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state and economy

November 2020 · Economic Eye 1(14)

Authors:

Wilayat Barzani
University of Kurdistan – Hawler

References (17)

Abstract

what is the role of the state (governance) in the

economy? Explain the changing economic role of the
state and discuss the economic role of the KRG.
Clearly identify how wide or narrow should such the
rule be in the economy? Abstract State intervenes in
the economy in many countries, sometimes state
intervention could affect the economy positively and in
contrast, it could affect negatively. This paper will try to
discover the significance role of the state and it is
scope in intervening the economy, focusing on
Kurdistan region (KR) by using primary and secondary
data collected for the purpose of this paper. This paper
will also investigate the role of governance and its
importance for the economy. There has been some
development to improve government regulations to
strengthen economy. Government intervention through
subsidies and taxes can impact the economic role of
state and state finances. Moreover, in many countries
the government role in the economy is not regulated.
In addition, there is little agreement between
economist and the general audience on the role of
state in regulation the economy. So, the role of the
state continues to be hot topic of discussion in both
developed and developing countries. Despite the pros
and cons, there are appeals for states to intervene in
the economy.

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University of Kurdistan Hawlér

Department of Business and Management

In Partial Fulfillment of the Degree of

MASTER OF ARTS (MA) IN BUSINESS MANAGEMNT

what is the role of the state (governance) in the economy? Explain the changing
economic role of the state and discuss the economic role of the KRG. Clearly
identify how wide or narrow should such the rule be in the economy?
Supervisor: Dr. Goran Mustafa Muhamad

Student: Wilayat Salih Mustafa

Abstract

State intervenes in the economy in many countries, sometimes state intervention could

affect the economy positively and in contrast, it could affect negatively. This paper will try to

discover the significance role of the state and it is scope in intervening the economy, focusing on

Kurdistan region (KR) by using primary and secondary data collected for the purpose of this paper.

This paper will also investigate the role of governance and its importance for the economy. There

has been some development to improve government regulations to strengthen economy.

Government intervention through subsidies and taxes can impact the economic role of state and

state finances. Moreover, in many countries the government role in the economy is not regulated.

In addition, there is little agreement between economist and the general audience on the role of

state in regulation the economy. So, the role of the state continues to be hot topic of discussion in

both developed and developing countries. Despite the pros and cons, there are appeals for states to

intervene in the economy.

Keywords: Economy, government intervention, role of the state, Kurdistan region

Introduction

“States provide a policy framework that adjusts directly or indirectly many phases of our

lives. Throughout the idea of the nation, they also play a key role in determining and fostering a

sense of community with potentially positive or negative consequences” (Storey, 2017, 121), The

economic role of the state plays a significant role in society and this role is expanding based on

various factors so as to make individuals an important part of the society; an effective political

system to decide on choosing the policy makers and establish it; the pressure on political and policy

makers to compel of what they are responsible, decisions that has been made by the government

and policy makers and it is not easy to proceed, (Tanzi, 2011, p.44). the government might also

interfere the situations like disaster (moos, 2002). Most economic decisions are made by

government, as well as decisions associated with welfare of people. However, arguably the role of

state in the economy is less problematic when it comes to countries with small GDP (Gross

domestic product), most of the decisions are for the benefit of the society empty from individual

interests. Nonetheless, people might not be so pleased, but the weakness and smallness of the

country helps political representatives to play a better role, (Baldacchino, 2018, P.4). Likewise,

during crisis and economic disaster governments intervene the Pakistani disaster in 2010, also the

role pf the economy under the name of “laissez faire”, the consumption helps the disasters occurred

in 19 centuries. Moreover, the essay will cover the role of the state in the economy and how it

changed in nowadays by mentioning the theoretical models of how economic developed also how

narrow or widely should the state intervene in the economy. Furthermore, it illustrates the

economic role of the state specifically in KRG.

Adam smith published his book titled (The Wealth of Nations, 1776) at the stage of

“laissez-faire” for directing the market. Smith illustrated the importance of economy and necessity

1|P a g e

of leaving it free. However, ,Smith’s notion regarding the division of labor force that benefited

economy to be more productive, it was a revolutionary idea to hamper the improvement of

commerce through policies and eliminate the cultural barriers, he insisted the British government

implement the idea through trading with America and India, he also stated that the government

should encourage commerce by creating an effective administration to support and facilitate

economy instead of restricting it. “Between the 16th and the 18th centuries, development policies

(or mercantile policies) contributed to “state building” and vice versa in various countries” (Jomo

and Reinert, 2005). According to (Ekelund and Tollison, 1981), the assumption of implementing

the policies and developing economy is relied on the ability of governments. Smith also expressed

his fears towards governments not being supportive to economy, particularly Smith’s concern

about economy’s monopoly powers and the fear that the state role being ignored. Furthermore,

“The role and importance of institutions have been examined extensively in the economic

literature” (Acemoglu et el., 2002). Institutions support the economy by making community more

dynamic, also it provides employment opportunity, by saving cost and increase the profitability to

help the economy in all aspects, considering what the most developed industrial countries such as

Japan and Korea follows, japan is a model of newly industrialized economies (NIE), (Heshmati,

2007., p.5). state widely intervene in the economy in japan, including a centralized planning with

an efficient management. Comparing to Kurdistan region industry there are not efficient data

available. However, the government is investing precisely on some specific sectors. Furthermore,

the roles of policy makers cannot be unnoticed, according to (Cichon and Schildberg, 2019)

designing policies are a part of art rather than to be a science, organizations face challenges while

creating policies for the first time due to the complexity.

The support of state institutions should be based on their competencies and should not

require any additional financial contributions (Kotylak 2009, p. 121). Institutions in their early

stages of development are required to be supported by the state due to the complexity of markets

and high competitiveness (Drab, 2018). The state intervention is based on the negative

performance of organizations resulting from free markets, and at this time, it should be considered

that the aim of government intervention is to balance the market to foster a positive change.

Moreover, if we further analyze state intervention as W. Eucken proposes, Europe’s economic

principles are based in ordo liberalism, (Buko 2009, pp. 53-55). In addition, the EU member states

demonstrate that the intervention is necessary when it comes to socio economy crisis, specifically,

the intervention of state is need to be limited when introducing market regulations, to the extend

to restrict the development of some organization and give more chances to others that need to be

supported to help grow the economy (Czaplewski 2015, pp. 165-166). Although, another important

point to be mentioned is the importance of local interventions in industries. Meanwhile, the

government interventions aim to develop the economy globally in to a macroeconomic

development, however, the intervention of the government is to reduce the market failure and

restructure it in a way to become more efficient, (Sztando, 2010, Patrzalek, 1996). From the

mentioned suggestion, the intervention of the governments in the economy is necessary

sometimes, in both national and international levels, to keep market in balance. Nevertheless, it‘s

necessary that the state intervention be limited in a way that it can be helpful and not harm to the

economy, hence, the necessity of the state intervening in economy is undeniable but it must to be

limited in terms of preferencing in the market policies

In the theory of the economic development several theories are examined, the models are

viewed of how economic is developed by aiding government. (Parpart and vatmeyer, 2004) stated

3|P a g e

that The modernization theory is highlighted to transfer the scientific knowledge and technology

with the assistance of state from west to developing countries, The structure change theory is the

outcome of deepening into industrialization process, manufacturing products as a reason for

growing and expansion in developing countries (Arthur, 2006). Thus, (Hendelman, 1996;

Arthur,2006) argues that Theory of dependency discuss that the satellite countries to improve it

need to eliminate market metropolis. Also, the liberalization theory’s main goal is arising

economic growth and manufacturing development (cook, 2018). Furthermore, there are also

several model for managing economic development, the laisses-fair mode witch smith described

as there is an obscure hand that derives the market in the direction of maximization of national

output and fostering public benefit ( koven and layons, 2003).Thus, the socialism models discusses

that the economy of the state it needs to be managed by the state in order to provide subsidies for

the state ( Dana and oheng, 2015). Hence, the mixed economic system model is the combination

of state intervention and market freedom. Therefore, Anglo Saxon model refers to work ethics,

property rights, and festivity of individual as market-based-model. So, US model of managing

development is relied on legitimizing a traditional management to a legitimized professional

management that is based on science, and so the Nordic model ignored the professional model of

economic development and seek into constitutional management that is the result it was a more

efficient model compared to Anglo Saxon and Europe model. Moreover, “East Asia’s rapid growth

is especially striking in that it occurred at a time when roughly 70 per cent of all developing

economies grew more slowly than high-income economies on average (World Bank 1993)”.

Consequently, New European model’s main aim was to achieve a higher development in

increasing employment to have a sustainable social market that requires a strong leadership.

The economic role of state changed at the beginning of 20th century, especially after the

effect of technological and globalization trigger obstacles for the government regarding not using

efficient technology, although, in terms of globalization in one hand it conveys multiple choices

for market and government, in the other hand it bounces opportunities to local market to be more

efficient due to foreign competition. In the result of these developments it diminishes the

government intervention (Tanzi, 2011). Furthermore, there is no evidence to make sure what

economic should the role of state play. Hence it depends on the situation of market, the needs of

citizens, the government economy system and political system, although, the rapid changes in the

market and business regulation are all justifications of growing faster, as today is identified through

taxation level and public spending. Thus, one of the most crucial impediments is faced by the

government is reduction in role of the state in the economy that will cause reduction in the public

spending and eventually it will make political oppositions. Moreover, there is an interface among

the status of market of how efficient it is and the government of what is necessary to do in

circumstances, the intervention of role of the state in the market id dependent on the efficiency of

market and also this will cause fall in public spending.

The Kurdistan region as a democratic institution. In 2003 KRG started to invest in private

sector and also succeeded in attracting foreign investment in both oil and non-oil sectors, however,

in 2014 the oil price had started to plunge and eventually it put pressures on the KRG economy

(world bank, 2016). KRG has faced many challenges in dealing with economic crises on hand and

facing the most dangerous terrorist groups such as Islamic State in the other hand. Moreover, a

structural change is necessary to materialize in order to Improve the status quo, as it ’s noticeable

the high dependency on oil sectors is a Dutch disease, although, the unnecessary role of public in

the economy as the GDP of KRG is 50 % compared to whole GDP of Iraq which is 61% that the

5|P a g e

public sectors has controlled the economy. Additionally, importing more than exporting is another

issue that needs to be considered that hinders the local business to grow and deprive them from

the opportunity to compete with foreign products. finally, the weaknesses of financial and banking

systems and dealing in cash money can be one of the problems, 30% of companies depend on cash

from Banks investments (world bank, 2016). The development of economy in Kurdistan is

dependent on diversifying the economy plus reconstructing and reforming the specific economic

sectors. “The Kurdistan Region (KR) has potential to achieve accelerated economic development

and growth. It’s anticipated that Kurdistan Regional Government consider the recommendations

from the Economic Development Assessment (EDA) to prioritized and implement given

recommendations in a timely manner” ("Kurdistan Region Economic Development Assessment",

2008, p.1). Furthermore, the role of KRG is important to support the local business and

organizations to grow and be able to be competitive. However, the government has already taken

steps to encourage local business and productions, but further development is requiring expanding

their capabilities.

In conclusion, the role of the state in economy and regulating it is important to bring

welfare and prosperity to society. thus, it is undisputable that the role of state cannot be ignored

but it also necessary to restrict and limit the scope of state innervation in the economy. so as for

the market to remain free and in equilibrium. Moreover. the role of KRG in economy has been

established in recent years to improve several sectors that has influence on the macroeconomy to

provide more opportunities and capabilities to be more compatible in the market that is ever

complex and unstable. Furthermore, swift developments, efficiency of market, peoples need,

economic and political system identifies the scope of intrusions of the government in the economy

by the new theoretical models and systems for economic development.

References

Cardinale, R. (2019). Theory and practice of State intervention: Italy, South Korea, and stages of
economic development. Structural Change and Economic Dynamics, 49, 206-
216.
Chen, Z., & Chen, G. C. (2019). The changing political economy of central state-owned oil
companies in China. The Pacific Review, 1-26.

Chipatuka, V., & Elischer, H. (2019). 4.2. 3 Zambia: Rights-based social protection: Getting the
politics and economics of social protection right. From international ivory towers
to national realities, 29(3), 50.

Creak, S., & Barney, K. (2018). Conceptualizing party-state governance and rule in
Laos. Journal of Contemporary Asia, 48(5), 693-716.
Cuneo, A. E. (2017). Heritage management challenges and changes in Northern Iraq after the
fall of Saddam Hussein: The rise of Kurdistan and the Islamic State
onslaught (Doctoral dissertation, Boston University).

Criekemans, D. (2020). Protodiplomacy: sub-state diplomacy and wannabe states. In Handbook

on the Politics of Small States. Edward Elgar Publishing.

Drab-Kurowska, A. (2018). State intervention in the context of creative

industries. Management , 22(1), 74-84

Heshmati, A. (2007). A model for industrial development of the federal region of Kurdistan:
science and technology policy, instruments, and institutions.

Hirono, M., Jiang, Y., & Lanteigne, M. (2019). China's New Roles and Behaviour in Conflict-
Affected Regions: Reconsidering Non-Interference and Non-Intervention. The
China Quarterly, 239, 573-593.

Kwon, J.K. and Kang, J.M., 2011. The East Asian model of economic development. Asian‐Pacific
Economic Literature, 25(2), pp.116-130.

Kurdistan Region Economic Development Assessment. (2008). Retrieved 23 June 2020, from
http://www.mop.gov.krd/resources/MoP%20Files/PDF%20Files/DCC/Studies/E
DA%20 Report_English.pdf.

Latzer, M., Saurwein, F., & Just, N. (2019). Governance-Choice Method: In Search of the
Appropriate Level of State Intervention. Palgrave Handbook of Methods for Media
Policy Research. Palgrave.

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Martínez‐Zarzoso, I., & Márquez‐Ramos, L. (2019). Exports and governance: Are the Middle East
and North Africa region different? The World Economy, 42(1), 143-174.
Mira, R., & Hammadache, A. (2017). Good governance and economic growth: A contribution to
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Journal of Middle Eastern and Islamic Studies, 11(3), 107-120.
Panda, S., & Nayak, S. S. (2019). Role of state in digitalization of economy-A futuristic analysis.
International Journal of Scientific Research , 8(9).

Sobczyński, M. (2019). Do we need state and what for? The role of the state in the modern
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Citations (0) References (17)

Do we need state and what for? The role of the

state in the modern World
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