In Economics, the term developing economy is applied only to the underdeveloped economies. There is, always, in every economy, a natural rate of growth. This corresponds to the rate which results from improvements and increases in the factors that determine production. There is, strictly speaking, no deliberate effort on the part of the economy to bring them about. It is surely a deliberate effort on the part of certain individuals but, even in their case, it is the natural outcome of their participation in the process of production. This natural rate of growth is so low that it is more or less offset by the increase in the population of the country in question. Therefore, there is hardly any growth of the economy. The standard of living of the people, the per capita consumption level, remains more or less static. Such an economy is termed as a stagnant economy. Thus a developing economy is the one which tries to pull itself out of stagnation. In other words, a developing economy is the one which is making efforts to outstrip nature in the field of economic growth.
The emphasis of a developing country. Therefore, is obviously on increasing its national output at a faster rate than it would have otherwise increased. This idea is not very old. Even in the 19th century, it was believed that there should be no interference in economic activity. Since interference could come only from authority, i.e. state, it was advocated that the state should keep itself aloof from the working of economic forces. This policy was known as that of laissez-faire. Events all over the world in the economic -field proved that the demands of economic growth of a welfare state call for state interference. The state has a responsibility regarding the working of economic forces and the nature and the extent of economic growth.
The economy working under the policy of laissez-faire is called a free market economy. It is ruled by the forces of demand and e supply. The demand is determined largely by consumers and supply largely by the producers. Therefore, the state has no place in the working of this economy except in cases where it enters into the market as a consumer. This economy is regulated by private individuals.
The individuals have caprices and cannot, in a welfare state, be invested with the power of controlling the economy. The state shall have no take upon itself this function. The state has to step in to check the foulness and promote the fairness of economic forces. This could be done through legislation and also through physical and monetary measures and by direct participation of the state in economic activity. That was the origin of the public sector. This sector has assumed a significant place in the economies of states opposed to socialization of all means of production. The U.S.A. which has at present the most capitalistic economy has a fairly large public sector worked by different boards and corporations.
The most important of these bodies in the context of a developing economy is the public works programmes which are essential to exploit the natural resources of the country. These works include river valley projects and mineral development corporations. The river valley projects serve, the twin purposes of supplying water for irrigation and of a generation of electric power. Irrigation is absolutely necessary for agriculture and agriculture is the soundest base for any economy. Electric power is the pre-requisite for industrialization. Therefore, these projects serve as an essential foundation for the development of the economy.
Such projects cannot be generally undertaken by private individuals mainly because they involve huge amounts of capital, mostly beyond the capacity of private individuals and they have a long period of gestation. Mineral development corporations are more or less exploratory bodies which undertake an exploration of minerals in the country and after finding deposits, which could be economically worked, often pass them on to the private entrepreneurs. This activity is very essential for the economy but the private entrepreneurs would not be prepared to undertake this because of the uncertainty of results. So, the public sector must step in here.
The second set of bodies is the development corporations operating in the field of key and basic industries such as the production of iron and steel, fertilizers and manufacture of machine tools and heavy machinery and other industries that are not likely to be immediately painful. The state-owned enterprises will be able to supply technical know-how and advice. They can also sponsor-training programmes and research by setting up these enterprises, These corporations may also prevent decay of any industry which may be kept alive in public interests. Such corporations can also secure loans from the international, bodies1.B.R.D.I.F.C. and C.D.A-for helping development. Lastly, these corporations can help in the setting up of small scale and cottage industries which bring about an increase in national production and provide a good deal of employment.
The third set of bodies provides finance. To meet the requirements of finance of the private sector State Finance Corporations are set up. They give loans to private investors on convenient terms. They can serve the double purpose of expanding and directing the private enterprise. In Pakistan, the Industrial Finance Corporation perform this function.
Finance is required not only for industrial but also for agricultural development. Private agencies of finance for rural areas are the traditional money-lenders. These people are unscrupulous and charge exorbitant rates of interest. The villagers have been squeezed for centuries by these powerful sharks. The illiteracy of the villagers had aggravated the evil because the poor debtor would not know on what document he was putting his thumb-impression. In many cases, lands went to the money-lenders because of the almost impossible terms in the documents. State legislation is of little help. Therefore, it is absolutely a must that the state should directly enter into the field of rural credit
This can be achieved both through banks and housing corporations. Whereas the former supply loans at reasonable rates of interest, the latter provide a substantial amount of money by keeping the produce in their modern godowns. The latter helps the farmers greatly in getting a good price for the product because they would not be in a hurry to dispose it off. In Pakistan, the Agricultural Development Bank of Pakistan provides credit to farmers by setting up its branches in rural areas.
The State Trading Corporation is a different category. The purposes of setting up such a corporation are mainly two-to facilitate trade with foreign countries and to root out the unhealthy practices indulged in by the private traders. It executęs barter agreements and other deals with socialist countries when there is a shortage of foreign exchange. It has been shown by experience that the private traders misuse the trust reposed in them and supply goods of a quality lower than that of the samples. sent. If the trade is between private parties on both sides, there are some other abuses also to which it is open. The private traders misuse their licenses in many ways. Besides, it is a common practice that some under-invoicing is resorted to and the accounts are settled secretly.
State trading in the field of import and export has some other advantages too. It does away with unhealthy cut-throat competition among the traders inside the country. Also, because of bulk supplies, better terms can be secured. This mode of trading also renders it, possible for the state to bring about adjustments in the quality and quantity of imports and exports necessitated by the exigencies of a developing economy.
Viewed from all these angles, the public sector has a very important role to play in the developing economy of a welfare state. The public sector in an economy is the Socialist sector whereas the private sector is the capitalist sector. Therefore when the two exist side by side the advantages of both the systems are repeated, doing away with the drawbacks of each. Since this arrangement accelerates the rate of development, it can be said with certainty that the public sector is a must in a developing economy.