Functions of the State in the Transition Economy

Any systemic whole, as well as a complex, systemic process, cannot do without regulation or management. The difference lies in the fact that some systems are regulated by internal, as if built-in mechanisms, and therefore are self-regulating (for example, the  human body), while others, not having their own mechanism of self-regulation, or in conditions where it is not enough, become non-self-regulating, i.e. regulated from the outside. These two types of regulation, considered in relation to the economy, are called: 1) spontaneous and 2) state-organized. At the same time, the main thing for both mechanisms is to ensure the interaction of the elements of the system and the conditions for achieving its target effect (Fig. 9.2.).

During the transition period of the transformational type, aiming at a life-saving transition to the market, many began to actively advocate a spontaneous type of regulation. As two hundred years ago, under Adam Smith, there was a high wave of liberalism.

Liberalism (economic liberalism) is a branch of economic theory that asserts complete freedom of private initiative in market conditions, based on private interest and competition, i.e. spontaneity of development. In other words, it is a denial of power, state regulation, it is self-regulation of the market, its spontaneous order. To illustrate the natural naturalness of liberal economics, its active defender Friedrich Hayek liked to talk about bees and their order. Like bees, Hayek believed, the spontaneous market, by its own market order, surpasses both science and public administration.

The main blow to liberalism, as you know, was dealt by John Keynes. This happened in the thirties of the twentieth century in the midst of a cruel world economic crisis and mass unemployment. In contrast to the liberals, Keynes began to argue that the automatism of the market in the new economic conditions does not work, that active economic actions of the state are necessary.

However, having recovered from the Keynesian blow, the new liberals launched a new offensive. At first it was  bookish. There were joint books by Milton Friedman and his wife Rosa called “Freedom of Choice” (1976), and then the work “The Tyranny of the Status Quo” (1984), where they  defended the positions of liberalism.

Then the action began. The most expressive way for liberals to limit the omnipotence of the state was the so-called “tax revolt”. Beginning at the University of California, the tax revolt swept to the east coast of the United States and then reached the Nordic countries and even Japan. The idea was extremely simple: to eliminate the income tax, and let the state look for the funds it needed differently, by saving its expenses.

Supporting the tax movement spreading in France, François Mitterrand announced that in 1985 France’s state taxes would be reduced, but by 1%. And Ronald Reagan in the United States did not stand aside. He resolutely refused to increase (!) taxes, which then amounted to about 50-60% of revenues, although the American budget was in deficit.

So does a market economy need a state? If so, what is the desired degree of government intervention in the market economy? In answering these questions, even neoliberals do not dare to say a categorical “no. And  the tax revolt itself had a different slogan: “Less oxygen to the state!” In favor of the state’s need for a market economy, modern market economic theory gives a number of arguments:

since a number of spontaneous market processes (crises, unemployment, inflation, etc.) are destructive to society, they should be controlled and minimized; the effective functioning of a market economy needs legal support on the basis of the creation by the state of common “rules of the game”; those groups of the population that are defenseless in market conditions need the protection of the state.

To solve these problems, the state and its regulatory influence are needed.

In the widespread American textbook by C.M. McConnell and S.L. Brew, entirely devoted to the market economy, it is emphasized: “All really functioning systems are “mixed” systems, since the government and the market system share the function of finding the answer to five well-known fundamental questions (vol. 1, p. 94).

The success of complex transitional transformations of the economic system largely depends on the regulatory actions of the state, on the correctness of its course and policy. At the same time, state-organized regulation is understood as the process of streamlining the transition consciously carried out by legislative, executive and regulatory bodies, as well as providing conditions for achieving the necessary goals and objectives of the transition period in the economy.

Economic intervention of the state in the modern market is necessary for the implementation of the following functions that any market is not able to perform. These are, first of all:

development and control over economic legislation representing uniform “rules of the game” for market entities; the organization of a national monetary system; optimization of the structure of the national product and production; redistribution of income in order to assist the disabled, the acutely needy, the unemployed; antimonopoly regulation; anti-inflationary policies; anti-crisis policy.

The need for the state to perform these functions in a mixed market economy leads to the following conclusion: there is virtually no unregulated market at all, because even an ideal, free market needs a certain influence from the state.

However, even the most market economy does not yet make up the entire economy of the country. After all, the market is occupied only by those  needs that are expressed through effective demand and bring profit to the private commodity producer. This circle of “profitable” needs and industries does not include a number of other – unprofitable. But they represent vital needs of society, for example: national defense, public order protection, a unified energy system, the country’s water supply network, health care, flood protection, etc.

The production of such goods and services that are unprofitable from the standpoint of private capital, but necessary for the country, constitutes a special sector of the economy – the so-called public sector. By the way, in the 80s of our century, the public sector (in terms of the share of value added) was 17% in France, 14% in Italy, 12% in Germany, and 11% in England. Moreover, the state of the entire economy, including the market, its private sector, depends on how developed the sector is. Hence the second group of functions of the state, related to the management of the public sector of the economy.

However, during the transition period, the economy is in a special state of intermediateness between different types of economic systems. This, of course, significantly affects the volume, directions and functions of state regulation. Thus, during the inter-system transition (from one system to another), there is a need for serious institutional reforms – such transformations that transform the most important institutions of the socio-economic system: rights, property, type of state structure, etc. These changes are so large-scale and significant that they lead to the transformation of state regulation in the transition period.

The transformation of the functions of the state is understood as a change in its main objective function, as well as the associated actualization and expansion of some functions and the narrowing of others.

Moreover, during the transition period, not only the functions of the state are transformed, but its actions become especially necessary. After all, the transformations that are being made during this period should, first of all, affect the legislative framework of  this country. This means that some laws and regulations should be repealed, while others should be created, moreover, in a complex, consistently, interconnectedly. Usually, during the transition period, the national monetary and banking systems, fiscal policy, social policy also change significantly, and these are all the concerns of the state.

As you can see, the functions of the state are becoming more, and they themselves are becoming more complicated. They can be divided into three main blocks (groups) during the transition period:

1) on the formation and regulation of new laws, relations, sectors and infrastructure in the economy;

2) on reforming and managing the public sector of the economy;

3) on the resolution of contradictions related to the transition period, and on socio-economic stabilization (Fig. 9.3.).

Rice. 9.3. The main blocks of state functions in the intersystem transition period

Thus, the specifics of the transition period significantly complicate the tasks that fall on the share of the state and not only expand its functions, but also transform them. From the implementation of them largely depend on the effectiveness and even the duration of the transition period, as well as greater or lesser costs, losses of the ongoing transition. And since such costs can be large and very painful (the outflow of national capital due to the crisis abroad, the impoverishment of the population, the spread of diseases, the fall of morality, the development of crime, etc.), the role of the state in the transition period becomes especially responsible.

The transition from a planned command economy to a market economy experienced by a number of countries is unique. Its tasks are being solved for the first time in history. The lack of appropriate scientific theory and historical experience, the depth of the economic and social crisis in post-socialist countries, as well as the psychological and economic unpreparedness of the bulk of the population – all this makes the functions and tasks of the state during this period especially difficult. At the same time, it is necessary to emphasize such a problem and task of the state of transition as the identification and skillful resolution of the contradictions that have arisen.

The particular importance of another problem of the State in the transition period should be emphasized. As you know, the engine of the entire economy, its main link is the enterprise, and the engine of the enterprise is its employees. Therefore, state regulation in the field of labor motivation is the most important direction and concern of state regulation in the modern economy in general, and even more so in the transition economy.

It was noted above that the regularity of the transition economy is the differentiation of incomes and the stratification of the population. Thus, in the CIS countries, these processes, as is known, led to the fact that 35-45% of the population were below the poverty line. This means not only a loss of motivation for high-performance work, but leads to depopulation of the population of these countries.

In such conditions, the positive potential of labor – its professionalism, qualification, creative activity – with the existing wages lose their social and personal meaning, i.e. lose their motivational base, strength and significance. And without this, the solution of any, and even more so transitional problems in the economy is doomed to failure. Therefore, solving the problem of labor motivation, creating the interest of employees in self-giving in the workplace is the most important direction of state regulation in the transition economy. It is social problems that should become the highest priority for him.

To successfully perform its complex functions in a transition economy, the state must have a special regulatory mechanism, which is a  system of purposeful ordering influence  on economic entities, their actions and relations.

The main constituent elements of such a mechanism are:

goals and objectives of state regulation at the macro, micro and inter levels of the economy; objects of regulation (production and non-production spheres; the process of reproduction and its phases; market and non-market sectors, monetary system, etc.); forms of regulatory impact (forecast programs, special and emergency programs, indicative planning, etc.); methods of regulation (economic, administrative, organizational, legal, social, psychological); tools used in state regulation (taxes, budget allocations, benefits, subsidies, quotas, prices, etc.).

The creation and competent, skillful use of such a mechanism is the most important task of the state, without the solution of which it cannot realize its functions that are being transformed during the transition period. And the timing and results of socio-economic transformations largely depend on their successful implementation.