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Role of Government in Economic Development


A government can participate in economic activities depends on the type of economic systems.

The capitalist economic system restricts the intervention of government in the economy.

Therefore even highly developed capitalist economies face various economic problems, such as economic instability, unemployment, and labor exploitation.


The main reason behind these problems is the profit maximization motive of organizations without any concern for economic welfare.

Therefore, the government intervention is necessary in capitalist economies for the eradication of unethical business practices, welfare of society, and economic stability.

On the other hand, underdeveloped countries usually adopt mixed economic structure. In these countries, even the basic requirements of individuals are not fulfilled. Therefore, underdeveloped countries face a large number of economic problems, such as poverty, less per capita income, and low standard of living, as compared to developed countries.

In such conditions, the government of underdeveloped countries needs to take several measures for the growth and development of economy. The prime function of the government in underdeveloped nations is to meet the basic requirements of individuals, such as schools, hospitals, colleges, transportation facilities, roads, and electricity.


These requirements of individuals involve a huge investment by the government. A nation whose basic needs are satisfied is able to attract foreign investments and encourage the growth of the private sector.

Over a passage of time, underdeveloped countries have realized that they are far behind the developed countries due to their adverse social, economic, and political conditions. Therefore, the government of underdeveloped countries has taken various measures to solve economic problems, so that economic growth and development can be achieved.

Some of the measures taken by government are as follows:

(a) Economic and Social Overheads:


Help in the economic growth and development of a country. Economic overheads include means of communication, transportation facilities, and electricity. On the other hand, social overheads comprise of educational, medical, and water facilities.

(b) Financial Facilities:

Act as an important tool in the economic development of a country. In underdeveloped countries, the savings of organizations and individuals are very less. Therefore, these savings cannot be utilized for economic development. For the utilization of these savings, the country requires to have a well-established banking system and other financing bodies.

The financial bodies along with the banking system are able to transfer the savings to industries. Here, government is required to establish more financial bodies for the economic development of the country.

(c) Direct Participation:

Constitutes an important measure taken by the government for economic development. The government directly intervenes in the economic development to support and regulate private business practices by formulating various policies. For example, in India, the government has established various public sector organizations in different fields, such as steel plant, electrical, fertilizers, and antibiotics under Industrial Policy Resolutions of 1948 and 1956. The profit generated from these organizations is utilized in the development of the country.

(d) Indirect Measures:

Refer to steps taken by the government to increase the growth of the country. It includes various policies, such as monetary, fiscal, and industrial relation policies.

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