply and demand, so the state intervention in market processes is undesirable. A country in a free trade will specialize in the production of those goods and services that have the most favorable domestic conditions; in the first place, their production will cost the least in terms of labor inputs. Such goods will be exported, others, on the contrary, will be imported. Government intervention in the economy leads to waste of resources and low efficiency. Free competition provides benefits for both individuals and society. In order to fully demonstrate the positive value of free competition, the boundaries of foreign goods should be opened, as competition will intensify. Thus, protectionism is determined as a harmful measure. In general, the state should not interfere in the economy, which is automatically able to achieve full employment and optimal production volumes. Free trade theory was developed from the classical positions by John Stuart Mill. He believed that we should not rely solely on the indicator of a positive or negative balance in trade, but we should compare the returns on exports and imports for the national economy as a whole. As to the role of the state in regulating the economy, Mill takes a balanced consideration. He considers taxes as the main economic tool of state policy. It is through the tax system that the state can (and should) implement policies in favor of entrepreneurs and the entire nation. However, the government should not interfere in economic processes directly. #### German national economy (A. Muller, F. List) German economists, as well as representatives of the alternative school of political economy, generally believed that individual and social interests in the economic sphere did not coincide, so their automatic harmonization would not take place. It is the state that has to coordinate these interests. The stronger the state, the stronger its regulatory role, the better implemented both individual and public interests in the country. A. Muller believed that the state forms the ideology of the nation's economic development (that is, economic strategy) and creates the necessary conditions for its realization. F. List also emphasized the decisive role of the state in economic processes. At the same time, he emphasized that the economic interests of different countries of the world did not coincide in the open economy, contrary to the statement of "classics", therefore the state in each concrete situation should define national interests and defend them. F. List positively assessed the protectionist policy that protects the national economy from foreign competition. Protectionism, in his opinion, is especially useful when a country's economy is in the process of becoming and loses in the competition to other states. F. List in such a situation considers it expedient to even apply dumping. The state, according to F. List, should also influence the rationalization of the structure of the national economy, and for this purpose it would be advisable to create the state sector of the economy. #### Marxist theory (K. Marx) It was implemented in the economic policy of the socialist states in the XXth century. The main postulate of Marxism is the elimination of private ownership of means of production (capital goods, factors of production). Ownership exists in two forms - state and cooperative. The practice of socialist management proved that, in fact, in the vast majority of states, including the USSR, only state property remained, since the collective-cooperative sector was strictly subordinated to the state authorities. The complete concentration of the economy in the public sector is accompanied by administrative methods of its management. Management of the national economy is carried out on the basis of planning, plans are of a legislative nature, that is, obligatory for execution. In the USSR and some other socialist countries, five-year (sometimes seven- and ten-year) economic development plans were implemented. Actually, they were strategies for economic development. Directive planning of economic development, along with rigorous administration, may be efficient in solving certain economic problems within a short time, usually in critical situations. Thus, in the USSR in the 1930s, it was possible to quickly build an industrial base, create a powerful military potential during the Second World War. But in the long run, this system proved to be ineffective, especially in the context of the scientific and technological revolution. Today, Marxism remains the scientific basis for economic policy in China, North Korea and Cuba. #### Marginalism: (K. Menger, F. Von Vizer, E. Bem-Baverk) Key postulate is priority of consumption over production. #### Neoclassical traditions developed by the Cambridge School Whose most prominent representative was A. Marshall. He initiated a theory that combines the elements of the labor theory of value with the theory of marginal utility. Marshall found that the price of a product on the market is determined by two factors: the price of the demand and the price of the supply. He linked the price of the product with the elasticity of demand for it. One of the most important scientific statements of A. Marshall is the conclusion concerning the "human capital" as an activating factor for production. He paid tribute to the level of education, qualifications, culture of an employee, considering it to be a capital; the end result, in his opinion, depends on the way of applying knowledge. Another representative of the Cambridge School, A. Pigou, developed the concept of the welfare economy. In his concept, the central idea is to redistribute income through the active tax policy of the state; while the tax system should be formed on the principle of proportional income growth. According to A. Pigou, the role of the state depends on specific conditions: in the usual situation it should be mediated (regulation through tax policy), and with the strengthening of monopolies, direct state intervention is necessary (control of prices, volumes of output, etc.). Another representative of the Cambridge School is R. Hawtrey, who is considered the founder of the neoclassical monetarist theory. The focus of his research was money. As the main direction of regulatory activity of the state he defined monetary policy, which should be flexibly related to wage policy. Lending to banks of producers and traders increases revenues that affect the income and expenditure of consumers, stimulating investment and employment. The classical school (and its neoclassical variant) prevailed as the theoretical basis for the development of economic policies of the governments of most European states and the USA in the second half of the nineteenth century, and in the first third of the twentieth century. Later, however, the global economic situation began to change significantly, which caused the need to revise the foundations of economic policies and develop new strategies for economic development. #### Keynesian theory Major standpoints of the theory include the following. Government's intervention in economic processes. Aggregate demand is the engine of economic growth. The leading role of investments in defining the employment level. Market cannot overcome crisis and unemployment, state intervention is needed. State fiscal policies' aim is stabilization of the national economy through government contracts, taxation and transfer payments. J. Keynes saw demand as the driving force behind economic processes. The country's national income level depends on aggregate effective demand, which is divided into consumer demand (two thirds of all purchased goods and services) and production demand (investment). According to J. Keynes, the total employment is determined by three factors: the propensity of people to consume; marginal efficiency of investments (return on capital); rate of interest. He formulated the "basic psychological law", according to which people are inclined to increase their consumption with increasing income, but not to the same extent as income increases. On this basis, Keynes considered it appropriate to encourage all kinds of consumption, and here the government should be active. One of the most important provisions of Keynes's general theory of employment is the provision of the decisive role of investment in determining the total employment. Investments should offset the insufficient growth in consumer demand. Keynes proceeded from the argument that the entrepreneur expanded the investment until the marginal efficiency of the capital (the rate of profit) is reduced to the norm of interest. An important conclusion of Keynes is the assertion that the market mechanism itself can not automatically prevent and neutralize the crisis and unemployment. Only intervention by the state can ensure non-crisis development, he considered. Keynes considered unemployment to be a source of insufficient demand. In his opinion, the volume of employment does not depend on the movement of wages, but on the level of national income, which means the aggregate effective demand for consumer and manufactured goods and services. He criticizes the provision according to which employment can be expanded by reducing wages. On the contrary, Keynes insists, the smartest policy is to maintain a stable overall level of monetary wages. In general, he believes unemployment is a phenomenon inherent in capitalism, and the economy can be balanced even at a high level of unemployment and inflation. Product prices and wages in the short run are inelastic, aggregate demand is volatile. In such a situation, unemployment can grow and persist for a long time, therefore, for the purpose of social stabilization, an active macroeconomic intervention of the state is necessary. In the regulation of economic development, great importance is attached to the establishment of the rate of interest. The maintenance of the low norm Keynes considered one of the main conditions of high economic activity. A significant role in regulation belongs to credit institutions that affect the rate of interest. Cheap loans are good stimulus of economic activity. In addition, entrepreneurs need to be financed from the state budget. An important part of Keynesian theory is the development of government fiscal policy. The purpose of this policy is to stabilize the national economy through the system of government procurement, taxation and transfer payments. The fiscal policy, which is aimed at increasing the output and employment of the population, implies an increase in public spending and a reduction in taxation. But as a result, the state budget deficit increases. If it is covered by the emission of money, then there is inflation. Keynes did not consider moderate inflation dangerous for the economy. If it reaches alarming proportions, it is necessary to reduce public spending and raise taxes. #### Neo-Keynesian (S. Harris, R. Harrod, P. Samuelson, D. Hiks) Major focus is placed on the issues of dynamic balance and cyclical fluctuation. The cyclical fluctuation depends on the fluctuation of the dynamics of investments, so the regulation of the investment process was given priority. The growing role is played by scientific and technological progress, the need for a continuous technological re-equipment of production, which stimulates all new investments. New investments contribute to the expansion of production, which increases the volume of cumulative income, and ultimately - aggregate demand. This is achieved by dynamic equilibrium, that is, equilibrium at a new level of economic development. The Neo-Keynesians considered it possible to curb the cycle, provided that the state would actively regulate the investment process. If the economy is in recession, the state should stimulate investment activity; if there is an "overheat" of the economy, the state impedes it through the mechanism of raising interest rates and other measures. In the same direction, the tax policy of the state should operate. Under conditions of too rapid economic growth, tax rates are rising, while in the downturn - they are decreasing. In crisis situations, the state should stimulate demand, increasing budget expenditures, in particular through the system of public procurement. One of the directions of neo-Keynesianism is the idea of indicative planning, which was initiated by French economist F. Perroux. This idea is based on the ability to effectively combine the actions of the market mechanism and state planning. Indicative plans, as opposed to the directive ones, are of a recommendatory nature. Nevertheless, the state through the mechanism of tax policy, interest rates and public investment can influence the development of the national economy in a definite direction. Keynesian theory was the basis of F. Roosevelt's economic policy in the 1930s, which proved to be very fruitful in the aftermath of a deep economic crisis. Keynes' ideas about the decisive role of the state in regulating the economy have also been applied and successfully implemented in the post-war economy of some Western European countries and Japan. Keynesian theories were also actively used in practice in the first post-war decades. In particular, in the United States Keynes's ideas were shared by advisers to presidents J. Kennedy, L. Johnson and R. Nixon. Special emphasis was placed on reducing unemployment. Keynesian theories were spread in Germany in the 1960s when the Kissinger government used deficit funding, moderate inflation, and regulated interest rates. The practical application of Keynes's doctrine was used in the post-war UK, with the primary goal of ensuring high employment. #### Neo-classic theory Within the framework of neoclassical theory, three main directions are distinguished: conservative, neoliberal, and neoclassical synthesis. Representatives of the conservative direction (J. Clark, R. Solow, J. Mead) attached great importance to the role of factors of production in achieving economic equilibrium and the positive dynamics of social production. The production function is considered as the basis of intra-industry economic development balances. The priority directions of development are determined. A feature of this course is the recognition of the decisive role of scientific and technological progress as a factor of economic growth. The neoliberal direction is based on the postulate of self-regulation of the economy and the principles of economic freedom. The state should only provide conditions for competition in the market. Neoliberalism is divided into several schools. The representative of the English school F. Hayek was a supporter of maximum, unrestricted freedom for the entrepreneur. He believed that the order in the national economy and in the world economy is formed spontaneously and is a consequence of the coincidence of circumstances inherent in this period of time; the state by its actions violates this order. The function of the state, according to Hayek, is to protect the natural social order - freedom of monopoly, freedom of competition, freedom of choice. Hayek denies any other intervention by the state, including the redistribution of income (the social function). He believed that state regulation of the social sphere (insurance, education, health care, price levels, social guarantees) impeded freedom and violated the natural social order. Hayek was confident that social inequality is a natural phenomenon, while social subsidies provided by the state to the poorer sections of the population weaken incentives for work. The idea of limiting the functions of the state only by creating favorable conditions for the formation of a competitive economy was dominant and for the Freiburg school (V. Oiken, V. Repke, A. Muller-Armak, etc.). Such conditions are provided by the state with the help of rational fiscal policy. Unlike Hayek, they recognized the state of the right to redistribute national income for the sake of social justice. Müller-Armak considered an important element of state regulation to be a tax policy that should stimulate the economic activity of individuals. Equally important component of the economic policy of the state is a policy of stabilization of the money supply in order to avoid inflation. In general, unlike Keynes, neoliberals condemned the government's use of inflation to address employment issues and stimulate production. The economic concepts of the Freiburg school were put into practice by the German minister of the economy, and later by Chancellor L. Erhard. The most famous and most important school of neo-liberalism is the American one, the doctrine of which was called monetarism. The advocates of the monetary theory believe that monetary and credit factors are decisive in the development of the economic cycle and its regulation. In the most in-depth form, the monetarist theory is contained in the writings of M. Friedman. Friedman's main idea is that the best economy develops under conditions of minimal state intervention. The government can only regulate by means of monetary policy. The main provisions of monetarism are the following: * it is "supply", not "demand", that is a driving force for the economy; * The state can influence economy only if the central bank is able to influence the activities of business and commercial structures, commercial banks by setting a discount rate; * it is necessary to implement a policy of stimulating private entrepreneurship; * The money supply regulation policy is the main instrument for managing the economy. Friedman, like other neo-liberals, considered the rising position of his concept to recognize the need for economic freedom, through which social balance is realized. Economic freedom is realized by state non-interference in the economy. The state's influence on the country's economic development is limited by monetary policy. Friedman is convinced that the cyclical nature of economic development is monetary; excessive emission of money leads to inflation and economic destabilization. On the other hand, insufficient amount of money in circulation inhibits production. Consequently, the government should determine the optimal amount of money for each period of economic development. Condemning inflation, Friedman argues that it does not provide employment growth, according to Keynesians. He believes that employment, like production, has a cyclical character. The best regulator of employment is the market. Moreover, the labor reserve provides the balance of the economy. Thus unemployment at the level of 4-5% is fully justified. The state should not interfere in determining the level of wages; It should also be prohibited by trade unions. The market itself will adjust wages at the optimal level. An important point in the Friedman's concept is the balance of the state budget. Expenditures must not exceed earnings. As for taxation, Friedman condemned the progressive taxation system, noting that the state translates the burden on the most profitable enterprises, which destabilizes the economy. According to Friedman, the foreign economic policy of the state should be based on the principles of openness of the economy. Monetarist concept comes from the leading importance of cash flow regulation. At the same time, Friedman opposes government intervention in establishing exchange rates; he believes that the market itself establishes a currency equilibrium. On this basis, Friedman insists on the introduction of floating (not fixed) currency regimes. Thus, Friedman's main idea is that the market economy is self-regulating; as to the state, its functions should be limited to macroeconomic regulation, namely, control over money circulation, stable fiscal policy and support of the budget equilibrium. M. Friedman said: "Financial authorities must follow the parameters that they can control, and not those that are not owned by them." His other recommendation to Governments is to "avoid abrupt movements" in the implementation of monetary policy. The society has to adapt to some steady pace of growth of a certain monetary aggregate. The exact size of the pace, as well as the type of the unit, is not as important as the habit of a stable and predetermined tempo. The monetarist theory was applied in the economic policy of the US President R. Reagan in the 1980's, and later on by British Prime Minister M. Thatcher. On the whole, it had positive effects, as the economic situation stabilized. However, the social stratification of society increased, and social programs were cut. The theory of neo-classical synthesis becomes widespread in the second half of the XXth century (J. Hicks, F. Modigliani, P. Samuelson). Foundation of this theory is neo-classics, but in some situations it is allowed to use certain elements of Keynesianism. The idea of this direction is that one should never adhere to one economic policy that would be based on the once chosen theory. Depending on the specific economic situation in which the country is currently, one can focus on either monetarism or Keynesianism. So, Samuelson, preferring market forces to regulate the economy, allows state intervention in specific cases. Monopolization of the economy, imperfect competition, unemployment, inflation, cyclicality - all this cannot be automatically regulated by market forces, therefore state should interfere. State regulation should be carried out at the macroeconomic level; the regulatory mechanism consists of tax policy, state subsidies, etc. Unlike the monetarists, who considered Supply to be the driving force of economic growth, Samuelson also pays attention to Demand. Another rejection is the recognition of the need for social regulation: Achieving high rates of economic development should not be carried out at the expense of the poor social strata of the country's population. In foreign economic policy, supporters of neoclassical synthesis pay much attention to fluctuations in the exchange rate, which depends on the situation on the international capital market. They believe that the state has little tools to effectively influence the exchange rate, since the monetary equilibrium is ultimately set by the forces of the world market. Given the market self-regulation of the economy, it is considered inappropriate to implement a protectionist policy. #### Institutionalism Followers of this theory believe that, along with purely economic phenomena in the regulation of the economy, social, political, ethical, legal problems should also be taken into account. Institutionalists began to construct a psychological theory of economic development. They are the engine of economic development recognizing the psychology of the collective, society, instincts, skills and predisposition of people. Institutionalists consider the ability of the market mechanism to regulate economic processes to be quite limited and insufficient. Thus, J. R. Commons, who is considered the author of the concept of "regulated capitalism", attached great importance to the state and trade unions in resolving social conflicts. One of the major trends of institutionalism is the theory of industrial society (W. Rostow, J. Eully, R. Aron, P. Druker, J. Galbraith) has received considerable popularity. Large corporations are recognized as the basis of the economy, whose strength is based on scientific and technological progress. Hence the need to stimulate large investments in production, as well as in research and experimental design development. J. Galbraith considers expedient to increase the cost of education and training. In this important role should play the state, which will provide significant costs for the intensification of scientific and technological progress and the implementation of its achievements in production. Galbraith introduces the concept of "technostructure", defining it as a union of knowledge and qualifications. An important position in the theory of Galbraith is the need for planning. This is argued by the fact that the market mechanism is no longer able to regulate the economy in terms of complex technology and large capitals. Corporate activities are subject to planning. The planning system predicts the activity of enterprises, corporations and state regulation. In general, the functions of the state, according to the Galbraith, must be significantly strengthened in the economic sphere; while planning should become one of the leading functions. The government regulates state demand, reallocating national income through the system of taxes. ### Q.3.2. The role of the state in the regulation of economy Today the state has emerged as an active participant in the process of economic development in many ways. Now the government has started participating increasingly in the productive activities and through its monetary and fiscal policies is guiding the direction of economic activities. It also determines the distribution of goods and services in the economy¹. The process of development in case of developed countries was spread over a long period but under-developed countries today have no time to wait and it is essential for them to cut short the period to development. In this case the government has an important role in the process of development. These countries have remained stagnant and a positive government intervention is necessary to put them on the path of the growth. In order to reduce the various rigidities inherent in an under-developed country, the state must play the strategic role. According to UN Study Group, "In addition to the functions, governments normally perform, there is a large borderland of functions which they ought to perform for the simple reason that they are important, and are not carried out sufficiently, by private effort. This borderland can exist in any country, but it is wider in under-developed countries, because private enterprise in the latter is more knowledgeable and more enterprising than in the former." In under-developed countries planning is not limited to intervention but is regarded as a necessary condition for economic development. Since sources are scarce in under-developed countries, it becomes necessary to plan their distribution among various projects as well as plan their utilization in these projects. Thus the under-developed countries cannot escape planning if they want to develop themselves in a reasonably short span of time which implies that time factor is very important. The problems prevailing in the under-developed countries cannot be solved by private enterprises and thus the state action is necessary for the economic development of these countries. It controls over production, distribution, consumption of commodities and to perform this the government has to devise physical controls and monetary and fiscal measures and these measures are essential for reducing economic and social inequalities that are prevailing in under-developed countries. The sphere of state action is very vast. It includes, "maintaining public services, influencing the use of resources, influencing the distribution of income, controlling the quantity of money, controlling fluctuations, ensuring full employment and influencing the level of investment." Thus the state has to shoulder heavy responsibilities in order to ensure rapid economic development in under-developed countries. This task can be performed by two types of measures i.e. (A) Direct and (B) Indirect. #### Types of Measures: **(A) Direct Measures:** For the economic development of under-developed countries state has involved itself directly and performs certain vital functions which are enumerated below: 1. **Organizational Changes:** The organizational changes play an important role in the process of economic development. It includes the expansion of the size of market and the organization of labour market. The state can develop the means of transport and communications for expanding the size of market because private enterprise cannot be capable of undertaking such schemes. Moreover, the state can help the growth of agriculture and industries. The organization of the labour market also falls under the functions of government. It increases the productivity of labour. The government helps in organizing labour by recognizing labour unions. It fixes working hours, payment of wages, establishes machinery for the settlement of labour disputes, provides for social security measures etc. This establishes relation between the employers and employees which increases efficiency of labour which in turn increases the production and reduces the cost. The majority of people, who live in rural areas are engaged in agricultural operations for a fixed period. They are not aware of the employment opportunities in towns and industrial centres. The government can help them in getting jobs by opening information centres in rural areas. Thus the government can help in the mobility of labour. The problem of urbanization arises, when the development labour moves from rural to urban areas and it is solved by the government. Such problems relate to housing, drinking water supply, electricity, slums, transport etc. 2. **Social and Economic Overheads:** The main obstacle in the way of economic development of under-developed countries is the lack of economic overheads such as means of communications and transportations, ports, electricity irrigation etc. In industrially advanced countries, these facilities are provided by private enterprises. But in under-developed countries the private enterprises are not interested to invest because the return is not fruitful and, moreover, such huge investments are beyond the capacity of private sector. Besides this, there is dearth of entrepreneurial ability in under-developed countries and the entrepreneurs prefer to invest in trade, housing, gold, jewellery etc. where the rate of return is very high. Thus, it becomes the responsibility of state to provide these economic overheads in the under-developed countries. 3. **Education:** Education plays an important role in the process of economic development. According to Myrdal, "To start on a national development programme, while leaving the population largely illiterate seems to be futile. The educational facilities provided in under-developed countries increase their geographic and occupational mobility, raising their productivity and facilitating innovations. The quality of labour is very important for economic growth." Unskilled workers even working for long hours result in low per capita income. It is through public education that the state can increase the effective labour supply and hence their productivity. There should be free and compulsory provision of primary education and the schools of secondary education should be opened. Various training institutions should be opened to provide training to mechanics, electricians, artisans, nurses, teachers, etc. Education is both a consumer and an investment service. Prof. Galbraith regards that investment in educating each and every man is directly productive. He argues that, to rescue farmers and workers from illiteracy may certainly be a goal in itself, but it is also a first indispensable step to any form of agricultural progress. Education so viewed, becomes a highly productive form of investment. 4. **Public Health and Family Planning:** The development and maintenance of public health services are important functions to be performed by the government. It is necessary that the health of people should be maintained to increase the efficiency and productivity of labour. Public health measures generally include the improvement of environmental sanitation in both rural and urban areas, removal of stagnant and polluted water, better disposal of sewage, control of communicable diseases, provision for medical and health services particularly in the field of maternity and child welfare, health and family planning education and the training of health and medical personnel and all this requires planned efforts on the part of public authorities. Public health assumes greater significance in under-developed countries for its capacity to improve the qualitative composition of labour force. At the same time, it makes need for development all the more urgent by increasing the size of population. Improvement in health will decline in death rate which in turn increases the population and it has adverse effect on economic growth. The problem of poverty in under-developed countries cannot be checked, unless the rapid increase in population is checked. In highly advanced countries there is need to reduce the fertility rates. For this family planning clinics should be opened in rural areas, in industrial end other backward areas. There should be incentives to encourage parents to have fewer children. More emphasis should be laid on removing barriers to birth control, raising the marriageable age etc. The problem of population explosion can be avoided in under-developed countries (UDC) if the family planning programme is adopted on governmental scale. 5. **Changes in Institutional Framework:** Economic development cannot take place in static institutional frame work. The rigid institutional frame work is a positive hindrance in the path of development in UDC. Prof. Paul Streeten has rightly observed that, "The difference between economic growth in advanced countries... and development in so called developing countries is that in the former attitudes and institutions are by and large, adopted to a change and the society has innovations and progress built into the system, while into the latter attitudes and institutions and even policies are stubborn obstacles to development." The people of a country must desire progress and their social, economic, legal and political institutions must be favourable to it, but in UDC these conditions are largely absent and there is a great need of social and cultural revolution. Economic change is not brought about by institutional changes alone. It is caused by both economic and non-economic factors. Thus, there must be a casual relationship between economic and the institutional changes or these changes may be independent of each other. The government play an important role in changing the institutional structure in developing countries and creating conditions for evolution of new institutions. New roads, new shipping routes or other improvements in communications may open up new opportunities for trade. War or inflation may create new demands. Foreigners may arrive in the country, bringing new trades, investing new capital or offering new changes of employment." Such new opportunities bring about changes in institution. The institutional changes can be brought about by the state in the form of land reforms, improvement in the laws of inheritance, regulation and control of monopolies, regulation for the control of money market, improvement in the distribution system etc. 6. **Stepping up the Rate of Investment:** The process of development is accelerated by increasing the rate of investment. The rate of savings in UDC is highly inadequate as compared to their investment requirements. Thus, it becomes essential for government to accelerate the rate of capital formation in these countries and the government can achieve this through taxation or inflation. The socialist economies have also been able to save and invest a very high percentage of their national income because of their government's active role in the field of capital formation. 7. **Agricultural Development:** In UDC majority of people depend upon agriculture for their livelihood. Lack of irrigation and credit facilities are main hurdles in the way of economic development. If the agriculture remains backward, the other sectors of the economy cannot develop because agriculture is the basic industry and the other industries depends upon it for raw material. The success of the agricultural development programmes depends upon land reform measures taken by the government. Land reforms measures usually include: 1. Abolition of intermediaries; 2. Security of tenure as tenants; 3. Right to purchase land which tenants cultivate; 4. Compensation for permanent improvements made on land by tenants; 5. To limit the rent charged by landowners; 6. Fixation of ceilings on agricultural holdings; and 7. Consolidation of holdings. Thus the agrarian policy of government consists of organisation of agriculture on co-operative lines, provisions of irrigation and credit facilities, establishment of subsidiary industries etc. 8. **Industrial Development:** Industrial policies should focus on decentralisation of industries which may spread all over the country without any political interference. A policy should be framed to promote exports which may substitute import which in turn will be helpful for rapid economic development. Special measures should be taken to establish cottage and small scale industries in rural areas so that the local resources may be used. It must provide larger opportunities of employment to the rural folks. In addition to this state should try to prevent the emergence of monopolistic organisations and concentration of wealth in few pockets. The state can go a long way in the growth of private industries by importing capital equipment machinery and technical knowhow and even raw materials. It should also provide various facilities and concessions for the promotion of basic and key industries. They can provide cheap credit facilities, tax rebate, cheap power, water, transport facilities etc., specially to those who are engaged for consumer goods industries for domestic consumption. 9. **Influencing the Use of Resources:** UDC are generally characterized by under-utilization and misuse of resources. Hence the government must take measures to ensure proper utilization of resources. There is problem of conservation of natural resources like forests and minerals. They should not be allowed to be utilized in a wasteful manner. Here the government is required to play a role influencing the use of scarce resources. There are also problems of proper land use, proper planning of towns and proper location of industries and it requires long term and comprehensive planning on the part of government. 10. **Removal of Inequalities:** Another important function of state is the removal or at least reduction of inequalities both economic and social. There is a great social disparity between various groups of society due to the highly unequal distribution of income. In fact, the economic and social inequalities are closely related to each other. The government must adopt appropriate measures for the equitable distribution of wealth. The government should impose progressive taxes on income and wealth and on luxury goods and benefit the poor through wise public expenditure policy. Government should facilitate greater equality and in particular in raising the standard of living. Policy measures should be taken in the interest of poor but most of them are not implemented or not put into practice and do not favour the poor. It is very clear that only those inequalities are removed that arise from the institutions of the ownership of means of production and inheritance. The functional inequalities which arise from hard work, education, intelligence etc., have also important role in the process of development. 11. **Optimum Allocation of Resources:** The various economic policies should aim at proper balance in the rate of development of different sectors and in the rate of development of different industries in each sector. To secure the balanced economic growth greater employment opportunities must be taken. The UDC not only lack in resources but are immobile also. The government should improve the mobility of factors of production by furnishing information about employment opportunities by setting employment exchanges and other appropriate institutions. The ultimate aim of economic development is to create conditions of full employment of labour and other resources. The state must mould the attitude of people in right direction. They must adopt attitude to work, thrift and to other problems of development. 12. **Maintenance of Peace and Security:** Peace and security are the two things which are essential for economic growth. Therefore, it becomes the responsibility of state to maintain law and order internally and to secure the country from external invasion. It will bring stability in economic system so as helpful in making bold decisions. A country involved in a prolonged war or internal strife cannot plan economic development in an effective manner. 13. **Balanced Growth:** The development of UDC is unbalanced. It is realised that the UDC must adopt the strategy of balanced growth