Development Economics and Public Economics: Emerging Analytical Interface and Practical Policy Implications

This chapter addresses the theoretical and practical relationship between public economics and development economics from a critical perspective. The state has always been central to economic thought and theory as the leading collective actor in the process of structural transformation. Accelerated by the impact of the global financial crisis on both ideas and policy, over the past two decades a new approach has begun to displace the conventional orthodoxy of public choice theory, deregulation and fiscal minimalism. The emerging analytical approach is based on the integration of modern theories of market failure, income inequality and endogenous growth on the one hand, with the recent practice of emerging market economies in managing structural change, welfare provision and integration to the world economy on the other. This Chapter therefore aims to contribute to this overdue revision of the conceptual place of public economics in development economics. Section 2 explores the recent shift towards proactive management of structural change, reduced inequality and resilience to external shocks; while Sect. 3 addresses the way in which the public sector mobilizes the resources necessary to undertake these tasks. Sections 4 and 5 analyse the fiscal transformation caused by economic globalization, the opening of capital markets and the determination of corporate tax rates by international competition. Section 6 concludes by sketching the implications of the analysis in this chapter for the design and implementation of public economic policy in developing countries. The underlying theme of this chapter is thus the renewed need for an active ‘developmental’ state to control sufficient fiscal resources to ensure economic sustainability and social cohesion while mitigating the uncertainty caused by the global economy.