The involvement of the government in economic activities is significant since it influences the economy as well as prosperity of a nation. Some of the institutions supported by governments are establishments for macroeconomic stabilization, regulatory organizations, institutes for social insurance and conflict management (Borisova & Simons, 2012). Notably, the political establishments in different countries who are trade partners influence their respective economies. Similarly, countries with different political systems can still trade by harmonizing their differences for the sake of economic prosperity (Hacker & O’Leary, 2012).
In developing countries, such as those South America, Africa and Asia, the respective governments have to be involved in the countries’ economic matters to hasten growth and development. It should be noted that a government can address structural failures within their economy (Christiansen & Koeman, 2015). They can do this by introducing subsidies targeting particular sectors of the economy, coordinating investment activities, as well as carrying out direct investments from budgetary allocations. In developing nations, there are few private entrepreneurs. In such cases, governments have to carry out entrepreneurial tasks. They also have to encourage private industrialists to invest in their economies (Siddiqui, 2007). A government can attract investors by manipulating the rates of return from private investment via direct government subsidies (Gregory & Stuart, 2014). They can also organize for joint government-private projects and promote management training programs (Twigg & Schecter, 2003).
The East Asian countries have governments that control their economy. Over time, some of these countries have been successful. China, for instance, managed to achieve success by shifting from import-substitution to export promotion. It did that by undertaking a set of market friendly institutional and policy reforms (Forte, Mudambi & Navarra, 2014). Most emerging economies have continued to invest in their countries’ infrastructure and human capital. For example, China has invested heavily on its transport infrastructure. The country developed new highway. The Chinese also improved their railway system (Mankiw, 2011). When it comes to human capital, they have ensured that most employees get proper housing so that their workers live comfortably to be productive. Other states have also been involved in the direct and indirect promotion of selective industrial policy (Thornton, 2013). Committed governments play a major role in promoting and managing successful reforms. The reason behind this is because if a government is not truly committed to reform efforts, they will end up working against it (Ekeh, 2009).
Economic growth is also affected by the political institution. Issues such as democratic or autocratic rules impact the liberalization of markets. Research shows that countries with democratic regimes are more likely to experience greater economic growth than those under autocratic rules (Semmler, 2011). A perfect example of a country whose economy has been adversely affected by an autocratic leader is North Korea. President Kim Jon Un has passed policies which affect his country’s economy negatively (Cheloukhine & Haberfeld, 2010). However, countries such as Libya prospered under an autocratic leader. President Gadhafi nationalized the country’s oil. His sound economic policies led to Libya’s economic prosperity (Lane, Oding & Welfens, 2003).
The involvement of a state in economic matters influences its growth and development. It is the role of the state to formulate policies that benefit its people; good policies lead to prosperity while poorly executed strategies impoverish the masses. In Russia, the economy was affected by maladministration, corruption, awful rule of law, pitiable protection of property rights and poor infrastructure (Acemoglu & Robinson, 2012). Countries such as the United States adopted policies that allowed for relatively high levels of economic freedom. In fact, that is the reason why the U.S. is considered one of the most prosperous countries in the world (Needle, 2010).
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Cheloukhine, S., & Haberfeld, M. R. (2010). Russian organized corruption networks and their international trajectories. New York: Springer.
Christiansen, B., & Koeman, J. (2015). Nationalism, cultural indoctrination, and economic prosperity in the digital age.
Ekeh, L. U. (2009). Industrialization and national prosperity: (lessons for the developing countries). London: Luzek Publishing.
Forte, F., Mudambi, R., & Navarra, P. (2014). A handbook of alternative theories of public economics.
Gregory, P. R., & Stuart, R. C. (2014). The global economy and its economic systems. Mason, OH: South-Western Cengage Learning.
Hacker, J. S., & O’Leary, A. (2012). Shared responsibility, shared risk: Government, markets and social policy in the twenty-first century. New York: Oxford University Press.
Lane, T., Oding, N., & Welfens, P. J. J. (2003). Real and Financial Economic Dynamics in Russia and Eastern Europe. Berlin, Heidelberg: Springer Berlin Heidelberg.
Mankiw, N. G. (2011). Principles of economics. Mason, Ohio: Thomson South-Western.
Needle, D. (2010). Business in context: An introduction to business and its environment. Andover: South-Western Cengage Learning.
Semmler, W. (2011). Asset Prices, Booms and Recessions: Financial Economics from a Dynamic Perspective. Berlin: Springer Berlin.
Siddiqui, A. (2007). India and South Asia: Economic developments in the age of globalization. Armonk, N.Y: M.E. Sharpe.
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Twigg, J. L., & Schecter, K. (2003). Social capital and social cohesion in post-Soviet Russia. Armonk, N.Y: M.E. Sharpe.
