Published :
Updated :
For all latest news, follow The Financial Express Google News channel.
The mission of the public leaders is supposed to ensure growth to raise the level of living standard of the people, welfare and environmental comforts for which employment of most of the citizens is the principal requirement. Macro parameters of an economy are mostly left to the so-called professionals and to the bureaucracy who are trained and in some cases experienced to establish access to all classes of the citizenry, while public leaders are mostly preoccupied with local cabal and conflicts to exercise their influence to either gain or sustain authority in governance.
Employment is generally linked to the availability of credit in the market by which producing and trading of goods and services are facilitated. Banks, in such cases are the institutional credit facilitators and act as a catalyst to accelerate nation's Gross domestic Product (GDP). In the developing countries banks are regulated by the central bank and by both monetary and fiscal policies of the Government.
Since the formation of Bretton Woods institutions, International Monetary Fund (IMF) and associated organisations like IBRD & IFC, which are engaged in providing funding to the least developed and the developing nations, prescribe guidelines and require accountability of the credit management by the receiving nations. One of the benchmarks for such accountability is to determine the success in the progress of enhancing per capita income. Although statistical narration will only indicate an aggregate performance, enhancement of per capita income will create a class of consumers who may later unify to form a resourceful middle class and be able to provide much-needed revenue to the treasury. This may be the hypothesis from which economists and management leaders would like to work on a global movement. But unfortunately, the cold war, social divide of the rich and poor and governance by autocrats and usurpers perpetrated deep-seeded corruption which completely distorted the noble purpose.
Resource management is a macro management affair and not all nations, unfortunately, are bestowed with enough resources. In some cases nations exist without any tangible resource. Economists over the years suggested initiatives for growth and use of resources for a targeted growth. Macroeconomic policy is usually implemented through two sets of tools: fiscal and monetary policies. Both forms of policy are used to stabilise the economy, which can mean boosting the economy to the level of GDP consistent with full employment. Macroeconomic policy focuses on limiting the effects of the business cycle to achieve economic goals of price stability, full employment and growth.
Conventional monetary policy can be ineffective in situations such as a liquidity trap. When interest rates and inflation are near zero, the central bank cannot relax monetary policy through conventional means. Central banks can use unconventional monetary policy such as quantitative easing to help increase output. Instead of buying government bonds, central banks can implement quantitative easing by buying not only government bonds, but also other assets such as corporate bonds, stocks and other securities. This allows lower interest rates beyond government bonds. In another example of unconventional monetary policy, the United States Federal Reserve recently made an attempt at such a policy with Operation Twist. Unable to lower current interest rates, the Federal Reserve lowered long-term interest rates by buying long-term bonds and selling short-term bonds to create a flat yield curve.
Developing countries made considerable gains during the first decade of the 21st century. Their economies grew at unprecedented rates resulting in reduction in extreme poverty and a significant expansion of the middle class. But more recently that progress has slowed with an economic environment of lacklustre global trade, not enough jobs coupled with skills mismatches, continued globalisation and technological change, greater income inequality, unprecedented population aging in richer countries, and youth bulges in the poorer ones. The structural change challenge is focused on moving resources from traditional low-productivity activities into modern, more productive industries. The fundamental challenge faced by policy makers in the developing world is about how best to develop broad capabilities such as human capital and infrastructure. While the two are inextricably linked, they are conceptually different.
In a developing economy banks can only act as the retail-credit provider without any innovative product or service. There are two different and may be contradictory paths followed in an economy for growth, mostly in the least and less developing nations. One is by orderly planning with inclusive participation of all able citizens, the other by individual initiatives, scattered and unregulated, which create division and disparity in the economy. Employment relates to skill development and with prudent resource management targeted skills can be developed. Banks in the emerging markets are unable to plan and target growth but only follow the regulatory guidelines. Banks are not allowed nor have they any expertise to managing resources, capital instruments and investing in diversifying skills within such guidelines, as transition from mixed economy culture to free market management has not been completed and at times the process of transition is mired and prevaricated by the protective mindsets of the bureaucracy and by manipulation of the contemporary oligarchs.
Macroeconomic output is usually measured by GDP or one of the other national accounts. Planners should be interested in long-run increases in output study of economic growth. Advances in technology, accumulation of machinery and other capital, and better education and human capital lead to increased economic output over time. However, output does not always increase consistently. Business cycles can cause short-term drops in output called recessions. It is important to manage macroeconomic policies that prevent economies from slipping into recessions.
An increase in output or economic growth can only occur because of an increase in the capital stock, a larger population, or technological advancements that lead to higher productivity. An increase in the savings rate leads to a temporary increase as the economy creates more capital, which adds to output. However, eventually the depreciation rate will limit the expansion of capital: savings will be used up replacing depreciated capital, and no savings will remain to pay for an additional expansion in capital.
The effects of fiscal policy can be limited by crowding out. When the government takes on spending projects, it limits the amount of resources available for the private sector to use. Crowding out occurs when government spending simply replaces private sector output instead of adding additional output to the economy. Crowding out also occurs when government spending raises interest rates, which limits investment. However, defenders of fiscal stimulus argue that crowding out is not a concern when the economy is depressed, plenty of resources are left idle, and interest rates are low. Economists usually favour monetary over fiscal policy because it has two major advantages. First, monetary policy is generally implemented by independent central banks instead of the political institutions that control fiscal policy. Independent central banks are less likely to make decisions based on political motives. Second, monetary policy suffers shorter inside lags and outside lags than fiscal policy. Central banks can quickly make and implement decisions while discretionary fiscal policy may take time to pass and even longer to carry out. Nominal rigidity of new Keynesian theory, if combined with rational expectations and the Real Business Cycle (RBC) methodology, will produce dynamic stochastic general equilibrium (DSGE) models. The fusion of elements from different schools of thought has been dubbed into the new neoclassical synthesis. These models are now used by many central banks and are a core part of contemporary macroeconomics.
Public and private sector investments need to be managed as complementary factors and private sector investors are needed to be included in framing policy guidelines to cross the threshold to the free market structures where institutional and regulatory control of the market will not be an impediment. Milton Freidman updated the quantity theory of money to include a role for money demand and argued that monetary policy was more effective than fiscal policy. However, Friedman doubted the government's ability to "fine-tune" the economy with monetary policy. He generally favoured a policy of steady growth in money supply instead of frequent intervention.
However, macroeconomic stability by itself does not ensure high rates of economic growth. In most cases, sustained high rates of growth also depend upon key structural measures, such as regulatory reform, privatisation, civil service reform, improved governance, trade liberalisation and banking sector reform. Governments need to find ways of "tying their hands" to resist the pressure to spend windfall revenues (Devarajan, 1999). For example, when the source of revenue is publicly owned, such as oil or other natural resources, it may be appropriate to save the windfall revenues abroad, with strict rules on how much of it can be repatriated. Countries such as Colombia, Chile, and Botswana have tried variants of this strategy, with benefits not just for overall macroeconomic management, but also for protecting the poor during adverse shocks, since saved funds during good times can be applied to financing safety nets during crisis.
In a democratic culture talents of all citizens are important in developing a cohesive initiative and to establish a stable structure to interact in the market without conflicts of division and disparity.