Final version originally published in Forum for Social Economics by Taylor and Francis, © 2017 The

Association for Social Economics

https://doi.org/10.1080/07360932.2017.1356345
Forum for Social Economics, 2019 Vol. 48, No. 2, 176–193

Sustainable Economics: Understanding Market

and Government Roles
Abdulla Galadari
Khalifa University, Masdar Institute, Abu Dhabi, United Arab
Emirates

Abstract There has always been a debate on the roles of government and market
for economic growth and development. Economic development encompasses more
than just growth; it seeks the betterment of the standard of living and higher Human
Development Index. There is no single strategy that would be considered the best
solution for economic development. Market role and government intervention are both
necessary for economic development. Since the economy is dynamic, then the policies
adopted need to change according to the circumstances. It is argued that government
intervention is sometimes necessary to ensure basic economic development, even if
it essentially fails in economic growth in the short-term. Nonetheless, a good solution
between the roles of market and government is through finding a dynamic equilibrium
point between them. Therefore, the best policy is a policy that is resilient to change.
Keywords: government failure, market failure, public policy, regulation

INTRODUCTION
Many analysts argue for either government or market failures. However, I find either
argument very pessimistic because they focus only on the failures. Do we compare
apples with oranges, or do we accept both as nutritious and valuable? Apples provide
us with certain nutrients that are not available in oranges and vice versa, but that
does not necessarily make either of them better. One problem is that when economic
policies are implemented, they remain unchanged for some time, even when such a
policy would not be necessary anymore or counterproductive to economic growth
(Howlett, 1991, 2000, 2002; Kagan, 1997; Kagan & Axelrad, 1997). In other words,
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policies are sometimes inflexible and take time with government bureaucracy to
get them changed, if ever. One of the reasons are that ruling government parties are
typically of a certain economic philosophy and the only way to change is either if a
different ruling party is democratically elected (Corrales, 2000; Powell & Whitten,
1993), or somehow the ruling party changes its own philosophy, such as the eco-
nomic reforms in China in the 1990s (Dickson, 2000; Shirk, 1993).
There is a distinction between economic growth and economic development.
We must understand the difference between both and also understand the strengths
that the market and government can provide for each. Long-term growth is not pos-
sible without development. Without growth, there is no sustainable development.
Economic growth is a subset of economic development, while economic devel-
opment includes living standards, such as levels of literacy and education, health,
quality and availability of housing, and environmental standards. If the market
is better in growth, while the government is better in development, then both are
needed to sufficiently provide us with a more sustainable society. We do not live in a
utopian world, and it is unreasonable to think that any solution will provide us with
one. Hence, instead of criticizing failures of either the market or government, we
need to find solutions that capitalize on their strengths. Dempsey (1989) compares
various government and market systems. He also explains that extremism is not a
solution, when the world is an ever-changing pendulum. He states that the middle
ground would probably be the best solution. Business improvement districts (B.I.D.)
are briefly explored in this paper to see how effective or ineffective it is when both
the government and the market try to partner with one another.
If we are to consider the United Nations (U.N.) as the world’s largest federal
government that gives much of independence to its member states, then it might
possibly be the world’s largest dysfunctional government as well. However, given
all its inherent problems and issues, its conflicting dysfunctions and malfunctions,
its world of divided ideas and ideals, where will the world be today without it? The
Concert of Europe in the nineteenth century attempted to bring cooperation between
European states for security purposes after and in response to the Napoleonic Wars.
The League of Nations was established in response to the World War I, which then
developed to the United Nations in response to the World War II. Hence, those inter-
national organizations were established for security purposes in its broader sense,
which would include national security from foreign aggression, economic security,
and the development of a peaceful human community. None of these organizations
were either costless or fully functional. However, I do not think anyone can reasona-
bly claim that the world would be better off without them. The United Nations may
not always be an impartial arbitrator that can always enforce its own rulings and
judgments easily. However, it can be considered a forum to mediate conflicts. Not
only can we consider the United Nations as the largest dysfunctional government
in the world, but also its civil servants, who represent their own nations, are not

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looking after the public interest of humanity, but the selfish interests of their own
nations. It is difficult to argue against such a notion. Given all the inefficiencies of
the United Nations that are typically the reason to call it a government failure, it
still is unfair to state that the world’s development would have been better without
it. Maybe the United Nations is not helping economic growth directly, but assisting
in economic development, which invests in the human capital, infrastructure, and
peace building that are essential for any growth.

MARKET OR GOVERNMENT
Many economists debate the issues of market and government failures. Those who
argue either one, usually attempt to show how either a deregulated market or a
bigger government role works better. Krueger (1990), for examples, argues how
government acts as a hindrance to economic growth favoring a deregulated market.
She states that when government introduces new policy for regulation, either a new
group is created or an existing government department gets expanded. This means
that not only is regulation decreasing market output, but also adding unnecessary
cost. She also states that administrators would want to keep their jobs, just like
anybody else, and show that what they do is of great importance and advocate
for that policy or even increasing its regulation. These issues can be direct results
of self-interests of civil servants, including the implications of the iron triangle,
where the main objective is not necessarily the public good, but the self-interests
of bureaucratic agencies.
The implications of market success and role of government must be understood
within their context. There is a distinction between economic growth and develop-
ment. Possibly a market success can provide more economic growth, while govern-
ment success can provide more economic development. This paper attempts to show
that if we understand the difference between economic growth and development,
then we may better understand the roles of the market and government in each.
When comparing economic growth of North Korea and South Korea between
1971 and 2010, as shown in Figure 1, I find that S. Korea for the most part had a
much larger growth rate than that of N. Korea. For the untrained eyes, it would be
assumed that this can be used as evidence of government failure, as it would be
assumed that S. Korea had a stronger market policy than that of N. Korea. However,
such a generalization would ignore the fact that for the same time period, the
overall growth rate in China overwhelmingly exceeded that of the United States,
as shown in Figure 2, even though the United States had a stronger market policy.
In S. Korea, the government actually heavily intervened by adopting policies that
were highly selective to particular industries and sometimes to particular firms
(Datta-Chaudhury, 1990; Jenkins, 1991).

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Figure 1: Economic growth (%) in N. Korea and S. Korea between 1971 and 2010 (U.N.
Statistics Division)

Since 1978, China started to adopt economic reforms that are more market-ori-
ented. This actually helped the economic growth of the Chinese economy and in
many ways successful (Hay, Morris, Liu, & Shujie, 1994). Hence, it is incorrect
to assume that government control was alone the cause of economic growth in
China, since the market also played a major role. As China performed fairly well
in the Asian economic crisis in the late 1990s and the financial crisis that erupted
in 2008, Ma and Tian (2012) argue that it is a balanced market and government
power that has allowed China to succeed. Therefore, it is imperative to understand
the equilibrium between the balance of both government and the market. It is not a
matter of criticizing their failures, but understanding their strengths.
On the one hand, Krueger (1990) argues that in the 1970s and the 1980s, develop-
ing countries had unworkable economic policies when their respective governments
intervened in the market. On the other hand, Jenkins (1991) arrives to a different
conclusion when comparing government intervention with the development and
economic growth in Latin America and East Asia. He argues that it is not the
degree of government intervention that affects economic performance, but more
precisely the effectiveness of those interventions. He states that the high degree of
state autonomy in S. Korea provided by certain key factors, flexibility, selectivity,
coherence, and emphasis on promotion instead of regulation, actually assisted the
growth of its economy. However, he also shows that external elements have also

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Figure 2: Economic growth (%) in China and United States between 1971 and 2010 (U.N.
Statistics Division)

helped the economic growth of S. Korea, such as the weakening of the aristocracy
during the World War II by the Japanese and the existence of military threats in the
region, which infused the high expenditure on military and the determination to
grow economically for survival.
The effectiveness of government intervention was also argued by Datta-
Chaudhury (1990), when he compares the economic development of India and S.
Korea from the 1960s to the 1980s. He argues that in both cases there were huge
government interventions in the market to help it survive. He explains that per
capita, the Indian gross domestic product (GDP) grew only by 411% while the
S. Korean GDP grew by 1494% due to the different methods that their respective
governments have used to regulate the economy, even though the population grew
by 83 and 68%, respectively. This means that the S. Korean economy had rapidly
grown due to its economic policy, although its government control was far more
aggressive than that of India. He reports that more than two-thirds of the aggre-
gate investment funds were directly controlled by government. With a great level
of command in the capital market, S. Korea was able to channel investments to
desired directions. One major difference he identifies between India and S. Korea
in implementing government control is the lower level of bureaucracy in S. Korea,
increasing its efficiency.

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ECONOMIC GROWTH AND DEVELOPMENT

To find a solution, or a point of equilibrium, we must look at the root cause of
failures. We can treat symptoms of a problem, but if we do not understand its
root cause, then any relief provided is temporary. Krueger (1990) does not nec-
essarily argue against the existence of market failures. Her main argument is that
even if market failures exist, government failures significantly outweigh them. To
know which policy is best to ensure economic development, we must first define
economic development. Economic growth is usually understood as gross national
product (GNP) or GDP growth per capita that is beyond the inflation rate. Economic
development, on the other hand, has a broader sense that is far more complex and
multidimensional in nature, as shall be defined later.
Ghatak (2003, p. 23) distinguishes between economic growth and development
by giving an example that Kuwait’s economic growth may exceed that of the United
States, but the standard of living enjoyed by an average Kuwaiti is not the same as
an average ‘American.’According to the International Monetary Fund, the GDP per
capita in the United States still exceeds that of Kuwait in 2011. However, Ghatak
is not really examining the GDP per capita in absolute terms, but more precisely
its growth rate. This brings into question two issues that need to be understood,
(i) how do we compare economic growth with development, and (ii) what is the
definition of standard of living.
First, economic growth is a ratio. It is a percentage of change in GDP per capita.
If we look at the United States’ economic growth rate and compare it with Kuwait’s,
then perhaps Kuwait does have a higher rate of growth in the past few decades due
to the increase in oil prices and production. Hence, if we are comparing economic
growth, which is a percentage change, can we claim that economic development
did not enjoy the same growth rate, if we are only looking at it in absolute terms?
Maybe the average Kuwaiti does not yet enjoy the same standard of living that an
average ‘American’ does, but we cannot compare absolute terms with percentages.
Perhaps the question should be different, because economic development has also
changed in Kuwait in the past decades. Is the change in economic development in
Kuwait coinciding with its economic growth? Angola’s economic growth may also
seem to be booming today, and its growth rate is exceeding many of the developed
nations. Angola’s rate of economic development is also changing and moving for-
ward even if it has not yet reached the same standard of living as that enjoyed in
developed nations.
When comparing ‘standard of living’ between nations, we need to define what
we mean by standard, especially that being used by the Human Development Index
(HDI). The HDI is used as a method to compare between nations to understand the
standard of living and quality of life enjoyed by people. Quality of life is subjective
and intangible. What a person in one country values may not be the same as what

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another person values. One pitfall of the HDI was its exclusion for variation of
aggregate income in each country, or, in other words, the disparity between the rich
and the poor. To take that into consideration, in 2010, an inequality-adjusted HDI
was formulated (Alkire & Foster, 2010). According to a study by Liu (2009), she
had noted that suicide rates are lowest in countries with the lowest HDI, though not
generally. She notes that the Philippines and Sri Lanka are both with low HDI, but
the suicide rate in the Philippines is as low as 0.5 per 100,000, whereas the rate is
as high as 33.2 in Sri Lanka. Nonetheless, the lowest suicide rates are dominated by
those with the lowest HDI, while the highest suicide rates are dominated by those
with the highest HDI Suicide rates are by no means a measure of overall happiness.
There could be countries that culturally deplore the act due to religious or ethical
implications, while others do not necessarily have a heritage that deplores it, such
as Japan. Many of the countries with low HDI may not enjoy the modern medicine
of psychiatry or have qualified psychologists. Maybe their culture is family oriented
and an individual’s problem is a problem shared by the family. This whole concept
is simply to formulate one argument. We cannot use the same standards when
comparing nations. If that is the case, then what is ‘standard’ in standard of living?
Economic development is not only defined as the wealth of a nation as a mone-
tary object; it also includes pillars of society that make economic growth possible.
Human capital is essential for growth. Henceforth, investing in human capital may
not necessarily provide growth immediately, but it does build a society that can
provide the essential growth in the long-term. Investing in human capital would
include an investment in health and education. Critical infrastructure is also impor-
tant in development, as well as national security along with the critical infrastructure
that allows it to exist. Nafziger (2012, p. 14) defines economic development as the
following:

A major goal of poor countries is economic development or economic growth. The two
terms are not identical. Growth may be necessary but not sufficient for development.
Economic growth refers to increase in a country’s production or income per capita.
Production is usually measured by GNP, an economy’s total output of goods and services.
Economic development refers to economic growth accompanied by changes in the mate-
rial well-being of the poorer half of the population, a decline in agriculture’s share and an
increase in services and industry’s share of GNP, an increase in the education and skills of
the labor force, and substantial technical advances originating within the country.

White (2009, pp. 5–6) also emphasizes the role research plays in economic devel-
opment. It covers the inefficiencies in all the required components for economic
growth, such as life expectancy, morbidity, and mortality rates, as well as improve-
ment in welfare.

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Modern economic development is more than simply an increase in income or output,

whether considered per capita or in absolute terms. The process of economic development
has as its core characteristic the ability of the relevant society to generate and/or absorb a
rapid rate of innovation, mostly technical in nature but also organizational. (White, 2009,
pp. 5–6)

THE ROOT PROBLEMS OF FAILURE

Krueger (1990) suggests the main problems behind government failure are ineffi-
ciencies and corruption. She implies that proponents of market failures have unrea-
sonable assumptions of a utopian society, where government is omniscient, selfless,
and can intervene without cost. To simplify the real problem, it really comes down
to money. If the government intervenes, then it will cost, which causes inefficiency.
In other words, the more aerodynamic the government can be while reducing inter-
nal friction in the form of cost and corruption, the better it becomes. The bigger
the government, the more money it consumes for it to operate, and hence a loss of
efficiency in managing public funds.
Economists who argue about market failure may claim that the market some-
times fails to produce public goods, giving rise to natural monopolies, disenfran-
chising parties through information asymmetry, or polarizing income distribution
(Williamson, 1971). In other words, to simplify the problem, it comes down to
fairness. Economists call it Pareto-optimality, but it really reduces down to the
common word of fairness. If the market does not allow price fairness due to monop-
oly or fair competition, then it fails. If it fails to produce public goods, because
it is not worth the investment when better potentials exist, it causes disparity, and
therefore, unfairness.
The root problems are oversimplified, but sometimes we need to simplify prob-
lems to be able to solve them. On one hand, we have the problem of fairness. On the
other, we have costs associated to reach fairness. To have economic growth, we need
to reduce costs. To achieve fairness, we need economic development. Accordingly,
we need the market to help reduce costs, while also needing government to help
achieve fairness.
Government expenditure affects the economy. However, sometimes the method of
government funding and financing plays a major role in its effectiveness. According
to Romer (1991) by World War II, government spending was very high. The war
was not the first stimulus for ending the Great Depression, as the high inflow of
gold increased money supply in the mid to late 1930s lowering interest rates and
encouraging investment. Nonetheless, the war caused a time of great economic
prosperity. Even though war spending by government is a stimulus to the economy,

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its efficiency is dependent on financing and funding policies. Ohanian (1997) com-
pares the difference between financing sought by the United States government in
World War II and the Korean War. World War II was mainly funded by government
debt, while the Korean War was funded by raising taxes. He argues that it is more
effective for government to finance through debt. Ohanian simplifies the issue by
excluding other factors. There is a possibility that we may sometimes reach a log-
arithmic growth rate. Because World War II was preceded by the Great Depression,
there was perhaps much more room for growth than at the time of the Korean War.
Nonetheless, if Ohanian is correct in his conclusions, then it would support Jenkins’
concept that it is not simply government intervention that plays a role in economic
growth, but the effectiveness of those interventions.
Consequently, understanding policy instrument design and implementation is
important for a successful intervention, if needed (Trebilcock & Hartle, 1982).
As Howlett (2009) suggests, there are two main reasons for economic policies:
(i) to correct market failure, and (ii) to correct government failure. These may be
established through (i) identifying the failure and the mechanism to correct it, (ii)
choosing the optimal mechanism that can theoretically solve the problem, and (iii)
implementing the mechanism successfully (Le Grand, 1991; Mandell, 2008; Wolf,
1987; Zeckhauser, 1981).

GROWTH OR DEVELOPMENT
Afonso and Furceri (2008) show that government size causes inefficiencies the
bigger it gets because public consumption increases, making a negative impact
on economic growth. They analyze data from the European Union and arrive at
similar conclusions as those who argue about government failures, such as Krueger
(1990) and Holcombe (1997). However, there is one important issue that we need
to take into account. Economic growth and development are two distinct features
of the economy. If we are to agree that government intervention can be negative
for economic growth due to inefficiencies, then does it have the same impact on
economic development?
Ali and Pernia (2003) suggest that government expenditure on infrastructure
can help alleviate poverty, because it allows for long-term growth. Their argument
is not necessarily focused only on economic growth, but more precisely develop-
ment though they call it growth. Economic development can bring growth, but not
exclusively.
Would the market provide development in poor communities that do not have
as much demand as other potential markets without the necessary incentives or
subsidies? Certain infrastructure investments to rural and poor locations, such as
roads, are crucial according to Ali and Pernia in the alleviation of poverty. If travel

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demand is not high, then revenue from tolls may not be an option. Even if a toll is
imposed, it would increase the cost of trade in those locations, which would not
help alleviate the problem. Therefore, it is essential to have government intervene to
ensure more economic development, which could provide growth in the long-term.
Government intervention, which seeks fairness, is important for economic devel-
opment. For example, health is an important factor for economic development.
Pharmaceutical companies may have a monopoly over certain medication through
intellectual property rights. With such a monopoly, they can play according to
market factors when pricing their product. It really depends on supply and demand.
However, what is the value of health? The demand is dependent on the number of
patients, but the supply is in the hands of the pharmaceutical companies. Therefore,
they can artificially change the market to arrive at a price that pleases their share-
holders, especially if the demand is dependent on the value of health, which is
usually high. As in any market economy, pharmaceutical companies are driven by
profit. Some patients may be unable to afford medication. Therefore, it is important
for such a market to be regulated because its primary goal is economic development,
not just growth. With a healthier population, productivity can increase, because the
labor market is more efficient. As stated earlier, even though economic develop-
ment helps growth, it is not its sole objective, but it is its outcome in the long-term.
However, we must not disregard the concept that without profit, pharmaceutical
companies will not have an incentive for future pharmaceutical innovations. Thus,
we need to balance both. Nonetheless, it is important to consider Article 25 of the
Universal Declaration of Human Rights where healthcare is a basic human right,
which the market alone cannot provide:

Everyone has the right to a standard of living adequate for the health and well-being of
himself and of his family, including food, clothing, housing and medical care and necessary
social services, and the right to security in the event of unemployment, sickness, disability,
widowhood, old age or other lack of livelihood in circumstances beyond his control. (U.N.
General Assembly 1948, Resolution 217 A-III)

Education is another crucial aspect in economic development. There can be private

education that is driven by the market. Again, it can be determined by supply and
demand. However, if there were no other options, then some families may not be
able to afford education. Without education, the labor force would be smaller,
leading to less productivity, which lowers economic growth. If poor families cannot
afford education and without education their children cannot have better employ-
ment opportunities in the future, then they will remain in this vicious cycle. It seems
to be imperative for government to intervene and invest in education, but not because
of growth. Its purpose is development, which can lead to growth in the long-term.
Article 26 of the Universal Declaration of Human Rights states the following:

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Everyone has the right to education. Education shall be free, at least in the elementary and
fundamental stages. Elementary education shall be compulsory. Technical and professional
education shall be made generally available and higher education shall be equally accessible
to all on the basis of merit. (U.N. General Assembly 1948, Resolution 217 A-III)

Infrastructure investment needs to be dissected into two goals. If the goal is eco-
nomic development, then similar to health and education sectors, it is imperative
for the government to intervene and invest. Even though Holcombe (1997) argues
that with simple real-world observation, many public goods are successfully pro-
duced in the private sector and not through government, with simpler real-world
observation, we can also see the opposite when it comes to deregulating pharma-
ceutical companies or fully privatizing the education sector. This does not mean
that the market can provide all that is necessary for economic development, such
as the case with pharmaceutical companies or education. Similarly, if the market
fails to provide critical infrastructure, then it is essential for government interven-
tion for the purposes of economic development, as Ali and Pernia (2003) suggest.
Economists need to realize that extremism is essentially unhelpful to humanity’s
development and that the middle path may be necessary (Dempsey, 1989). We
can neither deny failures nor successes of both the government and the market.
Perhaps the market can provide better economic growth. However, as shown,
government is not simply about growth, but about economic development that
cannot always be done without its intervention. Sometimes, the market can also
cause inadvertent externalities, such as environmental impacts, which can hinder
future economic development. In such cases, the government may sometimes need
to intervene with policies that regulate the market, as described by Gillingham
and Sweeney (2010). They emphasize the importance of government funding
of research in renewable energy to counter market externalities. Accordingly,
since research is defined as a pillar of economic development by White (2009),
as stated earlier, then we must realize that government is essentially intervening
primarily for development, and not necessarily for growth. Nonetheless, growth
could become a later offshoot of development. The market can provide many
services and contribute to the economic growth. However, it is the government’s
role to intervene in places where it succeeds, such as providing the necessary
regulations and infrastructure investments that contribute to economic develop-
ment by ensuring fairness and social equality. Growth without development is
not sustainable. Development without growth is equally not sustainable. The
market and the government need to be merged so that the strength that each has
can contribute positively to the economy.

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GOVERNMENT INEFFICIENCY
Although government is important to ensure economic development, it still has
shortfalls. As Krueger (1990) states, the government is neither omniscient, selfless,
nor can it intervene without cost. Civil servants sometimes want legislation and
regulation that would appear as if their role is important. It would give them job
security. It can also help them expand to give themselves improved opportunities.
Corruption has usually been defined in the context of bribery. However, motives of
civil servants who are not selfless can also be understood as some form of corrup-
tion. As the market may be subject to Pareto inefficiency, when some people gain
at someone else’s expense, then civil servants can also make gains at the public’s
expense. It is not just bribery that is a cause of corruption, but more generally self-
ishness. This is especially true with civil servants, because they are supposed to be
serving the public and not themselves. If they do not work for the overall good of
the public, and instead seek their own gain and fame, then it is a big problem. If their
main objective is to prove the importance of their role and expand their department
just so that they feel satisfied with more power and ensure their job security, then
that is a form of corruption. Because receiving a larger budget depends on having
greater responsibilities, public officials attempt to make (or fake) new responsibil-
ities. Public officials may want to take more responsibilities, instead of looking at
the overall public interest. The bureaucracy spent is not without cost, just because
public officials want to expand their authority.
Sometimes government departments are pushed to increase their own revenues,
instead of solely relying on the public treasury and budget. Therefore, government
officials who head different departments are usually monitored for how much reve-
nue they make compared to their budget as part of ensuring efficiency. In addition,
government officials start to make new unnecessary regulations to increase revenue.
Civil servants are not selfless, though with some exceptions. Instead of looking
for what is best for the public, they may be corrupt by prioritizing their own job
security and power. If government regulations are in place to ensure that the market
is reasonable and fair, then who regulates government for it also to be reasonable
and fair?
The issue of mismanagement and corruption, in its broader sense, is not unique to
civil servants. Corporate executives are also not selfless and they do not always seek
what is best for the corporation, but what is best for themselves. Because bonuses
are dependent on the annual performance of a corporation, then executives may be
more interested in making decisions that provide great short-term performance, even
if such decisions do not provide good long-term performance. Because executives
are rewarded more for short-term performance, as bonus schemes are dependent on
that, then they will attempt to maximize their reward. This is natural psychological
behavior in corporate management (Galadari, 2011; Narayanan, 1985; Trevino &

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Youngblood, 1990). If the system is made in a way that rewards good short-term
decisions and punishes bad ones, regardless of the effect in the long-term, then is
it the executives who are corrupt, or is it the system that is creating corrupt exec-
utives? Hence, the same issues that create inefficiencies in government can also
exist in the market. Just as there needs to be corporate governance, there needs
to be government governance. Accountability in corporations and government is
important to decrease inefficiencies. Several empirical data suggest the existence
of government failures in different echelons of government (Byrnes, Dollery, &
Wallis, 2001; Winston, 2000).
Non-Government Organizations (N.G.O.) can sometimes act as a watchdog to
government corruptions. According to a survey of N.G.Os, Carr and Outhwaite
(2011) report that though N.G.Os participation in anti-corruption is theoretically
plausible, it is not actively practiced beyond lobbying for laws and ethics of con-
duct. There are already laws and ethics of conduct. If they are not being enforced,
then they are practically ineffective. Unfortunately, the definition of corruption in
most literature is usually specific exclusively to bribery and not the self-interest of
civil servants who seek their own betterment instead of the public interest, without
necessarily taking bribes.
Arguably, creating a watchdog for government is itself a source of inefficiency,
and perhaps only increases government inefficiency. Physically, inefficiencies are
caused by friction. Due to air friction, airplanes are built to be more aerodynamic
to increase their efficiency. According to Newton’s first law of motion, an object
in motion continues in motion, unless a force compels it to change. Without the
force of friction in the air, an airplane will continue in motion, without the need
to exert additional force, making it more efficient. However, can we practically
remove friction completely? Scientifically, humanity has learnt to reduce friction
to increase efficiency, but at the same time uses it to its advantage. Without friction
between tires and the pavement, can a vehicle stop its motion? Actually, without
friction, we would not even be able to walk. I am not arguing that inefficiency is
good. However, it is a fact of life, and if we cannot completely eradicate it, then
we need to think of innovative ways for it to work to the advantage of the public
interest. One of such innovative ways of public–private partnership in development
is BIDs, although it is not without downfalls itself.

MARKET FAILURE
Though there are many government inefficiencies, an economy cannot fully depend
on the market either due to its own failure in social inequality and externalities
(Weeden & Grusky, 2014). Market regulations existed as far as the ancient civiliza-
tions, where standardized measurements of distance (for land surveying) or weights

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were needed (Lowry, 2003). Without regulation, if one company’s externality is

the pollution of a water body, in which local villagers obtain their food from, then
there can easily be a food insecurity due to market failure (Rocha, 2007). Zerbe
and McCurdy (1999) argue that market failure theories are flawed, because they are
hypothetical without empirical evidence. Though there are empirical data to prove
the futility of government’s efficiency (Winston, 2000), the same can now also be
said on the inevitability of market inefficiency as well (Charitou, Neophytou, &
Charalambous, 2004). As such, the concept of market failure cannot be denied, as
we cannot also deny the concept of government inefficiencies.
If the government is not without its inefficiencies, such as selfishness and cor-
ruption, then these can be easily said to the market as well. Businesses are usually,
though not always, in the market to make money or profit. Hence, its main outlook
is in the well-being of itself. As such, it is not in the business of social welfare nor
should it be. However, if someone’s business is creating an externality and inad-
vertently causing mishaps to others, then it is only fair for such business to address
such externality. If without government intervention, this might be done through
the market force, such as consumers boycotting the business to put pressure on it.
Otherwise, the business can try to find a more profitable solution that would at the
same time reduce their externality. As such, it is reward–punishment mechanism
that the market can impose upon itself. Industry self-regulation do exist, and can
be successful not without some kind of fear of government oversight or political
action (Garvin, 1983; Maxwell, Lyon, & Hackett, 2000). However, when humans
build their houses, how many of them thought about the ants’ houses that they are
destroying to build their own? Unfortunately, there are businesses who might view
certain sectors affected in society due to their externalities no differently.
One of the mishaps of economic theory is the notion of money. Does social
injustice and inequality exist due to people’s unwillingness to work smarter? In other
words, successful businesses became successful because they understood consum-
ers and worked hard in providing them with what they need. However, sometimes
society fails to understand the definition of success. Is the definition of success
related to the number in GDP per capita, or the amount of profit a business makes,
or the return on investment as a percentage of net present value? Is the success of
a human being dependent on their net worth? Is a person who has a great talent for
music not smart enough to sell a service or product to consumers when consumers
are unwilling to listen to that person’s music? Perhaps Copernicus would have made
far more money selling a new geocentric model than a heliocentric model. Would
that have made him more successful, because his net worth would have been greater?
As stated earlier, it is not economic growth alone that is a measure of success, but
that of economic development. The European Renaissance did not occur because
suddenly entrepreneurs became multi-billion dollar industries in Europe (and that is
not to say that such did not exist, such as the Dutch or British East India Companies).

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However, the renaissance occurred due to economic development, where more

masses of the population became immersed with the sciences, philosophy, and the
arts. These factors cannot be measured in monetary value. The Renaissance was
more of a cultural revolution than an economic one, and it is this cultural revolution
that brought forth economic theories.

CONCLUSION
We must agree to a priori that we do not live in a utopian world. There is no such
thing as a solution that solves problems completely. As Jessop (1998, p. 43) puts it,
“In conclusion I want to suggest that markets, states, and governance all fail. That is
not surprising because failure is a central feature of all social relations.” Although
Jessop emphasizes failure, I would like to emphasize their strengths. Every type of
solution that we have as humanity is a way to fill gaps of other problems, even if
this in itself creates different problems. We only hope that the problems they try to
solve outweigh the inherent problems that exist within. This is similar to medica-
tions that try to treat diseases. Medications are not without side effects. Those side
effects may also be debilitating. However, we just hope that what the medication
is trying to treat is a bigger problem than the side effects. Sometimes, it may even
be necessary to have other medications to try to treat side effects of yet another.
Patients may have no other choice but to try to tolerate many of the side effects.
The existence of side effects is not always a reason to stop treatment.
A deregulated market causes social disparity between the rich and the poor.
When adopting an inequality-adjusted HDI, it becomes important for a society’s
development to be fair. The market may not be able to provide fairness in society,
in which government would need to intervene. At the very least, the government is
sometimes needed to manage welfare, healthcare, and education, as articulated in
the Universal Declaration of Human Rights.
If we understand how the market can affect economic growth and how govern-
ment can affect economic development, and how both provide feedback to each
other, then we will better understand the role that each can have in society. There is
no perfect solution. Solutions are only medications that are not without side effects.
What we try to do as humanity is to identify a middle path and not be extremists
such that we can capitalize on the strengths we have in order to find solutions with
fewer side effects. As such, the government needs to be flexible. Therefore, if ruling
parties are not resilient to economic changes by changing their own economic phi-
losophies as required with the times, then economic development may be hindered
and political conflict may arise.
Instead of staunchly defending or criticizing one system or another, we need to
understand the natural dynamism of the economy and adopt the necessary policies

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accordingly. How much should the government intervene in the market cannot be
written on stone today and applied for many decades. What is best for today may not
be the best a decade later. The dynamic circumstances of the economy will always
change the point of equilibrium. The strongest policy is, therefore, the policy that
can be changed for an ever-changing economy. There needs to be future research
in computing the point of equilibrium between market and government policies.

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