In most countries of the world, institutions do not function, the rule
of law and properly rights are not upheld, the banking system is
dysfunctional and clogged by bad debts. Rusty monetary transmission
mechanisms render monetary policy impotent.
In most countries of the world, there is no entrepreneurial and
thriving private sector and the economy is at the mercy of external
shocks and fickle business cycles. Only the state can counter these
economically detrimental vicissitudes.
Often, the sole engine of growth and the exclusive automatic stabilizer
is public spending. Not all types of public expenditures have the
desired effect. Witness Japan's pork barrel spending on "infrastructure
projects". But development-related and consumption-enhancing spending
is usually beneficial.
To say, in most countries of the world, that "public borrowing is
crowding out the private sector" is wrong. It assumes the existence of
a formal private sector which can tap the credit and capital markets
through functioning financial intermediaries, notably banks and stock
exchanges.
Yet, this mental picture is a figment of economic imagination. The bulk
of the private sector in these countries is informal.
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