States and Economic Development: What Role? What Risks?

Based on his research and on his first-hand engagement with development challenges and processes, Professor Mushtaq Khan discussed the role of the state in economic development, and the potential and risks involved in pursuing more state-led policies.

For the past 20 years, donors have advised (and often pushed) governments of developing countries to reduce their direct engagement in the economy – to liberalize their markets, to privatize state owned enterprises and utility companies, and to focus the role of the state on policy development, regulation, and the provision of basic services.

In contrast to these principles, a number of emerging economies have been successful in stimulating development based on more state-interventionist models (of both capitalist and communist stripes). Moreover, in order to make poverty history and to achieve the MDGs, and also to develop the necessary infrastructure to provide clean water and to facilitate export-led growth, a re-expansion of the role of the state appears as an essential ingredient. However, as the history of many developing countries in the 1970s reminds us – when state-led development reached its zenith - interventionist policies harbour great risks, and can deteriorate into crippling degrees of rent-seeking.