The Role of the Public Sector

Herisadel Flores
FIC, PA 131 WFV

For class discussion only

Not for quotation

The Role of the Public Sector

Public Fiscal Administration
Generally refers to the formulation,
implementation, and evaluation of policies
and decisions on taxation and revenue
administration; resource allocation,
budgeting and public expenditure; public
borrowing and debt management;
accounting and auditing.

Public Sector Economics

Why

does the govt engage in some

economic activities and not others?
Why has the scope of its activities changed
over the past hundred years, and why does it
have different roles in different countries?
Does the government do too much?
Does it do well what it attempts to do?
Could it perform its economic role more
efficiently?

Mixed Economy
many

economic activities are undertaken by

private firms, others by the govt
government alters behavior of the private
sector through regulations, taxes and
subsidies

Evolution of the Role of the

Government
Primitive
Kings

and God-Kings, Emperors and Slaves

Medieval (Feudalism)
Capitalism

The Role of the Public Sector

Mercantilists (18th century French economists)

Governments should actively promote trade and

industry
Adam Smith

Wrote The Wealth of Nations (1776)

Argued for a limited role for government

Invisible Hand

The Role of the Public Sector

We hold these truths to be self-evident, that all men
are created equal, that they are endowed by their
Creator with certain inalienable rights, that among
these are life, liberty and the pursuit of
happiness. That to secure these rights,
governments are instituted among men, deriving
their just powers from the consent of the governed.
-- U.S. Declaration of Independence (1776)

The Role of the Public Sector

John Stuart Mill (1806-1873)
Laissez faire doctrine
Karl Marx (1818-1883)
Advocated greater role for the state in controlling the means of
production
Robert Owen (1771-1858)
Solution is neither in the state nor in private enterprise, but in
smaller groups of individuals getting together and acting
cooperatively for their mutual interest

The Role of the Public Sector

Great Depression (1930s)
Unemployment rate reached 25 percent
National output fell by about a third
Government was pressured to do something
John Maynard Keynes (1883-1946)
Government should and could do something about
economic slumps

New Deal in the United States

Congressional

acts and Presidential

executive orders during the term of Franklin
Roosevelt (1933-37)
A variety of legislation designed to alleviate
many specific problems: unemployment
insurance, social security, federal insurance
for depositors, federal programs aimed at
supporting agricultural prices, and a host of
other programs aimed at a variety of social
and economic objectives

The Role of the Public Sector

War on Poverty (1960s)
Pres. Lyndon B. Johnson
Many Americans were trapped in poverty despite the economic
prosperity experienced by the U.S.
Inadequate education, bleak job prospects
Good intentions not necessarily produce good results
Welfare system was massively overhauled in 1996
Government should not abandon efforts to solve major social
and economic problems, rather
Greater care must be taken in the appropriate design of
government programs

The Role of the Public Sector

Major Reasons for Government Failures
1.

Limited information

Consequences of actions are complicated and

difficult to foresee
E.g. health insurance

The Role of the Public Sector

Major Reasons for Government Failures
2. Limited control over private market responses

Lack of control mechanisms

E.g. tax incentives, smuggling

The Role of the Public Sector

3. Limited control over bureaucracy
Congress

writes the law

Bureaucrats write the Implementing Rules
and Regulations (IRR)
Principal-agent problem

The Role of the Public Sector

4. Limitations imposed by political process
Varying

political objectives despite full

information
E.g. Special interest groups influence on
legislators

The Role of the Public Sector

Markets often fail, but governments often do
not succeed in correcting the failures of the
market.
Emerging Consensus
Rethinking of the role of government has
been reflected in two initiatives: deregulation
and privatization

The Role of the Public Sector

Deregulation
While there is a need for regulation, many
regulations were overly burdensome, their
benefits less than their costs, and there
might be more effective ways of obtaining the
desired objectives

Downstream Oil Industry Deregulation Act of 1998

(RA 8479)

The Role of the Public Sector

Privatization
The turning over to the private sector
activities previously undertaken by
government.
Some of the privatization initiatives of the
Phil. government are:

Water services in Metro Manila

Various real estates of the government such as
Fort Bonifacio

Rethinking of the Deregulation and

Privatization Policies of the Govt
In

the Philippines, continuous debate hound

the policies of deregulation and privatization
In the U.S., new perspectives emerge in light
of important issues in deregulation and
privatization such as the Financial Crisis and
the Edward Snowden cases

References:
Joseph

E. Stiglitz, Economics of the Public

Sector, Third Edition (New York: W. W.
Norton & Co., 2000), Chapter 1 The Public
Sector in a Mixed Economy

Leonor

M. Briones, Philippine Public Fiscal

Administration, Vol. 1 (Manila: FAFI, 1996),
Chapters 1 Overview and 2 The
Development of Public Finance Institutions.

Next Meeting:
Jurado,

Gonzalo. 2003. Growth Models, Development

Planning, and Implementation in the Philippines.
Philippine Journal of Development Vol. 30, No. 1.
Makati City: Philippine Institute of Development Studies
(PIDS).
Danilo Reyes, The Crisis of Underdevelopment: A
Reexamination of Economic Models in the Third World.
In Bautista, Victoria A., et al. (eds.), Introduction to
Public Administration in the Philippines: A Reader. 1st
edition (Quezon City: UP NCPAG, 1993) pp. 239-267.