ABSTRACT
Development outcomes depend on the interactions between the state, the market, and civil society-–the fundamental development triangle (Figure 21.1) we presented in the Introduction. Each of these three institutions has intrinsic functions to fulfi ll and unique instruments at its disposal to act in pursuing this purpose. The state has the responsibility of protecting individuals, enforcing rights and preventing abuse,
coordinating for social gains, and delivering public goods and services. Important among these are public works, public education, public charity and social assistance, and public health. It acts via coercion, incentives, and partnerships. The market has the function of providing opportunities for the exchange of goods and services, and guiding the allocation of resources to their highest-valued uses. It acts via a set of institutions that favor competition and reduce transaction costs and risks. Civil society has the function of allowing individuals to coordinate in the pursuit of collective action and the provision of local public goods. It acts via cooperation (Hayami, 2009; Karnani, 2011). Each of these institutions can fail in its functions, calling on the others to compensate for what it does not do. The state in particular has a fundamental role to play in compensating for market and civil-society failures. If the state is eff ective in both its intrinsic functions and in its compensatory roles, development outcomes are more likely to be achieved; but the state can also fail. In this case, ineffi ciencies and defi cits in development outcomes will result. Many potentially good policies will not be implemented and many bad policies and bad practices such as abuse of power and corruption will be. Clearly, a wellfunctioning state is key for development, especially if market and community failures are pervasive as is typically the case at early stages of development. However, a wellfunctioning state is itself a product of development. We thus face a fundamental development paradox: the state is most prone to failure precisely where it is most needed. The role of the state in development must thus be clearly understood, and making the state fulfi ll its functions is essential for successful development outcomes.
