Effect of Government Spending Against Regional Growth

Author: Sri Palupi

Economic Development

Gadjah Mada University

2000

The Role of Government in the Economy

An ideal economy, perfectly competitive setting in which the allocation of resources derived from voluntary exchange of goods and money market rates would result in a maximum quantity of goods and services from all available resources in the economy to the Minister for the Economy. But in the reality of everyday, the market is not always present in his form ideal. In practice, market economy often entwined pollution and monopolization in line with soaring inflation or unemployment, n practice also, the distribution of income in society laissez-faire very uneven. To overcome these weaknesses the government took an important role in the economy. According to Samuelson (1997) outlined the government has three main functions, namely;

(1) Improve the efficiency,

(2) create equity and justice, and

(3) promote economic growth and maintain macroeconomic stability

Good government should always strive to improve market failures, for example by preventing monopolies and negative externalities (e.g. pollution) in order to achieve efficiency. The government must also fight for equality through taxation and redistribution of income for a particular group or community. The government should use the tax, spending and monetary policy to achieve economic stability and growth, reduce the rate of inflation and unemployment, and spur overall economic growth. But, while assessing the role of government in addressing economic problems, Also to look out for the possibility of government failure which can lead to more severe problems.

According to Jones (1996) the role of government can be classified into two, namely direct and indirect. Direct control of them is a matter of government revenue and expenditure. While the controls are not directly related to issues such as inflation, the rate of economic growth, the unemployment rate and the exchange rate.

Government Expenditure Policy

There are various instruments used by the government to influence the economy, one of them is spending or government expenditure. In the development model of the development expenditure which was developed by Rostow and Musgrave (Mangkoesoebroto, 1999) that in the early stages of economic development, percentage of government investment to total investment is huge. This is caused because at this stage the government should provide infrastructure. Role of government remains the intermediate stage because of the greater role of the private sector is much cause market failure.

However, according to Hyman (1999.397) there is a thing that a major problem in the state, namely in terms of distribution used in financing costs for the provision of public goods within the community. There is no way that you can give satisfaction to all levels of society. Taxation as a major component of financing is one of the impact of political impact and efficiency of the market mechanism.

In the context of developing economies, the role of fiscal policy is to stimulate the rate of capital formation. Fiscal policy also plays an important role in the development plan of the least developed countries. In the planning, a balance must attain both in real terms and in terms of money. In other words, physical plan must be tailored to the financial plan. Implementation of the financial plan and the achievement of balance in real terms and obviously a lot depends on the financial fiscal measures (Jhingan, 473).

Regional Economic Growth

Understanding economic growth is often distinguished from economic development. Economic growth is intertwined with the increased production of goods and services in economic activities, while development implies a broader. The development process includes a change in the composition of production, changes in patterns of use (allocation) of resources among the production sectors of economic activity, changes in the pattern of distribution of wealth and income among the various groups of economic actors, changes in the institutional framework in the life of society as a whole (Djojohadikusumo, 1994).

However, economic growth is a key feature in the development process, this is necessary due to the fact the population increases. Population growth by itself will increase the need for food, clothing, shelter, education and health services (Djojohakusumo, 1994).

The existence of a close link between economic growth and development, also point in the history of the emergence of theories of economic development. According to Todaro (1998) in the economic development literature after World War II, there are five main approaches in the schools of thought about the theories of development the linear model of gradual growth, structural development model, a model of international dependency, neoclassical counterrevolution free markets, and endogenous growth models.

Gradual linear growth model emphasizes on the understanding that the development process is a series of successive stages of economic growth, and also highlighted development as a combination of savings, investment and foreign aid. One of the stages that must be passed is the take-off stage, which marked by the mobilization of savings described by the mo-del Harrod-Domar growth. The model was developed further structural change and international dependence more on the differences between the two ideological differences.

Growth model developed in the next stage is the neoclassical growth model, where the Solow growth model into pillars. Solow found that output growth comes from three factors; increase in the quantity and quality of labor (through population growth and the improvement of education), additional capital (through savings and investment) and technology improvements. Most of the growth comes from the things that are exogenous or processes that are independent of technological progress (Todaro, 1998).

Weaknesses found in neoclassical theory is that the impact of technology cannot be fully controlled by economic factors, resulted in the emergence of a new growth model that endogenous growth. This model is still based on a model developed by the neoclassical, but contrary to the opinion of the neo classical, endogenous growth models recognize and encourage the active participation of the government in managing the economy.

Blakely (1994) also noted the importance of the role of government, by suggesting a number of factors that influence regional development. These factors are natural resources, labor, capital investment, entrepreneurship, transportation, communication, industry composition, technology, export markets, the international economic situation, the capacity of local governments, government spending and support development.