Giving space to the public sector

Chapter 2 has shown the limits to growth when the economy is merely left to market forces. When either effective demand or profitability is insufficient, no positive dynamics can emerge. This problem describes the current situation of developing countries well. The state can play an important role in this regard because it can make investments even if these are not profitable. Formal analysis as well as the extension of the stock-flow consistent model in this chapter show how economic policy intervention by either consumption expenditures or, better, productive investment can improve on effective demand and profitability to the favor of the private sector. The chapter thus also takes some effort to argue why active economic policy does not necessarily give rise to a crowding-out of the private sector, but rather tends to crowd it in. Appropriate policy intervention thus steers productivity and growth, thereby enabling poverty reduction.