Market failure and state failure: What is the way forward?

A market failure takes place when it fails to allocate resources efficiently, whereas a state failure occurs when the state intervention is unsuccessful while correcting the market failure. Many researches and studies have been undertaking by economists and aid agencies to discover the causes and propose the solutions. I put some of these findings to support my argumentation.

Khan (2002) argues that a state failure arises when a state fails to do things that could have improved economic performance and an error of commission when the state does things which worsen economic performance. To further justification, Khan proposes that state failure in developing countries contributes to under-performance economy (noted by the decline in GDP per capita level and the rises of inflation rate) and poverty as a failure in service-delivery provision. Food shortage, even famine, may follow, not to mention high rates of unemployment and growing inequality which leads to social conflicts, such as crime. To raise the causes, Khan argues that the failure relates to an inter-dependent constellation failure including corruption and rent-seeking, distortions in markets and the absence of democracy. Another failure relates to ‘social transformation’ context whereby traditional production systems collapse and a capitalist economy begin to emerge. The failure derives from a lack of institutional and incapability of institutional capacities with pre-existing distributions of power.

So that, in case of both market and state failure takes place, such conditions will create uncertainty, lack of trust and lack of information which make it difficult to achieve efficient outcome in short term between economic actors. Therefore, the way forward to manage such failure conditions is predominantly beginning by improving policy coordination between bureaucrats and politicians. The reforms in government institutions and a wider political system lead to a more efficient outcome, as well as prevention from particularly ‘lobbying’ behaviour in politics. The reform should also be emphasised the necessity of enforcing moral hazard within governance to its constituents.

Lastly, public-private partnership in any kind of forms is essential to secure the economic, social, and community development. This partnership should derive from the same understanding and trustworthy among economic actors. In addition, government is obliged to be more transparent and giving more opportunity in access information. Accountability is another way of translating transparency and trustworthy. Last, but not least, the politicians’ commitment to participate in the partnership can strengthen the sustainability of partnership.