In light of increasing government intervention in western economies (Greece and the U.S to name a few) over the last 3 years , the debate is raging as to whether "Government Interventionism" is the right thing to do or whether such actions, reactive though they may be, are going to take country into a state controlled soviet-styled regime.On the other hand, developing countries like India because of their restrictive social structures often find that their governments cannot pick up seemingly economic viable reforms as there is a vote-bank that is at risk of being forfeited should the reforms not work- FDI in multi-brand retail ,for example. The evaluation of a government's action(or inaction) may ,therefore, seem desirable. To evaluate it, one may try to understand the government action in terms of its impact to :
a) The state treasury
b) The people
I have kept businesses out of the beneficiary list as the impact of policies on business eventually is transferred to the people who run it ,are employed by it or consume for it. As Milton Friedman argues that a business is not a "a big cornucopia" but is rather a collective representation of its stakeholders and their interest. The following video clip, though addressing a lot of other issues does mention the above concept ("a big cornucopia") during its course :
Milton Friedman - The free lunch myth
The affect on the 2 affected parties can be viewed as positive or negative.
The effect of an action/decision will be a positive one on the government if it is able to raise more money via taxes (as a result of that action) and utilize it for some other socially uplifting process (a difficult assumption in the corruption ridden world, but we wouldn't get anywhere were we not to consider this).It is negative if it means that the money available in the treasury takes a hit on account of the said action
The effect of an action/decision will be a positive one for the people if it is able to benefit them economically by raising their income directly or indirectly by the lowering of prices or non economically by providing knowledge corpus (education) on which they may later base their future. The effect is a bad one if people grow effectively "poorer" by having less money to spend.
These are rather simplifying assumption and a lot more goes into decision making than just the general economics of a decision. With such assumptions in place , we try classifying the government action through its impact as being :
A) positive;positive - Good for the govt and good for the people
B) positive;negative - Good for the govt but bad for the people
C) negative;positive - Bad for the govt but good for the people
E) negative;negative - Bad for the govt and bad for the people
Lets analyze these concepts :
A) Positive;Positive - Govt action leads to people getting richer. Govt taxes these people and grows richer itself and uses the increased finances for 'socially uplifting' projects. An example of this is the Govt of India allowing a 100% FDI in multi-brand retail. The action would result in :
a) Retailing giants like Wal-Mart and Tesco setting fully owned processes in India.
b)Generates more employement
c)Reduces prices as the firms have well formed supply chain processes. People have more to spend - Thus a positive
d) The gvernement taxes the newly employed
e) The government taxes the profits of these behemoths and is now better off to spend the proceeds in other "socially uplifting" schemes - Thus a positive
Several counter arguments like the risk of Mom & Pop stores being at risk of being wiped out exist, but if we are to assume an ideal economy, the coming in of retail giants is only going to serve to benefit this community as the kirana stores will now think of becoming more efficient at managing their resources . Plus government restriction to practices like "predatory pricing" can also help these stores retain a fare share.
It is a win-win for all
B) Positive:Negative - Let's assume the scenario in which the government has to build a flyover and wishes to tax the people to achieve the objective. It can also raise money through Infra bonds and handing over the contract to private players but lets just assume they stick to the first action:
a) It is a positive for the government as it now has more money for a "socially uplifting" project
b) A negative for the people as they presently will have less money to spend and this paid money can never be recovered
Even if the contract is awarded to a private player the govt will be richer as it will now tax the profitable corporate entity. The built flyover is a national asset and will benefit the people in the long run but on immediate grounds is a loss to the people's buying power
Other example of such action being the taxing of people for mega-sporting events like the Commonwealth games
C)Negative :Positive : No government would ideally want to do this. But electoral compulsions may push them to frame policies like subsidizing Oil companies or higher education. In such a case :
a) The immediate effect is that a lot of the planned money for something else goes into saving the oil companies or improving the infrastructure of educational institution - a money which the government could have resisted spending by passing on the expenses to the public directly. This money is "dead money" as the expectation that it will be recovered is almost nil.The chances that the engineers and scientists in the long run will help improve the efficiency of government engineering firms is slim (certainly in this country) as most of the graduates from Govt run institutes take up private jobs
b) The public stands to benefit as it now spends less for petrol,LPG and diesel. Also parents spend less for the children's education.
Not a great proposition for the people at the helm,though ...
D)Negative:Negative: A "save our soul" response. Done during severe crises like the goverment's intervention in the US to save their banking system by borrowing money. The borrowed money will eventually be financed by the people who will become "poorer" unless the government magically turns around the economy to a high-growth path in less than a quarter in which case the people's increased income and subsequent taxes on it will finanance the help without essentially making the people poorer.
Another example is President Reagan's hike in interest rate to lower the country's high inflation pushing the economy into recession in the 1980's
People ,in general, while evaluating government responses should also evaluate the kind of finacial and to some extent social situation that exists in the country. The US response to the financial crisis was a "Negative:Negative" response but they had absolutely no other choice. Similarly the Indian govt's reluctance to allow more FDI in a high inflation environment is a depiction of the much used "lack of political will".
Give FDI a chance, you can change policies to mange the ill-effects should the situation go out of hand
No comments:
Post a Comment