Role of government in nations' economies shrinks - a little

It's obvious why third-world countries have financial problems, isn't it? Bloated government bureaucracy, inept state-owned corporations, wasteful subsidies - these hamper the workings of the invisible hand of the economic marketplace. That's the difference between the largely statist third-world and free-enterprise bastions like the United States and Britain, where the principle of government governing best by governing least is enshrined.

Well...not exactly.

As it turns out, the central governments of most first-world, market-oriented nations, including the US and Britain, actually take up a bigger share of the national economy than do the governments of poor nations, according to the World Bank's ``World Development Report 1988,'' released this week.

Although government's hand in the economy is decreasing in most nations, it remains sizable. Washington accounts for about one-quarter of gross national product (GNP), the total value of the nation's goods and services. In 1972, US government spending was 19 percent of GNP.

By contrast, government spending has been modest among poorer nations. Much of the money has gone into the highways, utilities, and factories that emerging nations needed to build to develop. Mexico's government, for instance, now accounts for about 27 percent of its GNP. In 1972, it was only 12 percent.

For most rich and poor nations, government spending has now overrun government revenue, forcing governments to borrow, hiking government debt, and prompting budget cuts and privatization of state-owned enterprises.

``In the late '70s and '80s, people began to understand the problems of rapid growth of government spending,'' says Johannes Linn, staff director of the World Bank report. ``From that came a backlash against government control and ownership.''

But despite the current emphasis on the free market, the World Bank report says, government will always play a big role in economies. In developing countries, government spends mostly to help build infrastructure. In industrial countries, government puts its money on social security and welfare.

``Governments everywhere,'' the World Development Report says, ``play an essential role in allocating resources - in influencing what gets produced, how it is produced, who receives the benefits, and who pays.'' The report says government involvement is ``clearly needed to supply public goods,'' but governments should not spend ``scarce, costly resources on activities that the private sector - if allowed to - can do better.''

Government, for example, is essential for defense, diplomacy, macroeconomic management, criminal and civil justice. Government probably remains best for managing education, health, transportation, public utilities, and environmental protection - areas where relying on the free-market can create socially disruptive distortions. But in areas like agriculture, industry, mining, and many services, the private sector is usually more efficient and government ought to back away.

``What matters,'' says the World Bank, ``is the quality of government, more than its size as such.''

Quality government means low deficits, holding down taxes while substituting user charges (taking care to minimize the impact on the poor), focusing government spending on high-priority areas such as infrastructure and education, and managing central- and local-government operations better.

``There have been serious quality-of-government questions'' in developing countries, Mr. Linn says. ``One of the major sources of the economic crisis has been imprudent management of government revenues and poor uses to which revenues are put.''

He notes, for instance, that when developing countries have been forced into across-the-board budget cuts, capital spending, and infrastructure spending typically get the ax, yet these are among the most useful investments for a developing nation.

Military spending - which can do more harm than good in developing nations - gets hit the least. But over the past few years, he says, Draconian budgets have been discredited. And he is encouraged that fiscal prudence - quality government - is catching on.

There is far to go, however. An economic analysis at the front of the World Development Report warns of ``the risk of a severe setback'' to the world economy if fiscal and trade imbalances in the industrial countries - especially the US - are not rectified.