WHAT DETERMINES ECONOMIC POLICY
Every country wants to grow and develop thus catch up with other countries while at the same time maintaining stable macroeconomic variables such as inflation, exchange rate, business cycle, interest rate, and also making sure the citizenry has a high standard of living. The driver of the aforementioned aims and aspirations of a country is termed Economic policy. An Economic policy is a course of action that is taken by the government to achieve set macroeconomic goals and objectives. There exist numerous economic goals of a nation. Some of the Economic goals include but are not limited to setting interest rates at a favorable levels, stabilizing market general price levels (inflation), promoting economic growth and development, ensuring high standards of living of its citizenry, and improving employment and living conditions.
The existence of Economic goals gives rise to economic policies because the policies are aimed at achieving the economic goals. Fiscal and monetary policies are aimed at inducing aggregate demand and expenditure and supply and demand of money respectively. Expansionary fiscal policies include; increase in government spending and/or cut in taxes while contractionary fiscal policies include decrease in government spending and/or increase in taxes. On the other hand, monetary policies include raising or cutting of interest rate, quantitative easing (creation of money and using it to buy bonds) and printing of money and directly pumping into the economy. Other economic policies include supply-side policies (privatization of state-owned companies, deregulation activities, and implementing incentive tax policies for businesses), microeconomic policies (subsidies, pollution permits, price controls, etc.), labor market policies (minimum and maximum wages, progressive taxes, and benefits, free child care support, etc.) and trade policies (imposition or reduction of tariffs and quotas, etc.). The setting and achievement of Economic policy are determined by many factors. This write-up seeks to discuss the determinants of economic policy and its achievements. The determinants among others to be discussed in this writeup include economic conditions, public opinion, scientific findings and technological change.
The economic condition in a country is one of the factors that determine economic policy in most cases. Economic conditions refers to the present state of the economy in a country or region and usually corresponds to the business cycle or economic fluctuations (expansion, peak, recession and trough). A country experiences adverse economic conditions such as high inflation and high unemployment during the recession. The vice versa, thus, positive conditions such as low unemployment, low level of cost of living (inflation) and high standard of living are experienced during expansions. The fluctuations in the economic conditions give rise to policies that will help control the condition at the various periods of the business cycle. For instance, the government may implement expansionary fiscal or monetary policies during a recession to boost aggregate expenditure. This is mostly aimed at reducing unemployment and improve the standard of living of the populace in the country.
Public opinion is also a determinant of economic policy. The public opinion explains the total beliefs or attitudes of the majority of the population in a particular country. Public opinion can be in a form of concerns raised by certain part of the public pertaining to developmental issues. Public opinions are effective in determining economic policy making at both the local and the national levels. Taking the local level into consideration, issues concerning conditions of roads, schools, hospitals, public toilet facilities, and other infrastructural facilities raises public opinions which goes a long way to influence economic policy. Interest groups such as think tanks in society can also influence economic policy. When interest groups express their opinions on economic variables such inflation, exchange rate etc., the state may factor their views into formulating economic policies that aim at resolving these issues.
Furthermore, economic policy in a country can also be influenced by Scientific findings. According to Christiansen (2001), it is increasingly being recognized that the development, adoption and diffusion of cleaner energy technologies are key determinants to the success or failure in environmental and climate policy, in the long term. For instance, the findings of the harm that smoke emissions may cause the environment will lead to formulating policies that will help abate the emissions. Such policies may include the introduction of Pigouvian taxes, trading permits, and other incentives for those who reduce pollution of the environment. There are other energy sector policies that are influenced by scientific findings.
Last but not least, a determinant of economic policy worth mentioning is technological change. Technological change as defined by economists is the shift in a production function as a result of an increase in the efficiency of a product or process. It can be in form of discovery of new ways of production or the improvement of the existing ones into a more effective one. In economic terms, technological change is presented as a positive transformation that often arrives in waves of related innovations. The rise of patent activity and the associated search for technology rents has led to the differential impacts of intellectual property on cities and regions. Technological change plays an important role in economic policy. That is a new technology that can help reduce the number of pollutions emitted into the environment. There can also be more efficient resource use possible. Notwithstanding, the absence of economic policy to regulate the activities of firms may prevent the realization of the benefits of technological change. As in other areas of technological change, knowledge spillovers lead to underinvestment in Research and Development (R&D) by private firms. Markets are unlikely to provide proper incentives for the development of clean technologies. This then informs economic policy. Countries deliberately invest in research to find new ways to producing and these technologies are used to formulate economic policies.
In a nutshell, the aforesaid determinants are not the only factors that determine economic policy. Other determinants include business associations lobbying government intervention which may lead to tax holidays for those businesses, political activities such as rallies and political campaigns and promises which also form basis for formulating some economic policies. Nonetheless all the determinants of economic policy, it is necessary to achieve them to ensure the overall growth and development of a nation. It is one thing to plan and formulate economic policy and it is another thing to achieve them. One of the major things that may determine the achievement of economic policies is political will. If those in authority and in government do not implement the formulated policies, the country may not progress and the macroeconomic goals mentioned above would not be achieved. It is therefore expedient for governments and leaders of state own institution such as the central bank to take up the responsibility of making sure whatever economic policy that is borne out the discussed determinants will be achieved.
REFERENCES
Christiansen, A.C. (2001). Technological change and the role of public policy: An analytical framework for dynamic efficiency assessments. FNI report
Norcliffe, G. (2020). International Encyclopedia of Human Geography.
Petrakis, P. E., Valsamis, D. G., & Kafka, K. I. (2020). The Determinants of Economic Policy Formation. In P. E. Petrakis, D. G. Valsamis, & K. I. Kafka (Eds.), Economic Growth and Development Policy (pp. 123–142).
Popp, D. & Jaffe, A. B (2010). Handbook of the Economics of Innovation
Economic Policy. Retrieved 22 July 2021, from https://www.cliffsnotes.com/study-guides/economics/introduction/economic-policy
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