TMJC 2025 J1H2 C1 Lecture 4 Role of State

1 WHAT IS A STATE? A state is a politically-bound space within which the resident population is governed by an authority such as the government. The term ‘the state’ can also be used to refer to the government, which we will be doing so for this topic. WHAT ARE THE MAIN OBJECTIVES OF THE STATE? The state has 2 main economic objectives for intervention in the economy: Promote economic development and raise the standard of living in the country. Reduce social economic disparities within the country (either between social groups or between regions in the country so as to ensure peace and political/economic stability. (A) STATES AS REGULATORS OF ECONOMIC ACTIVITIES AND TRANSACTIONS States play a role in the economic development of a country by regulating how their economies operate as they attempt to control what happens within and out of the country. This is done by: (i) Influencing the country’s industrial structure The state can promote economic development by influencing the industrial structure of the country to become more focused towards manufacturing and service industries. (a) Rural development policies Firstly, the state may implement rural development policies which aim to improve economic productivity of the primary industry. This is done through: i. Land redistribution by the state – to maximise landuse ii. Mechanisation of agriculture industry – to allow release of labour to work in nearby industries iii. Structural reforms to encourage a market -oriented agricultural system – to change from subsistence farming to production for sales For example in Guangdong province of China, the abundant labour supply due to modernisation of agriculture has provided an incentive for TNCs to invest branch assembly plants in the region. (b) Encourage development of manufacturing and service industries Secondly, the state can also encourage development of manufacturing and service industries, which provide higher returns than agriculture. This is achieved by stimulating particular industries and restraining others through the usage of taxes and subsidies, as well as legislation. The government does this through enhancing trade and investment policies to attract TNCs. It may encourage investment by reducing corporate tax, giving tax holidays, and investment Higher 2 (9173) Cluster 1: Development, Economy and Environment TMJC Cluster 1 Lecture 4 Can states influence economic activities? 2025

2 grants to investors. This lowers business cost and hence improves on the country’s export competitiveness. It may also attract investment and imports by reducing tariffs and providing non-tariff barriers to particular industries it wishes to focus on. Trade tariffs refer to import taxes which are only applied when trade cross a boundary Taxes are applied to items either within and across state boundary. For example, i n Singapore, the state offers subsidies for companies involved i n biomedical research such as A*STAR. (ii) Managing trade Depending on a country’s economic policy, the state may seek to either restrict imports or promote exports in order to aid economic development through: (a) Import substitution / protectionism Import substitution is usually favoured by areas with large markets. A state may choose to adopt policies which seek to restrict imports , which is also known as protectionism. Protectionism allows local firms to be insulated from overseas competition and thus be able to grow. Measures such as import taxes, quotas and licensing requirements are some ways in which the state can restrict imports. For example, protectionist measures were adopted in the early years of South Korea’s economic development whereby cheabols were developed (b) Export promotion In contrast to import substitution, the state may promote exports so that its firms can tap into a global market to obtain raw materials as well as sell its products. In this case, the state seeks to reduce barriers to trade by lowering import and export taxes. It will also have liberal regulations on trade. This is fav oured by small resource-poor countries which have a limited domestic market. Countries such as Singapore and Hong Kong have successfully pursued this route to economic development. (c) Manipulation of foreign exchange rate The state may also manage trade through manipulation of the foreign exchange rate. For example, the Chinese government has tried to keep the value of the Chinese Yuan low to make its exports cheaper and thereby more competitive. On the other hand, the Sing apore government has kept the Singapore Dollar strong in its effort to keep the cost of imported raw materials low for its manufacturing sector.

3 (B) PROVIDING GOOD PUBLIC INFRASTRUCTURE AND HUMAN CAPITAL TO ATTRACT TNCS In order to raise economic competitiveness, the state seeks to develop comparative advantages and attempt to reduce business costs to attract investments. This is achieved by: (i) Infrastructure development The development of infrastructure such as transportation and communications systems facilitates the growth of manufacturing and services. It reduces the need for TNCs to invest in infrastructure required for its operations and facilitates smooth transport of goods and services hence attracting investment. For example, the development of the port of Singapore has contributed to the rapid growth of the manufacturing and service sectors. The Singapore government has also provided infrastructural support for the biomedical industry through the development of th e Biopolis, a complex dedicated to biotechnology research. (ii) Developing human capital The development of human capital through the implementation of social policies which seek to improve t he quality of the labour force makes the country attractive to investment as it enable the people to better support the functions of firms’ operations. Social policies involve improvement of healthcare to improve standard of living and education to equip the workforce with relevant knowledge and skills to support local economy. In this way, the states are also the key providers of their countries’ health and education services. Health services attempts to ensure that the workforce is physically adequate to be economically productive. Education infrastructures such as schools, vocational and tertiary education institutions help to equip the workforce. This increases the country’s attractiveness to TNCs as TNCs would be able to engage the workforce without having to invest in developing the human capital to support its operations. The rapid growth of the first -generation Asian NIEs such as Singapore, Hong Kong and Taiwan owes much to the states’ focus on educating the population. For example, Singapore’s education system has evolved to cater to the global demands. To create opportunities for school leavers and adult learners to acquire skills, knowledge and values for employability and lifelong learning in a global economy: • 1960s – 1970s: Vocational education and training was emphasized to support the focus on manufacturing industries in Singapore • 1980s – early 1990s: Information and Communication T echnology (ICT) and innovation was emphasized to support the shift in economic focus from a labour intensive economy to a capital and skill-intensive economy in Singapore • Late 1990s – now: Critical thinking skills was emphasized to prepare its workforce for the world economy which is shifting to become a global knowledge economy As Singapore evolved from an economy based on port and warehousing activities, through a low-wage, labour -intensive manufacturing economy, and then to a more capital and skill - intensive industry and finally to its current focus on knowledge intensive industrial clusters, the

4 education system evolved to ramp up the quality of its education and the supply of specific skills needed to make S