The Role of Government Policy in Development
Despite these challenges for policymakers, economists have not always ascribed a central role
to government policy in economic development (Chang, 2003). Classic economic theory
describes the function of the free market and ignores that of government. Governments have
not always reciprocated and the twentieth century was filled with a range of grand
experiments in which governments directed, regulated, or otherwise intervened in their
economies. However, from the 1980s to the mid-1990s, there was a general consensus
(referred to as the “Washington Consensus”), expressed in the policies of international
financial institutions and adopted by many governments, that economic growth depended on
macroeconomic stability and market liberalization, rather than state interventions
(Williamson, 1990, 2000). The International Monetary Fund, the World Bank, and donor
nations emphasized the need for countries to avoid large national deficits, reform taxes, shift
public expenditure patterns, privatize state-owned enterprises, and deregulate financial
markets. According to the consensus, or at least one interpretation of it, the role of national
policy intervention in economic development was limited. The argument postulated that by
stepping back and selling off state enterprises; by allowing the free exchange of currencies; by
easing barriers to trade and capital flow; and by reducing taxes, public expenditures, tariffs,
and deficits; governments would activate the private sector, attract foreign investment, and
stimulate natural market forces to achieve subsequent growth in gross domestic product
(GDP). Public policy and public investment were to be redirected away from industry, trade,
and the financial sectors.