The Role of Government Policy in Improving Economic Outcomes
A nation, and indeed the world's economy depends on various factors. But before these factors are put into consideration, it is vital to first look at what economic development is all about. In many instances, people who refer to economic development are often thinking about economic growth. While the two terms are used interchangeably, there are several differences that make either of them unique. To put it simply, an economy may be growing but not developing when there is development in means an improvement in the general welfare of an economy to bring about a higher GDP. Besides the GDP, economic development also engulfs other economic indicators like improved literacy, excellent infrastructure, low poverty levels, and better health care standards, among others.
Economic growth, on the other hand, could be more on a firm level. When businesses are doing great, in terms of producing and supplying enough goods, and consumers are able to pay for the goods without any issues, we say an economy is growing. Economic growth can be both short-term and long-term when you factor in economic and business cycles. But economic development is usually looked at from a wider perspective and long-term considerations.
But one of the biggest questions that have raised debates among many experts is whether the government has a duty to play in economic development. The simplest answer is yes. Governments' decisions, policies, and political issues have a huge role to play in establishing a sustainable economy.
Government policies on economic development
The first role a government has to play is to create conducive macroeconomic conditions. This means it must ensure a stable economic climate with low inflation and positive economic growth. We know that inflation is something that happens in all levels of economies. But that does not mean nothing can be don't to cushion those involved in determining economic conditions. When there is a good business environment, a nation is able to attract international and internal investors, which drives an economy on an upward scale. It is vital to ensure positive growth in an economy so that everyone else in the society is pulled along.
The government is responsible for making economic regulations. Hence, they can either create laws that demean businesses or ones that uplift them. By creating, for instance, free-market supply policies, including privatization, deregulation, lower taxes, and less regulation, a government can easily stimulate more investments from the private sector.
Governments also intervene in many economic instances. They can, for example, create suppl-side policies, like increasing expenditure on 'public goods' to improve the general statues of society. When a government invests more in education, public transport, and healthcare systems, it creates a more conducive environment for economic development. This is because her citizens will be more concerned about working and creating job opportunities while getting to spend less.
And that is not all; economic development approaches depends on the general status of the economy. Throughout history, there have always been major economies and minor ones. And today, countries like the US, UK, and other European nations have a more stable economy that others. They are already developed, which leaves them to concentrate on sustainability and growth. For developing economies, there is much more they have to do in terms of export-oriented development, which includes a reduction of tariff barriers and promoting free trade in an effort to improve the development of their economies. Also, they have to focus on diversification far from agriculture and focus more on manufacturing. We are living in a different era far from the agricultural revolution, which leaves us to look at more manufacturing and information-oriented technology.
Macroeconomic looks at a wider perspective of an entire economy. It does not only consider individual consumers and firms like in the case of microeconomic approaches. And for this, it is important for a government to properly handle macroeconomic stability, which involves focusing on reduced inflation. By so doing, they create an environment where international investors well see better opportunities and have more confidence in a national economy. When inflation is through the roof, consequences could involve devaluation of the currency, which does not sit well with foreign investors. In order to create a low inflammatory framework, it will require a government to take several steps.
First, it has to create an effective monetary policy. Money is the biggest reason people struggle to achieve different goals in their lives. And for this reason, the government may, for example, give their Central Bank freedom to control inflation. This can be done through monetary policy, which, by default, touches all corners of an economy.
Second, the government will require a disciplined fiscal policy. When there are large budget deficits, it reduces economic progress and makes it harder for investors to trust the systems. It can, therefore, be a great idea for a government to work on reducing budget deficits.
The third requirement of a government to create a sustainable inflationary framework would involve putting a lid on inflation. Take an example of the current economies of China and India. They seem to have the highest rates of economic growth across the globe. However, economic experts have warned that these economies could easily 'overheat' and create bigger inflationary pressures. That is just a thing about a growing economy; it reaches its elastic point and may cause a major fall if the government is not careful enough to consider keeping it under control.
Even though it is vital to work on these issues affective inflation pursuit of macroeconomic stability, there are potential problems along the way, that policymakers have to be aware of. For instance, higher interest rates can be attractive to investors, but it can conflict with lower growth in an economy for the short-run. It is quite understandable when countries pursue low inflation with great vigor, but the ay cause recession and unemployment, which results in a strain on economic development. It is, therefore, important to find a balance between the two aspects by perhaps looking at both low inflation sustainable growth from the same bucket.
Different countries have different economic situations, and this is what determines the best approaches. In some states, for instance, exchange rates have been overvaluing currencies, and monetary policies tightened, which leads to a fundamental lack of demands. Based on this, we can say that economic development may call for demand-size laws and regulations that boost aggregate demand.
Another important approach to macroeconomic stabilization, many include reducing government budget deficits. The only flaw to this is that it may include spending cuts on social welfare programs.
Fighting corruption and more flexible regulations
In some of the developing countries, most of their regulations are over-restrictive, whereas corruption is highest. Such things increase the costs of doing business, hence chasing away investments from both local and international parties. It is possible to attract domestic and inward investment by removing these issues. A government will be able to create a more conducive environment for doing business.
Corruption is described as a thorn in the foot or economic development. It can greatly hurt and cripple any efforts to create a conducive climate for economic growth and development. Tackling this issue may not be easy, especially if it is deeply rooted in society. But it is still vital for developing countries to try eliminating it from all areas of their economy.
Also, it must be noted that too many levels of regulation may have a demeaning impact on economic development. A government must try to reduce these levels of regulation on useful ones, like protection on the environment. It is critical to protect the environment, but when it is overdone, it becomes difficult for investors to find an easy way out. The laws cannot be discarded, though, as this would attract great economic growth but at the expense of sustainable development.
Matter of privatization
China has been greatly applauded over the past few years from rapid economic growth. Experts have noted that this can be attributed to their dropping of a Communist economy and adopting a mixed one. In this case, many state-owned industries were taken over by private investors. In such situations, a firm receives a profit incentive, enabling them to cut on costs and put their focus on competition. Another important approach in this regard involves de-regularization, which opens competitive channels to state-owned monopolies. When this happens, a great competitive pressure opens and helps in the creation of incentives for reduced costs. Such pressure can also be created by the liberalization of trade and opening markets so that international competition can easily participate.
But great care must be taken when following the route for privatizations – it can encourage inequality in a society. A good example is Russia, where privatization gave power to a small number of individuals to control important industries at low costs. Experts advise that this does not help very much in economic development because all the most important resources are owned by a small fraction of rich individuals, who leave very little for the poorer members.
Tax-related process and investment in public services
In developing countries, there are different channels of tax collection, which are not very effective. In other words, they don't have a proper structure of how to do the collection. As you may already know, the wealthiest aspect of an economy is the production of natural resources. If a government is not able to collect sufficient tax from this aspect, it will not have enough funds to finance important investments in the public sector. A good example is the average tax rate in Sub-Saharan Africa, which is only 15% GDP as compared to 40% in the developed countries.
Apart from tax, there are often failures in public service areas like education, healthcare, and transport. For instance, a free market fails to provide sufficient levels of education. One of the most critical approaches to creating sustainable economic development is an increase in literacy and numeracy. If a society does not basic levels of education and training, their economy fails to develop into industries of higher values. Investing in education brings out mixed evidence on returns, as it may take a long time to get its impacts on the higher rates of growth in economies.
More on industries and less on agriculture
Developing countries are faced with a major constraint of producing primary products as their current comparative advantages. It may seem good idea at any level of an economy. Note, however, that this may put a limitation on development resulting from volatile prices, low-income elasticity of demand, and finite nature. For this reason, it may be a good idea for a government to encourage economic features of new industries such as manufacturing.
However, great care must be taken when diversifying agriculture because it may come with mixed results. Society depends on the food and production of consumables. If therefore, a government does not support this, it may be faced with another problem of hunger. In some instances, it is very difficult for nations with inadequate infrastructure to use capital investment in certain industries effectively. Also, experts have argued that there is mostly poor information about which industries should be promoted, a situation that leads to misplaced priority. They suggest, therefore, that it would be better to allow free markets to decide on their best investment ventures.
When it comes to restoring economic stability, policymakers must focus on bringing back the institutional purpose of governing. A government is in charge of building a stable environment that attracts both international and domestic investments. This process is dependent on currency stability, enforcement, and defense for property rights and offering oversights to assure citizens of the accountability of various stakeholders. A government comes with policies that allow participants to trust the systems in place. And in this case, both fiscal and monetary policies become a cornerstone of economic growth and sustainable development. It is easier for developed countries to create sustainability policies, as well as those that shield financial recessions again. Things may be different from emerging economies, yet it is still critical for government interventions to work.
Author: James Hamilton